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Economic Test Bank

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Test Bank 1
to accompany

Economics
Sixteenth Edition

Campbell R. McConnell University of Nebraska Stanley L. Brue Pacific Lutheran University

Prepared by Stanley L. Brue Pacific Lutheran University

Test Bank 1 to accompany ECONOMICS Campbell R. McConnell and Stanley L. Brue Published by McGraw-Hill, an imprint of The McGraw-Hill Companies, Inc., 1221 Avenue of the Americas, New York, NY 10020. Copyright  2005 by The McGraw-Hill Companies, Inc. All rights reserved. The contents, or parts thereof, may be reproduced in print form solely for classroom use with ECONOMICS provided such reproductions bear copyright notice, but may not be reproduced in any other form or for any other purpose without the prior written consent of The McGraw-Hill Companies, Inc., including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

1 2 3 4 5 6 7 8 9 0 Text printer code/Cover printer code 0 9 8 7 6 5 4 ISBN 0-07-288479-7

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Table of Contents

1 2 3 3W 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39W 40W

The Nature and Method of Economics ................................................................ 1 The Economizing Problem................................................................................. 31 Individual Markets: Demand and Supply........................................................... 69 Applications and Extensions of Supply and Demand Analysis ....................... 109 The Market System .......................................................................................... 125 The U.S. Economy: Private and Public Sectors ............................................... 141 The United States in the Global Economy ....................................................... 175 Measuring Domestic Output and National Income.......................................... 197 Introduction to Economic Growth and Instability............................................ 229 Basic Macroeconomic Relationships ............................................................... 253 The Aggregate Expenditures Model ................................................................ 289 Aggregate Demand and Aggregate Supply...................................................... 335 Fiscal Policy ..................................................................................................... 369 Money and Banking ......................................................................................... 403 How Banks and Thrifts Create Money............................................................. 433 Monetary Policy ............................................................................................... 455 Extending the Analysis of Aggregate Supply .................................................. 489 Economic Growth ............................................................................................ 515 Deficits, Surpluses, and the Public Debt .......................................................... 531 Disputes over Macro Theory and Policy.......................................................... 547 Elasticity of Demand and Supply..................................................................... 575 Consumer Behavior and Utility Maximization ................................................ 611 The Costs of Production................................................................................... 647 Pure Competition.............................................................................................. 687 Pure Monopoly................................................................................................. 731 Monopolistic Competition and Oligopoly........................................................ 773 Technology, R&D, and Efficiency................................................................... 819 The Demand for Resources .............................................................................. 843 Wage Determination ........................................................................................ 875 Rent, Interest, and Profit .................................................................................. 909 Government and Market Failure ...................................................................... 929 Public Choice Theory and Taxation................................................................. 953 Antitrust Policy and Regulation ....................................................................... 979 Agriculture: Economics and Policy................................................................ 1001 Income Inequality and Poverty ...................................................................... 1021 Labor Market Institutions and Issues: Unionism, Discrimination, and Immigration ................................................................... 1047 The Economics of Health Care ...................................................................... 1077 International Trade ......................................................................................... 1097 Exchange Rates, the Balance of Payments, and Trade Deficits..................... 1127 The Economics of Developing Countries (Internet-Only Chapter) ............... 1157 Transition Economies: Russia and China (Internet-Only Chapter) ............... 1177

Preface Test Bank I contains more than 6,300 multiple-choice and true-false questions. We have created approximately 670 new question for this edition; the remaining 5,630 have been checked and refined to ensure compatibility with the 16th Edition. Test Bank I continues to be accurate, functional, and user-friendly. 1. New questions: All new question are so identified. This will provide long-time users of Economics with a fresh set of questions. Grouping by topic: As in previous editions, all questions are grouped by topic and sequenced in the same order as the text material. A table at the beginning of each Test Bank chapter lists the topics and corresponding question numbers. Each topic has been numbered for easy reference. This sequencing should reduce the time required to make up well-balanced exams. Consider This and Last Word questions: Test Bank I contains and identifies two or three questions on each Consider This and Last Word vignette. Coding: Each item contains a code that identifies the particular type of question. For example, A=application of concept; D=definition; G=graphical analysis, and so forth. These codes are identified following this Preface, while the coding itself is found above each question. Former users of Test Bank I have found these codes useful in preparing exams and in identifying the types of questions missed by students. Page references: Each question includes a 16th Edition page reference. To aid instructors who are using the paperback split volumes, we list three separate page numbers: E indicates the Economics page number; MA indicates the Macroeconomics split volume page number; and MI indicates the Microeconomics split volume page number.

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All Test Bank I questions are also available in a Brownstone test generating system for PCs and Macintosh computers. Contact your McGraw-Hill/Irwin sales representative for more information. We wish to thank Robert Jensen for assistance and Becky Szura for her expertise in creating the Brownstone Diploma version. Stanley L Brue Campbell R. McConnell

Conversion Chart
There are three versions of the 16th edition of McConnell/Brue Economics: Macroeconomics, Microeconomics, and Economics. Test Bank I follows the Economics chapter order. Use the following chart to see how Test Bank I/Economics chapters correspond with the other two books:

Economics/TB I Chapter 1-6 7-19 20-36 37-38 3W 39W 40W

Macroeconomics Chapter 1-6 7-19 *** 20-21 3W 22W 23W

Microeconomics Chapter 1-6 *** 7-23 24-25 3W *** 26W

Bold type indicates chapters common to all three books. *** indicates chapters that do not appear in a particular split version of the text. W indicates chapters that are available only at the book’s website, www.mcconnell16.com.

Coding System for Test Bank I
The codes above each question indicate the following question types: A = Application of Concept A question that tests student understanding of a definition or concept. C = Complex Analysis A question that calls for students to apply more than one concept in order to reach the correct answer. D = Definition A straightforward question that tests recognition of a definition. E = Equation A question that calls for solving one or more equations. Many of these are designated as advanced analysis questions. F = Fact A problem that tests ability to recall a fact or some data. G = Graphical A question that requires students to demonstrate working facility with graphs. T = Table A question that requires students to interpret or manipulate tabular material. New = New Question A question that is new to this edition of Test Bank I. E = Economics, 16th Edition MA = Macroeconomics, 16th Edition MI = Microeconomics, 16th Edition

CHAPTER 1

The Nature and Method of Economics

Topic 1. 2. 3. 4. 5. 6. 7. Economics; economic perspective Benefits of studying economics Methodology Economic policy and goals Macroeconomics and microeconomics Positive and normative statements Logical pitfalls Consider This Last Word True-False

Question numbers 1-20 21-23 24-40 41-47 48-56 57-66 67-82 83-84 85-87 88-100

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Appendix 8. Construction and interpretation of graphs

101-155

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Multiple Choice Questions Economics; economic perspective

Type: D Topic: 1 E: 4 MI: 4 MA: 4 Status: New 1. For economists, the word "utility" means: A) versatility and flexibility. B) rationality. C) pleasure and satisfaction. D) purposefulness. Answer: C

Type: D Topic: 1 E: 4 MI: 4 MA: 4 Status: New 2. In economics, the pleasure, happiness, or satisfaction received from a product is called: A) marginal cost. B) rational outcome. C) status fulfillment. D) utility. Answer: D

Type: A Topic: 1 E: 4 MI: 4 MA: 4 Status: New 3. When economists say that people act rationally in their self interest, they mean that individuals: A) look for and pursue opportunities to increase their utility. B) generally disregard the interests of others. C) are mainly creatures of habit. D) are unpredictable. Answer: A

Chapter 1: The Nature and Method of Economics

Type: A Topic: 1 E: 3 MI: 3 MA: 3 4. According to Emerson: "Want is a growing giant whom the coat of Have was never large enough to cover." According to economists, "Want" exceeds "Have" because: A) people are greedy. C) human beings are inherently insecure. B) productive resources are limited. D) people are irrational. Answer: B

Type: A Topic: 1 E: 4 MI: 4 MA: 4 5. According to economists, economic self-interest: A) is a reality that underlies economic behavior. B) has the same meaning as selfishness. Answer: A

C) is more characteristic of men than of women. D) is usually self-defeating.

Type: A Topic: 1 E: 4 MI: 4 MA: 4 6. When entering a building, Sam diverts his path to go through an open door rather than make the physical effort to open the closed door that is directly in his path. This is an example of: A) irrational behavior. C) marginal benefit-marginal cost analysis. B) a lazy person. D) programmed learning. Answer: C

Type: A Topic: 1 E: 4 MI: 4 MA: 4 7. Joe sold gold coins for $1000 that he bought a year ago for $1000. He says, "At least I didn't lose any money on my financial investment." His economist friend points out that in effect he did lose money, because he could have received a 3 percent return on the $1000 if he had bought a bank certificate of deposit instead of the coins. The economist's analysis in this case incorporates the idea of: A) opportunity costs C) imperfect information. B) marginal benefits that exceed marginal costs. D) normative economics. Answer: A

Type: A Topic: 1 E: 4-5 MI: 4-5 MA: 4-5 8. There is too little of a good thing when its marginal: A) benefit exceeds its marginal cost. C) cost equals its marginal benefit. B) cost exceeds its marginal benefit. D) benefit is still positive. Answer: A

Type: D Topic: 1 E: 3 MI: 3 MA: 3 9. Economics may best be defined as the: A) interaction between macro and micro considerations. B) social science concerned with the efficient use of scarce resources to achieve maximum satisfaction of economic wants. C) empirical testing of value judgments through the use of logic. D) use of policy to refute facts and hypotheses. Answer: B

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Chapter 1: The Nature and Method of Economics

Type: D Topic: 1 E: 3 MI: 3 MA: 3 10. The study of economics is primarily concerned with: A) keeping private businesses from losing money. B) demonstrating that capitalistic economies are superior to socialistic economies. C) choices that are made in seeking to use scarce resources efficiently. D) determining the most equitable distribution of society's output. Answer: C

Type: D Topic: 1 E: 4 MI: 4 MA: 4 11. The economic perspective refers to: A) macroeconomic phenomena, but not microeconomic phenomena. B) microeconomic phenomena, but not macroeconomic phenomena. C) the making of rational decisions in a context of marginal costs and marginal benefits. D) unlimited resources in a context of limited economic wants. Answer: C

Type: D Topic: 1 E: 4 MI: 4 MA: 4 12. The economic perspective entails: A) irrational behavior by individuals and institutions. B) a comparison of marginal benefits and marginal costs in decision making. C) short-term but not long-term thinking. D) rejection of the scientific method. Answer: B

Type: D Topic: 1 E: 4 MI: 4 MA: 4 13. Rational behavior suggests that: A) everyone will make identical choices. B) resource availability exceeds economic wants. C) individuals will make different choices because their preferences and circumstances differ. D) an individual's economic goals cannot involve tradeoffs. Answer: C

Type: D Topic: 1 E: 4 MI: 4 MA: 4 14. Economics involves marginal analysis because: A) most decisions involve changes from the present situation. B) marginal benefits always exceed marginal costs. C) marginal costs always exceed marginal benefits. D) much economic behavior is irrational. Answer: A

Type: A Topic: 1 E: 5 MI: 5 MA: 5 15. You should decide to go to a movie: A) if the marginal cost of the movie exceeds its marginal benefit. B) if the marginal benefit of the movie exceeds its marginal cost. C) if your income will allow you to buy a ticket. D) because movies are enjoyable. Answer: B

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Type: D Topic: 1 E: 5 MI: 5 MA: 5 16. Marginal costs exist because: A) the decision to produce more of some product means the sacrifice of other products. B) wants are scarce relative to resources. C) households and businesses make rational decisions. D) most decisions do not involve sacrifices or tradeoffs. Answer: A

Type: D Topic: 1 E: 3 MI: 3 MA: 3 17. The assertion that "There is no free lunch" means that: A) there are always tradeoffs between economic goals. B) all production involves the use of scarce resources and thus the sacrifice of alternative goods. C) marginal analysis is not used in economic reasoning. D) choices need not be made if behavior is rational. Answer: B

Type: A Topic: 1 E: 4 MI: 4 MA: 4 18. Consumers spend their incomes to get the maximum benefit or satisfaction from the goods and services they purchase. This is a reflection of: A) resource scarcity and the necessity of choice. B) rational behavior. C) marginal costs that exceed marginal benefits. D) the tradeoff problem that exists between competing goals. Answer: B

Type: A Topic: 1 E: 5 MI: 5 MA: 5 19. There can be too much of a good thing. This statement suggests that: A) rational choice cannot be applied to many economic decisions. B) a good may be produced to the point where its marginal cost exceeds its marginal benefit. C) certain goods and services such as education and health care are inherently desirable and should be produced regardless of costs and benefits. D) a good may be produced to the point where its marginal benefit exceeds its marginal cost. Answer: B

Type: A Topic: 1 E: 5 MI: 5 MA: 5 20. Even though local newspapers are very inexpensive, people rarely buy more than one of them each day. This fact: A) is an example of irrational behavior. B) implies that reading should be taught through phonics rather than the whole language method. C) contradicts the economic perspective. D) implies that, for most people, the marginal benefit of reading a second newspaper is less than the marginal cost. Answer: D

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Chapter 1: The Nature and Method of Economics

Benefits of studying economics

Type: A Topic: 2 E: 5 MI: 5 MA: 5 21. Studying economics: A) helps one become a better-informed citizen and voter. B) is detrimental to good citizenship because economics emphasizes individualism. C) is a waste of time since we all participate in the economy whether we understand it or not. D) is important because economics is the science of earning money. Answer: A

Type: A Topic: 2 E: 5 MI: 5 MA: 5 22. Learning economics: A) is detrimental to good citizenship because economics emphasizes individualism. B) is helpful to employers, but not to workers and consumers. C) is important because economics is the science of earning money. D) helps students improve analytical skills that are in great demand in the workplace. Answer: D

Type: A Topic: 2 E: 6 MI: 6 MA: 6 23. The study of economics: A) is similar to management, marketing, and finance since it emphasizes how to make money. B) is helpful to businesses, but not particularly helpful in making personal buying decisions. C) is mainly an academic, not a vocational subject. D) looks at the economy from the viewpoint of one's own pocketbook, not from the standpoint of society's interest. Answer: C

Methodology

Type: D Topic: 3 E: 6 MI: 6 MA: 6 24. An economic hypothesis: A) has the same meaning as an economic principal or economic law. B) is usually a normative statement. C) is a possible explanation of cause and effect. D) is a stronger generalization than an economic law. Answer: C

Type: A Topic: 3 E: 6 MI: 6 MA: 6 25. Which of the following terms implies the least degree of confidence in an economic generalization? A) a hypothesis B) a theory C) a principle D) a law Answer: A

Type: A Topic: 3 E: 7 MI: 7 MA: 7 26. Which of the following terms implies the greatest degree of confidence in an economic generalization? A) a hypothesis B) a theory C) a principle D) an anomaly Answer: C

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Type: D Topic: 3 E: 7 MI: 7 MA: 7 27. A well-tested economic theory is often called: A) a hypothesis. B) a prototype. C) a principle. D) an anomaly. Answer: C

Type: C Topic: 3 E: 7 MI: 7 MA: 7 28. Economists: A) use both the economic perspective and the scientific method. B) use the economic perspective but not the scientific method. C) make positive economic statements, but not normative economic statements. D) reject theorizing as being impractical. Answer: A

Type: A Topic: 3 E: 6 MI: 6 MA: 6 29. The scientific method is: A) not applicable to economics, because economics deals with human beings. B) also known as the economic perspective. C) analysis that moves from broad generalizations called laws to theories and then to hypotheses. D) used by economists and other social scientists, as well as by physical scientists and life scientists. Answer: D

Type: D Topic: 3 E: 7 MI: 7 MA: 7 30. The process by which economists test hypotheses against facts to develop theories, principles, and models is called: A) the economic perspective. B) the scientific method. C) policy economics. D) microeconomcis. Answer: B

Type: D Topic: 3 E: 6 MI: 6 MA: 6 31. Economic theories: A) are useless because they are not based on laboratory experimentation. B) that are true for individual economic units are never true for the economy as a whole. C) are generalizations based on a careful observation of facts. D) are abstractions and therefore of no application to real situations. Answer: C

Type: A Topic: 3 E: 6 MI: 6 MA: 6 32. Theoretical economics: A) is also known as policy economics. B) is the process of deriving principles of economics. C) is highly impractical since it does not deal with the real world. D) rejects the scientific method as being inappropriate for the social sciences. Answer: B

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Type: D Topic: 3 E: 7 MI: 7 MA: 7 33. Which of the following is a correct statement? A) Economic concepts or laws that are valid during depression are necessarily valid during prosperity. B) Though not quantitatively exact, economic laws are useful because they allow us to predict and therefore control or adjust to events. C) Economics is as scientific as are physics and chemistry because economic laws are as quantitatively precise as the laws of physics or chemistry. D) Because economics is concerned with questions of "ought," it is a branch of applied ethics and not scientific. Answer: B

Type: D Topic: 3 E: 7 MI: 7 MA: 7 34. In constructing models, economists: A) make simplifying assumptions. B) include all available information. Answer: A

C) must use mathematical equations. D) attempt to duplicate the real world.

Type: D Topic: 3 E: 7 MI: 7 MA: 7 35. Economic models: A) are of limited use because they cannot be tested empirically. B) are limited to variables that are directly related to one another. C) emphasize basic economic relationships by abstracting from the complexities of the real world. D) are unrealistic and therefore of no practical consequence. Answer: C

Type: D Topic: 3 E: 7 MI: 7 MA: 7 36. The term "ceteris paribus" means: A) that if event A precedes event B, A has caused B. B) that economics deals with facts, not values. C) other things equal. D) prosperity inevitably follows recession. Answer: C

Type: D Topic: 3 E: 7 MI: 7 MA: 7 37. The basic purpose of the other-things-equal assumption is to: A) allow one to reason about the relationship between variables X and Y without the intrusion of variable Z. B) allow one to focus upon micro variables by ignoring macro variables. C) allow one to focus upon macro variables by ignoring micro variables. D) determine whether X causes Y or vice versa. Answer: A

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Type: A Topic: 3 E: 7 MI: 7 MA: 7 38. Suppose an economist says that "Other things equal, the lower the price of bananas, the greater the amount of bananas purchased." This statement indicates that: A) the quantity of bananas purchased determines the price of bananas. B) all factors other than the price of bananas (for example, consumer tastes and incomes) are assumed to be constant. C) economists can conduct controlled laboratory experiments. D) one cannot generalize about the relationship between the price of bananas and the quantity purchased. Answer: B

Type: D Topic: 3 E: 6 MI: 6 MA: 6 39. An hypothesis is: A) a fundamental truth that all economists accept. B) a tentative, untested statement of possible cause and effect. C) the same as a normative statement. D) also known as a principle or law. Answer: B

Type: D Topic: 3 E: 8 MI: 8 MA: 8 40. The term "other things equal" means that: A) the associated statement is normative. B) many variables affect the variable under consideration. C) a number of relevant variables are assumed to be constant. D) when variable X increases so does related variable Y. Answer: C

Economic policy and goals

Type: F Topic: 4 E: 8 MI: 8 MA: 8 Status: New 41. Which of the following statements is true? A) The process of deriving economic theories and principles is known as policy economics. B) Full employment, price-level stability, and economic growth are widely accepted macroeconomics goals in the United States. C) Normative economics deals with "what is," whereas positive economics deals with "what ought to be." D) There can be too little of a good thing, but never too much of a good thing. Answer: B

Type: A Topic: 4 E: 8 MI: 8 MA: 8 42. In formulating economic policy it is important to: A) use only positive economics, not normative economics. B) consider the benefits and costs of the various policy options for reaching desired goals. C) avoid outcomes for which marginal benefits exceed marginal costs. D) use only normative economics, not positive economics. Answer: B

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Type: D Topic: 4 E: 9 MI: 9 MA: 9 43. If there is a tradeoff between goals A and B: A) greater fulfillment of A means lesser fulfillment of B. B) goals A and B are positively correlated. C) causation exists between the two goals. D) greater fulfillment of A means greater fulfillment of B. Answer: A

Type: A Topic: 4 E: 9 MI: 9 MA: 9 44. The achieving of complete economic freedom is most likely to conflict with the goal of: A) price-level stability. C) an equitable distribution of income. B) economic growth. D) economic efficiency. Answer: C

Type: A Topic: 4 E: 9 MI: 9 MA: 9 45. If a reduction in the unemployment rate is always accompanied by a reduction in income inequality, then: A) full employment and greater income equality are conflicting goals. B) full employment and greater income equality are compatible goals. C) reduced income inequality is a more important goal than is achieving full employment. D) achieving full employment is a more important goal than reducing income inequality. Answer: B

Type: A Topic: 4 E: 10 MI: 10 MA: 10 46. Most of the disagreement among economists involves: A) the use of statistics. B) the gathering of facts. C) generalizing upon facts. Answer: D

D) policy economics.

Type: A Topic: 4 E: 9 MI: 9 MA: 9 47. With respect to the basic economic goals of society, for example, economic growth, full employment, economic efficiency, price level stability, economic freedom, distributional equity, and economic security, it can be said that: A) all are accepted and assigned similar priorities in every industrialized society. B) all are precisely measurable. C) some goals are complementary and others are conflicting. D) all are conflicting goals. Answer: C

Macroeconomics and microeconomics

Type: D Topic: 5 E: 9 MI: 9 MA: 9 48. Macroeconomics approaches the study of economics from the viewpoint of: A) the entire economy. B) governmental units. C) the operation of specific product and resource markets. D) individual firms. Answer: A

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Type: A Topic: 5 E: 9 MI: 9 MA: 9 49. Which of the following is associated with macroeconomics? A) an examination of the incomes of Harvard Business School graduates B) an empirical investigation of the general price level and unemployment rates since 1990 C) a study of the trend of pecan prices since the Second World War D) a case study of pricing and production in the textbook industry Answer: B

Type: A Topic: 5 E: 9 MI: 9 MA: 9 50. The problems of aggregate inflation and unemployment are: A) major topics of macroeconomics. C) major topics of microeconomics. B) not relevant to the U.S. economy. D) peculiar to command economies. Answer: A

Type: A Topic: 5 E: 9 MI: 9 MA: 9 51. Which of the following statements pertains to macroeconomics? A) Because the minimum wage was raised, Mrs. Olsen decided to enter the labor force. B) A decline in the price of soybeans caused farmer Wanek to plant more land in wheat. C) The national productivity rate grew by 2.7 percent last year. D) The Pumpkin Center State Bank increased its interest rate on consumer loans by 1 percentage point. Answer: C

Type: D Topic: 5 E: 9 MI: 9 MA: 9 52. Macroeconomics can best be described as the: A) analysis of how a consumer tries to spend income. B) study of the large aggregates of the economy or the economy as a whole. C) analysis of how firms attempt to maximize their profits. D) study of how supply and demand determine prices in individual markets. Answer: B

Type: D Topic: 5 E: 9 MI: 9 MA: 9 53. Microeconomics is concerned with: A) the aggregate or total levels of income, employment, and output. B) a detailed examination of specific economic units that make up the economic system. C) positive economics, but not normative economics. D) the establishing of an overall view of the operation of the economic system. Answer: B

Type: D Topic: 5 E: 9 MI: 9 MA: 9 54. Microeconomics: A) is the basis for the "after this, therefore because of this" fallacy. B) is not concerned with details, but only with the overall big picture of the economy. C) is concerned with individual economic units and specific markets. D) describes the aggregate flows of output and income. Answer: C

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Type: A Topic: 5 E: 9 MI: 9 MA: 9 55. Which of the following is a macroeconomic statement? A) The gross profits of all U.S. businesses were $182 billion last year. B) The price of beef declined by 3 percent last year. C) General Motors' profits increased last year. D) The productivity of steelworkers increased by 1 percent last year. Answer: A

Type: A Topic: 5 E: 9 MI: 9 MA: 9 56. Which of the following is a microeconomic statement? A) The real domestic output increased by 2.5 percent last year. B) Unemployment was 6.8 percent of the labor force last year. C) The price of personal computers declined last year. D) The general price level increased by 4 percent last year. Answer: C

Positive and normative statements

Type: D Topic: 6 E: 10 MI: 10 MA: 10 57. A normative statement is one that: A) is based on the law of averages. B) applies only to microeconomics. Answer: D

C) applies only to macroeconomics. D) is based on value judgments.

Type: A Topic: 6 E: 10 MI: 10 MA: 10 58. Which of the following is a normative statement? A) The temperature is high today. B) The humidity is high today. Answer: C

C) It is too hot to play tennis today. D) It will cool off later this evening.

Type: D Topic: 6 E: 10 MI: 10 MA: 10 59. A positive statement is one which is: A) derived by induction. B) derived by deduction. Answer: D

C) subjective and is based on a value judgment. D) objective and is based on facts.

Type: A Topic: 6 E: 10 MI: 10 MA: 10 60. Which of the following is a positive statement? A) The humidity is too high today. B) It is too hot to jog today. Answer: C

C) The temperature is 92 degrees today. D) I enjoy summer evenings when it cools off.

Type: D Topic: 6 E: 10 MI: 10 MA: 10 61. Normative statements are concerned with: A) facts and theories. B) what ought to be. Answer: B

C) what is. D) rational choice involving costs and benefits.

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Type: D Topic: 6 E: 10 MI: 10 MA: 10 62. A positive statement is concerned with: A) some goal that is desirable to society. B) what should be. Answer: C

C) what is. D) the formulation of economic policy.

Type: A Topic: 6 E: 10 MI: 10 MA: 10 63. Ideally, value judgments are involved at the: A) levels of facts, theory, and policy. B) levels of facts and theory only. Answer: D

C) level of facts only. D) level of policy only.

Type: A Topic: 6 E: 10 MI: 10 MA: 10 64. Most of the disagreement among economists involves: A) facts. B) principles. C) positive statements. D) normative statements. Answer: D

Type: A Topic: 6 E: 10 MI: 10 MA: 10 65. "Economics is concerned with using scarce productive resources efficiently in attempting to satisfy society's economic wants." This statement is: A) positive, but incorrect. C) normative, but incorrect. B) positive and correct. D) normative and correct. Answer: B

Type: A Topic: 6 E: 10 MI: 10 MA: 10 66. Ben says that "An increase in the tax on beer will raise its price." Holly argues that "Taxes should be increased on beer because college students drink too much." We can conclude that: A) Ben's statement is normative, but Holly's is positive. B) Holly's statement is normative, but Ben's is positive. C) Both statements are normative. D) Both statements are positive. Answer: B

Logical pitfalls

Type: D Topic: 7 E: 11 MI: 11 MA: 11 67. The fallacy of composition states that: A) because economic systems are composed of so many diverse economic units, economic laws are necessarily inexact. B) the anticipation of a particular event can affect the composition of that event when it occurs. C) what is true for the individual must necessarily be true for the group. D) because event A precedes event B, A is necessarily the cause of B. Answer: C

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Type: D Topic: 7 E: 11 MI: 11 MA: 11 68. The "after this, because of this" fallacy states that: A) because event A precedes event B, A is necessarily the cause of B. B) the very attempt to accomplish a certain objective may create conditions that prohibit the achievement of that goal. C) events may drastically alter plans; one's intentions and actual accomplishments may differ considerably. D) generalizations that are accurate at the level of microeconomics may be inaccurate at the level of macroeconomics. Answer: A

Type: A Topic: 7 E: 11 MI: 11 MA: 11 69. The safest way for an individual to leave a burning theater is to run for the nearest exit; it is therefore also the best means of escape for a large audience. This assertion illustrates the: A) "after this, therefore because of this" fallacy. C) fallacy of composition. B) correlation fallacy. D) fallacy of limited decisions. Answer: C

Type: D Topic: 7 E: 11 MI: 11 MA: 11 70. Which of the following has to do with the idea that generalizations that apply to individuals are also always valid for a group? A) the law of large numbers C) the fallacy of composition B) the law of averages D) the post hoc, ergo propter hoc fallacy Answer: C

Type: D Topic: 7 E: 11 MI: 11 MA: 11 71. The fallacy of composition states that: A) generalizations relevant to microeconomics never apply to macroeconomics. B) expectations give rise to self-fulfilling prophesies. C) generalizations pertaining to individuals always apply to the group. D) quantifiable economic goals are always incompatible with one another. Answer: C

Type: D Topic: 7 E: 11 MI: 11 MA: 11 72. The "after this, because of this" fallacy states that: A) positive statements are always followed by normative judgments. B) positive statements can never be proven true or false. C) if one acts on one's expectations, those expectations will always be fulfilled. D) cause and effect can be determined merely by observing the sequence of events. Answer: D

Type: A Topic: 7 E: 11 MI: 11 MA: 11 73. If you leave a football game at the end of the third quarter, you will avoid traffic and get home more quickly. Therefore, everyone should leave the game early. This assertion illustrates the: A) moral hazard problem. C) fallacy of limited decisions. B) adverse selection problem. D) fallacy of composition. Answer: D

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Type: D Topic: 7 E: 11 MI: 11 MA: 11 74. Which of the following has to do with the problem of distinguishing cause and effect in economic reasoning? A) the law of large numbers C) the post hoc, ergo propter hoc fallacy B) the law of averages D) the fallacy of composition Answer: C

Type: D Topic: 7 E: 11 MI: 11 MA: 11 75. Which of the following best illustrates the post hoc, ergo propter hoc fallacy? A) Because it was 90 degrees today, I worked up a sweat playing tennis. B) I took the day off work to go to the beach and that's why it rained. C) Because it rained at the football game, my new sweater got wet. D) Because I have studied diligently this semester, my grade average has improved. Answer: B

Type: D Topic: 7 E: 11 MI: 11 MA: 11 76. The fallacy of composition is essentially the error of: A) omitting relevant variables in constructing a model. B) reasoning from the general to the particular. C) confusing cause and effect in economic relationships. D) generalizing from the particular to the general. Answer: D

Type: D Topic: 7 E: 11 MI: 11 MA: 11 77. The post hoc fallacy and the correlation problem both relate to: A) the calculation of marginal costs and marginal benefits of any economic activity. B) the issue of determining causation. C) the frequent inability of households and businesses to behave rationally. D) the tradeoff problem associated with competing goals. Answer: B

Type: A Topic: 7 E: 11 MI: 11 MA: 11 78. If variables X and Y are positively correlated, this means that: A) X is the cause of Y . B) Y is the cause of X. C) causation necessarily exists, but we don't know whether X or Y is the cause. D) causation may or may not exist between X and Y . Answer: D

Type: A Topic: 7 E: 11 MI: 11 MA: 11 Status: New 79. "The government deregulated the electricity industry in California and a shortage of electricity soon occurred. It is clear that the deregulation caused the shortage." This statement needs careful analysis because it may reflect the: A) the fallacy of composition. C) use of loaded terminology. B) post hoc, ergo propter hoc fallacy. D) the law of averages. Answer: B

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Type: A Topic: 7 E: 10 MI: 10 MA: 10 Status: New 80. A caller to a radio talk show states that multinational corporations are "greedy exploiters of the poor." This is an example of: A) loaded terminology. B) the "after this, therefore because of this fallacy." C) the fallacy of composition. D) the economic perspective. Answer: A

Type: A Topic: 7 E: 10 MI: 10 MA: 10 Status: New 81. A caller to a radio talk show states that protesters against globalization are a collection of "anarchist punks, naïve college students, and trade union radicals." This is an example of: A) the fallacy of composition. C) loaded terminology. B) the economic perspective. D) marginal analysis. Answer: C

Type: F Topic: 7 E: 11 MI: 11 MA: 11 Status: New 82. A study found that the incidence of skin cancer increases along with the amount of time people work under fluorescent light, leading some people to conclude that fluorescent lighting is a cause of skin cancer. But further analysis found that people who work in offices, where fluorescent light is common, suffer more sunburn on their vacations than other workers. The sunburns, not the fluorescent light, were the cause of the higher incidence of skin cancer. The original conclusion illustrates: A) the fallacy of composition. B) confusion of correlation and causation. C) identifying marginal costs and marginal benefits. D) biases and loaded terminology. Answer: B

Consider This Questions

Type: F E: 4 MI: 4 MA: 4 Status: New 83. (Consider This) Free products offered by firms: A) may or may not be free to society, but are never free to individuals. B) may or may not be free to individuals, but are never free to society. C) are produced and distributed at no cost to society. D) usually are items nobody wants. Answer: B

Type: F E: 4 MI: 4 MA: 4 Status: New 84. (Consider This) The assertion by economists that "there is no free lunch" is: A) contradicted by the presence of free goods offered by firms. B) applies to goods that have prices, not to goods given away free by firms. C) remains true even for goods given away free by firms. D) applies to agricultural goods, but not to manufactured goods. Answer: C

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Last Word Questions

Type: A E: 12 MI: 12 MA: 12 85. (Last Word) The economic perspective used in customer decision making at fast-food restaurants is reflected in: A) customers selecting the shortest line. B) decisions for which marginal costs exceed marginal benefits. C) all customer lines tending to be of different length. D) irrational purchasing of high-fat-content food. Answer: A

Type: A E: 12 MI: 12 MA: 12 86. (Last Word) At fast-food restaurants: A) consumers enjoy complete and accurate information. B) decisions are usually made by trial and error. C) decisions entail comparisons of marginal costs and marginal benefits. D) benefits always exceed costs. Answer: C

Type: A E: 12 MI: 12 MA: 12 87. (Last Word) Consumers might leave a fast-food restaurant without being served because: A) they are misinformed about the marginal cost and marginal benefits of the food being served. B) they conclude that the marginal cost (monetary plus time costs) exceeds the marginal benefit. C) the environment is not conducive to a rational choice. D) the lines waiting for service are not of equal length. Answer: B

True/False Questions

Type: D E: 7 MI: 7 MA: 7 88. An economic model is an ideal or utopian type of economy that society should strive to obtain through economic policy. Answer: False

Type: D E: 7 MI: 7 MA: 7 89. Because economic generalizations are abstract, they are impractical and useless. Answer: False

Type: D E: 7 MI: 7 MA: 7 90. If economic theories are solidly based on relevant facts, then appropriate economic policy becomes obvious and undebatable. Answer: False

Type: A E: 10 MI: 10 MA: 10 91. Normative statements are expressions of facts. Answer: False

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Type: D E: 10 MI: 10 MA: 10 92. Positive statements are expressions of value judgments. Answer: False

Type: D E: 3 MI: 3 MA: 3 93. The primary objective of economics is to help businesspersons operate their firms profitably. Answer: False

Type: D E: 9 MI: 9 MA: 9 94. The basic goals for the U.S. economy are always complementary since the achievement of any one goal simultaneously furthers the attainment of other basic goals. Answer: False

Type: D E: 9 MI: 9 MA: 9 95. Macroeconomics explains the behavior of individual households and business firms; microeconomics is concerned with the behavior of aggregates or the economy as a whole. Answer: False

Type: D E: 4 MI: 4 MA: 4 96. Rational behavior implies that everyone will make identical choices. Answer: False

Type: D E: 4 MI: 4 MA: 4 97. Marginal analysis means that decision-makers compare the extra benefits with the extra costs of a specific choice. Answer: True

Type: D E: 4 MI: 4 MA: 4 98. Certain inherently desirable products such as education and health care should be produced so long as resources are available. Answer: False

Type: A E: 4 MI: 4 MA: 4 99. Rational individuals may make different choices because their preferences and circumstances differ. Answer: True

Type: D E: 4 MI: 4 MA: 4 100. Choices entail marginal costs because resources are scarce. Answer: True

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Appendix Multiple Choice Questions Construction and interpretation of graphs

Type: D Topic: 8 E: 16 MI: 16 MA: 16 101. If we say that two variables are directly related, this means that: A) the relationship between the two is purely random. B) an increase in one variable is associated with a decrease in the other variable. C) an increase in one variable is associated with an increase in the other variable. D) the two graph as a downsloping line. Answer: C

Type: D Topic: 8 E: 16 MI: 16 MA: 16 102. If we say that two variables are inversely related, this means that: A) the two graph as an upsloping line. B) an increase in one variable is associated with a decrease in the other. C) an increase in one variable is associated with an increase in the other. D) the resulting relationship can be portrayed by a straight line parallel to the horizontal axis. Answer: B

Type: D Topic: 8 E: 16 MI: 16 MA: 16 103. Economists: A) always put the independent variable on the horizontal axis and the dependent variable on the vertical axis. B) always put the dependent variable on the horizontal axis and the independent variable on the vertical axis. C) are somewhat arbitrary in assigning independent and dependent variables to the horizontal and vertical axes. D) measure the slope of a line differently than do mathematicians. Answer: C

Type: D Topic: 8 E: 16 MI: 16 MA: 16 104. Which of the following statements is correct? A) The value of the independent variable is determined by the value of the dependent variable. B) The value of the dependent variable is determined by the value of the independent variable. C) The dependent variable designates the "cause" and the independent variable the "effect." D) Dependent variables graph as upsloping lines; independent variables graph as downsloping lines. Answer: B

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Use the following to answer questions 105-108:

Type: G Topic: 8 E: 16 MI: 16 MA: 16 105. Refer to the above diagram. Which line(s) show(s) a positive relationship between x and y? A) A only B) both A and D C) A, B, and D D) both C and E Answer: C

Type: G Topic: 8 E: 16 MI: 16 MA: 16 106. Refer to the above diagram. Which line(s) show(s) a negative relationship between x and y? A) A only B) both A and D C) A, B, and D D) both C and E Answer: D

Type: G Topic: 8 E: 18 MI: 18 MA: 18 107. Refer to the above diagram. Which line(s) show(s) a positive vertical intercept? A) A and D only B) B and C only C) A, D, and E D) A, D, and B Answer: C

Type: G Topic: 8 E: 18 MI: 18 MA: 18 108. Refer to the above diagram. Which line(s) show(s) a negative vertical intercept? A) C only B) both C and E C) B, C, and E D) both B and C Answer: D

Type: G Topic: 8 E: 16 MI: 16 MA: 16 109. If two variables are inversely related, then as the value of one variable: A) increases, the value of the other may either increase or decrease. B) decreases, the value of the other decreases. C) increases, the value of the other decreases. D) increases, the value of the other increases. Answer: C

Type: G Topic: 8 E: 16 MI: 16 MA: 16 110. If a positive relationship exists between x and y: A) an increase in x will cause y to decrease. B) a decrease in x will cause y to increase. Answer: C

C) the relationship will graph as an upsloping line. D) the vertical intercept must be positive.

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Use the following to answer questions 111-113:

Type: D Topic: 8 E: 16 MI: 16 MA: 16 111. Answer on the basis of the relationships shown in the above four figures. The amount of Y is directly related to the amount of X in: A) both 1 and 3. B) both 1 and 2. C) 2 only. D) l only. Answer: D

Type: A Topic: 8 E: 16 MI: 16 MA: 16 112. Answer on the basis of the relationships shown in the above four figures. The amount of Y is inversely related to the amount of X in: A) 2 only. B) both 1 and 3. C) 3 only. D) 1 only. Answer: C

Type: G Topic: 8 E: 16 MI: 16 MA: 16 113. Answer on the basis of the relationships shown in the above four figures. The amount of Y is unrelated to the amount of X in: A) both 2 and 4. B) 3 only. C) 2 only. D) 1. Answer: C

Type: G Topic: 8 E: 16 MI: 16 MA: 16 114. If price (P) and quantity (Q) are directly related, this means that: A) a change in Q will alter P, but a change in P will not alter Q. B) if P increases, Q will decrease. C) if P increases, Q will also increase. D) an increase in P will cause Q to change, but the direction in which Q changes cannot be predicted. Answer: C

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Chapter 1: The Nature and Method of Economics

Use the following to answer questions 115-117: Answer the next question(s) on the basis of the following information. Assume that if the interest rate that businesses must pay to borrow funds were 20 percent, it would be unprofitable for businesses to invest in new machinery and equipment so that investment would be zero. But if the interest rate were 16 percent, businesses will find it profitable to invest $10 billion. If the interest rate were 12 percent, $20 billion would be invested. Assume that total investment continues to increase by $10 billion for each successive 4 percentage point decline in the interest rate.

Type: G Topic: 8 E: 16 MI: 16 MA: 16 115. Refer to the above information. Which of the following is an accurate verbal statement of the described relationship? A) There is no regular or dependable relationship between business investment and the interest rate. B) The amount of business investment is unaffected by changes in the interest rate. C) Investment spending by businesses varies inversely with the interest rate. D) Investment spending by businesses varies directly with the interest rate. Answer: C

Type: A Topic: 8 E: 16 MI: 16 MA: 16 116. Refer to the above information. Using i and I to indicate the interest rate and investment (in billions of dollars) respectively, which of the following is the correct tabular presentation of the described relationship? (a) i 20 16 12 8 4 0 I $50 40 30 20 10 0 i 24 20 16 12 8 4 (b) I $10 20 30 40 50 60 i 20 16 12 8 4 0 (c) I $ 0 10 20 30 40 50 i 20 16 12 8 4 0 (d) I $10 20 30 40 50 60

Answer: C

Type: D Topic: 8 E: 16 MI: 16 MA: 16 117. Refer to the above information. Which of the following correctly expresses the indicated relationship as an equation? A) i = 20 - 4I. B) i = 20 - .4I. C) i = 24 - .4I. D) i = 20 - 10I. Answer: B

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Type: T Topic: 8 E: 16 MI: 16 MA: 16 118.

Assume that if the interest rate that businesses must pay to borrow funds were 20 percent, it would be unprofitable for businesses to invest in new machinery and equipment so that investment would be zero. But if the interest rate were 16 percent, businesses will find it profitable to invest $10 billion. If the interest rate were 12 percent, $20 billion would be invested. Assume that total investment continues to increase by $10 billion for each successive 4 percentage point decline in the interest rate. Refer to the above graph. Which of the following is the correct graphical presentation of the indicated relationship? A) line 4 B) line 3 C) line 2 D) line 1 Answer: D

Use the following to answer questions 119-121: Answer the next question(s) on the basis of the following data: After-tax income $1000 2000 3000 4000 5000 Consumption $ 900 1800 2700 3600 4500

Type: G Topic: 8 E: 16 MI: 16 MA: 16 119. The above data suggest that: A) consumption varies inversely with after-tax income. B) consumption varies directly with after-tax income. C) consumption and after-tax income are unrelated. D) a tax increase will increase consumption. Answer: B

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Type: G Topic: 8 E: 16 MI: 16 MA: 16 120. The above data indicate that: A) consumers spend 80 percent of their after-tax incomes. B) consumers spend 90 percent of their after-tax incomes. C) a tax reduction will reduce consumption. D) the relationship between consumption and after-tax income is random. Answer: B

Type: T Topic: 8 E: 17 MI: 17 MA: 17 121. The above data suggest that: A) a policy of tax reduction will increase consumption. B) a policy of tax increases will increase consumption. C) tax changes will have no impact on consumption. D) after-tax income should be lowered to increase consumption. Answer: A

Type: T Topic: 8 E: 17 MI: 17 MA: 17 122. The slope of a straight line can be determined by: A) comparing the absolute horizontal change to the absolute vertical change between two points on the line. B) comparing the absolute vertical change to the absolute horizontal change between two points on the line. C) taking the reciprocal of the vertical intercept. D) comparing the percentage vertical change to the percentage horizontal change between two points on the line. Answer: B

Use the following to answer questions 123-126:

Type: C Topic: 8 E: 16 MI: 16 MA: 16 123. Refer to the above diagram. The variables X and Y are: A) inversely related. B) directly related. C) unrelated. Answer: B

D) negatively related.

Type: A Topic: 8 E: 18 MI: 18 MA: 18 124. Refer to the above diagram. The vertical intercept: A) is 40. B) is 50. C) is 60. D) cannot be determined from the information given. Answer: B

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Type: G Topic: 8 E: 17 MI: 17 MA: 17 125. Refer to the above diagram. The slope of the line: A) is - 1/4. B) is + 1/4. C) is .40. D) cannot be determined from the information given. Answer: B

Type: G Topic: 8 E: 17 MI: 17 MA: 17 126. Refer to the above diagram. The equation that shows the relationship between Y and X is: A) Y = 50 + 1/4 X . B) X = 1/4 Y . C) Y = .4X . D) Y = 1/4 X - 50. Answer: A

Use the following to answer questions 127-131:

Type: E Topic: 8 E: 16 MI: 16 MA: 16 127. Refer to the above graph. Which of the following statements is correct? A) Quantity demanded and quantity supplied are independent of price. B) Price and quantity demanded are directly related. C) Price and quantity supplied are directly related. D) Price and quantity supplied are inversely related. Answer: C

Type: E Topic: 8 E: 16 MI: 16 MA: 16 128. Refer to the above graph. Which of the following schedules correctly reflects "demand"?

(a) P $12 10 8 6 4 2 Qd 0 0 10 20 30 40 P $14 12 10 8 6 4

(b) Qd 0 0 20 40 60 80 P $14 12 10 8 6 4

(c) Qd 60 50 40 30 20 10 P $12 10 8 6 4 2

(d) Qd 0 10 20 30 40 50

Answer: A

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Type: G Topic: 8 E: 16 MI: 16 MA: 16 129. Refer to the above graph. Which of the following schedules correctly reflects "supply"? (a) P Qs $12 50 10 30 8 10 6 0 4 0 2 0 Answer: C (b) P $14 12 10 8 6 4 Qs 50 40 30 20 10 0 P $12 10 8 6 4 2 (c) Qs 50 40 30 20 10 0 (d) P $12 10 8 6 4 2

Qs 0 0 10 20 30 40

Type: C Topic: 8 E: 18 MI: 18 MA: 18 130. Refer to the above graph. Using Qd for quantity demanded and P for price, which of the following equations correctly states the demand for this product? A) P = Qd/10. B) P = 50 - P/2. C) P = 10 - .2Qd. D) P = 10 - 2Qd. Answer: C

Type: C Topic: 8 E: 18 MI: 18 MA: 18 131. Refer to the above graph. Using Qs for quantity supplied and P for price, which of the following equations correctly states the supply of this product? A) P = 4 + .2Qs. B) P = 60/Qs. C) P = 10Qs - 2P. D) P = 2 + .2Qs. Answer: D

Type: E Topic: 8 E: 16 MI: 16 MA: 16 132. Assume a household would consume $100 worth of goods and services per week if its weekly income were zero and would spend an additional $80 per week for each $100 of additional income. Letting C represent consumption and Y represent income, the equation that summarizes this relationship is: A) C = 80 + 100Y . B) C = 100 + .8Y . C) C = 100 + 80Y . D) C = 80 + .1Y . Answer: B

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Chapter 1: The Nature and Method of Economics

Use the following to answer questions 133-139: Answer the next question(s) on the basis of the following five data sets wherein it is assumed that the variable shown on the left is the independent variable and the one on the right is the dependent variable. Assume in graphing these data that the independent variable is shown on the horizontal axis and the dependent variable on the vertical axis.

(1) J 0 40 80 120 160 200

(2) K 10 20 30 40 50 60 L 0 30 60 90 120 150 M -15 -5 5 15 25 35

(3) N 100 80 60 40 20 0

(4) P 40 50 60 70 80 90 R 0 20 40 60 80 100 T -15 -25 -35 -45 -55 -65 U 0 5 10 15 20 25

(5) V 0 10 20 30 40 50

Type: E Topic: 8 E: 18 MI: 18 MA: 18 133. Refer to the above data sets. The variables are directly related in: A) all five data sets. C) in data sets 1, 2, and 3 only. B) in none of the data sets. D) in data sets 1, 2, and 5 only. Answer: D

Type: E Topic: 8 E: 18 MI: 18 MA: 18 134. Refer to the above data sets. The vertical intercept is positive for: A) all five data sets. B) data sets 1 and 3 only. C) data sets 1, 3, and 5 only. Answer: B

D) data set 2 only.

Type: T Topic: 8 E: 18 MI: 18 MA: 18 135. Refer to the above data sets. The vertical intercept is negative for: A) none of the data sets. C) data sets 2 and 4 only. B) data sets 1 and 3 only. D) data sets 1 and 5 only. Answer: C

Type: T Topic: 8 E: 18 MI: 18 MA: 18 136. Refer to the above data sets. The equation for data set 3 is: A) P = 90 - .5N . B) P = 90 + .5N . C) P = .5N . D) P = 40 + .5N . Answer: A

Type: T Topic: 8 E: 18 MI: 18 MA: 18 137. Refer to the above data sets. For which data set(s) is the vertical intercept zero? A) data set 4 B) data set 5 C) data sets 2 and 3 D) data set 1 Answer: B

Type: E Topic: 8 E: 18 MI: 18 MA: 18 138. Refer to the above data sets. The equation for data set 5 is: A) V = .5Y . B) U = -.5V . C) U = V . D) V = 2U . Answer: D

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Type: E Topic: 8 E: 17 MI: 17 MA: 17 139. Refer to the above data sets. Which of the data sets would graph as an upsloping line? A) 1 only B) 1, 2, and 3 only C) 4 and 5 only D) 1, 2, and 5 only Answer: D

Type: E Topic: 8 E: 17 MI: 17 MA: 17 140. If the equation y = 5 + 6x was graphed, the: A) slope would be -5. B) slope would be +5. Answer: C

C) slope would be +.6. D) vertical intercept would be +.6.

Type: C Topic: 8 E: 17 MI: 17 MA: 17 141. If the equation y = 15 - 4x was plotted, the: A) vertical intercept would be -4. B) vertical intercept would be +4. Answer: D

C) vertical intercept would be +9. D) slope would be -4.

Type: E Topic: 8 E: 17 MI: 17 MA: 17 142. If the equation y = -10 + 2.5x was plotted: A) the vertical intercept would be -10. B) the slope would be -7.5. Answer: A

C) it would graph as a downsloping line. D) the slope would be -10.

Type: E Topic: 8 E: 18 MI: 18 MA: 18 143.

The movement from line A to line A' represents a change in: A) the slope only. C) both the slope and the intercept. B) the intercept only. D) neither the slope nor the intercept. Answer: B

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Use the following to answer questions 144-146:

Type: E Topic: 8 E: 16 MI: 16 MA: 16 144. In the above diagram variables x and y are: A) both dependent variables. B) directly related. Answer: C

C) inversely related.

D) unrelated.

Type: G Topic: 8 E: 18 MI: 18 MA: 18 145. In the above diagram the vertical intercept and slope are: A) 4 and -11/3 respectively. C) 3 and + 3/4 respectively. 1/ respectively. B) 3 and -1 3 D) 4 and + 3/4 respectively. Answer: A

Type: G Topic: 8 E: 18 MI: 18 MA: 18 146. In the above diagram the equation for this line is: A) y = 4 - 11/3 x. B) y = 3 + 3/4 x. C) y = 4 - 3/4 x. Answer: A

D) y = 4 + 11/3 x.

Type: G Topic: 8 E: 17 MI: 17 MA: 17 147. If we are considering the relationship between two variables and release one of the other-things-equal assumptions, we would expect: A) the relationship to change from direct to inverse. B) the line representing that relationship on a graph to change locations. C) the data points to have a tighter fit to the line representing the relationship. D) the relationship to change from inverse to direct. Answer: B

Type: G Topic: 8 E: 18 MI: 18 MA: 18 148. The amount of pizzas that consumers want to buy per week is reflected in the equation P = 15 - .02Qd, where Qd is the amount of pizzas purchased per week and P is the price of pizzas. On the basis of this information we can say that: A) if pizzas were free, people would consume 800 per week. B) more pizzas will be purchased at a high price than at a low price. C) if the price of pizzas is $6, then 150 will be purchased. D) 50 fewer pizzas will be purchased per week for every $1 increase in price. Answer: D

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Use the following to answer questions 149-151:

Type: A Topic: 8 E: 18 MI: 18 MA: 18 149. Refer to the above diagram. The slope of curve ZZ at point A is: A) +2. B) +21/2. C) -21/2. D) +4. Answer: B

Type: E Topic: 8 E: 18 MI: 18 MA: 18 150. Refer to the above diagram. The slope of curve ZZ at point B is: A) infinity. B) zero. C) +1. D) -1. Answer: B

Type: G Topic: 8 E: 18 MI: 18 MA: 18 151. Refer to the above diagram. The slope of curve ZZ at point C is: A) -4. B) -2. C) -22/5. D) +3. Answer: C

Type: G Topic: 8 E: 18 MI: 18 MA: 18 152. The slope of a line parallel to the vertical axis is: A) zero. B) one. C) infinite. D) one-half. Answer: C

Type: G Topic: 8 E: 18 MI: 18 MA: 18 153. The slope of a line parallel to the horizontal axis is: A) zero. B) one. C) infinite. D) one-half. Answer: A

Type: D Topic: 8 E: 18 MI: 18 MA: 18 154. The measured slope of a line: A) is independent of how the two variables are denominated. B) will be affected by how the two variables are denominated. C) necessarily diminishes as one moves rightward on the line. D) necessarily increases as one moves rightward on the line. Answer: B

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Type: D Topic: 8 E: 18 MI: 18 MA: 18 155. Slopes of lines are especially important in economics because: A) they measure marginal changes. B) they always tell us something about profits. C) positive slopes are always preferred to negative slopes. D) they always relate to resource and output scarcity. Answer: A

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CHAPTER 2

The Economizing Problem

Topic 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Economizing problem Economic resources Efficiency; full employment and full production Production possibilities analysis Opportunity costs Allocative efficiency Economic growth and decline Applications Economic systems Circular flow model Consider This Last Word True-False

Question numbers 1-12 13-23 24-27 28-95 96-105 106-117 118-132 133-140 141-149 150-165 166-167 168-170 171-184

____________________________________________________________

_______________________________________

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_______________________________________

Multiple Choice Questions Economizing problem

Type: D Topic: 1 E: 22 MI: 22 MA: 22 1. The economizing problem is one of deciding how to make the best use of: A) virtually unlimited resources to satisfy virtually unlimited wants. B) limited resources to satisfy virtually unlimited wants. C) unlimited resources to satisfy limited wants. D) limited resources to satisfy limited wants. Answer: B

Type: D Topic: 1 E: 24 MI: 24 MA: 24 2. The concept of economic efficiency is primarily concerned with: A) the limited wants-unlimited resources dilemma. B) considerations of equity in the distribution of wealth. C) obtaining the maximum output from available resources. D) the conservation of irreplaceable natural resources. Answer: C

Chapter 2: The Economizing Problem

Type: D Topic: 1 E: 23 MI: 22 MA: 22 3. When the economist says that economic wants are insatiable, this means that: A) economic resources are valuable only because they can be used to produce consumer goods. B) economic resources--land, labor, capital, and entrepreneurial ability--are scarce. C) these wants are virtually unlimited and therefore incapable of complete satisfaction. D) the structure of consumer demand varies from time to time and from country to country. Answer: C

Type: D Topic: 1 E: 22 MI: 23 MA: 23 4. The fundamental problem of economics is: A) to establish a democratic political framework for the provision of social goods and services. B) the establishment of prices that accurately reflect the relative scarcities of products and resources. C) the scarcity of productive resources relative to economic wants. D) to achieve a more equitable distribution of money income in order to mitigate poverty. Answer: C

Type: D Topic: 1 E: 22 MI: 22 MA: 22 5. The science of economics stems from the fact that: A) the production possibilities curve is bowed inward to the origin. B) resources are scarce relative to people's demand for goods and services. C) individuals and institutions behave only in their self-interest. D) historically the production possibilities curve has been shifting toward the origin. Answer: B

Type: D Topic: 1 E: 23 MI: 23 MA: 23 6. The study of economics exists because: A) government interferes with the efficient allocation of scarce resources. B) resources are scarce in relation to economic wants. C) the market system is an obstacle to the efficient use of plentiful resources to satisfy constrained wants. D) resources are overly abundant as compared to wants; thus, an allocation problem exists. Answer: B

Type: D Topic: 1 E: 23 MI: 23 MA: 23 7. The scarcity problem: A) persists only because countries have failed to achieve continuous full employment. B) persists because economic wants exceed available productive resources. C) has been solved in all industrialized nations. D) has been eliminated in affluent societies such as the United States and Canada. Answer: B

Type: D Topic: 1 E: 24 MI: 24 MA: 24 8. Because of their scarcity, the efficient use of resources is: A) an important issue in all economies. B) an important issue only in centrally planned economies. C) an important issue only in market economies. D) not an important issue. Answer: A

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Type: A Topic: 1 E: 24 MI: 24 MA: 24 9. An increase in efficiency suggests that an economy: A) has moved from a point outside of, to a point on, its production possibilities curve. B) has decided to produce more consumer goods and fewer capital goods. C) has moved from a point on, to a point inside, its production possibilities curve. D) is able to get more output from a given amount of inputs. Answer: D

Type: D Topic: 1 E: 24 MI: 24 MA: 24 10. Economics can best be described as the study of: A) how to profitably invest one's income in stocks and bonds. B) how to use scarce productive resources efficiently. C) how government policies affect businesses and labor. D) managing business enterprises for profit. Answer: B

Type: D Topic: 1 E: 23 MI: 23 MA: 23 11. As used in economics, the idea of scarce resources means that: A) mineral deposits are only available in finite amounts. B) resources are not so plentiful that all economic wants can be fulfilled. C) some resources are free while others have price tags on them. D) the quantities available of some resources exceed the demand for them. Answer: B

Type: D Topic: 1 E: 24 MI: 24 MA: 24 12. Economics is primarily the study of: A) why resources are scarce. B) how advertising and sales promotion shape consumer wants. C) how to make profitable financial investments. D) how to use scarce resources efficiently. Answer: D

Economic resources

Type: D Topic: 2 E: 23 MI: 23 MA: 23 Status: New 13. Which of the following is a land resource? A) a computer programmer C) silicon (sand) used to make computer chips B) a computer D) a piece of software used by a firm Answer: C

Type: D Topic: 2 E: 23 MI: 23 MA: 23 Status: New 14. Which of the following is a labor resource? A) a computer programmer C) silicon (sand) used to make computer chips B) a computer D) a piece of software used by a firm Answer: A

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Type: D Topic: 2 E: 23 MI: 23 MA: 23 Status: New 15. Which of the following is a capital resource? A) a computer programmer B) a corporate bond issued by a computer manufacturer C) silicone (sand) used to make computer chips D) a piece of software used by a firm Answer: D

Type: D Topic: 2 E: 23 MI: 23 MA: 23 Status: New 16. The four factors of production are: A) land, labor, capital, and money B) land, labor, capital, and entrepreneurial ability C) labor, capital, technology, and entrepreneurial ability D) labor, capital, entrepreneurial ability, and money Answer: B

Type: D Topic: 2 E: 29 MI: 29 MA: 29 17. Which of the following is a land resource? A) a farmer B) an oil drilling rig C) a machine for detecting earthquakes. D) natural gas Answer: D

Type: D Topic: 2 E: 23 MI: 23 MA: 23 18. Which of the following lists includes only capital resources (and therefore no labor or land resources)? A) an ice arena; a professional hockey player; hockey uniforms. B) the owner of a new startup firm; a chemistry lab; a researcher. C) a hydroelectric dam; water behind the dam; power lines. D) autos owned by a car rental firm; computers at the car rental agency; the vans that shuffle rental customers to and from the airport. Answer: D

Type: A Topic: 2 E: 23 MI: 23 MA: 23 19. Money is not an economic resource because: A) money, as such, is not productive. B) idle money balances do not earn interest income. C) the terms of trade can be determined in nonmonetary terms. D) money is not a free gift of nature. Answer: A

Type: D Topic: 2 E: 24 MI: 24 MA: 24 20. The money payments made to owners of land, labor, capital, and entrepreneurial ability are: A) interest, wages, rent, and profits respectively. B) rent, wages, dividends, and interest respectively. C) rent, profits, wages, and interest respectively. D) rent, wages, interest, and profits respectively. Answer: D

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Type: D Topic: 2 E: 24 MI: 24 MA: 24 21. Economic resources are also called: A) free gifts of nature. B) consumption goods. Answer: D

C) units of money capital.

D) factors of production.

Type: D Topic: 2 E: 23 MI: 23 MA: 23 22. Which of the following is real capital? A) a pair of stockings B) a construction crane Answer: B

C) a savings account

D) a share of IBM stock

Type: D Topic: 2 E: 23 MI: 23 MA: 23 23. The main function of the entrepreneur is to: A) make routine pricing decisions. B) innovate. Answer: B

C) purchase capital. D) create market demand.

Efficiency; full employment and full production

Type: D Topic: 3 E: 24 MI: 24 MA: 24 24. Assuming an economy has fixed quantities of resources, that economy: A) is more efficient, the larger the amount of goods and services it produces. B) is able to satisfy all consumer wants. C) will produce the same output whether or not resources are used efficiently. D) is able to produce the same amount of output regardless of the production technologies it chooses. Answer: A

Type: D Topic: 3 E: 24 MI: 24 MA: 24 25. Productive efficiency refers to: A) the use of the least-cost method of production. B) the production of the product-mix most wanted by society. C) the full employment of all available resources. D) production at some point inside of the production possibilities curve. Answer: A

Type: A Topic: 3 E: 24 MI: 24 MA: 24 26. If an economy produces its most wanted goods but uses outdated production methods, it is: A) achieving productive efficiency, but not allocative efficiency. B) not achieving productive efficiency. C) achieving both productive and allocative efficiency. D) engaged in roundabout production. Answer: B

Type: D Topic: 3 E: 24 MI: 24 MA: 24 27. To realize full production a society must achieve: A) income inequality. B) productive efficiency only. C) both allocative and productive efficiency. D) any output lying inside of its production possibilities curve. Answer: C

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Production possibilities analysis

Type: A Topic: 4 E: 26 MI: 26 MA: 26 28. The production possibilities curve illustrates the basic principle that: A) the production of more of any one good will in time require smaller and smaller sacrifices of other goods. B) an economy will automatically obtain full employment of its resources. C) if all the resources of an economy are in use, more of one good can be produced only if less of another good is produced. D) an economy's capacity to produce increases in proportion to its population size. Answer: C

Type: A Topic: 4 E: 29 MI: 29 MA: 29 29. Which of the following will not produce an outward shift of the production possibilities curve? A) an upgrading of the quality of a nation's human resources B) the reduction of unemployment C) an increase in the quantity of a society's labor force D) the improvement of a society's technological knowledge Answer: B

Type: A Topic: 4 E: 29 MI: 29 MA: 29 30. Unemployment and/or productive inefficiencies: A) cause the production possibilities curve to shift outward. B) can exist at any point on a production possibilities curve. C) are both illustrated by a point outside the production possibilities curve. D) are both illustrated by a point inside the production possibilities curve. Answer: D

Type: A Topic: 4 E: 27 MI: 27 MA: 27 31. If the production possibilities curve is a straight line: A) the two products will sell at the same market prices. B) economic resources are perfectly shiftable between the production of the two products. C) the two products are equally important to consumers. D) equal quantities of the two products will be produced at each possible point on the curve. Answer: B

Type: A Topic: 4 E: 26 MI: 26 MA: 26 32. A production possibilities curve illustrates: A) scarcity. B) market prices. C) consumer preferences. D) the distribution of income. Answer: A

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Type: A Topic: 4 E: 26 MI: 26 MA: 26 33. A production possibilities curve shows: A) that resources are unlimited. B) that people prefer one of the goods more than the other. C) the maximum amounts of two goods that can be produced assuming the full and efficient use of available resources. D) combinations of capital and labor necessary to produce specific levels of output. Answer: C

Type: A Topic: 4 E: 27 MI: 27 MA: 27 34. A nation's production possibilities curve is bowed out from the origin because: A) resources are not equally efficient in producing every good. B) the originator of the idea drew it this way and modern economists follow this convention. C) resources are scarce. D) wants are virtually unlimited. Answer: A

Use the following to answer questions 35-39: Answer the next question(s) on the basis of the data given in the following production possibilities table: Production possibilities (alternatives) A B C D E F 5 1 4 3 2 0 0 14 5 9 12 15

Capital goods Consumer goods

Type: T Topic: 4 E: 27 MI: 27 MA: 27 35. Refer to the above table. If the economy is producing at production alternative C, the opportunity cost of the tenth unit of consumer goods will be: A) 4 units of capital goods. C) 3 units of capital goods. B) 2 units of capital goods. D) 1/3 of a unit of capital goods. Answer: D

Type: C Topic: 4 E: 27 MI: 27 MA: 27 36. Refer to the above table. As compared to production alternative D, the choice of alternative C would: A) tend to generate a more rapid growth rate. C) entail unemployment. B) be unattainable. D) tend to generate a slower growth rate. Answer: A

Type: C Topic: 4 E: 28 MI: 28 MA: 28 37. Refer to the above table. A total output of 3 units of capital goods and 4 units of consumer goods: A) is irrelevant because the economy is capable of producing a larger total output. B) will result in the maximum rate of growth available to this economy. C) would involve an inefficient use of the economy's scarce resources. D) is unobtainable in this economy. Answer: C

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Type: C Topic: 4 E: 29 MI: 29 MA: 29 38. Refer to the above table. For this economy to produce a total output of 3 units of capital goods and 13 units of consumer goods it must: A) achieve economic growth. B) use its resources more efficiently than the data in the table now indicate. C) allocate its available resources most efficiently among alternative uses. D) achieve the full employment of available resources. Answer: A

Type: A Topic: 4 E: 27 MI: 27 MA: 27 39. Refer to the above table. For these data the law of increasing opportunity costs is reflected in the fact that: A) the amount of consumer goods that must be sacrificed to get more capital goods diminishes beyond a point. B) larger and larger amounts of capital goods must be sacrificed to get additional units of consumer goods. C) the production possibilities data would graph as a straight downsloping line. D) the economy's resources are presumed to be scarce. Answer: B

Type: A Topic: 4 E: 27 MI: 27 MA: 27 40. When an economy is operating with maximum efficiency, the production of more of commodity A will mean the production of less of commodity B because: A) of the law of increasing opportunity costs. B) economic wants are insatiable. C) resources are limited. D) resources are specialized and only imperfectly shiftable. Answer: C

Type: C Topic: 4 E: 30 MI: 30 MA: 30 41. Assume that a change in government policy results in greater production of both consumer goods and investment goods. We can conclude that: A) the economy was suffering from unemployment and/or the inefficient use of resources before the policy change. B) the economy's production possibilities curve has been shifted to the left as a result of the policy decision. C) this economy's production possibilities curve is convex (bowed inward) to the origin. D) the law of increasing opportunity costs does not apply in this society. Answer: A

Type: D Topic: 4 E: 26 MI: 26 MA: 26 42. The production possibilities curve: A) shows all of those levels of production that are consistent with a stable price level. B) indicates that any combination of goods lying outside the curve is economically inefficient. C) is a frontier between all combinations of two goods that can be produced and those combinations that cannot be produced. D) shows all of those combinations of two goods that are most preferred by society. Answer: C

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Type: C Topic: 4 E: 27 MI: 27 MA: 27 43. Assume an economy is operating at some point on its production possibilities curve, which shows civilian and military goods. If the output of military goods is increased, the output of civilian goods: A) will remain unchanged. C) must be decreased. B) may be either increased or decreased. D) must also be increased. Answer: C

Type: A Topic: 4 E: 26 MI: 26 MA: 26 44. Any point inside the production possibilities curve indicates: A) the realization of allocative efficiency. B) that resources are imperfectly shiftable among alternative uses. C) the presence of inflationary pressures. D) that more output could be produced with available resources. Answer: D

Use the following to answer questions 45-46:

Type: G Topic: 4 E: 30 MI: 30 MA: 30 45. Refer to the above diagram. Other things equal, this economy will achieve the most rapid rate of growth if: A) the ratio of capital to consumer goods is minimized. B) it chooses point C. C) it chooses point B. D) it chooses point A. Answer: D

Type: G Topic: 4 E: 29 MI: 29 MA: 29 46. Refer to the above diagram. This economy will experience unemployment if it produces at point: A) A. B) B. C) C. D) D. Answer: D

Type: D Topic: 4 E: 29 MI: 29 MA: 29 47. In drawing the production possibilities curve we assume that: A) technology is fixed. C) economic resources are unlimited. B) unemployment exists. D) wants are limited. Answer: A

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Type: D Topic: 4 E: 29 MI: 29 MA: 29 48. Which of the following is assumed in constructing a typical production possibilities curve? A) the economy is using its resources inefficiently. B) resources are perfectly shiftable among alternative uses. C) production technology is fixed. D) the economy is engaging in international trade. Answer: C

Type: A Topic: 4 E: 27 MI: 27 MA: 27 49. If the production possibilities curve were a straight downsloping line, this would suggest that: A) resources are perfectly shiftable between the production of these two goods. B) it is possible to produce more of both products. C) both products are equally capable of satisfying consumer wants. D) the two products have identical prices. Answer: A

Type: D Topic: 4 E: 27 MI: 27 MA: 27 50. The typical production possibilities curve is: A) an upsloping line that is concave to the origin. B) a downsloping line that is convex to the origin. Answer: C

C) a downsloping line that is concave to the origin. D) a straight upsloping line.

Type: C Topic: 4 E: 29 MI: 29 MA: 29 51. Deltonia produces both consumer and capital goods. Other things equal, if Deltonia reduces the percentage of its output devoted to capital goods, then: A) its rate of growth will decline. B) its production possibilities curve will shift to the left. C) it must also reduce the percentage of its output devoted to consumer goods. D) its rate of growth will increase. Answer: A

Type: A Topic: 4 E: 27 MI: 27 MA: 27 52. The slope of the typical production possibilities curve: A) is positive. B) increases as one moves southeast along the curve. C) is constant as one moves down the curve. D) decreases as one moves southeast along the curve. Answer: B

Type: A Topic: 4 E: 29 MI: 29 MA: 29 53. Assume an economy is incurring unemployment and failing to realize least-cost production. The effect of resolving these problems will be to: A) move the level of actual output to the economy's production possibilities curve. B) create a less equal distribution of income. C) shift its production possibilities curve to the left. D) shift its production possibilities curve to the right. Answer: A

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Use the following to answer questions 54-58:

Civilian goods Military goods

Duckistan Production possibilities A B C D E 20 18 14 8 0 0 1 2 3 4 Herbania Production possiblities A B C D E 14 40 36 26 0 3 0 1 2 4

Civilian goods Military goods

Type: T Topic: 4 E: 30 MI: 30 MA: 30 Status: New 54. Refer to the above tables. Suppose that the amount and quality of resources are the same in both countries. We can conclude that: A) Duckistan is technologically better than Herbania at producing military goods. B) Herbania is technologically better than Herbania at producing both military goods and civilian goods. C) the total opportunity cost of producing 4 units of military goods is the same in both countries. D) Herbania is technologically superior to Duckistan in producing civilian goods. Answer: D

Type: T Topic: 4 E: 31 MI: 31 MA: 31 Status: New 55. Refer to the above tables. Suppose that technology and the quality of resources are the same in both countries. We can conclude that: A) Duckistan has more resources than Herbania. B) Herbania has more resources than Herbania. C) Duckistan has greater opportunity costs than Herbania. D) Prices are twice as high in Herbania as in Duckistan. Answer: B

Type: T Topic: 4 E: 27 MI: 27 MA: 27 Status: New 56. Refer to the above tables. Opportunity costs are: A) increasing in Duckistan but constant in Herbania. B) constant in both Duckistan and Herbania. C) larger in Duckistan than in Herbania. D) smaller in Duckistan than Herbania. Answer: D

Type: T Topic: 4 E: 30 MI: 30 MA: 30 Status: New 57. Refer to the above tables. Opportunity costs are: A) constant in both Duckistan and Herbania. B) larger in Duckistan than in Herbania. C) increasing in both Duckistan and Herbania. D) increasing in Duckistan and constant in Herbania. Answer: C

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Type: T Topic: 4 E: 30 MI: 30 MA: 30 Status: New 58. Refer to the above tables. Suppose that Duckistan and Herbania are each producing 14 units of civilian goods and 2 unit of military goods. Then: A) Duckistan is fully and efficiently using its resources but Herbania is not. B) both Duckistan and Herbania are fully and efficiently using their resources. C) Herbania is fully and efficiently using its resources by Duckistan is not. D) neither Duckistan nor Herbania are fully and efficiently using their resource. Answer: A

Type: G Topic: 4 E: 27 MI: 27 MA: 27 59.

In the figure above are two linear production possibilities curves for countries Alpha and Beta. We can conclude that: A) different value systems make it impossible to compare opportunity costs in the two countries. B) the opportunity cost of shelter is greater in Beta than it is in Alpha. C) the opportunity cost of food is greater in Alpha than it is in Beta. D) the opportunity cost of shelter is greater in Alpha than it is in Beta. Answer: D

Type: D Topic: 4 E: 23 MI: 23 MA: 23 60. The process of producing and accumulating capital goods is called: A) money capital. B) depreciation. C) investment. D) consumption. Answer: C

Type: D Topic: 4 E: 26 MI: 26 MA: 26 61. Which of the following is not correct? A typical production possibilities curve: A) indicates how much of two products a society can produce. B) reveals how much each additional unit of one product will cost in terms of the other product. C) specifies how much of each product society should produce. D) indicates that to produce more of one product society must forgo larger and larger amounts of the other product. Answer: C

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Type: A Topic: 4 E: 31 MI: 31 MA: 31 62. A country can achieve some combination of goods outside its production possibilities curve by: A) idling some of its resources. B) specializing and engaging in international trade. C) buying the debt (bonds and stocks) of foreign nations. D) producing more capital goods and fewer consumer goods. Answer: B

Type: A Topic: 4 E: 29 MI: 29 MA: 29 63. A point inside a production possibilities curve best illustrates: A) unemployment. C) the use of best-available technology. B) the efficient use of resources. D) unlimited wants. Answer: A

Use the following to answer questions 64-68:

Type: G Topic: 4 E: 27 MI: 27 MA: 27 64. Refer to the above diagram. This production possibilities curve is constructed so that: A) resources are presumed to be perfectly shiftable between bread and tractors. B) the opportunity cost of bread diminishes as more bread is produced. C) the opportunity cost of tractors diminishes as more bread is produced. D) the opportunity cost of both bread and tractors increases as more of each is produced. Answer: D

Type: G Topic: 4 E: 10, 31 MI: 10, 31 MA: 10, 31 65. Refer to the above diagram. Which of the following is a normative statement? A) Point C is superior to point B because it is important to enhance the future of society. B) If society is initially at point C, it must sacrifice 6 units of bread to obtain one more unit of tractors. C) If society produces 2 units of tractors and 12 units of bread, it is not using its available resources with maximum efficiency. D) Other things equal, the combination of outputs represented by point D will result in more rapid economic growth than will the combination represented by point C. Answer: A

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Type: G Topic: 4 E: 10, 26 MI: 10, 26 MA: 10, 26 66. Refer to the above diagram. Which of the following is a positive statement? A) A point inside the production possibilities curve is superior to a point on the curve because the former requires less work effort. B) Because any society should stress economic growth as its major goal, point D is superior to point C. C) Point B is preferable to point C because the ultimate goal of economic activity is to maximize consumption. D) Given its resources and technology, this society is incapable of simultaneously producing 3 units of tractors and 15 units of bread. Answer: D

Type: G Topic: 4 E: 27 MI: 27 MA: 27 67. Refer to the above diagram. Starting at point A, the opportunity cost of producing each successive unit of tractors is: A) a constant 2 units of bread. C) 8, 6, 4, and 2 units of bread. B) 2, 4, 6, and 8 units of bread. D) the reciprocal of the output of tractors. Answer: B

Type: G Topic: 4 E: 27 MI: 27 MA: 27 68. Refer to the above diagram. Starting at point E, the production of successive units of bread will cost: A) a constant 8 units of tractors. C) 1/8, 1/6, 1/4, and 1/2 units of tractors. B) a constant 6 units of tractors. D) 1/2, 1/4, 1/6, and 1/8 units of tractors. Answer: C

Use the following to answer questions 69-70:

War goods ( “guns”)

b a c

d

Civilian goods (“butter”)
Type: G Topic: 4 E: 29, 32 MI: 29, 32 MA: 29, 32 69. Refer to the above production possibilities curve. At the onset of the Second World War the United States had large amounts of idle human and property resources. Its economic adjustment from peacetime to wartime can best be described by the movement from point: A) c to point b. B) b to point c. C) a to point b. D) c to point d. Answer: C

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Type: G Topic: 4 E: 30 MI: 30 MA: 30 70. Refer to the above production possibilities curve. At the onset of the Second World War the Soviet Union was already at full employment. Its economic adjustment from peacetime to wartime can best be described by the movement from point: A) c to point b. B) b to point c. C) a to point b. D) c to point d. Answer: A

Type: D Topic: 4 E: 26 MI: 26 MA: 26 71. The production possibilities curve shows: A) the various combinations of two goods that can be produced when society uses its scarce resources efficiently. B) the minimum outputs of two goods that will sustain a society. C) the various combinations of two goods that can be produced when some resources are unemployed. D) the ideal, but unattainable, combinations of two goods that would maximize consumer satisfactions. Answer: A

Type: D Topic: 4 E: 26 MI: 26 MA: 26 72. The negative slope of the production possibilities curve is a graphical way of indicating that: A) any economy "can have its cake and eat it too." B) to produce more of one product we must do with less of another. C) the principle of increasing opportunity costs applies to only parts of the economy. D) consumers buy more when prices are low than when prices are high. Answer: B

Type: A Topic: 4 E: 26 MI: 26 MA: 26 73. If an economy is operating on its production possibilities curve for consumer goods and capital goods, this means that: A) it is impossible to produce more consumer goods. B) resources cannot be reallocated between the two goods. C) it is impossible to produce more capital goods. D) more consumer goods can only be produced at the cost of fewer capital goods. Answer: D

Type: D Topic: 4 E: 25 MI: 25 MA: 25 74. In drawing a production possibilities curve we hold constant: A) the money supply. C) both technology and resource supplies. B) the consumer price index. D) resource supplies only. Answer: C

Type: D Topic: 4 E: 25 MI: 25 MA: 25 75. The construction of a production possibilities curve assumes: A) the quantities of all resources are unlimited. B) technology is fixed. C) full employment, but not full production, is being realized. D) there is no inflation in the economy. Answer: B

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Type: D Topic: 4 E: 27 MI: 27 MA: 27 76. A typical concave (to the origin) production possibilities curve implies: A) that economic resources are unlimited. B) that society must choose among various attainable combinations of goods. C) decreasing opportunity costs. D) that society is using a market system to allocate resources. Answer: B

Type: D Topic: 4 E: 26 MI: 26 MA: 26 77. The production possibilities curve tells us: A) the specific combination of two products that is most desired by society. B) that costs do not change as society varies its output. C) costs are irrelevant in a society that has fixed resources. D) the combinations of two goods that can be produced with society's available resources. Answer: D

Type: D Topic: 4 E: 27 MI: 27 MA: 27 78. The production possibilities curve has: A) a positive slope that increases as we move along it from left to right. B) a negative slope that increases as we move along it from left to right. C) a negative slope that decreases as we move along it from left to right. D) a negative slope that is constant as we move along it from left to right. Answer: B

Type: A Topic: 4 E: 26 MI: 26 MA: 26 79. Which one of the following statements is correct? A) Relative scarcity is no longer a central idea in economics because we are in an age of abundance. B) Most production possibilities curves are convex to the origin. C) The production possibilities curve shows society's preferences for consumer goods relative to capital goods. D) The central concept underlying the production possibilities curve is that of limited resources. Answer: D

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Use the following to answer questions 80-84: Answer the next question(s) on the basis of the following production possibilities tables for two countries, North Cantina and South Cantina: North Cantina Production possibilities B C D E 4 3 2 1 10 18 24 28

Capital goods Consumer goods

A 5 0

F 0 30

Capital goods Consumer goods

A 5 0

South Cantina Production possibilities B C D E 2 1 4 3 21 25 8 15

F 0 27

Type: T Topic: 4 E: 27 MI: 27 MA: 27 80. Refer to the above tables. If South Cantina is producing at production alternative D, the opportunity cost of the third unit of capital goods will be: A) 3 units of consumer goods. C) 5 units of consumer goods. B) 4 units of consumer goods. D) 6 units of consumer goods. Answer: D

Type: T Topic: 4 E: 27 MI: 27 MA: 27 81. Refer to the above tables. If North Cantina is producing at production alternative B, the opportunity cost of the eleventh unit of consumer goods will be: A) 10 units of capital goods. C) 8 units of capital goods. B) 1/4 of a unit of capital goods. D) 1/8 of a unit of capital goods. Answer: D

Type: T Topic: 4 E: 27 MI: 27 MA: 27 82. Refer to the above tables. Suppose that North Cantina is producing 2 units of capital goods and 17 units of consumer goods while South Cantina is producing 2 units of capital goods and 21 units of consumer goods. We can conclude that: A) North Cantina is fully and efficiently using its resources, but South Cantina is not. B) South Cantina is fully and efficiently using its resources, but North Cantina is not. C) neither South Cantina nor North Cantina are fully and efficiently using their resources. D) both South Cantina and North Cantina are fully and efficiently using their resources. Answer: B

Type: C Topic: 4 E: 27 MI: 27 MA: 27 83. Refer to the above tables. Suppose that resources in North Cantina and South Cantina are identical in quantity and quality. We can conclude that: A) South Cantina has better technology than North Cantina in producing both capital and consumer goods. B) North Cantina has better technology than South Cantina in producing both capital and consumer goods. C) North Cantina is growing more rapidly than South Cantina. D) North Cantina has better technology than South Cantina in producing consumer goods, but not capital goods. Answer: D

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Type: T Topic: 4 E: 27 MI: 27 MA: 27 84. Refer to the above tables. The opportunity cost of the fifth unit of capital goods: A) is higher in North Cantina than in South Cantina. B) is the same in North Cantina and South Cantina. C) is lower in North Cantina than in South Cantina. D) cannot be determined from the information provided. Answer: A

Type: A Topic: 4 E: 26 MI: 26 MA: 26 85. If an economy is operating inside its production possibilities curve for consumer goods and capital goods, it: A) can only produce more consumer goods by producing fewer capital goods. B) can only produce more capital goods by producing fewer consumer goods. C) can produce more of both consumer goods and capital goods by using its resources more efficiently. D) must improve its technology to produce more output. Answer: C

Use the following to answer questions 86-92:

Type: G Topic: 4 E: 26 MI: 26 MA: 26 86. Refer to the above diagram. Points A, B, C, D, and E show: A) that the opportunity cost of bicycles increases, while that of computers is constant. B) combinations of bicycles and computers that society can produce by using its resources efficiently. C) that the opportunity cost of computers increases, while that of bicycles is constant. D) that society's demand for computers is greater than its demand for bicycles. Answer: B

Type: G Topic: 4 E: 27 MI: 27 MA: 27 87. Refer to the above diagram. This production possibilities curve is: A) convex to the origin because opportunity costs are constant. B) linear because opportunity costs are constant. C) concave to the origin because of increasing opportunity costs. D) convex to the origin because of increasing opportunity costs. Answer: C

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Type: G Topic: 4 E: 27 MI: 27 MA: 27 88. Refer to the above diagram. If society is currently producing 9 units of bicycles and 4 units of computers and it now decides to increase computer output to 6, the cost: A) will be 4 units of bicycles. B) will be 2 units of bicycles. C) will be zero because unemployed resources are available. D) of doing so cannot be determined from the information given. Answer: A

Type: G Topic: 4 E: 26 MI: 26 MA: 26 89. Refer to the above diagram. The combination of computers and bicycles shown by point G is: A) attainable, but too costly. B) unattainable, given currently available resources and technology. C) attainable, but involves unemployment. D) irrelevant because it is inconsistent with consumer preferences. Answer: B

Type: G Topic: 4 E: 27 MI: 27 MA: 27 90. Refer to the above diagram. If society is currently producing the combination of bicycles and computers shown by point D, the production of 2 more units of bicycles: A) cannot be achieved because resources are fully employed. B) will cost 1 unit of computers. C) will cost 2 units of computers. D) will cause some resources to become unemployed. Answer: B

Type: G Topic: 4 E: 27 MI: 27 MA: 27 91. Refer to the above diagram. The combination of computers and bicycles shown by point F: A) is unattainable, given currently available resources and technology. B) is attainable, but entails economic inefficiency. C) is irrelevant because it is inconsistent with consumer preferences. D) suggests that opportunity costs are constant. Answer: B

Type: G Topic: 4 E: 27 MI: 27 MA: 27 92. Refer to the above diagram. The movement down the production possibilities curve from point A to point E suggests that the production of: A) computers, but not bicycles, is subject to increasing opportunity costs. B) bicycles, but not computers, is subject to increasing opportunity costs. C) both bicycles and computers are subject to constant opportunity costs. D) both bicycles and computers are subject to increasing opportunity costs. Answer: D

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Use the following to answer questions 93-95:

Capital goods

A

B

D

C

0

Consumer goods

Type: G Topic: 4 E: 27 MI: 27 MA: 27 93. Refer to the above diagram. As it relates to production possibilities analysis, the law of increasing opportunity cost is reflected in curve: A) A B) B C) C D) D Answer: C

Type: G Topic: 4 E: 27 MI: 27 MA: 27 94. Refer to the above diagram. Curve B is a: A) production possibilities curve indicating constant opportunity costs. B) production possibilities curve indicating increasing opportunity costs. C) demand curve indicating that the quantity of consumer goods demanded increases as the price of capital falls. D) technology frontier curve. Answer: A

Type: G Topic: 4 E: 27 MI: 27 MA: 27 95. Refer to the above diagram. Curve C A) reflects increasing opportunity costs because the slope of the curve becomes less steep as one moves down along the curve. B) is a less desirable production possibilities curve for an economy than curve B. C) is a more desirable production possibilities curve for an economy than curve A. D) has a steeper slope throughout than curve B. Answer: C

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Opportunity costs

Type: A Topic: 5 E: 27 MI: 27 MA: 27 96. In deciding whether to study for an economics quiz or go to a movie, one is confronted by the idea(s) of: A) scarcity and opportunity costs. C) complementary economic goals. B) money and real capital. D) full production. Answer: A

Type: D Topic: 5 E: 27 MI: 27 MA: 27 97. Which one of the following expressions best states the idea of opportunity cost? A) "A penny saved is a penny earned." C) "There is no such thing as a free lunch." B) "He who hesitates is lost." D) "All that glitters is not gold." Answer: C

Type: A Topic: 5 E: 27 MI: 27 MA: 27 98. The fact that the slope of the production possibilities curve becomes steeper as we move down along the curve indicates that: A) the principle of increasing opportunity costs is relevant. B) society's resources are limited. C) the opportunity cost of producing each product is constant. D) resources are perfectly shiftable between alternative uses. Answer: A

Type: C Topic: 5 E: 27 MI: 27 MA: 27 99. The idea of opportunity cost: A) applies to consumers, but not to businesses. B) applies to businesses, but not to consumers. C) is relevant to economies of all ideological persuasions. D) would disappear if we were able to eliminate poverty. Answer: C

Type: A Topic: 5 E: 27 MI: 27 MA: 27 100. Which of the following is an economic explanation for why most college-aged movie stars do not attend college. A) they are too dumb to get into college B) they would find college life boring C) the opportunity cost in terms of reduced income is too great D) they cannot afford the room, board, and tuition fees most colleges charge. Answer: C

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Type: D Topic: 5 E: 27 MI: 27 MA: 27 101. The law of increasing opportunity costs states that: A) if society wants to produce more of a particular good, it must sacrifice larger and larger amounts of other goods to do so. B) the sum of the costs of producing a particular good cannot rise above the current market price of that good. C) if the sum of the costs of producing a particular good rises by a specified percent, the price of that good must rise by a greater relative amount. D) if the prices of all the resources used to produce goods increase, the cost of producing any particular good will increase at the same rate. Answer: A

Type: D Topic: 5 E: 27 MI: 27 MA: 27 102. The concept of opportunity cost: A) is irrelevant in socialistic economies because of central planning. B) suggests that the use of resources in any particular line of production means that alternative outputs must be forgone. C) is irrelevant if the production possibilities curve is shifting to the right. D) suggests that insatiable wants can be fulfilled. Answer: B

Type: A Topic: 5 E: 27 MI: 27 MA: 27 103. The law of increasing opportunity costs exists because: A) resources are not equally efficient in producing various goods. B) the value of the dollar has diminished historically because of persistent inflation. C) wage rates invariably rise as the economy approaches full employment. D) consumers tend to value any good more highly when they have little of it. Answer: A

Type: A Topic: 5 E: 27 MI: 27 MA: 27 104. The law of increasing opportunity costs is reflected in a production possibilities curve that is: A) an upsloping straight line. C) concave to the origin. B) a downsloping straight line. D) convex to the origin. Answer: C

Type: D Topic: 5 E: 27 MI: 27 MA: 27 105. Opportunity cost is best defined as: A) the monetary price of any productive resource. B) the amount of labor that must be used to produce one unit of any product. C) the ratio of the prices of imported goods to the prices of exported goods. D) the amount of one product that must be given up to produce one more unit of another product. Answer: D

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Allocative efficiency

Type: D Topic: 6 E: 27 MI: 27 MA: 27 106. Allocative efficiency is concerned with: A) producing the combination of goods most desired by society. B) achieving the full employment of all available resources. C) producing every good with the least-cost combination of inputs. D) reducing the concavity of the production possibilities curve. Answer: A

Type: D Topic: 6 E: 27 MI: 27 MA: 27 107. Allocative efficiency involves determining: A) which output-mix will result in the most rapid rate of economic growth. B) which production possibilities curve reflects the lowest opportunity costs. C) the point on the production possibilities curve that will maximize society's satisfaction. D) the optimal rate of technological progress. Answer: C

Type: D Topic: 6 E: 27 MI: 27 MA: 27 108. The point on the production possibilities curve that produces allocative efficiency can be found by: A) estimating the marginal costs of both products in real or physical terms. B) comparing marginal benefits and marginal costs in monetary terms. C) determining where least-cost production occurs. D) calculating where economic growth will be greatest. Answer: B

Type: D Topic: 6 E: 27 MI: 27 MA: 27 109. Allocative efficiency refers to: A) the use of the least-cost method of production. B) the production of the product-mix most wanted by society. C) the full employment of all available resources. D) production at some point inside of the production possibilities curve. Answer: B

Type: D Topic: 6 E: 27 MI: 27 MA: 27 110. The optimal or allocatively efficient point on a production possibilities curve is achieved where: A) the smallest physical amounts of inputs are used to produce each good. B) each good is produced at a level where marginal benefits equal marginal costs. C) large amounts of capital goods are produced relative to consumer goods. D) large amounts of consumer goods are produced relative to capital goods. Answer: B

Type: D Topic: 6 E: 28 MI: 28 MA: 28 111. The marginal benefit curve is: A) upsloping because of increasing marginal opportunity costs. B) upsloping because successive units of a specific product yield less and less extra utility. C) downsloping because of increasing marginal opportunity costs. D) downsloping because successive units of a specific product yield less and less extra utility. Answer: D

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Type: D Topic: 6 E: 28 MI: 28 MA: 28 112. The marginal cost curve is: A) upsloping because of increasing marginal opportunity costs. B) upsloping because successive units of a specific product yield less and less extra utility. C) downsloping because of increasing marginal opportunity costs. D) downsloping because successive units of a specific product yield less and less extra utility. Answer: A

Type: A Topic: 6 E: 28 MI: 28 MA: 28 113. The output of compact disc players should be: A) reduced if marginal benefits exceed marginal costs. B) reduced if marginal costs exceed marginal benefits. C) increased if marginal costs exceed marginal benefits. D) reduced to zero if their unit costs exceed the unit costs of alternative products. Answer: B

Type: D Topic: 6 E: 28 MI: 28 MA: 28 114. If the output of product X is such that marginal benefit equals marginal cost: A) the correct amount of resources is being allocated to X's production. B) the value of producing X exceeds the value of producing alternative products with the available resources. C) there can be a net gain to society by allocating either more or less resources to producing X. D) resources are overallocated to the production of X. Answer: A

Use the following to answer questions 115-117:

Marginal benefit and marginal cost (dollars)

Marginal Cost

Marginal Benefit Q1 Q2 Q3 Quantity of shoes

0

Type: A Topic: 6 E: 28 MI: 28 MA: 28 115. Refer to the above diagram for athletic shoes. The optimal output of shoes is: A) Q1. B) Q2. C) Q3. D) greater than Q3. Answer: B

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Type: A Topic: 6 E: 28 MI: 28 MA: 28 116. Refer to the above diagram for athletic shoes. If the current output of shoes is Q1, then: A) society would consider additional units of shoes to be more valuable than alternative products. B) society would consider additional units of shoes to be less valuable than alternative products. C) society would experience a net loss by producing more shoes. D) resources are being allocated efficiently to the production of shoes. Answer: A

Type: A Topic: 6 E: 28 MI: 28 MA: 28 117. Refer to the above diagram for athletic shoes. If the current output of shoes is Q3, then: A) resources are being allocated efficiently to the production of shoes. B) society would consider additional units of shoes to be more valuable than alternative products. C) society would consider additional units of shoes to be less valuable than alternative products. D) society would experience a net gain by producing more shoes. Answer: C

Economic growth and decline

Use the following to answer questions 118-120:

E
Capital goods

C A G

0

D H B Consumer Goods

F

Type: G Topic: 7 E: 30 MI: 30 MA: 30 118. Technological advance in producing both capital goods and consumer goods is shown by the shift of the production possibilities curve from AB to: A) CD. B) EB. C) AF. D) GH. Answer: A

Type: G Topic: 7 E: 30 MI: 30 MA: 30 119. Technological advance that is useful in producing capital goods but not in producing consumer goods is shown by the shift of the production possibilities curve from AB to: A) CD. B) BE. C) AF. D) GH. Answer: B

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Type: G Topic: 7 E: 30 MI: 30 MA: 30 120. Technological advance that is useful in producing consumer goods but not in producing capital goods is shown by the shift of the production possibilities curve from AB to: A) CD. B) EB. C) AF. D) GH. Answer: C

Type: D Topic: 7 E: 25 MI: 25 MA: 25 121. The basic difference between consumer goods and capital goods is that A) consumer goods are produced in the private sector and capital goods are produced in the public sector. B) an economy that commits a relatively large proportion of its resources to capital goods must accept a lower growth rate. C) the production of capital goods is not subject to the law of increasing opportunity costs. D) consumer goods satisfy wants directly while capital goods satisfy wants indirectly. Answer: D

Type: A Topic: 7 E: 32 MI: 32 MA: 32 122. Which of the following would be most likely to shift the production possibilities curve to the right? A) a sudden and substantial expansion of consumer wants B) an improvement in the literacy level and general level of education C) a decline in the size of the population and labor force D) shifting resources from the production of capital goods to the production of consumer goods. Answer: B

Type: D Topic: 7 E: 32 MI: 32 MA: 32 123. Which of the following will shift the production possibilities curve to the right? A) an increase in the unemployment rate from 6 to 8 percent B) a decline in the efficiency with which the present labor force is allocated C) a decrease in the unemployment rate from 8 to 6 percent D) a technological advance that allows farmers to produce more output from given inputs Answer: D

Type: C Topic: 7 E: 32 MI: 32 MA: 32 124. Other things equal, which of the following would shift an economy's production possibilities curve to the left? A) the discovery of a low-cost means of generating and storing solar energy B) the entrance of more women into the labor force C) a law requiring mandatory retirement from the labor force at age 55 D) an increase in the proportion of total output that consists of capital or investment goods Answer: C

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Use the following to answer questions 125-129:

Type: G Topic: 7 E: 27 MI: 27 MA: 27 125. Refer to the above diagram. The concave shape of each production possibilities curve indicates that: A) resources are perfectly substitutable. B) wants are virtually unlimited. C) prices are constant. D) resources are not equally suited for alternative uses. Answer: D

Type: G Topic: 7 E: 27 MI: 27 MA: 27 126. Refer to the above diagram. The concept of opportunity cost is best represented by the: A) shift of the production possibilities curve from PP1 to PP2. B) move from B on PP1 to E on PP2. C) move from B on PP1 to C on PP1. D) move from D inside PP1 to B on PP1. Answer: C

Type: C Topic: 7 E: 31 MI: 31 MA: 31 127. Refer to the above diagram. Which of the following positions relative to PP1 would be the most likely to result in a future production possibilities curve of PP3, rather than PP2 ? A) A. B) B. C) C. D) D. Answer: A

Type: G Topic: 7 E: 30 MI: 30 MA: 30 128. Refer to the above diagram. An improvement in technology will: A) shift the production possibilities curve from PP1 to PP2. B) shift the production possibilities curve from PP2 to PP1. C) move the economy from A to C along PP1. D) move the economy from A, B, or C on PP1 to D. Answer: A

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Type: G Topic: 7 E: 30 MI: 30 MA: 30 129. Refer to the above diagram. Which one of the following would shift the production possibilities curve from PP1 to PP2? A) immigration of skilled workers into the economy B) worsening of the AIDS epidemic C) an increase in consumer prices D) a reduction in hourly wages Answer: A

Type: D Topic: 7 E: 31 MI: 31 MA: 31 130. Which of the following statements, if any, is correct for a nation that is producing only consumption and capital goods? A) Other things equal, the more consumer goods a nation produces, the greater will be its future growth rate. B) Other things equal, the more capital goods a nation produces, the greater will be its future growth rate. C) There is no general relationship between the current division of output between consumer and capital goods and the future growth rate. D) None of the above statements is correct. Answer: B

Type: A Topic: 7 E: 32 MI: 32 MA: 32 131. All of the following could immediately or eventually lead to an inward shift of a nation's production possibilities curve, except: A) emigration of skilled workers from the nation. B) a decline in the birth rate. C) an increase in the average skill level of all occupational groups. D) depletion and reduced availability of major energy resources. Answer: C

Type: A Topic: 7 E: 32 MI: 32 MA: 32 132. A nation's production possibilities curve might shift to the left (inward) as a result of: A) technological advance. B) increases in the size of the labor force. C) the depletion of its soil fertility due to overplanting and overgrazing. D) investing in more capital goods. Answer: C

Applications

Type: A Topic: 8 E: 32 MI: 32 MA: 32 133. Which of the following might shift a nation's production possibilities curve inward? A) improved technology. B) devastation by war. C) improved health care. D) a business downturn in which unemployment temporarily rises. Answer: B

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Type: A Topic: 8 E: 32 MI: 32 MA: 32 134. Suppose that a university decides to spend $1 million to upgrade personal computers and scientific equipment for faculty rather than spend $1 million to expand parking for students. This example illustrates: A) distorted priorities. C) increasing opportunity costs. B) opportunity costs. D) productive efficiency. Answer: B

Type: A Topic: 8 E: 32 MI: 32 MA: 32 135. Which of the following most closely relates to the idea of opportunity costs? A) tradeoffs B) economic growth C) technological change D) capitalism Answer: A

Type: A Topic: 8 E: 32 MI: 32 MA: 32 136. Which of the following will enable a nation to obtain a combination of consumer goods and capital goods outside its production possibilities curve? A) full employment C) full production B) international specialization and trade D) productive efficiency. Answer: B

Type: C Topic: 8 E: 32 MI: 32 MA: 32 137. Suppose that Zualia, which has full employment and full production, can obtain 1 unit of capital goods by sacrificing 2 units of consumer goods domestically, but can obtain 1 unit of capital goods from another country by trading 1 unit of consumer goods for it. This reality illustrates: A) a rightward (outward) shift of the production possibilities curve. B) increasing opportunity costs. C) achieving points beyond the production possibilities curve through international specialization and trade. D) productive efficiency. Answer: C

Type: A Topic: 8 E: 31 MI: 31 MA: 31 138. Through specialization and international trade a nation: A) can attain some combination of goods lying outside its production possibilities curve. B) can move from a high consumption-low investment to a high investment-low consumption point on its production possibilities curve. C) will attain some combination of goods lying within its production possibilities curve. D) will cause its production possibilities curve to shift leftward. Answer: A

Type: A Topic: 8 E: 32 MI: 32 MA: 32 139. Some agricultural sub-Saharan nations of Africa have overfarmed and overgrazed their land to the extent that significant portions of it have turned into desert. This suggests that: A) the concavity of the production possibilities curves of such nations has increased. B) the production possibilities curves of such nations have shifted inward. C) the production possibilities curves of such nations have shifted outward. D) these nations are operating at some point outside of their production possibilities curves. Answer: B

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Type: A Topic: 8 E: 32 MI: 32 MA: 32 140. If all discrimination in the United States were eliminated, the economy would: A) have a less concave production possibilities curve. B) produce at some point closer to its production possibilities curve. C) be able to produce at some point outside of its production possibilities curve. D) produce more consumer goods and fewer investment goods. Answer: B

Economic systems

Type: F Topic: 9 E: 33 MI: 33 MA: 33 141. The two general types of economic systems that exist today are: A) market systems and capitalism. B) socialism and central planning. C) market systems and command systems. D) laissez faire systems and pure command systems. Answer: C

Type: D Topic: 9 E: 33 MI: 33 MA: 33 142. Which of the following is a distinguishing feature of a command system? A) private ownership of all capital. C) heavy reliance on markets. B) central planning. D) wide-spread dispersion of economic power. Answer: B

Type: D Topic: 9 E: 33 MI: 33 MA: 33 143. Which of the following is a distinguishing feature of a market system? A) public ownership of all capital. C) wide-spread private ownership of capital. B) central planning. D) a circular flow of goods, resources, and money. Answer: C

Type: A Topic: 9 E: 33 MI: 33 MA: 33 144. Examples of command economies are: A) the United States and Japan. B) Sweden and Norway. Answer: D

C) Mexico and Brazil. D) Cuba and North Korea.

Type: A Topic: 9 E: 33 MI: 33 MA: 33 145. Of the following countries, the one that best exhibits the characteristics of a market economy is: A) Canada. B) Cuba. C) North Korea. D) China. Answer: A

Type: D Topic: 9 E: 33 MI: 33 MA: 33 146. The French term "laissez-faire" means: A) "there is no free lunch." B) "let it be." C) "circular flow." D) "public ownership." Answer: B

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Type: D Topic: 9 E: 33 MI: 33 MA: 33 147. An economic system: A) requires a grouping of private markets linked to one another. B) is a particular set of institutional arrangements and a coordinating mechanism used to respond to the economizing problem. C) requires some sort of centralized authority (such as government) to coordinate economic activity. D) is a plan or scheme that allows a firm to make money at some other firm's expense. Answer: B

Type: D Topic: 9 E: 33 MI: 33 MA: 33 148. The term laissez faire suggests that: A) land and other natural resources should be privately owned, but capital should be publicly owned. B) land and other natural resources should be publicly owned, but capital equipment should be privately owned. C) government should not interfere with the operation of the economy. D) government action is necessary if the economy is to achieve full employment and full production. Answer: C

Type: D Topic: 9 E: 33 MI: 33 MA: 33 149. Economic scarcity: A) is peculiar to the United States economy. B) applies to all economies. Answer: B

C) is peculiar to command systems. D) is peculiar to market systems.

Circular flow model

Type: D Topic: 10 E: 34 MI: 34 MA: 34 150. The simple circular flow model shows that: A) households are on the buying side of both product and resource markets. B) businesses are on the selling side of both product and resource markets. C) households are on the selling side of the resource market and on the buying side of the product market. D) businesses are on the buying side of the product market and on the selling side of the resource market. Answer: C

Type: D Topic: 10 E: 34 MI: 34 MA: 34 151. The two basic markets shown by the simple circular flow model are: A) capital goods and consumer goods. C) product and resource. B) free and controlled. D) household and business. Answer: C

Type: D Topic: 10 E: 36 MI: 36 MA: 36 152. In the resource market: A) businesses borrow financial capital from households. B) businesses sell services to households. C) households sell resources to businesses. D) firms sell raw materials to households. Answer: C

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Type: A Topic: 10 E: 34 MI: 34 MA: 34 153. Which of the following is a limitation of the simple circular flow model? A) product markets are ignored. B) resource markets are ignored. C) The determination of product and resource prices is not explained. D) households are included, but not businesses. Answer: C

Type: D Topic: 10 E: 36 MI: 36 MA: 36 154. In the simple circular flow model: A) households are buyers of resources. B) businesses are sellers of final products. C) households are sellers of final products. D) there are real flows of goods, services, and resources, but not money flows. Answer: B

Use the following to answer questions 155-158:

Type: A Topic: 10 E: 34 MI: 34 MA: 34 155. Refer to the above diagram. Flow (1) represents: A) wage, rent, interest, and profit income. B) land, labor, capital, and entrepreneurial ability. Answer: A

C) goods and services. D) consumer expenditures.

Type: A Topic: 10 E: 34 MI: 34 MA: 34 156. Refer to the above diagram. Flow (2) represents: A) wage, rent, interest, and profit income. B) land, labor, capital, and entrepreneurial ability. Answer: B

C) goods and services. D) consumer expenditures.

Type: A Topic: 10 E: 34 MI: 34 MA: 34 157. Refer to the above diagram. Flow (3) represents: A) wage, rent, interest, and profit income. B) land, labor, capital, and entrepreneurial ability. Answer: C

C) goods and services. D) consumer expenditures.

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Type: A Topic: 10 E: 34 MI: 34 MA: 34 158. Refer to the above diagram. Flow (4) represents: A) wage, rent, interest, and profit income. B) land, labor, capital, and entrepreneurial ability. Answer: D

C) goods and services. D) consumer expenditures.

Type: D Topic: 10 E: 36 MI: 36 MA: 36 159. In terms of the circular flow diagram, households make expenditures in the _____ market and receive income through the _____ market. A) product; financial B) resource; product C) product; resource D) capital; product Answer: C

Type: D Topic: 10 E: 36 MI: 36 MA: 36 160. In terms of the circular flow diagram, businesses obtain revenue through the _____ market and make expenditures in the _____ market. A) product; financial B) resource; product C) product; resource D) capital; product Answer: C

Type: D Topic: 10 E: 36 MI: 36 MA: 36 161. Households and businesses are: A) both buyers in the resource market. B) both sellers in the product market. C) sellers in the resource and product markets respectively. D) sellers in the product and resource markets respectively. Answer: C

Type: D Topic: 10 E: 36 MI: 36 MA: 36 162. In the circular flow model: A) households sell resources to firms. B) households receive income through the product market. C) households spend income in the resource market. D) businesses neither buy nor sell resources. Answer: A

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Use the following to answer questions 163-165:

Type: A Topic: 10 E: 34 MI: 34 MA: 34 163. Refer to the above diagram. Arrows (1) and (2) represent: A) goods and resources respectively. C) output and money incomes respectively. B) money incomes and output respectively. D) resources and goods respectively. Answer: D

Type: A Topic: 10 E: 34 MI: 34 MA: 34 164. Refer to the above diagram. Arrows (3) and (4) represent: A) goods and services respectively. B) incomes and consumer expenditures respectively. C) resources and goods respectively. D) consumer expenditures and income respectively. Answer: B

Type: A Topic: 10 E: 36 MI: 36 MA: 36 165. Refer to the above diagram. Arrows (1) and (3) are associated with: A) the money market. B) the resource market. C) the product market. Answer: B

D) international trade.

Consider This Questions

Type: D E: 32 MI: 32 MA: 32 Status: New 166. (Consider This) A direct cost of going to college is: A) tuition, while an indirect cost (opportunity cost) is books and other supplies. B) forgone income while in college, while an indirect cost (opportunity cost) is tuition. C) tuition, while an indirect cost (opportunity cost) is forgone income while in college. D) books and supplies, while an indirect cost (opportunity cost) is food and housing. Answer: C

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Type: A E: 32 MI: 32 MA: 32 Status: New 167. (Consider This) An exception to the advice "go to college, stay in college, and earn a degree" occurs when: A) tuition expenses are high and rising. B) the opportunity cost of attending college is extraordinarily high. C) the price of textbooks is high and rising. D) the economy is growing rapidly and jobs are plentiful. Answer: B

Last Word Questions

Use the following to answer questions 168-170:

C A x Civilian goods
y

0

Defense goods

B

D

Type: G E: 35 MI: 35 MA: 35 Status: New 168. (Last Word) Refer to the above diagram. The direct economic impact of the destruction and loss of lives caused by the terrorist attacks of September 11, 2001 is illustrated by the: A) shift of the production possibilities curve from CD to AB. B) shift of the production possibilities curve from AB to CD. C) move from x to y on production possibilities curve AB. D) move from y to x on production possibilities curve AB. Answer: A

Type: G E: 35 MI: 35 MA: 35 Status: New 169. (Last Word) Refer to the above diagram. The U.S. response to the events of September 11, 2001, is illustrated by the: A) shift of the production possibilities curve from CD to AB. B) shift of the production possibilities curve from AB to CD. C) move from x to y on production possibilities curve AB. D) move from y to x on production possibilities curve AB. Answer: C

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Type: G E: 35 MI: 35 MA: 35 Status: New 170. (Last Word) Refer to the above diagram. Suppose that point y represents the optimal combination of civilian goods and defense goods. We can conclude that at y the marginal benefit of defense goods: A) exceeds the marginal cost of defense goods. C) is zero. B) equals the marginal cost of defense goods. D) is negative. Answer: B

True/False Questions

Type: D E: 24 MI: 24 MA: 24 171. Full production means that all available workers have jobs. Answer: False

Type: D E: 26 MI: 26 MA: 26 172. The production possibilities curve shows various combinations of two products that an economy can produce when achieving full employment and productive efficiency. Answer: True

Type: D E: 23 MI: 23 MA: 23 173. The entrepreneur's sole function is to combine other resources (land, labor, and capital) in the production of some good or service. Answer: False

Type: D E: 23 MI: 23 MA: 23 174. Products and services are scarce because resources are scarce. Answer: True

Type: D E: 26 MI: 26 MA: 26 175. An economy cannot produce at a point outside of its production possibilities curve because human economic wants are insatiable. Answer: False

Type: D E: 23 MI: 23 MA: 23 176. The process by which capital goods are accumulated is known as investment. Answer: True

Type: D E: 30 MI: 30 MA: 30 177. The present choice of position on the production possibilities curve will not influence the future location of the curve. Answer: False

Type: A E: 27 MI: 27 MA: 27 178. Although sleeping in on a work day or school day has an opportunity cost, sleeping late on the weekend does not. Answer: False

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Use the following to answer questions 179-182:

Type: A Topic: 5 E: 26 MI: 26 MA: 26 179. Refer to the above diagram. Given production possibilities curve (a), the combination of civilian and war goods indicated by point X is unattainable to this economy. Answer: False

Type: G E: 26 MI: 26 MA: 26 180. Refer to the above diagram. Given production possibilities curve (a), point Y indicates that society is failing to use available resources efficiently. Answer: False

Type: G E: 30 MI: 30 MA: 30 181. Refer to the above diagram. The movement from curve (a) to curve (b) implies an increase in the quantity and/or quality of society's productive resources. Answer: True

Type: G E: 30 MI: 30 MA: 30 182. Refer to the above diagram. The movement from curve (a) to curve (c) indicates an improvement in civilian goods technology but not in war goods technology. Answer: False

Type: G E: 29 MI: 29 MA: 29 183. An economy will always operate at some point on its production possibilities curve. Answer: False

Type: G E: 33 MI: 33 MA: 33 184. The increasing wealth of the United States has reduced the relevance of economics. Answer: False

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Topic 1. Demand and demand curve 2. Determinants of demand 3. Change in demand versus change in quantity demanded 4. Supply and supply curve 5. Determinants of supply 6. Equilibrium; rationing function 7. Changes in equilibrium price and quantity 8. Government-set prices Consider This Last Word True-False Multiple Choice Questions Demand and demand curve

Question numbers 1-18 19-55 56-69 70-77 78-92 93-126 127-174 175-194 195-196 197-200 201-215

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_______________________________________

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Type: D Topic: 1 E: 39 MI: 39 MA: 39 1. A market: A) reflects upsloping demand and downsloping supply curves. B) entails the exchange of goods, but not services. C) is an institution that brings together buyers and sellers. D) always requires face-to-face contact between buyer and seller. Answer: C

Type: D Topic: 1 E: 39 MI: 39 MA: 39 2. Markets explained on the basis of supply and demand: A) assume many buyers and many sellers of a standardized product. B) assume market power so that buyers and sellers bargain with one another. C) do not exist in the real-world economy. D) are approximated by markets in which a single seller determines price. Answer: A

Type: D Topic: 1 E: 40 MI: 40 MA: 40 3. The law of demand states that: A) price and quantity demanded are inversely related. B) the larger the number of buyers in a market, the lower will be product price. C) price and quantity demanded are directly related. D) consumers will buy more of a product at high prices than at low prices. Answer: A

Chapter 3: Individual Markets: Demand and Supply

Type: D Topic: 1 E: 41 MI: 41 MA: 41 4. Graphically, the market demand curve is: A) steeper than any individual demand curve that is part of it. B) greater than the sum of the individual demand curves. C) the horizontal sum of individual demand curves. D) the vertical sum of individual demand curves. Answer: C

Type: D Topic: 1 E: 41 MI: 41 MA: 41 5. The demand curve shows the relationship between: A) money income and quantity demanded. B) price and production costs. Answer: C

C) price and quantity demanded. D) consumer tastes and the quantity demanded.

Type: D Topic: 1 E: 40 MI: 40 MA: 40 6. Economists use the term demand to refer to: A) a particular price-quantity combination on a stable demand curve. B) the total amount spent on a particular commodity over a stipulated time period. C) an upsloping line on a graph that relates consumer purchases and product price. D) a schedule of various combinations of market prices and amounts demanded. Answer: D

Type: A Topic: 1 E: 40 MI: 40 MA: 40 7. The relationship between quantity supplied and price is _____ and the relationship between quantity demanded and price is _____. A) direct, inverse B) inverse, direct C) inverse, inverse D) direct, direct Answer: A

Type: D Topic: 1 E: 40 MI: 40 MA: 40 8. When the price of a product increases, a consumer is able to buy less of it with a given money income. This describes: A) the cost effect. B) the inflationary effect. C) the income effect. D) the substitution effect. Answer: C

Type: D Topic: 1 E: 41 MI: 41 MA: 41 9. A demand curve: A) shows the relationship between price and quantity supplied. B) indicates the quantity demanded at each price in a series of prices. C) graphs as an upsloping line. D) shows the relationship between income and spending. Answer: B

Type: D Topic: 1 E: 41 MI: 41 MA: 41 10. In presenting the idea of a demand curve economists presume that the most important variable in determining the quantity demanded is: A) the price of the product itself. C) the prices of related goods. B) consumer income. D) consumer tastes. Answer: A

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Type: D Topic: 1 E: 41 MI: 41 MA: 41 11. An increase in the price of a product will reduce the amount of it purchased because: A) supply curves are upsloping. B) the higher price means that real incomes have risen. C) consumers will substitute other products for the one whose price has risen. D) consumers substitute relatively high-priced for relatively low-priced products. Answer: C

Type: A Topic: 1 E: 40-41 MI: 40-41 MA: 40-41 12. The income and substitution effects account for: A) the upward sloping supply curve. C) movements along a given supply curve. B) the downward sloping demand curve. D) the "other things equal" assumption. Answer: B

Type: D Topic: 1 E: 41 MI: 41 MA: 41 13. When the price of a product rises, consumers shift their purchases to other products whose prices are now relatively lower. This statement describes: A) an inferior good. C) the substitution effect. B) the rationing function of prices. D) the income effect. Answer: C

Type: D Topic: 1 E: 40 MI: 40 MA: 40 14. When the price of a product falls, the purchasing power of our money income rises and thus permits consumers to purchase more of the product. This statement describes: A) an inferior good. C) the substitution effect. B) the rationing function of prices. D) the income effect. Answer: D

Type: G Topic: 1 E: 58 MI: 58 MA: 58 15.

(Advanced analysis) The equation for the demand curve in the above diagram: A) is P = 70 - Q. B) is P = 35 - 2Q. C) is P = 35 - .5Q. D) cannot be determined from the information given. Answer: C

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Type: D Topic: 1 E: 41 MI: 41 MA: 41 16. When product prices change, consumers are inclined to purchase larger amounts of the now cheaper products and less of the now more expensive products. This describes: A) the cost effect. B) the price effect. C) the income effect. D) the substitution effect. Answer: D

Type: D Topic: 1 E: 40, 45 MI: 40, 45 MA: 40, 45 17. The construction of demand and supply curves assumes that the primary variable influencing decisions to produce and purchase goods is: A) price. B) expectations. C) preferences. D) incomes. Answer: A

Type: A Topic: 1 E: 40 MI: 40 MA: 40 18. One reason that the quantity of a good demanded increases when its price falls is that the: A) price decline shifts the supply curve to the left. B) lower price shifts the demand curve to the left. C) lower price shifts the demand curve to the right. D) lower price increases the real incomes of buyers, enabling them to buy more. Answer: D

Determinants of demand

Type: C Topic: 2 E: 44 MI: 44 MA: 44 19. A recent study found that an increase in the Federal tax on beer (and thus an increase in the price of beer) would reduce the demand for marijuana. We can conclude that: A) beer and marijuana are substitute goods. C) beer is an inferior good. B) beer and marijuana are complementary goods. D) marijuana is an inferior good. Answer: B

Type: A Topic: 2 E: 43 MI: 43 MA: 43 20. In the past few years, the demand for donuts has greatly increased. This increase in demand might best be explained by: A) an increase in consumer income. C) a change in consumer expectations. B) an increase in the price of a substitute good. D) a change in buyer tastes. Answer: D

Type: A Topic: 2 E: 44-45 MI: 44-45 MA: 44-45 21. Which of the following will not cause the demand for product K to change? A) a change in the price of close-substitute product J B) an increase in consumer incomes C) a change in the price of K D) a change in consumer tastes Answer: C

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Type: A Topic: 2 E: 44 MI: 44 MA: 44 22. Which of the following would not shift the demand curve for beef? A) a widely publicized study that indicates beef increases one's cholesterol B) a reduction in the price of cattle feed C) an effective advertising campaign by pork producers D) a change in the incomes of beef consumers Answer: B

Type: A Topic: 2 E: 44 MI: 44 MA: 44 23. In 2003 the price of oil increased, which in turn caused the price of natural gas to rise. This can best be explained by saying that oil and natural gas are: A) complementary goods and the higher price for oil increased the demand for natural gas. B) substitute goods and the higher price for oil increased the demand for natural gas. C) complementary goods and the higher price for oil decreased the supply of natural gas. D) substitute goods and the higher price for oil decreased the supply of natural gas. Answer: B

Type: A Topic: 2 E: 43 MI: 43 MA: 43 24. An economist for a bicycle company predicts that, other things equal, a rise in consumer incomes will increase the demand for bicycles. This prediction is based on the assumption that: A) there are many goods that are substitutes for bicycles. B) there are many goods that are complementary to bicycles. C) there are few goods that are substitutes for bicycles. D) bicycles are normal goods. Answer: D

Type: C Topic: 2 E: 44 MI: 44 MA: 44 25. A rightward shift in the demand curve for product C might be caused by: A) an increase in income if C is an inferior good. B) a decrease in income if C is a normal good. C) a decrease in the price of a product that is a close substitute for C. D) a decrease in the price of a product that is complementary to C. Answer: D

Type: D Topic: 2 E: 44 MI: 44 MA: 44 26. If two goods are complements: A) they are consumed independently. B) an increase in the price of one will increase the demand for the other. C) a decrease in the price of one will increase the demand for the other. D) they are necessarily inferior goods. Answer: C

Type: A Topic: 2 E: 44 MI: 44 MA: 44 27. DVD players and DVDs are: A) complementary goods. B) substitute goods. Answer: A

C) independent goods.

D) inferior goods.

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Type: A Topic: 2 E: 44 MI: 44 MA: 44 28. If the demand curve for product B shifts to the right as the price of product A declines, then: A) both A and B are inferior goods. C) A is an inferior good and B is a superior good. B) A is a superior good and B is an inferior good. D) A and B are complementary goods. Answer: D

Type: A Topic: 2 E: 44 MI: 44 MA: 44 29. If the price of product L increases, the demand curve for close-substitute product J will: A) shift downward toward the horizontal axis. C) shift to the right. B) shift to the left. D) remain unchanged. Answer: C

Type: A Topic: 2 E: 44 MI: 44 MA: 44 30. If the price of K declines, the demand curve for the complementary product J will: A) shift to the left. B) decrease. C) shift to the right. D) remain unchanged. Answer: C

Type: A Topic: 2 E: 43 MI: 43 MA: 43 31. Which of the following is most likely to be an inferior good? A) fur coats B) ocean cruises C) used clothing D) steak Answer: C

Type: A Topic: 2 E: 44 MI: 44 MA: 44 32. Which of the following statements is correct? A) An increase in the price of C will decrease the demand for complementary product D. B) A decrease in income will decrease the demand for an inferior good. C) An increase in income will reduce the demand for a normal good. D) A decline in the price of X will increase the demand for substitute product Y. Answer: A

Type: A Topic: 2 E: 43 MI: 43 MA: 43 33. A shift to the right in the demand curve for product A can be most reasonably explained by saying that: A) consumer incomes have declined and they now want to buy less of A at each possible price. B) the price of A has increased and, as a result, consumers want to purchase less of it. C) consumer preferences have changed in favor of A so that they now want to buy more at each possible price. D) the price of A has declined and, as a result, consumers want to purchase more of it. Answer: C

Type: A Topic: 2 E: 44 MI: 44 MA: 44 34. If L and M are complementary goods, an increase in the price of L will result in: A) an increase in the sales of L. C) a decrease in the sales of M. B) no change in either the price or sales of M. D) an increase in the sales of M. Answer: C

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Type: A Topic: 2 E: 43 MI: 43 MA: 43 35. Which of the following will cause the demand curve for product A to shift to the left? A) population growth that causes an expansion in the number of persons consuming A B) an increase in money income if A is a normal good C) a decrease in the price of complementary product C D) an increase in money income if A is an inferior good Answer: D

Type: A Topic: 2 E: 43 MI: 43 MA: 43 36. If X is a normal good, a rise in money income will shift the: A) supply curve for X to the left. C) demand curve for X to the left. B) supply curve for X to the right. D) demand curve for X to the right. Answer: D

Type: A Topic: 2 E: 43 MI: 43 MA: 43 37. If Z is an inferior good, a decrease in money income will shift the: A) supply curve for Z to the left. C) demand curve for Z to the left. B) supply curve for Z to the right. D) demand curve for Z to the right. Answer: D

Type: C Topic: 2 E: 43 MI: 43 MA: 43 38. In 1994 Ford sold 500,000 Escorts at an average price of $7,200 per car; in 1995, 600,000 Escorts were sold at an average price of $7,500 per car. These statements: A) suggest that the demand for Escorts decreased between 1994 and 1995. B) imply that Escorts are an inferior good. C) suggest that the demand for Escorts increased between 1994 and 1995. D) constitute an exception to the law of demand in that they suggest an upsloping demand curve. Answer: C

Type: A Topic: 2 E: 44 MI: 44 MA: 44 39. Other things equal, which of the following might shift the demand curve for gasoline to the left? A) the discovery of vast new oil reserves in Montana B) the development of a low-cost electric automobile C) an increase in the price of train and air transportation D) a large decline in the price of automobiles Answer: B

Type: A Topic: 2 E: 43 MI: 43 MA: 43 40. An increase in consumer incomes will: A) increase the demand for an inferior good. B) increase the supply of an inferior good. Answer: C

C) increase the demand for a normal good. D) decrease the supply of a normal good.

Type: A Topic: 2 E: 44 MI: 44 MA: 44 41. Tennis rackets and ballpoint pens are: A) substitute goods. B) complementary goods. Answer: D

C) inferior goods.

D) independent goods.

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Type: D Topic: 2 E: 43 MI: 43 MA: 43 42. The demand for most products varies directly with changes in consumer incomes. Such products are known as: A) complementary goods. B) competitive goods. C) inferior goods. D) normal goods. Answer: D

Type: A Topic: 2 E: 43 MI: 43 MA: 43 43. Assume the demand curve for product X shifts to the right. This might be caused by: A) a decline in income if X is an inferior good. B) a decline in the price of Z if X and Z are substitute goods. C) a change in consumer tastes that is unfavorable to X. D) an increase in the price of Y if X and Y are complementary goods. Answer: A

Type: A Topic: 2 E: 44 MI: 44 MA: 44 44. Cameras and film are: A) substitute goods. B) complementary goods. Answer: B

C) independent goods.

D) inferior goods.

Type: A Topic: 2 E: 44 MI: 44 MA: 44 45. A decrease in the price of cameras will: A) cause the demand curve for film to become vertical. B) shift the demand curve for film to the right. C) shift the demand curve for film to the left. D) not affect the demand for film. Answer: B

Type: D Topic: 2 E: 43 MI: 43 MA: 43 46. A normal good is one: A) whose amount demanded will increase as its price decreases. B) whose amount demanded will increase as its price increases. C) whose demand curve will shift leftward as incomes rise. D) the consumption of which varies directly with incomes. Answer: D

Type: A Topic: 2 E: 43 MI: 43 MA: 43 47. If the demand for a normal good (for example, steak) shifts to the left, the most likely reason is that: A) consumer incomes have fallen. C) the price of steak has risen. B) cattle production has declined. D) the price of cattle feed has gone up. Answer: A

Type: A Topic: 2 E: 43 MI: 43 MA: 43 48. If consumer incomes increase, the demand for product X: A) will necessarily remain unchanged. C) will necessarily shift to the right. B) may shift either to the right or left. D) will necessarily shift to the left. Answer: B

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Type: A Topic: 2 E: 44 MI: 44 MA: 44 49. If products A and B are complements and the price of B decreases the: A) demand curves for both A and B will shift to the left. B) amount of B purchased will increase, but the demand curve for A will not shift. C) demand for A will increase and the amount of B demanded will increase. D) demand for A will decline and the demand for B will increase. Answer: C

Type: A Topic: 2 E: 44 MI: 44 MA: 44 50. If products C and D are close substitutes, an increase in the price of C will: A) tend to cause the price of D to fall. B) shift the demand curve of C to the left and the demand curve of D to the right. C) shift the demand curve of D to the right. D) shift the demand curves of both products to the right. Answer: C

Type: D Topic: 2 E: 40 MI: 40 MA: 40 51. In constructing a stable demand curve for product X: A) consumer preferences are allowed to vary. B) the prices of other goods are assumed constant. C) money incomes are allowed to vary. D) the supply curve of product X is assumed to be fixed. Answer: B

Type: D Topic: 2 E: 43-44 MI: 43-44 MA: 43-44 52. The demand curve for a product might shift as the result of a change in: A) consumer tastes. B) consumer incomes. C) the prices of related goods. Answer: D

D) all of the above.

Type: D Topic: 2 E: 43 MI: 43 MA: 43 53. An inferior good is: A) one whose demand curve will shift rightward as incomes rise. B) one whose price and quantity demanded vary directly. C) one which has not been approved by the Federal Food and Drug Administration. D) not accurately defined by any of the above statements. Answer: D

Type: C Topic: 2 E: 44 MI: 44 MA: 44 54. Suppose an excise tax is imposed on product X. We would expect this tax to: A) increase the demand for complementary good Y and decrease the demand for substitute product Z. B) decrease the demand for complementary good Y and increase the demand for substitute product Z. C) increase the demands for both complementary good Y and substitute product Z. D) decrease the demands for both complementary good Y and substitute product Z. Answer: B

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Type: A Topic: 2 E: 44 MI: 44 MA: 44 55. An increase in the price of product A will: A) reduce the demand for resources used in the production of A. B) increase the demand for complementary product C. C) increase the demand for substitute product B. D) reduce the demand for substitute product B. Answer: C

Change in demand versus change in quantity demanded

Use the following to answer questions 56-57:

Price

x y D1 0 Quantity D2

Type: G Topic: 3 E: 42 MI: 42 MA: 42 56. A decrease in demand is depicted by a: A) move from point x to point y. B) shift from D1 to D2. Answer: C

C) shift from D2 to D1. D) move from point y to point x.

Type: G Topic: 3 E: 45 MI: 45 MA: 45 57. A decrease in quantity demanded (as distinct from a decrease in demand) is depicted by a: A) move from point x to point y. C) shift from D2 to D1. B) shift from D1 to D2. D) move from point y to point x. Answer: D

Type: D Topic: 3 E: 42-43 MI: 42-43 MA: 42-43 58. When an economist says that the demand for a product has increased, this means that: A) consumers are now willing to purchase more of this product at each possible price. B) the product has become particularly scarce for some reason. C) product price has fallen and as a consequence consumers are buying a larger quantity of the product. D) the demand curve has shifted to the left. Answer: A

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Type: A Topic: 3 E: 44-45 MI: 44-45 MA: 44-45 59. "In the corn market, demand often exceeds supply and supply sometimes exceeds demand." "The price of corn rises and falls in response to changes in supply and demand." In which of these two statements are the terms demand and supply being used correctly? A) in neither statement B) in the second statement C) in the first statement D) in both statements Answer: B

Type: D Topic: 3 E: 44-45 MI: 44-45 MA: 44-45 60. By an increase in demand we mean that : A) product price has fallen so consumers move down to a new point on the demand curve. B) the quantity demanded at each price in a set of prices is greater. C) the quantity demanded at each price in a set of prices is smaller. D) a leftward shif of the demand curve has occurred. Answer: B

Type: C Topic: 3 E: 45 MI: 45 MA: 45 61. The quantity demanded of a product increases as its price declines because the: A) lower price shifts the demand curve rightward. C) lower price results in an increase in supply. B) lower price shifts the demand curve leftward. D) demand curve is downsloping. Answer: D

Type: D Topic: 3 E: 45 MI: 45 MA: 45 62. The term quantity demanded: A) refers to the entire series of prices and quantities that comprise the demand schedule. B) refers to a situation in which the income and substitution effects do not apply. C) refers to the amount of a product that will be purchased at some specific price. D) means the same thing as demand. Answer: C

Type: A Topic: 3 E: 44-45 MI: 44-45 MA: 44-45 63. If consumers are willing to pay a higher price than previously for each level of output, we can say that that following has occurred: A) a decrease in demand. C) a decrease in supply. B) an increase in demand. D) an increase in supply. Answer: B

Type: A Topic: 3 E: 44 MI: 44 MA: 44 64. A decrease in the demand for recreational fishing boats might be caused by an increase in the: A) income of sports fishers. C) size and number of fish available. B) price of outboard motors. D) price of sailing boats. Answer: B

Type: D Topic: 3 E: 42 MI: 42 MA: 42 65. An increase in demand means that: A) given supply, the price of the product will decline. B) the demand curve has shifted to the right. C) price has declined and consumers therefore want to purchase more of the product. D) the demand curve has shifted to the left. Answer: B

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Type: A Topic: 3 E: 45 MI: 45 MA: 45 66. Assume that the demand schedule for product C is downsloping. If the price of C falls from $2.00 to $1.75: A) a smaller quantity of C will be demanded. C) the demand for C will increase. B) a larger quantity of C will be demanded. D) the demand for C will decrease. Answer: B

Type: A Topic: 3 E: 45 MI: 45 MA: 45 67. An increase in the quantity demanded means that: A) given supply, the price of the product can be expected to decline. B) price has declined and consumers therefore want to purchase more of the product. C) the demand curve has shifted to the right. D) the demand curve has shifted to the left. Answer: B

Type: A Topic: 3 E: 45 MI: 45 MA: 45 68. An increase in product price will cause: A) quantity demanded to decrease. B) quantity supplied to decrease. Answer: A

C) quantity demanded to increase. D) the supply curve to shift to the right.

Type: A Topic: 3 E: 45 MI: 45 MA: 45 69. In moving along a stable demand curve which of the following is not held constant? A) the price of the product for which the demand curve is relevant B) price expectations C) consumer incomes D) the prices of complementary goods Answer: A

Supply and supply curve Use the following to answer questions 70-71:

x Price

S1

S2

y

0

Quantity

Type: G Topic: 4 E: 46 MI: 46 MA: 46 70. A decrease in supply is depicted by a: A) move from point x to point y. B) shift from S1 to S2. Answer: C

C) shift from S2 to S1. D) move from point y to point x.

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Type: G Topic: 4 E: 47 MI: 47 MA: 47 71. An increase in quantity supplied (as distinct from an increase in supply) is depicted by a: A) move from point y to point x. C) shift from S2 to S1. B) shift from S1 to S2. D) move from point x to point y. Answer: A

Type: D Topic: 4 E: 45 MI: 45 MA: 45 72. The law of supply indicates that: A) producers will offer more of a product at high prices than they will at low prices. B) the product supply curve is downsloping. C) consumers will purchase less of a good at high prices than they will at low prices. D) producers will offer more of a product at low prices than they will at high prices. Answer: A

Type: D Topic: 4 E: 45 MI: 45 MA: 45 73. The law of supply: A) reflects the amounts that producers will want to offer at each price in a series of prices. B) is reflected in a downsloping supply curve. C) shows that the relationship between producer revenue and quantity supplied is negative. D) reflects the income and substitution effects of a price change. Answer: A

Type: D Topic: 4 E: 46 MI: 46 MA: 46 74. The upward slope of the supply curve reflects the: A) principle of specialization in production. B) law of supply. C) fact that price and quantity supplied are inversely related. D) law of diminishing marginal utility. Answer: B

Type: G Topic: 4 E: 58 MI: 58 MA: 58 75.

(Advanced

analysis) The equation for the supply curve in the above diagram: A) is P = 5 + 1/3Q. B) is P = 5 + 2Q. C) is P = 5 + 3Q. D) is P = 5 - 3Q. Answer: A

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Type: D Topic: 4 E: 45 MI: 45 MA: 45 76. The supply curve shows the relationship between: A) price and quantity supplied. B) production costs and the amount demanded. C) total business revenues and quantity supplied. D) physical inputs of resources and the resulting units of output. Answer: A

Type: A Topic: 4 E: 45 MI: 45 MA: 45 77. A firm's supply curve is upsloping because: A) the expansion of production necessitates the use of qualitatively inferior inputs. B) mass production economies are associated with larger levels of output. C) consumers envision a positive relationship between price and quality. D) beyond some point the production costs of additional units of output will rise. Answer: D

Determinants of supply

Type: A Topic: 5 E: 47 MI: 47 MA: 47 78. A leftward shift of a product supply curve might be caused by: A) an improvement in the relevant technique of production. B) a decline in the prices of needed inputs. C) an increase in consumer incomes. D) some firms leaving an industry. Answer: D

Type: D Topic: 5 E: 47 MI: 47 MA: 47 79. The location of the product supply curve depends on: A) production technology. C) the tastes of buyers. B) the number of buyers in the market. D) the location of the demand curve. Answer: A

Type: A Topic: 5 E: 47 MI: 47 MA: 47 80. An improvement in production technology will: A) increase equilibrium price. B) shift the supply curve to the left. Answer: C

C) shift the supply curve to the right. D) shift the demand curve to the left.

Type: A Topic: 5 E: 47 MI: 47 MA: 47 81. Because of unseasonably cold weather, the supply of oranges has substantially decreased. This statement indicates that: A) the demand for oranges will necessarily rise. B) the equilibrium quantity of oranges will rise. C) the amount of oranges that will be available at various prices has declined. D) the price of oranges will fall. Answer: C

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Type: A Topic: 5 E: 47 MI: 47 MA: 47 82. If producers must obtain higher prices than previously to produce various levels of output, the following has occurred: A) a decrease in demand. C) a decrease in supply. B) an increase in demand. D) an increase in supply. Answer: C

Type: A Topic: 5 E: 47-48 MI: 47-48 MA: 47-48 83. In moving along a stable supply curve which of the following is not held constant? A) the number of firms producing this good B) expectations about the future price of the product C) techniques used in producing this product D) the price of the product for which the supply curve is relevant Answer: D

Type: D Topic: 5 E: 46 MI: 46 MA: 46 84. The location of the supply curve of a product depends on: A) the technology used to produce it. C) the number of sellers in the market. B) the prices of resources used in its production. D) all of the above. Answer: D

Type: C Topic: 5 E: 47 MI: 47 MA: 47 85. Assume product A is an input in the production of product B. In turn product B is a complement to product C. We can expect a decrease in the price of A to: A) increase the supply of B and increase the demand for C. B) decrease the supply of B and increase the demand for C. C) decrease the supply of B and decrease the demand for C. D) increase the supply of B and decrease the demand for C. Answer: A

Type: C Topic: 5 E: 47 MI: 47 MA: 47 86. Assume a drought in the Great Plains reduces the supply of wheat. Noting that wheat is a basic ingredient in the production of bread and that potatoes are a consumer substitute for bread, we would expect the price of wheat to: A) rise, the supply of bread to increase, and the demand for potatoes to increase. B) rise, the supply of bread to decrease, and the demand for potatoes to increase. C) rise, the supply of bread to decrease, and the demand for potatoes to decrease. D) fall, the supply of bread to increase, and the demand for potatoes to increase. Answer: B

Type: A Topic: 5 E: 47 MI: 47 MA: 47 87. Suppose product X is an input in the production of product Y. Product Y in turn is a substitute for product Z. An increase in the price of X can be expected to: A) decrease the demand for Z. C) have no effect on the demand for Z. B) increase the demand for Z. D) decrease the supply of Z. Answer: B

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Type: A Topic: 5 E: 46-47 MI: 46-47 MA: 46-47 Status: New 88. Other things equal, if the price of a key resource used to produce product X falls, the: A) product supply curve of X will shift to the right. B) product demand curve of X will shift to the right. C) product supply curve of X will shift to the left. D) product demand curve of X will shift to the right. Answer: A

Type: A Topic: 5 E: 47 MI: 47 MA: 47 Status: New 89. When the price of oil declines significantly, the price of gasoline also declines. The latter occurs because of a(n): A) increase in the demand for gasoline. C) increase in the supply of gasoline. B) decrease in the demand for gasoline. D) decrease in the supply of gasoline. Answer: C

Type: A Topic: 5 E: 47 MI: 47 MA: 47 Status: New 90. An increase in the excise tax on cigarettes raises the price of cigarettes by shifting the: A) demand curve for cigarettes rightward. C) supply curve for cigarettes rightward. B) demand curve for cigarettes leftward. D) supply curve for cigarettes leftward. Answer: D

Type: A Topic: 5 E: 47 MI: 47 MA: 47 Status: New 91. A government subsidy to the producers of a product: A) reduces product supply. C) reduces product demand. B) increases product supply. D) increases product demand. Answer: B

Type: C Topic: 5 E: 47 MI: 47 MA: 47 Status: New 92. Suppose that at prices of $5, $4, $3, $2, and $1 for product Z, the corresponding quantities supplied are 3, 4, 5, 6, and 7 units, respectively. Which of the following would increase the quantities supplied of Z to, say, 6, 8, 10, 12, and 14 units at these prices? A) improved technology for producing Z B) an increase in the prices of the resources used to make Z C) an increase in the excise tax on product Z D) increases in the incomes of the buyers of Z Answer: A

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Equilibrium; rationing function

Use the following to answer questions 93-98:
(1) Qd 50 60 80 90 100 (2) Qd 40 50 60 70 80 (3) Price $10 9 8 7 6 (4) Qs 70 60 50 40 30 (5) Qs 80 70 60 50 40

Type: T Topic: 6 E: 48-49 MI: 48-49 MA: 48-49 93. Refer to the above table. If demand is represented by columns (3) and (2) and supply is represented by columns (3) and (5), equilibrium price and quantity will be: A) $10 and 60 units. B) $9 and 50 units. C) $8 and 60 units. D) $7 and 50 units. Answer: C

Type: T Topic: 6 E: 48-49 MI: 48-49 MA: 48-49 94. Refer to the above table. If demand is represented by columns (3) and (1) and supply is represented by columns (3) and (4), equilibrium price and quantity will be: A) $10 and 60 units. B) $9 and 60 units. C) $8 and 80 units. D) $7 and 30 units. Answer: B

Type: T Topic: 6 E: 45 MI: 45 MA: 45 95. Refer to the above table. In relation to column (3), a change from column (2) to column (1) would indicate a(n): A) increase in demand. B) decrease in demand. C) increase in supply. D) decrease in supply. Answer: A

Type: T Topic: 6 E: 47 MI: 47 MA: 47 96. Refer to the above table. In relation to column (3), a change from column (5) to column (4) would indicate a(n): A) increase in demand. B) decrease in demand. C) increase in supply. D) decrease in supply. Answer: D

Type: T Topic: 6 E: 48 MI: 48 MA: 48 97. Refer to the above table. Suppose that demand is represented by columns (3) and (2) and supply is represented by columns (3) and (5). If the price were artificially set at $9, a: A) the market would clear. B) a surplus of 20 units would occur. C) a shortage of 20 units would occur. D) demand would change from columns (3) and (2) to columns (3 and (1). Answer: B

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Type: T Topic: 6 E: 48 MI: 48 MA: 48 98. Refer to the above table. Suppose that demand is represented by columns (3) and (2) and supply is represented by columns (3) and (5). If the price were artificially set at $6, a: A) the market would clear. B) a surplus of 40 units would occur. C) a shortage of 40 units would occur. D) demand would change from columns (3) and (2) to columns (3 and (1). Answer: C

Use the following to answer questions 99-101: Answer the next question(s) on the basis of the given supply and demand data for wheat: Bushels demanded per month 45 50 56 61 67 Price per bushel $5 4 3 2 1 Bushels supplied per month 77 73 68 61 57

Type: T Topic: 6 E: 48-49 MI: 48-49 MA: 48-49 99. Refer to the above data. Equilibrium price will be: A) $4. B) $3. C) $2. D) $1. Answer: C

Type: T Topic: 6 E: 48 MI: 48 MA: 48 100. Refer to the above data. If the price in this market was $4: A) the market would clear; quantity demanded would equal quantity supplied. B) buyers would want to purchase more wheat than is currently being supplied. C) farmers would not be able to sell all their wheat. D) there would be a shortage of wheat. Answer: C

Type: T Topic: 6 E: 48 MI: 48 MA: 48 101. Refer to the above data. If price was initially $4 and free to fluctuate, we would expect: A) quantity supplied to continue to exceed quantity demanded. B) the quantity of wheat supplied to decline as a result of the subsequent price change. C) the quantity of wheat demanded to fall as a result of the subsequent price change. D) the price of wheat to rise. Answer: B

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Use the following to answer questions 102-104:

Type: G Topic: 6 E: 48-49 MI: 48-49 MA: 48-49 102. Refer to the above diagram. The equilibrium price and quantity in this market will be: A) $1.00 and 200. B) $1.60 and 130. C) $.50 and 130. D) $1.60 and 290. Answer: A

Type: G Topic: 6 E: 48 MI: 48 MA: 48 103. Refer to the above diagram. A surplus of 160 units would be encountered if price was: A) $1.10, that is, $1.60 minus $.50. B) $1.60. C) $1.00. D) $.50. Answer: B

Type: G Topic: 6 E: 48 MI: 48 MA: 48 104. Refer to the above diagram. A shortage of 160 units would be encountered if price was: A) $1.10, that is, $1.60 minus $.50. B) $1.60. C) $1.00. D) $.50. Answer: D

Type: G Topic: 6 E: 48 MI: 48 MA: 48 105. If a product is in surplus supply, its price: A) is below the equilibrium level. B) is above the equilibrium level. Answer: B

C) will rise in the near future. D) is in equilibrium.

Type: D Topic: 6 E: 48 MI: 48 MA: 48 106. A market is in equilibrium: A) provided there is no surplus of the product. B) at all prices above that shown by the intersection of the supply and demand curves. C) if the amount producers want to sell is equal to the amount consumers want to buy. D) whenever the demand curve is downsloping and the supply curve is upsloping. Answer: C

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Type: C Topic: 6 E: 49 MI: 49 MA: 49 107. If the demand and supply curves for product X are stable, a government-mandated increase in the price of X will: A) increase the supply of X and decrease the demand for X. B) increase the demand for X and decrease the supply of X. C) increase the quantity supplied and decrease the quantity demanded of X. D) decrease the quantity supplied of X and increase the quantity demanded of X. Answer: C

Type: A Topic: 6 E: 48-49 MI: 48-49 MA: 48-49 108. At the equilibrium price: A) quantity supplied may exceed quantity demanded or vice versa. B) there are no pressures on price to either rise or fall. C) there are forces that cause price to rise. D) there are forces that cause price to fall. Answer: B

Use the following to answer questions 109-112:

Type: G Topic: 6 E: 48-49 MI: 48-49 MA: 48-49 109. Refer to the above diagram. A price of $60 in this market will result in: A) equilibrium. B) a shortage of 50 units. C) a surplus of 50 units. Answer: D

D) a surplus of 100 units.

Type: G Topic: 6 E: 48-49 MI: 48-49 MA: 48-49 110. Refer to the above diagram. A price of $20 in this market will result in: A) a shortage of 50 units. C) a surplus of 100 units. B) a surplus of 50 units. D) a shortage of 100 units. Answer: D

Type: G Topic: 6 E: 40 MI: 40 MA: 40 111. Refer to the above diagram. The highest price that buyers will be willing and able to pay for 100 units of this product is: A) $30. B) $60. C) $40. D) $20. Answer: B

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Type: G Topic: 6 E: 48-49 MI: 48-49 MA: 48-49 112. Refer to the above diagram. If this is a competitive market, price and quantity will move toward: A) $60 and 100 respectively. C) $40 and 150 respectively. B) $60 and 200 respectively. D) $20 and 150 respectively. Answer: C

Type: A Topic: 6 E: 49 MI: 49 MA: 49 113. At the point where the demand and supply curves for a product intersect: A) the selling price and the buying price need not be equal. B) the market may, or may not, be in equilibrium. C) either a shortage or a surplus of the product might exist, depending on the degree of competition. D) the quantity that consumers want to purchase and the amount producers choose to sell are the same. Answer: D

Type: D Topic: 6 E: 50 MI: 50 MA: 50 114. The rationing function of prices refers to the: A) tendency of supply and demand to shift in opposite directions. B) fact that ration coupons are needed to alleviate wartime shortages of goods. C) capacity of a competitive market to equate the quantity demanded and the quantity supplied. D) ability of the market system to generate an equitable distribution of income. Answer: C

Type: A Topic: 6 E: 50 MI: 50 MA: 50 115. A competitive market will: A) achieve an equilibrium price. B) produce shortages. Answer: A

C) produce surpluses.

D) create disorder.

Type: A Topic: 6 E: 48 MI: 48 MA: 48 116. If there is a shortage of product X: A) fewer resources will be allocated to the production of this good. B) the price of the product will rise. C) the price of the product will decline. D) the supply curve will shift to the left and the demand curve to the right, eliminating the shortage. Answer: B

Type: A Topic: 6 E: 49 MI: 49 MA: 49 117. At the point where the demand and supply curves intersect: A) the buying and selling decisions of consumers and producers are inconsistent with one another. B) the market is in disequilibrium. C) there is neither a surplus nor a shortage of the product. D) quantity demanded exceeds quantity supplied. Answer: C

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Type: A Topic: 6 E: 49 MI: 49 MA: 49 118. At the current price there is a shortage of a product. We would expect price to: A) increase, quantity demanded to increase, and quantity supplied to decrease. B) increase, quantity demanded to decrease, and quantity supplied to increase. C) increase, quantity demanded to increase, and quantity supplied to increase. D) decrease, quantity demanded to increase, and quantity supplied to decrease. Answer: B

Type: D Topic: 6 E: 50 MI: 50 MA: 50 119. In a competitive market the equilibrium price and quantity occur where: A) the downsloping demand curve intersects the upsloping supply curve. B) the upsloping demand curve intersects the downsloping supply curve. C) consumers and suppliers bargain to a mutually acceptable price. D) quantity demanded exceeds quantity supplied or vice versa. Answer: A

Type: A Topic: 6 E: 49 MI: 49 MA: 49 120. A surplus of a product will arise when price is: A) above equilibrium with the result that quantity demanded exceeds quantity supplied. B) above equilibrium with the result that quantity supplied exceeds quantity demanded. C) below equilibrium with the result that quantity demanded exceeds quantity supplied. D) below equilibrium with the result that quantity supplied exceeds quantity demanded. Answer: B

Type: A Topic: 6 E: 49 MI: 49 MA: 49 121. If price is above the equilibrium level, competition among sellers to reduce the resulting: A) surplus will increase quantity demanded and decrease quantity supplied. B) shortage will decrease quantity demanded and increase quantity supplied. C) surplus will decrease quantity demanded and increase quantity supplied. D) shortage will increase quantity demanded and decrease quantity supplied. Answer: A

Type: D Topic: 6 E: 50 MI: 50 MA: 50 122. If we say that a price is too high to clear the market, we mean that: A) quantity demanded exceeds quantity supplied. C) quantity supplied exceeds quantity demanded. B) the equilibrium price is above the current price. D) the price of the good is likely to rise. Answer: C

Type: A Topic: 6 E: 49 MI: 49 MA: 49 123. Assume in a competitive market that price is initially above the equilibrium level. We can predict that price will: A) decrease, quantity demanded will decrease, and quantity supplied will increase. B) decrease and quantity demanded and quantity supplied will both decrease. C) decrease, quantity demanded will increase, and quantity supplied will decrease. D) increase, quantity demanded will decrease, and quantity supplied will increase. Answer: C

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Type: A Topic: 6 E: 49 MI: 49 MA: 49 124. Assume in a competitive market that price is initially below the equilibrium level. We can predict that price will: A) decrease, quantity demanded will decrease, and quantity supplied will increase. B) decrease and quantity demanded and quantity supplied will both decrease. C) decrease, quantity demanded will increase, and quantity supplied will decrease. D) increase, quantity demanded will decrease, and quantity supplied will increase. Answer: D

Type: D Topic: 6 E: 49 MI: 49 MA: 49 125. A product market is in equilibrium: A) when there is no surplus of the product. B) when there is no shortage of the product. C) when consumers want to buy more of the product than producers offer for sale. D) where the demand and supply curves intersect. Answer: D

Type: D Topic: 6 E: 48 MI: 48 MA: 48 126. There will be a surplus of a product when: A) price is below the equilibrium level. B) the supply curve is downward sloping and the demand curve is upward sloping. C) the demand and supply curves fail to intersect. D) consumers want to buy less than producers offer for sale. Answer: D

Changes in equilibrium price and quantity

127.

Type: C Topic: 7 E: 47 MI: 47 MA: 47 Other things equal, an excise tax on a product will: A) increase its supply. B) increase its price. C) increase the quantity sold. Answer: B

D) increase its demand.

Type: A Topic: 7 E: 50-52 MI: 50-52 MA: 50-52 128. Assuming conventional supply and demand curves, changes in the determinants of supply and demand will: A) in all likelihood alter both equilibrium price and quantity. B) alter equilibrium quantity, but not equilibrium price. C) alter equilibrium price, but not equilibrium quantity. D) have no effect on equilibrium price or quantity. Answer: A

Type: A Topic: 7 E: 50 MI: 50 MA: 50 129. Which of the following will cause a decrease in market equilibrium price and an increase in equilibrium quantity? A) an increase in supply B) an increase in demand C) a decrease in supply D) a decrease in demand Answer: A

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Type: A Topic: 7 E: 50-51 MI: 50-51 MA: 50-51 130. Suppose in each of four successive years producers sell more of their product and at lower prices. This could be explained: A) by small annual increases in supply accompanied by large annual increases in demand. B) in terms of a stable supply curve and increasing demand. C) in terms of a stable demand curve and increasing supply. D) as an exception to the law of supply. Answer: C

Type: C Topic: 7 E: 47 MI: 47 MA: 47 131. Other things equal, the provision of a per unit subsidy for a product will: A) increase its supply. C) decrease the quantity sold. B) increase its price. D) decrease its demand. Answer: A

Type: C Topic: 7 E: 51 MI: 51 MA: 51 132. Which of the following statements is correct? A) If demand increases and supply decreases, equilibrium price will fall. B) If supply increases and demand decreases, equilibrium price will fall. C) If demand decreases and supply increases, equilibrium price will rise. D) If supply declines and demand remains constant, equilibrium price will fall. Answer: B

Type: C Topic: 7 E: 50-52 MI: 50-52 MA: 50-52 133. In which of the following instances will the effect on equilibrium price be dependent on the magnitude of the shifts in supply and demand? A) demand rises and supply rises C) demand rises and supply falls B) supply falls and demand remains constant D) supply rises and demand falls Answer: A

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Use the following to answer questions 134-138:

Type: G Topic: 7 E: 48-49 MI: 48-49 MA: 48-49 134. Refer to the above diagram, which shows demand and supply conditions in the competitive market for product X. If the initial demand and supply curves are D0 and S0, equilibrium price and quantity will be: A) 0F and 0C respectively. C) 0F and 0A respectively. B) 0G and 0B respectively. D) 0E and 0B respectively. Answer: A

Type: G Topic: 7 E: 52 MI: 52 MA: 52 135. Refer to the above diagram, which shows demand and supply conditions in the competitive market for product X. Given D0, if the supply curve moved from S0 to S1 , then: A) supply has increased and equilibrium quantity has decreased. B) supply has decreased and equilibrium quantity has decreased. C) there has been an increase in the quantity supplied. D) supply has increased and price has risen to 0G. Answer: B

Type: G Topic: 7 E: 48 MI: 48 MA: 48 136. Refer to the above diagram, which shows demand and supply conditions in the competitive market for product X. If supply is S1 and demand D0, then A) at any price above 0G a shortage would occur. B) 0F represents a price that would result in a surplus of AC. C) a surplus of GH would occur. D) 0F represents a price that would result in a shortage of AC. Answer: D

Type: G Topic: 7 E: 43-44 MI: 43-44 MA: 43-44 137. Refer to the above diagram, which shows demand and supply conditions in the competitive market for product X. A shift in the demand curve from D0 to D1 might be caused by a(n): A) decrease in income if X is an inferior good. B) increase in the price of complementary good Y. C) increase in money incomes if X is a normal good. D) increase in the price of substitute product Y. Answer: B

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Type: G Topic: 7 E: 46-47 MI: 46-47 MA: 46-47 138. Refer to the above diagram, which shows demand and supply conditions in the competitive market for product X. Other things equal, a shift of the supply curve from S0 to S1 might be caused by a(n): A) increase in the wage rates paid to laborers employed in the production of X. B) government subsidy per unit of output paid to firms producing X. C) decline in the price of the basic raw material used in producing X. D) increase in the number of firms producing X. Answer: A

Type: C Topic: 7 E: 52 MI: 52 MA: 52 139. If the supply and demand curves for a product both decrease, then equilibrium: A) quantity must fall and equilibrium price must rise. B) price must fall, but equilibrium quantity may either rise, fall, or remain unchanged. C) quantity must decline, but equilibrium price may either rise, fall, or remain unchanged. D) quantity and equilibrium price must both decline. Answer: C

Type: C Topic: 7 E: 51-52 MI: 51-52 MA: 51-52 140. If the supply of a product decreases and the demand for that product simultaneously increases, then equilibrium: A) price must rise, but equilibrium quantity may either rise, fall, or remain unchanged. B) price must rise and equilibrium quantity must fall. C) price and equilibrium quantity must both increase. D) price and equilibrium quantity must both decline. Answer: A

Type: C Topic: 7 E: 50 MI: 50 MA: 50 141. Assuming competitive markets with typical supply and demand curves, which of the following statements is correct? A) An increase in supply with a decrease in demand will result in an increase in price. B) An increase in supply with no change in demand will result in an increase in price. C) An increase in supply with no change in demand will result in a decline in sales. D) An increase in demand with no change in supply will result in an increase in sales. Answer: D

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Use the following to answer questions 142-145:

Type: G Topic: 7 E: 50-51 MI: 50-51 MA: 50-51 142. Refer to the above diagram, in which S1 and D1 represent the original supply and demand curves and S2 and D2 the new curves. In this market: A) supply has decreased and equilibrium price has increased. B) demand has increased and equilibrium price has decreased. C) demand has decreased and equilibrium price has decreased. D) demand has increased and equilibrium price has increased. Answer: B

Type: G Topic: 7 E: 50-51 MI: 50-51 MA: 50-51 143. Refer to the above diagram, in which S1 and D1 represent the original supply and demand curves and S2 and D2 the new curves. In this market: A) the equilibrium position has shifted from M to K. B) an increase in demand has been more than offset by an increase in supply. C) the new equilibrium price and quantity are both greater than originally. D) point M shows the new equilibrium position. Answer: B

Type: C Topic: 7 E: 47 MI: 47 MA: 47 144. Refer to the above diagram, in which S1 and D1 represent the original supply and demand curves and S2 and D2 the new curves. In this market the indicated shift in supply may have been caused by: A) an increase in the wages paid to workers producing this good. B) the development of more efficient machinery for producing this commodity. C) this product becoming less fashionable. D) an increase in consumer incomes. Answer: B

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Type: C Topic: 7 E: 43 MI: 43 MA: 43 145. Refer to the above diagram, in which S1 and D1 represent the original supply and demand curves and S2 and D2 the new curves. In this market the indicated shift in demand may have been caused by: A) a decline in the number of buyers in the market. B) a decline in the price of a substitute good. C) an increase in incomes if the product is a normal good. D) an increase in incomes if the product is an inferior good. Answer: C

Type: C Topic: 7 E: 47 MI: 47 MA: 47 146. An unusually large crop of coffee beans might: A) increase the supply of coffee. B) increase the price of coffee. Answer: A

C) decrease the quantity of coffee consumed. D) increase the price of tea.

Use the following to answer questions 147-156: In the following question(s) you are asked to determine, other things equal, the effects of a given change in a determinant of demand or supply for product X upon (1) the demand (D) for, or supply (S) of, X, (2) the equilibrium price (P) of X and (3) the equilibrium quantity (Q) of X.

Type: C Topic: 7 E: 50 MI: 50 MA: 50 147. Refer to the above. An increase in income, if X is a normal good, will: A) increase D, increase P, and increase Q. C) increase S, increase P, and increase Q. B) increase D, increase P, and decrease Q. D) decrease D, increase P, and increase Q. Answer: A

Type: C Topic: 7 E: 50 MI: 50 MA: 50 148. Refer to the above. An increase in the price of a product that is a close substitute for X will: A) decrease D, increase P, and decrease Q. C) increase D, increase P, and increase Q. B) increase D, increase P, and decrease Q. D) increase D, decrease P, and increase Q. Answer: C

Type: C Topic: 7 E: 50 MI: 50 MA: 50 149. Refer to the above. A decrease in the number of consumers of product X will: A) decrease S, decrease P, and decrease Q. C) decrease D, decrease P, and decrease Q. B) increase D, increase P, and increase Q. D) decrease D, decrease P, and increase Q. Answer: C

Type: C Topic: 7 E: 50 MI: 50 MA: 50 150. Refer to the above. An increase in the tastes and preferences for X will: A) increase S, decrease P, and increase Q. C) increase D, increase P, and increase Q. B) decrease S, decrease P, and decrease Q. D) decrease D, decrease P, and decrease Q. Answer: C

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Type: C Topic: 7 E: 50 MI: 50 MA: 50 151. Refer to the above. An increase in the prices of resources used to produce X will: A) increase S, increase P, and increase Q. C) decrease S, decrease P, and decrease Q. B) increase D, increase P, and increase Q. D) decrease S, increase P, and decrease Q. Answer: D

Type: C Topic: 7 E: 50 MI: 50 MA: 50 152. Refer to the above. An improvement in the technology used to produce X will: A) decrease S, increase P, and decrease Q. C) increase S, decrease P, and increase Q. B) decrease S, increase P, and increase Q. D) decrease D, decrease P, and decrease Q. Answer: C

Type: C Topic: 7 E: 50 MI: 50 MA: 50 153. Refer to the above. A reduction in the number of firms producing X will: A) increase D, increase P, and increase Q. C) decrease S, increase P, and decrease Q. B) increase S, decrease P, and increase Q. D) decrease S, decrease P, and increase Q. Answer: C

Type: C Topic: 7 E: 50 MI: 50 MA: 50 154. Refer to the above. An increase in the price of a product that is a complement to X will: A) decrease S, decrease P, and decrease Q. C) decrease D, decrease P, and decrease Q. B) increase D, increase P, and increase Q. D) increase D, increase P, and decrease Q. Answer: C

Type: C Topic: 7 E: 50 MI: 50 MA: 50 155. Refer to the above. If X is an inferior good, a decrease in income will: A) decrease D, decrease P, and decrease Q. C) increase S, decrease P, and increase Q. B) decrease D, decrease P, and increase Q. D) increase D, increase P, and increase Q. Answer: D

Type: C Topic: 7 E: 50 MI: 50 MA: 50 156. Refer to the above. Consumer expectations that the price of X will rise sharply in the future will: A) increase S, increase P, and increase Q. C) decrease S, increase P, and increase Q. B) increase D, increase P, and increase Q. D) increase D, decrease P, and increase Q. Answer: B

Type: C Topic: 7 E: 50 MI: 50 MA: 50 157. Data from the registrar's office at Gigantic State University indicate that over the past twenty years tuition and enrollment have both increased. From this information we can conclude that: A) higher education is an exception to the law of demand. B) the supply of education provided by GSU has also increased over the twenty-year period. C) school-age population, incomes, and preferences for education have changed over the twenty-year period. D) GSU's supply curve of education is downsloping. Answer: C

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Type: C Topic: 7 E: 51 MI: 51 MA: 51 158. One can say with certainty that equilibrium price will decline when supply: A) and demand both decrease. C) decreases and demand increases. B) increases and demand decreases. D) and demand both increase. Answer: B

Type: C Topic: 7 E: 52 MI: 52 MA: 52 159. One can say with certainty that equilibrium quantity will increase when supply: A) and demand both decrease. C) decreases and demand increases. B) increases and demand decreases. D) and demand both increase. Answer: D

Use the following to answer questions 160-165:

Type: G Topic: 7 E: 50-51 MI: 50-51 MA: 50-51 160. Which of the above diagrams illustrate(s) the effect of an increase in automobile worker wages on the market for automobiles? A) A only B) B only C) C only D) D only Answer: D

Type: G Topic: 7 E: 50-51 MI: 50-51 MA: 50-51 161. Which of the above diagrams illustrate(s) the effect of a decline in the price of personal computers on the market for software? A) A only B) A and D C) B only D) D only Answer: A

Type: G Topic: 7 E: 50-51 MI: 50-51 MA: 50-51 162. Which of the above diagrams illustrate(s) the effect of an increase in the price of Budweiser beer on the market for Coors beer? A) A and C B) A only C) B only D) C only Answer: B

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Type: G Topic: 7 E: 50-51 MI: 50-51 MA: 50-51 163. Which of the above diagrams illustrate(s) the effect of a decrease in incomes on the market for secondhand clothing? A) A and C B) A only C) B only D) C only Answer: B

Type: G Topic: 7 E: 50-51 MI: 50-51 MA: 50-51 164. Which of the above diagrams illustrate(s) the effect of a governmental subsidy on the market for AIDS research? A) A only B) B only C) C only D) D only Answer: C

Type: G Topic: 7 E: 50-51 MI: 50-51 MA: 50-51 165. Which of the above diagrams illustrate(s) the effect of a decline in the price of irrigation equipment on the market for corn? A) B only B) C only C) B and C D) D only Answer: B

Type: C Topic: 7 E: 50-51 MI: 50-51 MA: 50-51 166. With a downsloping demand curve and an upsloping supply curve for a product, an increase in consumer income will: A) increase equilibrium price and quantity if the product is a normal good. B) decrease equilibrium price and quantity if the product is a normal good. C) have no effect on equilibrium price and quantity. D) reduce the quantity demanded, but not shift the demand curve. Answer: A

Type: C Topic: 7 E: 50-51 MI: 50-51 MA: 50-51 167. With a downsloping demand curve and an upsloping supply curve for a product, a decrease in resource prices will: A) increase equilibrium price and quantity. B) decrease equilibrium price and quantity. C) decrease equilibrium price and increase equilibrium quantity. D) increase equilibrium price and decrease equilibrium quantity. Answer: C

Type: C Topic: 7 E: 50-51 MI: 50-51 MA: 50-51 168. With a downsloping demand curve and an upsloping supply curve for a product, placing an excise tax on this product will: A) increase equilibrium price and quantity. B) decrease equilibrium price and quantity. C) decrease equilibrium price and increase equilibrium quantity. D) increase equilibrium price and decrease equilibrium quantity. Answer: D

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Type: C Topic: 7 E: 50-51 MI: 50-51 MA: 50-51 169. Given a downsloping demand curve and an upsloping supply curve for a product, an increase in the price of a substitute good will: A) increase equilibrium price and quantity. B) decrease equilibrium price and quantity. C) increase equilibrium price and decrease equilibrium quantity. D) decrease equilibrium price and increase equilibrium quantity. Answer: A

Use the following to answer questions 170-174: (Advanced analysis) Answer the next question(s) on the basis of the following information. The demand for commodity X is represented by the equation P = 10 - 0.2Q and supply by the equation P = 2 + 0.2Q.

Type: E Topic: 7 E: 58 MI: 58 MA: 58 170. Refer to the above information. The equilibrium quantity is: A) 10. B) 20. C) 15. D) 30. Answer: B

Type: E Topic: 7 E: 58 MI: 58 MA: 58 171. Refer to the above information. The equilibrium price for X is: A) $2. B) $4. C) $6. D) $7. Answer: C

Type: E Topic: 7 E: 58 MI: 58 MA: 58 172. Refer to the above information. If demand changed from P = 10 - .2Q to P = 7 - .3Q, we can conclude that: A) demand has increased. C) supply will increase. B) demand has declined. D) supply will decrease. Answer: B

Type: E Topic: 7 E: 58 MI: 58 MA: 58 173. Refer to the above information. After the change in demand, the new equilibrium quantity is: A) 10. B) 20. C) 15. D) 30. Answer: A

Type: E Topic: 7 E: 58 MI: 58 MA: 58 174. Refer to the above information. After the change in demand, the new equilibrium price is: A) $2. B) $4. C) $6. D) $7. Answer: B

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Chapter 3: Individual Markets: Demand and Supply

Government-set prices

Use the following to answer questions 175-178:

Quantity Demanded 52 62 72 82 92

Price $50 45 40 35 30

Quantity Supplied 73 62 51 42 33

Type: T Topic: 8 E: 52-53 MI: 52-53 MA: 52-53 Status: New 175. In the above market, economists would call a government-set minimum price of $50 a: A) price ceiling. B) price floor. C) equilibrium price. D) fair price. Answer: B

Type: T Topic: 8 E: 52-53 MI: 52-53 MA: 52-53 Status: New 176. In the above market, economists would call a government-set minimum price of $40 a: A) price ceiling. B) price floor. C) equilibrium price. D) fair price. Answer: A

Type: T Topic: 8 E: 54 MI: 54 MA: 54 Status: New 177. If government set a minimum price of $50 in the above market, a: A) shortage of 21 units would occur. C) surplus of 21 units would occur. B) shortage of 125 units would occur. D) surplus of 125 units would occur. Answer: C

Type: T Topic: 8 E: 53 MI: 53 MA: 53 Status: New 178. If government set a maximum price of $45 in the above market: A) a shortage of 21 units would arise. C) a surplus of 40 units would arise. B) a surplus of 21 units would arise. D) neither a shortage nor a surplus would arise. Answer: D

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Use the following to answer questions 179-183:

S

C
B

Price

A D 0 E Quantity

Type: G Topic: 8 E: 54 MI: 54 MA: 54 179. Refer to the above diagram. A government-set price floor is best illustrated by: A) price A. B) quantity E. C) price C. D) price B. Answer: C

Type: G Topic: 8 E: 53 MI: 53 MA: 53 180. Refer to the above diagram. A government-set price ceiling is best illustrated by: A) price A. B) quantity E. C) price C. D) price B. Answer: A

Type: G Topic: 8 E: 53-54 MI: 53-54 MA: 53-54 181. Refer to the above diagram. Rent controls are best illustrated by: A) price A. B) quantity E. C) price C. D) price B. Answer: A

Type: G Topic: 8 E: 54 MI: 54 MA: 54 182. Refer to the above diagram. A government price support program to aid farmers is best illustrated by: A) quantity E. B) price C. C) price A. D) price B. Answer: B

Type: G Topic: 8 E: 53 MI: 53 MA: 53 183. Refer to the above diagram. A government-set maximum permissible interest rate is best illustrated by: A) price B. B) quantity E. C) price C. D) price A. Answer: D

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Type: A Topic: 8 E: 53 MI: 53 MA: 53 184. Price floors and ceiling prices: A) both cause shortages. B) both cause surpluses. C) cause the supply and demand curves to shift until equilibrium is established. D) interfere with the rationing function of prices. Answer: D

Type: D Topic: 8 E: 54 MI: 54 MA: 54 185. A price floor means that: A) inflation is severe in this particular market. B) sellers are artificially restricting supply to raise price. C) government is imposing a legal price that is below the equilibrium price. D) government is imposing a legal price that is above the equilibrium price. Answer: D

Type: A Topic: 8 E: 53 MI: 53 MA: 53 186. An effective ceiling price will: A) induce new firms to enter the industry. B) result in a product surplus. Answer: C

C) result in a product shortage. D) clear the market.

Type: A Topic: 8 E: 54 MI: 54 MA: 54 187. An effective price floor will: A) force some firms in this industry to go out of business. B) result in a product surplus. C) result in a product shortage. D) clear the market. Answer: B

Type: C Topic: 8 E: 53 MI: 53 MA: 53 188. Other things equal, the shortage associated with a price ceiling will be greater the: A) smaller the elasticity of both demand and supply. B) greater the elasticity of both demand and supply. C) greater the elasticity of supply and the smaller the elasticity of demand. D) greater the elasticity of demand and the smaller the elasticity of supply. Answer: B

Type: A Topic: 8 E: 53 MI: 53 MA: 53 189. Black markets are associated with: A) price floors and the resulting product surpluses. B) price floors and the resulting product shortages. C) ceiling prices and the resulting product shortages. D) ceiling prices and the resulting product surpluses. Answer: C

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Type: A Topic: 8 E: 53 MI: 53 MA: 53 190. Price ceilings and price floors: A) cause surpluses and shortages respectively. B) make the rationing function of free markets more efficient. C) interfere with the rationing function of prices. D) shift demand and supply curves and therefore have no effect on the rationing function of prices. Answer: C

Type: D Topic: 8 E: 53 MI: 53 MA: 53 191. A price ceiling means that: A) there is currently a surplus of the relevant product. B) government is imposing a legal price that is below the equilibrium price. C) government wants to stop a deflationary spiral. D) government is imposing a legal price that is above the equilibrium price. Answer: B

Type: A Topic: 8 E: 53 MI: 53 MA: 53 192. If an effective ceiling price is placed on hamburgers then: A) the quantity demanded will exceed the quantity supplied. B) a black market for hamburger may evolve. C) that consumers may want government to ration hamburger. D) all of the above are likely outcomes. Answer: D

Type: A Topic: 8 E: 53 MI: 53 MA: 53 193. If a legal ceiling price is set above the equilibrium price: A) a shortage of the product will occur. B) a surplus of the product will occur. C) a black market will evolve. D) neither the equilibrium price nor equilibrium quantity will be affected. Answer: D

Type: A Topic: 8 E: 54 MI: 54 MA: 54 194. An effective price floor on wheat will: A) force otherwise profitable farmers out of business. B) result in a shortage of wheat. C) result in a surplus of wheat. D) clear the market for wheat. Answer: C

Consider This Questions

Type: F E: 50 MI: 50 MA: 50 Status: New 195. (Consider This) Alfred Marshall's scissors analogy emphasizes that: A) there is no free lunch. B) supply curves slope upward and to the right. C) changes in demand differ from changes in quantity demanded. D) supply and demand are equally important in determining equilibrium price and quantity. Answer: D

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Type: A E: 50 MI: 50 MA: 50 Status: New 196. (Consider This) The idea that equilibrium price and quantity are jointly determined by supply and demand is best illustrated through an analogy of: A) the wind and tide. B) a chess match. C) a scissors. D) two sides of a coin. Answer: C

Last Word Questions

Type: D E: 55 MI: 55 MA: 55 197. (Last Word) Ticket scalping refers to: A) the surplus of tickets that occurs when price is set below equilibrium. B) the shortage of tickets that occurs when price is set above equilibrium. C) pricing tickets so high that an athletic or artistic event will not be sold out. D) reselling a ticket at a price above its original purchase price. Answer: D

Type: A E: 55 MI: 55 MA: 55 198. (Last Word) Ticket scalping: A) imposes economic losses on both buyers and sellers. B) creates economic gains for both buyers and sellers. C) imposes losses on buyers, but creates gains for sellers. D) imposes losses on sellers, but creates gains for buyers. Answer: B

Type: A E: 55 MI: 55 MA: 55 199. (Last Word) Ticket scalping implies that: A) event sponsors have established ticket prices at above-equilibrium levels. B) an event is not likely to be sold out. C) event sponsors have established ticket prices at below-equilibrium levels. D) the demand for tickets has fallen between the time tickets were originally sold and the event takes place. Answer: C

Type: A E: 55 MI: 55 MA: 55 200. (Last Word) Ticket scalping is likely to: A) produce a less interested audience. B) reduce the well-being of ticket sellers. Answer: D

C) reduce the well-being of ticket buyers. D) produce a more interested audience.

True/False Questions

Type: A E: 48 MI: 48 MA: 48 201. Surpluses drive market prices up; shortages drive them down. Answer: False

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Type: C E: 51-52 MI: 51-52 MA: 51-52 202. If demand increases and supply simultaneously decreases, equilibrium price will rise. Answer: True

Type: D E: 50 MI: 50 MA: 50 203. The rationing function of prices refers to the fact that government must distribute any surplus goods that may be left in a competitive market. Answer: False

Type: A E: 47 MI: 47 MA: 47 204. An increase in quantity supplied might be caused by an increase in production costs. Answer: False

Type: D E: 45 MI: 45 MA: 45 205. Supply refers to the amount of a product that a producer will offer in the market at some particular price. Answer: False

Type: C E: 52 MI: 52 MA: 52 206. An increase in demand accompanied by an increase in supply will increase the equilibrium quantity but the effect on equilibrium price will be indeterminate. Answer: True

Type: A E: 47 MI: 47 MA: 47 207. A government subsidy per unit of output increases supply. Answer: True

Type: D E: 43 MI: 43 MA: 43 208. Consumers buy more of normal goods as their incomes rise. Answer: True

Type: D E: 44 MI: 44 MA: 44 209. Toothpaste and toothbrushes are substitute goods. Answer: False

Type: A E: 47 MI: 47 MA: 47 210. A government tax per unit of output reduces supply. Answer: True

Type: C E: 51 MI: 51 MA: 51 211. If market demand increases and market supply decreases, the change in equilibrium price is unpredictable without first knowing the exact magnitudes of the demand and supply changes. Answer: False

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Type: C E: 50 MI: 50 MA: 50 212. A decrease in supply of X increases the equilibrium price of X, which reduces the demand for X and automatically returns the price of X to its initial level. Answer: False

Type: A E: 49 MI: 49 MA: 49 213. In a competitive market, every consumer willing to pay the market price can buy a product and every producer willing to sell the product at that price can sell it. Answer: True

Type: A E: 54 MI: 54 MA: 54 214. A price floor in a competitive market will result in persistent shortages of a product. Answer: False

Type: A E: 53 MI: 53 MA: 53 215. A ceiling price in a competitive market will result in persistent surpluses of a product. Answer: False

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Bonus Web Chapter 3W

Applications and Extensions of Supply and Demand Analysis
(Found at the book's website, www.mcconnell16.com)

Topic 1. 2. 3. 4. Changes in supply and demand Preset prices Nonprice goods Consider and producer surplus Consider This Last Word True-False

Question numbers 1-14 15-27 28-32 33-52 53-54 55-57 58-68

____________________________________________________________

_______________________________________

____________________________________________________________

_______________________________________

Multiple Choice Questions Changes in supply and demand

Type: A Topic: 1 E: 2 MI: 2 MA: 2 Status: New 1. An increase in demand is shown as a: A) movement from a higher point to a lower point on an existing demand curve. B) movement from a lower point to a higher point on an existing demand curve. C) rightward shift of a demand curve. D) leftward shift of a demand curve. Answer: C

Type: A Topic: 1 E: 2 MI: 2 MA: 2 Status: New 2. A decrease in demand is shown as a: A) movement from a higher point to a lower point on an existing demand curve. B) movement from a lower point to a higher point on an existing demand curve. C) rightward shift of a demand curve. D) leftward shift of a demand curve. Answer: D

Chapter 3W: Applications and Extensions of Supply and Demand Analysis

Type: A Topic: 1 E: 2 MI: 2 MA: 2 Status: New 3. An increase in supply is shown as a: A) rightward shift of a supply curve. B) leftward shift of a supply curve. C) movement from a higher point to a lower point on an existing supply curve. D) movement from a lower point to a higher point on an existing supply curve. Answer: A

Type: A Topic: 1 E: 2 MI: 2 MA: 2 Status: New 4. A decrease in supply is shown as a: A) movement from a higher point to a lower point on an existing supply curve. B) rightward shift of a supply curve. C) movement from a lower point to a higher point on an existing supply curve. D) leftward shift of a supply curve. Answer: D

Type: A Topic: 1 E: 2 MI: 2 MA: 2 Status: New 5. An increase in demand (with no change in supply) will: A) increase equilibrium price and reduce equilibrium quantity. B) decrease equilibrium price and increase equilibrium quantity. C) increase both equilibrium price and equilibrium quantity. D) decrease both equilibrium price and equilibrium quantity. Answer: C

Type: A Topic: 1 E: 2 MI: 2 MA: 2 Status: New 6. A decrease in demand (with no change in supply) will: A) increase equilibrium price and reduce equilibrium quantity. B) decrease equilibrium price and increase equilibrium quantity. C) increase both equilibrium price and equilibrium quantity. D) decrease both equilibrium price and equilibrium quantity. Answer: D

Type: A Topic: 1 E: 2 MI: 2 MA: 2 Status: New 7. An increase in supply (with no change in demand) will: A) increase equilibrium price and reduce equilibrium quantity. B) decrease equilibrium price and increase equilibrium quantity. C) increase both equilibrium price and equilibrium quantity. D) decrease both equilibrium price and equilibrium quantity. Answer: B

Type: A Topic: 1 E: 2 MI: 2 MA: 2 Status: New 8. A decrease in supply (with no change in demand) will: A) increase equilibrium price and reduce equilibrium quantity. B) decrease equilibrium price and increase equilibrium quantity. C) increase both equilibrium price and equilibrium quantity. D) decrease both equilibrium price and equilibrium quantity. Answer: A

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Type: C Topic: 1 E: 3 MI: 3 MA: 3 Status: New 9. An increase in demand that exceeds an increase in supply will: A) increase both equilibrium price and equilibrium quantity. B) increase equilibrium price and reduce equilibrium quantity. C) decrease equilibrium price and increase equilibrium quantity. D) decrease both equilibrium price and quantity. Answer: A

Type: C Topic: 1 E: 2 MI: 2 MA: 2 Status: New 10. An increase in supply that exceeds an increase in demand will: A) increase both equilibrium price and equilibrium quantity. B) increase equilibrium price and reduce equilibrium quantity. C) decrease equilibrium price and increase equilibrium quantity. D) decrease both equilibrium price and quantity. Answer: C

Type: C Topic: 1 E: 4 MI: 4 MA: 4 Status: New 11. Equal increases in demand and supply will: A) increase both equilibrium price and equilibrium quantity. B) leave equilibrium price unchanged and increase equilibrium quantity. C) decrease equilibrium price and increase equilibrium quantity. D) decrease both equilibrium price and quantity. Answer: B

Use the following to answer questions 12-14:

S1 S2

Price

D1

D2

0

Quantity

Type: G Topic: 1 E: 3 MI: 3 MA: 3 Status: New 12. Refer to the above diagram. If demand changes from D1 to D2 at the same time supply changes from S2 to S1, equilibrium price will: A) rise and equilibrium quantity will fall. C) rise, as will equilibrium quantity. B) fall and equilibrium quantity will rise. D) fall, as will equilibrium quantity. Answer: C

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Type: G Topic: 1 E: 3 MI: 3 MA: 3 Status: New 13. Refer to the above diagram. If demand changes from D2 to D1 at the same time supply changes from S1 to S2, equilibrium price will: A) rise and equilibrium quantity will fall. C) rise, as will equilibrium quantity. B) fall and equilibrium quantity will rise. D) fall, as will equilibrium quantity. Answer: D

Type: G Topic: 1 E: 3 MI: 3 MA: 3 Status: New 14. Refer to the above diagram. Which of the following will increase equilibrium price and reduce equilibrium quantity? A) a shift of supply from S1 to S2, with demand remaining at D1. B) a shift of supply from S2 to S1, with demand remaining at D2. C) simultaneous shifts of demand from D1 to D2 and supply from S1 to S2. D) simultaneous shifts of demand from D2 to D1 and supply from S2 to S1. Answer: B

Preset prices

Type: A Topic: 2 E: 4 MI: 4 MA: 4 Status: New 15. If the preset price of a product is below the equilibrium price: A) the demand curve will shift to the right. B) the supply curve will shift to the left. C) a surplus will occur and a secondary market will emerge. D) a shortage will occur and a secondary market will emerge. Answer: D

Type: A Topic: 2 E: 5 MI: 5 MA: 5 Status: New 16. If the preset price of a product is above the equilibrium price: A) the demand curve will shift to the right. B) the supply curve will shift to the left. C) a surplus of unsold goods will occur. D) a shortage will occur and a secondary market will emerge. Answer: C

Type: A Topic: 2 E: 4-5 MI: 4-5 MA: 4-5 Status: New 17. If the preset price of a product equals the equilibrium price: A) neither a surplus nor shortage will occur. B) a surplus will occur and a secondary market will emerge. C) the supply curve will shift to the left. D) a shortage will occur and a secondary market will emerge. Answer: A

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Type: A Topic: 2 E: 4 MI: 4 MA: 4 Status: New 18. A shortage of a product will occur and a secondary market will emerge if the: A) product supply curve suddenly shifts to the right. B) preset price is below the equilibrium price. C) product demand curve suddenly shifts to the left. D) preset price is above the equilibrium price. Answer: B

Use the following to answer questions 19-21:

S1

P3

Price

P2 D3 P1 D1 D2

0

Q1

Quantity
Type: G Topic: 2 E: 5 MI: 5 MA: 5 Status: New 19. Refer to the above diagram. Suppose that a seller offers Q1 units of tickets to some event, regardless of price, as shown by supply curve S1. If the seller presets the price at P2 and demand turns out to be D1: A) a shortage will occur and a secondary market will emerge. B) the event will not be a sellout. C) the event will be a sellout. D) the seller will necessarily experience a loss. Answer: B

Type: G Topic: 2 E: 4 MI: 4 MA: 4 Status: New 20. Refer to the above diagram. Suppose that a seller offers Q1 units of tickets to some event, regardless of price, as shown by supply curve S1. If the seller presets the price at P2 and demand turns out to be D3: A) a shortage will occur and a secondary market will emerge. B) the event will not be a sellout. C) the price of tickets in the secondary market will be below the preset price. D) the seller will necessarily experience a loss. Answer: A

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Type: G Topic: 2 E: 4-5 MI: 4-5 MA: 4 Status: New 21. Refer to the above diagram. Suppose that a seller offers Q1 units of tickets to some event, regardless of price, as shown by supply curve S1. If the seller presets the price at P2 and demand turns out to be D2: A) a shortage will occur and a secondary market will emerge. B) the event will not be a sellout. C) the price of tickets in the secondary market will be below the preset price. D) the event will be a sellout. Answer: D

Use the following to answer questions 22-25:
Quantity demanded (thousands) 40 50 60 70 80 Price $80 60 40 20 10 Quantity supplied (thousands) 60 60 60 60 60

Type: G Topic: 2 E: 4-5 MI: 4-5 MA: 4-5 Status: New 22. Suppose that the market above is for tickets to a specific football game. We can conclude that the: A) preset ticket price will necessarily be $40. B) stadium capacity is 60,000. C) stadium capacity can be adjusted from 40,000 to 80,000. D) preset ticket price will necessarily be $80. Answer: B

Type: G Topic: 2 E: 5 MI: 5 MA: 5 Status: New 23. Suppose that the market above is for tickets to a specific football game. If the preset ticket price is $60: A) ticket scalping will occur. C) a surplus of 20,000 tickets will occur. B) a shortage of 10,000 tickets will occur. D) 10,000 seats will remain unfilled. Answer: D

Type: G Topic: 2 E: 4 MI: 4 MA: 4 Status: New 24. Suppose that the market above is for tickets to a specific football game. If the preset ticket price is $20: A) a shortage of 20,000 tickets will occur. C) a surplus of 10,000 tickets will occur. B) ticket scalping will occur. D) 20,000 seats will remain unfilled. Answer: B

Type: G Topic: 2 E: 4-5 MI: 4-5 MA: 4-5 Status: New 25. Suppose that the market above is for tickets to a specific football game. If the preset ticket price is $40: A) a shortage of 10,000 tickets will occur. C) all the tickets will be sold. B) 10,000 seats will remain unfilled. D) a surplus of 20,000 tickets will occur. Answer: C

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Type: A Topic: 2 E: 4 MI: 4 MA: 4 Status: New 26. Where there is a secondary market in which the price of an item exceeds the original preset price: A) the preset price was above the equilibrium price. B) quantity supplied exceeded quantity demanded in the original market. C) the preset price was below the equilibrium price. D) the supply of the item must have increased after the price was first set. Answer: C

Type: A Topic: 2 E: 5 MI: 5 MA: 5 Status: New 27. Where there is a surplus of unsold goods: A) the preset price was above the equilibrium price. B) quantity demanded exceeded quantity supplied in the original market. C) the preset price was below the equilibrium price. D) the demand for the item must have increased after the price was first set. Answer: A

Nonprice goods

Type: D Topic: 3 E: 6 MI: 6 MA: 6 Status: New 28. A nonpriced good: A) is always in short supply relative to demand. B) is always in abundant supply relative to demand. C) is owned in common by the public and not priced in markets. D) has a perfectly horizontal supply curve. Answer: C

Type: A Topic: 3 E: 6 MI: 6 MA: 6 Status: New 29. An example of a nonpriced good is a: A) computer monitor. B) wild mushroom. C) can of soda. Answer: B

D) pair of scissors.

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Use the following to answer questions 30-31:

S1 D2

Price

D1

0

a

Quantity
Type: G Topic: 3 E: 6 MI: 6 MA: 6 Status: New 30. Suppose the diagram above represents the hypothetical demand and supply curves for beach clams, a nonpriced good owned in common. If demand is D1, a: A) shortage of ba will occur and clams will be overharvested. B) surplus of ba will occur and there will be no need for licenses, season restrictions, and limits. C) shortage of cb will occur and clams will be overharvested. D) surplus of cb will occur and there will no need for licenses, season restrictions, and limits. Answer: B

b

c

Type: G Topic: 3 E: 7 MI: 7 MA: 7 Status: New 31. Suppose the diagram above represents the hypothetical demand and supply curves for beach clams, a nonpriced good owned in common. If demand is D2, a: A) shortage of ba will occur and clams will be overharvested. B) surplus of ba will occur and there will be no need for licenses, season restrictions, and limits. C) shortage of cb will occur and clams will be overharvested. D) surplus of cb will occur and there will no need for licenses, season restrictions, and limits. Answer: C

Type: F Topic: 3 E: 7 MI: 7 MA: 7 Status: New 32. Faced with continuous rising demand, many goods or resources owned in common (such as fish in oceans): A) increase in price and expand in total availability. B) decline in price and expand in total availability. C) are overconsumed and eventually exhausted, unless protected through restrictions. D) are underconsumed and eventually neglected, unless promoted by government. Answer: C

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Consumer and producer surplus

Type: D Topic: 4 E: 7 MI: 7 MA: 7 Status: New 33. Consumer surplus: A) is the difference between the maximum prices consumers are willing to pay for a product and the lower equilibrium price. B) the difference between the maximum prices consumers are willing to pay for a product and the minimum prices producers are willing to accept. C) the difference between the minimum prices producers are willing to accept for a product and the higher equilibrium price. D) rises as equilibrium price rises. Answer: A

Type: D Topic: 4 E: 8 MI: 8 MA: 8 Status: New 34. Producer surplus: A) is the difference between the maximum prices consumers are willing to pay for a product and the lower equilibrium price. B) rises as equilibrium price falls. C) is the difference between the minimum prices producers are willing to accept for a product and the higher equilibrium price. D) is the difference between the maximum prices consumers are willing to pay for a product and the minimum prices producers are willing to accept. Answer: C

Type: C Topic: 4 E: 8 MI: 8 MA: 8 Status: New 35. Jennifer buys a piece of costume jewelry for $33 for which she was willing to pay $42. The minimum acceptable price to the seller, Nathan, was $39. Jennifer experiences: A) a consumer surplus of $75 and Nathan experiences a producer surplus of $3. B) a producer surplus of $9 and Nathan experiences a consumer surplus of $3. C) a consumer surplus of $9 and Nathan experiences a producer surplus of $3. D) a producer surplus of $75 and Nathan experiences a producer surplus of $81. Answer: C

Type: C Topic: 4 E: 8 MI: 8 MA: 8 Status: New 36. Amanda buys a ruby for $330 for which she was willing to pay $340. The minimum acceptable price to the seller, Tony, was $140. Amanda experiences: A) a consumer surplus of $10 and Tony experiences a producer surplus of $190. B) a producer surplus of $200 and Tony experiences a consumer surplus of $10. C) a consumer surplus of $770 and Tony experiences a producer surplus of $480. D) a producer surplus of $10 and Tony experiences a consumer surplus of $190. Answer: A

Type: F Topic: 4 E: 8 MI: 8 MA: 8 Status: New 37. Graphically, consumer surplus is measured as the triangle: A) under the demand curve and below the actual price. B) under the demand curve and above the actual price. C) above the supply curve and above the actual price. D) above the supply curve and below the actual price. Answer: B

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Type: F Topic: 4 E: 9 MI: 9 MA: 9 Status: New 38. Graphically, producer surplus is measured as the triangle: A) under the demand curve and below the actual price. B) under the demand curve and above the actual price. C) above the supply curve and above the actual price. D) above the supply curve and below the actual price. Answer: D

Use the following to answer questions 39-47:

S

a Price b P1 c d e f

D 0 Q1 Q2 Quantity Q3

Type: G Topic: 4 E: 8 MI: 8 MA: 8 Status: New 39. Refer to the above diagram. Assuming equilibrium price P1, consumer surplus is represented by areas: A) a + b. B) a + b + c + d. C) c + d. D) a + c. Answer: A

Type: G Topic: 4 E: 9 MI: 9 MA: 9 Status: New 40. Refer to the above diagram. Assuming equilibrium price P1, producer surplus is represented by areas: A) a + b. B) a + b + c + d. C) c + d. D) a + c. Answer: C

Type: G Topic: 4 E: 10 MI: 10 MA: 10 Status: New 41. Refer to the above diagram. The area that identifies the maximum sum of consumer surplus and producer surplus is: A) a + b + c + d + e + f. B) c + d + f. C) a + b + e. D) a + b + c + d. Answer: D

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Type: G Topic: 4 E: 10 MI: 10 MA: 10 Status: New 42. Refer to the above diagram. At Q1: A) efficiency is achieved. C) consumer surplus is maximized. B) an efficiency loss of b + d occurs. D) an efficiency loss of e + d occurs. Answer: B

Type: G Topic: 4 E: 10 MI: 10 MA: 10 Status: New 43. Refer to the above diagram. At Q2: A) efficiency is achieved. C) an efficiency loss of a + b + c + d occurs. B) an efficiency loss of a + c occurs. D) an efficiency loss of e + f occurs. Answer: A

Type: G Topic: 4 E: 10 MI: 10 MA: 10 Status: New 44. Refer to the above diagram. At Q3: A) efficiency is achieved. C) an efficiency loss of a + b + c + d occurs. B) an efficiency loss of e + f occurs. D) an efficiency loss of a + c occurs. Answer: B

Type: G Topic: 4 E: 10 MI: 10 MA: 10 Status: New 45. Refer to the above diagram. At Q1: A) maximum willingness to pay exceeds minimum acceptable price. B) the sum of consumer and producer surplus is maximized. C) minimum acceptable price exceeds maximum willingness to pay. D) an efficiency loss of a + b occurs. Answer: A

Type: G Topic: 4 E: 10 MI: 10 MA: 10 Status: New 46. Refer to the above diagram. At Q3: A) maximum willingness to pay exceeds minimum acceptable price. B) the sum of consumer and producer surplus is maximized. C) minimum acceptable price exceeds maximum willingness to pay. D) an efficiency loss of a + b occurs. Answer: C

Type: G Topic: 4 E: 10 MI: 10 MA: 10 Status: New 47. Refer to the above diagram. At Q2: A) maximum willingness to pay exceeds minimum acceptable price. B) the sum of consumer and producer surplus is maximized. C) minimum acceptable price exceeds maximum willingness to pay. D) an efficiency loss of b + d occurs. Answer: B

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Type: F Topic: 4 E: 10 MI: 10 MA: 10 Status: New 48. Allocative efficiency occurs only at that output where: A) marginal benefit exceeds marginal cost the by the greatest amount. B) consumer surplus exceeds producer surplus by the greatest amount. C) the combined amounts of consumer surplus and producer surplus are maximized. D) the areas of consumer and producer surplus are equal. Answer: C

Type: F Topic: 4 E: 10 MI: 10 MA: 10 Status: New 49. At the output level defining allocative efficiency: A) the areas of consumer and producer surplus necessarily are equal. B) marginal benefit exceeds marginal cost the by the greatest amount. C) consumer surplus exceeds producer surplus by the greatest amount. D) the maximum willingness to pay for the last unit of output equals the minimum acceptable price of that unit of output. Answer: D

Type: F Topic: 4 E: 10 MI: 10 MA: 10 Status: New 50. At the output where the combined amounts of consumer and producer surplus are largest: A) the areas of consumer and producer surplus necessarily are equal. B) the maximum willingness to pay for the last unit of output equals the minimum acceptable price of that unit of output. C) consumer surplus exceeds producer surplus by the greatest amount. D) marginal benefit exceeds marginal cost by the greatest amount. Answer: B

Type: D Topic: 4 E: 10 MI: 10 MA: 10 Status: New 51. An efficiency loss: A) is measured as the combined loss of consumer surplus and producer surplus. B) results from producing a unit of output for which the maximum willingness to pay exceeds the minimum acceptable price. C) can result from underproduction, but not from overproduction. D) can result from overproduction, but not from underproduction. Answer: A

Type: A Topic: 4 E: 10 MI: 10 MA: 10 Status: New 52. An efficiency loss declines in size when a unit of output is produced for which: A) marginal cost exceeds marginal benefit. B) maximum willingness to pay exceeds minimum acceptable price. C) consumer surplus exceeds producer surplus. D) producer surplus exceeds consumer surplus. Answer: B

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Consider This Questions

Type: F E: 5 MI: 5 MA: 5 Status: New 53. (Consider This) Why, in the past, did some rock superstars price their concert tickets below equilibrium levels? A) To reward loyal fans who could not afford the higher prices B) Because they systematically underestimated the equilibrium prices C) To make sure their concerts were completely sold out D) To create long ticket lines, scalping, and the attendant press publicity, which helped boost sales of CDs Answer: D

Type: F E: 5 MI: 5 MA: 5 Status: New 54. (Consider This) In recent years, many rock stars have abandoned their previous practice of pricing concert tickets below their equilibrium levels. The main reason for the change in pricing strategy is that: A) illegal downloading of CDs has reduced the value of the free publicity associated with long ticket lines and scalping activity. B) computer software has made it easier to estimate equilibrium prices in advance. C) concert goers have considerably higher incomes than in the past. D) rock stars tend to be greedier than in the old days. Answer: A

Last Word Questions

Type: D E: 11 MI: 11 MA: 11 Status: New 55. (Last Word) A prescription drug that has the same chemical properties and product quality as a previously patented drug is called a: A) synergistic drug. B) knock-off drug. C) generic drug. D) quasi-legal drug. Answer: C

Type: A E: 11 MI: 11 MA: 11 Status: New 56. (Last Word) When a patent expires on a brand name drug, and generic drugs emerge to compete with it: A) consumer surplus increases. C) allocative inefficiency worsens. B) efficiency losses rise. D) consumer surplus declines. Answer: A

Type: A E: 11 MI: 11 MA: 11 Status: New 57. (Last Word) Generic drugs: A) increase the price of drugs to consumers and increase consumer surplus. B) reduce the price of a drugs to consumers and reduce consumer surplus. C) increase the price of drugs to consumers and reduce consumer surplus. D) reduce the price of a drug to consumer and increase consumer surplus. Answer: D

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True/False Questions

Type: A E: 2 MI: 2 MA: 2 Status: New 58. An increase in demand with no change in supply will increase equilibrium price and reduce equilibrium quantity. Answer: False

Type: A E: 2 MI: 2 MA: 2 Status: New 59. A decrease in supply with no change in demand will increase equilibrium price and reduce equilibrium quantity. Answer: True

Type: A E: 4 MI: 4 MA: 4 Status: New 60. Equal decreases in demand and supply will leave equilibrium price unchanged and reduce equilibrium quantity. Answer: True

Type: A E: 4 MI: 4 MA: 4 Status: New 61. If a preset price is below the equilibrium price, a surplus of unsold goods will occur. Answer: False

Type: A E: 4 MI: 4 MA: 4 Status: New 62. If a preset price is below the equilibrium price, a shortage and secondary market will occur. Answer: True

Type: F E: 6 MI: 6 MA: 6 Status: New 63. Wild game (elk, deer, antelope, bears) on public lands are examples of nonpriced goods. Answer: True

Type: F E: 6 MI: 6 MA: 6 Status: New 64. Faced with rising demand, some nonpriced goods eventually get consumed beyond their sustainable levels. Answer: True

Type: A E: 8 MI: 8 MA: 8 Status: New 65. Along a demand curve, product price and consumer surplus are inversely related. Answer: True

Type: A E: 9 MI: 9 MA: 9 Status: New 66. Along a supply curve, product price and producer surplus are inversely related. Answer: False

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Type: A E: 10 MI: 10 MA: 10 Status: New 67. Allocative efficiency occurs where (for the last unit) maximum willingness to pay exceeds minimum acceptable price by the greatest amount. Answer: False

Type: A E: 10 MI: 10 MA: 10 Status: New 68. Allocative efficiency occurs where the collective sum of consumer and producer surplus is at a maximum. Answer: True

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The Market System

Topic 1. Characteristics of the market system; capital accumulation 2. Specialization 3. Exchange; use of money 4. Market system; profits and costs 5. Least-cost combination of resources 6. Consumer sovereignty; invisible hand Consider This Last Word True-False

Question numbers

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1-14 15-18 19-24 25-49 50-57 58-72 73-74 75-76 77-87

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Multiple Choice Questions Characteristics of the market system; capital accumulation

Type: D Topic: 1 E: 60-62 MI: 60-62 MA: 60-62 1. Which of the following is not a characteristic of the market system? A) private property C) government ownership of the major industries B) freedom of enterprise D) competition in product and resource markets Answer: C

Type: D Topic: 1 E: 60 MI: 60 MA: 60 2. Which of the following is a fundamental characteristic of the market system? A) property rights C) unselfish behavior B) central planning by government D) government-set wages and prices Answer: A

Type: A Topic: 1 E: 61 MI: 61 MA: 61 3. Copyrights and trademarks are examples of: A) capital goods. B) human capital. C) property rights. D) public goods. Answer: C

Chapter 4: The Market System

Type: A Topic: 1 E: 61 MI: 61 MA: 61 4. The pursuit of self-interest: A) is highly detrimental to the market system. B) means the same as "selfishness." C) is reflected in the behavior of firms, but not in the behavior of consumers. D) gives direction to the market system. Answer: D

Type: A Topic: 1 E: 62 MI: 62 MA: 62 5. The regulatory mechanism of the market system is: A) self-interest. B) private property. C) competition. D) specialization. Answer: C

Type: D Topic: 1 E: 62 MI: 62 MA: 62 6. Broadly defined, competition involves: A) private property and freedom of expression. B) independently acting buyers and sellers and freedom to enter or leave markets. C) increasing opportunity costs and diminishing marginal utility. D) capital goods and division of labor. Answer: B

Type: D Topic: 1 E: 62 MI: 62 MA: 62 7. Competition means that: A) sellers can manipulate market price by causing product scarcities. B) there are independently-acting buyers and sellers in each market. C) a product can be purchased at a number of different prices. D) there is more than one seller in a market. Answer: B

Type: A Topic: 1 E: 61 MI: 61 MA: 61 8. Well-defined property rights: A) discourage investment and growth. B) discourage hard work. C) impede exchange. D) encourage owners to maintain or improve their property. Answer: D

Type: A Topic: 1 E: 62 MI: 62 MA: 62 9. To increase the amount of capital goods in a full employment-full production economy, society must: A) decrease consumption. C) inflate the general price level. B) increase consumption. D) deflate the general price level. Answer: A

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Type: A Topic: 1 E: 63 MI: 63 MA: 63 10. Roundabout production usually leads to: A) the use of fewer capital goods. B) smaller markets. C) greater production. D) simultaneous increases in consumer goods production. Answer: C

Type: A Topic: 1 E: 62 MI: 62 MA: 62 11. Which of the following is an example of a capital good? A) a Federal government bond. C) a bag of potato chips B) a share of General Motors stock D) a Boeing 777 airplane Answer: D

Type: A Topic: 1 E: 62 MI: 62 MA: 62 12. If an economy is operating on its production possibilities curve, an increase in the production of capital goods: A) necessarily involves an increase in the division of labor. B) is in conflict with the concept of consumer sovereignty. C) necessitates production of fewer consumer goods. D) will impair future productive efficiency. Answer: C

Type: A Topic: 1 E: 62-63 MI: 62-63 MA: 62-63 13. The basic reason for the production of capital goods is to: A) promote the concentration of economic power in the business sector. B) facilitate exchange where a coincidence of wants does not exist. C) better synchronize the operation of resource and product markets. D) enhance future productive efficiency. Answer: D

Type: D Topic: 1 E: 63 MI: 63 MA: 63 14. Roundabout production refers to the: A) use of capital goods in the production process. B) double exchange of money for goods and goods for money. C) use of money as a medium of exchange. D) fact that barter impedes specialization. Answer: A

Specialization

Type: D Topic: 2 E: 63 MI: 63 MA: 63 15. The division of labor means that: A) labor markets are geographically segmented. B) unskilled workers outnumber skilled workers. Answer: C

C) workers specialize in various production tasks. D) each worker performs a large number of tasks.

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Type: D Topic: 2 E: 63 MI: 63 MA: 63 16. Specialization in production is important primarily because it: A) results in greater total output. B) allows society to avoid the coincidence-of-wants problem. C) allows society to trade by barter. D) allows society to have fewer capital goods. Answer: A

Type: D Topic: 2 E: 63 MI: 63 MA: 63 17. Specialization--the division of labor--enhances productivity and efficiency by: A) allowing workers to take advantage of existing differences in their abilities and skills. B) avoiding the time loss involved in shifting from one production task to another. C) allowing workers to develop skills by working on one, or a limited number, of tasks. D) all of the above means. Answer: D

Type: D Topic: 2 E: 63 MI: 63 MA: 63 18. Specialization in production is economically beneficial primarily because it: A) allows everyone to have a job which they like. B) permits the production of a larger output with fixed amounts of resources. C) facilitates trade by bartering. D) guarantees full employment. Answer: B

Exchange; use of money

Use the following to answer questions 19-21:

Type: A Topic: 3 E: 63 MI: 63 MA: 63 19. On the basis of the above information it can be said that: A) no coincidence of wants exists between any two states. B) a coincidence of wants exists between Michigan and Washington. C) a coincidence of wants exists between Texas and Washington. D) a coincidence of wants exists between Michigan and Texas. Answer: A

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Type: A Topic: 3 E: 63 MI: 63 MA: 63 20. On the basis of the above information and assuming trade occurs between the three states we can expect: A) Washington to exchange apples with Texas and receive money in return. B) Washington to exchange apples with Michigan and receive money in return. C) Texas to exchange lettuce with Michigan and receive autos in return. D) Texas to trade lettuce directly for Washington apples. Answer: A

Type: A Topic: 3 E: 64 MI: 64 MA: 64 21. Given the above information and assuming trade occurs between the three states we can expect: A) that there is no means by which Michigan can obtain lettuce while specializing in the production of autos. B) that money will not be needed to accomplish the desired exchanges. C) money to flow counterclockwise from Michigan to Texas to Washington. D) money to flow clockwise from Michigan to Washington to Texas. Answer: C

Type: D Topic: 3 E: 63 MI: 63 MA: 63 22. Barter: A) is the major means of exchange in centrally planned economies. B) accounts for over 30 percent of the dollar volume of all exchange in the U.S. economy. C) entails the exchange of goods for goods. D) is used to circumvent the problem of a lack of coincidence of wants among potential buyers and sellers. Answer: C

Type: D Topic: 3 E: 63 MI: 63 MA: 63 23. The coincidence-of-wants problem associated with barter refers to the fact that: A) for exchange to occur each seller must have a product that some buyer wants. B) money must be used as a medium of exchange or trade will never occur. C) specialization is restricted by the size or scope of a market. D) buyers in resource markets and sellers in product markets can never engage in exchange. Answer: A

Type: A Topic: 3 E: 63 MI: 63 MA: 63 24. The use of money contributes to economic efficiency because: A) governmental direction of the production and distribution of output can be avoided by using money. B) roundabout production could not occur without the availability of money. C) it is necessary for the creation of capital goods. D) it promotes specialization by overcoming the problems with barter. Answer: D

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Market system; profits and costs

Type: D Topic: 4 E: 65 MI: 65 MA: 65 25. Which of the following is one of the Four Fundamental Questions? A) Which products will be in scarce supply and which in excess supply? B) Who should appoint the head of the central bank? C) How much should the society save? D) What goods and services will be produced? Answer: D

Type: D Topic: 4 E: 65 MI: 65 MA: 65 26. Normal profit is: A) a cost because any excess of total receipts over total costs will go to the businessperson. B) a cost because they represent payments made for the resources which the businessperson owns and supplies in his or her own enterprise. C) not a cost because a firm can avoid this payment by temporarily closing down. D) not a cost of production because it need not be realized for a firm to retain entrepreneurial ability. Answer: B

Type: D Topic: 4 E: 65 MI: 65 MA: 65 27. Economic profit is: A) a cost because it is really a part of wage costs. B) a cost because it accrues to the entrepreneur. C) not a cost because it cannot be calculated. D) not an economic cost because it need not be realized for a business to acquire and retain entrepreneurial ability. Answer: D

Type: D Topic: 4 E: 65 MI: 65 MA: 65 28. A firm's economic profit is: A) usually lower than its normal profit. B) profit over and above that which it needs to compensate for the time and other resources the owner supplies to the business. C) a cost of production. D) a signal to the firm that it is producing too much output. Answer: B

Type: A Topic: 4 E: 65 MI: 65 MA: 65 29. Which of the following is not an economic cost? A) wages B) rents C) economic profits D) normal profits Answer: C

Type: A Topic: 4 E: 65 MI: 65 MA: 65 30. If competitive industry Z is making substantial economic profit, output will: A) fall, product price will fall, and economic profit will disappear. B) fall, product price will rise, and economic profit will disappear. C) expand, product price will fall, and economic profit will disappear. D) expand, product price will fall, and economic profit will rise. Answer: C

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Type: A Topic: 4 E: 65-66 MI: 65-66 MA: 65-66 31. When a competitive industry is in equilibrium: A) economic profit will be zero. B) product demand and derived demand are equal. C) the economizing problem will have been solved for that industry. D) normal profit will not be realized. Answer: A

Type: A Topic: 4 E: 65 MI: 65 MA: 65 32. From society's point of view the economic function of profits and losses is to: A) promote the equal distribution of real assets and wealth. B) achieve full employment and price level stability. C) contribute to a more equal distribution of income. D) reallocate resources from less desired to more desired uses. Answer: D

Type: A Topic: 4 E: 66 MI: 66 MA: 66 33. In a market economy a significant change in the demand for product X will: A) alter the profits or losses received by certain firms. B) cause a reallocation of scarce resources. C) cause some industries to expand and others to contract. D) do all of the above. Answer: D

Type: A Topic: 4 E: 65 MI: 65 MA: 65 34. Economic profits in an industry suggests the industry: A) can earn more profits by increasing product price. B) should be larger to better satisfy consumer demand. C) has excess production capacity. D) is the size that consumers want it to be. Answer: B

Type: A Topic: 4 E: 65 MI: 65 MA: 65 35. Economic profits and losses: A) are both considered by economists to be a part of production costs. B) are essential to the reallocation of resources from less desired goods to more desired goods. C) have no influence on the composition of the domestic output. D) equalize the distribution of income in the long run. Answer: B

Type: A Topic: 4 E: 68 MI: 68 MA: 68 36. If an increase occurs in the demand for product X, all of the following will occur except: A) an increase in the profits of industry X. B) an increase in the demand for resources employed by industry X. C) an increase in the output of industry X. D) a decrease in the prices of resources employed in industry X. Answer: D

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Type: A Topic: 4 E: 66 MI: 66 MA: 66 37. An increase in demand for strawberries is most likely to: A) increase the demand for strawberry pickers. C) reduce the supply of strawberries. B) reduce the supply of strawberry pickers. D) reduce the demand for strawberry pickers. Answer: A

Type: A Topic: 4 E: 66 MI: 66 MA: 66 38. If competitive industry Y is incurring substantial losses, output will: A) expand, product price will rise, and losses will disappear. B) contract, product price will fall, and losses will increase. C) contract, product price will rise, and losses will disappear. D) expand, product price will fall, and losses will disappear. Answer: C

Type: D Topic: 4 E: 65 MI: 65 MA: 65 39. The economic function of profits and losses is to: A) bring about a more equal distribution of income. B) signal that resources should be reallocated. C) eliminate small firms and reduce competition. D) tell government which industries need to be subsidized. Answer: B

Type: A Topic: 4 E: 65-66 MI: 65-66 MA: 65-66 40. In a competitive economy prices: A) influence consumers in their purchases of goods and services. B) influence businesses in their purchases of economic resources. C) influence workers in making occupational choices. D) do all of the above. Answer: D

Type: A Topic: 4 E: 65 MI: 65 MA: 65 41. Suppose a firm's total economic cost in producing 1,000 aluminum baseball bats is $10,000. These bats are then sold by the firm for $12,000. Thus: A) the firm is necessarily using the least-cost production technique because it is realizing an economic profit. B) the firm's normal profit is $2000. C) the firm's economic profit is $2000. D) there is no economic reason for the aluminum bat industry to expand or contract. Answer: C

Type: A Topic: 4 E: 65 MI: 65 MA: 65 42. If a competitive industry is neither expanding nor contracting, we would expect: A) normal profits to be zero. B) economic profits to be zero. C) consumer demand and derived demand to be equal. D) external costs or benefits to be large. Answer: B

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Type: A Topic: 4 E: 65 MI: 65 MA: 65 43. Suppose industry A is realizing substantial economic profit. Which of the following best describes the adjustment process that would bring about a new equilibrium? A) Firms will leave the industry, output will fall, and product price will rise. B) Firms will enter the industry, output will rise, and product price will rise. C) Firms will leave the industry, output will rise, and product price will fall. D) Firms will enter the industry, output will rise, and product price will fall. Answer: D

Type: D Topic: 4 E: 65 MI: 65 MA: 65 44. An industry is in long-run equilibrium when: A) normal profits are zero. B) total revenue exceeds total economic costs. Answer: D

C) total economic costs exceed total revenue. D) economic profits are zero.

Type: D Topic: 4 E: 66 MI: 66 MA: 66 45. When economists say that the demand for a resource is a derived demand, they mean that: A) producers substitute low-priced for high-priced resources. B) the demand for resources depends on the demand for the product that those resources produce. C) government demand complements private demand for most goods and services. D) resource demand curves are often upsloping. Answer: B

Type: D Topic: 4 E: 66 MI: 66 MA: 66 46. Which of the following best reflects the idea of derived demand? A) Product demand is determined by the demand for resources. B) The demand for automobiles will decline if the price of gasoline goes up. C) Economic resources are demanded because there is a demand for the goods they produce. D) The dollar votes of consumers determine the composition of output. Answer: C

Type: A Topic: 4 E: 65 MI: 65 MA: 65 47. The competitive market system: A) encourages innovation because government provides tax breaks and subsidies to those who develop new products or new productive techniques. B) discourages innovation because it is difficult to acquire additional capital in the form of new machinery and equipment. C) discourages innovation because firms want to get all the profits possible from existing machinery and equipment. D) encourages innovation because successful innovators are rewarded with economic profits. Answer: D

Type: A Topic: 4 E: 67 MI: 67 MA: 67 48. An increase in consumer demand for product X increases the demand for resources used in producing X. This indicates that: A) consumer sovereignty is not functioning in this economy. B) the idea of derived demand is relevant. C) production must be taking place at a loss. D) firms are failing to use the least-cost production technique. Answer: B

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Type: A Topic: 4 E: 67-68 MI: 67-68 MA: 67-68 49. In a market economy the distribution of income will be determined primarily by: A) consumer needs and preferences. B) the quantities and prices of the resources that households supply. C) government regulations that provide a minimum income for all. D) a social consensus as to what distribution of income is most equitable. Answer: B

Least-cost combination of resources

Type: D Topic: 5 E: 67 MI: 67 MA: 67 50. The most efficient combination of resources in producing any output is the combination that: A) comes closest to using the same quantities of land, labor, capital, and entrepreneurial ability. B) can be obtained for the smallest money outlay. C) uses the smallest total quantity of all resources. D) conserves most on the use of labor. Answer: B

Use the following to answer questions 51-54: Answer the next question(s) using the following data which show all available techniques for producing 20 units of a particular commodity: Resource Land Labor Capital Entrepreneurial ability Resource prices $4 3 3 2 Possible production techniques #1 #2 #3 #4 4 4 2 2 2 1 1 4 2 1 5 3 1 4 3 1 #5 4 3 2 1

Type: T Topic: 5 E: 67 MI: 67 MA: 67 51. Refer to the above data. In view of the indicated resource prices, the economically most efficient production technique(s) is (are) technique(s): A) #1. B) #2 and #4. C) #3. D) #1 and #3. Answer: B

Type: T Topic: 5 E: 67 MI: 67 MA: 67 52. Refer to the above data. Assuming that the firm is motivated by self-interest and that the 20 units which can be produced with each technique can be sold for $2 per unit, the firm will: A) realize an economic profit of $10. B) realize an economic profit of $4. C) only make a normal profit. D) close down rather than incur a loss by producing. Answer: A

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Type: T Topic: 5 E: 67 MI: 67 MA: 67 53. Refer to the above data. Which of the following statements concerning this industry is correct? A) Firms in this industry will find that firms in other industries are able to outbid them for resources. B) The industry will contract as firms are forced out of business. C) The industry will expand as new firms enter. D) The industry is in equilibrium in that there is no reason for it to expand or contract. Answer: C

Type: T Topic: 5 E: 67 MI: 67 MA: 67 54. Refer to the above data. If a new production technique is developed that enables a firm to produce 20 units of output with 3 units of land, 3 of labor, 1 of capital, and 2 of entrepreneurial ability, this technique would: A) not be adopted because, although it reduces production costs, it does not increase profit. B) be adopted because it would lower production costs and increase economic profit. C) not be adopted because it entails higher production costs than other available techniques. D) be adopted, even though economic profits would be reduced slightly. Answer: B

Use the following to answer questions 55-56: Answer the next question(s) on the basis of the following information: Suppose 30 units of product A can be produced by employing just labor and capital in the four ways shown below. Assume the prices of labor and capital are $2 and $3 respectively. I 4 2 Production techniques: II III IV 3 2 5 3 5 1

Labor Capital

Type: T Topic: 5 E: 67 MI: 67 MA: 67 55. Refer to the above information. Which technique is economically most efficient in producing A? A) I B) II C) III D) IV Answer: D

Type: T Topic: 5 E: 67 MI: 67 MA: 67 56. Refer to the above information. If the price of product A is $.50, the firm will realize: A) an economic profit of $4. C) an economic profit of $6. B) an economic profit of $2. D) a loss of $3. Answer: B

Type: A Topic: 5 E: 67 MI: 67 MA: 67 57. In a competitive market economy firms will select the least-cost production technique because: A) such choices will result in the full employment of available resources. B) to do so will maximize the firms' profits. C) this will prevent new firms from entering the industry. D) "dollar voting" by consumers mandates such a choice. Answer: B

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Consumer sovereignty; invisible hand

Type: A Topic: 6 E: 65 MI: 65 MA: 65 58. The market system's answer to the fundamental question "What will be produced?" is essentially: A) "Goods and services that are profitable." B) "Low cost goods and services." C) "Goods and service that can be produced using round-about production." D) "Goods and services that possess lasting value." Answer: A

Type: A Topic: 6 E: 67 MI: 67 MA: 67 59. The market system's answer to the fundamental question "How will the goods and services be produced?" is essentially: A) "With as much machinery as possible." C) "By exploiting labor." B) "Using the latest technology." D) "At least-cost production." Answer: D

Type: A Topic: 6 E: 67-68 MI: 67-68 MA: 67-68 60. The market system's answer to the fundamental question "Who will get the goods and services?" is essentially: A) "Those willing and able to pay for them." C) "Those who most need them." B) "Those who physically produced them." D) "Those who get utility from them." Answer: A

Type: A Topic: 6 E: 68-69 MI: 68-69 MA: 68-69 61. The market system's answer to the fundamental question "How will the system accommodate change?" is essentially: A) "Through government leadership and direction." B) "Through the guiding function of prices and the incentive function of profits." C) "Through training and retraining programs." D) "Through random trial and error." Answer: B

Type: A Topic: 6 E: 69 MI: 69 MA: 69 62. The advent of DVDs threatens to eventually demolish the market for videocassettes. This is an example of: A) creative destruction. B) derived demand. C) capital accumulation. D) the difference between normal and economic profits. Answer: A

Type: D Topic: 6 E: 66 MI: 66 MA: 66 63. Consumer sovereignty refers to the: A) fact that resource prices are higher than product prices in capitalistic economies. B) idea that the pursuit of self-interest is in the public interest. C) idea that the decisions of producers and resource suppliers with respect to the kinds and amounts of goods produced must be appropriate to consumer demands. D) fact that a Federal agency exists to protect consumers from harmful and defective products. Answer: C

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Type: D Topic: 6 E: 66 MI: 66 MA: 66 64. The dollar votes of consumers ultimately determine the composition of output and the allocation of resources in a market economy. This statement best describes the concept of: A) derived demand. B) consumer sovereignty. C) the invisible hand. D) market failure. Answer: B

Type: C Topic: 6 E: 68 MI: 68 MA: 68 65. Assume the demand for product Y increases and the market system responds by producing more Y. This illustrates: A) that the concept of derived demand is inapplicable. B) that consumer sovereignty is inoperative in this economy. C) the scarcity function of prices. D) the directing or guiding function of prices. Answer: D

Type: D Topic: 6 E: 68 MI: 68 MA: 68 66. Which of the following best describes the guiding function of competitive prices? A) Profitable industries contract and unprofitable industries expand. B) The market system will always generate economic profits for firms that use the least costly production technology. C) The market system can negotiate reallocations of resources that are appropriate to changes in consumer tastes, technology, and resource supplies. D) When prices are in equilibrium, product shortages or surpluses cannot occur. Answer: C

Type: D Topic: 6 E: 69 MI: 69 MA: 69 67. Which of the following best describes the invisible-hand concept? A) The desires of resource suppliers and producers to further their own self-interest will automatically further the public interest. B) The nonsubstitutability of resources creates a conflict between private and public interests and calls for government intervention. C) The market system is the best system for overcoming the scarce resources-unlimited wants problem. D) Central direction by the government will improve resource allocation in a capitalistic economy. Answer: A

Type: D Topic: 6 E: 69 MI: 69 MA: 69 68. The invisible hand refers to the: A) fact that the U.S. tax system redistributes income from rich to poor. B) notion that, under competition, decisions motivated by self-interest promote the social interest. C) tendency of monopolistic sellers to raise prices above competitive levels. D) fact that government controls the functioning of the market system. Answer: B

Type: A Topic: 6 E: 69 MI: 69 MA: 69 69. The invisible-hand concept suggests that: A) market failures imply the need for a national economic plan. B) big businesses are inherently more efficient than small businesses. C) the competitiveness of a capitalistic market economy invariably diminishes over time. D) assuming competition, private and public interests will coincide. Answer: D

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Type: A Topic: 6 E: 69 MI: 69 MA: 69 70. The invisible-hand concept suggests that: A) changes in product demands are only randomly reflected in changes in the demands for resources. B) profit maximization is inconsistent with an efficient allocation of resources. C) government action is necessary to correct for market failures. D) when firms maximize their profits, society's output will also be maximized. Answer: D

Type: A Topic: 6 E: 69 MI: 69 MA: 69 71. Two major virtues of the market system are that it: A) allocates resources efficiently and allows economic freedom. B) results in an equitable personal distribution of income and always maintains full employment. C) results in price level stability and a fair personal distribution of income. D) eliminates discrimination and minimizes environmental pollution. Answer: A

Type: A Topic: 6 E: 69 MI: 69 MA: 69 72. The market system: A) produces considerable inefficiency in the use of scarce resources. B) effectively harnesses the incentives of workers and entrepreneurs. C) is inconsistent with freedom of choice in the long run. D) has slowly lost ground to emerging command systems. Answer: B

Consider This Questions

Type: A E: 66 MI: 66 MA: 66 Status: New 73. (Consider This) In 1975 McDonald's introduced its Egg McMuffin breakfast sandwich, which remains popular and profitable today. This longevity illustrates the idea of: A) opportunity cost. B) upsloping supply. C) consumer sovereignty. D) specialization. Answer: C

Type: A E: 66 MI: 66 MA: 66 Status: New 74. (Consider This) In 1996 McDonald's introduced its Arch Deluxe hamburger, which failed to catch on with the public and was subsequently dropped from the menu. This failure illustrates the idea of: A) consumer sovereignty. B) technological change. C) downsloping demand. D) specialization. Answer: A

Last Word Questions Type: A E: 70 MI: 70 MA: 70 75. (Last Word) According to economist Donald Boudreaux, the world's tens of billions of individual resources get arranged productively: A) because government has become highly effective at central planning. B) because private property encourages people to consider the alternative uses of their resources and select those that provide the most rewards. C) because people tend to be creative and orderly. D) through random trial and error. Answer: B

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Type: A E: 70 MI: 70 MA: 70 76. (Last Word) According to economist Donald Boudreaux: A) private property eliminates the possibility that resource arrangements will be random. B) the market system threatens to do irreparable harm to the world's ecosystem. C) arranging resources under the market system is much like shuffling a deck of cards. D) the market system works wondrously for advanced industrial nations but not for developing nations. Answer: A

True/False Questions

Type: A E: 62 MI: 62 MA: 62 77. Market economies use capital goods because they improve productive efficiency. Answer: True

Type: A E: 63 MI: 63 MA: 63 78. Differences in opportunity costs are the basis for specialized production and trade. Answer: True

Type: D E: 63 MI: 63 MA: 63 79. Money functions as a medium of exchange in permitting the ready comparison of the relative worth of heterogeneous products. Answer: False

Type: A E: 66 MI: 66 MA: 66 80. Consumer sovereignty means that legislation now protects the rights of consumers to dispose of their incomes as they see fit. Answer: False

Type: D E: 68 MI: 68 MA: 68 81. Programs by state governments to keep milk prices higher than market-determined prices to protect family dairy farms from bankruptcy promote the efficient allocation of resources. Answer: False

Type: A E: 63 MI: 63 MA: 63 82. Specialization may expand total output even though the individuals involved may have identical abilities. Answer: True

Type: A E: 66 MI: 66 MA: 66 83. The wants of consumers are expressed on the demand side of the product market. Answer: True

Type: A E: 65 MI: 65 MA: 65 84. Costs can be defined as total payments made to workers, land owners, and capital suppliers less normal profits. Answer: False

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Type: D E: 65 MI: 65 MA: 65 85. If firms in any industry fail to earn normal profits, firms will immediately or eventually leave the industry. Answer: True

Type: A E: 68 MI: 68 MA: 68 86. The guiding function of prices indicates that, at equilibrium prices, neither product surpluses nor shortages can occur. Answer: False

Type: A E: 69 MI: 69 MA: 69 87. The invisible hand refers to the many indirect controls that the Federal government imposes in a the market system. Answer: False

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The U.S. Economy: Private and Public Sectors

Topic 1. Personal and functional distribution of income 2. Legal forms of business 3. Economic functions of government 4. Spillover costs and benefits 5. Public goods 6. Stabilization 7. Government in circular flow 8. Purchases, transfers, and government size 9. Federal finance and progressive taxes 10. State and local finance Consider This Last Word True-False

Question numbers 1-18 19-54 55-59 60-86 87-115 116-122 123-133 134-142 143-170 171-174 175-176 177-180 1181-204

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Multiple Choice Questions Personal and functional distribution of income

Type: D Topic: 1 E: 73 MI: 73 MA: 73 1. The personal distribution of income refers to the: A) division of income between personal taxes, consumption expenditures, and saving. B) division of income on the basis of industry sources, for example, agriculture, transportation, and mining. C) distribution of income to basic resource classes, that is, wages, rents, interest, and profits. D) way income is distributed among specific households or spending units. Answer: D

Type: D Topic: 1 E: 73 MI: 73 MA: 73 2. The functional distribution of income refers to the: A) division of income between personal taxes, consumption expenditures, and saving. B) division of income on the basis of industry sources, for example, agriculture, transportation, mining, etc. C) distribution of income to basic resource classes, that is, wages, rents, interest, and profits. D) way income is distributed among specific households or spending units. Answer: C

Chapter 5: The U.S. Economy: Private and Public Sectors

Type: D Topic: 1 E: 73 MI: 73 MA: 73 3. Income data that show the percentage of total income received by each fifth of all households describe the: A) functional distribution of income. C) personal distribution of income. B) horizontal distribution of income. D) vertical distribution of income. Answer: C

Type: D Topic: 1 E: 73 MI: 73 MA: 73 4. Income data that show how total income is distributed as wages, rents, interest, and profits describe the: A) functional distribution of income. C) personal distribution of income. B) horizontal distribution of income. D) vertical distribution of income. Answer: A

Type: F Topic: 1 E: 74 MI: 74 MA: 74 5. The personal distribution of income in the United States is such that the richest fifth receives about _____ percent of personal income. A) 30 B) 40 C) 50 D) 60 Answer: C

Type: F Topic: 1 E: 74 MI: 74 MA: 74 6. The largest functional share of the national income consists of: A) wages and salaries. B) interest and rental income. C) proprietors' income, that is, the income of unincorporated businesses. D) corporate profits. Answer: A

Use the following to answer questions 7-9:

Type: A Topic: 1 E: 74 MI: 74 MA: 74 7. In the above diagrams for a hypothetical economy, Figure 1 shows the: A) personal distribution of income. C) microeconomic distribution of income. B) functional distribution of income. D) international distribution of income. Answer: B

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Type: A Topic: 1 E: 74 MI: 74 MA: 74 8. In the above diagrams for a hypothetical economy, Figure 2 shows the: A) personal distribution of income. C) microeconomic distribution of income. B) functional distribution of income. D) rates of poverty in the United States. Answer: A

Type: A Topic: 1 E: 74 MI: 74 MA: 74 9. In the above diagrams for a hypothetical economy, from Figure 2 we can conclude that: A) income is quite equally distributed. B) wages are the main source of income. C) the distribution of income has become more unequal over time. D) the top one-fifth of all income receivers get about eight times as much income as the lowest one-fifth. Answer: D

Type: D Topic: 1 E: 73 MI: 73 MA: 73 10. The distribution of income among the owners of land, labor, capital, and entrepreneurial ability is known as: A) income differentials. C) the functional distribution of income. B) the personal distribution of income. D) the concentration ratio. Answer: C

Type: D Topic: 1 E: 73 MI: 73 MA: 73 11. The distribution of income among individual households is known as: A) income differentials. C) the functional distribution of income. B) the personal distribution of income. D) the concentration ratio. Answer: B

Type: F Topic: 1 E: 75 MI: 75 MA: 75 12. Listed in descending order of relative size, households divide their total incomes among: A) consumption expenditures, saving, and taxes. C) consumption expenditures, taxes, and saving. B) saving, consumption expenditures, and taxes. D) taxes, consumption expenditures, and saving. Answer: C

Type: C Topic: 1 E: 74 MI: 74 MA: 74 13. Other things equal, a rapid rise in profits relative to other types of income would affect: A) the functional distribution of income only. B) the personal distribution of income only. C) both the functional and personal distributions of income. D) the relative size of the public sector. Answer: C

Type: F Topic: 1 E: 74 MI: 74 MA: 74 14. Since 1940 personal taxes have: A) risen absolutely, but declined as a percentage of personal income. B) risen both absolutely and as a percentage of personal income. C) fallen absolutely, but risen as a percentage of personal income. D) fallen both absolutely and as a percentage of personal income. Answer: B

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Type: F Topic: 1 E: 75 MI: 75 MA: 75 15. Listed in descending order of relative size, total consumption spending is comprised of: A) nondurable goods, durable goods, and services. C) services, durable goods, and nondurable goods. B) services, nondurable goods, and durable goods. D) durable goods, nondurable goods, and services. Answer: B

Type: A Topic: 1 E: 75 MI: 75 MA: 75 16. If the aggregate income of households is $300 billion, consumption is $210 billion, and personal taxes are $60 billion, then personal saving: A) is $70 billion. B) is $30 billion. C) is $40 billion. D) cannot be determined from the information given. Answer: B

Type: D Topic: 1 E: 74 MI: 74 MA: 74 17. Economists define saving as: A) that part of after-tax income which is not consumed. B) total income less taxes. C) bank accounts. D) purchases of stocks and bonds. Answer: A

Type: F Topic: 1 E: 75 MI: 75 MA: 75 18. Households in the aggregate use the largest share of their total income to: A) pay taxes. B) consume. C) save. D) buy capital goods. Answer: B

Legal forms of business

Type: D Topic: 2 E: 75 MI: 75 MA: 75 19. In economics, a physical establishment such as a factory, farm, mine, store, or warehouse that performs one or more functions in fabricating and distributing goods is called a(n): A) industry. B) plant. C) conglomerate. D) shop. Answer: B

Type: D Topic: 2 E: 76 MI: 76 MA: 76 20. In economics, a group of firms that produce identical or similar products is called a(n): A) industry. B) plant. C) conglomerate. D) firm. Answer: A

Type: D Topic: 2 E: 75 MI: 75 MA: 75 21. In economics, a business establishment that owns one or more plants is called a(n): A) industry. B) shop. C) conglomerate. D) firm. Answer: D

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Type: D Topic: 2 E: 76 MI: 76 MA: 76 22. An industry is best defined as a group of firms that: A) compete for labor. B) produce identical or similar products. Answer: B

C) use identical production techniques. D) are located in the same city or geographic area.

Type: D Topic: 2 E: 76 MI: 76 MA: 76 23. A firm that makes computer chips at several locations across the country best illustrates a: A) vertically integrated firm. B) multinational corporation. C) multiplant firm. D) conglomerate. Answer: C

Type: D Topic: 2 E: 76 MI: 76 MA: 76 24. A firm that produces a single product but owns plants in many different stages of the production processfor example, a steel producer that owns iron ore mines and rolling mills-best illustrates a: A) vertically integrated firm. B) multinational corporation. C) virtual corporation. D) conglomerate. Answer: A

Type: D Topic: 2 E: 76 MI: 76 MA: 76 25. A firm comprised of plants or units operating in different industries, say, beer and theme parks, best illustrates a: A) vertically integrated firm. B) multinational corporation. C) multiplant firm. D) conglomerate. Answer: D

Type: D Topic: 2 E: 76 MI: 76 MA: 76 26. A group of plants that is owned and operated by a single firm and that consists of oil fields, refineries, and gasoline stations best illustrates a: A) trust. B) holding company. C) vertically integrated firm. D) multinational corporation. Answer: C

Type: F Topic: 2 E: 76 MI: 76 MA: 76 27. The division of U.S. businesses into the categories of proprietorships, partnerships, and corporations is based on: A) generally accepted accounting principles. B) legal considerations. C) the judgment of the American Economic Association. D) an executive order of the President. Answer: B

Type: F Topic: 2 E: 76 MI: 76 MA: 76 28. Which of the following is numerically the dominant type of business in the United States? A) corporations B) proprietorships C) partnerships D) cooperatives Answer: B

Type: F Topic: 2 E: 76 MI: 76 MA: 76 29. Which form of business enterprise accounts for the largest proportion of total output? A) corporations B) proprietorships C) partnerships D) cooperatives Answer: A

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Type: D Topic: 2 E: 76 MI: 76 MA: 76 30. The three basic legal forms of business enterprise are: A) monopolists, competitors, and enterprises. B) proprietorships, partnerships, and corporations. C) vertical, horizontal, and conglomerate corporations. D) conglomerates, multinationals, and partnerships. Answer: B

Type: F Topic: 2 E: 76 MI: 76 MA: 76 31. Listed in descending order of total numbers, the business population is comprised of: A) sole proprietorships, corporations, and partnerships. B) sole proprietorships, partnerships, and corporations. C) partnerships, corporations, and sole proprietorships. D) corporations, partnerships, and sole proprietorships. Answer: A

Type: D Topic: 2 E: 77 MI: 77 MA: 77 32. The advantages of the corporate form of business include: A) the ability to raise financial capital by selling stocks and bonds. B) the fact that owners are subject to unlimited liability. C) the elimination of the principal-agent problem. D) single taxation of corporate earnings. Answer: A

Type: F Topic: 2 E: 77 MI: 77 MA: 77 33. If a corporation goes bankrupt, its stockholders will lose: A) only the value of their stock. B) the value of their stock plus any other business assets they may own. C) the value of their stock plus any other personal assets they may own. D) the value of their stock plus any other business and personal assets they may own. Answer: A

Type: F Topic: 2 E: 77 MI: 77 MA: 77 34. A major disadvantage of corporations is that: A) they cannot issue bonds. B) dividends are taxed both as corporate income and as income to stockholders. C) stockholders are subject to unlimited liability. D) their charters last for only 20 years, at which time the corporation must reorganize. Answer: B

Type: A Topic: 2 E: 77 MI: 77 MA: 77 35. The most crucial determinant of the legal form of an enterprise will usually be the: A) ability of the firm to sell bonds to the public. B) amount of financial capital required by the line of production. C) amount of unemployment in the particular industry. D) state in which it is located. Answer: B

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Type: A Topic: 2 E: 77 MI: 77 MA: 77 36. The corporate form of business enterprise has promoted the development of large-scale business operations because: A) the corporate form of enterprise is in a highly advantageous position to protect itself from the effects of long-run inflation. B) corporations have been able to marshal large amounts of financial capital through the sale of stocks and bonds. C) corporations have been more successful than unincorporated businesses in keeping labor unions out of their plants. D) this legal form of enterprise has been subject to fewer government controls than have proprietorships and partnerships. Answer: B

Type: F Topic: 2 E: 77 MI: 77 MA: 77 37. An owner's liability for the debts of a business is: A) limited in a corporation to the assets of preferred stockholders. B) limited in a corporation to the assets of bondholders. C) limited to the owner's investment in a single proprietorship. D) unlimited in a partnership. Answer: D

Type: A Topic: 2 E: 77 MI: 77 MA: 77 38. Suppose you own $50,000 of personal property, $5,000 of stock in General Statics Corporation, a $10,000 savings account, and $20,000 of government bonds. If General Statics goes bankrupt, the most you could lose is: A) $50,000. B) $5,000. C) $35,000. D) $85,000. Answer: B

Type: F Topic: 2 E: 77 MI: 77 MA: 77 39. Limited liability applies to: A) partnerships. B) proprietorships. C) all corporations. D) financial corporations but not to manufacturing corporations. Answer: C

Type: F Topic: 2 E: 77 MI: 77 MA: 77 40. The owners of a firm face unlimited liability for the firm's debts in: A) a corporation. C) a proprietorship, but not in a partnership. B) a partnership, but not in a proprietorship. D) both a proprietorship and a partnership. Answer: D

Type: A Topic: 2 E: 78 MI: 78 MA: 78 41. The separation of ownership and control in a corporation means that: A) hired managers play a larger role in determining company policy than do a corporation's legal owners. B) the ownership of corporations is becoming increasingly concentrated in the hands of a few common stockholders. C) a firm's board of directors has no power over hired managers. D) stockholders have lost their voting privileges. Answer: A

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Type: D Topic: 2 E: 77 MI: 77 MA: 77 42. Limited liability means that: A) creditors have no legal claim on the personal assets of a proprietor. B) corporations cannot be sued. C) creditors have no legal claim on the personal assets of a corporate stockholder. D) corporations have a legal life independent of their owners and managers. Answer: C

Type: D Topic: 2 E: 77-78 MI: 77-78 MA: 77-78 43. Stocks are: A) promises to repay a loan. C) issued by sole proprietorships. B) also known as bonds. D) shares of ownership of a corporation. Answer: D

Type: D Topic: 2 E: 77 MI: 7 MA: 77 44. Corporate bonds are: A) promises by a corporation to repay a loan. B) also known as stocks. Answer: A

C) illegal in the United States. D) shares of ownership of a corporation.

Type: D Topic: 2 E: 78 MI: 78 MA: 78 45. As it relates to corporations, the principal-agent problem is that: A) the goals of the corporate managers (the principals) may not match the goals of the corporate owners (the agents). B) the goals of the corporate managers (the agents) may not match the goals of the corporate owners (the principals). C) the Federal government (the agent) taxes both corporate profits and the dividends paid to stockholders (the principals). D) It is costly for the corporate owners (the principals) to obtain a corporate charter from government (the agent). Answer: B

Type: A Topic: 2 E: 78 MI: 78 MA: 78 46. In corporations, owners are __________________ and managers are ________________. A) agents; principals. B) stockholders; bondholders. C) agents; employees. D) principals; agents. Answer: D

Type: A Topic: 2 E: 78 MI: 78 MA: 78 47. As it relates to owners and managers, the principal-agent problem results from the: A) separation of corporate ownership and control. B) double taxation of corporate profit. C) limited liability of corporate owners. D) differing interests of corporate stockholders and bondholders. Answer: A

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Type: A Topic: 2 E: 78 MI: 78 MA: 78 48. An S corporation is a: A) form of business organization designed to protect firms from lawsuits by disgruntled stockholders. B) super-size corporation characterized by 50,000 or more employees. C) form of business organization (reserved for relatively small firms) that avoids double taxation of corporate profit and provides limited liability for the owners. D) firm that accepts savings deposits. Answer: C

Type: A Topic: 2 E: 77-78 MI: 77-78 MA: 77-78 49. Double taxation of a firm's income occurs in a: A) corporation. B) limited-liability company. C) partnership. D) sole proprietorship. Answer: A

Type: D Topic: 2 E: 77-78 MI: 77-78 MA: 77-78 50. Double taxation means that: A) payroll taxes that finance social security are levied on both workers and employers. B) taxes levied on wholesale products also apply at the retail level. C) the part of corporate earnings paid as dividends is taxed as corporate profits and also as income to stockholders. D) corporate tax rates are twice as high as those on the incomes of incorporated businesses. Answer: C

Type: F Topic: 2 E: 76 MI: 76 MA: 76 51. Most output in the United States is produced by: A) cooperatives. B) partnerships. C) sole proprietorships. Answer: D

D) corporations.

Type: F Topic: 2 E: 76 MI: 76 MA: 76 52. Corporations comprise about _____ percent of all businesses, but produce nearly _____ percent of domestic output. A) 40; 60 B) 5; 70 C) 20; 90 D) 80; 20 Answer: C

Type: D Topic: 2 E: 78 MI: 78 MA: 78 53. Limited liability companies: A) limit the liability of owners whose income is subject to the corporate income tax. B) are the same as partnerships. C) have a limited life and their net incomes are taxed as personal income. D) are the same as corporations. Answer: C

Type: A Topic: 2 E: 78 MI: 78 MA: 78 54. The XYZ Company is subject to limited liability; its income is treated as personal income for tax purposes; it has a limited life of 30 years. XYZ is a: A) corporation. B) partnership. C) limited liability company. D) cooperative. Answer: C

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Economic functions of government

Type: A Topic: 3 E: 81 MI: 81 MA: 81 55. Which of the following is a shortcoming of the market system? A) It leads to firms that are too large to achieve productive efficiency. B) Certain goods will not be produced because there is no way of excluding nonpaying ("free-rider") individuals from the associated benefits. C) The resulting distribution of personal incomes might be too equal to maintain incentives. D) It is controlled by a handful of multinational corporations. Answer: B

Type: D Topic: 3 E: 79 MI: 79 MA: 79 56. The economic policies and programs of government affect all of the following except: A) the distribution of income. B) the allocation of resources. C) the composition of output. D) the underlying motives of consumers, workers, and firms. Answer: D

Type: A Topic: 3 E: 79 MI: 79 MA: 79 57. The Pure Food and Drug Act is an illustration of: A) governmental provision of public goods. B) the redistributional function of government. C) governmental provision of a suitable legal framework for the market system. D) governmental action designed to enhance competition. Answer: C

Type: A Topic: 3 E: 79 MI: 79 MA: 79 58. The U.S. Food Stamp program, which provides coupons that allow low-income individuals to buy food, is an illustration of: A) public provision of a suitable legal framework for the market system. B) the redistributional function of government. C) a government action designed to enhance competition. D) the stabilization function of government. Answer: B

Type: A Topic: 3 E: 80 MI: 80 MA: 80 59. Government may lessen income inequality by: A) providing transfer payments to the poor. B) directly modifying market prices as, for example, by establishing a legal minimum wage. C) using the tax system to tax the wealthy relatively more heavily than the poor. D) doing all of the above. Answer: D

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Spillover costs and benefits

Type: A Topic: 4 E: 81 MI: 81 MA: 81 60. In a competitive market: A) demand will not always reflect all spillover benefits. B) demand will always reflect all spillover benefits. C) supply will always reflect all spillover costs. D) supply will always reflect all spillover benefits. Answer: A

Type: A Topic: 4 E: 81 MI: 81 MA: 81 61. In a competitive market: A) spillover benefits will always exceed spillover costs. B) resources will be misallocated if government does not properly adjust demand and supply for large spillover costs and benefits. C) resources will be allocated efficiently only if spillover benefits equal spillover costs. D) an efficient allocation of resources is realized even where there are large spillover costs and benefits. Answer: B

Type: A Topic: 4 E: 80 MI: 80 MA: 80 62. Spillover costs arise: A) when firms pay more than the opportunity cost of resources. B) when the demand curve for a product is located too far to the left. C) when firms "use" resources without being compelled to pay for their full costs. D) only in capitalistic societies. Answer: C

Type: D Topic: 4 E: 81 MI: 81 MA: 81 63. Spillover benefits refer to: A) benefits that accrue to parties other than the producer and buyer of a good. B) the benefits that resource suppliers obtain from the production and sale of a good. C) the benefit that a consumer receives from buying a good. D) the combined benefits that buyer and seller receive from a voluntary market transaction. Answer: A

Type: A Topic: 4 E: 80 MI: 80 MA: 80 64. A pure market economy overallocates resources to the production of goods that: A) involve spillover costs (external costs). C) are public goods. B) involve spillover benefits (external benefits). D) are inexpensive to produce. Answer: A

Type: D Topic: 4 E: 80 MI: 80 MA: 80 Status: New 65. A spillover cost or spillover benefit is also known as a(n): A) marginal benefit. B) principal-agent problem. C) transfer payment. D) externality. Answer: D

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Type: A Topic: 4 E: 80 MI: 80 MA: 80 66. When spillovers cause substantial positive benefits for third parties, a competitive market: A) underallocates resources to the production of the good. B) overallocates resources to the production of the good. C) is allocatively efficient. D) compensates people for the value of the benefits that these third parties receive. Answer: A

Type: A Topic: 4 E: 80 MI: 80 MA: 80 67. If a market is competitive but externalities are present, the resulting equilibrium output: A) will also be the most efficient output. B) will always be less than the most efficient output. C) will always be greater than the most efficient output. D) may be either larger or smaller than the most efficient output. Answer: D

Type: D Topic: 4 E: 80-81 MI: 80-81 MA: 80-81 68. Spillovers or externalities: A) relate to costs only. C) relate to both costs and benefits. B) relate to benefits only. D) have been legislated out of existence. Answer: C

Type: D Topic: 4 E: 80 MI: 80 MA: 80 69. When the production or consumption of a good involves an externality: A) resources are necessarily overallocated to the product. B) resources are necessarily underallocated to the product. C) someone not involved in buying or selling the good is affected. D) the market will efficiently allocate resources to its production. Answer: C

Type: A Topic: 4 E: 81 MI: 81 MA: 81 70. If a good's production creates substantial spillover benefits and no spillover costs, then too: A) much of the good will be produced unless firms are subsidized. B) much of the good will be produced unless firms are taxed. C) little of the good will be produced unless firms are subsidized. D) little of the good will be produced unless firms are taxed. Answer: C

Type: A Topic: 4 E: 81 MI: 81 MA: 81 71. If the production of a good or service creates sizable spillover benefits, government might correct for the: A) underallocation of resources to its production by imposing an excise tax. B) overallocation of resources to its production by imposing an excise tax. C) underallocation of resources to its production by granting a subsidy. D) overallocation of resources to its production by granting a subsidy. Answer: C

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Type: A Topic: 4 E: 82 MI: 82 MA: 82 72. For which of the following goods or services would a government subsidy be most likely to improve the allocation of resources? A) wheat B) newspaper publishing C) cancer research D) toys Answer: C

Type: A Topic: 4 E: 81 MI: 81 MA: 81 73. If there are important spillover benefits associated with the consumption of a product: A) government should enact legislation to prohibit the production of the commodity. B) special excise taxes should be levied on producers of the product. C) the market demand curve understates the relative importance of the product and resources are therefore underallocated to its production. D) the market supply curve for the product lies too far to the right to provide an efficient allocation of resources. Answer: C

Type: A Topic: 4 E: 80 MI: 80 MA: 80 74. Suppose a product creates substantial spillover costs. If government adopts a policy that forces producers to pay these costs, the: A) output of the product will decrease. B) initial misallocation of resources will be intensified. C) output of the product will increase. D) price of the product will decrease. Answer: A

Type: A Topic: 4 E: 80 MI: 80 MA: 80 75. If spillover costs are not internalized, the: A) equilibrium output will exceed the most efficient output. B) most efficient output will exceed the equilibrium output. C) product must be a public good. D) distribution of income will necessarily become more equal. Answer: A

Type: A Topic: 4 E: 81 MI: 81 MA: 81 76. A productive activity that creates substantial spillover benefits should be: A) encouraged by subsidization. C) exempt from governmental intervention. B) discouraged by special taxes or legislation. D) prohibited. Answer: A

Type: A Topic: 4 E: 81 MI: 81 MA: 81 77. Suppose the production of a certain good creates substantial spillover benefits. If government adopts a policy that adjusts demand to take these benefits into account, then: A) firms in this industry will go out of business. C) the output of the product will decrease. B) the output of the product will increase. D) the price of the product will decrease. Answer: B

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Type: A Topic: 4 E: 80 MI: 80 MA: 80 78. The Federal government requires automobile manufacturers to install pollution control equipment. This is an illustration of the: A) intrusion problem. C) internalization of external benefits. B) production of public goods. D) internalization of external costs. Answer: D

Type: A Topic: 4 E: 80 MI: 80 MA: 80 79. Pollution: A) should be corrected by the subsidization of offending firms. B) is not an economic problem because it is external to the market system. C) is an example of private production costs. D) is an example of a spillover or external cost. Answer: D

Type: A Topic: 4 E: 82 MI: 82 MA: 82 80. Which of the following is most likely to be accompanied by external or spillover benefits? A) the construction of a nuclear power plant C) eating dinner at an expensive French restaurant B) studying in the library D) being immunized for measles Answer: D

Type: D Topic: 4 E: 80 MI: 80 MA: 80 81. A market externality refers to: A) economic costs and benefits of market activities that go to those who are not directly involved in the market transaction. B) the impact of legal and institutional forces on market behavior. C) any unanticipated change in market price or output. D) any noneconomic force, for example, political disruption of the flow of Middle East oil, which has market effects. Answer: A

Type: A Topic: 4 E: 80 MI: 80 MA: 80 82. Spillovers or externalities weaken the efficiency of the market system because they: A) are a major source of inflation. B) mean that certain essential goods and services do not get produced at all. C) are a major source of employment. D) cause certain goods to be overproduced or underproduced. Answer: D

Type: A Topic: 4 E: 81 MI: 81 MA: 81 83. A subsidy: A) should be provided when there are external costs. B) should be provided when there are external benefits. C) should be provided only when a public good is being produced. D) is appropriate when firms are guilty of pollution. Answer: B

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Type: A Topic: 4 E: 80 MI: 80 MA: 80 84. If an industry causes spillovers so that resources are overallocated to the industry: A) a principal-agent problem must be present. C) spillover costs are involved. B) the industry is producing a public good. D) spillover benefits are involved. Answer: C

Type: A Topic: 4 E: 80 MI: 80 MA: 80 85. If the production and consumption of a good cause both spillover benefits and spillover costs: A) the equilibrium output will be the optimal allocation of resources to its production. B) resources will necessarily be underallocated to its production. C) resources will necessarily be overallocated to its production. D) resources may be either underallocated or overallocated to its production. Answer: D

Type: C Topic: 4 E: 81 MI: 81 MA: 81 86. Education levels and crime rates are inversely related. This suggests that education: A) is not subject to the exclusion principle. C) creates a free-rider problem. B) entails external benefits. D) should be produced in the private sector. Answer: B

Public goods

Type: D Topic: 5 E: 81 MI: 81 MA: 81 Status: New 87. The main characteristics of a public good are: A) nonrivalry and nonexcludability. C) nonrivalry and large spillover costs. B) nonexcludability and rising costs of production. D) production at constant cost and rising demand. Answer: A

Type: D Topic: 5 E: 81 MI: 81 MA: 81 Status: New 88. As it relates to a public good, nonrivalry means that: A) the public sector is able to provide the good profitably. B) there is no need or demand for the good. C) either the public sector or the public sector can produce the good, but not both. D) one person's benefit from the good does not reduce the benefit available to others. Answer: D

Type: D Topic: 5 E: 81 MI: 81 MA: 81 Status: New 89. As it relates to a public good, nonexcludability means that: A) free riders cannot be barred from receiving the benefits. B) there is no need or demand for the good. C) either the public sector or the public sector can produce the good, but not both. D) one person's benefit from the good does not reduce the benefit available to others. Answer: A

Type: D Topic: 5 E: 81 MI: 81 MA: 81 Status: New 90. Rivalry and excludability are the main characteristics of: A) capital goods. B) private goods. C) public goods. D) consumption goods. Answer: B

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Type: D Topic: 5 E: 81 MI: 81 MA: 81 Status: New 91. Nonrivalry and nonexcludability are the main characteristics of: A) capital goods. B) private goods. C) public goods. D) consumption goods. Answer: C

Type: D Topic: 5 E: 81 MI: 81 MA: 81 Status: New 92. Unlike a private good, a public good: A) produces no spillover benefits or spillover costs. B) has no opportunity costs. C) has benefits that are available to all, regardless of payment. D) is characterized by rivalry and excludability. Answer: C

Type: A Topic: 5 E: 81 MI: 81 MA: 81 Status: New 93. Which of the following is an example of a public good? A) a fireworks display. B) a hotdog C) a barbeque grill D) a personal computer Answer: A

Type: A Topic: 5 E: 81 MI: 81 MA: 81 Status: New 94. An example of a public good is: A) a movie theater. B) a freight train. C) the war on terrorism. D) Disneyland. Answer: C

Type: A Topic: 5 E: 81 MI: 81 MA: 81 Status: New 95. Which of the following is a public good? A) chewing gum B) bread C) a professional baseball game D) street lights in a city Answer: D

Type: A Topic: 5 E: 81 MI: 81 MA: 81 Status: New 96. A public good: A) can be produced profitably by private firms. B) is available to all and cannot be denied to anyone. C) is characterized by rivalry and excludability. D) produces no spillover costs or spillover benefits. Answer: B

Type: D Topic: 5 E: 81 MI: 81 MA: 81 Status: New 97. The market system does not produce public goods because: A) there is no need or demand for such goods. B) private firms cannot stop consumers who are unwilling to pay for such goods from benefiting from them. C) public enterprises can produce such goods at lower cost than can private enterprises. D) their production seriously distorts the distribution of income. Answer: B

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Type: D Topic: 5 E: 81 MI: 81 MA: 81 Status: New 98. Nonexcludability is the idea that: A) government actions cannot remedy market failure. B) the presence of external costs and benefits produces a misallocation of resources. C) individuals cannot receive benefits from a good without paying for it. D) individuals who are unable or unwilling to pay for a good cannot be excluded from the benefits provided by that product. Answer: D

Type: D Topic: 5 E: 81 MI: 81 MA: 81 Status: New 99. Excludability: A) is a characteristics of private goods, but not of public goods. B) applies only where spillover benefits exceed spillover costs. C) suggest there are certain economic functions from which government must be excluded. D) is a fundamental characteristic of public goods. Answer: A

Use the following to answer questions 100-101:
Rivalry Excludability Nonexcludability A C Nonrivalry B D

Type: A Topic: 5 E: 81 MI: 81 MA: 81 Status: New 100. Refer to the above matrix. A private good is characterized by combination: A) A. B) B. C) C. D) D. Answer: A

Type: A Topic: 5 E: 81 MI: 81 MA: 81 Status: New 101. Refer to the above matrix. A public good is characterized by combination: A) A. B) B. C) C. D) D. Answer: D

Type: A Topic: 5 E: 81 MI: 81 MA: 81 Status: New 102. Government rather than the private sector must provide economically desirable public goods because: A) private production of those goods would entail unacceptably high external costs. B) the availability of such goods yields no benefits to individuals. C) the benefits yielded by such goods are available to everyone and cannot be withheld from those who refuse to pay for them. D) their provision is necessary to achieve full employment and price-level stability. Answer: C

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Type: A Topic: 5 E: 81 MI: 81 MA: 81 Status: New 103. The free-rider problem is associated with: A) all market goods. B) the structure of airline fares. C) producing goods that have characteristics of public goods. D) the overallocation of the resources to transportation facilities. Answer: C

Type: A Topic: 5 E: 81 MI: 81 MA: 81 Status: New 104. The free-rider problem is that: A) free public transportation is overcrowded. B) people will not voluntarily pay for something that they can obtain without paying. C) government supplies goods at no charge to people who can afford to pay for them. D) public goods often create large spillover costs. Answer: B

Type: A Topic: 5 E: 81 MI: 81 MA: 81 Status: New 105. Government rather than private firms must provide economically desirable public goods because: A) high marginal costs preclude their production in the private sector. B) public goods have characteristics that make it difficult or impossible for private firms to produce them profitably. C) public goods have marginal costs that exceed marginal benefits. D) the law of increasing opportunity costs applies only to private goods. Answer: B

Type: D Topic: 5 E: 81, 82 MI: 81, 82 MA: 81, 82 Status: New 106. A quasi-public good is: A) a public good that is produced profitably by private firms, without government subsidy. B) one characterized by nonrivalry and nonexcludability. C) one characterized by rivalry but not excludability. D) a good for which exclusion could take place but that has such large spillover benefits that government provides it to prevent an underallocation of resources. Answer: D

Type: A Topic: 5 E: 82 MI: 82 MA: 82 Status: New 107. An example of a quasi-public good is: A) public higher education. B) an automobile. C) a DVD player. D) national defense. Answer: A

Type: A Topic: 5 E: 81, 82 MI: 81, 82 MA: 81, 82 Status: New 108. Which list provides, in order, examples of a private good, a public good, and a quasi-public good? A) national defense, a national park, an automobile B) an automobile, national defense, a national park C) a national park, an automobile, national defense D) national defense, an automobile, a national park. Answer: B

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Type: A Topic: 5 E: 81, 82 MI: 81, 82 MA: 81, 82 Status: New 109. Which list provides, in order, examples of a private good, a public good, and a quasi-public good? A) a weather warning system, a DVD player, higher education. B) higher education, a DVD player, a weather warning system. C) a weather warning system, higher education, a DVD player. D) a DVD player, a weather warning system, higher education. Answer: D

Type: A Topic: 5 E: 81 MI: 81 MA: 81 110. The public decision to build the interstate highway system is an example of: A) the allocative function of government. B) the redistributional function of government. C) public provision of a suitable legal framework for the market system. D) the stabilization function of government. Answer: A

Type: A Topic: 5 E: 82 MI: 82 MA: 82 111. In a full-employment economy government can reallocate resources from private to public employment by: A) reducing taxes and increasing government expenditures. B) reducing taxes and reducing government expenditures. C) increasing taxes and reducing government expenditures. D) increasing taxes and increasing government expenditures. Answer: D

Use the following to answer questions 112-115:

Type: G Topic: 5 E: 82 MI: 82 MA: 82 112. Refer to the above diagram. The movement from point b to point c suggests that more: A) private goods are being produced at the expense of fewer public goods. B) public goods are being produced at the expense of fewer private goods. C) public goods are being produced by employing currently idle resources. D) private goods are being produced by employing currently idle resources. Answer: B

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Type: G Topic: 5 E: 82 MI: 82 MA: 82 113. Refer to the above diagram. The movement from point a to point c suggests that more: A) private goods are being produced by employing currently idle resources. B) public goods are being produced by employing currently idle resources. C) public goods are being produced at the expense of fewer private goods. D) private goods are being produced at the expense of fewer public goods. Answer: B

Type: G Topic: 5 E: 82 MI: 82 MA: 82 114. Refer to the above diagram. The movement from point b to point c can be achieved by: A) increasing taxes and increasing government spending. B) increasing taxes and decreasing government spending. C) decreasing taxes and increasing government spending. D) decreasing taxes and decreasing government spending. Answer: A

Type: G Topic: 5 E: 82 MI: 82 MA: 82 115. Refer to the above diagram. The movement from point a to point c can best be achieved by: A) increasing taxes and increasing 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

Stabilization

Type: D Topic: 6 E: 82 MI: 82 MA: 82 116. The stabilization function of government involves government's efforts to: A) alter the output of specific goods when external costs or benefits are present. B) reduce the after-tax incomes of the rich and increase the after-tax incomes of the poor. C) deal with the problems of substantial unemployment and rapid inflation. D) provide the socially desired output of public goods. Answer: C

Type: A Topic: 6 E: 82 MI: 82 MA: 82 117. In performing its stabilization function it may be appropriate for government to: A) increase both government spending and taxes when the economy is experiencing rapid inflation. B) reduce government spending and increase taxes when the economy experiences substantial unemployment. C) increase government spending and reduce taxes when the economy experiences rapid inflation. D) increase government spending and reduce taxes when the economy experiences substantial unemployment. Answer: D

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Type: A Topic: 6 E: 82, 83 MI: 82, 83 MA: 82, 83 118. Which of the following would not be appropriate if government were attempting to restrain a dramatic rise in the general price level? A) an increase in tax rates C) an increase in transfer payments to households B) a decrease in subsidies to businesses D) a decrease in government spending Answer: C

Type: A Topic: 6 E: 82 MI: 82 MA: 82 119. Which of the following would not be appropriate if government were trying to reduce high unemployment? A) an increase in tax rates C) an increase in transfer payments to households B) an increase in subsidies to businesses D) an increase in government spending Answer: A

Type: A Topic: 6 E: 83 MI: 83 MA: 83 Status: New 120. In performing its stabilization function, it may be appropriate for the nation's central bank (the Federal Reserve in the United States) to: A) raise taxes to reduce inflation. B) increase government spending to reduce unemployment. C) increase subsidies to businesses to reduce unemployment. D) lower interest rates to stimulate private spending and reduce unemployment. Answer: D

Type: A Topic: 6 E: 83 MI: 83 MA: 83 Status: New 121. In performing its stabilization function, it may be appropriate for the nation's central bank (the Federal Reserve in the United States) to take actions to: A) increase taxes to reduce inflation. B) increase interest rates to reduce inflation. C) reduce government spending to reduce inflation. D) increase subsidies to businesses to reduce unemployment. Answer: B

Type: F Topic: 6 E: 83 MI: 83 MA: 83 Status: New 122. Government's economic role is complicated by the fact that: A) public goods entail no opportunity costs. B) the public sector cannot base decisions on marginal costs and marginal benefits. C) economic decisions are made in a political context. D) the marginal utility of public goods rises rather than falls. Answer: C

Government in circular flow

Type: A Topic: 7 E: 83 MI: 83 MA: 83 Status: New 123. The addition of government to the circular-flow model illustrates that government: A) purchases resources in the resource market. C) purchases goods in the product market. B) provides services to businesses and households. D) does all of the above. Answer: D

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Use the following to answer questions 124-133:

Type: G Topic: 7 E: 84 MI: 84 MA: 84 124. Refer to the above diagram, in which solid arrows reflect real flows; broken arrows are monetary flows. Flow (1) might represent: A) corporate income tax payments. B) government provision of highways for truck transportation. C) business property tax payments. D) transfer payments to low-income families. Answer: B

Type: G Topic: 7 E: 87 MI: 87 MA: 87 125. Refer to the above diagram, in which solid arrows reflect real flows; broken arrows are monetary flows. Flow (2) might represent: A) the provision of national defense by government. B) a government subsidy to farmers. C) corporate income tax payments. D) welfare payments to low-income families. Answer: C

Type: G Topic: 7 E: 83-84 MI: 83-84 MA: 83-84 126. Refer to the above diagram, in which solid arrows reflect real flows; broken arrows are monetary flows. Flow (3) might represent: A) government salaries paid to school teachers. C) a state university's purchase of computers. B) property tax payments. D) social security payments to retirees. Answer: A

Type: G Topic: 7 E: 83-84 MI: 83-84 MA: 83-84 127. Refer to the above diagram, in which solid arrows reflect real flows; broken arrows are monetary flows. Flow (4) might represent: A) the services of NASA astrophysicists. C) personal income taxes. B) the purchase of Stealth bombers. D) investment spending by private corporations. Answer: A

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Type: G Topic: 7 E: 83-84 MI: 83-84 MA: 83-84 128. Refer to the above diagram, in which solid arrows reflect real flows; broken arrows are monetary flows. Flow (5) might represent: A) personal income tax revenues. B) the provision of public schools by local governments. C) the purchase of laptop computers by the state of Iowa. D) transfer payments to unemployed workers. Answer: B

Type: G Topic: 7 E: 86-87 MI: 86-87 MA: 86-87 129. Refer to the above diagram, in which solid arrows reflect real flows; broken arrows are monetary flows. Flow (6) might represent: A) the payment of payroll taxes by households. B) corporate income tax payments. C) the purchase of basketballs by the Ogallala school district. D) the purchase of armored personnel vehicles by government. Answer: A

Type: G Topic: 7 E: 83-84 MI: 83-84 MA: 83-84 130. Refer to the above diagram, in which solid arrows reflect real flows; broken arrows are monetary flows. Flow (7) might represent: A) a transfer payment to disabled persons. B) wage payments to public school teachers. C) subsidies to corporations to stimulate exports. D) the U. S. Bureau of Engraving and Printing's expenditures for paper. Answer: D

Type: G Topic: 7 E: 83-84 MI: 83-84 MA: 83-84 131. Refer to the above diagram, in which solid arrows reflect real flows; broken arrows are monetary flows. Flow (8) might represent: A) personal income taxes. C) the services of firefighters. B) automobile purchases by the state of Maine. D) subsidies to farmers. Answer: B

Type: G Topic: 7 E: 82-83 MI: 82-83 MA: 82-83 132. Refer to the above diagram, in which solid arrows reflect real flows; broken arrows are monetary flows. If the economy were in a serious recession, it would be most appropriate for government to: A) increase flows (3) and (7) and reduce flows (2) and (6). B) decrease flows (3) and (7) and increase flows (2) and (6). C) increase flows (2) and (3) and reduce flows (6) and (7). D) increase all of the monetary flows. Answer: A

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Type: G Topic: 7 E: 82-83 MI: 82-83 MA: 82-83 133. Refer to the above diagram, in which solid arrows reflect real flows; broken arrows are monetary flows. If the economy were experiencing inflation due to excess aggregate spending, it would be most appropriate for government to: A) increase flows (3) and (7) and reduce flows (2) and (6). B) decrease flows (3) and (7) and increase flows (2) and (6). C) increase flows (2) and (3) and reduce flows (6) and (7). D) increase all of the monetary flows. Answer: B

Purchases, transfers, and government size

Type: F Topic: 8 E: 84 MI: 84 MA: 84 134. In 2003, "Tax-Freedom Day" (the day average workers have earned enough to pay their tax bills) was: A) February 1. B) April 5. C) April 18. D) July 7. Answer: C

Type: F Topic: 8 E: 84-85 MI: 84-85 MA: 84-85 135. Transfer payments are about ____ percent of U. S. domestic output. A) 50 percent B) 5 percent C) 12 percent D) 22 percent Answer: C

Type: F Topic: 8 E: 84 MI: 84 MA: 84 136. Total governmental purchases--Federal, state, and local combined--account for about what percentage of domestic output? A) 30 percent B) 18 percent C) 10 percent D) 5 percent Answer: B

Type: F Topic: 8 E: 84 MI: 84 MA: 84 137. The total amount of U. S. tax revenue needed to finance the public sector: A) has been a declining percentage of the domestic output in this century. B) equals about 40 percent of domestic output. C) equals about 15 percent of domestic output. D) is slightly larger today than in 1960. Answer: D

Type: F Topic: 8 E: 85 MI: 85 MA: 85 138. As a proportion of domestic outputs, taxes in the United States: A) are lower than in most other industrially advanced countries. B) are higher than in most other industrially advanced countries. C) are approximately the same as in most other industrially advanced countries. D) doubled in the 1990s. Answer: A

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Type: A Topic: 8 E: 84 MI: 84 MA: 84 139. Which of the following is an exhaustive governmental outlay? A) a Federal $5,000 subsidy check to an Illinois farmer B) a Temporary Assistance to Needy Families payment made by the state of New York C) a NASA payment to Boeing Corporation for space hardware D) a Federal old age insurance payment to a retired coal miner Answer: C

Type: A Topic: 8 E: 84 MI: 84 MA: 84 140. Government purchases and transfer payments: A) differ because the latter absorb resources while the former do not. B) differ because the former absorb resources while the latter do not. C) are alike because both are more inflationary than private spending. D) are alike because both absorb resources. Answer: B

Type: A Topic: 8 E: 84 MI: 84 MA: 84 141. Government transfer payments: A) have been virtually eliminated by Federal revenue sharing. B) have virtually no effect on the distribution of income. C) make the distribution of income less equal. D) make the distribution of income less unequal. Answer: D

Type: A Topic: 8 E: 84 MI: 84 MA: 84 142. Transfer payments differ from government purchases in that the: A) former make a contribution to the domestic output, while the latter do not. B) former are associated with state and local governments, while the latter are associated with the Federal government. C) latter are not directly resource absorbing, while the former are. D) former are not directly resource absorbing, while the latter are. Answer: D

Federal finance and progressive taxes

Type: F Topic: 9 E: 85 MI: 85 MA: 85 143. The major source of tax revenue for the Federal government is: A) personal income taxes. C) corporate income taxes. B) property taxes. D) sales and excise taxes. Answer: A

Type: F Topic: 9 E: 86 MI: 86 MA: 86 144. Approximately what percentage of the Federal government's tax revenues are currently in the form of personal income taxes? A) 80 percent B) 15 percent C) 33 percent D) 46 percent Answer: D

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Type: F Topic: 9 E: 86 MI: 86 MA: 86 145. The three most important sources of Federal tax revenue in order of descending importance are: A) sales, payroll, and personal income taxes. B) personal income, corporate income, and sales taxes. C) personal income, corporate income, and payroll taxes. D) personal income, payroll, and corporate income taxes. Answer: D

Type: D Topic: 9 E: 85 MI: 85 MA: 85 146. In determining one's personal income tax, taxable income is: A) total income less deductions and exemptions. C) all income other than wages and salaries. B) earned income less property income. D) wage and salary income only. Answer: A

Type: F Topic: 9 E: 85-86 MI: 85-86 MA: 85-86 147. The largest category of Federal spending is for: A) agriculture and rural development. C) pensions and income security. B) science, space, and technology. D) highway construction. Answer: C

Type: A Topic: 9 E: 86 MI: 86 MA: 86 148. The tax rates embodied in the Federal personal income tax are such that: A) a rising absolute amount, but a declining proportion, of income is paid in taxes. B) the marginal and average tax rates are equal, making the tax progressive. C) the average tax rate rises more rapidly than does the marginal tax rate. D) the marginal tax rate is higher than the average tax rate, causing the average tax rate to rise. Answer: D

Type: F Topic: 9 E: 86 MI: 86 MA: 86 Status: New 149. The maximum Federal marginal tax rate on taxable personal income is currently (2003): A) 50 percent. B) 35 percent. C) 45 percent. D) 28 percent. Answer: B

Type: F Topic: 9 E: 86 MI: 86 MA: 86 150. Which of the following is not an important source of revenue for the Federal government? A) corporate income taxes B) property taxes C) payroll taxes D) personal income taxes Answer: B

Type: D Topic: 9 E: 85-86 MI: 85-86 MA: 85-86 151. A progressive tax is such that: A) tax rates are higher the greater one's income. B) the same tax rate applies to all income receivers, so that the rich pay absolutely more taxes than the poor. C) entrepreneurial income is exempt from taxation. D) the revenues it yields are spent on transfer payments. Answer: A

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Type: D Topic: 9 E: 85-86 MI: 85-86 MA: 85-86 152. An income tax is progressive if the: A) absolute amount paid as taxes varies directly with income. B) percentage of income paid as taxes is the same regardless of the size of income. C) percentage of income paid as taxes increases as income increases. D) tax rate varies inversely with income. Answer: C

Type: D Topic: 9 E: 86 MI: 86 MA: 86 153. The average tax rate is: A) equal to the marginal tax rate if the tax is progressive. B) the total tax rate minus the marginal tax rate. C) the ratio of total taxes paid to total taxable income. D) the tax rate that applies to incremental dollars of income. Answer: C

Type: A Topic: 9 E: 86 MI: 86 MA: 86 154. If you would have to pay $5000 in taxes on a $25,000 taxable income and $7000 on a $30,000 taxable income, then the marginal tax rate on the additional $5000 of income is: A) 40 percent and the average tax rate is about 23 percent at the $30,000 income level. B) 50 percent and the average tax rate is 40 percent at the $30,000 income level. C) 40 percent and the average tax rate is 25 percent at the $25,000 income level. D) 30 percent but average tax rates cannot be determined from the information given. Answer: A

Type: D Topic: 9 E: 86 MI: 86 MA: 86 155. The marginal tax rate is: A) the difference between the total tax rate and the average tax rate. B) the percentage of total income paid as taxes. C) change in taxes / change in taxable income D) total taxes / total taxable income Answer: C

Type: D Topic: 9 E: 86 MI: 86 MA: 86 156. The average tax rate is: A) change in taxes / change in taxable income B) total taxes / total taxable income C) the sum of the marginal tax rate and the rate of transfer payments. D) the tax on incremental income less the tax on total income. Answer: B

Type: A Topic: 9 E: 86 MI: 86 MA: 86 157. For a progressive tax the: A) average tax rate exceeds the marginal tax rate as income rises. B) marginal tax rate declines as income increases. C) average and marginal tax rates are equal. D) marginal tax rate exceeds the average tax rate as income rises. Answer: D

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Type: A Topic: 9 E: 86 MI: 86 MA: 86 158. Assume that in year 1 you pay an average tax rate of 20 percent on a taxable income of $20,000. In year 2, you pay an average tax rate of 25 percent on a taxable income of $30,000. Assuming no change in tax rates, the marginal tax rate on your additional $10,000 of income is: A) 5 percent. B) 12 percent. C) 35 percent. D) 42 percent. Answer: C

Type: D Topic: 9 E: 86 MI: 86 MA: 86 159. The marginal tax rate is: A) less than the average tax rate when a tax is progressive. B) calculated by dividing total taxes paid by one's total taxable income. C) the percentage of one's total income that is paid in taxes. D) the percentage of an increment of income that is paid in taxes. Answer: D

Type: F Topic: 9 E: 86 MI: 86 MA: 86 Status: New 160. Currently (2003) the marginal tax rates of the Federal personal income tax: A) are less than corresponding average tax rates. C) fall from 20 to 10 percent. B) rise from 5 to 50 percent. D) rise from 10 to 35 percent. Answer: D

Type: A Topic: 9 E: 86 MI: 86 MA: 86 161. Assume that in year 1 your average tax rate is 20 percent on a taxable income of $20,000. If the marginal tax rate on the next $10,000 of taxable income is 30 percent, what will be the average tax rate if your taxable income rises to $30,000? A) 7 percent B) 30 percent C) 16 percent D) about 23 percent Answer: D

Use the following to answer questions 162-163: The following data represent a personal income tax schedule. Answer the next question(s) on the basis of this information.

Taxable income $ 0 2000 4000 6000 8000 10,000

Total tax $ 0 200 600 1200 2000 3000

Type: T Topic: 9 E: 86 MI: 86 MA: 86 162. Refer to the above table. If your taxable income is $8,000, your average tax rate is: A) 25 percent and the marginal rate on additional income is also 25 percent. B) 25 percent and the marginal rate on additional income is 50 percent. C) 25 percent and the marginal rate on additional income cannot be determined from the information given. D) 20 percent and the marginal rate on additional income is 30 percent. Answer: B

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Type: T Topic: 9 E: 85-86 MI: 85-86 MA: 85-86 163. Refer to the above table. This tax is such that the after-tax distribution of income will be: A) more equal than the before-tax distribution. B) less equal than the before-tax distribution. C) distributed in precisely the same way as the before-tax distribution. D) less than the before-tax distribution by the same percentage at each income level. Answer: A

Use the following to answer questions 164-166: Answer the next question(s) on the basis of the following data: Taxable income $1000 2000 3000 4000 5000 6000 Total tax $ 0 100 300 600 1000 1500

Type: T Topic: 9 E: 85-86 MI: 85-86 MA: 85-86 164. The tax represented above is: A) optimal. B) proportional. C) regressive. D) progressive. Answer: D

Type: T Topic: 9 E: 86 MI: 86 MA: 86 165. Refer to the above data. If your taxable income is $4000, your average tax rate will be: A) 20 percent. B) 15 percent. C) 10 percent. D) 5 percent. Answer: B

Type: T Topic: 9 E: 86 MI: 86 MA: 86 166. Refer to the above data. If your taxable income increases from $4000 to $5000, you will encounter a marginal tax rate of: A) 40 percent. B) 25 percent. C) 15 percent. D) 10 percent. Answer: A

Type: A Topic: 9 E: 86 MI: 86 MA: 86 167. If the marginal tax rate is greater than the average tax rate, then: A) the average tax rate must be rising. B) the average tax rate must be falling. C) the average tax rate may be either rising or falling. D) the tax is regressive. Answer: A

Type: F Topic: 9 E: 85-86 MI: 85-86 MA: 85-86 168. The most important source of Federal tax revenue is: A) sales taxes. B) personal income taxes. C) corporate income taxes. Answer: B

D) payroll taxes.

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Type: D Topic: 9 E: 85 MI: 85 MA: 85 169. Taxable income is: A) total income less deductions and exemptions. B) the same as gross income. Answer: A

C) only income to which marginal tax rates apply. D) the sum of all wage and property income.

Type: F Topic: 9 E: 87 MI: 87 MA: 87 170. The basic tax rate on taxable corporate income is: A) 15 percent. B) 22 percent. C) 35 percent. Answer: C

D) 52 percent.

State and local finance

Type: F Topic: 10 E: 87 MI: 87 MA: 87 171. With respect to state finance: A) death and gift taxes are the major source of revenue and most expenditures are for hospitals and health services. B) the corporate income tax is the major source of revenue and natural resource development the major type of expenditure. C) property taxes are the basic source of revenue and education is the major type of expenditure. D) sales and excise taxes are the major source of revenue and education is the major type of expenditure. Answer: D

Type: D Topic: 10 E: 87 MI: 87 MA: 87 172. The essential difference between sales and excise taxes is that: A) sales taxes apply to a wide range of products, while excises apply only to a select group of products. B) excise taxes apply to a wide range of products, while sales taxes apply only to a select list of products. C) sales taxes are consumption taxes, while excises are not. D) excise taxes are consumption taxes, while sales taxes are not. Answer: A

Type: F Topic: 10 E: 87 MI: 87 MA: 87 173. With respect to local finance: A) death and gift taxes are the major source of revenue and most expenditures are for hospitals and health services. B) the corporate income tax is the major source of revenue and natural resource development the major type of expenditure. C) property taxes are the basic source of revenue and education is the major type of expenditure. D) sales and excise taxes are the major source of revenue and highway construction and maintenance is the major type of expenditure. Answer: C

Type: F Topic: 10 E: 87 MI: 87 MA: 87 174. Government lotteries are: A) used by a large number of states to supplement their tax revenues. B) illegal in the United States, but are a common source of revenue in other countries. C) used by local governments, but not by state governments. D) a form of progressive taxation. Answer: A

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Consider This Questions

Type: A E: 82 MI: 82 MA: 82 Status: New 175. (Consider This) Street entertainers generally have a difficult time making large incomes from their performances because they: A) are not sufficiently talented. B) provide public goods and therefore face free-rider problems. C) fail to attract audiences. D) tend to lack marketing skills. Answer: B

Type: A E: 82 MI: 82 MA: 82 Status: New 176. (Consider This) Which of the following groups face a severe free-rider problem in providing their services? A) store clerks B) tax accountants C) college professors D) street entertainers Answer: D

Last Word Questions

Type: F E: 88 MI: 88 MA: 88 177. (Last Word) Corporate common stockholders: A) are guaranteed an annual fixed payment for each share of stock they own. B) may or may not receive dividends, depending on the prosperity of the corporation. C) are guaranteed a fixed payment for their shares when they mature. D) are entitled to dividends before any payments can be made to bondholders. Answer: B

Type: D E: 88 MI: 88 MA: 88 178. (Last Word) "Bondholders have a 'legally prior claim' on a corporation's earnings." This means that: A) corporate bonds are riskless. B) bondholders have the power to change the interest rate they receive each year. C) interest must be paid on bonds before any dividends can be paid to stockholders. D) the market value of bonds cannot fluctuate from year to year. Answer: C

Type: A E: 88 MI: 88 MA: 88 179. (Last Word) Which of the following is correct? A) The market price of bonds and interest rates change in the same direction. B) The market price of bonds and interest rates are unrelated. C) Changes in interest rates affect stock prices, but not bond prices. D) The market price of bonds and interest rates are inversely related. Answer: D

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Type: A E: 88 MI: 88 MA: 88 180. (Last Word) Bonds entail risks because: A) the issuing corporation may encounter economic misfortune or go bankrupt. B) interest rates may rise. C) inflation may occur. D) of all of the above reasons. Answer: D

True/False Questions

Type: F E: 77 MI: 77 MA: 77 181. Only the bondholders of a corporation have the right to vote for a corporation's directors. Answer: False

Type: F E: 77 MI: 77 MA: 77 182. Limited liability means all members of a partnership are liable for the debts incurred by one another. Answer: False

Type: D E: 76 MI: 76 MA: 76 183. A vertically integrated firm is a group of plants each operating at different stages of production. Answer: True

Type: D E: 75 MI: 75 MA: 75 184. Households spend a larger proportion of their incomes for services than for either nondurable goods or durable goods. Answer: True

Type: F E: 74 MI: 74 MA: 74 185. Wages and salaries are the largest source of household income. Answer: True

Type: F E: 74-75 MI: 74-75 MA: 74-75 186. If total income is $200 billion, personal taxes are $40 billion, and consumption is $140 billion, then personal saving must be $60 billion. Answer: False

Type: A E: 80 MI: 80 MA: 80 187. When there are spillover costs involved in the production of a good, fewer resources are allocated to its production than if all costs were internalized. Answer: False

Type: A E: 80 MI: 80 MA: 80 188. If a good's production creates substantial spillover costs, then too little of it will be produced unless firms are subsidized. Answer: False

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Type: A E: 82-83 MI: 82-83 MA: 82-83 189. Increasing taxes and reducing government expenditures might be helpful in constraining inflation. Answer: True

Type: A E: 80 MI: 80 MA: 80 190. If a market is competitive, the resulting equilibrium output will always be the socially efficient output. Answer: False

Type: A E: 81 MI: 81 MA: 81 191. The free-rider problem refers to the possibility that someone may benefit from a good without paying for it. Answer: True

Type: D E: 81 MI: 81 MA: 81 192. The misallocation of resources resulting from large spillover benefits can best be corrected by levying a specific tax on the production of that good or service. Answer: False

Type: D E: 81 MI: 81 MA: 81 Status: New 193. Public goods are characterized by nonrivalry and nonexcludability. Answer: True

Type: D E: 81 MI: 81 MA: 81 Status: New 194. As it relates to public goods, nonexcludability means that nonpayers cannot be barred from obtaining the benefits. Answer: True

Type: A E: 81 MI: 81 MA: 81 Status: New 195. An example of a public good is cable television. Answer: False

Type: F E: 84 MI: 84 MA: 84 Status: New 196. "Tax Freedom Day" in the United occurs in mid-July. Answer: False

Type: A E: 79-80 MI: 79-80 MA: 79-80 197. Government assumes some responsibility for providing a minimum standard of living for all citizens to compensate for the increase in income inequality caused by government tax revenues and expenditures. Answer: False

Type: A E: 82 MI: 82 MA: 82 198. If there is substantial unemployment in the economy, it would be appropriate for government to cut tax rates. Answer: True

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Type: A E: 87 MI: 87 MA: 87 199. The largest source of local government's revenue is the sales tax. Answer: False

Type: F E: 87 MI: 87 MA: 87 200. The basic source of state government's revenue is the property tax. Answer: False

Type: F E: 87 MI: 87 MA: 87 201. The major expenditure of local governments is for education. Answer: True

Type: F E: 85 MI: 85 MA: 85 202. A tax is progressive if the average tax rate rises as income increases. Answer: True

Type: D E: 84 MI: 84 MA: 84 203. Unemployment compensation payments are an example of a transfer payment. Answer: True

Type: A E: 85-86 MI: 85-86 MA: 85-86 204. If you pay a $2000 tax on $10,000 of taxable income and a $4000 tax on a taxable income of $16,000, the tax is progressive. Answer: True

Type: A E: 86 MI: 86 MA: 86 205. The marginal tax rate is the tax rate that applies to additional income. Answer: True

Type: D E: 86 MI: 86 MA: 86 206. In descending order the three most important sources of Federal tax revenue are the personal income tax, payroll taxes, and corporate income taxes. Answer: True

Type: F E: 86 MI: 86 MA: 86 207. About two-thirds of all Federal spending is for national defense. Answer: False

Type: F E: 86-87 MI: 86-87 MA: 86-87 208. A progressive tax takes relatively more from the rich than it does from the poor. Answer: True

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Topic Question numbers __________________________________________________________ International linkages 1-7 Trade: volume, facilitating factors, participants 8-25 Specialization and comparative advantage 26-50 Foreign exchange market 51-68 Trade barriers 69-74 Multilateral agreements: free trade zones; implications of the global economy 75-102 Consider This 103-106 Last Word 107-108 True-False 109-124 __________________________________________________________ Multiple Choice Questions International linkages 1. 2. 3. 4. 5. 6.

Type: D Topic: 1 E: 91 MI: 91 MA: 91 1. The physical export of motorcycles from the United States to Mexico best illustrates a: A) trade flow. B) resource flow. C) financial flow. D) technology flow. Answer: A

Type: D Topic: 1 E: 91 MI: 91 MA: 91 2. The physical import of DVD players to the United States from Japan best illustrates a: A) resource flow. B) financial flow. C) trade flow. D) technology flow. Answer: C

Type: D Topic: 1 E: 92 MI: 92 MA: 92 3. The spending by Americans while traveling in Europe best illustrates a: A) trade flow. B) labor flow. C) financial flow. D) technology flow. Answer: C

Type: D Topic: 1 E: 91 MI: 91 MA: 91 4. The emigration of software designers from India to the United States best illustrates a(n): A) trade flow. B) resource flow. C) financial flow. D) information flow. Answer: B

Chapter 6: The United States in the Global Economy

Type: D Topic: 1 E: 91 MI: 91 MA: 91 5. The purchase by an American firm of the right to produce a prescription drug patented in Germany best illustrates a: A) trade flow. B) capital flow. C) goods and services flow. D) technology flow. Answer: D

Type: D Topic: 1 E: 91 MI: 91 MA: 91 6. The business-to-business (B2B) retrieval of prices of foreign resources via the Internet best illustrates a(n): A) trade flow. B) capital and labor flow. C) financial flow. D) information flow. Answer: D

Type: D Topic: 1 E: 91 MI: 91 MA: 91 7. The building of a production plant in China by an American firm best illustrates a(n): A) trade flow. B) resource flow. C) financial flow. D) information flow. Answer: B

Trade: volume, facilitating factors, participants

Type: F Topic: 2 E: 92 MI: 92 MA: 92 8. American exports and imports of goods and services each are about what percentage of GDP? A) 4-6 percent B) 25-28 percent C) 11-16 percent D) 30-32 percent Answer: C

Type: F Topic: 2 E: 92 MI: 92 MA: 92 9. Which of the following statements is correct? A) The United States' exports and imports are smaller absolutely, but larger as a percentage of GDP, than other nations'. B) A number of other nations have exports and imports that are absolutely larger than those of the United States. C) The United States' exports and imports are absolutely larger than any other nation's, but the exports and imports of many other nations are a larger percentage of their GDPs. D) The United States' exports and imports are larger absolutely and as a percentage of GDP than any other nation's. Answer: C

Type: F Topic: 2 E: 94 MI: 94 MA: 94 10. More than half of United States international trade is with: A) other industrially advanced capitalist countries. C) developing countries. B) the OPEC countries. D) Russia and China. Answer: A

Type: F Topic: 2 E: 94 MI: 94 MA: 94 11. The United States' most important trading partner in terms of dollar volume is: A) Mexico. B) Canada. C) Germany. D) Japan. Answer: B

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Type: F Topic: 2 E: 92 MI: 92 MA: 92 12. In terms of absolute volumes of imports and exports, the world's leading trading nation is: A) France. B) Japan. C) the United States. D) South Korea. Answer: C

Type: F Topic: 2 E: 92 MI: 92 MA: 92 13. Which of the following statements is correct? A) United States exports and imports have been decreasing as a percentage of U.S. GDP but the U.S. share of total world trade has been increasing. B) United States exports and imports have been decreasing as a percentage of U.S. GDP and the U.S. share of total world trade has been declining. C) United States exports and imports have been expanding as a percentage of U.S. GDP and the U.S. share of total world trade has been increasing. D) United States exports and imports have been expanding as a percentage of U.S. GDP but the U.S. share of total world trade has been declining. Answer: D

Type: F Topic: 2 E: 92 MI: 92 MA: 92 14. Since 1960, United States exports and imports have: A) grown absolutely, but remained a constant proportion of GDP. B) grown absolutely, but declined as a proportion of GDP. C) grown both absolutely and as a percentage of GDP. D) declined both absolutely and as a percentage of GDP. Answer: C

Type: F Topic: 2 E: 93 MI: 93 MA: 93 15. In recent years the United States has: A) exported more goods and services than it has imported. B) imported more goods and services than it has exported. C) realized an approximate balance in its imports and exports. D) experienced a falling absolute dollar amount of imports and a rising absolute dollar amount of exports. Answer: B

Type: F Topic: 2 E: 94 MI: 94 MA: 94 16. More than half of the U.S. international trade is with: A) the nations of Eastern Europe. B) the developing countries of Africa, Asia, and Latin America. C) other industrialized nations, for example, Canada, Japan, and the countries of Western Europe. D) China. Answer: C

Type: F Topic: 2 E: 92 MI: 92 MA: 92 17. Which of the following is a true statement? A) The United States has the world's largest ratio of exports to GDP. B) The United States is almost entirely dependent on other countries in obtaining items such as silk, nickel, tin, and coffee. C) U.S. exports to China greatly exceed U.S. imports from China. D) Since 1947 the United States has accounted for a rising percentage of total world trade. Answer: B

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Type: F Topic: 2 E: 92 MI: 92 MA: 92 18. As a percentage of GDP (total output), U.S. exports are: A) about 20 percent. B) lower than in some other industrial countries, including Germany and Canada. C) less today than they were in 1975. D) the highest in the world. Answer: B

Type: F Topic: 2 E: 95 MI: 95 MA: 95 19. The average U.S. tariff rate on imported goods is about: A) 5 percent. B) 12 percent. C) 25 percent. D) 50 percent. Answer: A

Type: F Topic: 2 E: 93 MI: 93 MA: 93 20. The major goods exports of the United States (in dollar volume) are: A) chemicals, semiconductors, consumer durables, and computers. B) petroleum, automobiles, clothing, and household appliances. C) iron and steel, clothing, beef, and sugar. D) aircraft, glassware, television sets, and furniture. Answer: A

Type: F Topic: 2 E: 93 MI: 93 MA: 93 21. The major goods imports of the United States (in dollar volume) are: A) chemicals, consumer durables, aircraft, and grain. B) automobiles, petroleum, computers, and household appliances. C) iron and steel, clothing, electronic equipment, and sugar. D) aircraft, paper products, television sets, and furniture. Answer: B

Type: F Topic: 2 E: 95 MI: 95 MA: 95 22. Which of the following has not been a facilitating factor in world trade? A) dramatic improvements in communications technology B) general declines in tariffs C) import quotas D) improvements in transportation technology. Answer: C

Type: F Topic: 2 E: 95 MI: 95 MA: 95 23. In terms of absolute dollar volume, the world's leading export nations are: A) the United States, Germany, and Japan. C) Japan, China, and Great Britain. B) the United States, Japan, and Canada. D) Japan, the United States, and France. Answer: A

Type: T Topic: 2 E: 95 MI: 95 MA: 95 Status: New 24. Which of the following countries has recently emerged as one of the world's top trading nations in terms of total trade volume? A) Chile B) India C) Ireland D) China Answer: D

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Type: D Topic: 2 E: 95 MI: 95 MA: 95 25. Multinational corporations: A) mainly are headquartered in Switzerland. B) are so named because of their heavy export volume. C) are illegal under the U.S. antitrust laws. D) are so named because of their sizable foreign production and distribution assets. Answer: D

Specialization and comparative advantage

Type: T Topic: 3 E: 97 MI: 97 MA: 97 Status: New 26. Which of the following concepts provides the basic rationale for international trade? A) increasing opportunity costs. C) comparative advantage. B) consumer sovereignty. D) the law of supply. Answer: C

Use the following to answer questions 27-35:
Alpha’s production possibilities: A 60 0 B 45 15 C 30 30 D 15 45 E 0 60

Steel (tons) Wheat (tons)

Omega’s production possibilities : A 20 0 B 15 15 C 10 30 D 5 45 E 0 60

Steel (tons) Wheat (tons)

Type: T Topic: 3 E: 97 MI: 97 MA: 97 Status: New 27. The above data would graph as: A) a straight line for Alpha, but as a concave curve for Omega. B) a concave curve for Alpha, but as a straight line for Omega. C) concave curves for both Alpha and Omega. D) straight lines for both Alpha and Omega. Answer: D

Type: T Topic: 3 E: 97 MI: 97 MA: 97 Status: New 28. Refer to the above data. Alpha is a(n): A) increasing cost economy, whereas Omega is a constant cost economy. B) constant cost economy, whereas Omega is an increasing cost economy. C) increasing cost economy, as is Omega. D) constant cost economy, as is Omega. Answer: D

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Type: T Topic: 3 E: 97 MI: 97 MA: 97 Status: New 29. Refer to the above data. The domestic opportunity cost of producing 1 ton of steel in Alpha is: A) ½ ton of wheat. B) 1 ton of wheat. C) 15 tons of wheat. D) 30 tons of wheat. Answer: B

Type: T Topic: 3 E: 97 MI: 97 MA: 97 Status: New 30. Refer to the above data. The domestic opportunity cost of producing 1 ton of steel in Omega is: A) ½ ton of wheat. B) 2 tons of wheat. C) 3 tons of wheat. D) 5 tons of wheat. Answer: C

Type: T Topic: 3 E: 97 MI: 97 MA: 97 Status: New 31. Refer to the above data. Alpha has a comparative advantage in producing: A) neither steel nor wheat. B) both steel and wheat. C) steel. D) wheat. Answer: C

Type: T Topic: 3 E: 98 MI: 98 MA: 98 Status: New 32. Refer to the above data. On the basis of the above information: A) Alpha should export both steel and wheat to Omega. B) Omega should export both steel and wheat to Alpha. C) Omega should export steel to Alpha and Alpha should export wheat to Omega. D) Alpha should export steel to Omega and Omega should export wheat to Alpha. Answer: C

Type: T Topic: 3 E: 98 MI: 98 MA: 98 Status: New 33. Refer to the above data. After specialization, Alpha will produce: A) 60 tons of steel and Omega will produce 45 tons of wheat. B) 20 tons of steel and Omega will produce 60 tons of wheat. C) 60 tons of steel and Omega will produce 60 tons of wheat. D) 30 tons of steel and Omega will produce 30 tons of wheat. Answer: C

Type: T Topic: 3 E: 98 MI: 98 MA: 98 Status: New 34. Refer to the above data. If Alpha and Omega each were producing at alternatives B before trade, the gain from specialization and trade would be: A) 30 tons of wheat. C) 30 tons of steel and 30 tons of wheat. B) 15 tons of steel. D) 60 tons of wheat and 60 tons of steel. Answer: A

Type: T Topic: 3 E: 98 MI: 98 MA: 98 Status: New 35. Refer to the above data. If Alpha was producing at alternative B and Omega was at alternative C before trade, the gain from specialization and trade would be: A) 30 tons of wheat. C) 5 tons of steel and 15 tons of wheat. B) 5 tons of steel. D) 15 tons of steel and 5 tons of wheat. Answer: C

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Type: D Topic: 3 E: 97 MI: 97 MA: 97 36. According to the concept of comparative advantage, a good should be produced in that nation where: A) its domestic opportunity cost is greatest. C) its domestic opportunity cost is least. B) money is used as a medium of exchange. D) the terms of trade are maximized. Answer: C

Type: D Topic: 3 E: 98 MI: 98 MA: 98 37. The terms of trade: A) show the ratio at which nations will exchange two goods. B) show how the gains from trade can be equally shared. C) show the value of one nation's currency in terms of another nation's currency. D) compare the volume of a nation's exports and imports. Answer: A

Use the following to answer questions 38-43: Answer the next question(s) on the basis of the following production possibilities data for Landia and Scandia: Landia production possibilities: A 8 0 B 6 10 C 4 20 D 2 30 E 0 40

Fish Chips

Scandia production possibilities: A 16 0 B 12 12 C 8 24 D 4 36 E 0 48

Fish Chips

Type: T Topic: 3 E: 97 MI: 97 MA: 97 38. Refer to the above data. The domestic opportunity cost of 1 fish in Landia is: A) 10 chips. B) 2 chips. C) 4 chips. D) 5 chips. Answer: D

Type: T Topic: 3 E: 97 MI: 97 MA: 97 39. Refer to the above data. The domestic opportunity cost of 1 fish in Scandia is: A) 12 chips. B) 4 chips. C) 3 chips. D) 1 chip. Answer: C

Type: C Topic: 3 E: 97 MI: 97 MA: 97 40. On the basis of the production possibilities data shown: A) Landia has a comparative advantage in chips while Scandia has a comparative advantage in fish. B) Landia has a comparative advantage in fish while Scandia has a comparative advantage in chips. C) both Landia and Scandia have a comparative advantage in fish. D) both Landia and Scandia have a comparative advantage in chips. Answer: A

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Type: C Topic: 3 E: 98 MI: 98 MA: 98 41. Refer to the above data. If Landia and Scandia fully specialize based on comparative advantage, their aggregate output will be: A) 48 chips and 8 fish. B) 40 chips and 16 fish. C) 36 chips and 10 fish. D) 42 chips and 12 fish. Answer: B

Type: C Topic: 3 E: 98 MI: 98 MA: 98 42. Refer to the above data. Assume that before specialization and trade Landia was producing combination C and Scandia was producing combination B. If these two nations now specialize completely based on with comparative advantage, the total gains from specialization and trade would be: A) 8 fish and 2 chips. B) 10 fish and 4 chips. C) 0 fish and 8 chips. D) 4 fish and 6 chips. Answer: C

Type: C Topic: 3 E: 98 MI: 98 MA: 98 43. Refer to the above data. Which of the following would be feasible terms of trade between Landia and Scandia? A) 1 fish for 4 chips B) 1 fish for 6 chips C) 1 fish for 7 chips D) 2 fish for 4 chips Answer: A

Type: A Topic: 3 E: 96 MI: 96 MA: 96 44. The primary benefits of international trade include: A) the more efficient use of world resources and higher living standards. B) greater stability of domestic output, employment, and the price level. C) diminished dependence on foreign supplies of goods and materials. D) greater economic security for our domestic producers. Answer: A

Use the following to answer questions 45-49: Answer the next question(s) on the basis of the following production possibilities tables for countries Alpha and Beta: Alpha Production Possibilities Product A B C D X 3 2 1 0 Y 0 4 8 12 Beta Product X Y Production Possibilities A B C D 6 4 2 0 0 4 8 12

Type: T Topic: 3 E: 97 MI: 97 MA: 97 45. Refer to the above tables. The domestic opportunity cost of one unit of X in Alpha is: A) 2 units of Y. B) 4 units of Y. C) 1 unit of Y. D) 3 units of Y. Answer: B

Type: T Topic: 3 E: 97 MI: 97 MA: 97 46. Refer to the above tables. The domestic opportunity cost of one unit of X in Beta is: A) 2 units of Y. B) 4 units of Y. C) 1 unit of Y. D) 3 units of Y. Answer: A

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Type: T Topic: 3 E: 98 MI: 98 MA: 98 47. Refer to the above tables. According to the concept of comparative advantage: A) Alpha should specialize in X; Beta in Y. C) Alpha should produce some X and some Y. B) Beta should produce some X and some Y. D) Beta should specialize in X; Alpha in Y. Answer: D

Type: T Topic: 3 E: 98 MI: 98 MA: 98 48. Refer to the above tables. Assume that before specialization both nations chose to produce alternative B. The gains from specialization and trade would be: A) 2 units of X and 2 units of Y. B) 4 units of X. C) 4 units of Y. D) 6 units of X and 3 units of Y. Answer: C

Type: T Topic: 3 E: 98 MI: 98 MA: 98 49. Refer to the above tables. Which one of the following terms of trade would be acceptable to both countries? A) 1 unit of X for 3 units of Y C) 1 unit of X for 12 units of Y B) 1 unit of X for 5 units of Y D) 1 unit of X for 1 unit of Y Answer: A

Type: G Topic: 3 E: 99 MI: 99 MA: 99 50.

Refer to the above domestic production possibilities curve for Abernorelco. The gain to Abernorelco from specialization and international trade is represented by a move from: A) A to B. B) C to A. C) C to D. D) B to E. Answer: D

Foreign exchange market

Type: A Topic: 4 E: 99 MI: 99 MA: 99 51. Exchange rates are particularly important because: A) they present a challenge to financial speculators. B) they link the price levels of various nations to one another. C) they represent exceptions to the laws of demand and supply. D) equilibrium is never achieved in such markets. Answer: B

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Type: A Topic: 4 E: 100-101 MI: 100-101 MA: 100-101 52. If the equilibrium exchange rate changes so that it takes more dollars to buy a British pound, then: A) the dollar has appreciated in value. C) the British will buy fewer U.S. goods. B) Americans will import more British goods. D) the dollar has depreciated in value. Answer: D

Type: A Topic: 4 E: 100-101 MI: 100-101 MA: 100-101 53. If incomes rise rapidly in the United States and U.S. preferences for foreign goods strengthen, we would expect: A) the dollar to appreciate in value. C) the dollar price of foreign monies to decrease. B) the dollar to depreciate in value. D) U.S. exports to increase. Answer: B

Type: A Topic: 4 E: 101 MI: 101 MA: 101 54. If the exchange rate changes from $1 = 2 euros to $1 = 3 euros: A) the dollar has appreciated in value. B) the dollar has depreciated in value. C) the dollar has neither appreciated nor depreciated, but the euro has appreciated in value. D) U.S. exports to Europe will increase. Answer: A

Type: A Topic: 4 E: 100 MI: 100 MA: 100 55. Mexican imports of U.S. goods: A) create a supply of pesos. B) create a supply of dollars. C) reduce the demand for dollars. D) have no effect on the peso-dollar exchange rate. Answer: A

Type: A Topic: 4 E: 101 MI: 101 MA: 101 56. A change in the dollar price of yen from $1 = 100 yen to $1 = 50 yen will: A) make U.S. goods more expensive to the Japanese. B) make Japanese goods less expensive to Americans C) increase U.S. exports and depress Japanese exports. D) increase Japanese exports and depress U.S. exports. Answer: C

Type: A Topic: 4 E: 100-101 MI: 100-101 MA: 100-101 57. Depreciation of the dollar will: A) increase the prices of U.S. imports, but decrease the prices of U.S. exports. B) decrease the prices of U.S. imports, but increase the prices of U.S. exports. C) increase the prices of both U.S. imports and exports. D) decrease the prices of both U.S. imports and exports. Answer: A

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Type: A Topic: 4 E: 101 MI: 101 MA: 101 58. Appreciation of the Mexican peso will: A) make Mexico's exports and imports both more expensive. B) make Mexico's exports more expensive and its imports less expensive. C) make Mexico's exports less expensive and its imports more expensive. D) increase Mexican exports. Answer: B

Type: A Topic: 4 E: 100-101 MI: 100-101 MA: 100-101 59. All else equal, depreciation of the Mexican peso relative to the U.S. dollar would make a trip by: A) an American to Mexico more expensive. B) a Mexican to the United States less expensive. C) an American to Mexico less expensive. D) an Australian to the United States more expensive. Answer: C

Type: A Topic: 4 E: 101 MI: 101 MA: 101 60. If the Japanese yen appreciates relative to the Swedish krona, then the krona: A) will be more expensive to the Japanese. B) may either appreciate or depreciate relative to the yen. C) will appreciate relative to the yen. D) will depreciate relative to the yen. Answer: D

Type: A Topic: 4 E: 100 MI: 100 MA: 100 61. Other things equal, Canadian imports of U.S. goods: A) create a supply of Canadian dollars in the foreign exchange market. B) create a supply of U.S. dollars in the foreign exchange market. C) reduce the demand for U.S. dollars. D) have no effect on the U.S. dollar price of Canadian dollars. Answer: A

Type: A Topic: 4 E: 100-101 MI: 100-101 MA: 100-101 62. If yesterday $1 would buy 800 South Korean won, but today $1 will only buy 790 won; the: A) dollar has appreciated in value. B) dollar has depreciated in value. C) demand for dollars in the foreign exchange market has increased relative to the supply of won. D) won price of dollars has gone up. Answer: B

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Use the following to answer questions 63-65: Answer the next question(s) on the basis of the following table which indicates the dollar price of luta, the currency used in the hypothetical economy of Luteland:

Quantity of luta demanded (billions) 200 400 600 800

Dollar price of luta $10 8 6 2

Quantity of luta supplied (billions) 650 400 200 150

Type: T Topic: 4 E: 100 MI: 100 MA: 100 63. Refer to the above table. The equilibrium dollar price of luta is: A) $10. B) $8. C) $6. D) $2. Answer: B

Type: T Topic: 4 E: 100 MI: 100 MA: 100 64. Refer to the above table. The exchange rate in this market is: A) 8 luta for one dollar. C) 6 luta for one dollar. B) .60 luta for one dollar. D) .125 luta for one dollar. Answer: D

Type: T Topic: 4 E: 100-101 MI: 100-101 MA: 100-101 65. Refer to the above table. Suppose that the United States imports more products from Luteland than before. All else equal, the dollar price of luta will: A) rise and the dollar will depreciate. C) rise and the dollar will appreciate. B) fall and the dollar will depreciate. D) fall and the dollar will appreciate. Answer: A

Type: A Topic: 4 E: 99 MI: 99 MA: 99 66. All else equal, U.S. imports from Germany create a: A) demand for German marks. C) demand for American dollars. B) supply of German marks. D) surplus of German marks. Answer: A

Type: A Topic: 4 E: 99 MI: 99 MA: 99 67. All else equal, U.S. exports to Germany create a: A) demand for German marks. B) supply of German marks. Answer: B

C) supply of American dollars. D) shortage of German marks.

Type: A Topic: 4 E: 99 MI: 99 MA: 99 68. If the dollar price of one yen is $.04, a Japanese good priced at 560 yen would cost an American: A) $22.40. B) $2240. C) $14,000. D) $2.40. Answer: A

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Trade barriers

Type: D Topic: 5 E: 101 MI: 101 MA: 101 69. Protective tariffs are: A) maximum limits on the quantity or total value of specific products imported to a nation. B) excise taxes or duties placed on imported products. C) licensing requirements, unreasonable quality standards, and the like designed to impede imports. D) government payments to domestic producers to reduce the world prices of exported goods. Answer: B

Type: D Topic: 5 E: 102 MI: 102 MA: 102 70. Import quotas are: A) maximum limits on the quantity or total value of specific products imported to a nation. B) excise taxes or duties placed on imported products. C) licensing requirements, unreasonable quality standards, and the like designed to impede imports. D) government payments to domestic producers to reduce the world prices of exported goods. Answer: A

Type: D Topic: 5 E: 102 MI: 102 MA: 102 71. Export subsidies are: A) maximum limits on the quantity or total value of specific products imported to a nation. B) excise taxes or duties placed on imported products. C) licensing requirements, unreasonable quality standards, and the like designed to impede imports. D) government payments to domestic producers to reduce the world prices of exported goods. Answer: D

Type: D Topic: 5 E: 102 MI: 102 MA: 102 72. Nontariff barriers are: A) maximum limits on the quantity or total value of specific products imported to a nation. B) excise taxes or duties placed on imported products. C) licensing requirements, unreasonable quality standards, and the like designed to impede imports. D) government payments to domestic producers to reduce the world prices of exported goods. Answer: C

Type: D Topic: 5 E: 102 MI: 102 MA: 102 73. A nation's true gain from international trade is: A) increased employment in export industries. B) an overall increase in output obtained through specialization and exchange. C) added technological knowledge. D) the tariff revenue that goes to the national treasury. Answer: B

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Type: F Topic: 5 E: 103 MI: 103 MA: 103 74. The Smoot-Hawley Act: A) bound the world's nations to a gradual process of tariff reduction. B) established very high tariffs on goods imported to the United States. C) exempted American exporters from the Sherman Antitrust Act. D) established the reciprocal trade agreements program. Answer: B

Multilateral agreements: free trade zones; implications of the global economy

Type: F Topic: 6 E: 103-104 MI: 103-104 MA: 103-104 75. The Reciprocal Trade Agreements Act: A) exempted American exporters from the Sherman Antitrust Act. B) provided technological assistance to developing countries. C) brought about considerable reductions in American trade barriers. D) eliminated American subsidies to agricultural exports. Answer: C

Type: D Topic: 6 E: 104 MI: 104 MA: 104 76. The "most-favored-nation" clause of reciprocal trade agreements: A) outlaw tariffs on products for which an exporting nation has a comparative advantage. B) single out a particular nation for exemption from an import quota. C) means that any tariff reductions the United States negotiates with a specific nation will automatically apply to many other nations. D) confers special trade privileges to nations in which the United States has military bases. Answer: C

Type: D Topic: 6 E: 104 MI: 104 MA: 104 77. The General Agreement on Tariffs and Trade (GATT) is based on the principle of: A) establishing a single international currency. B) tariff reductions through multilateral negotiations. C) converting tariffs to import quotas. D) establishing common environmental and labor standards for all member nations. Answer: B

Type: F Topic: 6 E: 104 MI: 104 MA: 104 Status: New 78. The latest, on-going international round of trade negotiations is called the: A) Bangkok Round. B) Doha Round. C) Seattle Round. D) Stockholm Round. Answer: B

Type: F Topic: 6 E: 104 MI: 104 MA: 104 79. The Uruguay Round of GATT negotiations completed in late 1993: A) established a free trade zone between the United States and Mexico. B) made the Russian ruble convertible into other currencies. C) created the European Union (EU). D) created international protections for intellectual property such as patents, copyrights, and trademarks. Answer: D

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Type: F Topic: 6 E: 104 MI: 104 MA: 104 80. An important outcome of the Uruguay Round of GATT negotiations was: A) a worldwide reduction of agricultural export subsidies. B) establishment of the European Union. C) the elimination of all tariffs and quotas worldwide. D) establishment of the World Bank. Answer: A

Type: F Topic: 6 E: 104 MI: 104 MA: 104 81. The World Trade Organization (WTO): A) sets tariffs to balance international trade among nations. B) is the successor to GATT. C) is better known as the European Union. D) sets exchange rates to balance international trade among nations. Answer: B

Type: F Topic: 6 E: 104 MI: 104 MA: 104 82. The World Trade Organization (WTO) A) sets tariffs to balance international trade among nations. B) is the successor to NAFTA. C) hears and rules on trade disputes between nations. D) sets exchange rates to balance international trade among nations. Answer: C

Type: A Topic: 6 E: 104 MI: 104 MA: 104 Status: New 83. American critics of the WTO argue that free international trade and investment will: A) reduce U.S. imports. B) reduce employment in developing nations. C) undermine environmental and labor protections in the United States. D) increase immigration from low-income to high-income nations. Answer: C

Type: A Topic: 6 E: 104 MI: 104 MA: 104 Status: New 84. Proponents of the WTO argue that free international trade and investment will: A) reduce economic growth rates in the industrial economies. B) reduce employment in developing nations. C) eliminate world poverty. D) increase living standards of all trading nations. Answer: D

Type: D Topic: 6 E: 105 MI: 105 MA: 105 85. A trade bloc is: A) a tariff or quota that impedes imports. B) a group of nations that allows free trade among member nations but restrict imports from nonmember nations via tariffs and quotas. C) an area of a nation where manufacturers can import product components without paying tariffs. D) a group of nations that advertise their common export goods abroad. Answer: B

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Type: F Topic: 6 E: 104 MI: 104 MA: 104 86. Which of the following nations is not a member of the European Union? A) Switzerland B) France C) Germany D) Italy Answer: A

Type: A Topic: 6 E: 105 MI: 105 MA: 105 87. The primary economic advantage of the European Union (EU) to its members is that: A) the tax structures of each participating nation have been made nearly identical. B) each nation is free to formulate its own antitrust and agricultural policies. C) participating nations use a common currency. D) the reduction of trade barriers permits producers to achieve mass-production economies. Answer: D

Type: A Topic: 6 E: 105 MI: 105 MA: 105 88. The main problem posed by trade blocs for nonmember nations is that: A) member nations may achieve growth rates that exceed those of nonmember nations. B) nonmembers must exchange their currencies for foreign monies before they can engage in export or import transactions. C) nonmembers face tariffs that member nations do not. D) member nations refuse to participate in tariff negotiations sponsored by GATT. Answer: C

Type: F Topic: 6 E: 105 MI: 105 MA: 105 89. The European Union (EU) comprises a group of European nations that have: A) abolished tariffs among one another and established a system of common tariffs with respect to nonmember nations. B) fully integrated their economies by establishing a central bank, a common currency, and a coordinated set of governmental budgetary policies. C) agreed to trade only among one another. D) eliminated all tariffs and trade barriers with nonmember nations. Answer: A

Type: F Topic: 6 E: 105 MI: 105 MA: 105 Status: New 90. The countries comprising NAFTA are: A) Canada, the United States, and Puerto Rico. C) the United States, United Kingdom, and France. B) the United States, Mexico, and Chile. D) Canada, Mexico, and the United States. Answer: D

Type: F Topic: 6 E: 104-105 MI: 104-105 MA: 104-105 Status: New 91. Which of the following sets of countries were among those admitted to the European Union in 2004? A) Spain, Portugal, and Turkey C) Poland, Hungary, and the Czech Republic B) Estonia, Bulgaria, and Switzerland D) Belgium, the Netherlands, and Luxembourg Answer: C

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Type: F Topic: 6 E: 105 MI: 105 MA: 105 92. The North American Free Trade Agreement (NAFTA): A) resulted from GATT negotiations at the Uruguay Round. B) established a free trade zone encompassing Canada, Mexico, and the United States. C) is also known as the Reciprocal Trade Act. D) permits the former republics of the Soviet Union to export goods duty free to North America. Answer: B

Type: F Topic: 6 E: 105 MI: 105 MA: 105 93. Which of the following has been an outcome of the North American Free Trade Agreement (NAFTA)? A) a lower standard of living in Canada, Mexico, and the United States B) lower wages in the United States and Canada C) increased trade among Canada, Mexico, and the United States D) lower wages and reduce employment in Mexico Answer: C

Type: F Topic: 6 E: 105 MI: 105 MA: 105 Status: New 94. A number of European nations have agreed to use the___________ as a common currency: A) mark. B) pound. C) euro. D) continental. Answer: C

Type: F Topic: 6 E: 105 MI: 105 MA: 105 Status: New 95. Which of these groups of nations are all members of the Euro zone? A) Great Britain, France, and Switzerland C) Denmark, Sweden, and Norway B) France, Germany, and Italy D) Russia, Poland, and Hungary Answer: B

Type: A Topic: 6 E: 105 MI: 105 MA: 105 Status: New 96. Which of the following nations is not a member of the Euro zone? A) Italy B) Spain C) Germany D) Great Britain Answer: D

Type: A Topic: 6 E: 105 MI: 105 MA: 105 97. The nations of the Euro zone have: A) abandoned their national currencies and switched to a common currency. B) abandoned their national currencies and switched to American dollars. C) formed a single country called the Union of European Nations (UEN). D) recently admitted 10 new members. Answer: A

Type: A Topic: 6 E: 105 MI: 105 MA: 105 98. The introduction and use of the euro is expected to: A) increase the rate of inflation slightly in the Euro zone nations. B) increase poverty substantially in Euro zone nations. C) increase international trade among the Euro zone nations. D) increase income inequality within the Euro zone nations. Answer: C

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Type: D Topic: 6 E: 105 MI: 105 MA: 105 Status: New 99. NAFTA refers to the: A) National Association of Free Trade Agencies. B) National Alliance for Foreign Trade and Assistance. C) North American Free Trade Agreement. D) Northern Alliance For Tariff Adjustment. Answer: C

Type: F Topic: 6 E: 105 MI: 105 MA: 105 100. Critics of the North American Free Trade Agreement (NAFTA) falsely feared that it would: A) increase the flow of illegal Mexican immigrants to the United States. B) cause the Eurpoean Union and Japan to raise trade barriers against U.S. goods. C) cause a massive loss of U.S. jobs to Mexico. D) increase foreign ownership of assets in the United States. Answer: C

Type: A Topic: 6 E: 106 MI: 106 MA: 106 101. Global competition: A) forces domestic producers to become more efficient and to improve product quality. B) drives up prices worldwide. C) reduces employment worldwide. D) creates higher flows of international migration than without trade. Answer: A

Type: A Topic: 6 E: 105 MI: 105 MA: 105 Status: New 102. Since the signing of the North American Free Trade Agreement (NAFTA) in 1993: A) total employment in the United States has slightly declined. B) total employment in the United States has greatly increased. C) Mexican exports to the United States have declined. D) productivity growth in Canada, Mexico, and the United States has stagnated. Answer: B

Consider This Questions

Type: F E: 100 MI: 100 MA: 100 Status: New 103. (Consider This) The relationship between dollars and tickets for rides provides insights on: A) opportunity cost. B) the law of demand. C) exchange rates. D) comparative advantage. Answer: C

Type: A E: 100 MI: 100 MA: 100 Status: New 104. (Consider This) If 10 fair tickets are needed to ride the roller coaster and each fair ticket costs $.50, the dollar-ticket exchange rate is: A) $1 = 2 tickets and the dollar cost of the ride is $5. B) $1 = 1/2 ticket and the dollar cost of the ride is $5. C) 1 ticket = $2 and the dollar cost of the ride is $20. D) $1 = 2 tickets and the dollar cost of the ride is $10. Answer: A

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Type: A E: 100 MI: 100 MA: 100 Status: New 105. (Consider This) If the price of tickets for fair rides increases from $.50 to $1 and the same number of tickets are required for each ride as before: A) the dollar has appreciated relative to fair tickets. B) the dollar price of the fair rides as declined. C) the dollar has depreciated relative to fair tickets. D) dollar ticket exchange rate has changed from $1 equals ½ ticket to $1 equals 1 ticket. Answer: C

Type: A E: 100 MI: 100 MA: 100 Status: New 106. (Consider This) If the price of tickets for fair rides decreases from $.50 to $.25 and the same number of tickets are required for each ride as before: A) fair tickets have appreciated relative to the dollar. B) the dollar price of the fair rides has declined. C) the dollar price of fair rides has increased. D) the dollar price of fair rides has not changed. Answer: B

Last Word Questions

Type: A E: 106 MI: 106 MA: 106 Status: New 107. (Last Word) In the "Petition of the Candlemakers" the French workers sought protection from which foreign rival? A) the sun B) the moon C) the Americans D) the Japanese Answer: A

Type: A E: 106 MI: 106 MA: 106 Status: New 108. (Last Word) The main point of the "Petition of the Candlemakers" is that: A) a nation must export in order to import. B) trading nations face rising, not constant, opportunity costs. C) rationales for trade barriers are often absurd. D) indusrial policies are doomed to fail. Answer: C

True/False Questions

Type: A E: 91 MI: 91 MA: 91 109. Immigration of workers is an example of a goods and services flow: Answer: False

Type: F E: 94 MI: 94 MA: 94 110. The United States exports a higher U.S. dollar volume of goods to Canada than to any other nation. Answer: True

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Type: F E: 95 MI: 95 MA: 95 111. The United States, Japan, and the western European nations are the major international traders in terms of overall volume. Answer: True

Type: F E: 96 MI: 96 MA: 96 112. Specialized production and international trade increase a nation's productivity and increase the availability of goods and services. Answer: True

Type: A Topic: 3 E: 97 MI: 97 MA: 97 113. A nation has a comparative advantage in some product when it can produce that good at a lower domestic opportunity cost than can a potential trading partner. Answer: True

Type: D E: 97 MI: 97 MA: 97 114. Terms of trade of 1X=5Y will be acceptable to two countries that have domestic opportunity costs of 1X=4Y and 1X=1Y, respectively. Answer: False

Type: A E: 99 MI: 99 MA: 99 115. Mexican importers are suppliers of pesos in the foreign exchange market. Answer: True

Type: A E: 101 MI: 101 MA: 101 116. When the dollar price of yen rises, the dollar appreciates in value relative to the yen. Answer: False

Type: A E: 102 MI: 102 MA: 102 117. Import quotas are taxes or duties on imported products. Answer: False

Type: D E: 102-103 MI: 102-103 MA: 102-103 118. Barriers to free trade impair efficiency in the international allocation of resources. Answer: True

Type: A E: 104 MI: 104 MA: 104 119. The most-favored-nation clause in reciprocal trade agreements means that any tariff reductions the United States negotiates with a specific nation will automatically apply to many other nations. Answer: True

Type: D E: 104 MI: 104 MA: 104 120. The WTO is comprised of 25 European nations. Answer: False

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Type: F E: 104 MI: 104 MA: 104 Status: New 121. The current, on-going round of trade negotiations is called the Doha Round. Answer: True

Type: F E: 104-105 MI: 104-105 MA: 104-105 122. The European Union (EU) is a free trade zone comprising all the nations of eastern and western Europe. Answer: False

Type: A E: 105 MI: 105 MA: 105 123. France, Germany, and Italy are all members of the Euro zone. Answer: True

Type: D E: 105 MI: 105 MA: 105 124. NAFTA is an international accord that will eliminate all tariffs and quotas worldwide by the year 2025. Answer: False

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Measuring Domestic Output, National Income, and the Price Level

Topic 1. 2. 3. 4. 5. 6. 7. 8. GDP concept C, I, G, and Xn components Investment and the capital stock GDP accounting: expenditure approach GDP accounting: value added; income approach Other social accounts Real versus nominal GDP; price indexes GDP and social welfare Consider This Last Word True-False

Question numbers 1-15 16-43 44-57 58-77 78-90 91-105 106-153 154-161 162-165 166-168 169-184

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Multiple Choice Questions GDP concepts

Type: D Topic: 1 E: 112 MA: 112 1. A nation's gross domestic product (GDP): A) is the dollar value of the total output produced within the borders of the nation. B) is the dollar value of the total output produced by its citizens, regardless of where they are living. C) can be found by summing C + In + S + Xn. D) is always some amount less than its C + Ig + G + Xn. Answer: A

Type: D Topic: 1 E: 117 MA: 117 2. A nation's gross domestic product (GDP): A) can be found by summing C + Ig + G + Xn. B) is the dollar value of the total output produced by its citizens, regardless of where they are living. C) can be found by summing C + S + G + Xn. D) is always some amount less than its NDP. Answer: A

Chapter 7: Measuring Domestic Output, National Income, and the Price Level

Type: D Topic: 1 E: 112 MA: 112 3. The GDP is the: A) monetary value of all final goods and services produced within a nation in a particular year. B) national income minus all nonincome charges against output. C) monetary value of all economic resources used in producing a year's output. D) monetary value of all goods and services, final and intermediate, produced in a specific year. Answer: A

Type: A Topic: 1 E: 113 MA: 113 4. Suppose Smith pays $100 to Jones. A) We can say with certainty that the GDP has increased by $100. B) We can say with certainty that the GDP has increased, but we cannot determine the amount. C) We can say with certainty that the nominal GDP has increased, but we can't say whether real GDP has increased or decreased. D) We need more information to determine whether GDP has changed. Answer: D

Type: A Topic: 1 E: 112 MA: 112 5. Suppose the total market value of all final goods and services produced in a particular country in 2004 is $500 billion and the total market value of final goods and services sold is $450 billion. We can conclude that: A) GDP in 2004 is $450 billion. C) GDP in 2004 is $500 billion. B) NDP in 2004 is $450 billion. D) inventories in 2004 fell by $50 billion. Answer: C

Type: A Topic: 1 E: 113 MA: 113 6. National income accountants can avoid multiple counting by: A) including transfers in their calculations. C) only counting final goods. B) counting both intermediate and final goods. D) only counting intermediate goods. Answer: C

Type: D Topic: 1 E: 113 MA: 113 7. Gross domestic product (GDP) measures and reports output: A) as an index number. B) in percentage terms. C) in dollar amounts. D) in quantities of physical units (for example, pounds, gallons, and bushels). Answer: C

Type: D Topic: 1 E: 112 MA: 112 8. GDP is: A) the monetary value of all goods and services (final, intermediate, and non-market) produced in a given year. B) total resource income less taxes, saving, and spending on exports. C) the economic value of all economic resources used in the production of a year's output. D) the market value of all final goods and services produced within a nation in a specific year. Answer: D

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Type: A Topic: 1 E: 113 MA: 113 9. By summing the dollar value of all market transactions in the economy we would: A) be determining the market value of all resources used in the production process. B) obtain a sum substantially larger than the GDP. C) be determining value added for the economy. D) be measuring GDP. Answer: B

Type: D Topic: 1 E: 113 MA: 113 10. Final goods and services refer to: A) goods and services that are unsold and therefore added to inventories. B) goods and services whose value has been adjusted for changes in the price level. C) goods and services purchased by ultimate users, rather than for resale or further processing. D) the excess of U.S. exports over U.S. imports. Answer: C

Type: A Topic: 1 E: 113 MA: 113 11. If intermediate goods and services were included in GDP: A) the GDP would then have to be deflated for changes in the price level. B) nominal GDP would exceed real GDP. C) the GDP would be overstated. D) the GDP would be understated. Answer: C

Type: A Topic: 1 E: 113 MA: 113 12. Which of the following is a final good or service? A) diesel fuel bought for a delivery truck B) fertilizer purchased by a farm supplier C) a haircut D) Chevrolet windows purchased by a General Motors assembly plant Answer: C

Type: A Topic: 1 E: 113 MA: 113 13. Which of the following is an intermediate good? A) the purchase of gasoline for a ski trip to Colorado B) the purchase of a pizza by a college student. C) the purchase of baseball uniforms by a professional baseball team. D) the purchase of jogging shoes by a professor Answer: C

Type: A Topic: 1 E: 113 MA: 113 14. Tom Atoe grows tomatoes for home consumption. This activity is: A) excluded from GDP in order to avoid double counting. B) excluded from GDP because an intermediate good is involved. C) productive but is excluded from GDP because no market transaction occurs. D) included in GDP because it reflects production. Answer: C

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Type: D Topic: 1 E: 113 MA: 113 15. GDP includes: A) neither intermediate nor final goods. B) both intermediate and final goods. Answer: D

C) intermediate, but not final, goods. D) final, but not intermediate, goods.

C, I, G, and Xn components

Type: A Topic: 2 E: 114 MA: 114 16. GDP can be calculated by summing: A) consumption, investment, government purchases, exports, and imports. B) investment, government purchases, consumption, and net exports. C) consumption, investment, wages, and rents. D) consumption, investment, government purchases, and imports. Answer: B

Type: D Topic: 2 E: 115 MA: 115 17. In national income accounting, consumption expenditures include purchases of: A) both new and used consumer goods. B) automobiles for personal use, but not houses. C) consumer durable and nondurable goods, but not services. D) consumer nondurable goods and services, but not consumer durable goods. Answer: B

Type: D Topic: 2 E: 115 MA: 115 18. In national income accounting, consumption expenditures include: A) purchases of both new and used consumer goods. B) consumer durable goods and consumer nondurable goods, but not services. C) consumer durable goods, consumer nondurable goods, and services. D) changes in business inventories. Answer: C

Type: D Topic: 2 E: 117 MA: 117 19. Net exports are: A) that portion of consumption and investment goods sent to other countries. B) exports plus imports. C) exports less imports. D) imports less exports. Answer: C

Type: D Topic: 2 E: 115-116 MA: 115-116 20. Gross investment refers to: A) private investment minus public investment. B) net investment plus replacement investment. C) net investment after it has been "inflated" for changes in the price level. D) net investment plus net exports. Answer: B

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Type: A Topic: 2 E: 117 MA: 117 21. Net exports are negative when: A) a nation's imports exceed its exports. B) the economy's stock of capital goods is declining. C) depreciation exceeds domestic investment. D) a nation's exports exceed its imports. Answer: A

Type: A Topic: 2 E: 116 MA: 116 22. Which of the following is not economic investment? A) the purchase of a drill press by the Ajax Manufacturing Company B) the purchase of 100 shares of AT&T by a retired business executive C) construction of a suburban housing project D) the piling up of inventories on a grocer's shelf Answer: B

Type: A Topic: 2 E: 115 MA: 115 23. Which of the following do national income accountants consider to be investment? A) the purchase of an automobile for private, nonbusiness use B) the purchase of a new house C) the purchase of corporate bonds D) the purchase of gold coins Answer: B

Type: D Topic: 2 E: 117 MA: 117 24. GDP is equal to: A) C + Ig + G + Xn. B) C + Ig + G - Xn. Answer: A

C) C + In + G + Xn.

D) C + In + G - Xn.

Type: D Topic: 2 E: 115 MA: 115 25. National income accountants define investment to include: A) any increase in business inventories. B) the addition of cash to a savings account. C) the purchase of common or preferred stock. D) the purchase of any durable good, for example, an automobile or a refrigerator. Answer: A

Type: D Topic: 2 E: 115 MA: 115 26. As defined in national income accounting, investment includes: A) business expenditures on machinery and equipment. B) all consumption. C) imports, but not exports. D) all nonfood items. Answer: A

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Type: A Topic: 2 E: 115 MA: 115 27. Suppose that inventories were $40 billion in 2003 and $50 billion in 2004. In 2004, accountants would: A) add $10 billion to other elements of investment in calculating total investment. B) subtract $10 billion from other elements of investments in calculating total investment. C) add $45 billion (= $90/2) to other elements of investment in calculating total investment. D) subtract $45 billion (= $90/2) from other elements of investment in calculating total investment. Answer: A

Type: A Topic: 2 E: 115 MA: 115 28. Suppose that inventories were $80 billion in 2003 and $70 billion in 2004. In 2004, accountants would: A) add $10 billion to other elements of investment in calculating total investment. B) subtract $10 billion from other elements of investments in calculating total investment. C) add $45 billion (= $90/2) to other elements of investment in calculating total investment. D) subtract $45 billion (= $90/2) from other elements of investment in calculating total investment. Answer: B

Type: C Topic: 2 E: 115-116 MA: 115-116 29. Suppose that GDP was $200 billion in year 1 and that all other components of expenditures remained the same in year 2 except that business inventories increased by $10 billion. GDP in year 2 is: A) $180 billion. B) $190 billion. C) $200 billion. D) $210 billion. Answer: D

Type: C Topic: 2 E: 115 MA: 115 30. Suppose that GDP was $200 billion in year 1 and that all other components of expenditures remained the same in year 2 except that business inventories fell by $10 billion. GDP in year 2 is: A) $180 billion. B) $190 billion. C) $200 billion. D) $210 billion. Answer: B

Type: A Topic: 2 E: 115 MA: 115 31. If the economy adds to its inventory of goods during some year: A) gross investment will exceed net investment by the amount of the inventory increase. B) this amount should be ignored in calculating that year's GDP. C) this amount should be subtracted in calculating that year's GDP. D) this amount should be included in calculating that year's GDP. Answer: D

Type: F Topic: 2 E: 117 MA: 117 32. The smallest component of aggregate spending in the United States is: A) net exports. B) government purchases. C) investment. D) consumption. Answer: A

Type: A Topic: 2 E: 114 MA: 114 33. In calculating GDP, governmental transfer payments, such as social security or unemployment compensation, are: A) not counted. C) counted as government spending. B) counted as investment spending. D) counted as consumption spending. Answer: A

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Type: F Topic: 2 E: 117 MA: 117 34. The largest component of total expenditures in the United States is: A) net exports. B) government purchases. C) consumption. D) gross investment. Answer: C

Type: D Topic: 2 E: 116 MA: 116 35. Government purchases include government spending on: A) government consumption goods and public capital goods. B) government consumption goods only. C) public capital goods only. D) government consumption goods, public capital goods, and transfer payments. Answer: A

Type: D Topic: 2 E: 116 MA: 116 36. In national income accounting, government purchases include: A) purchases by Federal, state, and local governments . B) purchases by the Federal government only. C) government transfer payments. D) purchases of goods for consumption, but not public capital goods. Answer: A

Type: A Topic: 2 E: 114 MA: 114 37. Transfer payments are: A) excluded when calculating GDP because they only reflect inflation. B) excluded when calculating GDP because they do not reflect current production. C) included when calculating GDP because they are a category of investment spending. D) included when calculating GDP because they increase the spending of recipients. Answer: B

Type: A Topic: 2 E: 117 MA: 117 38. The value of U.S. imports is: A) added to exports when calculating GDP because imports reflect spending by Americans. B) subtracted from exports when calculating GDP because imports do not constitute spending by Americans. C) subtracted from exports when calculating GDP because imports do not constitute production in the United States. D) added when calculating GDP because imports do not constitute production in the United States. Answer: C

Type: A Topic: 2 E: 117 MA: 117 39. In the treatment of U.S. exports and imports, national income accountants: A) subtract exports, but add imports, in calculating GDP. B) subtract both exports and imports in calculating GDP. C) add both exports and imports in calculating GDP. D) add exports, but subtract imports, in calculating GDP. Answer: D

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Type: A Topic: 2 E: 115-116 MA: 115-116 40. In calculating the GDP national income accountants: A) treat inventory changes as an adjustment to personal consumption expenditures. B) ignore inventories because they do not represent final goods. C) subtract increases in inventories or add decreases in inventories. D) add increases in inventories or subtract decreases in inventories. Answer: D

Type: A Topic: 2 E: 115 MA: 115 41. The ZZZ Corporation issued $25 million in new common stock in 2004. It used $18 million of the proceeds to replace obsolete equipment in its factory and $7 million to repay bank loans. As a result, investment: A) of $7 million has occurred. C) of $18 million has occurred. B) of $25 million has occurred. D) has not occurred. Answer: C

Type: A Topic: 2 E: 115 MA: 115 42. In 2003 Trailblazer Bicycle Company produced a mountain bike that was delivered to a retail outlet in November of 2003. The bicycle was sold to E.Z. Ryder in March of 2004. This bicycle is counted as: A) consumption in 2003 and as disinvestment in 2004. B) disinvestment in 2003 and as consumption in 2004. C) disinvestment in 2003 and as investment in 2004. D) investment in 2003 and as disinvestment in 2004. Answer: D

Type: D Topic: 2 E: 116 MA: 116 43. In national income accounting, G stands for: A) government purchases. B) gross investment. C) government transfer payments. D) gross saving. Answer: A

Investment and the capital stock

Type: A Topic: 3 E: 120 MA: 120 44. GDP differs from NDP in that: A) GDP is based on gross exports, while NDP is based on net exports. B) GDP includes, but NDP excludes, indirect business taxes. C) net investment is used in calculating GDP and gross investment is used in calculating NDP. D) gross investment is used in calculating GDP and net investment is used in calculating NDP. Answer: D

Type: A Topic: 3 E: 120 MA: 120 45. If depreciation exceeds gross investment: A) the economy's stock of capital may be either growing or shrinking. B) the economy's stock of capital is shrinking. C) the economy's stock of capital is growing. D) net investment is zero. Answer: B

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Type: D Topic: 3 E: 120 MA: 120 46. The concept of net domestic investment refers to: A) the amount of machinery and equipment used up in producing the GDP in a specific year. B) the difference between the market value and book value of outstanding capital stock. C) gross domestic investment less net exports. D) total investment less the amount of investment goods used up in producing the year's output. Answer: D

Type: A Topic: 3 E: 120 MA: 120 47. If depreciation (consumption of fixed capital) exceeds domestic investment, we can conclude that: A) nominal GDP is rising but real GDP is declining. B) net investment is negative. C) the economy is importing more than it exports. D) the economy's production capacity is expanding. Answer: B

Type: D Topic: 3 E: 120 MA: 120 48. When an economy's production capacity is expanding: A) nominal GDP, but not necessarily real GDP, is rising. B) net exports is always a positive amount. C) DI exceeds PI. D) domestic investment exceeds depreciation. Answer: D

Use the following to answer questions 49-50: Economy A: gross investment equals depreciation Economy B: depreciation exceeds gross investment Economy C: gross investment exceeds depreciation

Type: A Topic: 3 E: 120 MA: 120 49. Refer to the above information. Positive net investment is occurring in: A) economy A only. B) economy B only. C) economy C only. D) economies A and B only. Answer: C

Type: A Topic: 3 E: 120 MA: 120 50. Other things equal, the above information suggests that the production capacity in economy: A) B is growing more rapidly than either A or C. C) A is growing less rapidly than economy B. B) A is growing more rapidly than either B or C. D) C is growing more rapidly than economy B. Answer: D

Type: A Topic: 3 E: 120 MA: 120 51. In 1933 net private domestic investment was a minus $6.0 billion. This means that: A) gross private domestic investment exceeded depreciation by $6.0 billion. B) the economy was expanding in that year. C) the production of 1933's GDP used up more capital goods than were produced in that year. D) the economy produced no capital goods at all in 1933. Answer: C

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Type: A Topic: 3 E: 120 MA: 120 52. An economy is enlarging its stock of capital goods: A) when net investment exceeds gross investment. B) when gross investment exceeds replacement investment. C) whenever gross investment is positive. D) when replacement investment exceeds gross investment. Answer: B

Type: D Topic: 3 E: 120 MA: 120 53. A nation's stock of capital goods will decline when: A) gross investment exceeds net investment. B) net investment is positive, but less than gross investment. C) depreciation exceeds gross investment. D) gross investment exceeds depreciation. Answer: C

Type: D Topic: 3 E: 120 MA: 120 54. In an economy experiencing a declining production capacity: A) the nation's stock of capital goods is expanding. C) depreciation exceeds gross investment. B) net exports are necessarily zero. D) NDP exceeds GDP. Answer: C

Type: A Topic: 3 E: 120 MA: 120 55. If in some year gross investment was $120 billion and net investment was $65 billion, then in that year the country's capital stock: A) may have either increased or decreased. C) increased by $55 billion. B) increased by $65 billion. D) decreased by $55 billion. Answer: B

Type: D Topic: 3 E: 123-124 MA: 123-124 56. Consumption of fixed capital (depreciation) can be determined by: A) adding indirect business taxes to NDP. C) subtracting net investment from GDP. B) subtracting NDP from GDP. D) adding net investment to gross investment. Answer: B

Type: C Topic: 3 E: 113 MA: 113 57. GDP excludes: A) the market value of unpaid work in the home. B) the production of services. Answer: A

C) the production of nondurable goods. D) positive changes in inventories.

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GDP accounting: expenditure approach

Use the following to answer questions 58-59: Answer the next question(s) on the basis of the following data. All figures are in billions of dollars: Government purchases Consumption Gross investment Consumption of fixed capital Exports Imports $15 90 20 5 8 12

Type: T Topic: 4 E: 117 MA: 117 Status: New 58. Refer to the above data. GDP is: A) $116. B) $121. C) $125. D) $150. Answer: B

Type: T Topic: 4 E: 120 MA: 120 Status: New 59. Refer to the above data. NDP is: A) $116. B) $121. C) $125. D) $150. Answer: A

Use the following to answer questions 60-64: Answer the next question(s) on the basis of the following data. All figures are in billions of dollars.

Personal taxes Social Security contributions Indirect business taxes Corporate income taxes Transfer payments U.S. exports Undistributed corporate profits Government purchases Gross private domestic investment U.S. imports Personal consumption expenditures Consumption of fixed capital Net foreign factor income earned in the U.S.

$ 40 15 20 40 22 24 35 90 75 22 250 25 10

Type: T Topic: 4 E: 115-118 MA: 115-118 60. Refer to the above data. GDP is: A) $390. B) $417. C) $422. D) $492. E) $512. Answer: B

Type: T Topic: 4 E: 120 MA: 120 61. Refer to the above data. NDP is: A) $370. B) $402. C) $392. D) $467. Answer: C

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Type: T Topic: 4 E: 120 MA: 120 62. Refer to the above data. NI is: A) $364. B) $372. C) $447. D) $362. Answer: D

Type: T Topic: 4 E: 120 MA: 120 63. Refer to the above data. PI is: A) $294. B) $346. C) $408. D) $437. Answer: A

Type: T Topic: 4 E: 121 MA: 121 64. Refer to the above data. DI is: A) $284. B) $329. C) $254. D) $402. Answer: C

Use the following to answer questions 65-68: Answer the next question(s) on the basis of the following data. All figures are in billions of dollars. Gross investment National income Net exports Personal income Personal consumption expenditures Saving Government purchases Net domestic product $ 18 100 2 85 70 5 20 105

Type: T Topic: 4 E: 115-118 MA: 115-118 65. The gross domestic product for the above economy is: A) $100. B) $95. C) $110. D) $107. Answer: C

Type: T Topic: 4 E: 119 MA: 119 66. Refer to the above data. Consumption of fixed capital is: A) $5. B) $10. C) $20. D) $30. Answer: A

Type: T Topic: 4 E: 121 MA: 121 67. Refer to the above data. Disposable income is: A) $83. B) $73. C) $75. D) $77. Answer: C

Type: T Topic: 4 E: 119 MA: 119 68. Refer to the above data. From this information we can conclude that the sum of indirect business taxes and net foreign factor income is. A) $5 billion. B) zero. C) $1 billion. D) $15 billion. Answer: A

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Use the following to answer questions 69-72: Answer the next question(s) on the basis of the following national income data for the economy. All figures are in billions.

Personal consumption expenditures Government purchases Gross private domestic investment Net exports Net foreign factor income earned in the U.S. Consumption of fixed capital Indirect business taxes Compensation of employees Rents Interest Proprietors' income Corporate income taxes Dividends Undistributed corporate profits

$400 128 88 7 0 43 50 369 12 15 52 36 24 22

Type: T Topic: 4 E: 117 MA: 117 69. The gross domestic product for the above economy is: A) $584. B) $592. C) $609. D) $623. Answer: D

Type: T Topic: 4 E: 120 MA: 120 70. Refer to the above data. Net domestic product is: A) $520. B) $580. C) $623. D) $573. Answer: B

Type: T Topic: 4 E: 120 MA: 120 71. Refer to the above data. The national income is: A) $561. B) $573. C) $580. D) $530. Answer: D

Type: T Topic: 4 E: 121 MA: 121 72. Refer to the above data. Disposable income: A) cannot be determined from the data given. Answer: A

B) is $484.

C) is $416.

D) is $502.

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Use the following to answer questions 73-77: Answer the next question(s) on the basis of the following data. All figures are in billions of dollars. Gross private domestic investment Exports of the U.S. Disposable income Personal saving Government purchases Net foreign factor income earned in the U.S. Consumption of fixed capital Dividends Imports of the U.S. Indirect business taxes Personal taxes Social Security contributions $ 46 9 190 10 84 10 52 13 12 22 38 23

Type: T Topic: 4 E: 117 MA: 117 73. Refer to the above data. The gross domestic product is: A) $326. B) $282. C) $307. D) $300. Answer: C

Type: T Topic: 4 E: 120 MA: 120 74. Refer to the above data. The net domestic product is: A) $233. B) $255. C) $230. D) $348. Answer: B

Type: T Topic: 4 E: 120 MA: 120 75. Refer to the above data. The national income is: A) $223. B) $249. C) $208. D) $346. Answer: A

Type: T Topic: 4 E: 120 MA: 120 76. Refer to the above data. Personal income is: A) $184. B) $221. C) $149. D) $208. Answer: D

Type: T Topic: 4 E: 116 MA: 116 77. The economy characterized by the above data is: A) experiencing inflation because disposable income exceeds personal income. B) experiencing declining production capacity because net investment is negative. C) in a depression because personal income exceeds disposable income. D) experiencing expanding production capacity because net private domestic investment is positive. Answer: B

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GDP accounting: value added; income approach

Use the following to answer questions 78-80: Answer the next question(s) on the basis of the following data. All figures are in billions of dollars.

Proprietors’ income Compensation of employees Consumption of fixed capital Gross investment Rents Interest Exports Imports Corporate profits Indirect business taxes Net foreign factor income

$ 20 300 15 80 10 20 30 50 25 5 0

Type: T Topic: 5 E: 120 MA: 120 Status: New 78. Refer to the above data. National income is: A) $395. B) $380. C) $375. D) $360. Answer: C

Type: T Topic: 5 E: 117 MA: 117 Status: New 79. Refer to the above data. Gross domestic product is: A) $395. B) $380. C) $375. D) $360. Answer: A

Type: T Topic: 5 E: 117 MA: 117 Status: New 80. Refer to the above data. Net domestic product is: A) $395. B) $380. C) $375. D) $360. Answer: B

Type: D Topic: 5 E: 113 MA: 113 81. Value added refers to: A) any increase in GDP that has been adjusted for adverse environmental effects. B) the excess of gross investment over net investment. C) the difference between the value of a firm's output and the value of the inputs it has purchased from others. D) the portion of any increase in GDP that is caused by inflation as opposed to an increase in real output. Answer: C

Type: A Topic: 5 E: 113 MA: 113 82. Assume a manufacturer of stereo speakers purchases $40 worth of components for each speaker. The completed speaker sells for $70. The value added by the manufacturer for each speaker is: A) $110. B) $30. C) $40. D) $70. Answer: B

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Type: A Topic: 5 E: 113 MA: 113 83. Setup Corporation buys $100,000 of sand, rock, and cement to produce redi-mix concrete. It sells 10,000 cubic yards of concrete at $30 a cubic yard. The value added by Setup Corporation is: A) $300,000. B) $100,000. C) $200,000. D) zero dollars. Answer: C

Type: D Topic: 5 E: 113 MA: 113 84. By summing the values added at each stage in the production of some good we obtain: A) the price of that good. B) the total income generated by that good's production. C) the total cost (including profits) of that product. D) all of the above. Answer: D

Type: D Topic: 5 E: 113 MA: 113 85. Value added can be determined by: A) summing the profits of all enterprises in the economy. B) subtracting the purchase of intermediate products from the value of the sales of final products. C) calculating the year-to-year changes in real GDP. D) deflating nominal GDP. Answer: B

Use the following to answer questions 86-90: Answer the next question(s) on the basis of the following national income data. All figures are in billions of dollars. Personal taxes Net private domestic investment Net exports National income U.S. exports Gross private domestic investment Disposable income Indirect business taxes Undistributed corporate profits Proprietors' income Net foreign factor income earned in the U.S. $ 23 33 6 278 20 56 220 32 15 45 0

Type: T Topic: 5 E: 116 MA: 116 86. Refer to the above data. Consumption of fixed capital (private sector) is: A) $23. B) $14. C) $32. D) $26. Answer: A

Type: T Topic: 5 E: 117 MA: 117 87. Refer to the above data. U.S. imports are: A) $26. B) $16. C) $24. D) $14. Answer: D

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Type: T Topic: 5 E: 115 MA: 115 88. Refer to the above data. Personal consumption expenditures: A) cannot be calculated. B) are $231. C) are $225. D) are $205. Answer: A

Type: T Topic: 5 E: 118-119 MA: 118-119 89. Refer to the above data. The gross domestic product is: A) $328. B) $402. C) $382. D) $333. Answer: D

Type: T Topic: 5 E: 120 MA: 120 90. Refer to the above data. Personal income is: A) $229. B) $253. C) $274. D) $243. Answer: D

Other social accounts

Type: A Topic: 6 E: 119 MA: 119 91. If net foreign factor income earned in the U.S. is zero, the sum of national income, indirect business taxes, and the consumption of fixed capital equals: A) disposable income. B) personal income. C) net domestic product. D) gross domestic product. Answer: D

Type: A Topic: 6 E: 120 MA: 120 92. NDP is: A) NI plus net foreign factor income earned in the U.S. plus indirect business taxes. B) NI plus corporate income taxes. C) GDP deflated for increases in the price level. D) GDP minus indirect business taxes. Answer: A

Type: D Topic: 6 E: 120 MA: 120 93. Which of the following best defines national income? A) income received by households less personal taxes B) the before-tax income received by households C) all incomes earned by U.S. resource suppliers for their current contributions to production D) the market value of the annual output net of consumption of fixed capital Answer: C

Type: D Topic: 6 E: 120 MA: 120 94. The total amount of income earned by U.S. resource suppliers in a year is measured by: A) gross domestic product. B) national income. C) personal income. D) disposable income. Answer: B

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Type: D Topic: 6 E: 121 MA: 121 95. The largest component of national income is: A) compensation of employees. B) rents. C) interest. Answer: A

D) corporate profits.

Type: D Topic: 6 E: 120 MA: 120 96. The total income earned in any year by U.S. resource suppliers is measured by: A) DI. B) NI. C) PI. D) GDP. Answer: B

Type: D Topic: 6 E: 120 MA: 120 97. National income measures: A) nominal GDP after it has been inflated or deflated for changes in the value of the dollar. B) the after-tax income of resource suppliers. C) the market value or cost of the resources used in the production of the national output. D) the amount of wage, rent, interest, and profits income actually received by households. Answer: C

Type: A Topic: 6 E: 120 MA: 120 98. Personal income is most likely to exceed national income: A) when gross and net investment are equal. C) when gross investment exceeds net investment. B) during a period of recession or depression. D) during a period of extended inflation. Answer: B

Type: A Topic: 6 E: 120 MA: 120 99. If personal income exceeds national income in a particular year, we can conclude that: A) transfer payments exceeded the sum of Social Security contributions, corporate income taxes, and indirect business taxes. B) the sum of Social Security contributions, corporate income taxes, and undistributed corporate profits exceeded transfer payments. C) consumption of fixed capital and indirect business taxes exceeded personal taxes. D) transfer payments exceeded the sum of Social Security contributions, corporate income taxes, and undistributed corporate profits. Answer: D

Type: D Topic: 6 E: 121 MA: 121 100. Which of the following best defines disposable income? A) income received by households less personal taxes B) the before-tax income received by households C) all income earned by resource suppliers for their current contributions to production D) the market value of the annual output net of consumption of fixed capital Answer: A

Type: F Topic: 6 E: 121 MA: 121 101. Which of the following is the largest dollar amount in the United States? A) disposable income B) personal income C) gross domestic product Answer: C

D) national income

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Type: F Topic: 6 E: 121 MA: 121 102. Which of the following is the smallest dollar amount in the United States? A) disposable income B) personal income C) gross domestic product Answer: A

D) national income

Type: D Topic: 6 E: 120 MA: 120 103. Transfer payments are included in: A) NI. B) PI. C) GDP. D) NDP. Answer: B

Type: D Topic: 6 E: 121 MA: 121 104. The amount of after-tax income received by households is measured by: A) discretionary income. B) national income. C) disposable income. Answer: C

D) personal income.

Type: A Topic: 6 E: 121 MA: 121 105. In a typical year which of the following measures of aggregate output and income is likely to be the smallest? A) gross domestic product B) national income C) disposable income D) personal income Answer: C

Real versus nominal GDP; price indexes

Type: D Topic: 7 E: 123 MA: 123 106. Nominal GDP is: A) the sum of all monetary transactions that occur in the economy in a year. B) the sum of all monetary transactions involving final goods and services that occur in the economy in a year. C) the amount of production that occurs when the economy is operating at full employment. D) money GDP adjusted for inflation. Answer: B

Type: D Topic: 7 E: 123 MA: 123 107. Real GDP refers to: A) the value of the domestic output after adjustments have been made for environmental pollution and changes in the distribution of income. B) GDP data that embody changes in the price level, but not changes in physical output. C) GDP data that reflect changes in both physical output and the price level. D) GDP data that have been adjusted for changes in the price level. Answer: D

Type: D Topic: 7 E: 123 MA: 123 108. Real GDP measures: A) current output at current prices. B) current output at base year prices. Answer: B

C) base year output at current prices. D) base year output at current exchange rates.

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Type: D Topic: 7 E: 123 MA: 123 109. Nominal GDP is adjusted for price changes through the use of: A) the Consumer Price Index (CPI). C) the GDP price index. B) the Producer Price Index (PPI). D) exchange rates. Answer: C

Type: A Topic: 7 E: 123 MA: 123 Status: New 110. In the second quarter (3-month period) of 2001, U.S. nominal GDP increased but U.S. real GDP declined. We can conclude that: A) nominal income declined by more than personal income. B) the price level rose by more than nominal GDP. C) real wages declined by more than real GDP. D) the price level fell by more than real GDP. Answer: B

Type: D Topic: 7 E: 123 MA: 123 111. A price index is: A) a comparison of the price of a market basket from a fixed point of reference. B) a comparison of real GDP in one period relative to another. C) the cost of a market basket of goods and services in a base period divided by the cost of the same market basket in another period. D) a ratio of real GDP to nominal GDP. Answer: A

Type: D Topic: 7 E: 123 MA: 123 112. The GDP price index: A) includes fewer goods and services than the consumer price index. B) is identical to the consumer price index. C) is another term for the producer price index. D) includes all goods comprising the nation's domestic output. Answer: D

Type: A Topic: 7 E: 123 MA: 123 113. If real GDP falls from one period to another, we can conclude that: A) deflation occurred. C) nominal GDP fell. B) inflation occurred. D) none of the above necessarily occurred. Answer: D

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Use the following to answer questions 114-117: Use the following table for a hypothetical single-product economy. Units of Output 10 12 15 20 Price of bagel per unit $10 20 30 40 Price index (year 1 = 100) 100 200 300 400

Year 1 2 3 4

Type: T Topic: 7 E: 123 MA: 123 114. Refer to the above data. Nominal GDP in year 3 is: A) $100. B) $450. C) $225. D) $150. Answer: B

Type: T Topic: 7 E: 123 MA: 123 115. Refer to the above data. Real GDP in year 3 is: A) $100. B) $450. C) $225. D) $150. Answer: D

Type: T Topic: 7 E: 123 MA: 123 116. Refer to the above data. Nominal GDP in year 4 is: A) $320. B) $450. C) $225. D) $800. Answer: D

Type: T Topic: 7 E: 123 MA: 123 117. Refer to the above data. Real GDP in year 4 is: A) $320. B) $450. C) $200. D) $800. Answer: C

Type: A Topic: 7 E: 123 MA: 123 118. If real GDP in a particular year is $80 billion and nominal GDP is $240 billion, the GDP price index for that year is: A) 100. B) 200. C) 240. D) 300. Answer: D

Type: A Topic: 7 E: 124 MA: 124 119. Suppose a nation's 2003 nominal GDP was $972 billion and the general price index was 90. To make the 2003 GDP comparable with the base year GDP, the 2003 GDP must be: A) adjusted downward to $678 billion. C) inflated to $1080 billion. B) deflated to $896 billion. D) deflated to $1080 billion. Answer: C

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Type: C Topic: 7 E: 124 MA: 124 120. Suppose nominal GDP in 2002 was $100 billion and in 2003 it was $260 billion. The general price index in 2002 was 100 and in 2003 it was 180. Between 2002 and 2003 the real GDP rose by: A) 160 percent. B) 44 percent. C) 37 percent. D) 12 percent. Answer: B

Type: F Topic: 7 E: 124 MA: 124 121. Historically, real GDP has increased less rapidly than nominal GDP because: A) price indices have not reflected improvements in product quality. B) the general price level has increased. C) technological progress has resulted in more efficient production. D) the general price level has declined. Answer: B

Type: A Topic: 7 E: 124 MA: 124 122. Suppose nominal GDP was $360 billion in 1990 and $450 billion in 2000. The appropriate price index (1985 = 100) was 120 in 1990 and 125 in 2000. Between 1990 and 2000 real GDP: A) increased by $60 billion. C) increased by $100 billion. B) decreased by $32 billion. D) increased by $117 billion. Answer: A

Use the following to answer questions 123-127: Assume an economy that is producing only one product and that year 3 is the base year. Output and price data for a five-year period are as follows. Answer the next question(s) on the basis of these data.

Year 1 2 3 4 5

Units of output 3 4 6 7 8

Price per unit $3 4 5 7 8

Type: T Topic: 7 E: 123-124 MA: 123-124 123. Refer to the above data. If year 3 is chosen as the base year, the price index for year 1 is: A) 140. B) 40. C) 167. D) 60. Answer: D

Type: T Topic: 7 E: 123 MA: 123 124. Refer to the above data. The nominal GDP for year 4 is: A) $49. B) $55. C) $40. D) $35. Answer: A

Type: T Topic: 7 E: 123-124 MA: 123-124 125. Refer to the above data. Real GDP for year 5 is: A) $160. B) $49. C) $40. D) $64. Answer: C

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Type: T Topic: 7 E: 125 MA: 125 126. Refer to the above data. In determining real GDP, the nominal GDP for: A) each year must be multiplied by the relevant price index. B) years 1 and 2 must be inflated. C) years 4 and 5 must be inflated. D) years 1 and 2 must be deflated. Answer: B

Type: T Topic: 7 E: 125 MA: 125 127. Refer to the above data. For the years shown the growth of: A) real GDP has exceeded the growth of nominal GDP. B) nominal GDP accurately reflects changes in real output. C) nominal GDP overstates increases in real output. D) nominal GDP understates increases in real output. Answer: C

Type: A Topic: 7 E: 125 MA: 125 128. A price index can rise from one year to the next even though: A) some individual prices in the economy fall. C) real GDP falls. B) nominal GDP falls. D) all of the above occur. Answer: D

Type: D Topic: 7 E: 123 MA: 123 129. Real GDP and nominal GDP differ because the real GDP: A) is adjusted for changes in the volume of intermediate transactions. B) includes the economic effects of international trade. C) has been adjusted for changes in the price level. D) excludes depreciation charges. Answer: C

Type: A Topic: 7 E: 124 MA: 124 130. Nominal GDP was $130 and $150 in years 1 and 2 respectively. Real GDP was $100 and $110 in years 1 and 2 respectively. On the basis of this information we can conclude that: A) the price level increased between years 1 and 2. B) more intermediate goods were produced in year 1 than in year 2. C) the increase in nominal GDP between years 1 and 2 understated the increase in production which occurred. D) the price level declined between years 1 and 2. Answer: A

Type: A Topic: 7 E: 124 MA: 124 131. If nominal GDP rises: A) real GDP may either rise or fall. B) we can be certain that the price level has risen. Answer: A

C) real GDP must fall. D) real GDP must also rise.

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Type: D Topic: 7 E: 123 MA: 123 132. Real GDP is: A) the nominal value of all goods and services produced in the economy. B) the nominal value of all goods and services produced in the domestic economy corrected for inflation or deflation. C) that aggregate output that is produced when the economy is operating at full employment. D) always greater than nominal GDP. Answer: B

Type: A Topic: 7 E: 125 MA: 125 133. In comparing GDP data over a period of years, a difference between nominal and real GDP may arise because: A) of changes in trade deficits and surpluses. B) the length of the workweek has declined historically. C) the price level may change over time. D) depreciation may be greater or smaller than gross investment. Answer: C

Use the following to answer questions 134-136: Answer the next question(s) on the basis of the following information: Only three goods are produced in an economy in the following amounts: A = 10, B = 30, C = 5. The current year per unit prices of these three goods are A = $2, B = $3, and C = $1.

Type: A Topic: 7 E: 123 MA: 123 134. Refer to the above information. Nominal GDP in the current year is: A) $110. B) $115. C) $45. D) $90 Answer: B

Type: A Topic: 7 E: 124-125 MA: 124-125 135. (Advanced analysis) Refer to the above information. If the per unit prices of the three goods each were $1 in a base year used to construct a GDP price index, then the GDP price index in the current year is: A) 205.5. B) 255.5. C) 39.3. D) 100. Answer: B

Type: A Topic: 7 E: 124-125 MA: 124-125 136. (Advanced analysis) Refer to the above information. If the per unit prices of the three goods each were $1 in a base year used to construct a GDP price index, then real GDP in the current year is: A) $110. B) $115. C) $45. D) $160. Answer: C

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Use the following to answer questions 137-141: Assume an economy that is producing only one product. Output and price data for a three-year period are as follows. Answer the next question(s) on the basis of these data. Year 1 2 3 Units of output 20 25 30 Price per unit $ 4 4 6

Type: T Topic: 7 E: 123 MA: 123 137. Refer to the above data. If year 2 is chosen as the base year, the price index for year one is: A) 80. B) 100. C) 120. D) 20. Answer: B

Type: T Topic: 7 E: 123 MA: 123 138. Refer to the above data. The nominal GDP for year 3 is: A) 125 percent higher than the nominal GDP for year 1. B) 50 percent higher than the nominal GDP for year 1. C) $120. D) $30. Answer: A

Type: T Topic: 7 E: 123 MA: 123 139. Refer to the above data. If year 2 is chosen as the base year, real GDP for year 1 is: A) $25. B) $100. C) $20. D) $80. Answer: C

Type: T Topic: 7 E: 123-124 MA: 123-124 140. Refer to the above data. If year 2 is chosen for the base year, in year 3 nominal GDP and real GDP, respectively, are: A) $180 and $30 B) $30 and $5 C) $180 and $120 D) $120 and $100 Answer: C

Type: T Topic: 7 E: 123-124 MA: 123-124 141. Refer to the above data. If year 2 is chosen as the base year, in years 1 and 3 the price index values, respectively, are: A) 4 and 6. B) 6 and 4. C) 120 and 100. D) 100 and 150. Answer: D

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Use the following to answer questions 142-144: Answer the next question(s) on the basis of the following information: Year 1 2 3 4 5 Nominal GDP $ 550 560 576 586 604 Price index 140 135 120 117 108

Type: T Topic: 7 E: 125 MA: 125 142. The economy above has experienced a: A) a declining nominal GDP. B) a rising price level. Answer: D

C) a declining real GDP.

D) deflation.

Type: T Topic: 7 E: 125 MA: 125 143. In the economy above: A) the price level is rising faster than nominal GDP. B) nominal and real GDP are growing at the same rate. C) the growth of nominal GDP understates the growth of real GDP. D) the growth of nominal GDP overstates the growth of real GDP. Answer: C

Type: T Topic: 7 E: 124 MA: 124 144. In the economy above, real GDP for year 3 is: A) $512. B) $428. C) $480. D) $691. Answer: C

Type: A Topic: 7 E: 125 MA: 125 145. Assume that in 2002 the nominal GDP was $350 billion and in 2003 it was $375 billion. On the basis of this information we: A) cannot make a meaningful comparison of the economy's performance in 2002 relative to 2003. B) can conclude that the economy was achieving real economic growth. C) can conclude that real GDP was higher in 2002 than in 2003. D) can conclude that real GDP was lower in 2002 than in 2003. Answer: A

Type: A Topic: 7 E: 124 MA: 124 146. If nominal GDP in some year is $280 and real GDP is $160. The GDP price index for that year is: A) 175. B) 57. C) 160. D) 280. Answer: A

Type: C Topic: 7 E: 124 MA: 124 147. If real disposable income fell during a particular year, we can conclude that: A) personal taxes increased. C) transfer payments declined. B) inflation occurred. D) none of the above necessarily occurred. Answer: D

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Use the following to answer questions 148-149:

Nominal and real GDP ($)

Nominal GDP Real GDP

0

1996

Time

Type: G Topic: 7 E: 124 MA: 124 148. Refer to the above diagram. The base year used in determining the price indices for this economy: A) cannot be determined from the information given. B) is some year before 1996. C) is more recent than 1996. D) is 1996. Answer: D

Type: G Topic: 7 E: 125 MA: 125 149. Refer to the above diagram. Which of the following statements is correct? A) The price index is greater than 100 for every year shown on the graph. B) Nominal GDP must be deflated in each year prior to 1996 to determine real GDP. C) Real GDP has grown in this economy, but nominal GDP has not. D) Nominal GDP must be deflated in each year since 1996 to determine real GDP. Answer: D

Type: A Topic: 7 E: 125 MA: 125 150. In an economy experiencing persistent deflation: A) potential GDP will necessarily exceed actual GDP. B) changes in nominal GDP may either overstate or understate changes in real GDP. C) changes in nominal GDP understate changes in real GDP. D) changes in nominal GDP overstate changes in real GDP. Answer: C

Type: A Topic: 7 E: 124-125 MA: 124-125 151. If real GDP rises and the GDP price index has increased: A) the percentage increase in nominal GDP must have been less than the percentage increase in the price level. B) nominal GDP may have either increased or decreased. C) nominal GDP must have increased. D) nominal GDP must have fallen. Answer: C

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Type: F Topic: 7 E: 123 MA: 123 152. In determining real GDP economists adjust the nominal GDP by using the: A) national productivity index. C) GDP price index. B) wholesale (producers') price index. D) consumer price index. Answer: C

Type: A Topic: 7 E: 124-125 MA: 124-125 153. The fact that nominal GDP has risen faster than real GDP: A) suggests that the base year of the GDP price index has been shifted. B) tells us nothing about what has happened to the price level. C) suggests that the general price level has fallen. D) suggests that the general price level has risen. Answer: D

GDP and social welfare

Type: F Topic: 8 E: 125 MA: 125 Status: New 154. Which of the following activities is excluded from GDP, causing GDP to understate a nation's well-being? A) the services of used-car dealers B) the child-care services provided by stay-at-home parents C) the construction of new houses D) government expenditures on military equipment Answer: B

Type: F Topic: 8 E: 126 MA: 126 Status: New 155. Which of the following activities is excluded from GDP, causing GDP to understate a nation's well-being? A) the services of health care workers B) the services of military personnel C) the construction of new buildings D) goods and services produced in the underground economy. Answer: D

Type: F Topic: 8 E: 126 MA: 126 Status: New 156. A large underground economy results in an: A) understated GDP. B) overstated GDP. Answer: A

C) understated GDP price index. D) overstated GDP price index.

Type: D Topic: 8 E: 125 MA: 125 157. The GDP tends to: A) overstate economic welfare because it does not include certain nonmarket activities such as the productive work of housewives. B) understate economic welfare because it includes expenditures undertaken to offset or correct pollution. C) understate economic welfare because it does not take into account increases in leisure. D) overstate economic welfare because it does not reflect improvements in product quality. Answer: C

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Type: D Topic: 8 E: 125-126 MA: 125-126 158. The growth of GDP may understate changes in the economy's economic well-being over time if the: A) distribution of income becomes increasingly unequal. B) quality of products and services improves. C) environment deteriorates because of pollution. D) amount of leisure decreases. Answer: B

Type: D Topic: 8 E: 125-126 MA: 125-126 159. GDP data are criticized as being inaccurate measures of economic welfare because: A) they do not take into account changes in the amount of leisure. B) they do not take into account all changes in product quality. C) they do not take into account the adverse effects of economic activity on the environment. D) of all of the above considerations. Answer: D

Type: A Topic: 8 E: 126 MA: 126 160. Environmental pollution is accounted for in: A) GDP. B) PI. C) DI. D) none of the above. Answer: D

Type: A Topic: 8 E: 126 MA: 126 161. Assume that the size of the underground economy increases both absolutely and relatively over time. As a result: A) real GDP will rise more rapidly than nominal GDP. B) GDP will tend to increasingly understate the level of output through time. C) GDP will tend to increasingly overstate the level of output through time. D) the accuracy of GDP will be unaffected through time. Answer: B

Consider This Questions

Type: F E: 117 MA: 117 Status: New 162. (Consider This) In terms of a reservoir analogy, the: A) outflow below the dam is gross investment. B) inflow from the river is the stock of capital. C) level of water in the reservoir is the stock of capital. D) level of water in the reservoir is net investment. Answer: C

Type: F E: 117 MA: 117 Status: New 163. (Consider This) In terms of a reservoir analogy, the: A) outflow below the dam is the stock of capital. C) level of water in the reservoir is depreciation. B) inflow from the river is gross investment. D) level of water in the reservoir is net investment. Answer: B

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Type: A E: 117 MA: 117 Status: New 164. (Consider This) Gross investment is a: A) flow, as is depreciation. B) flow, as is capital. Answer: A

C) stock, whereas depreciation is a flow. D) stock, whereas capital is a flow.

Type: A E: 117 MA: 117 Status: New 165. (Consider This) Capital is a: A) flow, whereas gross investment and depreciation are stocks. B) flow, as are gross investment and depreciation. C) stock, as are gross investment and depreciation. D) stock , whereas gross investment and depreciation are flows. Answer: D

Last Word Questions

Type: F E: 127 MA: 127 166. (Last Word) The U.S. government agency responsible for compiling the national income accounts is the: A) Census Bureau. B) Bureau of Labor Statistics (BLS). C) Commerce Department's Bureau of Economic Analysis (BEA). D) Government Accounting Office (GAO). Answer: C

Type: F E: 127 MA: 127 167. (Last Word) Which of the following is a source of data for the consumption component of the U.S. GDP? A) the Census Bureau's Retail Trade Survey B) the Census Bureau's Survey of Government Finance C) the Conference Board's Index of Leading Indicators D) the Bureau of Labor Statistics Consumer Price Index Answer: A

Type: F E: 127 MA: 127 168. (Last Word) Which of the following is a source of data for the investment component of U.S. GDP? A) the Census Bureau's Retail Trade Survey B) the Census Bureau's Housing Starts Survey and Housing Sales Survey. C) the Conference Board's Survey of Consumer Sentiment D) the Bureau of Labor Statistics Consumer Price Index Answer: B

True/False Questions

Type: D E: 121 MA: 121 169. Disposable income measures the before-tax income received by resource suppliers. Answer: False

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Type: D E: 120 MA: 120 170. NDP can be determined by adding indirect business taxes to GDP. Answer: False

Type: D E: 115-116 MA: 115-116 171. In determining GDP by the expenditures method it is appropriate to use net investment rather than gross investment as a measure of investment spending. Answer: False

Type: A E: 114 MA: 114 172. The expenditures and income approaches to GDP yield identical results because goods that are not sold in one year will be sold in some following year. Answer: False

Type: D E: 120 MA: 120 173. Welfare payments to low-income families are included in national income. Answer: False

Type: C E: 121-122 MA: 121-122 174. Within the circular flow model, the level of total resource income and total spending on output will be approximately equal: Answer: True

Type: D E: 116 MA: 116 175. Interest on the public debt is included as a part of government purchases in determining GDP by the expenditures method. Answer: False

Type: A E: 115 MA: 115 176. The simplest way to calculate GDP is to sum the total sales of all business firms. Answer: False

Type: A E: 115-116 MA: 115-116 177. The purchase of Wal-Mart stock is a part of gross investment, but not of net investment. Answer: False

Type: A E: 120 MA: 120 178. Personal income usually exceeds disposable income. Answer: False

Type: A E: 116 MA: 116 179. Gross private domestic investment exceeds depreciation in an economy that experiences expanding production capacity. Answer: True

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Type: D E: 123-124 MA: 123-124 180. A price index is 100 times the ratio of real GDP to nominal GDP. Answer: False

Type: A E: 124 MA: 124 181. If nominal GDP is 150 and the GDP price index is 200, real GDP is 75. Answer: True

Type: A E: 115-116 MA: 115-116 182. All expenditures on new construction are included as investment in calculating GDP. Answer: True

Type: D E: 117 MA: 117 183. Exports are subtracted from imports in calculating U.S. GDP because exports are not available for domestic consumption. Answer: False

Type: A E: 124 MA: 124 184. If real GDP is 50 and nominal GDP is 100, the GDP price index is 200. Answer: True

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CHAPTER 8

Introduction to Economic Growth and Instability

Topic 1. 2. 3. 4. 5. 6. 7. 8. Economic growth Business cycle Unemployment GDP gap; Okun's law Inflation: measurement, rule of 70 Demand-pull and cost-push inflation Nominal versus real income Inflation effects Consider This Last Word True-False

Question numbers 1-22 23-35 36-78 79-95 96-105 106-112 113-120 121-133 134-135 136-139 140-154

____________________________________________________________

_______________________________________

____________________________________________________________

_______________________________________

Multiple Choice Questions Economic growth

Type: D Topic: 1 E: 131 MA: 131 1. Economic growth is best defined as an increase in: A) either real GDP or real GDP per capita. B) nominal GDP. Answer: A

C) total consumption expenditures. D) wealth in the economy.

Type: A Topic: 1 E: 131-132 MA: 131-132 2. Real GDP per capita is found by: A) adding real GDP and population. B) subtracting population from real GDP. Answer: C

C) dividing real GDP by population. D) dividing population by real GDP.

Type: A Topic: 1 E: 132 MA: 132 Status: New 3. Real GDP per capita: A) cannot grow more rapidly than real GDP. B) cannot grow more slowly than real GDP. C) necessarily grows more rapidly than real GDP. D) can grow either more slowly or more rapidly than real GDP. Answer: D

Chapter 8: Introduction to Economic Growth and Instability

Type: F Topic: 1 E: 132 MA: 132 Status: New 4. Which of the following best measures improvements in the standard of living of a nation? A) growth of nominal GDP C) growth of real GDP per capita B) growth of real GDP D) growth of national income Answer: C

Type: A Topic: 1 E: 132 MA: 132 Status: New 5. If a nation's real GDP increases from 100 billion to 106 billion and its population jumps from 200 million to 212 million, it real GDP per capita will: A) remain constant. B) fall by 6 percent. C) rise by 6 percent. D) fall by 12 percent. Answer: A

Type: A Topic: 1 E: 132 MA: 132 Status: New 6. For a nation's real GDP per capita to rise during a year: A) consumption spending must increase. B) real GDP must increase more rapidly than population. C) population must increase more rapidly than real GDP. D) investment spending must increase. Answer: B

Type: A Topic: 1 E: 132 MA: 132 7. Growth is advantageous to a nation because it: A) promotes faster population growth. B) lessens the burden of scarcity. Answer: B

C) eliminates the economizing problem. D) slows the growth of wants.

Type: A Topic: 1 E: 132 MA: 132 8. For comparing changes in potential military strength and political preeminence, the most meaningful measure of economic growth would be: A) changes in total nominal output. C) changes in per capita output. B) changes in total real output. D) changes in per family output. Answer: B

Use the following to answer questions 9-12:
Alta (real GDP) $ 2,000 2,100 2,200 Zorn (real GDP) $ 150,000 152,000 154,000 Alta (population) 200 202 210 Zorn (population) 500 505 508

Year 1 2 3

Type: T Topic: 1 E: 132 MA: 132 9. Refer to the above table. Between years 1 and 2, real GDP grew by __________ percent in Alta: A) 3 percent. B) 4 percent. C) 5 percent. D) 10 percent. Answer: C

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Type: T Topic: 1 E: 132 MA: 132 10. Refer to the above table. Between years 1 and 2, real GDP per capita grew by __________ percent in Alta: A) 3 B) 4 C) 5 D) 10 Answer: B

Type: T Topic: 1 E: 132 MA: 132 11. Refer to the above table. Between years 2 and 3: A) Alta's real GDP grew more rapidly than Zorn's real GDP. B) real GDP fell in Zorn. C) population growth reduced Alta's real GDP growth to zero. D) population fell in Alta's. Answer: A

Type: T Topic: 1 E: 132 MA: 132 12. Refer to the above table. Per capita GDP was about: A) $105 in year 3 in Alta. C) $200 in year 1 in Zorn. B) $303 in year 3 in Zorn. D) $5 in year 2 in Alta. Answer: B

Type: D Topic: 1 E: 132 MA: 132 Status: New 13. Given the annual rate of economic growth, the "rule of 70" allows one to: A) determine the accompanying rate of inflation. B) calculate the size of the GDP gap. C) calculate the number of years required for real GDP to double. D) determine the growth rate of per capita GDP. Answer: C

Type: A Topic: 1 E: 132 MA: 132 Status: New 14. The number of years required for real GDP to double can be found by: A) dividing the annual growth rate by .07. C) dividing 70 by the annual growth rate. B) multiplying the annual growth rate by 70. D) adding 14 to annual growth rate. Answer: C

Type: A Topic: 1 E: 132 MA: 132 Status: New 15. At an annual growth rate of 4 percent, real GDP will double in about: A) 17 ½ years. B) 20 years. C) 13 ½ years. D) 15 years. Answer: A

Type: A Topic: 1 E: 132 MA: 132 Status: New 16. At an annual growth rate of 7 percent, real GDP will double in about: A) 11 ½ years. B) 10 years. C) 13 ½ years. D) 9 years. Answer: B

Type: A Topic: 1 E: 132 MA: 132 17. If a nation's real GDP is growing by 5 percent per year, its real GDP will double in approximately: A) 22 years. B) 20 years. C) 14 years. D) 8 years. Answer: C

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Type: A Topic: 1 E: 132 MA: 132 18. If the economy's real GDP doubles in 18 years, we can: A) not say anything about the average annual rate of growth. B) conclude that its average annual rate of growth is about 5.5 percent. C) conclude that its average annual rate of growth is about 2 percent. D) conclude that its average annual rate of growth is about 4 percent. Answer: D

Type: F Topic: 1 E: 132 MA: 132 19. About ________ of U.S. economic growth comes from improved productivity (as opposed to added inputs). A) one-fourth. B) one-third. C) one-half. D) two-thirds. Answer: D

Type: F Topic: 1 E: 133 MA: 133 20. Between 1950 and 2002, U.S. real GDP grew at an average annual rate of about: A) 1.3 percent. B) 3.4 percent. C) 5.1 percent. D) 8.6 percent. Answer: B

Type: F Topic: 1 E: 133 MA: 133 21. Between 1950 and 2002, U.S. real GDP per capita grew at an average annual rate of about: A) 5.5 percent. B) 4.2 percent. C) 3.5 percent. D) 2.1 percent. Answer: D

Type: F Topic: 1 E: 133 MA: 133 22. The United States experienced a: A) higher economic growth rate than Japan between 1950 and 2002, but a lower rate between 1992 and 2002. B) lower economic growth rate than Japan between 1950 and 2002, but a higher rate between 1992 and 2002. C) higher rate of growth of real GDP than of real GDP per capita between 1950 and 2002. D) higher rate of growth of real GDP than of real GDP per capita between 1990 and 2002. Answer: B

Business cycle

Type: D Topic: 2 E: 134 MA: 134 23. Recurring upswings and downswings in an economy's real GDP over time are called: A) recessions. B) business cycles. C) output yo-yos. D) total product oscillations. Answer: B

Type: F Topic: 2 E: 134 MA: 134 24. In the United States, business cycles have occurred against a backdrop of a long-run trend of: A) declining unemployment. C) rising real GDP. B) stagnant productivity growth. D) rising inflation. Answer: C

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Type: F Topic: 2 E: 135 MA: 135 25. The immediate determinant of the volume of output and employment is the: A) composition of consumer spending. B) ratio of public goods to private goods production. C) level of total spending. D) size of the labor force. Answer: C

Type: D Topic: 2 E: 135 MA: 135 26. As it relates to economic growth, the term long-run trend refers to: A) the long-run increase in the relative importance of durable goods in the U.S. economy. B) the long-term expansion or contraction of business activity that occurs over 50 or 100 years. C) fluctuations in business activity that average 40 months in duration. D) fluctuations in business activity that occur around Christmas, Easter, and so forth. Answer: B

Type: A Topic: 2 E: 135 MA: 135 27. In which of the following industries or sectors of the economy is output likely to be most strongly affected by the business cycle? A) military goods B) capital goods C) textile products D) agricultural commodities Answer: B

Type: A Topic: 2 E: 135 MA: 135 Status: New 28. The industries or sectors of the economy in which output is likely to be most strongly affected by the business cycle are: A) military goods and capital goods. C) clothing and education. B) services and nondurable consumer goods. D) capital goods and durable consumer goods. Answer: D

Type: A Topic: 2 E: 135 MA: 135 29. During a severe recession, we would expect output to fall the most in: A) the health-care industry. B) the clothing industry. C) agriculture. Answer: D

D) the construction industry.

Type: D Topic: 2 E: 134 MA: 134 30. The phase of the business cycle in which real GDP declines is called: A) the peak. B) a recovery. C) a recession. D) the trough. Answer: C

Type: D Topic: 2 E: 134 MA: 134 31. The phase of the business cycle in which real GDP is at a minimum is called: A) the peak. B) a recession. C) the trough. D) the pits. Answer: C

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Type: F Topic: 2 E: 133-134 MA: 133-134 32. Market economies have been characterized by: A) occasional instability of employment and price levels. B) uninterrupted economic growth. C) persistent full employment. D) declining populations. Answer: A

Type: A Topic: 2 E: 135 MA: 135 33. The production of durable goods varies more than the production of nondurable goods because: A) durables purchases are nonpostponable. B) durables purchases are postponable. C) the producers of nondurables have monopoly power. D) producers of durables are highly competitive. Answer: B

Type: D Topic: 2 E: 134 MA: 134 34. A recession is a period in which: A) cost-push inflation is present. B) nominal domestic output falls. Answer: D

C) demand-pull inflation is present. D) real domestic output falls.

Type: F Topic: 2 E: 134 MA: 134 Status: New 35. The main cause of the 2001 recession in the United States was a large decline in: A) investment spending. B) government spending. C) net exports. D) interest rates. Answer: A

Unemployment

Use the following to answer questions 36-38: Answer the next question(s) on the basis of the following information about the hypothetical economy of Bralone. All figures are in millions.

Not in the labor force Unemployed Total population Employed Discouraged workers

45 7 145 95 3

Type: A Topic: 3 E: 136 MA: 136 Status: New 36. Refer to the above information. The labor force in Bralone is: A) 95 million. B) 102 million. C) 105 million. D) 145 million. Answer: B

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Type: A Topic: 3 E: 136 MA: 136 Status: New 37. Refer to the above information. The unemployment rate in Bralone is: A) 2.5 percent. B) 3.2 percent. C) 5.0 percent. D) 6.9 percent. Answer: D

Type: C Topic: 3 E: 136 MA: 136 Status: New 38. Refer to the above information. If the natural rate of unemployment in Bralone is 5 percent, then: A) structural unemployment is 3 percent. C) cyclical unemployment is 2 percent. B) frictional unemployment is 2 percent. D) hidden unemployment is 5 percent. Answer: C

Type: F Topic: 3 E: 137-138 MA: 137-138 39. The United States' economy is considered to be at full employment when: A) 90 percent of the total population is employed. B) 90 percent of the labor force is employed. C) about 4-5 percent of the labor force is unemployed. D) 100 percent of the labor force is employed. Answer: C

Type: F Topic: 3 E: 138, 140 MA: 138, 140 40. In the United States, the rate of unemployment is highest for: A) white teenagers. B) black teenagers. C) married women. D) unmarried women. Answer: B

Type: A Topic: 3 E: 136-137 MA: 136-137 41. Kimberly voluntarily quit her job as an insurance agent to return to school full-time to earn an MBA degree. With degree in hand she is now searching for a position in management. Kimberly presently is: A) cyclically unemployed. C) frictionally unemployed. B) structurally unemployed. D) not a member of the labor force. Answer: C

Type: D Topic: 3 E: 136 MA: 136 42. To be officially unemployed a person must: A) be in the labor force. B) be 21 years of age or older. Answer: A

C) have just lost a job. D) be waiting to be called back from a layoff.

Type: D Topic: 3 E: 137 MA: 137 43. The natural rate of unemployment is: A) higher than the full-employment rate of unemployment. B) lower than the full-employment rate of unemployment. C) that rate of unemployment occurring when the economy is at its potential output. D) found by dividing total unemployment by the size of the labor force. Answer: C

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Type: D Topic: 3 E: 136 MA: 136 44. The labor force includes: A) employed workers and persons who are officially unemployed. B) employed workers, but excludes persons who are officially unemployed. C) full-time workers, but excludes part-time workers. D) permanent employees, but excludes temporary employees. Answer: A

Type: F Topic: 3 E: 140 MA: 140 45. The unemployment rate of: A) women greatly exceeds that of men. B) whites is roughly equal to that of blacks. C) white-collar workers exceeds that of blue-collar workers. D) teenagers is much higher than that of adults. Answer: D

Type: A Topic: 3 E: 136 MA: 136 46. Anne Kasperson works in her own home as a full-time caretaker and homemaker. Officially, she is: A) unemployed. B) employed. C) not in the labor force. D) in the labor force. Answer: C

Type: A Topic: 3 E: 137-138 MA: 137-138 47. If the unemployment rate is 9 percent and the natural rate of unemployment is 5 percent, then the: A) frictional unemployment rate is 5 percent. B) cyclical unemployment rate and the frictional unemployment rate together are 5 percent. C) cyclical unemployment rate is 4 percent. D) natural rate of unemployment will eventually increase. Answer: C

Type: A Topic: 3 E: 136 MA: 136 48. Official unemployment statistics: A) understate unemployment because individuals receiving unemployment compensation are counted as employed. B) understate unemployment because discouraged workers are not counted as unemployed. C) include cyclical and structural unemployment, but not frictional unemployment. D) overstate unemployment because workers who are involuntarily working part time are counted as being employed. Answer: B

Type: A Topic: 3 E: 136 MA: 136 49. The presence of discouraged workers: A) increases the size of the labor force, but does not affect the unemployment rate. B) reduces the size of the labor force, but does not affect the unemployment rate. C) may cause the official unemployment rate to understate the amount of unemployment. D) may cause the official unemployment rate to overstate the amount of unemployment. Answer: C

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Type: A Topic: 3 E: 136 MA: 136 50. Part-time workers are counted as: A) unemployed and therefore the official unemployment rate may overstate the level of unemployment. B) unemployed and therefore the official unemployment rate may understate the level of unemployment. C) fully employed and therefore the official unemployment rate may overstate the level of unemployment. D) fully employed and therefore the official unemployment rate may understate the level of unemployment. Answer: D

Type: F Topic: 3 E: 138 MA: 138 51. The natural rate of unemployment: A) is fixed over time. B) is found by adding the cyclical and structural unemployment rates. C) may change from one decade to another. D) cannot be changed through public policy. Answer: C

Type: A Topic: 3 E: 136 MA: 136 52. Assuming the total population is 100 million, the civilian labor force is 50 million, and 47 million workers are unemployed, the unemployment rate is: A) 3 percent. B) 6 percent. C) 7 percent. D) 9 percent. Answer: B

Type: D Topic: 3 E: 137 MA: 137 53. The natural rate of unemployment is the: A) unemployment rate experienced at the depth of a depression. B) full-employment unemployment rate. C) unemployment rate experienced by the least-skilled workers in the economy. D) unemployment rate experienced by the most-skilled workers in the economy. Answer: B

Type: A Topic: 3 E: 137 MA: 137 54. Assume that Hernandez is temporarily unemployed because he has voluntarily quit his job with company A and will begin a better job next week with company B. Hernandez will be considered as: A) cyclically unemployed. B) frictionally unemployed. C) secularly unemployed. D) employed. Answer: B

Type: F Topic: 3 E: 140 MA: 140 55. During periods of full employment the: A) burden of unemployment is quite evenly distributed among males and females, blacks and whites, and young and old workers. B) unemployment rate for teenagers is below the rate for the labor force as a whole. C) unemployment rate for women is considerably lower than that for men. D) unemployment rate for blacks is about twice the rate for whites. Answer: D

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Type: D Topic: 3 E: 136 MA: 136 56. The unemployment rate is the: A) ratio of unemployed to employed workers. B) number of employed workers minus the number of workers who are not in the labor force. C) percentage of the labor force that is out of work. D) percentage of the total population that is out of work. Answer: C

Type: F Topic: 3 E: 138 MA: 138 57. The full-employment unemployment rate means an unemployment rate of about: A) 15 percent. B) 10 percent. C) 4-5 percent. D) 2 percent. Answer: C

Type: D Topic: 3 E: 136 MA: 136 58. The official unemployment rate: A) involves people over 16 years of age who are not currently seeking employment. B) is the ratio of unemployed to employed workers. C) is the percentage of the labor force that is unemployed. D) is the percentage of the total population that is not working. Answer: C

Type: A Topic: 3 E: 136 MA: 136 59. Suppose there are 5 million unemployed workers seeking jobs. After a period of time, 1 million of them become discouraged over their job prospects and cease to look for work. As a result of this, the official unemployment rate would: A) increase in the short run but eventually decline. B) increase. C) decline. D) be unchanged. Answer: C

Type: A Topic: 3 E: 137 MA: 137 60. Eckstein has lost her job in a Massachusetts textile plant because of import competition. She intends to take a short course in electronics and move to California where she anticipates that a new job will be available. We can say that Eckstein is faced with: A) secular unemployment. C) structural unemployment. B) cyclical unemployment. D) frictional unemployment. Answer: C

Type: D Topic: 3 E: 137 MA: 137 61. Cyclical unemployment results from: A) a deficiency of aggregate spending. B) the decreasing relative importance of goods and the increasing relative importance of services in the U.S. economy. C) the everyday dynamics of a free labor market. D) technological change. Answer: A

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Type: F Topic: 3 E: 140 MA: 140 62. Which of the following is correct? A) The unemployment rates of men and women workers are roughly the same. B) Unemployment rates for black and white workers are approximately the same. C) Teenagers experience approximately the same unemployment rates as do adults. D) Laborers are less vulnerable to unemployment than are professional workers. Answer: A

Type: A Topic: 3 E: 136-137 MA: 136-137 63. A college graduate using the summer following graduation to search for a job would best be classified as: A) not officially a member of the labor force. C) a part of cyclical unemployment. B) a part of structural unemployment. D) a part of frictional unemployment. Answer: D

Type: D Topic: 3 E: 137 MA: 137 64. Unemployment involving a mismatch of the skills of unemployed workers and the skills required for available jobs is called: A) frictional unemployment. C) cyclical unemployment. B) structural unemployment. D) compositional unemployment. Answer: B

Type: D Topic: 3 E: 137 MA: 137 65. Structural unemployment: A) is also known as frictional unemployment. B) is the main component of cyclical unemployment. C) is said to occur when people are waiting to be called back to previous jobs. D) may involve a locational mismatch between unemployed workers and job openings. Answer: D

Type: A Topic: 3 E: 136 MA: 136 66. Dr. Homer Simpson, an economics professor, decided to take a year off from teaching to run a commercial fishing boat in Alaska. That year, Professor Simpson would be officially counted as: A) structurally unemployed. B) frictionally unemployed. C) not in the labor force. D) employed. Answer: D

Type: D Topic: 3 E: 138 MA: 138 67. When the U.S. economy has achieved full employment, the unemployment rate is between: A) 5 and 6 percent. B) 4 and 5 percent. C) 3 and 4 percent. D) 2 and 3 percent. Answer: B

Type: D Topic: 3 E: 137 MA: 137 68. Which of the following constitute the unemployment occurring at the natural rate of unemployment? A) frictional and cyclical unemployment B) structural and frictional unemployment C) cyclical and structural unemployment D) frictional, structural, and cyclical unemployment. Answer: B

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Type: A Topic: 3 E: 137 MA: 137 69. Wait unemployment and search unemployment are both types of: A) cyclical unemployment. C) frictional unemployment. B) hidden unemployment. D) structural unemployment. Answer: C

Type: A Topic: 3 E: 137 MA: 137 70. The type of unemployment associated with recessions is called: A) frictional unemployment. C) cyclical unemployment. B) structural unemployment. D) seasonal unemployment. Answer: C

Type: A Topic: 3 E: 136 MA: 136 71. Suppose there are 10 million part-time workers and 90 million full-time workers in an economy. Five million of the part-time workers switch to full-time work. As a result: A) the official unemployment rate will fall. B) the official unemployment rate will rise. C) the official unemployment rate will remain unchanged. D) the size of the labor force will increase. Answer: C

Type: D Topic: 3 E: 137 MA: 137 72. Cyclical unemployment is also called: A) wait unemployment. B) search unemployment. Answer: D

C) seasonal unemployment. D) deficient-demand unemployment.

Type: D Topic: 3 E: 137 MA: 137 73. At the economy's natural rate of unemployment: A) the economy achieves its potential output. B) there is only a relatively small amount of cyclical unemployment. C) only frictional unemployment exists. D) only structural unemployment exists. Answer: A

Type: A Topic: 3 E: 137 MA: 137 74. Search unemployment and wait unemployment are types of: A) frictional unemployment. C) deficient-demand unemployment. B) structural unemployment. D) cyclical unemployment. Answer: A

Type: F Topic: 3 E: 137 MA: 137 75. In the depth of the Great Depression, the unemployment rate in the United States was about: A) 15 percent. B) 33 percent. C) 25 percent. D) 40 percent. Answer: C

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Use the following to answer questions 76-78: Answer the next question(s) on the basis of the following information about a hypothetical economy: Full-time employed = 80 Part-time employed = 25 Unemployed = 15 Discouraged workers = 5 Members of underground economy = 6 Consumer Price Index = 110

Type: A Topic: 3 E: 136 MA: 136 76. Refer to the above information. The unemployment rate is: A) 18.8 percent. B) 12.5 percent. C) 16.7 percent. D) 25 percent. Answer: B

Type: C Topic: 3 E: 137 MA: 137 77. Refer to the above information. If the members of the underground economy are presently counted as part of the unemployed when in fact they are employed, the official unemployment rate is overstated by: A) 0 percentage points. B) 2 percentage points. C) 5 percentage points. D) 6 percentage points. Answer: C

Type: A Topic: 3 E: 141 MA: 141 78. Refer to the above information. The rate of inflation: A) is 110 percent. B) is 10 percent. C) is 0 percent. Answer: D

D) cannot be determined from the data.

GDP gap; Okun's law

Type: D Topic: 4 E: 138 MA: 138 Status: New 79. The GDP gap measures the difference between: A) NDP and GDP. C) actual GDP and potential GDP. B) NI and PI. D) nominal GDP and real GDP. Answer: C

Type: A Topic: 4 E: 138 MA: 138 80. A large negative GDP gap implies: A) an excess of imports over exports. B) a low rate of unemployment. Answer: C

C) a high rate of unemployment. D) a sharply rising price level.

Type: A Topic: 4 E: 138 MA: 138 81. The aggregate cost of unemployment can be measured by the: A) amount by which actual GDP exceeds potential GDP. B) amount by which potential GDP exceeds actual GDP. C) excess of real GDP over nominal GDP. D) excess of nominal GDP over real GDP. Answer: B

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Type: A Topic: 4 E: 138 MA: 138 82. If the U.S. unemployment rate is 9 percent, we can infer that: A) the economy is in the expansion phase of the business cycle. B) potential GDP is in excess of actual GDP. C) actual GDP is in excess of potential GDP. D) actual GDP is equal to potential GDP. Answer: B

Type: A Topic: 4 E: 138 MA: 138 Status: New 83. If actual GDP is $500 billion and there is a negative GDP gap of $10 billion, potential GDP is: A) $510 billion. B) $490 billion. C) $10 billion. D) $990 billion. Answer: A

Type: A Topic: 4 E: 138 MA: 138 Status: New 84. If actual GDP is $340 billion and there is a positive GDP gap of $20 billion, potential GDP is: A) $360 billion. B) $660 billion. C) $320 billion. D) $20 billion. Answer: C

Type: A Topic: 4 E: 138 MA: 138 Status: New 85. If potential GDP is $330 billion and there is a positive GDP gap of $30 billion, real GDP is: A) $300 billion. B) $30 billion. C) $360 billion. D) $630 billion. Answer: C

Type: A Topic: 4 E: 138 MA: 138 Status: New 86. If potential GDP is $400 billion and there is a negative GDP gap of $15 billion, real GDP is: A) $415 billion. B) $385 billion. C) $15 billion. D) $785 billion. Answer: B

Type: A Topic: 4 E: 138 MA: 138 87. Assume the natural rate of unemployment in the U.S. economy is 5 percent and the actual rate of unemployment is 9 percent. According to Okun's law, the negative GDP gap as a percent of potential GDP is: A) 4 percent. B) 8 percent. C) 10 percent. D) 2 percent. Answer: B

Type: D Topic: 4 E: 138 MA: 138 88. The relationship between the size of the negative GDP gap and the unemployment rate is: A) direct. B) inverse. C) undefined. D) direct during recession, but inverse during expansion. Answer: A

Type: A Topic: 4 E: 138 MA: 138 89. If actual GDP is less than potential GDP: A) potential GDP will fall. B) the price level will rise. C) investment spending will fall. D) the actual unemployment rate will be higher than the natural unemployment rate. Answer: D

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Type: D Topic: 4 E: 138 MA: 138 90. Full-employment output is also called: A) zero-unemployment output. B) equilibrium output. Answer: C

C) potential output.

D) zero-savings output.

Use the following to answer questions 91-93: Answer the next question(s) on the basis of the following information for a specific year in a hypothetical economy for which Okun's law is applicable: Potential Real GDP = $200 billion Natural rate of unemployment = 6 percent Actual rate of unemployment = 12 percent

Type: A Topic: 4 E: 138 MA: 138 91. The size of the negative GDP gap as a percent of potential GDP for the above economy is: A) 9 percent. B) 12 percent. C) 15 percent. D) 18 percent. Answer: B

Type: C Topic: 4 E: 138 MA: 138 92. The amount of output being forgone by the above economy is: A) $12 billion. B) $15 billion. C) $18 billion. D) $24 billion. Answer: D

Type: A Topic: 4 E: 138 MA: 138 93. If the unemployment rate in the above economy declined to 6 percent, we could conclude that: A) only structural unemployment remained. B) the economy's production possibilities curve shifted outward. C) the economy had moved from a point inside its production possibilities curve to a point on or near the curve. D) nominal GDP would rise but real GDP would fall. Answer: C

Type: D Topic: 4 E: 138 MA: 138 94. Okun's law: A) measures the tradeoff between the rate of inflation and the rate of unemployment. B) indicates the number of years it will take for a constant rate of inflation to double the price level. C) quantifies the relationship between nominal and real incomes. D) shows the relationship between the unemployment rate and the size of the negative GDP gap. Answer: D

Type: D Topic: 4 E: 138 MA: 138 95. For every 1 percentage point that the actual unemployment rate exceeds the natural rate, a 2 percentage point negative GDP gap occurs. This is a statement of: A) Taylor's rule. B) Okun's law. C) Say's law. D) the Coase theorem. Answer: B

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Inflation: measurement, rule of 70

Type: D Topic: 5 E: 141 MA: 141 96. Inflation means that: A) all prices are rising, but at different rates. B) all prices are rising and at the same rate. C) prices in the aggregate are rising, although some particular prices may be falling. D) real incomes are rising. Answer: C

Type: A Topic: 5 E: 141 MA: 141 97. If the consumer price index falls from 120 to 116 in a particular year, the economy has experienced: A) inflation of 4 percent. C) deflation of 3.33 percent. B) inflation of 3.33 percent. D) deflation of 4 percent. Answer: C

Type: A Topic: 5 E: 141 MA: 141 98. The consumer price index was 177.1 in 2001 and 179.9 in 2002. Therefore, the rate of inflation in 2002 was about: A) 6.7 percent. B) 3.4 percent. C) 1.6 percent. D) 4.1 percent. Answer: C

Type: A Topic: 5 E: 141 MA: 141 99. The rate of inflation can be found by subtracting: A) the real income from the nominal income. B) last year's price index from this year's price index. C) this year's price index from last year's price index and dividing the difference by this year's price index. D) last year's price index from this year's price index and dividing the difference by last year's price index. Answer: D

Type: A Topic: 5 E: 141 MA: 141 100. If the Consumer Price index rises from 300 to 333 in a particular year, the rate of inflation in that year is: A) 11 percent. B) 33 percent. C) 91 percent. D) 10 percent. Answer: A

Type: D Topic: 5 E: 142 MA: 142 101. As applied to the price level, the "rule of 70" indicates that the number of years required for the price to double can be found by: A) dividing "70" into the annual rate of inflation. B) dividing the annual rate of inflation into "70." C) subtracting the annual change in nominal incomes from "70." D) multiplying the annual rate of inflation by "70." Answer: B

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Type: C Topic: 5 E: 142 MA: 142 102. Between 1980 and 2000 the price level approximately doubled. The average annual rate of inflation over this 20-year period was about: A) 5.5 percent. B) 4.7 percent. C) 3.5 percent. D) 2.8 percent. Answer: C

Type: D Topic: 5 E: 141-142 MA: 141-142 103. Given the annual rate of inflation, the "rule of 70" allows one to: A) determine whether the inflation is demand-pull or cost-push. B) calculate the accompanying rate of unemployment. C) determine when the value of a real asset will approach zero. D) calculate the number of years required for the price level to double. Answer: D

Type: C Topic: 5 E: 141-142 MA: 141-142 104. If Ernie's annual real income rises by 8 percent each year, his annual real income will double in about: A) 8-9 years. B) 10-11 years. C) 5-6 years. D) 19-20 years. Answer: A

Type: A Topic: 5 E: 141-142 MA: 141-142 105. If the rate of inflation is 12 percent per year, the price level will double in about: A) 4 years. B) 6 years. C) 10 years. D) 12 years. Answer: B

Demand-pull and cost-push inflation

Type: D Topic: 6 E: 142 MA: 142 106. Demand-pull inflation: A) occurs when prices of resources rise, pushing up costs and the price level. B) occurs when total spending exceeds the economy's ability to provide output at the existing price level. C) occurs only when the economy has reached its absolute production capacity. D) is also called cost-push inflation. Answer: B

Type: A Topic: 6 E: 142 MA: 142 107. Demand-pull inflation: A) occurs when total spending in the economy is excessive. B) is measured differently than cost-push inflation. C) can be present even during an economic depression. D) is also called "hyperinflation." Answer: A

Type: D Topic: 6 E: 142 MA: 142 108. "Too much money chasing too few goods" best describes: A) the GDP gap. B) demand-pull inflation. C) the inflation premium. Answer: B

D) cost-push inflation.

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Type: A Topic: 6 E: 143 MA: 143 109. Unlike demand-pull inflation, cost-push inflation: A) is self-limiting. B) drives up the price level. Answer: A

C) increases nominal income. D) increases real income.

Type: D Topic: 6 E: 143 MA: 143 110. Inflation initiated by increases in wages or other resource prices is labeled: A) demand-pull inflation. B) demand-push inflation. C) cost-push inflation. Answer: C

D) cost-pull inflation.

Type: A Topic: 6 E: 143 MA: 143 111. Cost-push inflation: A) is caused by excessive total spending. B) shifts the nation's production possibilities curve leftward. C) moves the economy inward from its production possibilities curve. D) is a mixed blessing because it has positive effects on real output and employment. Answer: C

Type: A Topic: 6 E: 143 MA: 143 112. Cost-push inflation may be caused by: A) a decline in per unit production costs. B) a decrease in wage rates. Answer: C

C) a negative supply shock. D) an increase in resource availability.

Nominal versus real income

Type: F Topic: 7 E: 144 MA: 144 Status: New 113. Real income is found by: A) dividing nominal income by 70. B) multiplying nominal income by 1.03. C) dividing the price index (in hundredths) by nominal income. D) dividing nominal income by the price index (in hundredths). Answer: D

Type: D Topic: 7 E: 144 MA: 144 114. Which of the following formulas is correct? Percentage change in: A) price level approximates percentage change in real income minus percentage change in nominal income. B) real income approximates percentage change in nominal income minus percentage change in price level. C) nominal income approximates percentage change in price level minus percentage change in real income. D) real income approximates percentage change in price level minus percentage change in nominal income. Answer: B

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Type: A Topic: 7 E: 144 MA: 144 115. Real income can be determined by: A) dividing the price level by nominal income. B) inflating nominal income for inflation. C) dividing the annual rate of inflation into the number "70." D) deflating nominal income for inflation. Answer: D

Type: A Topic: 7 E: 144 MA: 144 116. Suppose that a person's nominal income rises from $10,000 to $12,000 and the consumer price index rises from 100 to 105. The person's real income will: A) fall by about 20 percent. C) rise by about 15 percent. B) fall by about 2 percent. D) rise by about 25 percent. Answer: C

Type: A Topic: 7 E: 144 MA: 144 117. Recently a labor union argued that the standard of living of its members was falling. A critic of the union argued that this could not possibly be true because the union had been acquiring increases in the nominal incomes of its members through collective bargaining. Is the critic correct? A) Yes, because when you have a large nominal income your standard of living automatically increases. B) No, because real income may fall if price increases are more proportionately than the increase in nominal income. C) No, because real income may fall if price increases are less proportionately than the increases in nominal income. D) Yes, because real income may fall if price increases are less proportionately than the increases in nominal income. Answer: B

Type: A Topic: 7 E: 144 MA: 144 118. Suppose that a person's nominal income rises by 5 percent and the price level rises from 125 to 130. The person's real income will: A) fall by about 1 percent. C) rise by about 4 percent. B) remain constant. D) rise by about 1 percent. Answer: D

Type: A Topic: 7 E: 144 MA: 144 119. In 2002 Ortega's nominal income rose by 4.6 percent and the price level rose by 1.6 percent. We can conclude that Ortega's real income: A) may have either increased or decreased. C) rose by 3 percent. B) rose by 6.2 percent. D) fell by 13 percent. Answer: C

Type: A Topic: 7 E: 144 MA: 144 120. Which of the following is correct? A) Real and nominal incomes always move in the same direction. B) Inflation increases the purchasing power of the dollar and necessarily reduces one's nominal income. C) Inflation reduces the purchasing power of the dollar and necessarily reduces one's real income. D) Inflation reduces the purchasing power of the dollar, but does not necessarily reduce one's real income. Answer: D

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Inflation effects

Type: F Topic: 8 E: 143 MA: 143 Status: New 121. Cost-push inflation: A) reduces real output. C) reduces the unemployment rate. B) increases real output. D) raises the natural rate of unemployment. Answer: A

Type: F Topic: 8 E: 143 MA: 143 Status: New 122. Mild demand-pull inflation: A) raises the natural rate of unemployment. C) has an uncertain effect on real output. B) usually leads to hyperinflation.. D) decreases the natural rate of unemployment. Answer: C

Type: A Topic: 8 E: 145 MA: 145 123. Cost-of-living adjustment clauses (COLAs): A) invalidate the "rule of 70." B) apply only to demand-pull inflation. C) increase the gap between nominal and real income. D) tie wage increases to changes in the price level. Answer: D

Type: D Topic: 8 E: 148 MA: 148 124. During a period of hyperinflation: A) creditors gain because their loans are repaid with dollars of higher value. B) people tend to hold goods rather than money. C) income is redistributed away from borrowers. D) the real value of the national currency rises. Answer: B

Type: A Topic: 8 E: 144 MA: 144 125. Inflation is undesirable because it: A) arbitrarily redistributes real income and wealth. C) usually is accompanied by declining real GDP. B) invariably leads to hyperinflation. D) reduces everyone's standard of living. Answer: A

Type: A Topic: 8 E: 146 MA: 146 126. Who is least likely to be hurt by unanticipated inflation? A) a disabled laborer who is living off accumulated savings B) an owner of a small business C) a secretary D) a pensioned steelworker Answer: B

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Type: A Topic: 8 E: 144 MA: 144 127. Which of the following statements is correct? Unanticipated inflation: A) arbitrarily "taxes" fixed-income groups. C) increases the purchasing power of the dollar. B) increases the real value of savings. D) benefits creditors at the expense of debtors. Answer: A

Type: A Topic: 8 E: 146 MA: 146 128. A lender need not be penalized by inflation if the: A) long-term rate of inflation is less than the short-term rate of inflation. B) short-term rate of inflation is less than the long-term rate of inflation. C) lender correctly anticipates inflation and increases the nominal interest rate accordingly. D) inflation is unanticipated by both borrower and lender. Answer: C

Type: A Topic: 8 E: 146 MA: 146 129. Unanticipated inflation: A) reduces the real burden of the public debt to the Federal government. B) hurts borrowers and helps lenders. C) hurts people whose sole source of income is from Social Security benefits. D) helps savers. Answer: A

Type: A Topic: 8 E: 146 MA: 146 130. Inflation affects: A) both the level and the distribution of income. B) neither the level nor the distribution of income. Answer: A

C) the distribution, but not the level, of income. D) the level, but not the distribution, of income.

Type: A Topic: 8 E: 146 MA: 146 131. If the nominal interest rate is 5 percent and the real interest rate is 2 percent, then the inflation premium is: A) 8 percent. B) 5 percent. C) 3 percent. D) 2 percent. Answer: C

Type: A Topic: 8 E: 146 MA: 146 132. If both the real interest rate and the nominal interest rate are 3 percent, then the: A) inflation premium is zero. C) nominal GDP must exceed real GDP. B) real GDP must exceed the nominal GDP. D) inflation premium also is 3 percent. Answer: A

Type: A Topic: 8 E: 146 MA: 146 133. Suppose the nominal annual interest rate on a two year loan is 8 percent and lenders expect inflation to be 5 percent in each of the two years. The annual real rate of interest is: A) 6 percent. B) 8 percent. C) 2 percent. D) 3 percent. Answer: D

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Consider This Questions

Type: A E: 143 MA: 143 Status: New 134. (Consider This) The feudal practice of clipping coins illustrates the idea of: A) taxation through inflation. C) the derived demand for resources. B) good money driving out bad money. D) cost-push inflation. Answer: A

Type: A E: 143 MA: 143 Status: New 135. (Consider This) The main point of the Consider This box on clipping coins is that: A) decreases in the money supply cause deflation. B) decreases in tax rates often increase tax revenues. C) inflation imposes a "hidden tax" on those who hold money. D) demand creates its own supply. Answer: C

Last Word Questions

Type: F E: 149 MA: 149 136. (Last Word) Which of the following statements is false? A) Stock prices are one clue as to the future direction of the economy. B) Research has shown that changes in stock prices have a relatively modest impact on the economy. C) Black Monday (1987) was followed immediately by a severe recession. D) A rise in stock prices increases consumer wealth and therefore slightly boosts consumption spending. Answer: C

Type: F E: 149 MA: 149 137. (Last Word) Declines in stock prices measured by the Dow Jones average: A) are a major cause of recessions. B) usually reduce saving and increase consumption spending. C) usually increase investment and reduce net exports. D) sometimes precede recessions; sometimes do not. Answer: D

Type: F E: 149 MA: 149 138. (Last Word) Changes in stock market prices: A) do not greatly impact the macroeconomy and used alone are not reliable predictors of the future health of the economy. B) greatly impact the macroeconomy but used alone are not reliable predictors of the future health of the economy. C) greatly impact the macroeconomy and used alone are reliable predictors of the future health of the economy. D) do not greatly impact the macroeconomy but used alone are reliable predictors of the future health of the economy. Answer: A

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Type: F E: 149 MA: 149 139. (Last Word) A burst stock market bubble might adversely affect the economy by: A) causing rapid inflation. B) greatly reducing net exports. C) causing a severe negative wealth effect and engendering pessimism about the economy's future. D) raising interest rates. Answer: C

True/False Questions

Type: A E: 131 MA: 131 140. If real GDP is $300 billion in year 1 and $312 billion in year 2, the growth rate between the two years is 4 percent. Answer: True

Type: F E: 132 MA: 132 141. Between 1992 and 2000, real GDP per capita increased more rapidly than real GDP in the United States. Answer: False

Type: F E: 132 MA: 132 142. About two-thirds of U.S. economic growth derives from more inputs and one-third derives from greater productivity of inputs. Answer: False

Type: A E: 135 MA: 135 143. The production of durable goods is more stable than the production of nondurables over the business cycle. Answer: False

Type: F E: 146 MA: 146 144. Unanticipated inflation benefits debtors at the expense of creditors. Answer: True

Type: A E: 132 MA: 132 145. If the price level doubles in a 23-year period, we can conclude that the average annual rate of inflation over that period was about 3 percent. Answer: True

Type: A E: 134 MA: 134 146. The business cycle is so named because upswings and downswings in business activity are equal in terms of duration and intensity. Answer: False

Type: D E: 136 MA: 136 147. People who work part time, but desire to work full time, are considered to be officially unemployed. Answer: False

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Type: A E: 138 MA: 138 148. The natural rate of unemployment in the United States is about 4 to 5 percent. Answer: True

Type: F E: 132 MA: 132 149. An annual rate of inflation of 7 percent will double the price level in about 15 years. Answer: False

Type: A E: 145 MA: 145 150. Unanticipated inflation benefits some groups in the economy. Answer: True

Type: A E: 146 MA: 146 151. If the nominal interest rate is 8 percent and the real interest rate is 5 percent, then the inflation premium is 13 percent. Answer: False

Type: A E: 134 MA: 134 152. During the past ten years the U.S. economy has experience three recessions. Answer: False

Type: F E: 142 MA: 142 153. During the past ten years the annual rate of inflation in the United States has averaged less than 1 percent. Answer: False

Type: F E: 140-141 MA: 140-141 154. During recent years the U.S. unemployment rate has been substantially higher than the rate in most of the other major industrial nations. Answer: False

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Topic 1. 2. 3. 4 5. 6. Consumption function/APC/MPC Saving function/APS/MPS Shifts in consumption and saving functions Graphs/tables: mixed consumption and saving Investment demand Multiplier effect Consider This Last Word True-False

Question numbers 1-39 40-53 54-69 70-106 107-145 146-181 182-183 184-185 186-200

____________________________________________________________

_______________________________________

____________________________________________________________

_______________________________________

Multiple Choice Questions Consumption function/APC/MPC

Type: A Topic: 1 E: 152 MA: 152 1. The most important determinant of consumer spending is: A) the level of household debt. C) the stock of wealth. B) consumer expectations. D) the level of income. Answer: D

Type: D Topic: 1 E: 152 MA: 152 2. The most important determinant of consumption and saving is the: A) level of bank credit. B) level of income. C) interest rate. D) price level. Answer: B

Type: A Topic: 1 E: 156 MA: 156 3. If Smith's disposable income increases from $1,200 to $1,700 and her level of saving increases from minus $100 to a plus $100, her marginal propensity to: A) save is three-fifths. C) consume is three-fifths. B) consume is one-half. D) consume is one-sixth. Answer: C

Type: A Topic: 1 E: 156 MA: 156 4. With an MPS of .4, the MPC will be: A) 1.0 minus .4. B) .4 minus 1.0. C) the reciprocal of the MPS. Answer: A

D) .4.

Chapter 9: Basic Macroeconomic Relationships

Type: D Topic: 1 E: 156 MA: 156 5. The MPC can be defined as that fraction of a: A) change in income that is not spent. B) change in income that is spent. Answer: B

C) given total income that is not consumed. D) given total income that is consumed.

Type: A Topic: 1 E: 154 MA: 154 6. The 45-degree line on a graph relating consumption and income shows: A) all points where the MPC is constant. B) all points at which saving and income are equal. C) all the points at which consumption and income are equal. D) the amounts households will plan to save at each possible level of income. Answer: C

Type: A Topic: 1 E: 154 MA: 154 7. As disposable income goes up the: A) APC falls. B) APS falls. Answer: A

C) volume of consumption declines absolutely. D) volume of investment diminishes.

Type: D Topic: 1 E: 153 MA: 153 8. The consumption schedule shows: A) that the MPC increases in proportion to GDP. B) that households consume more when interest rates are low. C) that consumption depends primarily on the level of business investment. D) the amounts households plan or intend to consume at various possible levels of aggregate income. Answer: D

Type: D Topic: 1 E: 153 MA: 153 9. The consumption schedule relates: A) consumption to the level of disposable income. B) saving to the level of disposable income. Answer: A

C) disposable income to domestic income. D) consumption to saving.

Type: A Topic: 1 E: 153 MA: 153 10. A decline in disposable income: A) increases consumption by moving upward along a specific consumption schedule. B) decreases consumption because it shifts the consumption schedule downward. C) decreases consumption by moving downward along a specific consumption schedule. D) increases consumption because it shifts the consumption schedule upward. Answer: C

Type: D Topic: 1 E: 154 MA: 154 11. The APC is calculated as: A) change in consumption / change in income B) consumption / income Answer: B

C) change in income / change in consumption D) income / consumption

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Type: A Topic: 1 E: 153 MA: 153 12. The consumption schedule shows: A) a direct relationship between aggregate consumption and accumulated wealth. B) a direct relationship between aggregate consumption and aggregate income. C) an inverse relationship between aggregate consumption and accumulated financial wealth. D) an inverse relationship between aggregate consumption and aggregate income. Answer: B

Type: D Topic: 1 E: 153 MA: 153 13. The APC can be defined as the fraction of a: A) change in income that is not spent. B) change in income that is spent. C) specific level of total income that is not consumed. D) specific level of total income that is consumed. Answer: D

Type: G Topic: 1 E: 154-155 MA: 154-155 14.

The consumption schedule in the above diagram indicates that: A) consumers will maximize their satisfaction where the consumption schedule and 45° line intersect. B) up to a point consumption exceeds income, but then falls below income. C) the MPC falls as income increases. D) households consume as much as they earn. Answer: B

Type: A Topic: 1 E: 154 MA: 154 15. The consumption schedule is drawn on the assumption that as income increases consumption will: A) be unaffected. B) increase absolutely, but remain constant as a percentage of income. C) increase absolutely, but decline as a percentage of income. D) increase both absolutely and as a percentage of income. Answer: C

Type: A Topic: 1 E: 154 MA: 154 16. Which of the following is correct? A) APC + APS = 1. B) APC + MPS = 1. Answer: A

C) APS + MPC = 1.

D) APS + MPS = 1.

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Type: A Topic: 1 E: 154-156 MA: 161 17. The consumption schedule is such that: A) both the APC and the MPC increase as income rises. B) the APC is constant and the MPC declines as income rises. C) the MPC is constant and the APC declines as income rises. D) the MPC and APC must be equal at all levels of income. Answer: C

Type: A Topic: 1 E: 154 MA: 154 18. For all levels of income to the left of the intersection of the 45-degree line and the consumption schedule, the APC is: A) greater than 100 percent. B) less than the APS. C) equal to the MPC. D) equal to 100 percent. Answer: A

Type: A Topic: 1 E: 156 MA: 156 19. The consumption and saving schedules reveal that the: A) MPC is greater than zero, but less than one. B) MPC and APC are equal at the point where the consumption schedule intersects the 45-degree line. C) APS is positive at all income levels. D) MPC is equal to or greater than one at all income levels. Answer: A

Type: A Topic: 1 E: 156 MA: 156 20. The size of the MPC is assumed to be: A) less than zero. B) greater than one. Answer: C

C) greater than zero, but less than one.

D) two or more.

Type: A Topic: 1 E: 153-154 MA: 153-154 21. As disposable income increases, consumption: A) and saving both increase. B) and saving both decrease. Answer: A

C) decreases and saving increases. D) increases and saving decreases.

Type: D Topic: 1 E: 154 MA: 154 22. The average propensity to consume indicates the: A) amount by which income exceeds consumption. B) relationship between a change in saving and the consequent change in consumption. C) percentage of total income that will be consumed. D) percentage of a change in income that will be consumed. Answer: C

Type: A Topic: 1 E: 153 MA: 153 23. The relationship between consumption and disposable income is such that: A) an inverse and stable relationship exists between consumption and income. B) a direct, but very volatile, relationship exists between consumption and income. C) a direct and relatively stable relationship exists between consumption and income. D) the two are always equal. Answer: C

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Type: A Topic: 1 E: 156 MA: 156 24. If the MPC is .8 and disposable income is $200, then A) consumption and saving cannot be determined from the information given. B) saving will be $20. C) personal consumption expenditures will be $80. D) saving will be $40. Answer: A

Type: A Topic: 1 E: 156 MA: 156 25. The MPC for an economy is: A) the slope of the consumption schedule or line. B) the slope of the savings schedule or line. C) 1 divided by the slope of the consumption schedule or line. D) 1 divided by the slope of the savings schedule or line. Answer: A

Type: F Topic: 1 E: 158 MA: 158 26. In contrast to investment, consumption is: A) relatively stable. B) relatively unstable. Answer: A

C) measurable.

D) unmeasurable.

Use the following to answer questions 27-28: (Advanced analysis) Answer the next question(s) on the basis of the following consumption schedule: C = 20 + .9Y , where C is consumption and Y is disposable income.

Type: E Topic: 1 E: 156 MA: 156 27. Refer to the above data. The MPC is: A) .45. B) .20. C) .50. D) .90. Answer: D

Type: E Topic: 1 E: 156 MA: 156 28. Refer to the above data. At an $800 level of disposable income, the level of saving is: A) $180. B) $740. C) $60. D) $18. Answer: C

Type: A Topic: 1 E: 156 MA: 156 29. Which one of the following will cause a movement down along an economy's consumption schedule? A) an increase in stock prices C) an increase in consumer indebtedness B) a decrease in stock prices D) a decrease in disposable income Answer: D

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Type: G Topic: 1 E: 156 MA: 156 30.

The above diagram shows consumption schedules for economies A and B. We can say that the: A) MPC is greater in B than in A. B) APC at any given income level is greater in B than in A. C) MPS is smaller in B than in A. D) MPC is greater in A than in B. Answer: D

Type: A Topic: 1 E: 154 MA: 154 31. At the point where the consumption schedule intersects the 45-degree line: A) the MPC is 1.00. C) saving is equal to consumption. B) the APC is 1.00. D) the economy is in equilibrium. Answer: B

Type: C Topic: 1 E: 156 MA: 156 32. Holly's break-even level of income is $10,000 and her MPC is 0.75. If her actual disposable income is $16,000, her level of: A) consumption spending will be $14,500. C) consumption spending will be $13,000. B) consumption spending will be $15,500. D) saving will be $2,500. Answer: A

Type: A Topic: 1 E: 156 MA: 156 33. If Ben's MPC is .80, this means that he will: A) spend eight-tenths of any increase in his disposable income. B) spend eight-tenths of any level of disposable income. C) break even when his disposable income is $8,000. D) save two-tenths of any level of disposable income. Answer: A

Type: A Topic: 1 E: 154 MA: 154 34. Suppose a family's consumption exceeds its disposable income. This means that its: A) MPC is greater than 1. B) MPS is negative. C) APC is greater than 1. D) APS is positive. Answer: C

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Type: E Topic: 1 E: 154 MA: 154 35. (Advanced analysis) If the equation for the consumption schedule is C = 20 + 0.8Y , where C is consumption and Y is disposable income, then the average propensity to consume is 1 when disposable income is: A) $80. B) $100. C) $120. D) $160. Answer: B

Type: E Topic: 1 E: 156 MA: 156 36. (Advanced analysis) The equation C = 35 + .75Y , where C is consumption and Y is disposable income, shows that: A) households will consume three-fourths of whatever level of disposable income they receive. B) households will consume $35 if their disposable income is zero and will consume three-fourths of any increase in disposable income they receive. C) there is an inverse relationship between disposable income and consumption. D) households will save $35 if their disposable income is zero and will consume three-fourths of any increase in disposable income they receive. Answer: B

Type: E Topic: 1 E: 156 MA: 156 37. (Advanced analysis) If the equation C = 20 + .6Y , where C is consumption and Y is disposable income, were graphed: A) the vertical intercept would be +.6 and the slope would be +20. B) it would reveal an inverse relationship between consumption and disposable income. C) the vertical intercept would be negative, but consumption would increase as disposable income rises. D) the vertical intercept would be +20 and the slope would be +.6. Answer: D

Type: A Topic: 1 E: 154 MA: 154 38. One can determine the amount of any level of total income that is consumed by: A) multiplying total income by the slope of the consumption schedule. B) multiplying total income by the APC. C) subtracting the MPS from total income. D) multiplying total income by the MPC. Answer: B

Type: C Topic: 1 E: 154, 156 MA: 154, 156 39. Which of the following is correct? A) MPC + MPS = APC + APS B) APC + MPS = APS + MPC Answer: A

C) APC + MPC = APS + MPS D) APC - APS = MPC - MPS

Saving function/APS/MPS Type: A Topic: 2 E: 154 MA: 154 40. The consumption and saving schedules reveal that: A) consumption rises, but saving declines, as disposable income rises. B) saving varies inversely with the profitability of investment. C) saving varies directly with the level of disposable income. D) saving is inversely related to the rate of interest. Answer: C

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Type: D Topic: 2 E: 154 MA: 154 41. Dissaving means: A) the same thing as disinvesting. B) that households are spending more than their current incomes. C) that saving and investment are equal. D) that disposable income is less than zero. Answer: B

Type: D Topic: 2 E: 154 MA: 154 42. Dissaving occurs where: A) income exceeds consumption. B) saving exceeds consumption. Answer: C

C) consumption exceeds income. D) saving exceeds income.

Type: A Topic: 2 E: 156 MA: 156 43. Which of the following relations is not correct? A) 1 - MPC = MPS B) APS + APC = 1 C) MPS = MPC + 1 Answer: C

D) MPC + MPS = 1

Type: A Topic: 2 E: 154 MA: 154 44. The saving schedule is drawn on the assumption that as income increases: A) saving will decline absolutely and as a percentage of income. B) saving will increase absolutely, but remain constant as a percentage of income. C) saving will increase absolutely, but decline as a percentage of income. D) saving will increase absolutely and as a percentage of income. Answer: D

Type: A Topic: 2 E: 154 MA: 154 45. At the point where the consumption schedule intersects the 45-degree line: A) the MPC equals 1. B) the APC is zero. C) saving equals income. D) saving is zero. Answer: D

Type: A Topic: 2 E: 154 MA: 154 46. The saving schedule is such that as aggregate income increases by a certain amount saving: A) increases by the same amount as the increase in income. B) does not change. C) increases, but by a smaller amount. D) increases by an even larger amount. Answer: C

Type: A Topic: 2 E: 156 MA: 156 47. If the consumption schedule is linear, then the: A) saving schedule will also be linear. B) MPS will decline as income rises. Answer: A

C) MPC will decline as income rises. D) APC will be constant at all levels of income.

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Type: A Topic: 2 E: 153 MA: 153 48. Given the consumption schedule, it is possible to graph the relevant saving schedule by: A) subtracting the MPC from 1 at each level of income. B) subtracting investment from consumption at each level of GDP. C) plotting the horizontal differences between the consumption schedule and the 45-degree line. D) plotting the vertical differences between the consumption schedule and the 45-degree line. Answer: D

Type: A Topic: 2 E: 154 MA: 154 49. As aggregate income decreases, the APC: A) and APS will both increase. B) will decrease, but the APS will increase. Answer: C

C) will increase, but the APS will decrease. D) and APS will both decrease.

Type: A Topic: 2 E: 156 MA: 156 50. If the marginal propensity to consume is .9, then the marginal propensity to save must be: A) 1. B) .1. C) 1.1. D) .9. Answer: B

Type: A Topic: 2 E: 156 MA: 156 51. The greater is the marginal propensity to consume, the: A) smaller is the marginal propensity to save. C) lower is the average propensity to consume. B) higher is the interest rate. D) lower is the price level. Answer: A

Type: A Topic: 2 E: 156 MA: 156 52. If the saving schedule is a straight line, the: A) MPS must be constant. B) APS must be constant. Answer: A

C) APC must be constant. D) MPC must be rising.

Type: A Topic: 2 E: 154 MA: 154 53. Which one of the following will cause a movement up along an economy's saving schedule? A) an increase in household debt outstanding C) an increase in stock prices B) an increase in disposable income D) an increase in interest rates Answer: B

Shifts in consumption and saving functions

Type: D Topic: 3 E: 156-157 MA: 156-157 54. In the late 1990s the U. S. stock market boomed, causing U.S. consumption to rise. Economists refer to this outcome as the: A) Keynes effect. B) interest-rate effect. C) wealth effect. D) multiplier effect. Answer: C

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Type: A Topic: 3 E: 157 MA: 157 55. The wealth effect is shown graphically as a: A) shift of the consumption schedule. B) movement along an existing consumption schedule. C) shift of the investment schedule. D) movement along an existing investment schedule. Answer: A

Use the following to answer questions 56-59:

C2
Consumption

C1
b a

0

Income

Type: G Topic: 3 E: 157 MA: 157 56. Refer to the above graph. A movement from b to a along C1 might be caused by a: A) recession. B) wealth effect of an increase in stock market prices. C) decrease in income tax rates. D) increase in saving. Answer: A

Type: G Topic: 3 E: 157 MA: 157 57. Refer to the above graph. A shift of the consumption schedule from C1 to C2 might be caused by a: A) recession. B) wealth effect of an increase in stock market prices. C) increase in income tax rates. D) increase in saving. Answer: B

Type: G Topic: 3 E: 157 MA: 157 58. Refer to the above graph. A movement from a to b along C1 might be caused by a: A) recession. B) wealth effect of an increase in stock market prices. C) increase in income tax rates. D) increase in real GDP. Answer: D

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Type: G Topic: 3 E: 157 MA: 157 59. Refer to the above graph. A shift of the consumption schedule from C2 to C1 might be caused by a: A) increase in real GDP. B) reverse wealth effect, caused by a decrease in stock market prices. C) decrease in income tax rates. D) decrease in saving. Answer: B

Type: C Topic: 3 E: 157 MA: 157 60. An upward shift of the saving schedule suggests: A) nothing with respect to changes in the APC and APS. B) that the APC and APS have both decreased at each GDP level. C) that the APC and APS have both increased at each GDP level. D) that the APC has decreased and the APS has increased at each GDP level. Answer: D

Type: A Topic: 3 E: 157 MA: 157 61. Which of the following will not tend to shift the consumption schedule upward? A) a currently small stock of durable goods in the possession of consumers B) the expectation of a future decline in the consumer price index C) a currently low level of household debt. D) the expectation of future shortages of essential consumer goods. Answer: B

Type: A Topic: 3 E: 157 MA: 157 62. If the consumption schedule shifts upward and the shift was not caused by a tax change, the saving schedule: A) will not shift. C) will shift downward. B) may shift either upward or downward. D) will also shift upward. Answer: C

Type: A Topic: 3 E: 156 MA: 156 63. Which of the following will not cause the consumption schedule to shift? A) a sharp increase in the amount of wealth held by households B) a change in consumer incomes C) the expectation of a recession D) a growing expectation that consumer durables will be in short supply Answer: B

Type: A Topic: 3 E: 157 MA: 157 64. An increase in personal taxes will shift: A) both the consumption and saving schedules downward. B) both the consumption and saving schedules upward. C) the consumption schedule upward and the saving schedule downward. D) the consumption schedule downward and the saving schedule upward. Answer: A

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Type: A Topic: 3 E: 157 MA: 157 65. If for some reason households become increasingly thrifty, we could show this by: A) a downshift of the saving schedule. C) an upshift of the saving schedule. B) an upshift of the consumption schedule. D) an increase in the equilibrium GDP. Answer: C

Type: G Topic: 3 E: 156 MA: 156 66.

Suppose the economy's saving schedule shifts from S1 to S 2 as shown in the above diagram. We can say that its: A) MPC has increased. B) MPS has increased. C) APS has increased at all levels of disposable income. D) APS has decreased at all levels of disposable income. Answer: B

Type: C Topic: 3 E: 154 MA: 154 67. If a consumption schedule shifts upward, this necessarily means that the: A) MPC has increased. B) MPS has decreased. C) APC is now higher at each level of disposable income. D) APC is now lower at each level of disposable income. Answer: C

Type: A Topic: 3 E: 158 MA: 158 68. Assume the economy's consumption and saving schedules simultaneously shift downward. This must be the result of: A) an increase in disposable income. C) an increase in personal taxes. B) an increase in household wealth. D) the expectation of a recession. Answer: C

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Type: G Topic: 3 E: 154 MA: 154 69.

Suppose an economy's consumption schedule shifts from C1 to C2 as shown in the above diagram. We can say that its: A) MPC has increased but its APC at each income level is unchanged. B) APC at each income level is increased but its MPC is unchanged. C) MPC and APC at each income level have both increased. D) MPC and APC at each income level have both decreased. Answer: C

Graphs/tables: mixed consumption and saving

Use the following to answer questions 70-72:
Disposable income $ 200 225 250 275 300

Consumption $ 205 225 245 265 285

Type: T Topic: 4 E: 156 MA: 156 70. Refer to the above data. The marginal propensity to consume is: A) .25. B) .75. C) .20. D) .80. Answer: D

Type: T Topic: 4 E: 154 MA: 154 71. Refer to the above data. At the $200 level of disposable income: A) the marginal propensity to save is 2½ percent. C) the average propensity to save is .20. B) dissaving is $5. D) the average propensity to consume is .80. Answer: B

Type: T Topic: 4 E: 156 MA: 156 72. Refer to the above data. If disposable income was $325, we would expect consumption to be: A) $315. B) $305. C) $20. D) $290. Answer: B

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Use the following to answer questions 73-78:

Type: G Topic: 4 E: 154 MA: 154 73. Refer to the above diagram. The average propensity to consume is 1 at point: A) F. B) A. C) D. D) B. Answer: B

Type: G Topic: 4 E: 156 MA: 156 74. Refer to the above diagram. The marginal propensity to consume is equal to: A) AE/0E. B) CF/CD. C) CB/AB. D) CD/CF. Answer: C

Type: G Topic: 4 E: 154-155 MA: 154-155 75. Refer to the above diagram. At income level F the volume of saving is: A) BD. B) AB. C) CF-BF. D) CD. Answer: D

Type: G Topic: 4 E: 154 MA: 154 76. Refer to the above diagram. Consumption will be equal to income at: A) an income of E. B) an income of F. C) point C. D) point D. Answer: A

Type: G Topic: 4 E: 154-155 MA: 154-155 77. Refer to the above diagram. The economy is dissaving: A) in the amount CD. C) at income level H. B) at all income levels greater than E. D) at income level E. Answer: C

Type: G Topic: 4 E: 156 MA: 156 78. Refer to the above diagram. The marginal propensity to save is: A) CD/EF. B) CB/CF. C) CB/AF. D) EF/CB. Answer: A

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Use the following to answer questions 79-80:
120 100 80 60
40

Consumption (billions)

C

20

45 20 40 60 80 100 120 Income (billions)

0

Type: A Topic: 4 E: 153 MA: 153 79. The above figure suggests that: A) consumption would be $60 billion even if income were zero. B) saving is zero at the $120 billion income level. C) as income increases, consumption decreases as a percentage of income. D) as income increases, consumption decreases absolutely. Answer: C

Type: A Topic: 4 E: 154-155 MA: 154-155 80. Refer to the above figure. If the relevant saving schedule were constructed: A) saving would be minus $20 billion at the zero level of income. B) aggregate saving would be $60 at the $60 billion level of income. C) its slope would be 1/2. D) it would slope downward and to the right Answer: A

Use the following to answer questions 81-83: Answer the next question(s) on the basis of the following data for a hypothetical economy. Disposable income $ 0 50 100 150 200 Saving $-10 0 10 20 30

Type: T Topic: 4 E: 156 MA: 156 81. Refer to the above data. The marginal propensity to consume is: A) .80. B) .75. C) .20. D) .25. Answer: A

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Type: T Topic: 4 E: 154 MA: 154 82. Refer to the above data. At the $100 level of income, the average propensity to save is: A) .10. B) .20. C) .25. D) .90. Answer: A

Type: T Topic: 4 E: 156 MA: 156 83. Refer to the above data. If plotted on a graph, the slope of the saving schedule would be: A) .80. B) .10. C) .20. D) .15. Answer: C

Use the following to answer questions 84-88:

Type: G Topic: 4 E: 156 MA: 156 84. Refer to the above diagram. The marginal propensity to save is equal to: A) CD/0D. B) 0B/0A. C) 0D/0D. D) CD/BD. Answer: D

Type: G Topic: 4 E: 154 MA: 154 85. Refer to the above diagram. At disposable income level D, the average propensity to save is equal to: A) CD/BD. B) CD/D. C) D/CD. D) A/B. Answer: B

Type: G Topic: 4 E: 154-155 MA: 154-155 86. Refer to the above diagram. At disposable income level D, consumption is: A) equal to CD. B) equal to D minus CD. C) equal to CD/D. D) equal to CD plus BD. Answer: B

Type: G Topic: 4 E: 154-155 MA: 154-155 87. Refer to the above diagram. Consumption equals disposable income when: A) disposable income is B. B) disposable income is D. C) CD equals A. Answer: A

D) B equals CD.

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Type: A Topic: 4 E: 156-157 MA: 156-157 88. The saving schedule shown in the above diagram would shift downward if, all else equal: A) the average propensity to save increased at each income level. B) the marginal propensity to save rose at each income level. C) consumer wealth rose rapidly because of a significant increase in stock market prices. D) the real interest rate fell. Answer: C Use the following to answer questions 89-96: Answer the next question(s) on the basis of the following consumption schedules. DI signifies disposable income and C represents consumption expenditures. All figures are in billions of dollars.

(1) DI $ 0 10 20 30 40 50 C $ 4 11 18 25 32 39 DI $ 0 80 160 240 320 400

(2) C $ 65 125 185 245 305 365

(3) DI C $ 0 $ 2 20 20 40 38 60 56 80 74 100 92

Type: T Topic: 4 E: 156 MA: 156 89. Refer to the above data. The marginal propensity to consume in economy (1) is: A) .5. B) .3. C) .8. D) .7. Answer: D

Type: T Topic: 4 E: 156 MA: 156 90. Refer to the above data. The marginal propensity to consume: A) is highest in economy (1). C) is highest in economy (3). B) is highest in economy (2). D) cannot be calculated from the data given. Answer: C

Type: T Topic: 4 E: 156 MA: 156 91. Refer to the above data. The marginal propensity to save: A) is highest in economy (1). C) is highest in economy (3). B) is highest in economy (2). D) cannot be determined from the data given. Answer: A

Type: T Topic: 4 E: 154 MA: 154 92. Refer to the above data. At an income level of $40 billion, the average propensity to consume: A) is highest in economy (1). C) is highest in economy (3). B) is highest in economy (2). D) cannot be determined from the data given. Answer: B

Type: T Topic: 4 E: 154 MA: 154 93. Refer to the above data. At an income level of $400 billion, the average propensity to save in economy (2) is: A) .9125. B) .0725. C) .0875. D) .9305. Answer: C

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Type: T Topic: 4 E: 156 MA: 156 94. (Advanced analysis) Refer to the above data. When plotted on a graph, the vertical intercept of the consumption schedule in economy (3) is _____ and the slope is _____. A) minus $2; .9. B) $2; .18. C) $100; .5. D) $2; .9. Answer: D

Type: T Topic: 4 E: 158 MA: 158 95. Refer to the above data. Suppose that consumption decreased by $2 billion at each level of DI in each of the three countries. We can conclude that the: A) marginal propensity to consume will remain unchanged in each of the three countries. B) marginal propensity to consume will decline in each of the three countries. C) average propensity to save will fall at each level of DI in each of the three countries. D) marginal propensity to save will rise in each of the three countries. Answer: A

Type: T Topic: 4 E: 157 MA: 157 96. Refer to the above data. A $2 billion increase in consumption at each level of DI could be caused by: A) a decrease in consumer wealth. C) an increase in taxation. B) new expectations of higher future income. D) an increase in saving. Answer: B

Use the following to answer questions 97-100:

Type: G Topic: 4 E: 154 MA: 154 97. Refer to the above diagram. The break-even level of disposable income: A) is zero. B) is minus $10. C) is $100. D) cannot be determined from the information given. Answer: C

Type: G Topic: 4 E: 156 MA: 156 98. Refer to the above diagram. The marginal propensity to consume is: A) .2. B) .8. C) .4. D) .3. Answer: B

Type: G Topic: 4 E: 156 MA: 156 99. (Advanced analysis) The equation for the above saving schedule is: A) Yd = -20 + .8S. B) Yd = 20 + .2S. C) S = -20 + .2Yd. D) S = 20 + .8Yd. Answer: C

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Type: G Topic: 4 E: 154-155 MA: 154-155 100. Refer to the above diagram. The average propensity to consume: A) is greater than 1 at all levels of disposable income above $100. B) is greater than 1 at all levels of disposable income below $100. C) is equal to the average propensity to save. D) cannot be determined from the information given. Answer: B

Use the following to answer questions 101-104:
$270 240 210

Consumption (C)

45 line

180 150 120 90 60

C

30
0

45 $30 60 90 120 150 180 210 240 270 300 Income (Y)

Type: G Topic: 4 E: 154 MA: 154 101. Refer to the above diagram. The break-even level of income is: A) zero. B) $150. C) $60. D) $120. Answer: B

Type: G Topic: 4 E: 154 MA: 154 102. Refer to the above diagram. The average propensity to consume is: A) greater than 1 at all levels of income above $150. B) greater than 1 at all levels of income below $150. C) zero. D) .6. Answer: B

Type: G Topic: 4 E: 156 MA: 156 103. Refer to the above diagram. The marginal propensity to consume is: A) .4. B) .6. C) .5. D) .8. Answer: B

Type: G Topic: 4 E: 156 MA: 156 104. (Advanced analysis) Refer to the above diagram. The equation for the consumption schedule is: A) C = .6Y . B) Y = 60 + .6C. C) C = 60 + .6Y . D) C = 60 + .4Y . Answer: C

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Use the following to answer questions 105-106: (Advanced analysis) Answer the next question(s) on the basis of the following data:

Disposable income (Yd) $ 0 100 200 300 400

Consumption (C) $ 40 100 160 220 280

Type: T Topic: 4 E: 156 MA: 156 105. Which of the following equations correctly represents the above data? A) Yd = 40 + .6C B) C = 60 + .4Yd C) C = 40 + .6Yd D) C = .6Yd Answer: C

Type: T Topic: 4 E: 156 MA: 156 106. Which of the following equations represents the saving schedule implicit in the above data? A) S = C - Yd B) S = 40 + .4Yd C) S = 40 + .6Yd D) S = -40 + .4Yd Answer: D

Investment demand

Type: F Topic: 5 E: 160 MA: 160 Status: New 107. The investment demand curve portrays an inverse (negative) relationship between: A) investment and real GDP. C) the nominal interest rate and investment. B) the real interest rate and investment. D) the price level and investment. Answer: B

Type: F Topic: 5 E: 160 MA: 160 Status: New 108. The investment demand slopes downward and to the right because lower real interest rates: A) expand consumer borrowing, making investments more profitable. B) boost expected rates of returns on investment. C) enable more investment projects to be undertaken profitably. D) create tax incentives to invest. Answer: C

Type: A Topic: 5 E: 159 MA: 159 Status: New 109. Other things equal, a decrease in the real interest rate will: A) shift the investment demand curve to the right. B) shift the investment demand curve to the left. C) move the economy upward along its existing investment demand curve. D) move the economy downward along its existing investment demand curve. Answer: D

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Type: A Topic: 5 E: 159 MA: 159 110. Suppose that a new machine tool having a useful life of only one year costs $80,000. Suppose, also, that the net additional revenue resulting from buying this tool is expected to be $96,000. The expected rate of return on this tool is: A) 80 percent. B) 8 percent. C) 2 percent. D) 20 percent. Answer: D

Type: A Topic: 5 E: 159 MA: 159 111. Assume a machine which has a useful life of only one year costs $2,000. Assume, also, that net of such operating costs as power, taxes, and so forth, the additional revenue from the output of this machine is expected to be $2,300. The expected rate of return on this machine is: A) 7.5 percent. B) 10 percent. C) 15 percent. D) 20 percent. Answer: C

Type: A Topic: 5 E: 159 MA: 159 112. If the firm in the previous question finds it can borrow funds at an interest rate of 10 percent the firm should: A) not purchase the machine because the expected rate of return exceeds the interest rate. B) not purchase the machine because the interest rate exceeds the expected rate of return. C) purchase the machine because the expected rate of return exceeds the interest rate. D) purchase the machine because the interest rate exceeds the expected rate of return. Answer: C

Type: D Topic: 5 E: 159-160 MA: 159-160 113. The relationship between the real interest rate and investment is shown by the: A) investment demand schedule. C) saving schedule. B) consumption of fixed capital schedule. D) aggregate supply curve. Answer: A

Type: A Topic: 5 E: 159-160 MA: 159-160 114. Given the expected rate of return on all possible investment opportunities in the economy: A) an increase in the real rate of interest will reduce the level of investment. B) a decrease in the real rate of interest will reduce the level of investment. C) a change in the real interest rate will have no impact on the level of investment. D) an increase in the real interest rate will increase the level of investment. Answer: A

Type: A Topic: 5 E: 159-160 MA: 159-160 115. A decline in the real interest rate will: A) increase the amount of investment spending. B) shift the investment schedule downward. Answer: A

C) shift the investment demand curve to the right. D) shift the investment demand curve to the left.

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Type: A Topic: 5 E: 159-160 MA: 159-160 116. The immediate determinants of investment spending are the: A) expected rate of return on capital goods and the real interest rate. B) level of saving and the real interest rate. C) marginal propensity to consume and the real interest rate. D) interest rate and the expected price level. Answer: A

Type: A Topic: 5 E: 160 MA: 160 117. The investment demand curve suggests: A) that changes in the real interest rate will not affect the amount invested. B) there is an inverse relationship between the real rate of interest and the level of investment spending. C) that an increase in business taxes will tend to stimulate investment spending. D) there is a direct relationship between the real rate of interest and the level of investment spending. Answer: B

Type: T Topic: 5 E: 160 MA: 160 118. Assume there are no prospective investment projects (I) that will yield an expected rate of return (r) of 25 percent or more, but that there are $5 billion of investment opportunities with an expected rate of return between 20 and 25 percent, an additional $5 billion between 15 and 20 percent, and so on. The investmentdemand curve for this economy is:

(a) r I 25% $10 20 15 15 20 10 25 5 30 0 35 Answer: B

(b) r I 25% $ 0 20 5 15 10 10 15 5 20 0 25

(c) r I 20% $10 15 20 10 30 5 40 0 50

(d) r 25% 20 15 10 5 0 I $ 5 10 15 20 25 30

Type: T Topic: 5 E: 160 MA: 160 119. In view of your answer to the previous question, if the real interest rate is 15 percent in this economy, the aggregate amount of investment will be: A) $25. B) $20. C) $15. D) $10. Answer: D

Type: C Topic: 5 E: 162 MA: 162 120. If business taxes are reduced and the real interest rate increases: A) consumption and saving will necessarily increase. B) the level of investment spending might either increase or decrease. C) the level of investment spending will necessarily increase. D) the level of investment spending will necessarily decrease. Answer: B

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Type: A Topic: 5 E: 162 MA: 162 121. Other things equal, a 10 percent decrease in corporate income taxes will: A) decrease the market price of real capital goods. B) have no effect on the location of the investment-demand curve. C) shift the investment-demand curve to the right. D) shift the investment-demand curve to the left. Answer: C

Type: A Topic: 5 E: 162 MA: 162 122. The investment demand curve will shift to the right as the result of: A) the availability of excess production capacity. B) an increase in business taxes. C) businesses becoming more optimistic about future business conditions. D) an increase in the real interest rate. Answer: C

Type: A Topic: 5 E: 159-160 MA: 159-160 123. Other things equal, the real interest rate and the level of investment are: A) related only when saving equals planned investment. B) unrelated. C) inversely related. D) directly related. Answer: C

Use the following to answer questions 124-125: Answer the next question(s) on the basis of the following table: Expected rate of return 12% 10 8 6 4 2 Amount of investment with this rate of return or higher (billions) $10 20 30 40 50 60

Type: T Topic: 5 E: 160 MA: 160 124. The above table reflects a(n): A) interest rate schedule. B) demand-for-money schedule. Answer: C

C) investment demand schedule. D) profit schedule.

Type: T Topic: 5 E: 160 MA: 160 125. The above schedule indicates that if the real interest rate is 8 percent, then: A) we cannot tell what volume of investment will be profitable. B) $30 billion will be both saved and invested. C) $30 billion of investment will be undertaken. D) $60 billion of investment will be undertaken. Answer: C

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Type: C Topic: 5 E: 162 MA: 162 126. Other things equal, if the real interest rate falls and business taxes rise: A) investment will rise until it is equal to saving. B) we will be uncertain as to the resulting change in investment. C) we can be certain that investment will rise. D) we can be certain that investment will fall. Answer: B

Type: A Topic: 5 E: 162 MA: 162 127. The investment demand curve will shift to the right as a result of: A) an increase in the excess production capacity available in industry. B) an increase in business taxes. C) technological progress. D) an increase in the acquisition and maintenance cost of capital goods. Answer: C

Type: A Topic: 5 E: 162 MA: 162 128. The investment demand curve will shift to the left as a result of: A) an increase in the excess production capacity available in industry. B) a decrease in business taxes. C) increased business optimism with respect to future economic conditions. D) a decrease in labor costs. Answer: A

Type: A Topic: 5 E: 159 MA: 159 129. If the real interest rate in the economy is i and the expected rate of return from additional investment is r, then more investment will be forthcoming when: A) r falls. B) i is greater than r. C) r is greater than i. D) i rises. Answer: C

Type: A Topic: 5 E: 162 MA: 162 130. A rightward shift of the investment demand curve might be caused by: A) an increase in the price level. B) a decline in the real interest rate. C) an increase in the expected rate of return on investment. D) an increase in business taxes. Answer: C

Type: A Topic: 5 E: 159 MA: 159 131. The real interest rate is: A) the percentage increase in money that the lender receives on a loan. B) the percentage increase in purchasing power that the lender receives on a loan. C) also called the after-tax interest rate. D) usually higher than the nominal interest rate. Answer: B

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Type: A Topic: 5 E: 160 MA: 160 132. When we draw an investment demand curve we hold constant all of the following except: A) the expected rate of return on the investment. C) the interest rate. B) business taxes. D) the present stock of capital goods. Answer: C

Type: A Topic: 5 E: 159 MA: 159 133. If the nominal interest rate is 18 percent and the real interest rate is 6 percent, the inflation rate is: A) 18 percent. B) 24 percent. C) 12 percent. D) 6 percent. Answer: C

Type: A Topic: 5 E: 159-160 MA: 159-160 134. If the inflation rate is 10 percent and the real interest rate is 12 percent, the nominal interest rate is: A) 2 percent. B) zero percent. C) 10 percent. D) 22 percent. Answer: D

Type: A Topic: 5 E: 160 MA: 160 135. A high rate of inflation is likely to cause a: A) high nominal interest rate. B) low nominal interest rate. Answer: A

C) low rate of growth of nominal GDP. D) decrease in nominal wages.

Type: A Topic: 5 E: 160 MA: 160 136. If the real interest rate in the economy is i and the expected rate of return on additional investment is r, then other things equal: A) more investment will be forthcoming when i exceeds r. B) less investment will be forthcoming when r rises. C) r will fall as more investment is undertaken. D) r will exceed i at all possible levels of investment. Answer: C

Type: A Topic: 5 E: 159 MA: 159 137. If the real interest rate in the economy is i and the expected rate of return on additional investment is r, then other things equal: A) investment will take place until i and r are equal. B) investment will take place until r exceeds i by the greatest amount. C) r will rise as more investment is undertaken. D) i will fall as more investment is undertaken. Answer: A

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Type: G Topic: 5 E: 160 MA: 160 138. Assume that for the entire business sector of a private closed economy there is $0 worth of investment projects that will yield an expected rate of return of 25 percent or more. But there are $15 worth of investments that will yield an expected rate of return of 20-25 percent; another $15 with an expected rate of return of 15-20 percent; and similarly an additional $15 of investment projects in each successive rate of return range down to and including the 0-5 percent range.

Which of the lines on the above diagram represents these data? A) A B) B C) C D) D Answer: B

Use the following to answer questions 139-141: Answer the next question(s) on the basis of the following information for a private closed economy. Assume that for the entire business sector of the economy there is $0 worth of investment projects that will yield an expected rate of return of 25 percent or more. But there are $15 worth of investments that will yield an expected rate of return of 20-25 percent; another $15 with an expected rate of return of 15-20 percent; and similarly an additional $15 of investment projects in each successive rate of return range down to and including the 0-5 percent range.

Type: G Topic: 5 E: 159 MA: 159 139. Refer to the above information. If the real interest rate is 15 percent, what amount of investment will be undertaken? A) $15 B) $30 C) $45 D) $60 Answer: B

Type: G Topic: 5 E: 159 MA: 159 140. Refer to the above information. If the real interest rate is 5 percent, what amount of investment will be undertaken? A) $15 B) $30 C) $45 D) $60 Answer: D

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Type: G Topic: 5 E: 160 MA: 160 141. Refer to the above information. The expected rate of return curve: A) shows a direct relationship between the interest rate and investment. B) is also the investment demand curve. C) is indeterminant. D) implies a direct (positive) relationship between the interest rate and the level of GDP. Answer: B

Use the following to answer questions 142-144:

Real interest rate

ID2 ID1
ID3

0

Investment

Type: G Topic: 5 E: 162 MA: 162 Status: New 142. Which of the following would shift the investment demand curve from ID1 to ID2? A) a lower interest rate C) a higher interest rate B) lower expected rates of return on investment D) higher expected rates of return on investment Answer: D

Type: G Topic: 5 E: 162 MA: 162 Status: New 143. Which of the following would shift the investment demand curve from ID1 to ID3? A) a lower interest rate C) a higher interest rate B) lower expected rates of return on investment D) higher expected rates of return on investment Answer: B

Type: G Topic: 5 E: 160 MA: 160 Status: New 144. Which of the following would increase investment, while leaving an existing investment demand curve, say, ID2, in place? A) a lower interest rate C) lower expected returns on investment B) a higher interest rate D) higher expected returns on investment Answer: A

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Type: F Topic: 5 E: 162-163 MA: 162-163 Status: New 145. In annual percentage terms, investment spending in the United States is: A) less variable than real GDP. C) less variable than the price level. B) less variable than consumption spending. D) more variable than real GDP. Answer: D

Multiplier effect

Type: A Topic: 6 E: 164 MA: 164 146. The multiplier effect means that: A) consumption is typically several times as large as saving. B) a change in consumption can cause a larger increase in investment. C) an increase in investment can cause GDP to change by a larger amount. D) a decline in the MPC can cause GDP to rise by several times that amount. Answer: C

Type: E Topic: 6 E: 166 MA: 166 147. The multiplier is: A) 1/MPC. B) 1/(1 + MPC). C) 1/MPS. Answer: C

D) 1/(1 - MPS).

Type: A Topic: 6 E: 164 MA: 164 148. The multiplier is useful in determining the: A) full-employment unemployment rate. B) level of business inventories. C) rate of inflation. D) change in GDP resulting from a change in spending. Answer: D

Type: D Topic: 6 E: 164 MA: 164 149. The multiplier is defined as: A) 1 - MPS. B) change in GDP × initial change in spending. Answer: C

C) change in GDP/initial change in spending. D) change in GDP - initial change in spending.

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Use the following to answer questions 150-151:

Type: G Topic: 6 E: 156 MA: 156 150. The above figure shows the saving schedules for economies 1, 2, 3, and 4. Which economy has the highest marginal propensity to consume? A) 1 B) 2 C) 3 D) 4 Answer: D

Type: G Topic: 6 E: 166 MA: 166 151. The above figure shows the saving schedules for economies 1, 2, 3, and 4. Which economy has the largest multiplier? A) 1 B) 2 C) 3 D) 4 Answer: D

Type: E Topic: 6 E: 166 MA: 166 152. If 100 percent of any change in income is spent, the multiplier will be: A) equal to the MPC. B) 1. C) zero. D) infinitely large. Answer: D

Type: E Topic: 6 E: 166 MA: 166 153. The multiplier can be calculated as: A) 1/(MPS + MPC) B) MPC/MPS Answer: C

C) 1/(1 - MPC)

D) 1 - MPC = MPS

Type: D Topic: 6 E: 166 MA: 166 154. The multiplier: A) occurs only in response to a change in the level of investment spending. B) can be found by taking the reciprocal of the MPS. C) occurs only when intended investment increases as GDP increases. D) is measured by the slope of the saving schedule. Answer: B

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Type: A Topic: 6 E: 166 MA: 166 155. The size of the multiplier is equal to the: A) slope of the consumption schedule. B) reciprocal of the slope of the consumption schedule. C) slope of the saving schedule. D) reciprocal of the slope of the saving schedule. Answer: D

Type: C Topic: 6 E: 166 MA: 166 156. If the MPS is only half as large as the MPC, the multiplier is: A) 2. B) 3. C) 4. D) 5. Answer: B

Type: A Topic: 6 E: 166 MA: 166 157. If the MPC is .70 and gross investment increases by $3 billion, the equilibrium GDP will: A) increase by $10 billion. C) decrease by $4.29 billion. B) increase by $2.10 billion. D) increase by $4.29 billion. Answer: A

Type: A Topic: 6 E: 166 MA: 166 158. The numerical value of the multiplier will be smaller the: A) larger the average propensity to consume. C) larger the slope of the consumption schedule. B) larger the slope of the saving schedule. D) smaller the slope of the saving schedule. Answer: B

Type: A Topic: 6 E: 165 MA: 165 159. The practical significance of the multiplier is that it: A) equates the real interest rate and the expected rate of return on investment. B) magnifies initial changes in spending into larger changes in GDP. C) keeps inflation within tolerable limits. D) helps to stabilize the economy. Answer: B

Type: F Topic: 6 E: 166 MA: 166 160. The multiplier: A) varies directly with the slope of the investment demand schedule. B) is unrelated to the slope of the saving schedule. C) will be greater, the smaller is the slope of the saving schedule. D) will be greater, the steeper is the slope of the saving schedule. Answer: C

Type: A Topic: 6 E: 166 MA: 166 161. The increase in income that results from an increase in investment spending would be greater the: A) smaller the MPS. B) smaller the APC. C) larger the MPS. D) smaller the MPC. Answer: A

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Type: A Topic: 6 E: 164 MA: 164 162. The multiplier effect: A) reduces the MPC. B) magnifies changes in spending into larger changes in output and income. C) promotes stability of the general price level. D) lessens upswings and downswings in business activity. Answer: B

Type: E Topic: 6 E: 166 MA: 166 163. If the MPC is .6, the multiplier will be: A) 4.0. B) 6.0. C) 2.5. D) 1.67. Answer: C

Type: C Topic: 6 E: 166 MA: 166 164. Assume the MPC is 2/3. If investment spending increases by $2 billion, the level of GDP will increase by: A) $3 billion. B) $2/3 billion. C) $6 billion. D) $2 billion. Answer: C

Type: E Topic: 6 E: 166 MA: 166 165. The multiplier is: A) 1/APS. B) 1/APC. C) 1/MPC. Answer: D

D) 1/MPS.

Type: A Topic: 6 E: 164 MA: 164 Status: New 166. The multiplier applies to: A) investment but not to net exports or government spending. B) investment, net exports, and government spending. C) increases in spending but not to decreases in spending. D) spending by the private sector but not by the public sector. Answer: B

Type: A Topic: 6 E: 164 MA: 164 167. The multiplier effect indicates that: A) a decline in the interest rate will cause a proportionately larger increase in investment. B) a change in spending will change aggregate income by a larger amount. C) a change in spending will increase aggregate income by the same amount. D) an increase in total income will generate a larger change in aggregate expenditures. Answer: B

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Use the following to answer questions 168-173: Answer the next question(s) on the basis of the following table that illustrates the multiplier process. Change in income Assumed increase in investment Second round All other rounds Totals $20 $_____ $_____ $_____ Change in consumption $_____ $12.80 $36.00 $_____ Change in saving $4 $_____ $_____ $20

Type: T Topic: 6 E: 156 MA: 156 168. Refer to the above table. The marginal propensity to consume is: A) .5. B) .75. C) .8. D) .9. Answer: C

Type: T Topic: 6 E: 156 MA: 156 169. Refer to the above table. The marginal propensity to save is: A) .5. B) .25. C) .2. D) .1. Answer: C

Type: T Topic: 6 E: 156 MA: 156 170. Refer to the above table. The change in income in round two will be: A) $4. B) $16. C) $20. D) $24. Answer: B

Type: T Topic: 6 E: 164 MA: 164 171. Refer to the above table. The total change in income resulting from the initial change in investment will be: A) $100. B) $20. C) $80. D) $200. Answer: A

Type: T Topic: 6 E: 165 MA: 165 172. Refer to the above table. The total change in consumption resulting from the initial change in investment will be: A) $100. B) $96. C) $180. D) $80. Answer: D

Type: T Topic: 6 E: 166 MA: 166 173. Refer to the above table. The multiplier in this economy is: A) 2. B) 4. C) 5. D) 10. Answer: C

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Type: C Topic: 6 E: 164 MA: 164 174. If a $200 billion increase in investment spending creates $200 billion of new income in the first round of the multiplier process and $160 billion in the second round, the multiplier in the economy is: A) 4. B) 5. C) 3.33. D) 2.5. Answer: B

Type: C Topic: 6 E: 164 MA: 164 175. If a $50 billion decrease in investment spending causes income to decline by $50 billion in the first round of the multiplier process and by $25 in the second round, the multiplier in the economy is: A) 2. B) 3.33. C) 5. D) 10. Answer: A

Type: C Topic: 6 E: 165 MA: 165 176. If a $100 billion decrease in investment spending causes income to decline by $100 billion in the first round of the multiplier process and by $75 billion in the second round, income will eventually decline by: A) $200 billion. B) $300 billion. C) $400 billion. D) $500 billion. Answer: C

Type: C Topic: 6 E: 165 MA: 165 177. If a $500 billion increase in investment spending increases income by $500 billion in the first round of the multiplier process and by $450 in the second round, income will eventually increase by: A) $2500 billion. B) $3000 billion. C) $4000 billion. D) $5000 billion. Answer: D

Type: C Topic: 6 E: 166 MA: 166 178. If the marginal propensity to save is 0.2 in an economy, a $20 billion rise in investment spending will increase: A) GDP by $120 billion. C) saving by $25 billion. B) GDP by $20 billion. D) consumption by $80 billion. Answer: D

Type: A Topic: 6 E: 166 MA: 166 179. A $1 billion increase in investment will cause a: A) (1/MPS) billion increase in GDP. B) (MPS) billion increase in GDP. Answer: A

C) (1 - MPC) billion increase in GDP. D) (MPC - MPS) billion increase in GDP.

Type: F Topic: 6 E: 166-167 MA: 166-167 180. The Council of Economic Advisers has estimated that the actual multiplier for the U.S. economy is approximately: A) 4. B) 3.5. C) 3. D) 2. Answer: D

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Type: F Topic: 6 E: 166-167 MA: 166-167 Status: New 181. The actual multiplier effect in the U.S. economy is less than the multiplier effect in the text examples because: A) the real-world MPS is larger than the MPS in the examples. B) in addition to saving, households use some of any increase in income to buy imported goods and to pay higher taxes. C) the gap between the nominal interest rate and the real interest rate widens as the economy expands or contracts. D) the MPC in the United States is greater than 1. Answer: B

Consider This Questions

Type: F E: 159 MA: 159 Status: New 182. (Consider This) U.S. consumption increased between March 2000 and July 2002 even though stock values declined by $3.7 trillion. One of the reasons was that: A) lower interest rates allowed many households to reduce their monthly loan payments and increase their consumption spending. B) deflation occurred, which increased purchasing power. C) economic growth accelerated relative to the prior two years. D) the unemployment rate dramatically declined. Answer: A

Type: F E: 159 MA: 159 Status: New 183. (Consider This) Part of the wealth effect of a $3.7 trillion decline in stock values between March 2000 and July 2002 was offset by rising: A) tax rates. B) interest rates. C) house values. D) expectations of future income. Answer: C

Last Word Questions

Type: A E: 167 MA: 167 184. (Last Word) Art Buchwald's article "Squaring the Economic Circle" is a humorous description of: A) a negative GDP gap. C) the marginal propensity to save. B) a positive GDP gap. D) the multiplier. Answer: D

Type: A E: 167 MA: 167 185. (Last Word) Art Buchwald's article "Squaring the Economic Circle" humorously describes how: A) a person's decision not to buy an automobile eventually reduces many people's incomes, including that of the person making the original decision. B) a price increase on a single product eventually leads to rapid inflation. C) an increase in imports eventually leads to a greater increase in exports. D) a government tax rate increase eventually results in the government collecting less tax revenue than before the tax rate hike. Answer: A

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True/False Questions

Type: A E: 154 MA: 154 186. If DI is $275 billion and the APC is 0.8, we can conclude that saving is $55 billion. Answer: True

Type: A E: 156 MA: 156 187. If the MPC is constant at various levels of income, then the APC must also be constant at all of those income levels. Answer: False

Type: A E: 154 MA: 154 188. The average propensity to consume is defined as income divided by consumption. Answer: False

Type: D E: 156 MA: 156 189. 1 - MPC = MPS. Answer: True

Type: A E: 159 MA: 159 190. A decline in the real interest rate will shift the investment demand curve to the right. Answer: False

Type: A E: 156 MA: 156 191. If the Brown family's marginal propensity to consume is 0.70, then it will necessarily consume seven-tenths of its total income. Answer: False

Type: A E: 156 MA: 156 192. 1 + MPS = MPC. Answer: False

Type: A E: 156 MA: 156 193. The slope of the consumption schedule is measured by the MPC. Answer: True

194.

Type: A E: 159 MA: 159 A specific investment will be undertaken if the expected rate of return, r, exceeds the interest rate, i. Answer: True

Type: A E: 163-164 MA: 163-164 195. Investment is highly stable; it rarely changes. Answer: False

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Type: A E: 156 MA: 156 196. The greater the MPC, the greater the multiplier. Answer: True

Type: A E: 166 MA: 166 197. If the MPS is 1, the multiplier will be 1. Answer: True

Type: A E: 166 MA: 166 198. The multiplier is equal to the reciprocal of the MPC. Answer: False

Type: F E: 164 MA: 164 Status: New 199. The multiplier shows the relationship between changes in a component of spending, say, investment, and the consequent changes in real income and output. Answer: True

Type: F E: 167 MA: 167 Status: New 200. The estimate for the value of the real-world multiplier is 2. Answer: True

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Topic 1. 2. 3. 4. 5. 6. Investment schedule Equilibrium GDP in private closed economy Open economy Mixed economy Recessionary and inflationary gaps Applications and critiques Last Word True-False

Question numbers 1-9 10-96 97-125 126-199 200-225 226-233 234-236 237-255

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Multiple Choice Questions Investment schedule

Type: D Topic: 1 E: 173 MA: 173 1. The relationship between investment and GDP is shown by the: A) consumption of fixed capital schedule. C) investment schedule. B) saving schedule. D) consumption schedule. Answer: C

Type: D Topic: 1 E: 174 MA: 174 2. In the aggregate expenditures model, it is assumed that investment: A) automatically changes in response to changes in real GDP. B) changes by less in percentage terms than changes in real GDP. C) does not respond to changes in interest rates. D) does not change when real GDP changes. Answer: D

Type: C Topic: 1 E: 173 MA: 173 3. All else equal, a large decline in the real interest rate will shift the: A) investment demand curve leftward. C) investment schedule upward. B) investment demand curve rightward. D) investment schedule downward. Answer: C

Chapter 10: The Aggregate Expenditures Model

Use the following to answer questions 4-9:

Type: G Topic: 1 E: 173 MA: 173 4. Refer to the above diagrams. Curve A: A) is an investment schedule and curve B is a consumption of fixed capital schedule. B) is an investment demand curve and curve B is an investment schedule. C) and B are totally unrelated. D) shifts to the left when curve B shifts upward. Answer: B

Type: G Topic: 1 E: 173 MA: 173 5. Refer to the above diagrams. Other things equal, Curve B will shift upward when: A) the level of GDP increases. C) curve A shifts to the left. B) the interest rate increases. D) curve A shifts to the right. Answer: D

Type: G Topic: 1 E: 173 MA: 173 6. Refer to the above diagrams. Other things equal, an interest rate decrease will: A) shift curve A to the right and shift curve B upward. B) shift curve A to the left and shift curve B downward. C) leave curve A in place but shift curve B downward. D) leave curve A in place but shift curve A upward. Answer: D

Type: G Topic: 1 E: 173 MA: 173 7. Refer to the above diagrams. Other things equal, an interest rate increase will: A) shift curve A to the right and shift curve B upward. B) shift curve A to the left and shift curve B downward. C) leave curve A in place but shift curve B downward. D) leave curve A in place but shfit curve A upward. Answer: C

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Type: G Topic: 1 E: 173 MA: 173 8. Refer to the above diagram. Other things equal, an interest rate reduction coupled with a rightward shift in curve A will: A) shift curve B upward. C) have no effeect on curve B. B) shift curve B downward. D) reduce GDP. Answer: A

Type: G Topic: 1 E: 173 MA: 173 9. Refer to the above diagram. The location of curve B depends on the: A) level of real GDP. B) location of curve A only. C) interest rate only. D) interest rate together with the location of curve A. Answer: D

Equilibrium GDP in private closed economy

Type: D Topic: 2 E: 174 MA: 174 10. The level of aggregate expenditures in the private closed economy is determined by the: A) expenditures of consumers and businesses. B) intersection of the saving schedule and the 45-degree line. C) equality of the MPC and MPS. D) intersection of the saving and consumption schedules. Answer: A

Use the following to answer questions 11-13: Answer the next question(s) on the basis of the following data for a private closed economy. Possible levels of domestic output and income (GDP = DI) $320 330 340 350 360 370 380 Consumption $320 327 334 341 348 355 362

Type: T Topic: 2 E: 155-156 MA: 155-156 11. Refer to the above data. The MPS is: A) 7/10. B) 3/10. C) 2/5. D) 3/5. Answer: B

Type: T Topic: 2 E: 154-155 MA: 154-155 12. Refer to the above data. At the $370 billion level of DI the APS is approximately: A) 4 percent. B) 7 percent. C) 1 percent. D) 16 percent. Answer: A

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Type: T Topic: 2 E: 174 MA: 174 13. Refer to the above data. If gross investment is $12 billion, the equilibrium level of GDP will be: A) $380. B) $370. C) $360. D) $350. Answer: C

Use the following to answer questions 14-17:

C + Ig
C + Ig

C $300
$200

$100 0

$100 $200 $300 GDP

Type: G Topic: 2 E: 175-176 MA: 175-176 14. Refer to the above diagram for a private closed economy. The equilibrium level of GDP is: A) $400. B) $300. C) $200. D) $100. Answer: B

Type: G Topic: 2 E: 175-176 MA: 175-176 15. Refer to the above diagram for a private closed economy. At the equilibrium level of GDP, investment and saving are both: A) $50. B) $100. C) $20. D) $40. Answer: A

Type: G Topic: 2 E: 175-176 MA: 175-176 16. Refer to the above diagram for a private closed economy. The $400 level of GDP is: A) that output at which saving is zero. B) too high because consumption exceeds investment. C) unstable because aggregate expenditures exceed GDP. D) unstable because aggregate expenditures are less than GDP. Answer: D

Type: G Topic: 2 E: 175-176 MA: 175-176 17. Refer to the above diagram for a private closed economy. Unplanned changes in inventories will be zero: A) only at the $300 level of GDP. C) at all levels of GDP. B) only at the $200 level of GDP. D) only at the $400 level of GDP. Answer: A

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Use the following to answer questions 18-21:

Type: G Topic: 2 E: 154-155 MA: 154-155 18. Refer to the above diagram that applies to a private closed economy. The APC is equal to 1 at income level: A) J. B) M. C) H. D) G. Answer: D

Type: G Topic: 2 E: 175-176 MA: 175-176 19. Refer to the above diagram that applies to a private closed economy. If aggregate expenditures are C + Ig2, the amount of saving at income level J is: A) LK. B) KN. C) KD. D) JD. Answer: B

Type: G Topic: 2 E: 155-156 MA: 155-156 20. Refer to the above diagram that applies to a private closed economy. The slope of the consumption schedule in this figure reveals that the: A) MPS rises as income rises. C) APC is constant. B) MPC is constant. D) APC increases as income increases. Answer: B

Type: G Topic: 2 E: 175-176 MA: 175-176 21. Refer to the above diagram that applies to a private closed economy. If gross investment is Ig1, the equilibrium GDP and the level of consumption will be: A) H and HB respectively. C) J and JK respectively B) J and JI respectively. D) H and HF respectively. Answer: D

Type: A Topic: 2 E: 175 MA: 175 22. Other things equal, the slope of the aggregate expenditures schedule will increase as a result of: A) a decline in the size of the inflationary gap. C) an increase in the MPS. B) an increase in the MPC. D) a decline in the general price level. Answer: B

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Type: A Topic: 2 E: 174 MA: 174 23. The equilibrium level of GDP in a private closed economy is where: A) MPC = APC. B) unemployment is about 3 percent of the labor force. C) consumption equals saving. D) aggregate expenditures equal GDP. Answer: D

Type: A Topic: 2 E: 176-177 MA: 176-177 24. In a private closed economy, when aggregate expenditures equal GDP: A) consumption equals investment. B) consumption equals aggregate expenditures. C) planned investment equals saving. D) disposable income equals consumption minus saving. Answer: C

Type: A Topic: 2 E: 174-175 MA: 174-175 25. In a private closed economy, when aggregate expenditures exceed GDP: A) GDP will decline. C) saving will decline. B) business inventories will rise. D) business inventories will fall. Answer: D

Type: A Topic: 2 E: 177 MA: 177 26. If an unintended increase in business inventories occurs at some level of GDP, then GDP: A) entails a rate of aggregate expenditures in excess of the rate of aggregate production. B) may be either above or below the equilibrium output. C) is too low for equilibrium. D) is too high for equilibrium. Answer: D

Type: A Topic: 2 E: 177 MA: 177 27. The equilibrium level of GDP is associated with: A) an excess of planned investment over saving. B) no unintended changes in inventories. Answer: B

C) an unintended decrease in business inventories. D) an unintended increase in business inventories.

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Type: G Topic: 2 E: 175 MA: 175 28.
AE4 Consumption and investment AE3 AE2

AE1

45 0 Real GDP

Which aggregate expenditure schedule AE in the above diagram for a private closed economy implies the largest MPC, assuming investment is the same at each level of income? A) AE4 B) AE3 C) AE2 D) AE1 Answer: A

Type: A Topic: 2 E: 177 MA: 177 29. If at some level of GDP the economy is experiencing an unintended decrease in inventories: A) the aggregate level of saving will decline. C) the business sector will lay off workers. B) the price level will fall. D) domestic output will increase. Answer: D

Type: D Topic: 2 E: 174 MA: 174 30. The equilibrium GDP is the level of domestic output: A) where consumption equals saving. C) which is sustainable. B) where actual investment equals consumption. D) where full employment exists. Answer: C

Type: A Topic: 2 E: 177 MA: 177 31. If an unintended increase in business inventories occurs: A) we can expect aggregate production to be unaffected. B) we can expect businesses to increase the level of production. C) we can expect businesses to lower the level of production. D) aggregate expenditures must exceed the domestic output. Answer: C

32.

Type: A Topic: 2 E: 177 MA: 177 Assume that in a private closed economy consumption is $240 billion and investment is $50 billion, both at the $280 billion level of domestic output. Thus: A) saving is $10 billion. B) unplanned decreases in inventories of $10 billion will occur. C) the MPC is .80. D) unplanned increases in inventories of $10 billion will occur. Answer: B

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Type: A Topic: 2 E: 177 MA: 177 33. A private closed economy will expand when: A) actual GDP is less than potential GDP. B) unplanned decreases in inventories occur. Answer: B

C) aggregate expenditures are less than GDP. D) unplanned increases in inventories occur.

Type: A Topic: 2 E: 177 MA: 177 34. If aggregate expenditures exceed GDP in a private closed economy: A) leakages will exceed injections. C) unplanned investment in inventories will occur. B) planned investment will exceed saving. D) saving will exceed planned investment. Answer: B

Type: A Topic: 2 E: 177 MA: 177 35. For a private closed economy, an unintended decline in inventories suggests that: A) aggregate expenditures are less than the business sector expected them to be. B) aggregate expenditures exceed GDP. C) actual investment exceeds saving. D) planned investment is greater than consumption. Answer: B

Use the following to answer questions 36-39:

$200 180
Private spending (billions)

C+Ig

160 140
120 100 80 60 40 20

C

45 $20 40 60 80 100 120 140 160 180 200 GDP (billions)

0

Type: G Topic: 2 E: 175-176 MA: 175-176 36. Refer to the above diagram for a private closed economy. The equilibrium GDP is: A) $60 billion. C) between $60 and $180 billion. B) $180 billion. D) $60 billion at all levels of GDP. Answer: B

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Type: G Topic: 2 E: 175-176 MA: 175-176 37. Refer to the above diagram for a private closed economy. In this economy investment: A) decreases as GDP increases. C) is $40 billion at all levels of GDP. B) increases as GDP increases. D) is $60 billion at all levels of GDP. Answer: C

Type: G Topic: 2 E: 175 MA: 175 38. Refer to the above diagram for a private closed economy. In this economy aggregate expenditures: A) do not change as GDP increases. C) increase by $2 for every $4 increase in GDP. B) increase by $2 for every $5 increase in GDP. D) increase by $2 for every $3 increase in GDP. Answer: D

Type: G Topic: 2 E: 177 MA: 177 39. Refer to the above diagram for a private closed economy. Aggregate saving in this economy will be zero when: A) C + Ig cuts the 45-degree line. C) GDP is $60 billion. B) GDP is $180 billion. D) GDP is also zero. Answer: C

Type: D Topic: 2 E: 174 MA: 174 40. For a private closed economy aggregate expenditures consist of: A) C + Ig. B) C - Ig. C) C + S. D) C - S. Answer: A

Use the following to answer questions 41-43: (Advanced analysis) Answer the next question(s) on the basis of the following consumption and investment data for a private closed economy. Figures are in billions of dollars.

C = 60 + .6Y I = I0 = 30

Type: E Topic: 2 E: 175, 191 MA: 175, 191 41. Refer to the above data. The equilibrium level of income (Y ) is: A) 360. B) 225. C) 200. D) 135. Answer: B

Type: E Topic: 2 E: 175, 191 MA: 175, 191 42. Refer to the above data. In equilibrium the level of consumption spending will be: A) 170. B) 270. C) 160. D) 195. Answer: D

Type: E Topic: 2 E: 175, 191 MA: 175, 191 43. Refer to the above data. In equilibrium the level of saving will be: A) 30. B) 26. C) 25. D) 60. Answer: A

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Use the following to answer questions 44-46: (Advanced analysis) Answer the next question(s) on the basis of the following data. The letters Y, C, S, and I are used to represent GDP, consumption, saving, and investment respectively. GDP(Y) $ 0 100 200 300 400 500 Consumption(C) $ 60 120 180 240 300 360 Investment(I) $ 30 40 50 60 70 80

Type: E Topic: 2 E: 175 MA: 175 44. The equation representing the consumption schedule for the above economy is: A) C = Y - .6S. B) Y = C + S. C) C = 60 + .4Y . D) C = 60 + .6Y . Answer: D

Type: E Topic: 2 E: 175 MA: 175 45. The equation representing the investment schedule for the above economy is: A) I = .3Y . B) I = 80 -.3Y . C) I = 30 + .1Y . D) I = I0 = 30. Answer: C

Type: E Topic: 2 E: 175 MA: 175 46. Refer to the above data. Equilibrium Y (= GDP) is: A) $100. B) $200. C) $300. D) $400. Answer: C

Type: A Topic: 2 E: 175 MA: 175 47. When investment remains the same at each level of GDP in a private closed economy, the slope of the aggregate expenditures schedule: A) exceeds the MPC. B) is less than the MPC. C) equals the MPS. D) equals the MPC. Answer: D

Type: C Topic: 2 E: 154 MA: 154 48. Actual investment is $62 billion at an equilibrium output level of $620 billion in a private closed economy. The average propensity to save at this level of output is: A) .10. B) 10. C) .62. D) .84. Answer: A

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Use the following to answer questions 49-54:

Type: G Topic: 2 E: 175 MA: 175 49. Refer to the above diagram for a private closed economy. The MPC and MPS are: A) .6 and .4 respectively. B) .7 and .3 respectively. C) both .5. D) both .7. Answer: C

Type: G Topic: 2 E: 174-175 MA: 174-175 50. Refer to the above diagram for a private closed economy. Gross investment: A) is positively related to the level of GDP. B) is negatively related to the level of GDP. C) is independent of the level of GDP. D) must be subtracted from consumption to determine aggregate expenditures. Answer: C

Type: G Topic: 2 E: 175-176 MA: 175-176 51. Refer to the above diagram for a private closed economy. At the $200 level of GDP: A) consumption is $200 and planned investment is $50 so that aggregate expenditures are $250. B) consumption is $200 and planned investment is $100 so that aggregate expenditures are $300. C) consumption is $250 and actual investment is $50 so that aggregate expenditures are $300. D) aggregate expenditures fall short of GDP with the result that GDP will decline. Answer: A

Type: G Topic: 2 E: 175-176 MA: 175-176 52. Refer to the above diagram for a private closed economy. At the $400 level of GDP: A) aggregate expenditures exceed GDP with the result that GDP will rise. B) consumption is $350 and planned investment is zero so that aggregate expenditures are $350. C) consumption is $300 and planned investment is $50 so that aggregate expenditures are $350. D) consumption is $300 and actual investment is $100 so that aggregate expenditures are $400. Answer: C

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Type: G Topic: 2 E: 175-176 MA: 175-176 53. Refer to the above diagram for a private closed economy. At the $300 level of GDP: A) aggregate expenditures and GDP are equal. B) consumption is $200 and planned investment is $50. C) saving exceeds planned investment. D) consumption plus saving is $400. Answer: A

Type: G Topic: 2 E: 154 MA: 154 54. Refer to the above diagram for a private closed economy. At the equilibrium level of GDP the APC and APS: A) are 5/6 and 1/6 respectively. B) are equal to the MPC and MPS respectively. C) are 4/5 and 1/5 respectively. D) cannot be determined from the information given. Answer: A

Type: A Topic: 2 E: 177 MA: 177 55. If unintended increases in business inventories occur, we can expect: A) a decline in GDP and rising unemployment. C) an increase in consumption. B) inflation. D) an offsetting increase in planned investment. Answer: A

Use the following to answer questions 56-58: (Advanced analysis) Answer the next question(s) on the basis of the following information for a private closed economy, where Ig is gross investment, S is saving, and Y is gross domestic product (GDP). _ Ig = Ig = 80 S = -80 + .4Y

Type: E Topic: 2 E: 175-176 MA: 175-176 56. Refer to the above information. The equilibrium GDP will be: A) $160. B) $400. C) $360. D) $480. Answer: B

Type: E Topic: 2 E: 175-176 MA: 175-176 57. Refer to the above information. In equilibrium consumption will be: A) $400. B) $280. C) $320. D) $360. Answer: C

Type: E Topic: 2 E: 175-176 MA: 175-176 58. Refer to the above information. In equilibrium saving will be: A) $40. B) $120. C) $60. D) $80. Answer: D

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Use the following to answer questions 59-61: (Advanced analysis) Answer the next question(s) on the basis of the following information for a private closed economy.

S = -20 + .4Y Ig = 25 - 3i
where S is saving, Ig is gross investment, i is the real interest rate, and Y is GDP.

Type: E Topic: 2 E: 175-176 MA: 175-176 59. Refer to the above information. If the real interest rate is 5 percent, investment will be: A) $10 and the equilibrium GDP will be $75. C) $10 and the equilibrium GDP will be $120. B) $15 and the equilibrium GDP will be $100. D) $15 and the equilibrium GDP will be $180. Answer: A

Type: E Topic: 2 E: 175-176 MA: 175-176 60. Refer to the above information. In equilibrium the level of saving will be: A) $10. B) $15. C) $20. D) $30. Answer: A

Type: E Topic: 2 E: 175-176 MA: 175-176 61. Refer to the above information. In equilibrium the level of consumption will be: A) $80. B) $95. C) $65. D) $70. Answer: C

Type: A Topic: 2 E: 177 MA: 177 62. In a private closed economy _____ investment is equal to saving at all levels of GDP and equilibrium occurs only at that level of GDP where _____ investment is equal to saving. A) planned; actual B) actual; planned C) gross; net D) net; gross Answer: B

Type: E Topic: 2 E: 175-176 MA: 175-176 63. (Advanced analysis) If S = - 60 + .25Y and Ig = Ig = 60, where S is saving, Ig is gross investment, and Y is gross domestic product (GDP), then the equilibrium level of GDP is: A) $200. B) $320. C) $360. D) $480. Answer: D

Type: A Topic: 2 E: 175-176 MA: 175-176 64. In the aggregate expenditures model, equilibrium GDP in a private closed economy is indicated by: A) the equality of saving and planned investment. B) the intersection of aggregate expenditures and the 45-degree line. C) the absence of unplanned changes in inventories. D) all of the above. Answer: D

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Type: C Topic: 2 E: 178 MA: 178 65. In the aggregate expenditures model, technological progress will shift the investment schedule: A) downward and increase aggregate expenditures. B) downward and decrease aggregate expenditures. C) upward and increase aggregate expenditures. D) upward and decrease aggregate expenditures. Answer: C

Type: A Topic: 2 E: 175-176 MA: 175-176 66. In the aggregate expenditures model, the level of GDP moves toward an equilibrium because: A) the investment schedule is steeper than the saving schedule. B) the 45-degree line is steeper than the aggregate expenditures schedule. C) the saving schedule is steeper than the consumption schedule. D) wages and prices are flexible downward. Answer: B

Type: D Topic: 2 E: 175 MA: 175 67. At equilibrium real GDP in a private closed economy: A) the MPC must equal the APC. B) the slope of the aggregate expenditures schedule equals the MPS. C) aggregate expenditures and real GDP are equal. D) planned saving and consumption are equal. Answer: C

Use the following to answer questions 68-69: (Advanced analysis) Answer the next question(s) on the basis of the following information for a private closed economy where C is consumption, Y is the gross domestic product, Ig is gross investment, and i is the interest rate:

C = 40 + .8Y Ig = 60 - 2i _ i = i = 10

Type: E Topic: 2 E: 174-176 MA: 174-176 68. Refer to the above information. Given that the interest rate is 10 (percent), the amount that businesses will want to invest will be: A) $58. B) $60. C) $40. D) $20. Answer: C

Type: E Topic: 2 E: 174-176 MA: 174-176 69. Refer to the above information. The equilibrium level of GDP in this economy is: A) $240. B) $300. C) $360. D) $400. Answer: D

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Type: A Topic: 2 E: 177 MA: 177 70. What will be the effect of an excess of planned investment over saving in a private closed economy with unemployed resources? A) a decline in the rate of interest B) an unintended accumulation of inventories by businesses C) a rise in the real GDP D) the Federal budget will automatically move toward a deficit Answer: C

Type: A Topic: 2 E: 177 MA: 177 71. Which of the following statements is correct for a private closed economy? A) Saving equals planned investment only at the equilibrium level of GDP. B) All levels of GDP where planned investment exceeds saving will be too high for equilibrium. C) Planned and actual investment are identical at all possible levels of GDP. D) Saving equals actual investment only at the equilibrium level of GDP. Answer: A

Type: A Topic: 2 E: 177 MA: 177 72. At the $180 billion equilibrium level of income, saving is $38 billion in a private closed economy. Planned investment must be: A) $138 billion. B) $126 billion. C) $38 billion. D) $180 billion. Answer: C

Type: A Topic: 2 E: 177 MA: 177 73. In which of the following situations for a private closed economy will the level of GDP expand? A) when planned investment exceeds saving C) when saving exceeds consumption B) when planned investment exceeds consumption D) when consumption exceeds investment Answer: A

Type: A Topic: 2 E: 176-177 MA: 176-177 74. Planned investment plus unintended increases in inventories equals: A) actual investment. C) consumption minus saving. B) consumption of fixed capital. D) unintended saving. Answer: A

Type: A Topic: 2 E: 177 MA: 177 75. Saving is always equal to: A) planned investment less unintended increases in inventories. B) actual investment. C) planned investment. D) unintended changes in inventories. Answer: B

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Type: D Topic: 2 E: 177 MA: 177 76. Actual investment is: A) gross investment less replacement investment. B) the ratio of planned investment to unintended increases in inventories. C) unintended increases in inventories less planned investment. D) planned investment plus unintended increases in inventories. Answer: D

Type: A Topic: 2 E: 177 MA: 177 77. Actual investment equals saving: A) at all levels of GDP. B) at all below-equilibrium levels of GDP. Answer: A

C) at all above-equilibrium levels of GDP. D) only at the equilibrium GDP.

Type: A Topic: 2 E: 177 MA: 177 78. Planned investment equals saving: A) at all levels of GDP. B) at all below-equilibrium levels of GDP. Answer: D

C) at all above-equilibrium levels of GDP. D) only at the equilibrium GDP.

Type: A Topic: 2 E: 174, 176-177 MA: 174, 176-177 79. That the economy has achieved aggregate equilibrium is indicated by: A) an equality of saving and planned investment. B) an equality of aggregate expenditures and GDP. C) the absence of unplanned changes in inventories. D) all of the above. Answer: D

Type: A Topic: 2 E: 177 MA: 177 80. Unintended changes in inventories: A) cause the economy to move away from the equilibrium GDP. B) are treated as components of consumption. C) bring actual investment and saving into equality only at the equilibrium level of GDP. D) bring actual investment and saving into equality at all levels of GDP. Answer: D

Type: D Topic: 2 E: 176-177 MA: 176-177 81. Investment and saving are, respectively: A) income and wealth. B) stocks and flows. Answer: C

C) injections and leakages. D) leakages and injections.

Type: C Topic: 2 E: 175-176 MA: 175-176 82. In a private closed economy (a) the marginal propensity to save is 0.25, (b) consumption equals income at $120 billion, and (c) the level of investment is $40 billion. What is the equilibrium level of income? A) $280 billion B) $320 billion C) $262 billion D) $198 billion Answer: A

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Type: C Topic: 2 E: 175-176 MA: 175-176 83. If the marginal propensity to consume is 0.9 in a private closed economy, a $20 billion decline in investment spending will decrease: A) GDP by $20 billion. C) saving by $20. B) GDP by $100 billion. D) consumption by $200 billion. Answer: C

Type: C Topic: 2 E: 175-176 MA: 175-176 84. Suppose that the level of GDP increased by $100 billion in a private closed economy where the marginal propensity to consume is 0.5. Aggregate expenditures must have increased by: A) $100 billion. B) $50 billion. C) $500 billion. D) $5 billion. Answer: B

Type: E Topic: 2 E: 178 MA: 178 85. (Advanced analysis) Assume the consumption schedule for a private closed economy is C = 40 + 0.75Y , where C is consumption and Y is gross domestic product. The multiplier for this economy is: A) 3. B) 4. C) 5. D) 10. Answer: B

Type: E Topic: 2 E: 178 MA: 178 86. (Advanced analysis) Assume the saving schedule for a private closed economy is S = -20 + 0.2Y , where S is saving and Y is gross domestic product. The multiplier for this economy is: A) 3. B) 4. C) 5. D) 10. Answer: C

Use the following to answer questions 87-90: Answer the next question(s) below on the basis of the following information for a private closed economy: Gross domestic product $100 200 300 400 500 Consumption $120 180 240 300 360 Expected rate of return 25% 20 15 10 5 Amount of investment $ 0 20 40 60 80

Type: T Topic: 2 E: 172-174 MA: 172-174 87. Refer to the above information. If the real interest rate is 20 percent, the equilibrium GDP will be: A) $100. B) $200. C) $300. D) $400. Answer: B

Type: T Topic: 2 E: 172-174 MA: 172-174 88. Refer to the above information. If the real interest rate is 10 percent, the equilibrium GDP will be: A) $100. B) $200. C) $300. D) $400. Answer: C

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Type: T Topic: 2 E: 172-174 MA: 172-174 89. Refer to the above information. Your answers to the two previous questions suggest that: A) the interest rate and the equilibrium GDP are directly related. B) the interest rate and the equilibrium GDP are inversely related. C) the interest rate and the equilibrium GDP are unrelated. D) as the interest rate falls, investment also falls. Answer: B

Type: T Topic: 2 E: 178 MA: 178 90. Refer to the above information. The multiplier for this economy is: A) 2. B) 2.5. C) 3. D) 4. Answer: B

Use the following to answer questions 91-93: Answer the next question(s) on the basis of the following information for a private closed economy:

Expected rate of return 15% 12 9 6 3 0

Investment 0 40 80 120 160 200

GDP $100 200 300 400 500 600

Consumption $100 160 220 280 340 400

Type: T Topic: 2 E: 172-174 MA: 172-174 91. Refer to the above information. If the real interest rate is 9 percent, the equilibrium GDP will be: A) $600. B) $500. C) $400. D) $300. Answer: D

Type: T Topic: 2 E: 172-174 MA: 172-174 92. Refer to the above information. In this economy a 3 percentage point decrease in the interest rate will: A) increase equilibrium GDP by $200. C) increase equilibrium GDP by $100. B) increase equilibrium GDP by $50. D) decrease equilibrium GDP by $50. Answer: C

Type: T Topic: 2 E: 178 MA: 178 93. Refer to the above information. The multiplier in this economy is: A) 4. B) 5. C) 2.5. D) 3.5. Answer: C

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Use the following to answer questions 94-96:

Type: G Topic: 2 E: 175-176 MA: 175-176 94. Refer to the above diagram for a private closed economy. The marginal propensity to consume is: A) GF/GB. B) DA/GB. C) FE/DE. D) FB/0B. Answer: C

Type: G Topic: 2 E: 178 MA: 178 95. Refer to the above diagram for a private closed economy. The upshift of the aggregate expenditures schedule from (C + Ig)1 to (C + Ig) 2 reflects: A) an increase in investment expenditures. C) an increase in the MPC. B) a decrease in consumption expenditures. D) an increase in the APS. Answer: A

Type: G Topic: 2 E: 178 MA: 178 96. Refer to the above diagram for a private closed economy. The multiplier is: A) GF/DE. B) GF/GB. C) FE/GF. D) AB/GF. Answer: D

Open economy

Type: A Topic: 3 E: 179 MA: 179 97. Inports have the same effect on the current size of GDP as: A) exports. B) investment. C) consumption. D) saving. Answer: D

Type: A Topic: 3 E: 179 MA: 179 98. Exports have the same effect on the current size of GDP as: A) imports. B) investment. C) taxes. D) saving. Answer: B

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Type: A Topic: 3 E: 179 MA: 179 99. At the equilibrium GDP for an open economy: A) net exports may be either positive or negative. B) imports will always exceed exports. Answer: A

C) exports will always exceed imports. D) exports and imports will be equal.

Type: A Topic: 3 E: 180 MA: 180 100. Other things equal, if a change in the tastes of American consumers causes them to purchase more foreign goods at each level of U.S. GDP: A) unemployment will decrease domestically. C) inflation will occur domestically. B) U.S. GDP will fall. D) U.S. real GDP will rise. Answer: B

Use the following to answer questions 101-102: Complete the following table and answer the next question(s) on the basis of the resulting data. All figures are in billions of dollars.

Domestic output (GDP = PI) $ 200 250 300 350 400 450 500

Aggregate expenditures, closed economy $ 230 270 310 350 390 430 470

Exports $ 30 30 30 30 30 30 30

Imports $ 20 20 20 20 20 20 20

Net exports $____ ____ ____ ____ ____ ____ ____

Aggregate expenditures, open economy $____ ____ ____ ____ ____ ____ ____

Type: T Topic: 3 E: 179 MA: 179 101. If the above economy was closed to international trade, the equilibrium GDP and the multiplier would be: A) $300 and 5. B) $350 and 4. C) $400 and 4. D) $350 and 5. Answer: D

Type: T Topic: 3 E: 179-180 MA: 179-180 102. Refer to the above table. For the open economy the equilibrium GDP and the multiplier are: A) $300 and 2.5. B) $450 and 5. C) $400 and 4. D) $400 and 5. Answer: D

Type: A Topic: 3 E: 180 MA: 180 103. If net exports decline from zero to some negative amount, the aggregate expenditures schedule would: A) shift upward. B) shift downward. C) not move (net exports do not affect aggregate expenditures). D) become steeper. Answer: B

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Type: A Topic: 3 E: 179 MA: 179 104. If net exports are positive: A) the equilibrium GDP must be greater than the full-employment GDP. B) imports must exceed exports. C) aggregate expenditures are greater at each level of GDP than when net exports are zero or negative. D) some other component of aggregate expenditures must be negative. Answer: C

Type: C Topic: 3 E: 179-180 MA: 179-180 105. An upward shift of the aggregate expenditures schedule might be caused by: A) a decrease in exports, with no change in imports. B) a decrease in imports, with no change in exports. C) an increase in exports, with an equal decrease in investment spending. D) an increase in imports, with no change in exports. Answer: B

Type: A Topic: 3 E: 179 MA: 179 106. Other things equal, an increase in an economy's exports will: A) lower the marginal propensity to import. B) have no effect on domestic GDP because imports will change by an offsetting amount. C) decrease its domestic aggregate expenditures and therefore decrease its equilibrium GDP. D) increase its domestic aggregate expenditures and therefore increase its equilibrium GDP. Answer: D

Type: A Topic: 3 E: 181 MA: 181 107. If the dollar appreciates relative to foreign currencies, we would expect: A) the multiplier to decrease. C) a country's net exports to rise. B) a country's exports and imports to both fall. D) a country's net exports to fall. Answer: D

Type: A Topic: 3 E: 181 MA: 181 108. If a nation imposes tariffs and quotas on foreign products, the immediate effect will be to: A) reduce the rate of domestic inflation. C) increase domestic output and employment. B) increase efficiency in the world economy. D) reduce domestic output and employment. Answer: C

Type: A Topic: 3 E: 179 MA: 179 109. If the multiplier in an economy is 5, a $20 billion increase in net exports will: A) increase GDP by $100 billion. C) decrease GDP by $100 billion. B) reduce GDP by $20 billion. D) increase GDP by $20 billion. Answer: A

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Use the following to answer questions 110-113: (Advanced analysis) Answer the next question(s) on the basis of the following information for a private open economy:

C = 40 + .8Y _ Ig = Ig = 40 _ X = X = 20 _ M = M = 30

Type: E Topic: 3 E: 180 MA: 180 110. The equilibrium GDP (=Y ) in the above economy is: A) $200. B) $245. C) $320. D) $350. Answer: D

Type: E Topic: 3 E: 180 MA: 180 111. Refer to the above information. In equilibrium, saving is: A) $20. B) $30. C) $40. D) $50. Answer: B

Type: E Topic: 3 E: 180 MA: 180 112. Refer to the above information. This nation is incurring: A) a trade surplus. B) balance in its international trade. Answer: C

C) a trade deficit.

D) unemployment.

Type: A Topic: 3 E: 181 MA: 181 113. Refer to the above information. International trade in this case: A) has an expansionary effect on GDP. C) has no effect on GDP. B) has a contractionary effect on GDP. D) is causing inflation in this economy. Answer: B

Type: A Topic: 3 E: 180 MA: 180 114. If the equilibrium level of GDP in a private open economy is $1000 billion and consumption is $700 billion at that level of GDP, then: A) saving must be $300 billion. C) S + C must equal $300 billion. B) net exports must be $300 billion. D) Ig+ Xn must equal $300 billion. Answer: D

Type: D Topic: 3 E: 181 MA: 181 115. An exchange rate: A) is the ratio of the dollar volume of a nation's exports to the dollar volume of its imports. B) measures the interest rate ratios of any two nations. C) is the amount that one nation must export to obtain $1 worth of imports. D) is the price at that the currencies of any two nations exchange for one another. Answer: D

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Type: A Topic: 3 E: 181 MA: 181 116. If the United States wants to increase its net exports, it might take steps to: A) increase its GDP. C) decrease the dollar price of foreign currencies. B) reduce existing tariffs and import quotas. D) increase the dollar price of foreign currencies. Answer: D

Type: A Topic: 3 E: 181 MA: 181 117. Other things equal, serious recession in the economies of U.S. trading partners will: A) have no perceptible impact on the U.S. economy. B) cause inflation in the U.S. economy. C) depress real output and employment in the U.S. economy. D) stimulate real output and employment in the U.S. economy. Answer: C

Use the following to answer questions 118-123:

Type: G Topic: 3 E: 179-180 MA: 179-180 118. Refer to the above diagram. If (C + Ig) are the private expenditures in the closed economy and Xn2 are the net exports in the open economy: A) exports are negative. C) net exports are negative. B) net exports are positive. D) exports are positive. Answer: B

Type: G Topic: 3 E: 180 MA: 180 119. Refer to the above diagram. If net exports are Xn2, the GDP in the open economy will exceed GDP in the closed economy by: A) AB. B) AD. C) FG. D) BD. Answer: D

Type: G Topic: 3 E: 180 MA: 180 120. Refer to the above diagram. The multiplier in this economy is: A) 0E/0A. B) BD/FG. C) FG/BD. D) BD/AD. Answer: B

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Type: G Topic: 3 E: 179-180 MA: 179-180 121. Refer to the above diagram. If aggregate expenditures in this economy are (C + Ig + Xn2), then the equilibrium levels of GDP and aggregate expenditures respectively will be: A) 0A and 0E. B) 0B and 0F. C) 0A and AH . D) 0D and DJ . Answer: D

Type: G Topic: 3 E: 181 MA: 181 122. Refer to the above diagram. The change in aggregate expenditures as shown from (C + Ig + Xn2) to (C + Ig + Xn 1) might be caused by: A) an appreciation of this nation's currency relative to the currencies of its trading partners. B) a depreciation of this nation's currency relative to the currencies of its trading partners. C) a decrease in this nation's price level relative to price levels abroad. D) a rightward shift in this nation's 45-degree line. Answer: A

Type: G Topic: 3 E: 181 MA: 181 123. Refer to the above diagram. The change in aggregate expenditures as shown from (C + Ig + Xn1) to (C + Ig + Xn 2) will produce: A) a decrease in real GDP. B) an inflationary gap if 0D is this nation's full-employment level of GDP. C) an increase in real GDP if 0B is this nation's full-employment level of GDP. D) an inflationary gap if 0B is this nation's full-employment level of GDP. Answer: D

Use the following to answer questions 124-125: (Advanced analysis) Answer the next question(s) on the basis of the following information for a private open economy. The letters Y , C, Ig, X , and M stand for GDP, consumption, gross investment, exports, and imports respectively. Figures are in billions of dollars.

C = 26 + .75Y Ig = 60 X = 24 M = 10

Type: E Topic: 3 E: 179-181 MA: 179-181 124. The equilibrium GDP for the above open economy is: A) $390. B) $375. C) $320. D) $400. Answer: D

Type: G Topic: 3 E: 179-181 MA: 179-181 125. The multiplier for the above economy is: A) 4.60. B) 3.33. C) 5.00. D) 4.00. Answer: D

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Mixed economy

Type: D Topic: 4 E: 182 MA: 182 126. In a mixed open economy the equilibrium GDP exists where: A) Ca + Ig + Xn intersects the 45-degree line. C) Ca + Ig + Xn + G = GDP. B) Ca + Ig = Sa + T + X . D) Ca + Ig + Xn = Sa + T . Answer: C

Type: D Topic: 4 E: 185 MA: 185 127. In a mixed open economy the equilibrium GDP is determined at that point where: A) Sa + M + T = Ig + X + G. B) the 45-degree line and the saving schedule intersect. C) Sa + X + G = Ig + T . D) Sa + Ig + X = G + T . Answer: A

Type: C Topic: 4 E: 185 MA: 185 128. Suppose that a mixed open economy is producing at its equilibrium income and that net exports are zero. If at the equilibrium income the public sector's budget shows a surplus: A) Ca + Ig + Xn + G must exceed GDP. C) a recessionary gap must exist. B) planned investment must exceed saving. D) saving must exceed planned investment. Answer: B

129.

Type: C Topic: 4 E: 182 MA: 182 Other things equal, if $100 billion of government purchases (G) is added to private spending (C + Ig + Xn), GDP will: A) increase by $100 billion. C) increase by more than $100 billion. B) increase by less than $100 billion. D) fall by $100 billion Answer: C

Type: C Topic: 4 E: 182 MA: 182 130. Suppose the economy's multiplier is 2. Other things equal, a $25 billion decrease in government expenditures on national defense will cause equilibrium GDP to: A) decrease by $50 billion. B) decrease by $150 billion. C) remain unchanged since spending on military goods is unproductive and usually wasteful. D) decrease by $25 billion. Answer: A

Type: A Topic: 4 E: 183 MA: 183 131. Assume the MPC is .8. If government were to impose $50 billion of new taxes on household income, consumption spending would decrease by: A) $100 billion. B) $90 billion. C) $40 billion D) $50 billion. Answer: C

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Use the following to answer questions 132-134:

Type: G Topic: 4 E: 183 MA: 183 132. Refer to the above diagram. The level of government spending: A) is equal to tax collections at each level of GDP. C) varies inversely with the level of GDP. B) is the same at all levels of GDP. D) varies directly with the level of GDP. Answer: B

Type: G Topic: 4 E: 183 MA: 183 133. Refer to the above diagram. The sizes of the multipliers associated with changes in investment and government spending in this economy are: A) 2.5 and 1.5 respectively. B) 3 and 2 respectively. C) both 2.5. D) 2 and 3 respectively. Answer: C

Type: G Topic: 4 E: 183 MA: 183 134. Refer to the above diagram. The impact of the public sector on the equilibrium GDP: A) is expansionary. B) is contractionary. C) is neutral. D) cannot be determined from the information given. Answer: A

Type: A Topic: 4 E: 182 MA: 182 135. Other things equal, the multiplier effect associated with a change in government spending is: A) the same as that associated with a change in taxes. B) equal to that associated with a change in investment or consumption. C) less than that associated with a change in investment. D) greater than that associated with a change in investment. Answer: B

Type: A Topic: 4 E: 185 MA: 185 136. In which of the following situations for a mixed open economy will the level of GDP expand? A) when Ig + X + G exceeds Sa + M + T C) when GDP exceeds Ca + Ig + G + Xn B) when Sa + T + M exceeds Ig + G + X D) when Ig + M + T exceeds Ca + X + S Answer: A

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Type: A Topic: 4 E: 183 MA: 183 137. If a lump-sum income tax of $25 billion is levied and the MPS is 0.20, the: A) saving schedule will shift upward by $5 billion. B) consumption schedule will shift downward by $25 billion. C) consumption schedule will shift downward by $20 billion. D) consumption schedule will shift upward by $25 billion. Answer: C

Type: A Topic: 4 E: 183 MA: 183 138. Which of the following statements is incorrect? A) Given the economy's MPS, a $15 billion reduction in government spending will reduce the equilibrium GDP by more than would a $15 billion increase in taxes. B) Other things unchanged, a tax reduction of $10 billion will increase the equilibrium GDP by $25 billion when the MPS is 0.4. C) If the MPC is 0.8 and GDP has declined by $40 billion, this was caused by a decline in aggregate expenditures of $8 billion. D) A government surplus is anti-inflationary; a government deficit is expansionary. Answer: B

Type: C Topic: 4 E: 184-185 MA: 184-185 139. Suppose the economy is operating at its full-employment-noninflationary GDP and the MPC is 0.75. The Federal government now finds that it must increase spending on military goods by $21 billion in response to a deterioration in the international political situation. To sustain full-employment-noninflationary GDP government must: A) reduce taxes by $28 billion. C) increase taxes by $21 billion. B) reduce transfer payments by $21 billion. D) increase taxes by $28 billion. Answer: D

Type: A Topic: 4 E: 184-185 MA: 184-185 140. A $1 increase in government spending on goods and services will have a greater impact on the equilibrium GDP than will a $1 decline in taxes because: A) government spending is more employment-intensive than is either consumption or investment spending. B) government spending increases the money supply and a tax reduction does not. C) a portion of a tax cut will be saved. D) taxes vary directly with income. Answer: C

Type: A Topic: 4 E: 183 MA: 183 141. The multiplier associated with a change in government purchases is: A) always equal to 1. B) smaller than that associated with an equal change in taxes. C) the same as that associated with a change in investment. D) less than that associated with a change in investment. Answer: C

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Type: A Topic: 4 E: 185 MA: 185 142. In a mixed open economy, if aggregate expenditures exceed GDP: A) Ig + X + G = Ca. C) Ig > S . B) Ca + Ig + Xn + G < domestic output. D) Ig + X + G > Sa + M + T . Answer: D

Type: A Topic: 4 E: 182 MA: 182 143. Ignoring international trade, in a mixed economy aggregate expenditures are comprised of: A) Ca + S + G. B) Ca + Ig + G. C) Ca + S + Ig. D) Ca + T + Ig. Answer: B

Type: A Topic: 4 E: 184-185 MA: 184-185 144. An increase in taxes of a specific amount will have a smaller impact on the equilibrium GDP than will a decline in government spending of the same amount because: A) the MPC is smaller in the private sector than it is in the public sector. B) declines in government spending always tend to stimulate private investment. C) disposable income will fall by some amount smaller than the tax increase. D) some of the tax increase will be paid out of income that would otherwise have been saved. Answer: D

Type: A Topic: 4 E: 184-185 MA: 184-185 145. If APC = .6 and MPC = .7, the immediate impact of an increase in personal taxes of $20 will be to: A) have no effect on consumption. C) decrease consumption by $12. B) decrease consumption by $14. D) increase consumption by $14. Answer: B

Use the following to answer questions 146-149: The following schedule contains data for a private closed economy. All figures are in billions. Use these data in answering the next question(s). GDP $140 180 220 260 300 C $150 180 210 240 270

Type: T Topic: 4 E: 173-174 MA: 173-174 146. Refer to the above data. If gross investment is $10 at all levels of GDP, the equilibrium GDP will be: A) $300. B) $260. C) $220. D) $180. Answer: C

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Type: T Topic: 4 E: 183 MA: 183 147. Refer to the above data. If a lump-sum tax of $20 is imposed, the consumption schedule will become:

(a) GDP $120 160 200 240 280 Answer: C C $150 180 210 240 270 GDP $140 180 220 260 300

(b) C $155 185 215 245 275 GDP $140 180 220 260 300

(c) C $135 165 195 225 255 GDP $140 180 220 260 300

(d) C $130 160 190 220 250

Type: T Topic: 4 E: 183 MA: 183 148. Refer to the above data. If gross investment remains at $10 at all levels of GDP, the after-tax equilibrium level of GDP will be: A) $220. B) $190. C) $180. D) $160. Answer: D

Type: T Topic: 4 E: 184-185 MA: 184-185 149. Refer to the above data. Given the levels of investment and taxes already specified, the addition of governmental expenditures of $10 at each level of GDP will result in an equilibrium GDP of: A) $235. B) $220. C) $200. D) $180. Answer: C

Type: A Topic: 4 E: 183 MA: 183 150. Which of the following is a correct statement of the impacts of a lump-sum tax? A) Disposable income will increase by the amount of the tax and consumption at each level of GDP will decline by the amount of the tax multiplied by the MPC. B) Disposable income will decline by the amount of the tax and consumption at each level of GDP will decline by the amount of the tax multiplied by the multiplier. C) Disposable income will decline by the amount of the tax and consumption at each level of GDP will also decline by the amount of the tax. D) Disposable income will decline by the amount of the tax and consumption at each level of GDP will decline by the amount of the tax multiplied by the MPC. Answer: D

Type: A Topic: 4 E: 185 MA: 185 151. When the public sector is added to the aggregate expenditures model: A) the equilibrium condition becomes G + S = T + Ig + X . B) the equilibrium condition becomes G + T = S + Ig + X . C) the equilibrium condition becomes Ca + Ig + Xn + G + T = GDP. D) we add a new leakage in the form of taxes and a new injection in the form of government spending. Answer: D

Type: D Topic: 4 E: 182 MA: 182 152. The level of aggregate expenditures in a mixed open economy is comprised of: A) Ca + Ig + Xn B) Ca + Ig + G + T + Xn . C) Ca + Ig + Xn + G. D) Ca + G. Answer: C

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Type: A Topic: 4 E: 183 MA: 183 153. If the MPC is 2/3, the initial impact of an increase of $12 billion in lump-sum taxes will be to cause: A) a rightward shift in the investment demand schedule. B) an $8 billion downshift in the consumption schedule. C) a $4 billion upshift in the consumption schedule. D) a $12 billion downshift in the consumption schedule. Answer: B

Type: A Topic: 4 E: 185 MA: 185 154. In a mixed closed economy: A) government purchases and saving are injections, while investment and taxes are leakages. B) taxes and government purchases are leakages, while investment and saving are injections. C) taxes and savings are leakages, while investment and government purchases are injections. D) taxes and investment are injections, while saving and government purchases are leakages. Answer: C

Type: A Topic: 4 E: 184-185 MA: 184-185 155. An increase in taxes will have a greater effect on the equilibrium GDP: A) if the tax revenues are redistributed through transfer payments. B) the larger the MPS. C) the smaller the MPC. D) the larger the MPC. Answer: D

Type: A Topic: 4 E: 183 MA: 183 156. A lump-sum tax causes the after-tax consumption schedule: A) and the before-tax consumption schedule to coincide. B) to be steeper than the before-tax consumption schedule. C) to be flatter than the before-tax consumption schedule. D) to be parallel to the before-tax consumption schedule. Answer: D

Use the following to answer questions 157-160: (Advanced analysis) Answer the next question(s) on the basis of the following information for a mixed open economy. The letters Y , Ca, Ig, Xn, G , and T stand for GDP, consumption, gross investment, net exports, government purchases, and net taxes respectively. Figures are in billions of dollars.

Ca = 25 + .75(Y - T ) Ig = Ig0 = 50 Xn = Xn0 = 10 G = G0 = 70 T = T0 = 30

Type: A Topic: 4 E: 185 MA: 185 157. Refer to the above information. The equilibrium level of GDP for this economy is: A) $600. B) $530. C) $415. D) $400. Answer: B

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Type: A Topic: 4 E: 185 MA: 185 158. Refer to the above information. The multiplier for this economy is: A) 4. B) 3. C) 2. D) 2.33. Answer: A

Type: A Topic: 4 E: 185 MA: 185 159. Refer to the above information. If government desired to raise the equilibrium GDP to $650, it could: A) raise G by $45 and reduce T by $10. C) raise G by $30 or reduce T by $40. B) raise G by $40 and reduce T by $30. D) raise both G and T by $40. Answer: C

Type: A Topic: 4 E: 185 MA: 185 160. Refer to the above information. If the economy's tax schedule was T = 0.2Y rather than T = T0 = 30, the equilibrium GDP would be: A) $387.5. B) $518.5. C) $316. D) $412. Answer: A

Type: A Topic: 4 E: 184-185 MA: 184-185 161. Which of the following would increase GDP by the greatest amount? A) a $20 billion reduction in taxes B) $20 billion increases in both government spending and taxes C) $20 billion decreases in both government spending and taxes D) a $20 billion increase in government spending Answer: D

Type: A Topic: 4 E: 184-185 MA: 184-185 162. Which of the following is correct? A) Government expenditures and taxes both increase GDP. B) Government expenditures and taxes both decrease GDP. C) Government expenditures increase, but taxes decrease, GDP. D) Government expenditures decrease, but taxes increase, GDP. Answer: C

Type: C Topic: 4 E: 184-185 MA: 184-185 163. Which of the following would reduce GDP by the greatest amount? A) a $20 billion increase in taxes B) $20 billion increases in both government spending and taxes C) $20 billion decreases in both government spending and taxes D) a $20 billion decrease in government spending Answer: D

Type: A Topic: 4 E: 182 MA: 182 164. What do investment and government expenditures have in common? A) both represent injections to the circular flow C) neither is subject to the multiplier effect B) both represent leakages from the circular flow D) both represent a decline in indebtedness Answer: A

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Type: A Topic: 4 E: 185 MA: 185 165. Taxes represent: A) a leakage of purchasing power, like saving. B) an injection of purchasing power, like investment. C) an injection of purchasing power, like government spending. D) a leakage of purchasing power, like government spending. Answer: A

Type: A Topic: 4 E: 182 MA: 182 166. In moving from a private closed economy to a mixed closed economy in the aggregate expenditures model, government spending must be: A) added to saving. B) added to consumption and gross investment. C) subtracted from consumption and gross investment. D) added to gross investment and saving. Answer: B

Use the following to answer questions 167-171: The following information is for a closed economy:

GDP $100 200 300 400 500 600 700

C $100 160 220 280 340 400 460

S $ 0 40 80 120 160 200 240

Ig $80 80 80 80 80 80 80

Type: T Topic: 4 E: 182 MA: 182 167. Refer to the above information. If both government spending and taxes are zero, the equilibrium level of GDP is: A) $200. B) $300. C) $400. D) $500. Answer: B

Type: T Topic: 4 E: 183 MA: 183 168. Refer to the above information. If government now spends $80 billion at each level of GDP and taxes remain at zero, the equilibrium GDP: A) will rise to $700. B) will rise to $600. C) will rise to $500. D) may either rise or fall. Answer: C

Type: T Topic: 4 E: 183 MA: 183 169. Refer to the above information. The introduction of $80 billion of government spending has: A) lowered the multiplier from 2.5 to 2.0. C) increased the multiplier from 2.0 to 2.5. B) increased the multiplier from 2.5 to 3.0. D) had no effect on the size of the multiplier. Answer: D

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Type: T Topic: 4 E: 183 MA: 183 170. Refer to the above information. If in addition to spending $80 billion at each level of GDP, government imposes a lump-sum tax of $100: A) equilibrium GDP will now be $350. C) equilibrium GDP will now be $300. B) equilibrium GDP will now be $400. D) the equilibrium GDP cannot be determined. Answer: A

Type: T Topic: 4 E: 183 MA: 183 171. Refer to the above information. The addition of a $100 billion lump-sum tax: A) reduces the MPC and increases the multiplier. B) increases the MPC and decreases the multiplier. C) increases both the MPC and the multiplier. D) has no effect on either the MPC or the multiplier. Answer: D

Type: A Topic: 4 E: 185 MA: 185 172. ln moving from a private closed to a mixed closed economy in the aggregate expenditures model, taxes: A) must be added to gross investment. B) must be added to saving. C) must be added to consumption and gross investment. D) have no impact upon the equilibrium GDP. Answer: B

Type: C Topic: 4 E: 185 MA: 185 173. Suppose government finds it can increase the equilibrium real GDP $45 billion by increasing government purchases by $18 billion. On the basis of this information we can say that the: A) MPS in this economy is .4. B) MPC in this economy is .4. C) balanced-budget multiplier does not apply in this economy. D) multiplier is 3. Answer: A

Use the following to answer questions 174-176: Answer the next question(s) on the basis of the following table: GDP $ 500 510 520 530 540 550 560 570 Before taxes C S $ 480 $ 20 486 24 492 28 498 32 504 36 510 40 516 44 522 48 After taxes Ca Sa $ 474 $ 16 480 20 486 24 492 28 498 32 504 36 510 40 516 44

Type: T Topic: 4 E: 183-184 MA: 183-184 174. The tax in the above economy is a: A) 10 percent proportional tax. B) lump-sum tax of $20. Answer: C

C) lump-sum tax of $10. D) progressive tax.

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Type: T Topic: 4 E: 183 MA: 183 175. The MPC and MPS in the above economy: A) are .4 and .6 respectively. B) are .6 and .4 respectively. C) are .8 and .2 respectively. D) cannot be determined from the information given. Answer: B

Type: T Topic: 4 E: 183-184 MA: 183-184 176. Refer to the above table. If an additional lump-sum tax of $20 were imposed, we would expect: A) equilibrium GDP to fall by $30. C) equilibrium GDP to fall by $50. B) equilibrium GDP to fall by $20. D) equilibrium GDP to rise by $24. Answer: A

Type: A Topic: 4 E: 183 MA: 183 177. Suppose the multiplier is 4 and lump-sum taxes are increased by $16 in a closed economy. We can predict that: A) GDP will increase by $64. B) GDP will decrease by $64. C) the aggregate expenditures schedule will shift downward by $12. D) inflation will occur. Answer: C

Type: A Topic: 4 E: 185 MA: 185 178. In a mixed open economy, which of the following all affect the equilibrium GDP in the same direction? A) Ca, Ig, Sa, and M B) Sa, T, and M C) Ig, T, and Ca D) Sa, Ig, and X Answer: B

Type: A Topic: 4 E: 184 MA: 184 179. In the aggregate expenditures model, a reduction in taxes may: A) increase saving. B) decrease real GDP. C) increase unemployment. Answer: A

D) reduce consumption.

Type: A Topic: 4 E: 182 MA: 182 180. In the aggregate expenditures model, an increase in government spending may: A) decrease real GDP. B) increase output and employment. C) shift the aggregate expenditures schedule downward. D) reduce the size of the inflationary gap. Answer: B

Type: C Topic: 4 E: 182 MA: 182 181. If a $20 billion increase in government expenditures increases equilibrium GDP by $50 billion then: A) the multiplier is 2. C) inflation is occurring. B) the MPC for this economy is .6. D) the MPS for this economy is .6. Answer: B

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Type: C Topic: 4 E: 183 MA: 183 182. If a $10 billion decrease in lump-sum taxes increases equilibrium GDP by $40 billion then: A) the multiplier is 4. C) the MPC for this economy is .6. B) the MPC for this economy is .8. D) the multiplier is 3. Answer: B

Type: A Topic: 4 E: 183 MA: 183 183. A lump-sum tax means that: A) the tax only applies to one time period. B) the same amount of tax revenue is collected at each level of GDP. C) tax revenues vary directly with GDP. D) tax revenues vary inversely with GDP. Answer: B

Type: C Topic: 4 E: 183 MA: 183 184. In an aggregate expenditures diagram, a lump-sum tax (T ) will: A) not affect the C + Ig + Xn line. B) shift the C + Ig + Xn line upward by an amount equal to T . C) shift the C + Ig + Xn line downward by an amount equal to T . D) shift the C + Ig + Xn line downward by an amount equal to T × MPC. Answer: D

Type: A Topic: 4 E: 183 MA: 183 185. If government increases lump-sum taxes by $20 billion and the economy's MPC is .6, then the: A) consumption schedule will shift upward by $12 billion. B) consumption schedule will shift downward by $12 billion. C) equilibrium GDP will increase by $40 billion. D) equilibrium GDP will decrease by $40 billion. Answer: B

Type: A Topic: 4 E: 183 MA: 183 186. The effect of imposing a lump-sum tax is to: A) reduce the absolute levels of consumption and saving at each level of GDP and to reduce the size of the multiplier. B) reduce the absolute levels of consumption and saving at each level of GDP, but to not change the size of the multiplier. C) reduce the absolute levels of consumption and saving at each level of GDP and to increase the size of the multiplier. D) increase the absolute levels of consumption and saving at each level of GDP and to increase the size of the multiplier. Answer: B

Type: C Topic: 4 E: 185 MA: 185 187. Suppose that unintended increases in inventories are occurring in a mixed closed economy. We can surmise that: A) Ig + T > Sa + G. B) T + G > Sa + Ig. C) T + Sa > Ig + G. D) T + Sa < Ig + G. Answer: C

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Type: C Topic: 4 E: 183 MA: 183 188. If a lump-sum tax of $40 billion is imposed and the MPC is 0.6, the saving schedule will shift: A) downward by $24 billion. C) downward by $16 billion. B) upward by $24 billion. D) upward by $16 billion. Answer: C

Type: C Topic: 4 E: 183 MA: 183 189. If the MPC in an economy is .75, a $1 billion increase in taxes will ultimately reduce consumption by: A) $1 billion. B) $.75 billion. C) $3 billion. D) $4 billion. Answer: C

Type: C Topic: 4 E: 182 MA: 182 190. If the MPC in an economy is .9, a $1 billion increase in government spending will ultimately increase consumption by: A) $1 billion. B) $.9 billion. C) $10 billion. D) $9 billion. Answer: D

Type: A Topic: 4 E: 183 MA: 183 191. If the marginal propensity to save in a closed economy is 0.25 and a lump-sum tax is imposed, the slope of the economy's aggregate expenditures schedule will be: A) .25. B) less than the slope before the tax. C) greater than the slope before the tax. D) .75. Answer: D

Type: A Topic: 4 E: 182 MA: 182 192. If the marginal propensity to consume in an economy is 0.8, net exports are zero, and government spending is $33 billion at each level of real GDP, the slope of the economy's aggregate expenditures schedule will be: A) .8. B) .2. C) 5. D) .125. Answer: A

Type: A Topic: 4 E: 184-185 MA: 184-185 193. If MPC = .5, a simultaneous increase in both taxes and government spending of $20 will: A) decrease GDP by $20. C) increase GDP by $20. B) decrease GDP by $40. D) increase GDP by $40. Answer: C

Type: A Topic: 4 E: 182 MA: 182 194. If government increases its purchases by $15 billion and the MPC is 2/3, then we would expect the equilibrium GDP to: A) increase by $30 billion. C) decrease by $35 billion. B) increase by $45 billion. D) increase by $50 billion. Answer: B

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Type: A Topic: 4 E: 182 MA: 182 195. If government increases its tax revenues by $15 billion and the MPC is 2/3, then we can expect the equilibrium GDP to: A) decrease by $30 billion. C) decrease by $35 billion. B) decrease by $45 billion. D) decrease by $55 billion. Answer: A

Type: A Topic: 4 E: 184-185 MA: 184-185 196. It is true that: A) equal increases in government spending and taxes do not change the equilibrium GDP. B) equal increases in government spending and taxes reduce the equilibrium GDP. C) equal increases in government spending and taxes increase the equilibrium GDP. D) taxes have a stronger effect upon equilibrium GDP than do government purchases. Answer: C

Type: A Topic: 4 E: 184-185 MA: 184-185 197. In an aggregate expenditures diagram equal increases in government spending and in lump-sum taxes will: A) shift the aggregate expenditures line downward. C) not affect the aggregate expenditures line. B) shift the aggregate expenditures line upward. D) reduce the equilibrium GDP. Answer: B

Type: A Topic: 4 E: 185 MA: 185 198. Equal increases in government purchases and taxes will: A) increase the equilibrium GDP and the size of that increase varies directly with the size of the MPC. B) increase the equilibrium GDP and the size of that increase is independent of the size of the MPC. C) increase the equilibrium GDP and the size of that increase varies inversely with the size of the MPC. D) decrease the equilibrium GDP and the size of that decrease is independent of the size of the MPC. Answer: B

Type: C Topic: 4 E: 185 MA: 185 199. Assume in a private closed economy that the equilibrium level of income is $380 and the MPS is 0.25. Now suppose government collects taxes of $50 and spends the entire amount. As a result: A) the equilibrium level of real income and the price level will both remain unchanged. B) nominal wage rates will fall. C) the equilibrium level of income will rise to $420. D) the equilibrium level of income will rise to $430. Answer: D

Recessionary and inflationary gaps

Type: D Topic: 5 E: 187 MA: 187 200. An inflationary gap is the amount by which: A) equilibrium GDP falls short of the full-employment GDP. B) aggregate expenditures exceed any given level of GDP. C) saving exceeds investment at the full-employment GDP. D) aggregate expenditures exceed the full-employment level of GDP. Answer: D

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Type: D Topic: 5 E: 185 MA: 185 201. A recessionary gap is: A) the amount by which the full-employment GDP exceeds the level of aggregate expenditures. B) the amount by which equilibrium GDP falls short of the full-employment GDP. C) the amount by which investment exceeds saving at the full-employment GDP. D) the amount by which aggregate expenditures exceed the full-employment level of GDP. Answer: A

Use the following to answer questions 202-212:

Real GDP 0 10 40 70 100 130 160

Consumption (after taxes) $ -20 0 20 40 60 80 100

Gross investment $10 10 10 10 10 10 10

Net exports $ +5 +5 +5 +5 +5 +5 +5

Government purchases $15 15 15 15 15 15 15

Type: G Topic: 5 E: 184 MA: 184 202. Refer to the above table. The economy shown is a: A) private economy. B) private open economy. C) mixed closed economy. D) mixed open economy. Answer: D

Type: G Topic: 5 E: 183 MA: 183 203. Refer to the above table. The after-tax MPC in the economy shown is: A) .5. B) .67. C) .75. D) .8. Answer: B

Type: G Topic: 5 E: 183 MA: 183 204. Refer to the above table. The after-tax MPS shown is: A) .1. B) .2. C) .33. D) .4. Answer: C

Type: G Topic: 5 E: 183 MA: 183 205. Refer to the above table. The multiplier is: A) 5. B) 4. C) 3. D) 2. Answer: C

Type: G Topic: 5 E: 182-183 MA: 182-183 206. Refer to the above table. Equilibrium GDP is: A) $40. B) $70. C) $100. D) $130. Answer: B

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Type: G Topic: 5 E: 187 MA: 187 207. Refer to the above table. If the full-employment real GDP is $100 the: A) inflationary gap is $30. C) recessionary gap is $20. B) inflationary gap is $10. D) recessionary gap is $10. Answer: D

Type: G Topic: 5 E: 187 MA: 187 208. Refer to the above table. If the full-employment real GDP is $40 the: A) inflationary gap is $20. C) recessionary gap is $30. B) inflationary gap is $10. D) recessionary gap is $10. Answer: B

Type: G Topic: 5 E: 185-187 MA: 185-187 209. Refer to the above table. If the full-employment real GDP is $70 the: A) inflationary gap is $30. C) recessionary and inflationary gaps are both $0. B) inflationary gap is $10. D) recessionary gap is $10. Answer: C

Type: G Topic: 5 E: 184 MA: 184 210. Refer to the above table. Exports might be ____ and imports ____. A) $10; $5. B) $10; $0. C) $0; $5. D) $5; 10. Answer: A

Type: G Topic: 5 E: 179 MA: 179 211. Refer to the above table. An increase in net exports of $10 would: A) increase real GDP by $10. C) decrease real GDP by $10. B) increase real GDP by $30. D) decrease real GDP by $30. Answer: B

Type: G Topic: 5 E: 182 MA: 182 212. Refer to the above table. A decrease in government purchases of $5 would: A) increase real GDP by $5. C) decrease real GDP by $5. B) increase real GDP by $10. D) decrease real GDP by $15. Answer: D

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Use the following to answer questions 213-216:

Type: G Topic: 5 E: 185 MA: 185 213. Refer to the above diagram. If the full-employment level of GDP is B and aggregate expenditures are at AE3, the: A) inflationary gap is BC. C) recessionary gap is ed. B) recessionary gap is BC. D) inflationary gap is ed. Answer: C

Type: G Topic: 5 E: 187 MA: 187 214. Refer to the above diagram. If the full-employment level of GDP is B and aggregate expenditures are at AE1, the: A) inflationary gap is BC. C) inflationary gap is zero. B) recessionary gap is BC. D) inflationary gap is ei. Answer: D

Type: G Topic: 5 E: 185-187 MA: 185-187 215. Refer to the above diagram. If the full-employment level of GDP is B and aggregate expenditures are at AE2, the: A) inflationary gap is ed. C) inflationary gap is eg. B) recessionary gap is BC. D) economy is in equilibrium, at full employment. Answer: D

Type: G Topic: 5 E: 185 MA: 185 216. Refer to the above diagram. The value of the multiplier for this economy is: A) BC/hg. B) BC/AB. C) ed/di. D) df/BC. Answer: A

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Type: A Topic: 5 E: 185 MA: 185 217. A recessionary gap exists if: A) planned investment exceeds saving at the full-employment GDP. B) the aggregate expenditures schedule lies below the 45-degree line at the full-employment GDP. C) the aggregate expenditures schedule intersects the 45-degree line at any level of GDP. D) the aggregate expenditures schedule lies above the 45-degree line at the full-employment GDP. Answer: B

Type: C Topic: 5 E: 185 MA: 185 218. Assume the current equilibrium level of income is $200 billion as compared to the full-employment income level of $240 billion. If the MPC is 0.625, what change in aggregate expenditures is needed to achieve full employment? A) a decrease of $12 billion C) an increase of $10 billion B) an increase of $25 billion D) an increase of $15 billion Answer: D

Type: A Topic: 5 E: 185 MA: 185 219. Cyclical unemployment in the United States is essentially the consequence of: A) procyclical fiscal policies. C) rapid technological progress. B) a deficient level of aggregate expenditures. D) the geographic immobility of the labor force. Answer: B

Type: A Topic: 5 E: 185 MA: 185 220. If the MPS is .25 and the economy has a recessionary gap of $5 billion, then equilibrium GDP is: A) $5 billion below the full-employment GDP. C) $20 billion below the full-employment GDP. B) $5 billion above the full-employment GDP. D) $20 billion above the full-employment GDP. Answer: C

Type: A Topic: 5 E: 185 MA: 185 221. Which of the following statements concerning the equilibrium level of GDP is incorrect? A) there will be no tendency for businesses to alter the aggregate rate of production B) full employment will necessarily be realized C) no unintended changes in inventories will occur D) leakages equal injections Answer: B

Type: A Topic: 5 E: 185 MA: 185 222. If the economy is in equilibrium at $400 billion of GDP and the full-employment GDP is $500 billion: A) real and nominal GDP will both increase. B) GDP will remain at $400 billion unless aggregate expenditures change. C) real GDP will increase, but nominal GDP will decrease. D) the price level will increase. Answer: B

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Type: A Topic: 5 E: 185 MA: 185 223. If an increase in aggregate expenditures results in no increase in real GDP we can surmise that the: A) economy is in a deep recession. B) MPC equals 1. C) economy is already operating at full employment. D) price level has fallen. Answer: C

Type: A Topic: 5 E: 185 MA: 185 224. When the level of domestic output is $500 billion, the level of aggregate expenditures: A) may be greater than, less than, or equal to $500 billion. B) must be greater than $500 billion, because investment will occur. C) must be less than $500 billion, because saving will occur. D) must also be $500 billion. Answer: A

Type: C Topic: 5 E: 185 MA: 185 225. If the MPC is .50, all taxes are lump-sum taxes, and the equilibrium GDP is $40 billion below the fullemployment GDP, then the size of the recessionary gap is: A) $40 billion. B) $20 billion. C) $60 billion. D) $80 billion. Answer: B

Applications and critiques

Type: F Topic: 6 E: 187 MA: 187 Status: New 226. The recessionary gap associated with the recession of 2001 resulted from: A) the government's attempt to control hyperinflation. B) a major increase in personal and corporate taxes. C) a rapid decline in investment spending. D) a rapid increase in imports resulting from large tariff reductions. Answer: C

Type: F Topic: 6 E: 186 MA: 186 Status: New 227. Which of the following was not a contributing cause of the decline in investment and thus the recessionary gap occurring during the U.S. recession of 2001? A) overcapacity in major industries B) pessimism relating to the stock market crash C) the collapse of numerous Internet-related start-up firms D) low interest rates Answer: D

Type: A Topic: 6 E: 186-187 MA: 186-187 Status: New 228. The U.S. recession of 2001 provides a good example of: A) demand-pull inflation. C) a recessionary gap. B) cost-push inflation. D) the repercussions of hyperinflation. Answer: C

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Type: F Topic: 6 E: 187 MA: 187 Status: New 229. During the late 1980s, the U.S. economy experienced: A) cost-push inflation. B) an inflationary gap. C) a recessionary gap. Answer: B

D) cyclical unemployment.

Type: F Topic: 6 E: 187 MA: 187 Status: New 230. The inflationary gap in the United States in the late 1980s was caused by: A) a rapid decline of net exports. C) rising aggregate expenditures. B) a major tax increase. D) cost-push inflationary forces. Answer: C

Type: F Topic: 6 E: 187 MA: 187 Status: New 231. Viewed through the aggregate expenditures model, the U.S. recession of 2001 resulted mainly from: A) a fall in the average propensity to save. C) reduced government spending. B) insufficient aggregate expenditures. D) increased taxes. Answer: B

Type: A Topic: 6 E: 187, 189 MA: 187, 189 232. Which one of the following is not a shortcoming of the aggregate expenditures model? A) failure to show price level changes B) failure to allow for "self-correction" of the economy C) failure to account for cost-push inflation D) failure to account for cyclical unemployment Answer: D

Type: A Topic: 6 E: 189 MA: 189 233. A shortcoming of the aggregate expenditures model is that it does not: A) account for cost-push inflation. C) explain how cyclical unemployment can arise. B) explain how demand-pull inflation can arise. D) detail the components of aggregate spending. Answer: A

Last Word Questions

Type: F E: 188 MA: 188 234. (Last Word) Say's law and classical macroeconomics were disputed by: A) Adam Smith. B) Jeremy Bentham. C) John Stuart Mill. D) John Maynard Keynes. Answer: D

Type: F E: 188 MA: 188 235. (Last Word) Classical macroeconomics was dealt severe blows by: A) the Great Depression and Keynes's macroeconomic theory. B) the Second World War and the writings of Milton Friedman. C) Adam Smith and his idea of the invisible hand. D) the strong recovery after the Second World War and Alvin Hansen's stagnation thesis. Answer: A

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Type: F E: 188 MA: 188 236. (Last Word) In The General Theory of Employment, Interest, and Money: A) Adam Smith stated his idea of the invisible hand. B) Thorstein Veblen poked fun at the leisure class. C) John Maynard Keynes attacked the classical economist's contention that recession or depression will automatically cure itself. D) J. B. Say developed "Say's law." Answer: C

True/False Questions

Type: G E: 173 MA: 173 Status: New 237. Graphically, the height of the investment schedule depends on the real interest rate, together with the location of the investment demand curve. Answer: True

Type: F E: 174 MA: 174 Status: New 238. In the aggregate expenditure model presented in the textbook, investment is assumed to rise with increases in real GDP and fall with decreases in real GDP. Answer: False

Type: D E: 173-174 MA: 173-174 Status: New 239. In the private closed economy, equilibrium GDP occurs where C + Ig = GDP. Answer: True

Type: F E: 176-177 MA: 176-177 Status: New 240. When C + Ig = GDP in a private closed economy, S = I and there are no unplanned changes in inventories. Answer: True

Type: A E: 175 MA: 175 Status: New 241. If C + Ig exceeds GDP in a private closed economy, GDP will decline. Answer: False

Type: A E: 176-177 MA: 176-177 Status: New 242. If the MPC is .8 in a private closed economy, a $30 billion increase in planned investment will increase equilibrium real GDP by $120 billion. Answer: False

Type: A E: 177 MA: 177 Status: New 243. Actual investment consists of planned investment plus unplanned changes in inventories (plus or minus.) Answer: True

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Type: A E: 177 MA: 177 Status: New 244. A $20 billion decrease in investment in a private closed economy that has an MPS of .5 will reduce saving by $10 billion once the multiplier process has ended. Answer: False

Type: G E: 179 MA: 179 245. Exports are added to, and imports are subtracted from, aggregate expenditures in moving from a closed to an open economy. Answer: True

Type: G E: 185 MA: 185 246. For an open mixed economy the equilibrium level of GDP is determined where Sa + Ig + X = T + G. Answer: False

Type: A E: 184-185 MA: 184-185 247. Equal increases in government expenditures and tax collections will leave the equilibrium GDP unchanged. Answer: False

Type: A E: 184-185 MA: 184-185 248. A $10 billion decrease in taxes will increase the equilibrium GDP by more than would a $10 billion increase in government expenditures. Answer: False

Type: A E: 183 MA: 183 249. A lump-sum tax causes the after-tax consumption schedule to be flatter than the before-tax consumption schedule. Answer: False

Type: A E: 182 MA: 182 250. If government decreases its purchases by $20 billion and the MPC is 0.8, equilibrium GDP will decrease by $100 billion. Answer: True

Type: A E: 183 MA: 183 251. If the MPC is .9, a $20 billion increase in a lump-sum tax will reduce GDP by $200 billion. Answer: False

Type: A E: 185 MA: 185 252. A recessionary gap in a mixed open economy can be measured as the extent to which aggregate expenditures (Ca + Ig + Xn + G) fall short of real GDP at the full-employment level of real GDP. Answer: True

Type: D E: 185 MA: 185 253. The recessionary gap is the amount by which the equilibrium GDP and the full-employment GDP differ. Answer: False

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Type: F E: 183 MA: 183 254. The aggregate expenditures schedule in the mixed open economy has a negative slope. Answer: False

Type: A E: 187, 189 MA: 187, 189 255. The aggregate expenditures model does not allow for cost-push inflation. Answer: True

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Aggregate Demand and Aggregate Supply

Topic 1. 2. 3. 4. 5. Aggregate demand Long-run aggregate supply Aggregate supply (short run) Equilibrium; changes in equilibrium Downward price and wage inflexibility Consider This Last Word True-False

Question numbers 1-22 23-27 28-63 64-125 126-134 135-136 137-138 139-155

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Appendix 6. AD in relation to the AE model Multiple Choice Questions Aggregate demand

156-166

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Type: D Topic: 1 E: 193 MA: 193 1. The aggregate demand curve: A) is upsloping because a higher price level is necessary to make production profitable as production costs rise. B) is downsloping because production costs decline as real output increases. C) shows the amount of expenditures required to induce the production of each possible level of real output. D) shows the amount of real output that will be purchased at each possible price level. Answer: D

Type: A Topic: 1 E: 194 MA: 194 2. The aggregate demand curve is: A) vertical if full employment exists. B) horizontal when there is considerable unemployment in the economy. C) downsloping because of the interest-rate, real-balances, and foreign purchases effects. D) downsloping because production costs decrease as real output rises. Answer: C

Chapter 11: Aggregate Demand and Aggregate Supply

Type: A Topic: 1 E: 194 MA: 194 3. The interest-rate effect suggests that: A) a decrease in the supply of money will increase interest rates and reduce interest-sensitive consumption and investment spending. B) an increase in the price level will increase the demand for money, reduce interest rates, and decrease consumption and investment spending. C) an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending. D) an increase in the price level will decrease the demand for money, reduce interest rates, and increase consumption and investment spending. Answer: C

Type: A Topic: 1 E: 194 MA: 194 4. The real-balances effect indicates that: A) an increase in the price level will increase the demand for money, increase interest rates, and reduce consumption and investment spending. B) a lower price level will decrease the real value of many financial assets and therefore reduce spending. C) a higher price level will increase the real value of many financial assets and therefore increase spending. D) a higher price level will decrease the real value of many financial assets and therefore reduce spending. Answer: D

Type: A Topic: 1 E: 195 MA: 195 5. The interest-rate and real-balances effects are important because they help explain: A) rightward and leftward shifts of the aggregate demand curve. B) why fiscal policy cannot be used effectively to curb inflation. C) the shape of the aggregate demand curve. D) the shape of the aggregate supply curve. Answer: C

Type: A Topic: 1 E: 194-195 MA: 194-195 6. The foreign purchases effect suggests that an increase in the U.S. price level relative to other countries will: A) increase the amount of U.S. real output purchased. B) increase U.S. imports and decrease U.S. exports. C) increase both U.S. imports and U.S. exports. D) decrease both U.S. imports and U.S. exports. Answer: B

Type: A Topic: 1 E: 194-195 MA: 194-195 7. The foreign purchases effect suggests that a decrease in the U.S. price level relative to other countries will: A) shift the aggregate demand curve leftward. B) shift the aggregate supply curve leftward. C) decrease U.S. exports and increase U.S. imports. D) increase U.S. exports and decrease U.S. imports. Answer: D

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Type: A Topic: 1 E: 195 MA: 195 8. The foreign purchases effect: A) shifts the aggregate demand curve rightward. B) shifts the aggregate demand curve leftward. C) shifts the aggregate supply curve rightward. D) moves the economy along a fixed aggregate demand curve. Answer: D

Type: A Topic: 1 E: 194 MA: 194 9. If the price level increases in the United States relative to foreign countries, then American consumers will purchase more foreign goods and fewer U.S. goods. This statement describes: A) the output effect. C) the real-balances effect. B) the foreign purchases effect. D) the shift-of-spending effect. Answer: B

Type: A Topic: 1 E: 194 MA: 194 10. The real-balances, interest-rate, and foreign purchases effects all help explain: A) why the aggregate demand curve is downsloping. B) why the aggregate supply curve is upsloping. C) shifts in the aggregate demand curve. D) shifts in the aggregate supply curve. Answer: A

Type: A Topic: 1 E: 194 MA: 194 11. Which of the following explains why the aggregate demand schedule is downward sloping: A) the real-balances effect C) the foreign purchases effect B) the interest-rate effect D) all of the above Answer: D

Type: A Topic: 1 E: 194 MA: 194 12. Which of the following is incorrect? A) As the U.S. price level rises, U.S. goods become relatively more expensive so that U.S. exports fall and U.S. imports rise. B) As the price level falls, the demand for money declines, the interest rate declines, and interest-rate sensitive spending increases. C) When the price level increases, real balances increase, businesses and households find themselves wealthier and therefore increase their spending. D) Given aggregate demand, an increase in aggregate supply increases real output and, assuming downward flexible prices, reduces the price level. Answer: C

Type: D Topic: 1 E: 194 MA: 194 13. The factors that affect the amounts that consumers, businesses, government, and foreigners wish to purchase at each price level are the: A) real-balances, interest-rate, and foreign purchases effects. B) determinants of aggregate supply. C) determinants of aggregate demand. D) sole determinants of the equilibrium price level and the equilibrium real output. Answer: C

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Type: D Topic: 1 E: 195 MA: 195 14. The determinants of aggregate demand: A) explain why the aggregate demand curve is downsloping. B) explain shifts in the aggregate demand curve. C) demonstrate why real output and the price level are inversely related. D) include input prices and resource productivity. Answer: B

Type: A Topic: 1 E: 195 MA: 195 15. Other things equal, if the national incomes of the major trading partners of the United States were to rise, the U.S.: A) aggregate demand curve would shift to the right. B) aggregate supply curve would shift to the left. C) aggregate supply curve would shift to the right. D) aggregate demand curve would shift to the left. Answer: A

Type: A Topic: 1 E: 194 MA: 194 16. Which one of the following would not shift the aggregate demand curve? A) a change in the price level B) depreciation of the international value of the dollar C) a decline in the interest rate at each possible price level D) an increase in personal income tax rates Answer: A

Type: A Topic: 1 E: 194-195 MA: 194-195 Status: New 17. Other things equal, a decrease in the real interest rate will: A) expand investment and shift the AD curve to the left. B) expand investment and shift the AD curve to the right. C) reduce investment and shift the AD curve to the left. D) reduce investment and shift the AD curve to the right. Answer: B

Type: A Topic: 1 E: 196 MA: 196 Status: New 18. A decline in investment will shift the AD curve to the: A) left by a multiple of the change in investment. B) left by the same amount as the change in investment. C) right by the same amount as the change in investment. D) right by a multiple of the change in investment. Answer: A

Type: A Topic: 1 E: 197 MA: 197 Status: New 19. An increase in net exports will shift the AD curve to the: A) left by a multiple of the change in investment. B) left by the same amount as the change in investment. C) right by the same amount as the change in investment. D) right by a multiple of the change in investment. Answer: D

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Type: C Topic: 1 E: 195 MA: 195 Status: New 20. If investment increases by $10 billion and the economy's MPC is .8, the aggregate demand curve will shift: A) leftward by $40 billion at each price level. C) rightward by $50 billion at each price level. B) rightward by $10 billion at each price level. D) leftward by $20 billion at each price level. Answer: C

Type: C Topic: 1 E: 195 MA: 195 Status: New 21. If investment decreases by $20 billion and the economy's MPC is .5, the aggregate demand curve will shift: A) leftward by $40 billion at each price level. C) rightward by $40 billion at each price level. B) rightward by $20 billion at each price level. D) leftward by $20 billion at each price level. Answer: A

Type: C Topic: 1 E: 195 MA: 195 Status: New 22. An economy's aggregate demand curve shifts leftward or rightward by more than changes in initial spending because of the: A) net export effect. B) wealth effect. C) real-balances effect. D) multiplier effect. Answer: D

Long-run aggregate supply

Type: D Topic: 2 E: 198 MA: 198 Status: New 23. The economy's long-run aggregate supply curve: A) slopes upward and to the right. C) is horizontal. B) is vertical. D) slopes downward and to the right. Answer: B

Type: C Topic: 2 E: 198 MA: 198 Status: New 24. The economy's long-run AS curve assumes that wages and other resource prices: A) eventually rise and fall to match upward or downward changes in the price level. B) are flexible upward but inflexible downward. C) rise and fall more rapidly than the price level. D) are relatively inflexible both upward and downward. Answer: A

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Use the following to answer questions 25-27:

1

2

Price level

3 4

0

Real domestic output

Type: G Topic: 2 E: 198 MA: 198 Status: New 25. In the above diagram, the economy's long-run aggregate supply curve is shown by line: A) 1. B) 2. C) 3. D) 4. Answer: A

Type: G Topic: 2 E: 198-199 MA: 198-199 Status: New 26. In the above diagram, the economy's relevant aggregate demand and long-run aggregate supply curves are lines: A) 4 and 2. B) 4 and 1. C) 2 and 4. D) 2 and 3. Answer: B

Type: G Topic: 2 E: 198-199 MA: 198-199 Status: New 27. In the above diagram, the economy's short-run AS curve is line ___ and its long-run AS curve is line ___. A) 1; 3. B) 2; 4. C) 3; 4. D) 2; 1. Answer: D

Aggregate supply (short run)

Type: D Topic: 3 E: 198 MA: 198 Status: New 28. The aggregate supply curve: A) is explained by the interest rate, real-balances, and foreign purchases effects. B) gets steeper as the economy moves from the top of the curve to the bottom of the curve. C) shows the various amounts of real output that businesses will produce at each price level. D) is downsloping because real purchasing power increases as the price level falls. Answer: C

Type: D Topic: 3 E: 198 MA: 198 Status: New 29. The graphical relationship between the price level and the amount of real GDP that businesses will offer for sale is known as the: A) aggregate demand curve. C) investment demand curve. B) investment supply curve. D) aggregate supply curve. Answer: D

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Type: D Topic: 3 E: 198 MA: 198 Status: New 30. The aggregate supply curve (short-run): A) slopes downward and to the right. C) slopes upward and to the right. B) graphs as a vertical line. D) graphs as a horizontal line. Answer: C

Type: F Topic: 3 E: 198 MA: 198 Status: New 31. The aggregate supply curve (short-run): A) graphs as a horizontal line. B) is steeper above the full-employment output than below it. C) slopes downward and to the right. D) presumes that changes in wages and other resource prices match changes in the price level. Answer: B

Type: A Topic: 3 E: 198 MA: 198 Status: New 32. The aggregate supply curve (short-run) slopes upward and to the right because: A) changes in wages and other resource prices completely offset changes in the price level. B) the price level is flexible upward but inflexible downward. C) supply creates its own demand. D) wages and other resource prices adjust only slowly to changes in the price level. Answer: D

Type: A Topic: 3 E: 198 MA: 198 Status: New 33. The aggregate supply curve (short-run) is upsloping because: A) wages and other resource prices match changes in the price level. B) the price level is flexible upward but inflexible downward. C) per-unit production costs rise as the economy moves toward and beyond its full-employment real output. D) wages and other resource prices are flexible upward but inflexible downward. Answer: C

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Use the following to answer questions 34-39:
AS3
AS1 AS2
Price level

0

Real domestic output, GDP

Type: G Topic: 3 E: 200 MA: 200 Status: New 34. In the above diagram, a shift from AS1 to AS3 might be caused by a(n): A) increase in productivity. C) decrease in the prices of domestic resources. B) increase in the prices of imported resources. D) decrease in business taxes. Answer: B

Type: G Topic: 3 E: 200 MA: 200 Status: New 35. In the above diagram, a shift from AS1 to AS2 might be caused by a(n): A) increase in market power of resource sellers. C) decrease in the prices of domestic resources. B) increase in the prices of imported resources. D) increase in business taxes. Answer: C

Type: G Topic: 3 E: 200 MA: 200 Status: New 36. In the above diagram, a shift from AS3 to AS2 might be caused by an increase in: A) business taxes and government regulation. C) the prices of domestic resources. B) the prices of imported resources. D) productivity. Answer: D

Type: G Topic: 3 E: 200 MA: 200 Status: New 37. In the above diagram, a shift from AS2 to AS3 might be caused by a(n): A) decrease in interest rates. B) increase in business taxes and costly government regulation. C) decrease in the prices of domestic resources. D) decrease in the price level. Answer: B

Type: G Topic: 3 E: 200 MA: 200 Status: New 38. In the above diagram, the most favorable shift of the aggregate supply curve for the economy would be from: A) AS1 to AS2. B) AS1 to AS3. C) AS2 to AS3. D) AS3 to AS2. Answer: D

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Type: G Topic: 3 E: 200 MA: 200 Status: New 39. In the above diagram, a substantial appreciation of the U.S. dollar with no immediate change in the U.S. price level would result in a: A) movement upward along an existing aggregate supply curve such as AS1. B) movement downward along an existing aggregate supply curve such as AS1. C) rightward shift of the aggregate supply curve, such as from AS1 to AS2. D) leftward shift of the aggregate supply curve, such as from AS1 to AS3. Answer: C

Type: A Topic: 3 E: 200-201 MA: 200-201 Status: New 40. Other things equal, an improvement in productivity will: A) shift the aggregate demand curve to the left. C) shift the aggregate supply curve to the right. B) shift the aggregate supply curve to the left. D) increase the price level. Answer: C

Type: A Topic: 3 E: 200-201 MA: 200-201 41. A rightward shift in the aggregate supply curve is best explained by an increase in: A) business taxes. B) productivity. C) nominal wages. D) the price of imported resources. Answer: B

Use the following to answer questions 42-45: Suppose that real domestic output in an economy is 20 units, the quantity of inputs is 10, and the price of each input is $4. Answer the following question(s) on the basis of this information.

Type: A Topic: 3 E: 201 MA: 201 42. Refer to the above information. The level of productivity is: A) 20. B) 10. C) 5. D) 2. Answer: D

Type: A Topic: 3 E: 201 MA: 201 43. The per unit cost of production in the economy described above is: A) $.50. B) $1. C) $2. D) $5. Answer: C

Type: A Topic: 3 E: 201 MA: 201 44. Refer to the above information. All else being equal, if the price of each input increased from $4 to $6, productivity would: A) fall from 2 to 3. B) fall from .50 to .33. C) rise from 1 to 2. D) remain unchanged. Answer: D

Type: A Topic: 3 E: 199 MA: 199 45. Refer to the above information. Given an increase in input price from $4 to $6, we would expect the aggregate: A) supply curve to shift to the left. C) demand curve to shift to the left. B) supply curve to shift to the right. D) demand curve to shift to the right. Answer: A

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Type: A Topic: 3 E: 200 MA: 200 46. Other things equal, if the U.S. dollar were to depreciate, the: A) aggregate demand curve would remain fixed in place. B) aggregate supply curve would shift to the left. C) aggregate supply curve would shift to the right. D) aggregate demand curve would shift to the left. Answer: B

Type: A Topic: 3 E: 200 MA: 200 47. Which one of the following would increase per unit production cost and therefore shift the aggregate supply curve to the left? A) a reduction in business taxes B) production bottlenecks occurring when producers near full plant capacity C) an increase in the price of imported resources D) deregulation of industry Answer: C

Type: D Topic: 3 E: 200 MA: 200 48. Shifts in the aggregate supply curve are caused by changes in: A) consumption spending. B) the quantity of real output demanded. C) the quantity of real output supplied. D) one or more of the determinants of aggregate supply. Answer: D

Use the following to answer questions 49-51: Answer the next question(s) on the basis of the following information: An economy is employing 2 units of capital, 5 units of raw materials, and 8 units of labor to produce its total output of 640 units. Each unit of capital costs $10, each unit of raw materials, $4, and each unit of labor, $3.

Type: A Topic: 3 E: 201 MA: 201 49. Refer to the above information. The per unit cost of production in this economy is: A) $.05. B) $.10. C) $.50. D) $1.00. Answer: B

Type: A Topic: 3 E: 201 MA: 201 50. Refer to the above information. If the per unit price of raw materials rises from $4 to $8 and all else remains constant, the per unit cost of production will rise by about: A) 100 percent. B) 50 percent. C) 40 percent. D) 30 percent. Answer: D

Type: A Topic: 3 E: 201 MA: 201 51. Refer to the above information. As a result of the change indicated in the previous question, the aggregate: A) supply curve would shift to the left. C) demand curve would shift to the left. B) supply curve would shift to the right. D) demand curve would shift to the right. Answer: A

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Type: D Topic: 3 E: 199 MA: 199 52. The determinants of aggregate supply: A) are consumption, investment, government, and net export spending. B) explain why real domestic output and the price level are directly related. C) explain the three distinct ranges of the aggregate supply curve. D) include resource prices and resource productivity. Answer: D

Type: A Topic: 3 E: 200 MA: 200 53. Which of the following would not shift the aggregate supply curve? A) an increase in labor productivity C) a decline in business taxes B) a decline in the price of imported oil D) an increase in the price level Answer: D

Type: D Topic: 3 E: 200 MA: 200 54. Productivity measures: A) real output per unit of input. B) per unit production costs. C) the changes in real wealth caused by price level changes. D) the amount of capital goods used per worker. Answer: A

Type: D Topic: 3 E: 201 MA: 201 55. Per unit production cost is: A) real output divided by inputs. B) total input cost divided by units of output. Answer: B

C) units of output divided by total input cost. D) a determinant of aggregate demand.

Type: A Topic: 3 E: 201 MA: 201 56. Suppose that nominal wages fall and productivity rises in a particular economy. Other things equal, the aggregate: A) demand curve will shift leftward. C) supply curve will shift leftward. B) supply curve will shift rightward. D) expenditures curve will shift downward. Answer: B

Type: D Topic: 3 E: 200 MA: 200 57. Monopoly or market power is the ability of a firm to: A) shift its demand curve to the right. C) set its price. B) shift its demand curve to the left. D) achieve economies of scale. Answer: C

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Type: C Topic: 3 E: 200 MA: 200 58. Other things equal, appreciation of the dollar: A) increases aggregate demand in the United States and may increase aggregate supply by reducing the prices of imported resources. B) increases aggregate demand in the United States and may decrease aggregate supply by reducing the prices of imported resources. C) decreases aggregate demand in the United States and may increase aggregate supply by reducing the prices of imported resources. D) decreases aggregate demand in the United States and may reduce aggregate supply by increasing the prices of imported resources. Answer: C

Type: C Topic: 3 E: 201 MA: 201 59. Other things equal, a reduction in personal and business taxes can be expected to: A) increase aggregate demand and decrease aggregate supply. B) increase both aggregate demand and aggregate supply. C) decrease both aggregate demand and aggregate supply. D) decrease aggregate demand and increase aggregate supply. Answer: B

Type: A Topic: 3 E: 201 MA: 201 60. Other things equal, an improvement in productivity will: A) increase the equilibrium price level. C) shift the aggregate supply curve to the right. B) shift the aggregate supply curve to the left. D) shift the aggregate demand curve to the left. Answer: C

Use the following to answer questions 61-63: Answer the next question(s) on the basis of the following information about the relationship between input quantities and real domestic output in a hypothetical economy: Input quantity 100 150 200 Real domestic output 200 300 400

Type: T Topic: 3 E: 201 MA: 201 61. The level of productivity in the above economy is: A) 2. B) .5. C) 4. D) 200. Answer: A

Type: T Topic: 3 E: 201 MA: 201 62. If the price of each input is $5, the per unit cost of production in the above economy is: A) $5. B) $2.75. C) $2.50. D) $.40. Answer: C

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Type: T Topic: 3 E: 201 MA: 201 63. Suppose that the price of each input increased from $5 to $8. The per unit cost of production in the above economy would: A) rise by $1.50 and the aggregate supply curve would shift to the right. B) rise by 60 percent and the aggregate supply curve would shift to the left. C) rise by 60 percent and the aggregate demand curve would shift to the left. D) fall by $1.50 and the aggregate demand curve would shift to the right. Answer: B

Equilibrium; changes in equilibrium

Type: D Topic: 4 E: 203 MA: 203 64. The equilibrium price level and level of real output occur where: A) real output is at its highest possible level. B) export equal imports. C) the price level is at its lowest level. D) the aggregate demand and supply curves intersect. Answer: D

Use the following to answer questions 65-68: Answer the next question(s) on the basis of the following aggregate demand and supply schedules for a hypothetical economy:

Amount of real output demanded $200 300 400 500 600

Price level (index value) 300 250 200 150 100

Amount of real output supplied $500 450 400 300 200

Type: T Topic: 4 E: 202 MA: 202 65. Refer to the above data. The equilibrium price level will be: A) 150. B) 200. C) 250. D) 300. Answer: B

Type: T Topic: 4 E: 203 MA: 203 66. Refer to the above data. If the price level is 150 and producers supply $300 of real output: A) a shortage of real output of $200 will occur. B) a shortage of real output of $100 will occur. C) a surplus of real output of $300 will occur. D) neither a shortage nor a surplus of real output will occur. Answer: A

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Type: T Topic: 4 E: 202 MA: 202 67. Refer to the above data. If the amount of real output demanded at each price level falls by $200, the equilibrium price level and equilibrium level of real domestic output will fall to: A) 250 and $200, respectively. C) 150 and $300, respectively. B) 200 and $300, respectively. D) 150 adn $200, respectively. Answer: C

Type: T Topic: 4 E: 203 MA: 203 68. Refer to the above data. The change in aggregate demand indicated in the previous question might have been caused by: A) an increase in net exports. C) an increase in consumer wealth. B) a worsening of business expectations. D) a decrease in the personal income tax. Answer: B

Type: A Topic: 4 E: 203 MA: 203 Status: New 69. Graphically, demand-pull inflation is shown as a: A) rightward shift of the AD curve along an upsloping AS curve. B) leftward shift of the AS curve along a downsloping AD curve. C) leftward shift of AS curve along an upsloping AD curve. D) rightward shift of the AD curve along a downsloping AS curve. Answer: A

Type: A Topic: 4 E: 205 MA: 205 70. Graphically, cost-push inflation is shown as a: A) leftward shift of the AD curve. B) rightward shift of the AS curve. Answer: C

C) leftward shift of AS curve. D) rightward shift of the AD curve.

Type: A Topic: 4 E: 203 MA: 203 71. Graphically, the full-employment, low-inflation, rapid-growth economy of the last half of the 1990s is depicted by a: A) rightward shift of the aggregate demand curve along a fixed aggregate supply curve. B) rightward shift of the aggregate supply curve along a fixed aggregate demand curve. C) rightward shift of the aggregate demand curve and a rightward shift of the aggregate supply curve. D) leftward shift of the aggregate demand curve and a leftward shift of the aggregate supply curve. Answer: C

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Use the following to answer questions 72-81:
P AS1 P2 P1 AD1 AD2 0 Q2 (A) Q1 Q 0 Q2 (B) Q1 Q 0 Q1 (C) P1 b a AD1 AD1 Q2 AD2 Q P AS2 AS1 P1 a b c P AS1 AS2

Type: G Topic: 4 E: 203-207 MA: 203-207 Status: New 72. Refer to the above diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. A recession is depicted by: A) panel (A) only. B) panel (B) only. C) panel (C) only. D) panels (A) and (B). Answer: D

Type: G Topic: 4 E: 203-207 MA: 203-207 73. Refer to the above diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Cost-push inflation is depicted by: A) panel (A) only. B) panel (B) only. C) panel (C) only D) panels (B) and (C). Answer: B

Type: G Topic: 4 E: 203-207 MA: 203-207 74. Refer to the above diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Growth, full-employment and price stability is depicted by: A) panel (A) only. B) panel (B) only. C) panel (C) only D) panels (B) and (C). Answer: C

Type: G Topic: 4 E: 203-207 MA: 203-207 75. Refer to the above diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, an increase in investment spending is depicted by: A) panel (A) only. B) panel (B) only. C) panel (C) only D) panels (B) and (C). Answer: C

Type: G Topic: 4 E: 203-207 MA: 203-207 76. Refer to the above diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, a decline in productivity is depicted by: A) panel (A) only. B) panel (B) only. C) panel (C) only D) panels (B) and (C). Answer: B

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Type: G Topic: 4 E: 203-207 MA: 203-207 77. Refer to the above diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, a decline in net exports caused by a change in incomes abroad is depicted by: A) panel (A) only. B) panel (B) only. C) panel (C) only D) panels (B) and (C). Answer: A

Type: G Topic: 4 E: 203-207 MA: 203-207 78. Refer to the above diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, a decline in net exports caused by the foreign purchases effect of a price-level increase is depicted by the: A) shift of the AD curve in panel (A). C) shift of the AS curve in panel (B). B) move from point a to point b in panel (B). D) move from point a to point c in panel (C). Answer: B

Type: G Topic: 4 E: 203-207 MA: 203-207 79. Refer to the above diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, a decline in investment spending caused by the interest-rate effect of a price-level increase is depicted by the: A) shift of the AD curve in panel (A). C) move from point a to point b in panel (B). B) shift of the AS curve in panel (B). D) move from point a to point c in panel (C). Answer: C

Type: G Topic: 4 E: 203-207 MA: 203-207 80. Refer to the above diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, a decrease in resource prices is depicted by: A) panel (A) only. B) panel (B) only. C) panel (C) only D) panels (B) and (C). Answer: C

Type: G Topic: 4 E: 203-207 MA: 203-207 81. Refer to the above diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, inflation is absent in: A) panel (A) only. B) panel (B) only. C) panel (C) only D) panels (A) and (C). Answer: D

Type: A Topic: 4 E: 204 MA: 204 Status: New 82. If aggregate demand decreases, and as a result, real output and employment decline but the price level remains unchanged, we can assume that: A) the money supply has declined. B) the price level is inflexible downward and a recession has occurred. C) cost-push inflation has occurred. D) productivity has declined. Answer: B

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Type: A Topic: 4 E: 203 MA: 203 Status: New 83. A rightward shift of the AD curve in the very steep upper part of the upsloping AS curve will: A) increase real output by more than the price level. B) increase the price level by more than real output. C) reduce real output by more than the price level. D) reduce the price level by more than real output. Answer: B

Type: A Topic: 4 E: 203 MA: 203 Status: New 84. A rightward shift of the AD curve in the very flat part of the upsloping AS curve will: A) increase real output by more than the price level. B) increase the price level by more than real output. C) reduce real output by more than the price level. D) reduce the price level by more than real output. Answer: A

Type: A Topic: 4 E: 203 MA: 203 Status: New 85. Given a fixed upsloping AS curve, a rightward shift of the AD curve will: A) cause cost push inflation. C) increase the price level but not real output. B) increase real output but not the price level. D) increase both the price level and real output. Answer: D

Type: A Topic: 4 E: 204 MA: 204 Status: New 86. A decrease in aggregate demand will cause a greater decline in real output the: A) less flexible is the economy's price level. B) more flexible is the economy's price level. C) steeper is the economy's AS curve. D) larger is the economy's marginal propensity to save. Answer: A

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Use the following to answer questions 87-88:

AS1
AS2

Price level

P1 AD2

AD1 0 Q1 Q2 Q3 Real domestic output

Type: A Topic: 4 E: 206 MA: 206 87. In the above figure AD1 and AS1 represent the original aggregate supply and demand curves and AD2 and AS2 show the new aggregate demand and supply curves. The change in aggregate supply from AS1 to AS2 could be caused by: A) a reduction in the price level. B) the increased availability of entrepreneurial talent. C) an increase in business taxes. D) the real-balances, interest-rate, and foreign purchases effects. Answer: B

Type: G Topic: 4 E: 206 MA: 206 88. In the above figure AD1 and AS1 represent the original aggregate supply and demand curves and AD2 and AS2 show the new aggregate demand and supply curves. The changes in aggregate demand and supply in the above diagram produce: A) a higher price level. B) an expansion of real output and a stable price level. C) an expansion of real output and a higher price level. D) a decline in real output and a stable price level. Answer: B

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Use the following to answer questions 89-93:

AS1 AS0 G
Price level

H

F E AD1 AD0

0

A B C Real domestic output

Type: G Topic: 4 E: 209 MA: 209 89. Refer to the above diagram. If the initial aggregate demand and supply curves are AD0 and AS0, the equilibrium price level and level of real domestic output will be: A) F and C, respectively. C) F and A, respectively. B) G and B, respectively. D) E and B, respectively. Answer: A

Type: G Topic: 4 E: 209 MA: 209 90. Refer to the above diagram. If the aggregate supply curve shifted from AS0 to AS1, we could say that: A) aggregate supply has increased, equilibrium output has decreased, and the price level has increased. B) aggregate supply has decreased, equilibrium output has decreased, and the price level has increased. C) an increase in the amount of output supplied has occurred. D) aggregate supply has increased and the price level has risen to G. Answer: B

Type: G Topic: 4 E: 209 MA: 209 91. Refer to the above diagram. If aggregate supply is AS1 and aggregate demand is AD0, then: A) at any price level above G a shortage of real output would occur. B) F represents a price level that would result in a surplus of real output of AC. C) a surplus of real output of GH would occur. D) F represents a price level that would result in a shortage of real output of AC. Answer: D

Type: G Topic: 4 E: 209 MA: 209 92. Refer to the above diagram. A shift of the aggregate demand curve from AD1 to AD0 might be caused by a(n): A) decrease in aggregate supply. C) increase in investment spending. B) decrease in the amount of output supplied. D) decrease in net export spending. Answer: C

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Type: G Topic: 4 E: 209 MA: 209 93. Refer to the above diagram. Other things equal, a shift of the aggregate supply curve from AS0 to AS1 might be caused by a(n): A) increase in government regulation. C) increase in productivity. B) increase in aggregate demand. D) decline in nominal wages. Answer: A

Type: C Topic: 4 E: 209 MA: 209 94. If aggregate demand increases and aggregate supply decreases, the price level: A) will decrease, but real output may either increase or decrease. B) will increase, but real output may either increase or decrease. C) and real output will both increase. D) and real output will both decrease. Answer: B

Type: C Topic: 4 E: 200 MA: 200 95. If the dollar price of foreign currencies falls (that is, the dollar appreciates), we would expect: A) aggregate demand to decrease and aggregate supply to increase. B) both aggregate demand and aggregate supply to decrease. C) both aggregate demand and aggregate supply to increase. D) aggregate demand to increase and aggregate supply to decrease. Answer: A

Type: C Topic: 4 E: 196 MA: 196 96. We would expect a decline in personal and corporate income taxes to: A) shift the aggregate demand curve rightward. C) decrease real output. B) decrease consumption and investment spending. D) shift the aggregate supply curve leftward. Answer: A

Type: C Topic: 4 E: 201 MA: 201 97. An increase in input productivity will: A) shift the aggregate supply curve leftward. B) reduce the equilibrium price level, assuming downward flexible prices. C) reduce the equilibrium real output. D) reduce aggregate demand. Answer: B

Type: C Topic: 4 E: 196, 201 MA: 196, 201 98. If personal taxes were decreased and resource productivity increased simultaneously, the equilibrium: A) output would rise. C) price level would necessarily fall. B) output would fall. D) price level would necessarily rise. Answer: A

Type: A Topic: 4 E: 203 MA: 203 99. If the current price level was such that the aggregate quantity demanded exceeded the aggregate quantity supplied, we would expect: A) inflation to occur. C) the aggregate demand curve to shift leftward. B) the aggregate demand curve to shift rightward. D) the aggregate supply curve to shift leftward. Answer: A

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Type: C Topic: 4 E: 203 MA: 203 100. In which of the following sets of circumstances can we confidently expect inflation? A) aggregate supply and aggregate demand both increase B) aggregate supply and aggregate demand both decrease C) aggregate supply decreases and aggregate demand increases D) aggregate supply increases and aggregate demand decreases Answer: C

Use the following to answer questions 101-109: Use the following diagrams for the U.S. economy to answer the following questions.

Type: G Topic: 4 E: 201 MA: 201 101. Which of the above diagrams best portrays the effects of an increase in resource productivity? A) A B) B C) C D) D Answer: A

Type: G Topic: 4 E: 200 MA: 200 102. Which of the above diagrams best portrays the effects of a decrease in the availability of key natural resources? A) A B) B C) C D) D Answer: B

Type: G Topic: 4 E: 197 MA: 197 103. Which of the above diagrams best portrays the effects of an increase in foreign spending on U.S. products? A) A B) B C) C D) D Answer: C

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Type: G Topic: 4 E: 196 MA: 196 104. Which of the above diagrams best portrays the effects of an increase in consumer spending? A) A B) B C) C D) D Answer: C

Type: G Topic: 4 E: 196 MA: 196 105. Which of the above diagrams best portrays an improvement in expected rates of return on investment? A) A B) B C) C D) D Answer: C

Type: G Topic: 4 E: 197 MA: 197 106. Which of the above diagrams best portrays the effects of declines in the incomes of U.S. trading partners? A) A B) B C) C D) D Answer: D

Type: G Topic: 4 E: 200 MA: 200 107. Which of the above diagrams best portrays the effects of declines in the prices of imported resources? A) A B) B C) C D) D Answer: A

Type: G Topic: 4 E: 197 MA: 197 108. Which of the above diagrams best portrays the effects of a substantial reduction in government spending? A) A B) B C) C D) D Answer: D

Type: G Topic: 4 E: 199-200 MA: 199-200 109. Which of the above diagrams best portrays the effects of a dramatic increase in energy prices? A) A B) B C) C D) D Answer: B

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Use the following to answer questions 110-119: Answer the next question(s) on the basis of the following table for a particular country in which C is consumption expenditures, Ig is gross investment expenditures, G is government expenditures, X is exports, and M is imports. All figures are in billions of dollars. Each question is independent of the other questions. (1) Price level 128 125 122 119 116 (2) C $18 20 22 24 26 (3) Ig $2 4 6 8 10 (4) G $3 3 3 3 3 (5) X $1 2 3 4 5 (6) M $5 4 3 2 1 (7) Real GDP

Type: T Topic: 4 E: 195-197 MA: 195-197 110. Refer to the above table. Which of the following schedules constitutes aggregate demand in this country? (a) GDP $19 25 31 37 43 (b) GDP $23 27 31 35 39 (c) GDP $20 22 24 26 28 (d) GDP $34 37 40 43 46

P 128 125 122 119 116

P 128 125 122 119 116

P 128 125 122 119 116

P 128 125 122 119 116

Answer: A

Type: T Topic: 4 E: 194 MA: 194 111. Refer to the above table. The interest-rate effect of changes in the price level is shown by columns: A) (1) and (4) of the table. C) (1) and (3) of the table. B) (5) and (6) of the table. D) (2) and (4) of the table. Answer: C

Type: T Topic: 4 E: 194 MA: 194 112. Refer to the above table. The real-balances effect of changes in the price level is: A) shown by columns (1) and (2) of the table. C) shown by columns (1) and (4) of the table. B) shown by columns (1) and (5) of the table. D) not shown by the data in the table. Answer: A

Type: T Topic: 4 E: 202 MA: 202 113. Refer to the above table. If equilibrium real GDP is $31 billion, the equilibrium price level will be: A) 128. B) 125. C) 122. D) 119. E) 116. Answer: C

Type: T Topic: 4 E: 202 MA: 202 Status: New 114. Refer to the above table. If the amounts of GDP supplied at the price levels shown (in descending order) are $45, $43, $40, $37, and $31, the equilibrium level of real GDP will be: A) $37 billion. B) $35 billion. C) $26 billion. D) $43 billion. Answer: A

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Type: T Topic: 4 E: 202 MA: 202 Status: New 115. Refer to the above table. If the amounts of GDP supplied at the price levels shown (in descending order) are $27, $25, $22, $18, and $13, the equilibrium price level will be: A) 128. B) 125. C) 122. D) 119. Answer: B

Type: T Topic: 4 E: 197 MA: 197 116. Refer to the above table. If this nation's equilibrium price level is 125, its net exports will be: A) minus $4 billion. B) minus $2 billion. C) zero. D) $2 billion. Answer: B

Type: T Topic: 4 E: 196 MA: 196 117. Refer to the above table. If the equilibrium level of real GDP is $43 billion, its level of consumption will be: A) $20 billion. B) $22 billion. C) $24 billion. D) $26 billion. Answer: D

Type: T Topic: 4 E: 197 MA: 197 118. Refer to the above table. A decline in the international value of the dollar would: A) increase the values in columns (5) and (6) and reduce aggregate demand. B) decrease the values in columns (5) and (6) and increase aggregate demand. C) decrease the values in column (5), increase the values in column (6), and reduce aggregate demand. D) increase the values in column (5), decrease the values in column (6), and increase aggregate demand. Answer: D

Type: T Topic: 4 E: 196 MA: 196 119. Refer to the above table. A decrease in the interest rate would: A) increase the values in column (3) and increase aggregate demand. B) decrease the values in column (3) and increase aggregate demand. C) increase the values in column (2) and decrease aggregate demand. D) decrease the values in column (2) and decrease aggregate demand. Answer: A

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Use the following to answer questions 120-124:

AS
Price level

P1

AD2 AD1 0 Q1 Real domestic output

Type: G Topic: 4 E: 202 MA: 202 120. Refer to the above diagram. If equilibrium real output is Q2, then: A) aggregate demand is AD1. C) producers will supply output level Q1. B) the equilibrium price level is P1. D) the equilibrium price level is P2. Answer: D

Type: G Topic: 4 E: 202 MA: 202 121. Refer to the above diagram. If the equilibrium price level is P1, then: A) aggregate demand is AD2. C) the equilibrium output level is Q2. B) the equilibrium output level is Q3. D) producers will supply output level Q1. Answer: D

Type: G Topic: 4 E: 202 MA: 202 122. Refer to the above diagram. At the equilibrium price and quantity: A) aggregate demand exceeds aggregate supply. B) the amount of real output demanded and supplied are equal. C) aggregate demand equals aggregate supply. D) aggregate supply exceeds aggregate demand. Answer: B

Type: G Topic: 4 E: 197 MA: 197 123. Refer to the above diagram. Which of the following would shift the aggregate demand curve from AD2 to AD1? A) a decline in personal income tax rates B) an increase in the international value of the dollar C) an increase in government spending D) an upward revision of expected rates of return on investment projects Answer: B

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Type: G Topic: 4 E: 202 MA: 202 124. Refer to the above diagram. Suppose that aggregate demand increased from AD1 to AD2. For the price level to stay constant: A) the aggregate supply curve would have to shift rightward. B) the aggregate supply curve would have to shift leftward. C) real domestic output would have to remain constant. D) the aggregate supply curve would have to be vertical. Answer: A

Type: A Topic: 4 E: 195 MA: 195 125. The size of the multiplier associated with an initial increase in spending will be: A) the same whether or not inflation occurs. C) zero if any increase in the price level occurs. B) diminished if inflation occurs. D) enhanced if inflation occurs. Answer: B

Downward price and wage inflexibility

Type: A Topic: 5 E: 204 MA: 204 126. Which of the following is a true statement? A) firms and resource suppliers generally find it easier to reduce prices than to raise them. B) as the price level increases, interest rates will rise and therefore consumption and investment spending will also rise. C) an initial increase in aggregate demand may cause a further increase in aggregate demand because higher prices mean higher incomes. D) a decline in aggregate demand will primarily affect real output and employment if prices are inflexible downward. Answer: D

Type: D Topic: 5 E: 204 MA: 204 127. Prices and wages tend to be: A) flexible both upward and downward. B) inflexible both upward and downward. Answer: D

C) flexible downward, but inflexible upward. D) flexible upward, but inflexible downward.

Type: D Topic: 5 E: 204 MA: 204 128. Efficiency wages are: A) above-market-wages that bring forth so much added work effort that per-unit production costs are lower than at market wages. B) wage payments necessary to compensate workers for unpleasant or risky work conditions. C) usually less than market wages. D) relevant to macro economics because they explain rightward shifts in aggregate demand. Answer: A

Type: A Topic: 5 E: 204 MA: 204 129. When aggregate demand declines, wage rates may be inflexible downward, at least for a time, because of: A) the foreign purchases effect. B) inflexible product prices. C) wage contracts. D) the wealth effect. Answer: C

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Type: A Topic: 5 E: 204 MA: 204 130. When aggregate demand declines, many firms may reduce employment rather than wages because wage reductions may: A) reduce per unit production costs. B) reduce worker morale and work effort, and thus lower productivity. C) increase the firms' cost of raising financial capital. D) reduce the demands for their products. Answer: B

Type: A Topic: 5 E: 204 MA: 204 131. When aggregate demand declines, some firms may reduce employment rather than wages because wage reductions may: A) not be possible due to the minimum wage law. C) reduce the demands for their products. B) increase the cost of raising money capital. D) may set off a price war. Answer: A

Type: A Topic: 5 E: 204 MA: 204 132. When aggregate demand declines, the price level may remain constant, at lease for a time, because: A) firms individually fear that their price cut may set off a price war. B) menu costs rise. C) price cuts tend to increase efficiency wages. D) product markets are highly competitive. Answer: A

Type: D Topic: 5 E: 204 MA: 204 133. Menu costs: A) increase during recession. B) decrease during recession. C) are the costs to firms of changing prices and communicating them to customers. D) are sunk costs and therefore should be disregarded. Answer: C

Type: A Topic: 5 E: 205 MA: 205 134. The fear of unwanted price wars may explain why many firms are reluctant to: A) reduce wages when a decline in aggregate demand occurs. B) reduce prices when a decline in aggregate demand occurs. C) expand production capacity when an increase in aggregate demand occurs. D) provide wage increases when labor productivity rises. Answer: B

Consider This Questions

Type: D E: 205 MA: 205 Status: New 135. (Consider This) The idea that the price level readily moves upward but not downward is called the: A) elevator effect. B) escalator effect. C) ratchet effect. D) stair-step effect. Answer: C

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Type: D E: 205 MA: 205 Status: New 136. (Consider This) The ratchet effect is the tendency of: A) the price level to increase but not to decrease. B) nominal GDP to increase more rapidly than real GDP. C) real interest rates to fall more rapidly than nominal interest rates. D) consumption to rise year after year regardless of what happens to disposable income. Answer: A

Last Word Questions

Type: F E: 207 MA: 207 137. (Last Word) In recent years: A) unemployment rates in Europe have been higher than in the United States. B) the natural rate of unemployment in Europe has fallen sharply. C) Europe has had strong aggregate demand and low unemployment rates. D) European nations have greatly reduced their unemployment rates by reducing minimum wages, welfare benefits, and government restrictions against firing workers. Answer: A

Type: A E: 207 MA: 207 138. (Last Word) It is unclear whether: A) high European rates of inflation reflect demand-pull or cost-push forces. B) high European rates of poverty can be reduced by by higher transfer payments. C) high European unemployment rates have resulted from high natural rates of unemployment or insufficient aggregate demand. D) European trade deficits stimulate or retard the European economies. Answer: C

True/False Questions

Type: A E: 194 MA: 194 139. The interest-rate effect is one of the determinants of aggregate demand. Answer: False

Type: D E: 201 MA: 201 140. Other things equal, an increase in productivity will shift the aggregate supply curve rightward. Answer: True

Type: A E: 195 MA: 195 141. An increase in wealth from a substantial increase in stock prices will move the economy along a fixed aggregate demand curve. Answer: False

Type: A E: 195 MA: 195 142. In order to study the macroeconomy we must combine the prices and quantities generated in single-product markets into broad aggregates. Answer: True

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Type: A E: 197 MA: 197 143. An increase in imports (independently of a change in the U.S. price level) will increase both U.S. aggregate supply and U.S. aggregate demand. Answer: False

Type: A E: 201 MA: 201 144. An increase in business excise taxes will shift the aggregate supply curve leftward. Answer: True

Type: A E: 200 MA: 200 145. A decrease in per unit production costs will shift the aggregate supply curve leftward. Answer: False

Type: A E: 203 MA: 203 146. Unemployment and inflation can coexist. Answer: True

Type: D E: 199 MA: 199 147. The shape of the aggregate supply curve is determined by what happens to aggregate demand as real output expands. Answer: False

Type: A E: 194 MA: 194 148. The real-balances effect indicates that inflation makes the public feel wealthier and they therefore spend more out of their current incomes. Answer: False

Type: D E: 194 MA: 194 149. In locating a particular aggregate demand curve it is assumed that the money supply is fixed. Answer: True

Type: F E: 198-199 MA: 198-199 Status: New 150. The aggregate supply curve (short-run) becomes steeper as the economy moves rightward and upward along it. Answer: True

Type: A E: 205 MA: 205 Status: New 151. Cost-push inflation is depicted as a rightward shift of the aggregate demand curve along an upsloping aggregate supply curve. Answer: False

Type: F E: 204 MA: 204 Status: New 152. A negative GDP gap can be caused by either a decrease in aggregate demand or a decrease in aggregate supply. Answer: True

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Type: D E: 202 MA: 202 Status: New 153. The equilibrium price level and equilibrium level of real GDP occur at the intersection of the aggregate demand curve and the aggregate supply curve. Answer: True

Type: A E: 199 MA: 199 Status: New 154. The greater the upward slope of the AS curve, the larger is the realized multiplier effect of a change in investment spending. Answer: False

Type: A E: 204 MA: 204 Status: New 155. The price level in the United States is more flexible downward than upward. Answer: False

Appendix AD in relation to the AE model

Type: A Topic: 6 E: 211 MA: 211 156. The aggregate expenditures model and the aggregate demand curve can be reconciled because, other things equal, in the aggregate expenditures model: A) changes in the price level have no effect on the equilibrium level of GDP. B) an increase in the price level increases the real value of wealth. C) the level of aggregate expenditures and therefore the level of real GDP vary inversely with the price level. D) the level of aggregate expenditures and therefore the level of real GDP vary directly with the price level. Answer: C

Type: A Topic: 6 E: 212 MA: 212 157. In deriving the aggregate demand curve from the aggregate expenditures model we note that: A) the real-balances effect is irrelevant to both models. B) a change in the price level will have no impact on the aggregate expenditures schedule. C) an increase (decrease) in the price levels shifts the aggregate expenditures schedule upward (downward). D) an increase (decrease) in the price level shifts the aggregate expenditures schedule downward (upward). Answer: D

Type: A Topic: 6 E: 212 MA: 212 158. An increase in aggregate expenditures resulting from a decrease in the price level is equivalent to a: A) rightward shift of the aggregate demand curve. B) leftward shift of the aggregate demand curve. C) movement downward along a fixed aggregate demand curve. D) decrease in aggregate supply. Answer: C

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Use the following to answer questions 159-160:

Type: G Topic: 6 E: 212 MA: 212 159. Refer to the above diagrams. A decline in aggregate expenditures from AE2 to AE1 resulting from the realbalances, interest-rate effect, and foreign purchases effects would be depicted as: A) a movement from A to C along aggregate demand curve AD1. B) a movement from C to A along aggregate demand curve AD1. C) a shift of aggregate demand from AD1 to AD2. D) a shift of aggregate demand from AD2 to AD1. Answer: B

Type: G Topic: 6 E: 212 MA: 212 160. Refer to the above diagrams. Assuming a constant price level, an increase in aggregate expenditures from AE1 to AE2 would: A) move the economy from A to C along AD1. C) increase aggregate demand from AD1 to AD2. B) move the economy from C to A along AD1. D) decrease aggregate demand from AD2 to AD1. Answer: C

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Type: C Topic: 6 E: 212 MA: 212 161. An increase in net exports will shift the: A) aggregate expenditures curve upward and the aggregate demand curve rightward. B) aggregate expenditures curve upward and the aggregate demand curve leftward. C) aggregate expenditures curve downward and the aggregate demand curve rightward. D) aggregate expenditures curve downward and the aggregate demand curve leftward. Answer: A

Type: A Topic: 6 E: 211-212 MA: 211-212 162. An increase in investment spending caused by higher expected rates of return will: A) shift the aggregate supply curve to the left. B) move the economy up along an existing aggregate demand curve. C) shift the aggregate expenditures curve downward and the aggregate demand curve to the left. D) shift the aggregate expenditures curve upward and the aggregate demand curve to the right. Answer: D

Type: A Topic: 6 E: 212 MA: 212 163. An increase in aggregate expenditures resulting from some factor other than a change in the price level is equivalent to: A) a rightward shift of the aggregate demand curve in the AD-AS model. B) a leftward shift of the aggregate demand curve in the AD-AS model. C) a movement downward along a fixed aggregate demand curve in the AD-AS model. D) a decrease in aggregate supply in the AD-AS model. Answer: A

Type: A Topic: 6 E: 211 MA: 211 164. When deriving the aggregate demand (AD) curve from the aggregate expenditure model, an increase in U.S. product prices would cause an increase in: A) the value of household wealth and lower consumption expendtitures. B) interest rates and lower investment expenditures. C) exports and imports. D) U.S. resource prices and an increase in aggregate supply. Answer: B

Type: C Topic: 6 E: 212 MA: 212 165. (Advanced analysis) Assume that the MPS is .33 in an economy that has an aggregate supply curve with a slope of 1. An increase in investment spending of $10 billion will shift the aggregate demand curve rightward by: A) $30 billion and increase real GDP by $15 billion. B) $30 billion and increase real GDP by $30 billion. C) $10 billion and increase real GDP by $30 billion. D) $10 billion and increase real GDP by $10 billion. Answer: A

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Type: C Topic: 6 E: 212 MA: 212 166. (Advanced analysis) Assume that the MPC is .8 in an economy that has an aggregate supply curve with a slope of 1. Also, suppose that the price level is flexible downward. A decrease in investment spending of $10 billion will shift the aggregate demand curve leftward by: A) $50 billion and decrease real GDP by $50 billion. B) $50 billion and decrease real GDP by $25 billion. C) $10 billion and decrease real GDP by $10 billion. D) $10 billion and decrease real GDP by $25 billion. Answer: B

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CHAPTER 12

Fiscal Policy

Topic 1. 2. 3. 4. 5. 6. 7. Fiscal policy; definitions Discretionary fiscal policy Financing deficits; disposing of surpluses Built-in stabilizers Full-employment budget Problems, criticisms, complications Fiscal policy: AE model (these questions assume coverage of AE model) 8. Fiscal policy: open economy complications Last Word True-False Multiple Choice Questions

Question numbers 1-8 9-49 50-55 56-82 83-117 118-131 132-137 138-144 145-147 148-164

____________________________________________________________

_______________________________________

____________________________________________________________

_______________________________________

Fiscal policy; definitions

Type: F Topic: 1 E: 214 MA: 214 1. In the Employment Act of 1946, the Federal government: A) applied the unemployment compensation program to intrastate workers. B) agreed to subsidize unemployed workers to the extent of 50 percent of their average incomes. C) committed itself to accept some degree of responsibility for the general levels of employment and prices. D) agreed to hire, through public works programs, any employees who cannot find jobs with private industry. Answer: C

Type: F Topic: 1 E: 215 MA: 215 2. Fiscal policy is carried out primarily by: A) the Federal government. B) state and local governments working together. Answer: A

C) state governments alone. D) local governments alone.

Chapter 12: Fiscal Policy

Type: D Topic: 1 E: 215 MA: 215 3. Discretionary fiscal policy refers to: A) any change in government spending or taxes that destabilizes the economy. B) the authority that the President has to change personal income tax rates. C) changes in taxes and government expenditures made by Congress to stabilize the economy. D) the changes in taxes and transfers that occur as GDP changes. Answer: C

Type: A Topic: 1 E: 215 MA: 215 4. Countercyclical discretionary fiscal policy calls for: A) surpluses during recessions and deficits during periods of demand-pull inflation. B) deficits during recessions and surpluses during periods of demand-pull inflation. C) surpluses during both recessions and periods of demand-pull inflation. D) deficits during both recessions and periods of demand-pull inflation. Answer: B

Type: D Topic: 1 E: 214 MA: 214 5. Fiscal policy refers to the: A) manipulation of government spending and taxes to stabilize domestic output, employment, and the price level. B) manipulation of government spending and taxes to achieve greater equality in the distribution of income. C) altering of the interest rate to change aggregate demand. D) fact that equal increases in government spending and taxation will be contractionary. Answer: A

Type: D Topic: 1 E: 215 MA: 215 6. Discretionary fiscal policy is so named because it: A) is undertaken at the option of the nation's central bank. B) occurs automatically as the nation's level of GDP changes. C) involves specific changes in T and G undertaken expressly for stabilization at the option of Congress. D) is invoked secretly by the Council of Economic Advisers. Answer: C

Type: D Topic: 1 E: 215 MA: 215 7. Expansionary fiscal policy is so named because it: A) involves an expansion of the nation's money supply. B) necessarily expands the size of government. C) is aimed at achieving greater price stability. D) is designed to expand real GDP. Answer: D

Type: D Topic: 1 E: 216 MA: 216 8. Contractionary fiscal policy is so named because it: A) involves a contraction of the nation's money supply. B) necessarily reduces the size of government. C) is aimed at reducing aggregate demand and thus achieving price stability. D) is expressly designed to contract real GDP. Answer: C

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Discretionary fiscal policy Type: A Topic: 2 E: 215 MA: 215 9. An economist who favors smaller government would recommend: A) tax cuts during recession and reductions in government spending during inflation. B) tax increases during recession and tax cuts during inflation. C) tax cuts during recession and tax increases during inflation. D) increases in government spending during recession and tax increases during inflation. Answer: A

Type: C Topic: 2 E: 216 MA: 216 10. If the MPS in an economy is .1, government could shift the aggregate demand curve rightward by $40 billion by: A) increasing government spending by $4 billion. C) decreasing taxes by $4 billion. B) increasing government spending by $40 billion. D) increasing taxes by $4 billion. Answer: A

Type: C Topic: 2 E: 216 MA: 216 11. If the MPC in an economy is .8, government could shift the aggregate demand curve rightward by $100 billion by: A) increasing government spending by $25 billion. C) decreasing taxes by $25 billion. B) increasing government spending by $80 billion. D) decreasing taxes by $100 billion. Answer: C

Type: A Topic: 2 E: 215 MA: 215 12. An economist who favored expanded government would recommend: A) tax cuts during recession and reductions in government spending during inflation. B) tax increases during recession and tax cuts during inflation. C) tax cuts during recession and tax increases during inflation. D) increases in government spending during recession and tax increases during inflation. Answer: D

Type: C Topic: 2 E: 216 MA: 216 13. If the MPS in an economy is .4, government could shift the aggregate demand curve leftward by $50 billion by: A) reducing government expenditures by $125 billion. B) reducing government expenditures by $20 billion. C) increasing taxes by $50 billion. D) increasing taxes by $250 billion. Answer: B

Type: C Topic: 2 E: 216 MA: 216 14. If the MPC in an economy is .75, government could shift the aggregate demand curve leftward by $60 billion by: A) reducing government expenditures by $12 billion. B) reducing government expenditures by $60 billion. C) increasing taxes by $15 billion. D) increasing taxes by $20 billion. Answer: D

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Type: A Topic: 2 E: 215 MA: 215 15. Discretionary fiscal policy will stabilize the economy most when: A) deficits are incurred during recessions and surpluses during inflations. B) the budget is balanced each year. C) deficits are incurred during inflations and surpluses during recessions. D) budget surpluses are continuously incurred. Answer: A

Type: A Topic: 2 E: 216 MA: 216 16. The effect of a government surplus on the equilibrium level of GDP is substantially the same as: A) a decrease in saving. C) an increase in consumption. B) an increase in saving. D) an increase in investment. Answer: B

Type: C Topic: 2 E: 215 MA: 215 17. Assume the economy is at full employment and that investment spending declines dramatically. Under these conditions government fiscal policy should be directed toward: A) an equality of tax receipts and government expenditures. B) an excess of tax receipts over government expenditures. C) an excess of government expenditures over tax receipts. D) a reduction of subsidies and transfer payments and an increase in tax rates. Answer: C

Type: C Topic: 2 E: 215 MA: 215 18. Suppose that the economy is in the midst of a recession. Which of the following policies would be consistent with active fiscal policy? A) a Congressional proposal to incur a Federal surplus to be used for the retirement of public debt B) a reduction in agricultural subsidies and veterans' benefits C) a postponement of a highway construction program D) a reduction in Federal tax rates on personal and corporate income Answer: D

Type: A Topic: 2 E: 217 MA: 217 19. Assume that aggregate demand in the economy is excessive, causing demand-pull inflation. Which of the following would be most in accord with appropriate government fiscal policy? A) an increase in Federal income tax rates B) an increase in the size of income tax exemptions for each dependent C) passage of legislation providing for the construction of 8,000 new school buildings D) an increase in soil conservation subsidies to farmers Answer: A

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Type: A Topic: 2 E: 216 MA: 216 20. In a certain year the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $120 billion. To obtain price level stability under these conditions the government should: A) increase tax rates and reduce government spending. B) discourage personal saving by reducing the interest rate on government bonds. C) increase government expenditures. D) encourage private investment by reducing corporate income taxes. Answer: A

Type: A Topic: 2 E: 216 MA: 216 21. In a certain year the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $200 billion. To obtain full employment under these conditions the government should: A) encourage personal saving by increasing the interest rate on government bonds. B) decrease government expenditures. C) reduce tax rates and increase government spending. D) discourage private investment by increasing corporate income taxes. Answer: C

Type: A Topic: 2 E: 215 MA: 215 22. An appropriate fiscal policy for a severe recession is: A) a decrease in government spending. C) appreciation of the dollar. B) a decrease in tax rates. D) an increase in interest rates. Answer: B

Type: A Topic: 2 E: 217 MA: 217 23. An appropriate fiscal policy for severe demand-pull inflation is: A) an increase in government spending. C) a reduction in interest rates. B) depreciation of the dollar. D) a tax rate increase. Answer: D

Type: A Topic: 2 E: 215 MA: 215 24. Suppose that in an economy with a MPC of .5 the government wanted to shift the aggregate demand curve rightward by $80 billion at each price level to expand real GDP. It could: A) reduce taxes by $160 billion. C) reduce taxes by $40 billion. B) increase government spending by $80 billion. D) increase government spending by $40 billion. Answer: D

Type: A Topic: 2 E: 215 MA: 215 25. In an aggregate demand-aggregate supply diagram, equal decreases in government spending and taxes will: A) shift the AD curve to the right. C) not affect the AD curve. B) increase the equilibrium GDP. D) shift the AD curve to the left. Answer: D

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Type: A Topic: 2 E: 217 MA: 217 26. Suppose that in an economy with a MPC of .8 the government wanted to shift the aggregate demand curve leftward by $40 billion at each price level to remedy demand-pull inflation. It could: A) increase taxes by $10 billion. C) reduce government spending by $5 billion. B) reduce government spending by $40 billion. D) increase taxes by $20 billion. Answer: A

Type: A Topic: 2 E: 215 MA: 215 27. Which of the following represents the most expansionary fiscal policy? A) a $10 billion tax cut C) a $10 billion tax increase B) a $10 billion increase in government spending D) a $10 billion decrease in government spending Answer: B

Type: A Topic: 2 E: 217 MA: 217 28. Which of the following represents the most contractionary fiscal policy? A) a $30 billion tax cut C) a $30 billion tax increase B) a $30 billion increase in government spending D) a $30 billion decrease in government spending Answer: D

Type: A Topic: 2 E: 217 MA: 217 29. A contractionary fiscal policy is shown as a: A) rightward shift in the economy's aggregate demand curve. B) rightward shift in the economy's aggregate supply curve. C) movement along an existing aggregate demand curve. D) leftward shift in the economy's aggregate demand curve. Answer: D

Type: A Topic: 2 E: 215 MA: 215 30. A expansionary fiscal policy is shown as a: A) rightward shift in the economy's aggregate demand curve. B) movement along an existing aggregate demand curve. C) leftward shift in the economy's aggregate supply curve. D) leftward shift in the economy's aggregate demand curve. Answer: A

Type: A Topic: 2 E: 216 MA: 216 31. A tax reduction of a specific amount will be more expansionary, the: A) smaller is the economy's MPC. C) smaller is the economy's multiplier. B) larger is the economy's MPC. D) less the economy's built-in stability. Answer: B

Type: A Topic: 2 E: 216 MA: 216 32. A specific reduction in government spending will dampen demand-pull inflation by a greater amount, the: A) smaller is the economy's MPC. C) smaller is the economy's MPS. B) flatter is the economy's aggregate supply curve. D) less the economy's built-in stability. Answer: C

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Use the following to answer questions 33-39:
AD3 AS

Price level

AD1

AD2 AD0 0

Qf Real GDP

Type: G Topic: 2 E: 216-217 MA: 216-217 33. Refer to the above diagram, in which Qf is the full-employment output. A contractionary fiscal policy would be most appropriate if the economy's present aggregate demand curve were at: A) AD0 B) AD1 C) AD2 D) AD3 Answer: D

Type: G Topic: 2 E: 215 MA: 215 34. Refer to the above diagram, in which Qf is the full-employment output. An expansionary fiscal policy would be most appropriate if the economy's present aggregate demand curve were at: A) AD0 B) AD1 C) AD2 D) AD3 Answer: A

Type: G Topic: 2 E: 215 MA: 215 35. Refer to the above diagram, in which Qf is the full-employment output. If the economy's present aggregate demand curve is AD2: A) the most appropriate fiscal policy is an increase of government expenditures or a reduction of taxes. B) the most appropriate fiscal policy is a reduction of government expenditures or an increase of taxes. C) government should undertake neither an expansionary nor a contractionary fiscal policy. D) the economy is achieving its full capacity output. Answer: C

Type: G Topic: 2 E: 215 MA: 215 Status: New 36. Refer to the above diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD0, it is experiencing: A) a positive GDP gap. B) a negative GDP gap. C) inflation. D) an adverse supply shock. Answer: B

Type: G Topic: 2 E: 216 MA: 216 Status: New 37. Refer to the above diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD3, it is experiencing: A) a positive GDP gap. B) a negative GDP gap. C) a recession. D) cost-push inflation. Answer: A

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Type: G Topic: 2 E: 215 MA: 215 Status: New 38. Refer to the above diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD0, it would be appropriate for the government to: A) reduce government expenditures and taxes by equal-size amounts. B) reduce government expenditures or increase taxes. C) increase government expenditures or reduce taxes. D) reduce unemployment compensation benefits. Answer: C

Type: G Topic: 2 E: 216-217 MA: 216-217 Status: New 39. Refer to the above diagram, in which Qf is the full-employment output. If the economy's current aggregate demand curve is AD3, it would be appropriate for the government to: A) reduce government expenditures and taxes by equal-size amounts. B) reduce government expenditures or increase taxes. C) increase government expenditures or reduce taxes. D) reduce unemployment compensation benefits. Answer: B

Use the following to answer questions 40-45:

AS
AD1

Price level

AD3

0

Qf Real GDP

Type: G Topic: 2 E: 215-216 MA: 215-216 40. Refer to the above diagram, in which Qf is the full-employment output. If aggregate demand curve AD1 describes the current situation, appropriate fiscal policy would be to: A) increase taxes and reduce government spending to shift the aggregate demand curve rightward to AD2. B) reduce taxes on businesses to shift the aggregate supply curve leftward. C) reduce taxes and increase government spending to shift the aggregate demand curve from AD1 to AD2. D) do nothing since the economy appears to be achieving full-employment real GDP. Answer: C

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Type: G Topic: 2 E: 216-217 MA: 216-217 41. Refer to the above diagram, in which Qf is the full-employment output. If aggregate demand curve AD3 describes the current situation, appropriate fiscal policy would be to: A) do nothing since the economy appears to be achieving full-employment real output. B) increase taxes and reduce government spending to shift the aggregate demand curve leftward from AD3 to AD2. C) increase taxes on businesses to shift the aggregate supply curve rightward to reduce the price level. D) increase taxes and reduce government spending to shift the aggregate demand curve from AD3 to AD1. Answer: B

Type: G Topic: 2 E: 215 MA: 215 42. Refer to the above diagram, in which Qf is the full-employment output. If aggregate demand curve AD2 describes the current situation, appropriate fiscal policy would be to: A) do nothing since the economy appears to be achieving full-employment real output. B) increase taxes and reduce government spending to shift the aggregate demand curve rightward from AD2 to AD3. C) increase taxes on businesses to shift the aggregate supply curve rightward to reduce the price level. D) reduce taxes and increase government spending to shift the aggregate demand curve from AD2 to AD1. Answer: A

Type: G Topic: 2 E: 216-217 MA: 216-217 43. Refer to the above diagram, in which Qf is the full-employment output. The shift of the aggregate demand curve from AD3 to AD2 is consistent with: A) an expansionary fiscal policy. C) a contractionary fiscal policy. B) a major recession. D) demand-pull inflation. Answer: C

Type: G Topic: 2 E: 215 MA: 215 44. Refer to the above diagram, in which Qf is the full-employment output. The shift of the aggregate demand curve from AD1 to AD2 is consistent with: A) an expansionary fiscal policy. C) a contractionary fiscal policy. B) a major recession. D) severe demand-pull inflation. Answer: A

Type: G Topic: 2 E: 216-217 MA: 216-217 45. Refer to the above diagram, in which Qf is the full-employment output. The shift in the aggregate demand curve from AD3 to AD2 could result from which of the following fiscal policy actions? A) a tax reduction B) a tax reduction accompanied by an even larger reduction in government spending C) a tax increase accompanied by an even larger increase in government spending D) an increase in government spending Answer: B

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Type: C Topic: 2 E: 217 MA: 217 Status: New 46. Suppose the price level is fixed, the MPC is .5, and the GDP gap is a negative $80 billion. To achieve fullemployment output (exactly), government should: A) increase government expenditures by $80 billion. B) reduce government expenditures by $40 billion. C) reduce taxes by $40 billion. D) reduce taxes by $80 billion. Answer: D

Type: C Topic: 2 E: 217 MA: 217 Status: New 47. Suppose the price level is fixed, the MPC is .5, and the GDP gap is a negative $100 billion. To achieve full-employment output (exactly), government should: A) increase government expenditures by $100 billion. B) increase government expenditures by $50 billion. C) reduce taxes by $50 billion. D) reduce taxes by $200 billion. Answer: B

Type: C Topic: 2 E: 217 MA: 217 Status: New 48. Suppose the price level is fixed, the MPC is .8, the GDP gap is a negative $200 billion. To achieve fullemployment output (exactly), government should: A) increase government expenditures by $200 billion. B) reduce taxes by $200 billion. C) increase government expenditures by $40 billion. D) reduce taxes by $160 billion. Answer: C

Type: C Topic: 2 E: 217 MA: 217 Status: New 49. Suppose the price level is fixed, the MPC is .8, and the GDP gap is a negative $320 billion. To achieve full-employment output (exactly), government should: A) increase government expenditures by $320 billion. B) increase government expenditures by $80 billion. C) reduce taxes by $320 billion. D) reduce taxes by $80 billion. Answer: D

Financing deficits; disposing of surpluses

Type: A Topic: 3 E: 217-218 MA: 217-218 50. Which of the following fiscal actions would be the most effective in curbing inflation? A) incurring a budget deficit by borrowing from the public B) incurring a budget surplus which is used to retire debt held by commercial banks C) incurring a budget surplus and impounding that surplus D) incurring a budget surplus which is used to retire debt held by the public Answer: C

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Type: A Topic: 3 E: 218 MA: 218 51. If the government increases its spending during recession to assist the economy, the funds for such expenditures must come from some source. Which of the following sources would be the most expansionary? A) additional taxes on personal incomes C) borrowing from the public B) creating new money D) additional taxes on corporate profits Answer: B

Type: A Topic: 3 E: 218 MA: 218 52. The greatest expansionary impact of a budget deficit will occur when the: A) government finances the deficit by obtaining newly printed money. B) government borrows the money from the general public. C) economy is operating in the intermediate range of its aggregate supply curve. D) marginal propensity to save for the economy is high. Answer: A

Type: A Topic: 3 E: 218 MA: 218 53. The greatest anti-inflationary impact of a budget surplus will occur when the Federal government: A) uses the surplus funds to pay off its outstanding debt. B) impounds the surplus funds and lets them stand idle. C) uses the surplus funds to expand transfer payments. D) gives the surplus funds to the states through federal grants. Answer: B

Type: A Topic: 3 E: 218 MA: 218 54. Other things equal, which of the policies will have the most expansionary effect on the economy? A) a balanced budget B) a budget surplus held as an idle money balance C) a budget deficit financed by creating new money D) a budget surplus used for debt retirement Answer: C

Type: A Topic: 3 E: 218 MA: 218 55. Other things equal, which of the policies will have the most contractionary effect on the economy? A) a balanced budget B) a budget surplus held as an idle money balance C) a budget deficit financed by creating new money D) a budget surplus used for debt retirement Answer: B

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Built-in stabilizers

Type: A Topic: 4 E: 218 MA: 218 56. Built-in stability means that: A) an annually balanced budget will offset the procyclical tendencies created by state and local finance and thereby stabilize the economy. B) with given tax rates and expenditures policies, a rise in domestic income will reduce a budget deficit or produce a budget surplus while a decline in income will result in a deficit or a lower budget surplus. C) Congress will automatically change the tax structure and expenditure programs to correct upswings and downswings in business activity. D) government expenditures and tax receipts automatically balance over the business cycle, though they may be out of balance in any single year. Answer: B

Type: C Topic: 4 E: 219 MA: 219 57. If Congress adjusted the U.S. tax system so that the MPC was reduced, the A) economy would become more inflation prone. C) stability of the economy would be unaffected. B) economy would become less stable. D) economy would become more stable. Answer: D

Type: A Topic: 4 E: 219 MA: 219 58. A major advantage of the built-in or automatic stabilizers is that they: A) simultaneously stabilize the economy and reduce the absolute size of the public debt. B) automatically produce surpluses during recessions and deficits during inflations. C) require no legislative action by Congress to be made effective. D) guarantee that the Federal budget will be balanced over the course of the business cycle. Answer: C

Type: A Topic: 4 E: 219 MA: 219 59. Which of the following best describes the built-in stabilizers as they function in the United States? A) The size of the balanced-budget multiplier varies inversely with the level of GDP. B) Personal and corporate income tax collections automatically fall and transfers and subsidies automatically rise as GDP rises. C) Personal and corporate income tax collections and transfers and subsidies all automatically vary inversely with the level of GDP. D) Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises. Answer: D

Type: A Topic: 4 E: 220 MA: 220 60. The effectiveness of the built-in or automatic stabilizers is limited because: A) the stabilizers produce budget surpluses during recessions. B) transfer payments and subsidies increase during inflation and decrease during recessions. C) the offset the stabilizers provide to a change in private spending is less than the change in private spending. D) the stabilizers raise the general price level regardless of the phase of the business cycle. Answer: C

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Type: F Topic: 4 E: 220 MA: 220 61. Which of the following statements is correct? A) Built-in stability only partially offsets fluctuations in economic activity. B) Built-in stability works in halting inflation, but it cannot alleviate unemployment. C) Built-in stability can be relied on to eliminate completely any fluctuation in economic activity. D) Built-in stability has eliminated the need for discretionary fiscal policy. Answer: A

Use the following to answer questions 62-67:

Type: G Topic: 4 E: 219 MA: 219 62. Refer to the above diagram in which T is tax revenues and G is government expenditures. All figures are in billions. This diagram portrays the idea of: A) progressive taxation. C) the balanced-budget multiplier. B) built-in stability. D) discretionary fiscal policy. Answer: B

Type: G Topic: 4 E: 219 MA: 219 63. Refer to the above diagram in which T is tax revenues and G is government expenditures. All figures are in billions. The tax system of this economy is such that: A) it is regressive. C) tax revenues equal 50 percent of GDP. B) it is progressive. D) it tends to destabilize the economy. Answer: C

Type: G Topic: 4 E: 219 MA: 219 Status: New 64. Refer to the above diagram in which T is tax revenues and G is government expenditures. All figures are in billions. The equilibrium level of GDP in this economy: A) is $400. B) is greater than $400. C) is less than $400. D) cannot be determined from the information given. Answer: D

Type: G Topic: 4 E: 219 MA: 219 65. Refer to the above diagram in which T is tax revenues and G is government expenditures. All figures are in billions. If GDP is $400: A) there will be a budget deficit. C) the budget will be balanced. B) there will be a budget surplus. D) the macroeconomy will be in equilibrium. Answer: C

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Type: G Topic: 4 E: 219 MA: 219 66. Refer to the above diagram in which T is tax revenues and G is government expenditures. All figures are in billions. The budget will entail a deficit: A) at all levels of GDP. C) at any level of GDP below $400. B) at any level of GDP above $400. D) only when GDP is stable. Answer: C

Type: G Topic: 4 E: 219 MA: 219 67. Refer to the above diagram in which T is tax revenues and G is government expenditures. All figures are in billions. In this economy: A) tax revenues and government spending both vary directly with GDP. B) tax revenues vary directly with GDP, but government spending is independent of GDP. C) tax revenues and government spending both vary inversely with GDP. D) government spending varies directly with GDP, but tax revenues are independent of GDP. Answer: B

Use the following to answer questions 68-70:

Type: G Topic: 4 E: 219 MA: 219 68. Refer to the above diagram. Which tax system has the most built-in stability? A) T4 B) T3 C) T2 D) T1 Answer: D

Type: G Topic: 4 E: 219 MA: 219 69. Refer to the above diagram. Which tax system has the least built-in stability? A) T4 B) T3 C) T2 D) T1 Answer: A

Type: G Topic: 4 E: 219 MA: 219 70. Refer to the above diagram. Which tax system will generate the largest cyclical deficits? A) T4 B) T3 C) T2 D) T1 Answer: D

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Use the following to answer questions 71-74:

Type: G Topic: 4 E: 219-220 MA: 219-220 71. (Advanced analysis) Refer to the above diagram, in which C1 is the before-tax consumption schedule. The consumption schedule represented by C2 reflects: A) a higher MPC than is embodied in C1. C) a proportional tax system. B) a regressive tax system. D) a progressive tax system. Answer: B

Type: G Topic: 4 E: 219-220 MA: 219-220 72. (Advanced analysis) Refer to the above diagram, in which C1 is the before-tax consumption schedule. The consumption schedule represented by C3 reflects: A) a progressive tax system. C) a regressive tax system. B) a proportional tax system. D) a higher MPC than is embodied in C1. Answer: B

Type: G Topic: 4 E: 219-220 MA: 219-220 73. (Advanced analysis) Refer to the above diagram, in which C1 is the before-tax consumption schedule. The consumption schedule represented by C4 reflects: A) a progressive tax system. C) a regressive tax system. B) a proportional tax system. D) a higher MPC than is embodied in C1. Answer: A

Type: G Topic: 4 E: 219-220 MA: 219-220 74. (Advanced analysis) Refer to the above diagram, in which C1 is the before-tax consumption schedule. Other things being equal, the economy would enjoy the greatest built-in stability with consumption schedule: A) C1. B) C2. C) C3. D) C4. Answer: D

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Use the following to answer questions 75-78: Answer the next question(s) on the basis of the following before-tax consumption schedule for a closed economy: Gross domestic product (GDP) $ 0 100 200 300 400 Consumption (C) $ 40 120 200 280 360

Type: T Topic: 4 E: 216 MA: 216 75. Refer to the above data. If a lump-sum tax (the same tax amount at each level of GDP) of $40 is now imposed in this economy, the consumption schedule will be: (a) GDP C $ 0 $ 8 100 88 200 168 300 248 400 320 Answer: A (b) GDP C $ 0 $ 0 100 80 200 160 300 240 400 320 (c) GDP C $ 0 $ 10 100 90 200 170 300 250 400 310 (d) GDP C $ 0 $ 0 100 60 200 120 300 180 400 240

Type: T Topic: 4 E: 216 MA: 216 76. Refer to the above data. If a lump-sum tax (the same tax amount at each level of GDP) of $40 is imposed in this economy, the tax system: A) is regressive. C) is progressive. B) is proportional. D) may be either proportional or progressive. Answer: A

Type: T Topic: 4 E: 216 MA: 216 77. Refer to the above data. If a lump-sum tax (the same tax amount at each level of GDP) of $40 is imposed in this economy, the marginal propensity to consume is: A) .8 before taxes and .6 after taxes. C) .6 before taxes and .8 after taxes. B) .8 both before and after taxes. D) .8 before taxes and .4 after taxes. Answer: B

Type: T Topic: 4 E: 216 MA: 216 78. Refer to the above data. If a lump-sum tax (the same tax amount at each level of GDP) of $40 is imposed in this economy, we can conclude that the tax: A) enhances the economy's built-in stability. B) reduces the economy's built-in stability. C) neither increases nor decreases built-in stability. D) increases the MPC and therefore increases the size of the multiplier. Answer: C

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Use the following to answer questions 79-82: (Advanced analysis) Answer the next question(s) on the basis of the following before-tax consumption schedule for an economy: Gross domestic product (GDP) $100 200 300 400 500 Consumption (C) $140 200 260 320 380

Type: T Topic: 4 E: 219 MA: 219 79. Refer to the above data. If a 10 percent proportional tax on income is imposed, the consumption schedule will now be:

(a) GDP $100 200 300 400 500

C $134 188 242 296 350

(b) GDP $100 200 300 400 500

C $144 212 278 344 410

(c) GDP $100 200 300 400 500

C $134 194 254 324 374

(d) GDP $100 200 300 400 500

C $146 218 286 352 412

Answer: A

Type: T Topic: 4 E: 219 MA: 219 80. Refer to the above data. The 10 percent proportional tax on income would cause: A) both consumption and saving to decrease by larger and larger absolute amounts as GDP rises. B) both consumption and saving to decrease by smaller and smaller absolute amounts as GDP rises. C) consumption to decrease by larger amounts and saving to decrease by smaller amounts as GDP rises. D) no change in the amounts consumed and saved at each level of GDP. Answer: A

Type: T Topic: 4 E: 219 MA: 219 81. Refer to the above data. The 10 percent proportional tax on income would: A) reduce the MPC from .6 to .54. C) reduce the MPC from .6 to .5. B) not affect the size of the MPC. D) increase the MPC from .6 to .64. Answer: A

Type: T Topic: 4 E: 219 MA: 219 82. Refer to the above data. A 10 percent proportional tax on income would: A) affect neither the size of the multiplier nor the stability of the economy. B) increase the size of the multiplier and make the economy more stable. C) increase the size of the multiplier and make the economy less stable. D) reduce the size of the multiplier and make the economy more stable. Answer: D

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Full-employment budget

Type: D Topic: 5 E: 220 MA: 220 83. The full-employment budget refers to: A) the inflationary impact that the automatic stabilizers have in a full-employment economy. B) that portion of a full-employment GDP that is not consumed in the year it is produced. C) the size of the Federal government's budgetary surplus or deficit when the economy is operating at full employment. D) the number of workers who are underemployed when the level of unemployment is 4 to 5 percent. Answer: C

Type: D Topic: 5 E: 220 MA: 220 84. The full-employment budget tells us: A) that in a full-employment economy the Federal budget should be in balance. B) that tax revenues should vary inversely with GDP. C) what the size of the Federal budget deficit or surplus would be if the economy was at full employment. D) the actual budget deficit or surplus realized in any given year. Answer: C

Type: A Topic: 5 E: 220 MA: 220 85. Which of the following statements is correct? A) The full-employment budget and the actual budget differ because the latter does not take government transfer payments into account. B) The full-employment budget is less likely to show a deficit than is the actual budget. C) The full-employment budget and the actual budget will show the same size deficit or surplus in any given fiscal year. D) The full-employment budget is more likely to show a deficit than is the actual budget. Answer: B

Type: A Topic: 5 E: 220 MA: 220 86. If the economy has a full-employment budget surplus, this means that: A) the public sector is exerting an expansionary impact on the economy. B) tax revenues would exceed government expenditures if full employment were achieved. C) the actual budget is necessarily also in surplus. D) the economy is actually operating at full employment. Answer: B

Type: A Topic: 5 E: 222 MA: 222 87. The actual budget deficit of the Federal government in 1991 was about $269 billion. On the basis of this information it: A) can be concluded that the economy was faced with serious inflation in 1991. B) cannot be determined whether fiscal policy had an expansionary or a contractionary impact in 1991. C) can be concluded that fiscal policy was contractionary in 1991. D) can be concluded that fiscal policy was expansionary in 1991. Answer: B

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Type: D Topic: 5 E: 220 MA: 220 88. When current government expenditures equal current tax revenues and the economy is achieving full employment: A) the full-employment budget has neither a deficit nor a surplus. B) the full-employment budget may have either a deficit or a surplus. C) fiscal policy is contractionary. D) nominal GDP and real GDP are equal. Answer: A

Type: A Topic: 5 E: 220 MA: 220 89. When current government expenditures exceed current tax revenues and the economy is achieving full employment: A) the full-employment budget has neither a deficit nor a surplus. B) the full-employment budget has a deficit. C) fiscal policy is contractionary. D) nominal GDP and real GDP are equal. Answer: B

Type: A Topic: 5 E: 220 MA: 220 90. When current tax revenues exceed current government expenditures and the economy is achieving full employment: A) the full-employment budget has neither a deficit nor a surplus. B) the full-employment budget may have either a deficit or a surplus. C) the full-employment budget has a surplus. D) nominal GDP and real GDP are equal. Answer: C

Type: A Topic: 5 E: 216 MA: 216 91. Suppose the government purposely changes the economy's full-employment budget from a deficit of 3 percent of real GDP to a surplus of 1 percent of real GDP. The government is engaging in a(n): A) expansionary fiscal policy. C) neutral fiscal policy. B) contractionary fiscal policy. D) high-interest rate policy. Answer: B

Type: A Topic: 5 E: 215 MA: 215 92. Suppose the government purposely changes the economy's full-employment budget from a deficit of 0 percent of real GDP to a deficit of 3 percent of real GDP. The government is engaging in a(n): A) expansionary fiscal policy. C) neutral fiscal policy. B) contractionary fiscal policy. D) low-interest rate policy. Answer: A

Type: A Topic: 5 E: 216 MA: 216 93. Suppose the government cuts taxes to keep the economy's full-employment budget in balance when the economy is expanding. The government is engaging in a(n): A) contractionary fiscal policy. C) low-interest rate policy. B) expansionary fiscal policy. D) neutral fiscal policy. Answer: D

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Use the following to answer questions 94-97:
Actual budget, percent of GDP (- deficits; + surpluses) 0 -3 -5 -2 +2 Full-employment budget, percent of GDP (- deficits; + surpluses) 0 0 -2 -2 +1

Year 1998 1999 2000 2001 2002

Type: T Topic: 5 E: 215-216 MA: 215-216 94. Refer to the above data for a fictional economy. The changes in the budget conditions between 1998 and 1999 best reflect: A) demand-pull inflation. C) a recession. B) an expansionary fiscal policy. D) a contractionary fiscal policy. Answer: C

Type: T Topic: 5 E: 215 MA: 215 95. Refer to the above data for a fictional economy. The changes in the budget conditions between 1999 and 2000 best reflect: A) demand-pull inflation. C) a tax increase. B) an expansionary fiscal policy. D) a contractionary fiscal policy. Answer: B

Type: T Topic: 5 E: 215 MA: 215 96. Refer to the above table for a fictional economy. The changes in the budget conditions between 2000 and 2001 best reflect: A) demand-pull inflation. B) cost-push inflation. C) an expansion of real GDP and an automatic increase in tax revenues. D) a contractionary fiscal policy. Answer: C

Type: T Topic: 5 E: 216 MA: 216 97. Refer to the above table for a fictional economy. The changes in the budget conditions between 2001 and 2002 best reflect a(n): A) recession. B) expansionary fiscal policy. C) tax increase. D) contractionary fiscal policy. Answer: D

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Use the following to answer questions 98-104:

Government purchases and tax revenues

T1 d T2

b c a

G

0

A

B

GDP

Type: G Topic: 5 E: 221 MA: 221 98. Refer to the above diagram. Assume that G and T1 are the relevant curves and that the economy is currently at B, which is its full-employment GDP. This economy has a: A) full-employment budget surplus only. B) full-employment budget deficit only. C) full-employment budget surplus and an actual budget surplus. D) full-employment deficit and an actual budget deficit. Answer: C

Type: G Topic: 5 E: 221 MA: 221 99. Refer to the above diagram. Assume that G and T1 are the relevant curves, the economy is currently at A, and the full-employment GDP is B. This economy has a: A) full-employment budget surplus. C) actual budget deficit. B) full-employment budget deficit. D) actual budget surplus. Answer: A

Type: G Topic: 5 E: 221 MA: 221 100. Refer to the above diagram. Assume that G and T1 are the relevant curves, the economy is currently at A, and the full-employment GDP is B. This economy has a: A) full-employment budget deficit. B) actual budget deficit. C) actual budget surplus. D) neither a surplus nor deficit in the actual budget. Answer: D

Type: G Topic: 5 E: 221 MA: 221 101. Refer to the above diagram. Assume that G and T2 are the relevant curves, the economy is currently at A, and the full-employment GDP is B. This economy has a: A) full-employment budget surplus. C) full-employment budget deficit. B) actual budget deficit. D) actual budget surplus. Answer: B

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Type: G Topic: 5 E: 221 MA: 221 102. Refer to the above diagram. Assume that G and T1 are the relevant curves, the economy is currently at B, and the full-employment GDP is A. This economy has a: A) full-employment budget surplus. C) full-employment budget deficit. B) actual budget deficit. D) actual budget surplus. Answer: D

Type: G Topic: 5 E: 221 MA: 221 103. Refer to the above diagram. Discretionary fiscal policy designed to slow the economy is illustrated by: A) the shift of curve T1 to T2 . C) a movement from a to c along curve T2. B) the shift of curve T2 to T1. D) a movement from d to b along curve T1. Answer: B

Type: G Topic: 5 E: 221 MA: 221 104. Refer to the above diagram. Discretionary fiscal policy designed to expand GDP is illustrated by: A) the shift of curve T1 to T2. C) a movement from a to c along curve T2. B) the shift of curve T2 to T1. D) a movement from d to b along curve T1. Answer: A

Use the following to answer questions 105-107:

Government purchases (G) and tax revenues (T)

T G

0

H

J

K

L

GDP

Type: G Topic: 5 E: 221 MA: 221 105. If the full-employment GDP for the above economy is at L, the: A) actual budget will have a deficit. C) actual budget will have a surplus. B) full-employment budget will have a deficit. D) full-employment budget will have a surplus. Answer: D

Type: G Topic: 5 E: 221 MA: 221 106. With the expenditures programs and the tax system shown in the above diagram: A) the public budget will be expansionary at all GDP levels above K, and contractionary at all GDP levels below K. B) the public budget will be a destabilizing force at all levels of GDP. C) deficits will occur at income levels below K, and surpluses above K. D) deficits will occur at income levels below H, and surpluses above H. Answer: C

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Type: G Topic: 5 E: 221 MA: 221 107. Refer to the above diagram. The degree of built-in stability in the above economy could be increased by: A) reducing government purchases so that the purchases line shifts downward but parallel to its present position. B) changing the tax system so that the tax line is shifted downward but parallel to its present position. C) changing the tax system so that the tax line has a greater slope. D) altering the government expenditures line so that it has a positive slope. Answer: C

Type: A Topic: 5 E: 215 MA: 215 108. An effective expansionary fiscal policy will: A) reduce a cyclical deficit, but necessarily increase the actual deficit. B) reduce a full-employment. C) increase the full-employment deficit but reduce the cyclical deficit. D) always result in a balanced actual budget once full-employment is achieved. Answer: C

Use the following to answer questions 109-114:

Type: G Topic: 5 E: 219 MA: 219 109. Refer to the above diagram where T is tax revenues and G is government expenditures. All figures are in billions of dollars. If the full-employment GDP is $400 billion while the actual GDP is $200 billion, the actual budget deficit is: A) $200 billion. B) $20 billion. C) $40 billion. D) $60 billion. Answer: C

Type: G Topic: 5 E: 219 MA: 219 110. Refer to the above diagram where T is tax revenues and G is government expenditures. All figures are in billions of dollars. If the full-employment GDP is $400 billion while the actual GDP is $200 billion, the full-employment budget deficit is: A) $40 billion. B) zero. C) $60 billion. D) $20 billion. Answer: D

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Type: G Topic: 5 E: 219 MA: 219 111. Refer to the above diagram where T is tax revenues and G is government expenditures. All figures are in billions of dollars. If the full-employment GDP is $400 billion while the actual GDP is $200 billion, the cyclical deficit is: A) $40 billion. B) $20 billion. C) zero. D) $60 billion. Answer: B

Type: G Topic: 5 E: 219 MA: 219 112. Refer to the above diagram where T is tax revenues and G is government expenditures. All figures are in billions of dollars. If the full-employment GDP is $400 billion while the actual GDP is $200 billion, the: A) actual budget deficit exceeds the full-employment budget deficit. B) actual budget deficit is less than the full-employment budget deficit. C) full-employment deficit exceeds the cyclical deficit. D) cyclical deficit exceeds the full-employment deficit. Answer: A

Type: G Topic: 5 E: 219 MA: 219 113. Refer to the above diagram where T is tax revenues and G is government expenditures. All figures are in billions of dollars. If the full-employment GDP and actual GDP are each $400 billion, this economy will realize a: A) full-employment deficit of $20 billion. C) cyclical surplus of $20 billion. B) cyclical deficit of $20 billion. D) full-employment deficit of zero. Answer: A

Type: G Topic: 5 E: 219 MA: 219 114. Refer to the above diagram where T is tax revenues and G is government expenditures. All figures are in billions of dollars. If the full-employment and actual GDP are each $400 billion, government can balance its budget by: A) increasing T by $40 billion. B) reducing G by $20 billion. C) reducing T by $20 billion. D) increasing T by $10 billion and reducing G by $20 billion. Answer: B

Type: D Topic: 5 E: 221 MA: 221 115. Economists refer to a budget deficit that exists when the economy is achieving full employment as a: A) cyclical deficit. B) full-employment budget. C) natural deficit. D) nonrecurring deficit. Answer: B

Type: A Topic: 5 E: 221 MA: 221 116. When the economy is at full employment: A) one cannot generalize in comparing the actual and the full-employment budgets. B) the full-employment budget will show a surplus and the actual budget will show a deficit. C) the actual budget will show a surplus and the full-employment budget will show a deficit. D) the actual and the full-employment budgets will be equal. Answer: D

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Type: A Topic: 5 E: 221 MA: 221 117. If government increases the size of its full-employment surplus, we can: A) assume that government is causing interest rates to rise. B) not determine government's impact on the economy without also knowing the status of the actual budget. C) assume that government is having a contractionary effect on the economy. D) assume that government is having an expansionary effect on the economy. Answer: C

Problems, criticisms, complications

Use the following to answer questions 118-120: Answer the next question(s) on the basis of the following sequence of events involving fiscal policy: 1) The composite index of leading indicators turns downward for three consecutive months; (2) Economists reach agreement that the economy is moving into a recession; (3) A tax cut is proposed in Congress; (4) The tax cut is passed by Congress and signed by the President; (5) Consumption spending begins to rise, aggregate demand increases, and the economy begins to recover.

Type: A Topic: 6 E: 223 MA: 223 118. Refer to the above information. The operational lag of fiscal policy is reflected in events: A) 1 and 2. B) 2 and 3. C) 3 and 4. D) 4 and 5. Answer: D

Type: A Topic: 6 E: 223 MA: 223 119. Refer to the above information. The recognition lag of fiscal policy is reflected in events: A) 1 and 2. B) 2 and 3. C) 3 and 4. D) 4 and 5. Answer: A

Type: A Topic: 6 E: 223 MA: 223 120. Refer to the above information. The administrative lag of fiscal policy is reflected in events: A) 1 and 2. B) 2 and 3. C) 3 and 4. D) 4 and 5. Answer: C

Type: A Topic: 6 E: 223 MA: 223 121. Which of the following best describes the idea of a political business cycle? A) Politicians are more willing to cut taxes and increase government spending than they are to do the reverse. B) Fiscal policy will result in alternating budget deficits and surpluses. C) Politicians will use fiscal policy to cause output, real incomes, and employment to be rising prior to elections. D) Despite good intentions, various timing lags will cause fiscal policy to reinforce the business cycle. Answer: C

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Type: D Topic: 6 E: 223 MA: 223 122. The political business cycle refers to the possibility that: A) incumbent politicians will be reelected regardless of the state of the economy. B) politicians will manipulate the economy to enhance their chances of being reelected. C) there is more inflation during Democratic administrations than during Republican administrations. D) recessions coincide with election years. Answer: B

Type: D Topic: 6 E: 224 MA: 224 123. The crowding-out effect of expansionary fiscal policy suggests that: A) tax increases are paid primarily out of saving and therefore are not an effective fiscal device. B) increases in government spending financed through borrowing will increase the interest rate and thereby reduce investment. C) it is very difficult to have excessive aggregate spending in the U.S. economy. D) consumer and investment spending always vary inversely. Answer: B

Type: A Topic: 6 E: 224 MA: 224 124. The crowding-out effect of expansionary fiscal policy suggests that: A) government spending is increasing at the expense of private investment. B) imports are replacing domestic production. C) private investment is increasing at the expense of government spending. D) saving is increasing at the expense of investment. Answer: A

Type: D Topic: 6 E: 224 MA: 224 125. Assume the government purposely incurs a budget deficit that is financed by borrowing. As a result, interest rates rise and the amount of private investment spending declines. This illustrates: A) the equation-of-exchange effect. C) the crowding-out effect. B) the paradox of thrift. D) the wealth effect. Answer: C

Type: D Topic: 6 E: 224 MA: 224 126. The financing of a government deficit increases interest rates and, as a result, reduces investment spending. This statement describes: A) the supply-side effects of fiscal policy. C) the crowding-out effect. B) built-in stability. D) the net export effect. Answer: C

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Use the following to answer questions 127-131:

AS
Price level Price level

AS

P1

P1

AD1 0 X Z Real GDP (billions) 0

AD1 X Y Z Real GDP (billions)

Type: G Topic: 6 E: 215 MA: 215 Status: New 127. Suppose real GDP is X, as shown in graph (a). Appropriate government fiscal policy would be to: A) increase taxes. B) reduce government spending. C) reduce government spending and taxes by equal-sized amounts. D) reduce taxes or increase government spending. Answer: D

Type: G Topic: 6 E: 216 MA: 216 Status: New 128. Suppose real GDP is X, as shown in graph (a). If the economy's MPC is .75, X is $100 billion and fullemployment real GDP Y is $140 billion, an appropriate fiscal policy would be to: A) reduce taxes by $100 billion. B) increase government expenditures by $100 billion. C) reduce taxes by $10 billion. D) increase government expenditures by $10 billion. Answer: D

Type: G Topic: 6 E: 216 MA: 216 Status: New 129. Suppose real GDP is X, as shown in graph (a). If the economy's MPC is .8, X is $200 billion and fullemployment real GDP Y is $300 billion, an appropriate fiscal policy would be to reduce taxes by: A) $100 billion. B) $20 billion. C) $25 billion. D) $164 billion. Answer: C

Type: G Topic: 6 E: 226 MA: 226 130. Refer to the above diagrams. Suppose that government undertakes fiscal policy designed to increase aggregate demand from AD1 to AD2 and thereby to increase GDP from X to Z. In terms of graph a, which of the following might explain why GDP increases to Y rather than to Z? A) inflation B) an increase in stock prices C) a net export effect D) a ratchet effect Answer: C

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Type: G Topic: 6 E: 226 MA: 226 131. Refer to the above diagrams. A second correct answer to the previous question would be a: A) depreciation of the dollar. B) reduction in tariffs imposed by our trading partners. C) decrease in the saving schedule. D) crowding-out effect. Answer: D

Fiscal policy: AE model

Use the following to answer questions 132-133:

Type: G Topic: 7 E: 179 MA: 179 132. Refer to the above diagram. If the full-employment level of GDP is D, then it would be appropriate fiscal policy for government to: A) decrease spending and increase taxes. C) increase spending and increase taxes. B) decrease spending and decrease taxes. D) increase spending and decrease taxes. Answer: D

Type: G Topic: 7 E: 179 MA: 179 133. Refer to the above diagram. If the full-employment level of GDP is A, then it would be appropriate fiscal policy for government to: A) decrease spending and increase taxes. C) increase spending and increase taxes. B) decrease spending and decrease taxes. D) increase spending and decrease taxes. Answer: A

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Use the following to answer questions 134-137:

Type: G Topic: 7 E: 179 MA: 179 134. In the above diagram it is assumed that investment, net exports, and government purchases: A) are leakages from the circular flow. C) vary inversely with GDP. B) are independent of the level of GDP. D) vary directly with GDP. Answer: B

Type: G Topic: 7 E: 179 MA: 179 135. Refer to the above diagram. The equilibrium level of GDP is: A) Y5. B) Y4. C) Y3. D) Y2. Answer: B

Type: G Topic: 7 E: 215 MA: 215 136. Refer to the above diagram. If the full-employment GDP is Y5, government should: A) incur neither a deficit nor a surplus. B) cut taxes and government spending by equal amounts. C) reduce taxes and increase government spending. D) increase taxes and reduce government spending. Answer: C

Type: G Topic: 7 E: 217 MA: 217 137. Refer to the above diagram. If the full-employment GDP is Y3, government should: A) incur neither a deficit nor a surplus. B) increase taxes and government spending by equal amounts. C) reduce taxes and increase government spending. D) increase taxes and reduce government spending. Answer: D

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Fiscal policy: open economy complications

Type: A Topic: 8 E: 226 MA: 226 138. An expansionary U.S. fiscal policy that drives up U.S. interest rates is most likely to: A) decrease the foreign demand for dollars and appreciate the international value of the dollar. B) decrease the foreign demand for dollars and depreciate the international value of the dollar. C) increase the foreign demand for dollars and appreciate the international value of the dollar. D) increase the foreign demand for dollars and depreciate the international value of the dollar. Answer: C

Type: A Topic: 8 E: 226 MA: 226 139. A contractionary U.S. fiscal policy that reduces domestic interest rates is most likely to: A) depreciate the international value of the dollar and increase U.S. net exports. B) depreciate the international value of the dollar and decrease U.S. net exports. C) appreciate the international value of the dollar and increase U.S. net exports. D) appreciate the international value of the dollar and decrease U.S. net exports. Answer: A

Type: A Topic: 8 E: 226 MA: 226 140. Which one of the following best describes the net export effect associated with an expansionary U.S. fiscal policy? A) domestic interest rate falls, foreign demand for dollars rises, dollar appreciates, and net exports increase. B) domestic interest rate falls, foreign demand for dollars rises, dollar appreciates, and net exports fall. C) domestic interest rate rises, foreign demand for dollars falls, dollar depreciates, and net exports increase. D) domestic interest rate rises, foreign demand for dollars increases, dollar appreciates, and net exports decline. Answer: D

Type: A Topic: 8 E: 226 MA: 226 141. The higher domestic interest rate resulting from an expansionary U.S. fiscal policy will tend to: A) increase domestic investment spending. C) increase domestic consumption spending. B) increase U.S. exports. D) decrease U.S. exports. Answer: D

Type: A Topic: 8 E: 226 MA: 226 142. An expansionary U.S. fiscal policy might unintentionally cause demand-pull inflation if: A) the dollar unexpectedly appreciates while the expansionary policy is in place. B) the dollar unexpectedly depreciates while the expansionary policy is in place. C) the policy produces severe crowding out. D) our trading partners experience recession during the time of the fiscal policy action. Answer: B

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Type: A Topic: 8 E: 226 MA: 226 143. International flows of financial capital in response to interest rate changes in the United States: A) weaken domestic fiscal policy through an offsetting net export effect. B) strengthen domestic fiscal policy through a supporting net export effect. C) strengthen domestic fiscal policy through an offsetting net export effect. D) do none of the above. Answer: A

Type: A Topic: 8 E: 226 MA: 226 144. All else equal, a contractionary U.S. fiscal policy which reduces domestic interest rates tends to: A) increase U.S. imports. C) reduce the foreign demand for U.S. dollars. B) increase the international value of the dollar. D) aggravate an existing U.S. trade deficit. Answer: C

Last Word Questions

Type: A E: 227 MA: 227 145. (Last Word) Which of the following is not an item in the list of leading economic indicators? A) changes in mutual fund balances B) the length of the average work week C) the money supply D) the value of the index of consumer expectations Answer: A

Type: A E: 227 MA: 227 146. (Last Word) The composite index of leading indicators is useful for: A) predicting potential GDP. C) developing discretionary fiscal policy. B) determining the natural rate of unemployment. D) forecasting aggregate supply shocks. Answer: C

Type: A E: 227 MA: 227 147. (Last Word) Which one of the following is one of the leading economic indicators? A) index of consumer expectations C) the consumer price index B) the unemployment rate D) Federal income tax collections Answer: A

True/False Questions

Type: A E: 215 MA: 215 148. Expansionary fiscal policy is so-named because it involves an expansion of the nation's money supply. Answer: False

Type: D E: 216 MA: 216 149. If the MPC in the economy is .75, government could shift the aggregate demand curve rightward by $30 billion by cutting taxes by $10 billion. Answer: True

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Type: A E: 216 MA: 216 150. A contractionary fiscal policy shifts the aggregate demand curve leftward. Answer: True

Type: A E: 216 MA: 216 151. The greatest impact of a tax cut will occur when government borrows from the public rather than prints money to finance the resulting budget deficit. Answer: False

Type: A E: 216 MA: 216 152. Demand-pull inflation can be restrained by increasing government spending and reducing taxes. Answer: False

Type: A E: 218 MA: 218 153. Built-in stability is synonymous with discretionary fiscal policy. Answer: False

Type: A E: 220 MA: 220 154. The actual budget may be in deficit while the full-employment budget is in surplus. Answer: True

Type: A E: 220 MA: 220 155. An increase in the cyclical deficits will automatically increase the full-employment budget deficit. Answer: False

Type: A E: 219 MA: 219 156. Tax revenues automatically increase during economic expansions and decrease during recessions. Answer: True

Type: A E: 223 MA: 223 157. The operational lag of fiscal policy refers to the time that elapses between the beginning of a recession or inflation and the certain awareness that it is actually happening. Answer: False

Type: D E: 224 MA: 224 158. The crowding-out effect refers to the possibility that deficit spending may motivate people to increase their saving in anticipation of higher future taxes. Answer: False

Type: D E: 226 MA: 226 159. If fiscal policy leads to higher interest rates, the dollar may appreciate and net exports may fall. Answer: True

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Type: D E: 214 MA: 214 Status: New 160. Fiscal policy is mainly undertaken by the Federal Reserve. Answer: False

Type: F E: 234 MA: 234 Status: New 161. Tax increases and government spending cuts by state governments during recessions often reduce the expansionary impact of fiscal policy by the Federal government. Answer: True

Type: F E: 216 MA: 216 Status: New 162. Permanent tax reductions are more likely to be expansionary than temporary tax reductions. Answer: True

Type: F E: 220 MA: 220 Status: New 163. As measured by the full-employment budget, the U.S. government engaged in a contractionary fiscal policy in 2001 and 2002. Answer: False

Type: F E: 223 MA: 223 Status: New 164. Fiscal policy is complicated by political considerations and political motivations. Answer: True

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Money and Banking

Topic 1. 2. 3. 4. 5. 6. Functions of money Supply of money (definition, value, etc.) Demand for money Money market U.S. financial system Recent developments and reform Consider This Last Word True-False

Question numbers 1-11 12-63 64-81 82-117 118-143 144-156 157-159 160-162 163-176

____________________________________________________________

_______________________________________

____________________________________________________________

_______________________________________

Multiple Choice Questions Functions of money

Type: A Topic: 1 E: 232 MA: 232 1. To say money is socially defined means that: A) money has been defined in a Constitutional amendment. B) whatever performs the functions of money extremely well is considered to be money. C) the money supply includes all public and private securities purchased by society. D) society, acting through Congress, specifies what shall be included in the money supply. Answer: B

Type: D Topic: 1 E: 232-233 MA: 232-233 2. Money functions as: A) a store of value. B) a unit of account. C) a medium of exchange. Answer: D

D) all of the above.

Type: A Topic: 1 E: 233 MA: 233 3. If you are estimating your total expenses for school next semester, you are using money primarily as: A) a medium of exchange. B) a store of value. C) a unit of account. D) an economic investment. Answer: C

Type: A Topic: 1 E: 233 MA: 233 4. If you place a part of your summer earnings in a savings account, you are using money primarily as a: A) medium of exchange. B) store of value. C) unit of account. D) standard of value. Answer: B

Chapter 13: Money and Banking

Type: A Topic: 1 E: 232 MA: 232 5. If you write a check on a bank to purchase a used Honda Civic, you are using money primarily as: A) a medium of exchange. B) a store of value. C) a unit of account. D) an economic investment. Answer: A

Type: A Topic: 1 E: 233 MA: 233 6. A $70 price tag on a sweater in a department store window is an example of money functioning as a: A) unit of account. B) standard of deferred payments. C) store of value. D) medium of exchange. Answer: A

Type: A Topic: 1 E: 233 MA: 233 7. Stock market price quotations best exemplify money serving as a: A) store of value. B) unit of account. C) medium of exchange. Answer: B

D) index of satisfaction.

Type: A Topic: 1 E: 232 MA: 232 8. Purchasing common stock by writing a check best exemplifies money serving as a: A) store of value. B) unit of account. C) medium of exchange. D) index of satisfaction. Answer: C

Type: A Topic: 1 E: 232 MA: 232 9. When economists say that money serves as a medium of exchange, they mean that it is: A) a way to keep wealth in a readily spendable form for future use. B) a means of payment. C) a monetary unit for measuring and comparing the relative values of goods. D) declared as legal tender by the government. Answer: B

Type: A Topic: 1 E: 233 MA: 233 10. When economists say that money serves as a unit of account, they mean that it is: A) away to keep wealth in a readily spendable form for future use. B) a means of payment. C) a monetary unit for measuring and comparing the relative values of goods. D) declared as legal tender by the government. Answer: C

Type: A Topic: 1 E: 233 MA: 233 11. When economists say that money serves as a store of value, they mean that it is: A) a way to keep wealth in a readily spendable form for future use. B) a means of payment. C) a monetary unit for measuring and comparing the relative values of goods. D) declared as legal tender by the government. Answer: A

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Supply of money

Type: F Topic: 2 E: 234 MA: 234 12. The paper money used in the United States is: A) National Bank Notes. B) Treasury Notes. Answer: D

C) United States Notes.

D) Federal Reserve Notes.

Type: F Topic: 2 E: 233 MA: 233 13. The largest component of the money supply (M1) is: A) gold certificates. B) checkable deposits. C) paper money in circulation. Answer: C

D) coins.

Type: D Topic: 2 E: 233 MA: 233 14. In the United States, the money supply (M1) is comprised of: A) coins, paper currency, and checkable deposits. B) currency, checkable deposits, and Series E bonds. C) coins, paper currency, checkable deposits, and credit balances with brokers. D) paper currency, coins, gold certificates, and time deposits. Answer: A

Type: D Topic: 2 E: 237 MA: 237 15. Fiat money is: A) composed only of checkable deposits. B) money because the government asserts that it is. C) money that is in a commercial bank vault. D) money that can be redeemed for a valuable commodity such as gold. Answer: B

Type: A Topic: 2 E: 237 MA: 237 16. The purchasing power of the dollar: A) has been increasing in recent years because of economic growth. B) varies directly with the cost-of-living index. C) is inversely related to the level of aggregate demand. D) is the reciprocal of the price level. Answer: D

Type: F Topic: 2 E: 238 MA: 238 17. The money supply is backed: A) by the government's ability to control the supply of money and therefore to keep its value relatively stable. B) by government bonds. C) dollar-for-dollar with gold and silver. D) dollar-for-dollar with gold bullion. Answer: A

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Type: A Topic: 2 E: 234 MA: 234 18. Checkable deposits are classified as money because: A) they can be readily used in purchasing goods and paying debts. B) banks hold currency equal to the value of their checkable deposits. C) they are ultimately the obligations of the Treasury. D) they earn interest income for the depositor. Answer: A

Type: A Topic: 2 E: 237 MA: 237 19. The value of money varies: A) inversely with the price level. B) directly with the volume of employment. Answer: A

C) directly with the price level. D) directly with the interest rate.

Type: F Topic: 2 E: 233 MA: 233 20. Currency (paper money plus coins) constitutes about: A) 81 percent of the U.S. Ml money supply. C) 92 percent of the U.S. M1 money supply. B) 52 percent of the U.S. M1 money supply. D) 11 percent of the U.S. M1 money supply. Answer: B

Type: F Topic: 2 E: 233 MA: 233 21. In 2002, the supply of money (M1) in the United States was about: A) $247 billion. B) $1600 billion. C) $203 billion. D) $1236 billion. Answer: D

Type: F Topic: 2 E: 234 MA: 234 22. Nearly one-half the money in the U.S. economy is created by: A) the receipt of gold bullion through international trade and finance. B) commercial banks and thrift institutions. C) the Federal mint. D) the Federal Treasury. Answer: B

Type: A Topic: 2 E: 235 MA: 235 23. In defining money as M1, economists exclude time deposits because: A) the intrinsic value of time deposits is nil. B) the purchasing power of time deposits is much less stable than that of checkable deposits and currency. C) they are not directly or immediately a medium of exchange. D) they are not recognized by the Federal government as legal tender. Answer: C

Type: A Topic: 2 E: 237 MA: 237 24. The purchasing power of money and the price level vary: A) inversely. B) directly during recessions, but inversely during inflations. C) directly, but not proportionately. D) directly and proportionately. Answer: A

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Type: A Topic: 2 E: 237 MA: 237 25. If the price index rises from 100 to 120, the purchasing power value of the dollar: A) may either rise or fall. C) will fall by one-sixth. B) will rise by one-sixth. D) will rise by 20 percent. Answer: C

Type: C Topic: 2 E: 237 MA: 237 26. Other things equal, an excessive increase in the money supply will : A) increase the purchasing power of each dollar. B) decrease the purchasing power of each dollar. C) have no impact on the purchasing power of the dollar. D) reduce the price level. Answer: B

Type: E Topic: 2 E: 237 MA: 237 27. If P equals the price level expressed as an index number and D equals the value of the dollar, then: A) P = D - 1. B) D = 1/P. C) 1 = D/P. D) D = P - 1. Answer: B

Use the following to answer questions 28-30: Answer the next question(s) on the basis of the following table: Year 1 2 3 4 Price level 1.00 1.25 .80 .50 Value of dollar $1.00

Type: T Topic: 2 E: 237 MA: 237 28. Refer to the above table. The value of the dollar in year 2 is: A) $1.25. B) $1.33. C) $.80. D) $1.00. Answer: C

Type: T Topic: 2 E: 237 MA: 237 29. Refer to the above table. The value of the dollar in year 3 is: A) $1.00. B) $1.25. C) $.80. D) $.50. Answer: B

Type: T Topic: 2 E: 237 MA: 237 30. Refer to the above table. The value of the dollar in year 4 is: A) $.25. B) $.33. C) $.50. D) $2.00. Answer: D

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Type: D Topic: 2 E: 235 MA: 235 31. Which of the following is not part of the M2 money supply? A) money market mutual fund balances C) currency B) money market deposit accounts D) large ($100,000 or more) time deposits Answer: D

Type: D Topic: 2 E: 235 MA: 235 32. The M2 money supply includes: A) stock certificates. B) corporate bond certificates. C) the cash value of life insurance policies. D) individual shares in money market mutual funds. Answer: D

Type: A Topic: 2 E: 234 MA: 234 33. A checking account entry is money because it: A) is ensured by the Federal Deposit Insurance Corporation. B) has been declared as such by the Federal government. C) performs the functions of money. D) can be sold for currency. Answer: C

Type: A Topic: 2 E: 233-235 MA: 233-235 34. Currency in circulation is part of: A) M1 only. B) M2 only. C) M3 only. D) M1, M2, and M3. Answer: D

Type: D Topic: 2 E: 233-235 MA: 233-235 35. Money market deposit accounts are included in: A) M1 only. B) both M1 and M2. C) both M2 and M3. Answer: C

D) M3 only.

Type: D Topic: 2 E: 233-234 MA: 233-234 36. Checkable deposits are: A) included in M1. B) not included in either Ml or M2. Answer: A

C) considered to be a near money. D) also called time deposits.

Type: D Topic: 2 E: 233-235 MA: 233-235 37. Checkable deposits are: A) included in M1 but not in M2. B) considered to be a near-money. Answer: C

C) included in M1 and in M2. D) also called time deposits.

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Type: F Topic: 2 E: 233-235 MA: 233-235 38. The amount of money reported as M2: A) is smaller than the amount reported as M1. B) is larger than the amount reported as M1. C) excludes coins and currency. D) includes large ($100,000 or more) certificates of deposit. Answer: B

Type: F Topic: 2 E: 233-234 MA: 233-234 39. The largest component of the money supply is: A) coins. B) paper money. C) checkable deposits. Answer: B

D) stock certificates.

Type: F Topic: 2 E: 234 MA: 234 40. Paper money (currency) in the United States is issued by the: A) United States Mint. B) Federal Reserve Banks. C) United States Treasury. Answer: B

D) national banks.

Type: A Topic: 2 E: 234 MA: 234 41. A $20 bill is a: A) gold certificate. B) Treasury note. Answer: D

C) Treasury bill.

D) Federal Reserve Note.

Type: D Topic: 2 E: 233-235 MA: 233-235 42. Coins in people's pockets and purses are: A) included in M1, but not in M2. B) included in both M1 and in M2. C) included in M2, but not in M1. D) excluded from M1 and M2 because people can exchange them for Federal Reserve notes. Answer: B

Type: D Topic: 2 E: 234 MA: 234 43. Coins held in commercial banks are: A) included in M1, but not in M2. B) included both in M1 and in M2. Answer: D

C) included in M2, but not in M1. D) not part of the nation's money supply.

Type: D Topic: 2 E: 234 MA: 234 44. Checkable deposits include: A) both large and small time deposits. B) the deposits of banks and thrifts on which checks can be written. C) only the checkable deposits of commercial banks. D) only the checkable deposits of thrift institutions. Answer: B

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Type: D Topic: 2 E: 233-235 MA: 233-235 45. The difference between M1 and M2 is that: A) the former includes time deposits. B) the latter includes small time deposits, noncheckable savings accounts, money market deposit accounts, and money market mutual fund balances. C) the latter includes negotiable government bonds. D) the latter includes cash held by commercial banks and the U.S. Treasury. Answer: B

Type: A Topic: 2 E: 233-234 MA: 233-234 46. Assuming no other changes, if checkable deposits increase by $40 billion and currency and coins in circulation decrease by $40 billion, the: A) M1 money supply will decline. C) M2 money supply will decline. B) M1 money supply will not change. D) M3 money supply will increase. Answer: B

Type: A Topic: 2 E: 233-235 MA: 233-235 47. Assuming no other changes, if checkable deposits decrease by $40 billion and balances in money market mutual funds increase by $40 billion, the: A) M1 money supply will decline and M2 money supply will remain unchanged. B) M1 and M2 money supplies will not change. C) M2 and M3 money supplies will increase. D) M1, M2, and M3 money supplies will decline. Answer: A

Type: A Topic: 2 E: 233-235 MA: 233-235 48. Assuming no other changes, if balances in money market mutual funds increase by $40 billion and large time deposits decrease by $40 billion, the: A) M1 and M2 money supplies will not change. B) M2 and M3 money supplies will increase. C) M1, M2, and M3 money supplies will decline. D) M2 money supply will increase and M3 money supply will remain unchanged. Answer: D

Use the following to answer questions 49-51:

Money market mutual fund balances Currency and coins in banks Currency and coins in circulation Saving deposits, including money market deposit accounts Large ($100,000 or more) time deposits Small (less than $100,000) time deposits Checkable deposits

$220 10 60 50 180 80 70

Type: A Topic: 2 E: 233-234 MA: 233-234 49. Refer to the above information. Money supply M1 for this economy is: A) $60. B) $70. C) $130. D) $140. Answer: C

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Type: A Topic: 2 E: 233, 235 MA: 233, 235 50. Refer to the above information. Money supply M2 for this economy is: A) $480. B) $130. C) $490. D) $660. Answer: A

Type: A Topic: 2 E: 233, 235 MA: 233, 235 51. Refer to the above information. Money supply M3 for this economy is: A) $480. B) $130. C) $490. D) $660. Answer: D

Use the following to answer questions 52-55: Answer the next question(s) on the basis of the following list of assets: 1. Large ($100,000 and over) time deposits 2. Noncheckable savings deposits 3. Currency (coins and paper money) 4. Small (under $100,000) time deposits 5. Stock certificates 6. Checkable deposits 7. Money market deposit accounts 8. Money market mutual fund balances

Type: A Topic: 2 E: 233-234 MA: 233-234 52. Refer to the above list. The M1 definition of money comprises item(s): A) 6 only. B) 3, 4, and 6. C) 3 and 6. D) 2, 3, and 6. Answer: C

Type: A Topic: 2 E: 233-235 MA: 233-235 53. Refer to the above list. The M2 definition of money comprises: A) items 1, 2, 3, and 6. C) items 2, 3, 4, 6, 7, and 8. B) items 3, 4, 5, and 6. D) items 1, 2, 3, and 4. Answer: C

Type: A Topic: 2 E: 233-235 MA: 233-235 54. Refer to the above list. The M3 definition of money comprises: A) items 1, 2, 3, 4, 6, 7, and 8. C) items 1, 3, 4, 6, 7, and 8. B) items 2, 3, 4, 6, 7, and 8. D) all of the eight items listed. Answer: A

Type: A Topic: 2 E: 233 MA: 233 55. Refer to the above list. Which of the following is not included in any of the three official definitions of money? A) item 2 B) item 5 C) item 4 D) items 1 and 4 Answer: B

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Type: A Topic: 2 E: 233, 235 MA: 233, 235 Status: New 56. Large time deposits of $100,000 or more are: A) a component of M1. C) a component of M3 but not of M2. B) a component of M2 but not of M1. D) not a component of M1, M2, or M3. Answer: C

Type: A Topic: 2 E: 235 MA: 235 57. A basic argument for using the M1 concept of money is that: A) it includes all of the important financial assets that have any degree of liquidity. B) the government collects data for the components of M1, but does not do so for M2 and M3. C) its components are superior to other financial assets as a store of value. D) its components are directly and immediately spendable. Answer: D

Type: A Topic: 2 E: 234 MA: 234 58. Currency and coins held within banks are part of: A) the M3 definition of the money supply. B) the M2 definition of the money supply. C) the M1 definition of the money supply. D) none of the above definitions of the money supply. Answer: D

Demand for money

Use the following to answer questions 59-63:
M1 Currency and coins in circulation Currency and coins in banks Small (less than $100,000) time deposits M2 Savings deposits, including money market deposit accounts Large (more than $100,000) time deposits $300 30 10 15 350 20 40

Type: A Topic: 2 E: 233-234 MA: 233-234 Status: New 59. Refer to above information. Checkable deposits in this economy are: A) $320. B) $230. C) $270. D) $260. Answer: C

Type: A Topic: 2 E: 233-234 MA: 233-234 Status: New 60. Refer to above information. Money market mutual fund balances in this economy are: A) $15. B) $20. C) $0. D) $10. Answer: A

Type: A Topic: 2 E: 233-234 MA: 233-234 Status: New 61. Refer to above information. M3 in this economy is: A) $360. B) $410. C) $370. D) $390. Answer: D

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Type: F Topic: 2 E: 233-234 MA: 233-234 Status: New 62. Which of the following is a component of the M1 money supply in the United States? A) money market mutual fund balances. B) checkable deposits C) savings deposits, including money market mutual fund accounts. D) small (less than $100,000) time deposits. Answer: B

Type: F Topic: 2 E: 233-234 MA: 233-234 Status: New 63. Which of the following is a component of the M1 money supply in the United States? A) money market mutual fund balances. B) small (less than $100,000) time deposits. C) currency in circulation D) savings deposits, including money market mutual fund accounts. Answer: C

Demand for money

Type: A Topic: 3 E: 238 MA: 238 64. The transactions demand for money is most closely related to money functioning as a: A) unit of account. B) medium of exchange. C) store of value. D) measure of value. Answer: B

Type: A Topic: 3 E: 239-240 MA: 239-240 65. The asset demand for money is most closely related to money functioning as a: A) unit of account. B) medium of exchange. C) store of value. D) measure of value. Answer: C

Type: A Topic: 3 E: 240 MA: 240 66. The asset demand for money: A) is unrelated to both the interest rate and the level of GDP. B) varies inversely with the rate of interest. C) varies inversely with the level of real GDP. D) varies directly with the level of nominal GDP. Answer: B

Type: A Topic: 3 E: 241 MA: 241 67. On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the transactions demand for money can be represented by: A) a line parallel to the horizontal axis. C) a downsloping line or curve from left to right. B) a vertical line. D) an upsloping line or curve from left to right. Answer: B

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Type: A Topic: 3 E: 241 MA: 241 68. On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the asset demand for money can be represented by: A) a line parallel to the horizontal axis. C) a downsloping line or curve from left to right. B) a vertical line. D) an upsloping line or curve from left to right. Answer: C

Type: A Topic: 3 E: 241 MA: 241 69. On a diagram where the interest rate and the quantity of money demanded are shown on the vertical and horizontal axes respectively, the total demand for money can be found by: A) horizontally adding the transactions and the asset demand for money. B) vertically subtracting the transactions demand from the asset demand for money. C) horizontally subtracting the asset demand from the transactions demand for money. D) vertically adding the transactions and the asset demand for money. Answer: A

Type: A Topic: 3 E: 240 MA: 240 70. The total demand for money curve will shift to the right as a result of: A) an increase in nominal GDP. C) a decline in the interest rate. B) an increase in the interest rate. D) a decline in nominal GDP. Answer: A

Type: A Topic: 3 E: 240-241 MA: 240-241 71. Which of the following statements is correct? Other things equal: A) a decline in real output will shift both the transactions demand curve for money and the total money demand curve to the right. B) a decline in the interest rate will shift the asset demand curve for money to the right, but leave the total money demand curve unchanged. C) deflation will shift both the transactions demand curve for money and the total money demand curve to the left. D) inflation will shift the transactions demand curve for money to the right, but leave the total money demand curve unchanged. Answer: C

Type: A Topic: 3 E: 240 MA: 240 72. If nominal GDP is $600 billion and, on the average, each dollar is spent three times per year, then the amount of money demanded for transactions purposes will be: A) $1800 billion. B) $600 billion. C) $200 billion. D) $1200 billion. Answer: C

Type: A Topic: 3 E: 240 MA: 240 73. In which of the following situations is it certain that the quantity of money demanded by the public will decrease? A) nominal GDP decreases and the interest rate decreases B) nominal GDP increases and the interest rate decreases C) nominal GDP decreases and the interest rate increases D) nominal GDP increases and the interest rate increases Answer: C

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Type: A Topic: 3 E: 240 MA: 240 74. It is costly to hold money because: A) deflation may reduce its purchasing power. B) in doing so one sacrifices interest income. Answer: B

C) bond prices are highly variable. D) the velocity of money may decline.

Type: A Topic: 3 E: 240 MA: 240 75. An increase in nominal GDP increases the demand for money because: A) interest rates will rise. B) more money is needed to finance a larger volume of transactions. C) bond prices will fall. D) the opportunity cost of holding money will decline. Answer: B

Type: A Topic: 3 E: 240 MA: 240 76. Which of the following is correct? A) The asset demand for money is downsloping because the opportunity cost of holding money declines as the interest rate rises. B) The asset demand for money is downsloping because the opportunity cost of holding money increases as the interest rate rises. C) The transactions demand for money is downsloping because the opportunity cost of holding money varies inversely with the interest rate. D) The asset demand for money is downsloping because bond prices and the interest rate are directly related. Answer: B

Type: A Topic: 3 E: 238-239 MA: 238-239 77. The transactions demand for money will shift to the: A) right when the interest rate increases. C) right when aggregate income increases. B) left when the interest rate decreases. D) right when aggregate income decreases. Answer: C

Type: A Topic: 3 E: 240 MA: 240 78. The opportunity cost of holding money: A) is zero because money is not an economic resource. B) varies inversely with the interest rate. C) varies directly with the interest rate. D) varies inversely with the level of economic activity. Answer: C

Type: A Topic: 3 E: 240 MA: 240 79. The total demand for money will shift to the left as a result of: A) a decline in nominal GDP. C) a change in the interest rate. B) an increase in the price level. D) an increase in nominal GDP. Answer: A

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Type: A Topic: 3 E: 240 MA: 240 80. The asset demand for money is downsloping because: A) the opportunity cost of holding money increases as the interest rate rises. B) it is more attractive to hold money at high interest rates than at low interest rates. C) bond prices rise as interest rates rise. D) the opportunity cost of holding money declines as the interest rate rises. Answer: A

Type: E Topic: 3 E: 240-241 MA: 240-241 81. (Advanced analysis) Assume the equation for the total demand for money is L = 0.4Y + 80 - 4 i, where L is the amount of money demanded, Y is gross domestic product, and i is the interest rate. If gross domestic product is $200 and the interest rate is 10 (percent), what amount of money will society want to hold? A) $200 B) $120 C) $320 D) $160 Answer: B

Money market

Type: A Topic: 4 E: 240-241 MA: 240-241 82. If the quantity of money demanded exceeds the quantity supplied: A) the supply-of-money curve will shift to the left. B) the demand-for-money curve will shift to the right. C) the interest rate will rise. D) the interest rate will fall. Answer: C

Type: A Topic: 4 E: 241 MA: 241 83. The equilibrium rate of interest in the money market is determined by the intersection of the: A) supply of money curve and the asset demand for money curve. B) supply of money curve and the transactions demand for money curve. C) supply of money curve and the total demand for money curve. D) investment demand curve and total demand for money curve. Answer: C

Type: A Topic: 4 E: 240-241 MA: 240-241 84. If the demand for money and the supply of money both decrease, the equilibrium: A) interest rate will decline, but we cannot predict the change in the equilibrium quantity of money. B) quantity of money and the equilibrium interest rate will both increase. C) quantity of money will increase, but we cannot predict the change in the equilibrium interest rate. D) quantity of money will decline, but we cannot predict the change in the equilibrium interest rate. Answer: D

Type: A Topic: 4 E: 241 MA: 241 85. If in the money market the quantity of money demanded exceeds the money supply, the interest rate will: A) fall, causing households and businesses to hold less money. B) rise, causing households and businesses to hold less money. C) rise, causing households and businesses to hold more money. D) fall, causing households and businesses to hold more money. Answer: B

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Type: A Topic: 4 E: 241 MA: 241 86. If in the money market the amount of money supplied exceeds the amount of money households and businesses want to hold, the interest rate will: A) fall, causing households and businesses to hold less money. B) rise, causing households and businesses to hold less money. C) rise, causing households and businesses to hold more money. D) fall, causing households and businesses to hold more money. Answer: D

Use the following to answer questions 87-91:

Type: A Topic: 4 E: 240 MA: 240 87. Refer to the above diagram of the money market. The downward slope of the money demand curve Dm is best explained in terms of the: A) transactions demand for money. B) direct or positive relationship between bond prices and interest rates. C) asset demand for money. D) wealth or real-balances effect. Answer: C

Type: A Topic: 4 E: 241 MA: 241 88. Refer to the above diagram of the money market. The vertical money supply curve Sm reflects the fact that: A) bond prices and interest rates are inversely related. B) the stock of money is determined by the Federal Reserve System and does not change when the interest rate changes. C) the velocity of money is zero. D) lower interest rates result in lower opportunity costs of supplying money. Answer: B

Type: A Topic: 4 E: 241 MA: 241 89. Refer to the above diagram of the money market. The equilibrium interest rate is: A) i1. B) i2. C) i3. D) not determinable without additional information. Answer: B

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Type: A Topic: 4 E: 241 MA: 241 90. Refer to the above diagram of the money market. Given Dm and Sm, an interest rate of i3 is not sustainable because the: A) supply of bonds in the bond market will decline and the interest rate will rise. B) supply of bonds in the bond market will increase and the interest rate will decline. C) demand for bonds in the bond market will decline and the interest rate will rise. D) demand for bonds in the bond market will rise and the interest rate will fall. Answer: D

Type: A Topic: 4 E: 238-239 MA: 238-239 91. Refer to the above diagram of the money market. Other things equal, the money demand curve in the diagram would shift leftward if: A) the asset demand for money increased. C) nominal GDP decreased. B) the transactions demand for money increased. D) the overall price level rose. Answer: C

Use the following to answer questions 92-93: Answer the next question(s) on the basis of the following information for a bond having no expiration date: bond price = $1000; bond fixed annual interest payment = $100; bond annual interest rate = 10 percent.

Type: A Topic: 4 E: 241 MA: 241 92. Refer to the above information. If the price of this bond falls by $200, the interest rate will: A) rise by 2.5 percentage points. C) fall by 2.5 percentage points. B) rise by 5 percentage points. D) fall by 5 percentage points. Answer: A

Type: A Topic: 4 E: 241 MA: 241 93. Refer to the above information. If the price of this bond increases to $1250, the interest rate will: A) fall to 9 percent. B) fall to 8 percent. C) rise to 11 percent. D) rise to 12 percent. Answer: B

Type: A Topic: 4 E: 240 MA: 240 94. Which of the following statements is correct? A) Interest rates and bond prices vary directly. B) Interest rates and bond prices vary inversely. C) Interest rates and bond prices are unrelated. D) Interest rates and bond prices vary directly during inflations and inversely during recessions. Answer: B

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Use the following to answer questions 95-101:

Rate of interest (percent)

S 10 8 6 4 2

D1

100 200 300 400 Amount of money demanded (billions of dollars)

Type: G Topic: 4 E: 239 MA: 239 95. Refer to the above money market diagrams. The asset demand for money is shown by: A) D1. B) D2. C) D3. D) S. Answer: B

Type: G Topic: 4 E: 239 MA: 239 96. Refer to the above money market diagrams. Curve D1 represents the: A) speculative demand for money. C) asset demand for money. B) transactions demand for money. D) stock of money. Answer: B

Type: G Topic: 4 E: 239 MA: 239 97. Refer to the above money market diagrams. The total demand for money is shown by: A) D1. B) D2. C) D3. D) S. Answer: C

Type: G Topic: 4 E: 239 MA: 239 98. Refer to the above money market diagrams. If each dollar held for transactions is spent four times per year on the average, we can infer that the: A) real GDP is $800. C) money supply must be $800. B) nominal GDP is $800. D) nominal GDP is $1200. Answer: B

Type: G Topic: 4 E: 239 MA: 239 99. Refer to the above money market diagrams. If the interest rate was at 3 percent, people would: A) sell bonds, which would cause bond prices to fall and the interest rate to rise. B) buy bonds, which would cause bond prices to fall and the interest rate to rise. C) sell bonds, which would cause bond prices to rise and the interest rate to rise. D) buy bonds, which would cause bond prices to rise but have an uncertain effect upon the interest rate. Answer: A

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Type: G Topic: 4 E: 239 MA: 239 100. Refer to the above money market diagrams. If the interest rate was at 8 percent, people would: A) sell bonds, which would cause bond prices to fall and the interest rate to fall. B) buy bonds, which would cause bond prices to rise and the interest rate to fall. C) have insufficient liquidity, which would cause them to reduce their spending on consumer goods. D) buy bonds, which would cause bond prices to fall and the interest rate to rise. Answer: B

Type: G Topic: 4 E: 239 MA: 239 101. Refer to the above money market diagrams. If the Federal Reserve increased the stock of money, the: A) S curve would shift leftward and the equilibrium interest rate would rise. B) S curve would shift rightward and the equilibrium interest rate would fall. C) D3 would shift leftward and the equilibrium interest rate would fall. D) D3 curve would shift leftward and the equilibrium interest rate would rise. Answer: B

Type: A Topic: 4 E: 239 MA: 239 102. Suppose the demand for money and the supply of money increase simultaneously. We can: A) expect the interest rate to rise and bond prices to fall. B) expect the interest rate to fall and bond prices to rise. C) the nominal GDP to expand. D) not predict what will happen to interest rates or bond prices. Answer: D

Type: A Topic: 4 E: 239 MA: 239 103. When the money market is in equilibrium: A) the quantity of money demanded equals the quantity of money supplied. B) the interest rate is increasing. C) bond prices are falling. D) the interest rate is declining. Answer: A

Type: A Topic: 4 E: 239 MA: 239 104. Other things equal, if there is an increase in nominal GDP: A) the demand for money will decrease. C) bond prices will rise. B) the interest rate will rise. D) consumption spending will fall. Answer: B

Type: A Topic: 4 E: 239 MA: 239 105. Other things equal, if the supply of money is reduced: A) the demand for money will increase. C) bond prices will fall. B) the interest rates will fall. D) investment spending will increase. Answer: C

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Use the following to answer questions 106-108: Answer the next question(s) on the basis of the following table in which columns (1) and (2) indicate the transactions demand (Dt) for money and columns (1) and (3) show the asset demand (Da) for money:

(1) Interest rate 12% 10 8 6 4 2

(2) Dt $100 100 100 100 100 100

(3) Da $ 0 20 40 60 80 100

Type: T Topic: 4 E: 238 MA: 238 106. The above data suggest that the amount of money demanded for transactions: A) varies directly with the interest rate. C) varies inversely with nominal GDP. B) varies inversely with the interest rate. D) is independent of the interest rate. Answer: D

Type: T Topic: 4 E: 240 MA: 240 107. The above data suggest that the amount of money that society wishes to hold as an asset: A) varies directly with the interest rate. C) varies inversely with nominal GDP. B) varies inversely with the interest rate. D) is independent of the interest rate. Answer: B

Type: T Topic: 4 E: 239 MA: 239 108. Refer to the above data. If the money supply is $160, the equilibrium interest rate will be: A) 10 percent. B) 8 percent. C) 6 percent. D) 4 percent. Answer: C

Use the following to answer questions 109-110: Answer the next question(s) on the basis of the following information. For transactions, households and businesses want to hold an amount of money equal to one half of nominal GDP. The table shows the amounts of money they want to hold as an asset at various interest rates. Interest rate 10% 8 6 4 2 Amount of money demanded $ 20 40 60 80 100

Type: T Topic: 4 E: 238-239 MA: 238-239 109. Refer to the above information. If nominal GDP is $200 and the interest rate is 6 percent, the total amount of money that households and businesses will want to hold is: A) $120 B) $140 C) $160 D) $180 Answer: C

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Type: T Topic: 4 E: 238-239 MA: 238-239 110. Refer to the above information. If nominal GDP is $300 and the supply of money is $230, the equilibrium interest rate will be: A) 8 percent. B) 6 percent. C) 4 percent. D) 2 percent. Answer: C

Type: A Topic: 4 E: 241 MA: 241 111. The price of a bond having no expiration date is originally $8,000 and has a fixed annual interest payment of $800. A fall in the price of the bond by $3,000 will provide a new buyer of the bond an interest rate of: A) 10 percent. B) 12 percent. C) 14 percent. D) 16 percent. Answer: D

Use the following to answer questions 112-117: Answer the next question(s) on the basis of the following table:

Interest rate 2% 4 6 8 10

Transaction demand for money $220 220 220 220 220

Asset demand for money $300 280 260 240 220

Money supply $460 460 460 460 460

Type: T Topic: 4 E: 239 MA: 239 112. The transactions demand for money in the above money market would graph as a: A) vertical line. C) line sloping downward and to the right. B) horizontal line. D) line sloping upward and to the right. Answer: A

Type: T Topic: 4 E: 239 MA: 239 113. The total demand for money curve in the above money market would graph as a: A) vertical line. C) line sloping upward to the right. B) horizontal line. D) line sloping downward to the right. Answer: D

Type: T Topic: 4 E: 239 MA: 239 114. At equilibrium in the above money market, the total amount of money demanded is: A) $500. B) $480. C) $460. D) $440. Answer: C

Type: T Topic: 4 E: 239 MA: 239 115. Refer to the above table. The equilibrium interest rate is: A) 2 percent. B) 4 percent. C) 6 percent. D) 8 percent. Answer: D

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Type: T Topic: 4 E: 239 MA: 239 116. Refer to the above table. An increase in the money supply of $20 billion will cause the equilibrium interest rate to: A) fall by 4 percentage points. C) rise by 4 percentage points. B) fall by 2 percentage points. D) rise by 2 percentage points. Answer: B

Type: T Topic: 4 E: 239 MA: 239 117. All else equal, the transaction demand for money in the above table would increase if: A) nominal GDP increased. C) the supply of money increased. B) the interest rate fell. D) the economy's MPC declined. Answer: A

U.S. financial system

Type: F Topic: 5 E: 242 MA: 242 118. The basic policy-making body in the U.S. banking system is the: A) Federal Open Market Committee (FOMC). C) Federal Monetary Authority. B) Board of Governors of the Federal Reserve. D) Council of Economic Advisers. Answer: B

Type: F Topic: 5 E: 244 MA: 244 119. The twelve Federal Reserve Banks: A) are owned and operated by the U.S. Treasury. B) were created in 1776. Answer: C

C) hold the reserve deposits of commercial banks. D) are also known as national banks.

Type: F Topic: 5 E: 242 MA: 242 120. The Federal Reserve System was created in: A) 1926. B) 1946. C) 1895. D) 1913. Answer: D

Type: F Topic: 5 E: 242 MA: 242 121. In the U.S. economy the money supply is controlled by the: A) U.S. Treasury. C) Senate Committee on Banking and Finance. B) Federal Reserve System. D) Congress. Answer: B

Type: F Topic: 5 E: 243 MA: 243 Status: New 122. As it relates to Federal Reserve activities, the acronym FOMC describes the: A) Federal Open Market Committee. C) Federal Organization for Monetary Control. B) Federal Options Market Committee. D) Federal Organization for Money Creation. Answer: A

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Type: F Topic: 5 E: 243 MA: 243 Status: New 123. The Federal Open Market Committee (FOMC) is made up of: A) the chair of the Board of Governors along with the 12 presidents of the Federal Reserve Banks. B) the seven members of the Board of Governors along with the president of the New York Federal Reserve Bank. C) the seven members of the Board of Governors of the Federal Reserve System along with the three members of the Council of Economic Advisers. D) the seven member of the Board of Governors of the Federal Reserve System along with the president of the New York Federal Reserve Bank and four other Federal Reserve Banks presidents on a rotating basis. Answer: D

Type: F Topic: 5 E: 243 MA: 243 124. The group that sets the Federal Reserve Systems policy on buying and selling government securities (bills, notes, and bonds) is the: A) Federal Deposit Insurance Corporation (FDIC). C) Council of Economic Advisers. B) Federal Bond Sale Authority. D) Federal Open Market Committee (FOMC). Answer: D

Type: F Topic: 5 E: 244 MA: 244 Status: New 125. How many commercial banks are now operating in the United States? A) about 140,000 B) about 7,800 C) about 2,000 D) about 6,000 Answer: B

Type: F Topic: 5 E: 242 MA: 242 126. Which one of the following is true about the U. S. Federal Reserve System? A) There are 10 regional Federal Reserve Banks. B) The head of the U.S. Treasury also chairs the Federal Reserve Board. C) There are seven members of the Federal Reserve Board. D) The Open Market Committee is smaller in size than the Federal Reserve Board. Answer: C

Type: F Topic: 5 E: 243 MA: 243 127. Which one of the following is true about the U. S. Federal Reserve System? A) The head of the U.S. Treasury also chairs the Federal Reserve Board. B) There are 10 regional Federal Reserve Banks. C) There are 14 members of the Federal Reserve Board. D) The Federal Open Market Committee (FOMC) has more members than does the Federal Reserve Board. Answer: D

Type: F Topic: 5 E: 243 MA: 243 128. Which one of the following is true about the U. S. Federal Reserve System? A) There are 12 regional Federal Reserve Banks. B) The head of the U.S. Treasury also chairs the Federal Reserve Board. C) There are 14 members of the Federal Reserve Board. D) The Open Market Committee is smaller in size than the Federal Reserve Board. Answer: A

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Type: F Topic: 5 E: 243 MA: 243 129. In which of the following U. S. cities is one of the twelve Federal Reserve Banks located? A) Miami B) New Orleans C) San Francisco D) Denver Answer: C

Type: F Topic: 5 E: 243 MA: 243 130. In which of the following U. S. cities is one of the twelve Federal Reserve Banks located? A) New York City B) Seattle C) Miami D) Denver Answer: A

Type: F Topic: 5 E: 242 MA: 242 131. The Board of Governors of the Federal Reserve has ____ members. A) 5 B) 7 C) 9 D) 14 Answer: B

Type: F Topic: 5 E: 242-243 MA: 242-243 132. The members of the Federal Reserve Board: A) serve seven-year terms. B) are appointed by the American Economic Association. C) are elected by votes of the 12 presidents of the Federal Reserve Banks. D) serve 14-year terms. Answer: D

Type: F Topic: 5 E: 244-245 MA: 244-245 133. An important routine function of the Federal Reserve Bank is to: A) supervise the liquidation of the assets of bankrupt state banks. B) help large commercial banks develop correspondent relationships with smaller commercial banks. C) advise commercial banks as to the most profitable ways of reinvesting profits. D) provide facilities by which commercial banks and thrift institutions may collect checks. Answer: D

Type: A Topic: 5 E: 243 MA: 243 134. Which of the following statements best describes the twelve Federal Reserve Banks? A) They are privately owned and privately controlled central banks whose basic goal is to provide an ample and orderly market for U.S. Treasury securities. B) They are privately owned and publicly controlled central banks whose basic function is to minimize the risks in commercial banking in order to make it a reasonably profitable industry. C) They are privately owned and publicly controlled central banks whose basic goal is to control the money supply and interest rates in promoting the general economic welfare. D) They are privately owned and publicly controlled central banks whose basic goal is to earn profits for their owners. Answer: C

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Type: F Topic: 5 E: 242 MA: 242 135. The seven members of the Board of Governors of the Federal Reserve System are: A) appointed by the President with the confirmation of the Senate. B) elected by Congress from a slate of nominees provided by the President. C) appointed by the Senate Finance Committee. D) appointed by the presidents of the twelve Federal Reserve Banks. Answer: A

Type: D Topic: 5 E: 243 MA: 243 136. To say that the Federal Reserve Banks are quasi-public banks means that: A) they are privately owned, but managed in the public interest. B) they deal only with banks of foreign nations and do not have direct business contact with U.S. banks. C) they deal only with commercial banks, and not the public. D) they are publicly owned, but privately managed. Answer: A

Type: A Topic: 5 E: 245 MA: 245 137. Which of the following is the basic economic policy function of the Federal Reserve Banks? A) holding the deposits or reserves of commercial banks B) acting as fiscal agents for the Federal government C) controlling the supply of money D) the collection or clearing of checks among commercial banks Answer: C

Type: A Topic: 5 E: 243 MA: 243 138. The Federal Reserve System: A) is basically an independent agency. B) has the same status as the Supreme Court. C) has the status of a Congressional committee. D) is an agency of the executive branch of the Federal government. Answer: A

Type: F Topic: 5 E: 245 MA: 245 139. Research for industrially advanced countries indicates that: A) the more independent the central bank, the lower the average annual rate of inflation. B) the more independent the central bank, the higher the average annual rate of inflation. C) there is no relationship between the degree of independence of a country's central bank and its inflation rate. D) the more independent the central bank, the higher the average annual rate of unemployment. Answer: A

Type: F Topic: 5 E: 245 MA: 245 140. Research involving industrially advanced countries suggests that: A) the more independent the central bank, the lower the average annual growth of real GDP. B) the more independent the central bank, the higher the average annual growth of real GDP. C) there is no relationship between the degree of independence of a country's central bank and the growth rate of its real GDP. D) the less independent the central bank, the higher the average annual rate of inflation. Answer: D

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Type: A Topic: 5 E: 244 MA: 244 141. Commercial banks and thrift institutions: A) differ because thrifts cannot make loans. B) differ because thrifts cannot offer checkable deposits. C) have become less similar in recent years. D) have become increasingly similar in recent years. Answer: D

Type: F Topic: 5 E: 245 MA: 245 142. The traditional role of savings and loan associations has been to: A) finance business purchases of capital goods. B) purchase corporate stocks on behalf of their depositors. C) make installment loans to consumers. D) make mortgage loans on houses. Answer: D

Type: D Topic: 5 E: 244 MA: 244 143. The term thrift institution or thrifts includes: A) savings and loan associations, mutual savings banks, and credit unions. B) savings and loan associations, mutual savings banks, credit unions, and commercial banks. C) commercial banks and the twelve Federal Reserve Banks. D) any institution offering savings accounts. Answer: A

Recent developments and reform

Type: D Topic: 6 E: 246 MA: 246 144. Firms whose central business is to offer security advice and buy and sell individual stocks and bonds for clients are known as: A) thrifts. B) pension fund companies. C) securities firms. D) insurance companies. Answer: C

Type: D Topic: 6 E: 246 MA: 246 145. Firms whose central business is providing individual account shares of collections of stocks, bonds, or both are known as: A) insurance companies. B) thrifts. C) commercial banks. D) mutual funds companies. Answer: D

Type: C Topic: 6 E: 245 MA: 245 146. Which of these pairs of financial institutions are most alike in terms of their main lines of business? A) commercial banks and thrifts B) insurance companies and mutual fund companies. C) thrifts and securities firms. D) pension fund companies and commercial banks. Answer: A

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Type: F Topic: 6 E: 237 MA: 237 147. The Federal Deposit Insurance Corporation (FDIC) insures deposits up to $100,000 in: A) mutual fund companies and pension fund companies. B) thrifts and insurance companies. C) commercial banks and thrifts. D) securities firms and insurance companies. Answer: C

Type: F Topic: 6 E: 245 MA: 245 148. Banks and thrifts have responded to their relative declines by: A) expanding their services and merging with one another. B) merging with computer and software manufacturers. C) selling their ATMs to new startup firms. D) asking for trade protection against imported of financial services. Answer: A

Type: F Topic: 6 E: 245-246 MA: 245-246 149. Within the past decade, Congress has: A) permitted banks and thrifts to "self-insure" rather than participate in the FDIC system. B) allowed holders of government bonds to add these bonds to their insured checking accounts. C) ended restrictions on banks' merging with insurance companies, securities firms, and other firms offering financial services.. D) ended restrictions on banks' buying of nonbank firms such as manufacturers, corporate farms, and real estate companies. Answer: C

Type: F Topic: 6 E: 245 MA: 245 150. The bank and thrift share of total financial assets has: A) declined significantly since 1980. B) increased significantly since 1980. C) remained quite constant since the Second World War. D) increased in the United States but declined abroad. Answer: A

Type: F Topic: 6 E: 245 MA: 245 151. The share of total financial assets held by insurance companies, pension funds, mutual funds companies, and security-related firms has: A) declined significantly since 1980. B) increased significantly since 1980. C) has remained quite constant since the Second World War. D) decreased in the United States but increased abroad. Answer: B

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Type: F Topic: 6 E: 247 MA: 247 152. Which of the following is a true statement? A) The bank and thrift share of total financial assets has increased dramatically since 1980. B) The vast bulk of investment in the major nations is financed, not from internal saving, but from funds from abroad. C) The world's financial markets have become increasingly integrated. D) International stock and bond funds cannot be sold in the United States. Answer: C

Type: F Topic: 6 E: 246-247 MA: 246-247 153. In the 1990s, Congress passed legislation that: A) will eventually replace the $1 bill with a $1 coin. B) allows nonbank firms such as Chrysler and IBM to own large commercial banks or thifts. C) replaces the twelve Federal Reserve Banks with a single Central Bank. D) ends the legal separation of the banking industry and securities firms. Answer: D

Type: F Topic: 6 E: 246 MA: 246 154. The Financial Services Modernization Act of 1999: A) set limits on the fees that banks can charge for automatic teller machine (ATM) withdrawals. B) established a new dollar coin that will replace the dollar bill in 2005. C) permitted banks, thrifts, pension companies, and securities firms to merge and to sell each other's products. D) outlawed "payday loans" that are advanced against forthcoming payroll checks. Answer: C

Type: F Topic: 6 E: 247 MA: 247 155. Electronic money is: A) closely associated with smart cards. B) issued in real terms so that it is immune from the effects of inflation. C) the money dispensed by automatic teller machines (ATMs). D) also called share-draft money. Answer: A

Type: D Topic: 6 E: 247 MA: 247 156. Plastic cards that contain computer chips that store account balances are known as: A) credit cards. B) smart cards. C) debit cards. D) E-cards. Answer: B

Consider This Questions

Type: F E: 236 MA: 236 Status: New 157. (Consider This) Credits cards are: A) the fastest growing component of the M1 money supply. B) near-monies that are part of the M3 money supply but not part of the M2 or M1 money supplies. C) not money, officially defined. D) also known as time deposits. Answer: C

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Type: F E: 236 MA: 236 Status: New 158. (Consider This) Which of the following is not part of the M2 money supply? A) currency in circulation. C) small time deposits of less than $100,000. B) credit card balances. D) checkable deposits. Answer: B

Type: F E: 236 MA: 236 Status: New 159. (Consider This) Credit card balances are: A) a component of M1. B) a component of M2 but not of M1 Answer: D

C) a component of M3 but not of M2 or M1. D) not a component of M1, M2, or M3.

Last Word Questions

Type: F E: 248 MA: 248 160. (Last Word) The major countries in which citizens hold and use large quantities of U.S. dollars are: A) Germany, England, and France. C) Canada, Australia, and New Zealand. B) Russia, Argentina, and Poland. D) Egypt, Spain, and Italy. Answer: B

Type: F E: 248 MA: 248 161. (Last Word) The use of U.S. dollars in foreign countries: A) is illegal under international law. B) helps foreign buyers and sellers overcome problems with their domestic currencies. C) varies directly (positively) with U.S. interest rates. D) is less in volume than the use of foreign currencies in the United States. Answer: B

Type: F E: 248 MA: 248 162. (Last Word) The use of U.S. dollars in foreign countries: A) is illegal under international law. B) actually benefits the United States because each dollar costs less than a dollar to produce. C) varies directly (positively) with U.S. interest rates. D) is less in volume than the use of foreign currencies in the United States. Answer: B

True/False Questions

Type: F E: 233 MA: 233 163. The M2 money supply is larger than the M1 money supply. Answer: True

Type: F E: 237 MA: 237 164. Fiat money refers to all near monies. Answer: False

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Type: D E: 243 MA: 243 165. The twelve Federal Reserve Banks are governmentally owned but privately controlled. Answer: False

Type: F E: 244 MA: 244 166. The United States Treasury is the only source of money in the U.S. economy. Answer: False

Type: F E: 238-239 MA: 238-239 167. The higher the interest rate, the larger will be the amount of money demanded for transaction purposes. Answer: False

Type: A E: 240 MA: 240 168. The asset demand for money varies inversely with the nominal GDP. Answer: False

Type: A E: 245 MA: 245 169. Depository institutions are a major source of money in the U. S. economy. Answer: True

Type: F E: 233-234 MA: 233-234 170. Checkable deposits held in saving and loan institutions, mutual savings banks, and credit unions are part of the M1 definition of the money supply. Answer: True

Type: F E: 240 MA: 240 171. Bond prices and interest rates are directly or positively related. Answer: False

Type: A E: 234 MA: 234 172. Currency and coins held by banks are part of the M1 definition of money supply. Answer: False

Type: F E: 245 MA: 245 173. The percentage share of total U.S. financial assets held by commercial banks and thrifts has increased since 1980. Answer: False

Type: F E: 245 MA: 245 174. The number of U.S. banks has increased since 1990. Answer: False

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Type: F E: 246 MA: 246 175. Fidelity, Putnam, Dreyfus, and Kemper are examples of mutual fund companies. Answer: True

Type: F E: 244 MA: 244 176. Thrifts are known as "banker's banks" because they lend money to commercial banks. Answer: False

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Topic 1. 2. 3. 4. Bank balance sheets Banks and money creation Monetary multiplier Combined topics Last Word True-False

Question numbers 1-9 10-95 96-106 107-113 114-117 118-135

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Multiple Choice Questions Bank balance sheets

Type: A Topic: 1 E: 252 MA: 252 1. Which of the following statements is correct? A) The actual reserves of a commercial bank equal its excess reserves minus its required reserves. B) A bank's liabilities plus its net worth equal its assets. C) When borrowers repay bank loans, the supply of money increases. D) A single commercial bank can safely lend a multiple amount of its excess reserves. Answer: B

Type: A Topic: 1 E: 252 MA: 252 2. A bank that has assets of $85 billion and a net worth of $10 billion must have: A) liabilities of $75 billion. C) liabilities of $10 billion. B) excess reserves of $10 billion. D) excess reserves of $75 billion. Answer: A

Type: A Topic: 1 E: 252 MA: 252 3. A bank that has liabilities of $150 billion and a net worth of $20 billion must have: A) excess reserves of $130 billion. C) excess reserves of $150 billion. B) assets of $150 billion. D) assets of $170 billion. Answer: D

Chapter 14: How Banks and Thrifts Create Money

Type: A Topic: 1 E: 252 MA: 252 4. If a bank has liabilities that exceed its net worth it: A) will not be able to meet the legal reserve ratio. B) is considered to be insolvent. C) most likely is a heavy borrower from its district Federal Reserve Bank. D) may or may not be a profitable firm. Answer: D

Type: D Topic: 1 E: 252 MA: 252 5. Which of the following describes the identity embodied in a balance sheet? A) Net Worth plus Assets equal Liabilities C) Assets equal Liabilities plus Net Worth B) Assets plus Liabilities equal Net Worth D) Assets plus Reserves equal Net Worth Answer: C

Type: D Topic: 1 E: 252 MA: 252 6. The claims of the owners of a firm against the firm's assets are called: A) working capital. B) assets. C) net worth. D) liabilities. Answer: C

Type: A Topic: 1 E: 252 MA: 252 7. Which of the following are all assets to a commercial bank? A) demand deposits, capital stock, and reserves C) vault cash, property, and capital stock B) vault cash, property, and reserves D) vault cash, capital stock, and demand deposits Answer: B

Type: D Topic: 1 E: 253 MA: 253 8. The reserves of a commercial bank consist of: A) the amount of money market funds it holds. B) deposits at the Federal Reserve Bank and vault cash. C) government securities that the bank holds. D) the bank's net worth. Answer: B

Type: A Topic: 1 E: 254 MA: 254 9. A commercial bank's reserves are: A) liabilities to both the commercial bank and the Federal Reserve Bank holding them. B) liabilities to the commercial bank and assets to the Federal Reserve Bank holding them. C) assets to both the commercial bank and the Federal Reserve Bank holding them. D) assets to the commercial bank and liabilities to the Federal Reserve Bank holding them. Answer: D

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Banks and money creation

Type: F Topic: 2 E: 253 MA: 253 10. The goldsmith's ability to create money was based on the fact that: A) withdrawals of gold tended to exceed deposits of gold in any given time period. B) consumers and merchants preferred to use gold for transactions, rather than paper money. C) the goldsmith was required to keep 100 percent gold reserves. D) paper money in the form of gold receipts was rarely redeemed for gold. Answer: D

Type: F Topic: 2 E: 253 MA: 253 11. When the receipts given by goldsmiths to depositors were used to make purchases: A) the gold standard was created. B) existing banking laws were violated. C) the receipts became in effect paper money. D) a fractional reserve banking system was created. Answer: C

Type: A Topic: 2 E: 255-256 MA: 255-256 12. The primary purpose of the legal reserve requirement is to: A) prevent banks from hoarding too much vault cash. B) provide a means by which the monetary authorities can influence the lending ability of commercial banks. C) prevent commercial banks from earning excess profits. D) provide a dependable source of interest income for commercial banks. Answer: B

Type: A Topic: 2 E: 255 MA: 255 13. The ABC Commercial Bank has $5,000 in excess reserves and the reserve ratio is 30 percent. The bank must have: A) $90,000 in outstanding loans and $35,000 in reserves. B) $90,000 in checkable deposit liabilities and $32,000 in reserves. C) $20,000 in checkable deposit liabilities and $10,000 in reserves. D) $90,000 in checkable deposit liabilities and $35,000 in reserves. Answer: B

Type: A Topic: 2 E: 253 MA: 253 14. Which one of the following is presently a major deterrent to bank panics in the United States? A) the legal reserve requirement C) the gold standard B) the fractional reserve system D) deposit insurance Answer: D

Type: A Topic: 2 E: 258 MA: 258 15. Commercial banks monetize claims when they: A) collect checks through the Federal Reserve System. B) make loans to the public. C) accept repayment of outstanding loans. D) borrow from the Federal Reserve Banks. Answer: B

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Type: F Topic: 2 E: 252 MA: 252 16. Most modern banking systems are based on: A) money of intrinsic value. B) commodity money. Answer: D

C) 100 percent reserves. D) fractional reserves.

Type: A Topic: 2 E: 259 MA: 259 17. Money is destroyed when: A) loans are made. B) checks written on one bank are deposited in another bank. C) loans are repaid. D) the net worth of the banking system declines. Answer: C

Type: D Topic: 2 E: 254 MA: 254 18. Checkable deposits are also called: A) checking accounts. B) high-powered money. Answer: A

C) savings balances.

D) Federal Reserve Notes.

Type: A Topic: 2 E: 255 MA: 255 19. Suppose a commercial bank has checkable deposits of $100,000 and the legal reserve ratio is 10 percent. If the bank's required and excess reserves are equal, then its actual reserves: A) are $30,000. B) are $10,000. C) are $20,000. D) cannot be determined from the given information. Answer: C

Type: A Topic: 2 E: 258 MA: 258 20. Banks create money when they: A) add to their reserves in the Federal Reserve Bank. B) accept deposits of cash. C) sell government bonds. D) exchange checkable deposits for the IOU's of businesses and individuals. Answer: D

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Use the following to answer questions 21-24: Answer the next question(s) on the basis of the following table for a commercial bank or thrift: Reserve requirement, percent W 8 12 20 Checkable deposits $100,000 X 200,000 300,000 Actual reserves $ 10,000 20,000 Y 70,000 Excess reserves $ 0 12,000 8,000 Z

(1) (2) (3) (4)

Type: A Topic: 2 E: 254-255 MA: 254-255 Status: New 21. Refer to row 1 in the above table. The number appropriate for space W is: A) 4. B) 6. C) 10. D) 12. Answer: C

Type: A Topic: 2 E: 254-255 MA: 254-255 Status: New 22. Refer to row 2 in the above table. The number appropriate for space X is: A) $20,000. B) $60,000. C) $200,000. D) $100,000. Answer: D

Type: A Topic: 2 E: 254-255 MA: 254-255 Status: New 23. Refer to row 3 in the above table. The number appropriate for space Y is: A) $24,000. B) $32,000. C) $48,000. D) $96,000. Answer: B

Type: A Topic: 2 E: 254-255 MA: 254-255 Status: New 24. Refer to row 4 in the above table. The number appropriate for space Z is: A) $10,000. B) $70,000. C) $48,000. D) zero. Answer: A

Type: A Topic: 2 E: 256 MA: 256 25. When a check is drawn and cleared, the A) reserves and deposits of both the bank against which the check is cleared and the bank receiving the check are unchanged by this transaction. B) bank against which the check is cleared loses reserves and deposits equal to the amount of the check. C) bank receiving the check loses reserves and deposits equal to the amount of the check. D) bank against which the check is cleared acquires reserves and deposits equal to the amount of the check. Answer: B

Type: A Topic: 2 E: 255 MA: 255 26. Suppose the ABC bank has excess reserves of $4,000 and outstanding checkable deposits of $80,000. If the reserve requirement is 25 percent, what is the size of the bank's actual reserves? A) $16,000 B) $84,000 C) $24,000 D) $20,000 Answer: C

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Type: D Topic: 2 E: 255 MA: 255 27. Excess reserves refer to the: A) difference between a bank's vault cash and its reserves deposited at the Federal Reserve Bank. B) minimum amount of actual reserves a bank must keep on hand to back up its customers deposits. C) difference between actual reserves and loans. D) difference between actual reserves and required reserves. Answer: D

Type: A Topic: 2 E: 255 MA: 255 28. Suppose the reserve requirement is 10 percent. If a bank has $5 million of checkable deposits and actual reserves of $500,000, the bank: A) can safely lend out $500,000. C) can safely lend out $50,000 B) can safely lend out $5 million. D) cannot safely lend out more money Answer: D

Type: A Topic: 2 E: 255 MA: 255 29. A reserve requirement of 20 percent means a bank must have $1000 of reserves if its checkable deposits are: A) $100. B) $1,000. C) $5,000. D) $12,000. Answer: C

Type: A Topic: 2 E: 255 MA: 255 30. Assume that a bank initially has no excess reserves. If it receives $5,000 in cash from a depositor and the bank finds that it can safely lend out $4,500, the reserve requirement must be: A) zero. B) 10 percent. C) 20 percent. D) 25 percent Answer: B

Type: A Topic: 2 E: 258-259 MA: 258-259 31. Suppose the reserve requirement is 20 percent. If a bank has checkable deposits of $4 million and actual reserves of $1 million, it can safely lend out: A) $1 million. B) $1.2 million. C) $200,000. D) $800,000. Answer: C

Type: A Topic: 2 E: 255 MA: 255 32. Suppose that a bank's actual reserves are $5 million, its checkable deposits are $5 million, and its excess reserves are $3 million. The reserve requirement must be: A) 40 percent. B) 20 percent. C) 10 percent. D) 5 percent. Answer: A

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Type: T Topic: 2 E: 255 MA: 255 33. Assume the Continental National Bank's balance statement is as follows:

Assets Reserves $ 40,000 Loans 25,000 Securities 110,000

Liabilities and net worth Checkable deposits $130,000 Capital stock 45,000

Assuming a legal reserve ratio of 20 percent, how much excess reserves would this bank have after a check for $10,000 was drawn and cleared against it? A) $3,000 B) $24,000 C) $6,000 D) $16,000 Answer: C

Type: D Topic: 2 E: 255 MA: 255 34. The reserve ratio refers to the ratio of a bank's: A) reserves to its liabilities and net worth. B) capital stock to its total assets. C) checkable deposits to its total liabilities. D) reserves and vault cash to its checkable deposits. Answer: D

Type: A Topic: 2 E: 258 MA: 258 35. The amount that a commercial bank can lend is determined by its: A) required reserves. B) excess reserves. C) outstanding loans. Answer: B

D) outstanding checkable deposits.

Type: A Topic: 2 E: 259 MA: 259 36. A commercial bank can expand its excess reserves by: A) demanding and receiving payment on an overdue loan. B) buying bonds from a Federal Reserve Bank. C) buying bonds from the public. D) paying back money borrowed from a Federal Reserve Bank. Answer: A

Type: D Topic: 2 E: 258 MA: 258 37. Commercial banks create money when they: A) accept cash deposits from the public. B) purchase government securities from the central banks. C) create checkable deposits in exchange for IOUs. D) raise their interest rates. Answer: C

Type: A Topic: 2 E: 259 MA: 259 38. Banks destroy money when they: A) buy government bonds. C) fail to reissue loans that are paid off. B) accept deposits of cash into checkable accounts. D) clear checks against another bank. Answer: C

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Type: A Topic: 2 E: 258 MA: 258 39. Individual commercial banks are limited in their ability to create money by lending because: A) lending is likely to result in the loss of reserves to other banks. B) only the Treasury and the Federal Reserve Banks are authorized to create new money. C) the Board of Governors prohibits bank lending when the result is an expansion of the money supply. D) banking is a highly competitive industry. Answer: A

Type: A Topic: 2 E: 258 MA: 258 40. Assume Company X deposits $100,000 in cash in commercial Bank A. If no excess reserves exist at the time this deposit is made and the reserve ratio is 20 percent, Bank A can increase the money supply by a maximum of: A) $50,000. B) $180,000. C) $80,000. D) $500,000. Answer: C

Type: C Topic: 2 E: 258 MA: 258 41. Assume that Smith deposits $600 in currency into her checking account in the XYZ Bank. Later that same day Jones negotiates a loan for $1,200 at the same bank. In what direction and by what amount has the supply of money changed? A) decreased by $600 B) increased by $1,800 C) increased by $600 D) increased by $1,200 Answer: D

Type: A Topic: 2 E: 258 MA: 258 42. Assume the Standard Internet Company negotiates a loan for $5,000 from the Metro National Bank and receives a checkable deposit for that amount in exchange for its promissory note (IOU). As a result of this transaction: A) the supply of money is increased by $5,000. B) the supply of money declines by the amount of the loan. C) a claim has been "demonetized." D) the Metro Bank acquires reserves from other banks. Answer: A

Use the following to answer questions 43-47: Use the following balance sheet for the ABC National Bank in answering the next question(s). Assume the required reserve ratio is 20 percent. Assets Reserves $ 27,000 Loans 50,000 Securities 33,000 Property 200,000 Liabilities and net worth Checkable deposits $110,000 Capital stock 200,000

Type: T Topic: 2 E: 255 MA: 255 43. Refer to the above data. This commercial bank has excess reserves of: A) $0. B) $3,000. C) $12,000. D) $5,000. Answer: D

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Type: T Topic: 2 E: 258 MA: 258 44. Refer to the above data. This bank can safely expand its loans by a maximum of: A) $7,000. B) $25,000. C) $12,000. D) $5,000. Answer: D

Type: T Topic: 2 E: 258-259 MA: 258-259 45. Refer to the above data. Assuming the bank has a check cleared against it for the amount loaned in the previous question, its reserves and checkable deposits will now be: A) $25,000 and $122,000 respectively. C) $32,000 and $115,000 respectively. B) $22,000 and $110,000 respectively. D) $22,000 and $105,000 respectively. Answer: B

Type: T Topic: 2 E: 256 MA: 256 46. Refer to the above data. After the transaction described in the previous question is completed, the bank will now have excess reserves of: A) $0. B) $3,000. C) $12,000. D) $5,000. Answer: A

Type: T Topic: 2 E: 261 MA: 261 47. Refer to the above data. If the original balance sheet was for the commercial banking system, rather than a single bank, loans and checkable deposits could have been expanded by a maximum of: A) $8,000. B) $15,000. C) $48,000. D) $25,000. Answer: D

Type: A Topic: 2 E: 258 MA: 258 48. A single commercial bank must meet a 25 percent reserve requirement. If the bank has no excess reserves initially and $5,000 of cash is deposited in the bank, it can increase its loans by a maximum of: A) $1,250. B) $120,000. C) $5,000. D) $3,750. Answer: D

Type: A Topic: 2 E: 259 MA: 259 49. When a bank loan is repaid the supply of money: A) is constant, but its composition will have changed. B) is decreased. C) is increased. D) may either increase or decrease. Answer: B

Type: A Topic: 2 E: 255 MA: 255 50. If you deposit a $50 bill in a commercial bank that has a 10 percent legal reserve requirement the bank will: A) have $45 of additional excess reserves. C) be capable of lending an additional $50. B) be capable of lending an additional $500. D) have $50 of required reserves. Answer: A

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Type: A Topic: 2 E: 258 MA: 258 51. When a commercial bank has excess reserves: A) it is in a position to make additional loans. B) its actual reserves are less than its required reserves. C) it is charging too high an interest rate on its loans. D) its reserves exceed its assets. Answer: A

Type: A Topic: 2 E: 256 MA: 256 52. If we both have checking accounts in the same commercial bank and I write a check in your favor for $200, the bank's: A) balance sheet will be unchanged. B) reserves and checkable deposits will both decline by $200. C) liabilities will decline by $200, but its net worth will increase by $200. D) assets and liabilities will both decline by $200. Answer: A

Type: A Topic: 2 E: 258 MA: 258 53. Which of the following is correct? A) Both the granting and repaying of bank loans expand the aggregate money supply. B) Granting and repaying bank loans do not affect the money supply. C) Granting a bank loan destroys money; repaying a bank loan creates money. D) Granting a bank loan creates money; repaying a bank loan destroys money. Answer: D

Type: A Topic: 2 E: 255 MA: 255 54. If the reserve requirement is 10 percent, how much excess reserves does a bank acquire when a business deposits a $500 check drawn on another bank? A) $450 B) $550 C) $5000 D) $500 Answer: A

Type: A Topic: 2 E: 254 MA: 254 55. The amount of reserves that a commercial bank is required to hold is equal to: A) the amount of its checkable deposits. B) the sum of its checkable deposits and time deposits. C) its checkable deposits multiplied by the reserve requirement. D) its checkable deposits divided by its total assets. Answer: C

Type: A Topic: 2 E: 259 MA: 259 56. Banks create money when they: A) allow loans to mature. B) accept deposits of cash. Answer: C

C) buy government bonds from households. D) sell government bonds from households.

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Type: A Topic: 2 E: 260 MA: 260 57. In prosperous times banks are likely to hold very small amounts of excess reserves because: A) the Fed wants commercial banks to increase the money supply during economic expansions. B) it is very costly to transfer funds between commercial banks and the central banks. C) the Federal Reserve Banks do not pay interest on bank reserves. D) the Federal Reserve Banks want to minimize their interest payments on such deposits. Answer: C

Type: D Topic: 2 E: 255 MA: 255 58. Which of the following is correct? A) Required reserves minus actual reserves equal excess reserves. B) Required reserves equal excess reserves minus actual reserves. C) Required reserves equal actual reserves plus excess reserves. D) Actual reserves minus required reserves equal excess reserves. Answer: D

Use the following to answer questions 59-60: Answer the next question(s) on the basis of the following balance sheet for the First National Bank of Bunco. All figures are in millions.

Assets Reserves Securities Loans Property

$20 25 15 90

Liabilities and net worth Checkable Deposits $100 Capital Stock 50

Type: T Topic: 2 E: 255 MA: 255 59. Refer to the above data. If this bank has excess reserves of $6 million, the legal reserve ratio must be: A) 10 percent. B) 12 percent. C) 14 percent. D) 20 percent. Answer: C

Type: T Topic: 2 E: 255 MA: 255 60. Refer to the above data. Suppose that customers of this bank collectively write checks for cash at the bank in the amount of $6 million. As a result, the bank's excess reserves diminish to: A) $0. B) $6 million. C) $.72 million. D) $.84 million. Answer: D

Type: A Topic: 2 E: 256 MA: 256 61. When a bank has a check drawn and cleared against it: A) excess reserves in the banking system decline. B) the nation's total money supply falls. C) the bank's balance sheet does not change. D) the amount of required reserves the bank must have will fall. Answer: D

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Type: A Topic: 2 E: 255 MA: 255 62. A bank's actual reserves can be found by: A) adding its required and excess reserves. B) subtracting its required reserves from its excess reserves. C) multiplying its excess reserves by the reserve ratio. D) multiplying its checkable deposits by the reserve ratio. Answer: A

Type: A Topic: 2 E: 255 MA: 255 63. Suppose a savings and loan association has checkable deposits of $500,000 and the legal reserve ratio is 10 percent. If the institution has excess reserves of $4,000, then its actual reserves are: A) $46,000. B) $50,000. C) $54,000. D) $4,000. Answer: C

Type: F Topic: 2 E: 254 MA: 254 64. The legal reserve ratio applies to checkable deposits at: A) national banks. B) credit unions. C) savings and loans. Answer: D

D) institutions of all of the above types.

Type: A Topic: 2 E: 258 MA: 258 65. Suppose a commercial banking system has $100,000 of outstanding checkable deposits and actual reserves of $35,000. If the reserve ratio is 20 percent, the banking system can expand the supply of money by the maximum amount of: A) $122,000. B) $175,000. C) $300,000. D) $75,000. Answer: D

Type: A Topic: 2 E: 258 MA: 258 66. If a portion of the loans extended by commercial banks is taken as cash rather than as checkable deposits, the maximum money-creating potential of the commercial banking system will: A) be equal to twice the reciprocal of the reserve ratio. B) be unaffected. C) increase. D) decrease. Answer: D

Type: A Topic: 2 E: 261 MA: 261 67. The basic reason why the commercial banking system can increase its checkable deposits by a multiple of its excess reserves is that: A) reserves lost by any particular bank will be gained by some other bank. B) the central banks follow policies that prevent reserves from falling below the level required by law. C) the MPC of borrowers is greater than zero, but less than 1. D) the banking system must keep reserves equal to 100 percent of its checkable-deposit liabilities. Answer: A

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Use the following to answer questions 68-70: Answer the next question(s) on the basis of the following consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 30 percent. All figures are in billions. Assets Reserves Securities Loans Property $ 51 100 109 10 Liabilities and net worth Checkable Deposits $140 Capital Stock 130

Type: T Topic: 2 E: 255 MA: 255 68. Refer to the above data. The commercial banking system has excess reserves of: A) $9 billion. B) $7 billion. C) $6.1 billion. D) $5 billion. Answer: A

Type: T Topic: 2 E: 261 MA: 261 69. Refer to the above data. The maximum amount by which the commercial banking system can expand the supply of money by lending is: A) $30 billion. B) $23.1 billion. C) $27 billion. D) $15 billion. Answer: A

Type: T Topic: 2 E: 258 MA: 258 70. Refer to the above data. If the commercial banking system actually loans the maximum amount it is able to lend: A) reserves and deposits equal to that amount will be gained. B) excess reserves will be $2.6 billion. C) excess reserves will fall to $1.7 billion. D) excess reserves will be reduced to zero. Answer: D

Type: A Topic: 2 E: 258 MA: 258 71. If borrowers take a portion of their loans as currency rather than checkable deposits, the maximum amount by which the commercial banking system can increase the money supply by lending will: A) decrease because the legal reserve ratio varies directly with the amount of currency in circulation. B) increase because currency is the basis for all checkable-deposit creation. C) decrease because the amount of reserves transferred to other banks will diminish. D) increase because commercial banks can lend by the reciprocal of the amount of currency in circulation. Answer: C

Type: A Topic: 2 E: 259 MA: 259 72. Given a 25 percent reserve ratio, assume the commercial banking system is loaned up. Now assume the reserve ratio is reduced to 20 percent. As a result of this reduction: A) we can expect bank lending and bank profits to decline. B) each dollar of bank reserves will now support a maximum of $5 of checkable deposits. C) the banking system must now reduce outstanding loans by 5 percent. D) the banking system can now increase lending by 5 percent. Answer: B

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Type: A Topic: 2 E: 259 MA: 259 73. When commercial banks use excess reserves to buy government securities from the public: A) new money is created. C) the money supply falls. B) commercial bank reserves increase. D) checkable deposits decline. Answer: A

Type: A Topic: 2 E: 260 MA: 260 74. Which of the following would reduce the money supply? A) Commercial banks use excess reserves to buy government bonds from the public. B) Commercial banks loan out excess reserves. C) Commercial banks sell government bonds to the public. D) A check clears from Bank A to Bank B. Answer: C

Type: A Topic: 2 E: 264 MA: 264 75. In an unregulated banking system there will be a tendency for: A) interest rates to vary directly with the rate of increase in the money supply. B) the money supply to grow at a constant rate through time. C) the money supply to decrease during recession. D) the money supply to increase during recession. Answer: C

Use the following to answer questions 76-78: Answer the next question(s) on the basis of the following consolidated balance sheet for the commercial banking system. Assume the required reserve ratio is 10 percent. All figures are in billions. Assets Reserves $ 30 Securities 70 Loans 130 Property 200 Liabilities and net worth Checkable Deposits $300 Capital Stock 130

Type: T Topic: 2 E: 255 MA: 255 76. Refer to the above data. The commercial banking system has excess reserves of: A) $0 billion. B) $30 billion. C) $60 billion. D) $70 billion. Answer: A

Type: T Topic: 2 E: 255 MA: 255 77. Refer to the above data. After a deposit of $10 billion of new currency into a checking account in the banking system, excess reserves will increase by: A) $0 billion. B) $7 billion. C) $9 billion. D) $10 billion. Answer: C

Type: T Topic: 2 E: 261 MA: 261 78. Refer to the above data. After the deposit, the maximum amount by which this commercial banking system can expand the supply of money by lending is: A) $9 billion. B) $45 billion. C) $36 billion. D) $90 billion. Answer: D

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Use the following to answer questions 79-82: Answer the next question(s) on the basis of the following information about a banking system: new currency deposited in the system = $40 billion; legal reserve ratio = 0.20; excess reserves prior to the currency deposit = $0.

Type: A Topic: 2 E: 254 MA: 254 79. Refer to the above information. The $40 billion deposit of currency into checking accounts will initially create: A) $8 billion of new checkable deposits. C) $40 billion of new checkable deposits. B) $10 billion of new checkable deposits. D) $160 billion of new checkable deposits. Answer: C

Type: A Topic: 2 E: 255 MA: 255 80. Refer to the above information. The $40 billion deposit of currency into checking accounts will create excess reserves of: A) $20 billion. B) $32 billion. C) $40 billion. D) $0. Answer: B

Type: A Topic: 2 E: 261 MA: 261 81. Refer to the above information. The banking system will be able to expand the money supply through loans by: A) $160 billion. B) $200 billion. C) $40 billion. D) $128 billion. Answer: A

Type: A Topic: 2 E: 263 MA: 263 82. Refer to the above information. The $40 billion deposit of new currency will support total checkable deposits of: A) $160 billion. B) $200 billion. C) $40 billion. D) $128 billion. Answer: B

Use the following to answer questions 83-87: Answer the next question(s) on the basis of the following table for a commercial bank or thrift: (1) Legal reserve ratio, percent 10 20 25 30 (2) Checkable deposits $40,000 40,000 40,000 40,000 (3) Actual reserves $10,000 10,000 10,000 10,000

Type: T Topic: 2 E: 255 MA: 255 83. Refer to the above table. When the legal reserve ratio is 25 percent, the excess reserves of this single bank are: A) $0. B) $1,000. C) $5,000. D) $30,000. Answer: A

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Type: T Topic: 2 E: 258 MA: 258 84. Refer to the above table. When the legal reserve ratio is 10 percent, the money creating potential of this single bank is: A) $0. B) $6,000. C) $30,000. D) $60,000. Answer: B

Type: T Topic: 2 E: 261 MA: 261 85. Refer to the above table. When the legal reserve ratio is 20 percent, the money creating potential of the entire banking system is: A) $4,000. B) $6,000. C) $8,000. D) $10,000. Answer: D

Type: T Topic: 2 E: 262 MA: 262 86. Refer to the above table. When the legal reserve ratio is 30 percent, the monetary multiplier is: A) 5. B) 4. C) 3.33. D) 2.5. Answer: C

Type: T Topic: 2 E: 255 MA: 255 87. Refer to the above table. If the legal reserve ratio falls from 25 percent to 10 percent, excess reserves of this single bank will: A) rise by $6,000 and the monetary multiplier will increase from 4 to 10. B) rise by $60,000 and the monetary multiplier will increase from 4 to 10. C) fall by $6,000 and the monetary multiplier will decline from 30 to 10. D) fall by $2,000 and the monetary multiplier will decline from 10 to 4. Answer: A

Type: A Topic: 2 E: 255 MA: 255 88. If excess reserves in the banking system are $4,000, checkable deposits are $40,000, and the legal reserve ratio is 10 percent, then actual reserves are: A) $4,000. B) $6,000. C) $8,000. D) $5,000. Answer: C

Type: A Topic: 2 E: 255 MA: 255 89. If actual reserves in the banking system are $8,000, checkable deposits are $70,000, and the legal reserve ratio is 10 percent, then excess reserves are: A) zero. B) $1,000. C) $2,000. D) $500. Answer: B

Type: A Topic: 2 E: 255 MA: 255 90. If actual reserves in the banking system are $40,000, excess reserves are $10,000, and checkable deposits are $240,000, then the legal reserve requirement is: A) 10 percent. B) 12.5 percent. C) 20 percent. D) 5 percent. Answer: B

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Type: C Topic: 2 E: 262-263 MA: 262-263 91. If actual reserves in the banking system are $50,000, excess reserves are $5,000, and checkable deposits are $225,000, then the monetary multiplier is: A) 10. B) 4. C) 5. D) 10. Answer: C

Type: D Topic: 2 E: 260 MA: 260 92. Overnight loans from one bank to another for reserve purposes entail an interest rate called the: A) prime rate. B) discount rate. C) Federal funds rate. D) treasury bill rate. Answer: C

Type: A Topic: 2 E: 260 MA: 260 93. A bank temporarily short of required reserves may be able to remedy this situation by: A) borrowing funds in the Federal funds market. B) granting new loans. C) shifting some of its vault cash to its reserve account at the Federal Reserve. D) buying bonds from the public. Answer: A

Type: D Topic: 2 E: 260 MA: 260 94. The market for immediately available reserve balances at the Federal Reserve is known as the: A) money market. C) short-term bond market. B) long-term bond market. D) Federal funds market. Answer: D

Type: D Topic: 2 E: 260 MA: 260 95. The Federal funds market is the market in which: A) banks borrow from the Federal Reserve Banks. B) U.S. securities are bought and sold. C) banks borrow reserves from one another on an overnight basis. D) Federal Reserve Banks borrow from one another. Answer: C

Monetary multiplier Type: A Topic: 3 E: 262 MA: 262 96. The multiple by which the commercial banking system can expand the supply of money is equal to the reciprocal of: A) the MPS. B) its actual reserves. C) its excess reserves. D) the reserve ratio. Answer: D

Type: A Topic: 3 E: 263 MA: 263 97. The multiple by which the commercial banking system can expand the supply of money on the basis of excess reserves: A) is larger the smaller the legal reserve ratio. B) is the reciprocal of the bank's actual reserves. C) is directly or positively related to the size of the required reserve ratio. D) will be zero when the required reserve ratio is 100 percent. Answer: A

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Type: A Topic: 3 E: 263 MA: 263 98. The multiple by which the commercial banking system can increase the supply of money on the basis of each dollar of excess reserves is equal to: A) the reciprocal of the legal reserve ratio. C) the reciprocal of the income velocity of money. B) 1 minus the legal reserve ratio. D) 1/MPS. Answer: A

Type: E Topic: 3 E: 263 MA: 263 99. If m equals the maximum number of new dollars that can be created for a single dollar of excess reserves and R equals the required reserve ratio, then for the banking system: A) m = R - 1. B) R = m/1. C) R = m - 1. D) m = 1/R. Answer: D

Type: E Topic: 3 E: 263 MA: 263 100. If D equals the maximum amount of a new demand-deposit money that can be created by the banking system on the basis of any given amount of excess reserves; E equals the amount of excess reserves; and m is the monetary multiplier, then: A) m = E/D. B) D = E × m. C) D = E - 1/m. D) D = m/E. Answer: B

Type: A Topic: 3 E: 263 MA: 263 101. If the reserve ratio is 15 percent and commercial bankers decide to hold additional excess reserves equal to 5 percent of any newly acquired checkable deposits, then the relevant monetary multiplier for the banking system will be: A) 31/2. B) 4. C) 5. D) 10. Answer: C

Type: A Topic: 3 E: 263 MA: 263 102. Other things equal, if the required reserve ratio was lowered: A) banks would have to reduce their lending. B) the size of the monetary multiplier would increase. C) the actual reserves of banks would increase. D) the Federal funds interest rate would rise. Answer: B

Type: A Topic: 3 E: 263 MA: 263 103. If the monetary authorities want to reduce the monetary multiplier, they should: A) lower the legal reserve ratio. C) increase bank reserves. B) raise the legal reserve ratio. D) lower interest rates. Answer: B

Type: A Topic: 3 E: 263 MA: 263 104. If the reserve ratio is 100 percent, the value of the monetary multiplier is: A) 0. B) 1. C) 10. D) 100. Answer: B

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Type: E Topic: 3 E: 262 MA: 262 105. The value of the monetary multiplier is: A) 1/MPS. B) 1/Excess Reserves. C) 1/MPC. Answer: D

D) 1/Required Reserve Ratio.

Type: A Topic: 3 E: 263 MA: 263 106. The greater the legal reserve ratio, the: A) higher is the income multiplier. B) lower is the income multiplier. Answer: C

C) lower is the monetary multiplier. D) higher is the monetary multiplier.

Combined topics

Use the following to answer questions 107-113: Answer the next question(s) on the basis of the following information for the Moola Bank.

Reserves Checkable deposits Loans (to customers) Property Securities (owned) Capital stock

$ 100 1000 300 400 300 0

Type: A Topic: 4 E: 253-254 MA: 253-254 107. Assume that the listed amounts constitute this bank's complete set of accounts. Moola's: A) assets are $1000. B) liabilities are $1000. C) net worth is zero. D) profit is $1000. Answer: B

Type: A Topic: 4 E: 253-254 MA: 253-254 108. Assume that the listed amounts constitute this bank's complete set of accounts. Moola's: A) assets are $1100. B) liabilities are $1100. C) net worth is $300. D) profit is $1000. Answer: A

Type: C Topic: 4 E: 253-254 MA: 253-254 109. Assume that the listed amounts constitute this bank's complete set of accounts. Moola's: A) assets are $1000. B) liabilities are $300. C) net worth is $100. D) annual profit is $200. Answer: C

Type: C Topic: 4 E: 254 MA: 254 110. Refer to the above information. If Moola Bank is legally "loaned up," the reserve requirement must be: A) 10 percent. B) 15 percent. C) 20 percent. D) 25 percent. Answer: A

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Type: C Topic: 4 E: 262-263 MA: 262-263 111. Refer to the above information. If Moola Bank is legally "loaned up," the banking system's monetary multiplier must be: A) 5. B) 8. C) 10. D) 20. Answer: C

Type: A Topic: 4 E: 262-263 MA: 262-263 112. Refer to the above information and assumed that Moola bank is "loaned up." If it receives a $100 deposit of currency, it could safely expand its loans by: A) $100. B) $90. C) $900. D) $1000. Answer: B

Type: A Topic: 4 E: 263 MA: 263 113. Refer to the above information and assume that Moola Bank is "loaned up." If it receives a $100 deposit of currency, the banking system of which Moola is a part could expand loans by: A) $100. B) $90. C) $900. D) $1000. Answer: C

Last Word Questions

Type: F E: 265 MA: 265 114. (Last Word) The bank panics of 1930-1933: A) resulted in the passage of the Smoot-Hawley Act. B) boosted the nation's money supply, causing inflation. C) directly resulted in the Federal insured deposit program. D) caused a significant outflow of gold from the United States. Answer: C

Type: F E: 265 MA: 265 115. (Last Word) A "national bank holiday" that closed all banks for a week and resulted in Federal deposit insurance occurred in the United States in: A) 1903, following the "Louisiana stampede." B) 1987, following the collapse of numerous savings and loan associations. C) 1945, following the end of the Second World War. D) 1933, following the bank panics of 1930-1933. Answer: D

Type: F E: 265 MA: 265 116. (Last Word) Which of the following represents a change in today's banking policies that should prevent a recurrence of the bank panics of 1930-1933? A) banks are more cautious lenders B) banks keep large amounts of excess reserves on hand C) the FDIC insures bank deposits and therefore depositors do not panic and rush to withdraw money when individual banks have financial problems D) the President now has the authority to close banks whenever panics occur Answer: C

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Type: F E: 265 MA: 265 117. (Last Word) The bank panics of 1930-1933 and the resulting failures of many banks were caused by: A) the widespread conversion of checkable deposits to cash by the public. B) the raising of the reserve requirement by the Board of Governors. C) a massive inflow of gold bullion to the United States. D) a massive inflow of cash into bank deposits by citizens who feared their money was losing its value. Answer: A

True/False Questions

Type: A E: 255 MA: 255 118. Excess reserves are the amount by which required reserves exceed actual reserves. Answer: False

Type: D E: 259 MA: 259 119. The supply of money increases when the public buys government securities from commercial banks. Answer: False

Type: A E: 255 MA: 255 120. Commercial bank reserves are an asset to commercial banks but a liability to the Federal Reserve Bank holding them. Answer: True

Type: A E: 258-259 MA: 258-259 121. Commercial banks increase the supply of money when they purchase either personal IOU's or government bonds from businesses and households. Answer: True

122.

Type: A E: 252 MA: 252 Balance sheets always balance because reserves must always equal liabilities plus net worth Answer: False

Type: A E: 259 MA: 259 123. When commercial banks retire outstanding loans, the supply of money is increased. Answer: False

Type: A E: 260 MA: 260 124. Commercial banks monetize claims when they sell securities to Federal Reserve Banks. Answer: False

Type: A E: 255 MA: 255 125. Actual reserves equal required reserves plus excess reserves. Answer: True

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Type: D E: 262 MA: 262 126. The banking system can lend by a multiple of its excess reserves because lending does not result in a loss of reserves to the banking system as a whole. Answer: True

Type: A E: 262 MA: 262 127. The monetary multiplier and the income multiplier are two ways of referring to the same concept. Answer: False

Type: D E: 264 MA: 264 128. In an uncontrolled or unregulated system commercial bank lending will tend to intensify the business cycle. Answer: True

Type: F E: 258 MA: 258 Status: New 129. Loans made to customers are a liability on a bank's balance sheet. Answer: False

Type: F E: 254 MA: 254 Status: New 130. Checkable deposits are a liability on a bank's balance sheet. Answer: True

Type: A E: 259 MA: 259 Status: New 131. An individual bank can safely lend out a multiply of its excess reserves, but the banking system can safely lend out only an amount equal to the excess reserves in the banking system. Answer: False

Type: F E: 263 MA: 263 Status: New 132. If the reserve requirement is 10 percent, the monetary multiplier will be 10. Answer: True

Type: F E: 263 MA: 263 Status: New 133. If the reserve requirement is 20 percent, the monetary multiplier will be 4. Answer: False

Type: A E: 263 MA: 263 Status: New 134. The higher the reserve requirement, the lower is the monetary multiplier. Answer: True

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CHAPTER 15

Monetary Policy

Topic 1. 2. 3. 4. 5. 6. 7. 8. Fed balance sheet and general Open-market operations Reserve ratio Discount rate Monetary policy and the economy Assessment/recent policy International complications AD-AS/policy summary Consider This Last Word True-False

Question numbers 1-14 15-39 40-53 54-62 63-97 98-135 136-151 152-156 157-158 159-162 163-176

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Multiple Choice Questions Fed balance sheet and general

Type: A Topic: 1 E: 269 MA: 269 1. Which of the following is an asset on the consolidated balance sheet of the Federal Reserve Banks? A) loans to commercial banks C) Treasury deposits B) Federal Reserve Notes in circulation D) reserves of commercial banks Answer: A

Type: A Topic: 1 E: 269 MA: 269 2. Reserves must be deposited in the Federal Reserve Banks by: A) only commercial banks which are members of the Federal Reserve System. B) all depository institutions, that is, all commercial banks and thrift institutions. C) state chartered commercial banks only. D) federally chartered commercial banks only. Answer: B

Type: F Topic: 1 E: 269 MA: 269 3. The securities held as assets by the Federal Reserve Banks consist mainly of: A) corporate bonds. C) common stock. B) Treasury bills and Treasury bonds. D) certificates of deposit. Answer: B

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Type: A Topic: 1 E: 270 MA: 270 4. Federal Reserve Notes in circulation are: A) an asset as viewed by the Federal Reserve Banks. B) a liability as viewed by the Federal Reserve Banks. C) neither an asset nor a liability as viewed by the Federal Reserve Banks. D) part of M1, but not of M2 or M3. Answer: B

Type: A Topic: 1 E: 270 MA: 270 5. Which of the following will increase commercial bank reserves? A) the purchase of government bonds in the open market by the Federal Reserve Banks B) a decrease in the reserve ratio C) an increase in the discount rate D) the sale of government bonds in the open market by the Federal Reserve Banks Answer: A

Type: A Topic: 1 E: 274 MA: 274 6. When a commercial bank borrows from a Federal Reserve Bank: A) the supply of money automatically increases. B) it indicates that the commercial bank is unsound financially. C) the commercial bank's lending ability is increased. D) the commercial bank's reserves are reduced. Answer: C

Type: A Topic: 1 E: 272 MA: 272 7. The Federal Reserve Banks sell government securities to the public. As a result, the checkable deposits: A) of commercial banks are unchanged, but their reserves increase. B) and reserves of commercial banks both decrease. C) of commercial banks are unchanged, but their reserves decrease. D) of commercial banks are both unchanged. Answer: B

Type: A Topic: 1 E: 270 MA: 270 8. The Federal Reserve Banks buy government securities from commercial banks. As a result, the checkable deposits: A) of commercial banks are unchanged, but their reserves increase. B) and reserves of commercial banks both decrease. C) of commercial banks are unchanged, but their reserves decrease. D) and reserves of commercial banks are both unchanged. Answer: A

Type: A Topic: 1 E: 274 MA: 274 9. The commercial banking system borrows from the Federal Reserve Banks. As a result, the checkable deposits: A) of commercial banks are unchanged, but their reserves increase. B) and reserves of commercial banks both decrease. C) of commercial banks are unchanged, but their reserves decrease. D) and reserves of commercial banks are both unchanged. Answer: A

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Type: D Topic: 1 E: 270 MA: 270 10. Which of the following is a tool of monetary policy? A) open market operations C) changes in tax rates B) changes in banking laws D) changes in government spending Answer: A

Type: A Topic: 1 E: 275 MA: 275 11. Commercial banks and thrifts usually hold only small amounts of excess reserves because: A) the presence of such reserves tends to boost interest rates and reduce investment. B) the Fed constantly uses open market operations to eliminate excess reserves. C) the Fed does not pay interest on reserves. D) the Fed does not want commercial banks and thrifts to be too liquid. Answer: C

Type: F Topic: 1 E: 270 MA: 270 12. In the United States monetary policy is the responsibility of the: A) U.S. Treasury. B) Department of Commerce. C) Board of Governors of the Federal Reserve System. D) U.S. Congress. Answer: C

Type: A Topic: 1 E: 270 MA: 270 13. The three main tools of monetary policy are: A) tax rate changes, the discount rate, and open-market operations. B) tax rate changes, changes in government expenditures, and open-market operations. C) the discount rate, the reserve ratio, and open-market operations. D) changes in government expenditures, the reserve ratio, and the discount rate. Answer: C

Type: A Topic: 1 E: 270 MA: 270 14. The Fed can change the money supply by: A) changing bank reserves through the sale or purchase of government securities. B) changing the quantities of required and excess reserves by altering the legal reserve ratio. C) changing the discount rate so as to encourage or discourage commercial banks in borrowing from the central banks. D) doing all of the above. Answer: D

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Open-market operations

Type: A Topic: 2 E: 270-271 MA: 270-271 15. Assume the reserve ratio is 25 percent and Federal Reserve Banks buy $4 million of U.S. securities from the public, which deposits this amount into checking accounts. As a result of these transactions, the supply of money is: A) not directly affected, but the money-creating potential of the commercial banking system is increased by $12 million. B) directly increased by $4 million and the money-creating potential of the commercial banking system is increased by $16 million. C) directly reduced by $4 million and the money-creating potential of the commercial banking system is decreased by $12 million. D) directly increased by $4 million and the money-creating potential of the commercial banking system is increased by $12 million. Answer: D

Type: A Topic: 2 E: 274-275 MA: 274-275 16. Assume the legal reserve ratio is 25 percent and the Fourth National Bank borrows $10,000 from the Federal Reserve Bank in its district. As a result: A) commercial bank reserves are increased by $10,000. B) the supply of money automatically declines by $7,500. C) commercial bank reserves are increased by $7,500. D) the supply of money is automatically increased by $10,000. Answer: A

Type: D Topic: 2 E: 270 MA: 270 17. Open-market operations refer to: A) purchases of stocks in the New York Stock Exchange. B) the purchase or sale of government securities by the Fed. C) central bank lending to commercial banks. D) the specifying of loan maximums on stock purchases. Answer: B

Type: A Topic: 2 E: 270-271 MA: 270-271 18. If the Federal Reserve System buys government securities from commercial banks and the public: A) commercial bank reserves will decline. B) commercial bank reserves will be unaffected. C) it will be easier to obtain loans at commercial banks. D) the money supply will contract. Answer: C

Type: A Topic: 2 E: 271 MA: 271 19. The purchase of government securities from the public by the Fed will cause: A) commercial bank reserves to decrease. C) demand deposits to decrease B) the money supply to increase. D) the interest rate to increase. Answer: B

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Type: A Topic: 2 E: 271-272 MA: 271-272 20. Assume that a single commercial bank has no excess reserves and that the reserve ratio is 20 percent. If this bank sells a bond for $1,000 to a Federal Reserve Bank, it can expand its loans by a maximum of: A) $1,000. B) $2,000. C) $800. D) $5,000. Answer: A

Type: A Topic: 2 E: 272-273 MA: 272-273 21. Suppose the Federal Reserve Banks sell $2 billion of government bonds to the public which pays for them by drawing checks. As a result, commercial bank reserves will: A) increase by $10 billion. C) decrease by $2 billion. B) remain unchanged. D) increase by $2 billion. Answer: C

Type: A Topic: 2 E: 271 MA: 271 22. Which of the following statements is correct? A) The supply of money decreases when the Federal Reserve Banks buy government securities from households or businesses. B) Excess reserves are the amount by which actual reserves exceed required reserves. C) Commercial banks decrease the supply of money when they purchase government bonds from households or businesses. D) Commercial bank reserves are a liability to commercial banks but an asset to the Federal Reserve Banks. Answer: B

Use the following to answer questions 23-26:
CONSOLIDATED BALANCE SHEET: COMMERCIAL BANKING SYSTEM Liabilities and net worth Assets $ 72 Checkable deposits $240 110 Loans from Federal 60 Reserve Banks 2

Reserves Securities Loans

CONSOLIDATED BALANCE SHEET: FEDERAL RESERVE BANKS Assets Liabilities and net worth Securities $240 Reserves of commercial Loans to commercial Banks $72 banks 2 Treasury deposits 30 Federal Reserve Notes 140

Type: T Topic: 2 E: 261 MA: 261 23. Refer to the above balance sheets. The commercial banks have excess reserves of: A) $12. B) $22. C) $16. D) $24. Answer: A

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Type: T Topic: 2 E: 261 MA: 261 24. Refer to the above balance sheets. The maximum money-creating potential of the commercial banking system is: A) $36. B) $17. C) $48. D) $24. Answer: C

Type: T Topic: 2 E: 270-271 MA: 270-271 25. Refer to the above balance sheets. Suppose the Federal Reserve Banks buy $2 in securities from the public, which deposits this amount into checking accounts. As a result of these transactions, the supply of money will: A) be unaffected but the money-creating potential of the commercial banking system will increase by $6. B) directly decrease by $2 and the money-creating potential of the commercial banking system will be unaffected. C) directly increase by $8 and the money-creating potential of the commercial banking system will increase by $32. D) directly increase by $2 and the money-creating potential of the commercial banking system will increase by $6. Answer: D

Type: T Topic: 2 E: 271-272 MA: 271-272 26. Refer to the above balance sheets. Suppose the Federal Reserve Banks sell $2 in securities directly to the commercial banks. As a result of this transaction the supply of money: A) will decrease by $2, but the money-creating potential of the commercial banking system will not be affected. B) is not directly affected, but the money-creating potential of the commercial banking system will decrease by $8. C) will directly increase by $2 and the money-creating potential of the commercial banking system will decrease by $8. D) will directly increase by $2 and the money-creating potential of the commercial banking system will increase by $8. Answer: B

Type: A Topic: 2 E: 275 MA: 275 27. The Federal Reserve System regulates the money supply primarily by: A) controlling the production of coins at the United States mint. B) altering the reserve requirements of commercial banks and thereby the ability of banks to make loans. C) altering the reserves of commercial banks, largely through sales and purchases of government bonds. D) restricting the issuance of Federal Reserve Notes because paper money is the largest portion of the money supply. Answer: C

Type: A Topic: 2 E: 270-271 MA: 270-271 28. Assuming no currency drains, when the Federal Reserve Banks purchase government securities the reserves of commercial banks are: A) decreased by a multiple of the amount of the purchase. B) decreased by the amount of the purchase. C) increased by a multiple of the amount of the purchase. D) increased by the amount of the purchase. Answer: D

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Type: A Topic: 2 E: 270-271 MA: 270-271 29. Which of the following is correct? When the Federal Reserve buys government securities from the public, the money supply: A) contracts and commercial bank reserves increase. B) expands and commercial bank reserves decrease. C) contracts and commercial bank reserves decrease. D) expands and commercial bank reserves increase. Answer: D

Type: A Topic: 2 E: 271 MA: 271 30. Which of the following will happen when the Federal Reserve buys bonds from the public in the open market and cash in the hands of the public does not change? A) the required reserve ratio will increase C) the deposits of commercial banks will decline B) the money supply will decrease D) commercial bank reserves will increase Answer: D

Use the following to answer questions 31-32: Answer the next question(s) on the assumption that the legal reserve ratio is 20 percent. Suppose that the Fed sells $500 of government securities to commercial banks and buys $500 of securities from individuals, who deposit the cash in checking accounts.

Type: C Topic: 2 E: 270-272 MA: 270-272 31. As a result of the above transactions, reserves in the banking system will: A) remain unchanged. B) rise by $100. C) fall by $100. D) rise by $1000. Answer: A

Type: C Topic: 2 E: 270-272 MA: 270-272 32. As a result of the above transactions, the supply of money in the economy will: A) remain unchanged. B) rise by $500. C) fall by $100. D) fall by $500. Answer: A

Type: A Topic: 2 E: 270-273 MA: 270-273 33. Open-market operations change: A) the size of the monetary multiplier, but not commercial bank reserves. B) commercial bank reserves, but not the size of the monetary multiplier. C) neither commercial bank reserves nor the size of the monetary multiplier. D) both commercial bank reserves and the size of the monetary multiplier. Answer: B

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Use the following to answer questions 34-39: Answer the next question(s) on the basis of the following consolidated balance sheet of the commercial banking system. Assume that the reserve requirement is 10 percent. All figures are in billions and each question should be answered independently of changes specified in the preceding ones. Assets Reserves $ 60 Securities 140 Loans 260 Property 400 Liabilities and net worth Checkable deposits $600 Capital stock 260

Type: A Topic: 2 E: 261 MA: 261 Status: New 34. Refer to the above data. The commercial banking system has excess reserves of: A) $10 billion. B) $5 billion. C) $2 billion. D) zero. Answer: D

Type: A Topic: 2 E: 261 MA: 261 Status: New 35. Refer to the above data. The monetary multiplier for the commercial banking system is: A) 5. B) 10. C) 12.5. D) 20. Answer: B

Type: A Topic: 2 E: 271-272 MA: 271-272 Status: New 36. Refer to the above data. Suppose the Fed sold $10 billion of U.S. securities to the banks. This would: A) increase bank reserves to $70 billion, reduce bank-held securities to $130 billion, and increase the money supply (checkable deposits) by $100 billion. B) increase bank reserves to $70 billion, reduce bank-held securities to $130 billion, and decrease the money supply (checkable deposits) by $100 billion. C) reduce bank reserves to $50 billion, increase bank-held securities to $150 billion, and increase the money supply (checkable deposits) by $100 billion. D) reduce bank reserves to $50 billion, increase bank-held securities to $150 billion, and decrease the money supply (checkable deposits) by $100 billion. Answer: D

Type: A Topic: 2 E: 270 MA: 270 Status: New 37. Refer to the above data. Suppose the Fed bought $20 billion of U.S. securities from the banks. This would: A) increase bank reserves to $80 billion, reduce bank-held securities to $120 billion, and increase the money supply (checkable deposits) by $200 billion. B) increase bank reserves to $80 billion, reduce bank-held securities to $120 billion, and decrease the money supply (checkable deposits) by $200 billion. C) reduce bank reserves to $40 billion, increase bank-held securities to $160 billion, and increase the money supply (checkable deposits) by $200 billion. D) reduce bank reserves to $40 billion, increase bank-held securities to $160 billion, and decrease the money supply (checkable deposits) by $200 billion. Answer: A

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Type: A Topic: 2 E: 270 MA: 270 Status: New 38. Refer to the above data. Suppose the Fed wants to increase the money supply by $400 billion to drive down interest rates and stimulate the economy. To accomplish this it could: A) sell $20 billion of U.S. securities to the banks. B) buy $20 billion of U.S. securities from the banks. C) sell $40 billion of U.S. securities to the banks. D) buy $40 billion of U.S. securities from the banks. Answer: D

Type: A Topic: 2 E: 271-272 MA: 271-272 Status: New 39. Refer to the above data. Suppose the Fed wants to reduce the money supply by $400 billion to drive up interest rates and dampen inflation. To accomplish this it could: A) sell $20 billion of U.S. securities to the banks. B) buy $20 billion of U.S. securities from the banks. C) sell $40 billion of U.S. securities to the banks. D) buy $40 billion of U.S. securities from the banks. Answer: C

Reserve ratio

Type: A Topic: 3 E: 273-274 MA: 273-274 40. If the Fed were to increase the legal reserve ratio, we would expect: A) lower interest rates, an expanded GDP, and depreciation of the dollar. B) lower interest rates, an expanded GDP, and appreciation of the dollar. C) higher interest rates, a contracted GDP, and appreciation of the dollar. D) higher interest rates, a contracted GDP, and depreciation of the dollar. Answer: C

Type: A Topic: 3 E: 273-274 MA: 273-274 41. An increase in the legal reserve ratio: A) increases the money supply by increasing excess reserves and increasing the monetary multiplier. B) decreases the money supply by decreasing excess reserves and decreasing the monetary multiplier. C) increases the money supply by decreasing excess reserves and decreasing the monetary multiplier. D) decreases the money supply by increasing excess reserves and decreasing the monetary multiplier. Answer: B

Type: A Topic: 3 E: 273-274 MA: 273-274 42. When the reserve requirement is increased: A) required reserves are changed into excess reserves. B) the excess reserves of member banks are increased. C) a single commercial bank can no longer lend dollar-for-dollar with its excess reserves. D) the excess reserves of member banks are reduced. Answer: D

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Type: C Topic: 3 E: 273-274 MA: 273-274 43. Assume that the commercial banking system has checkable deposits of $10 billion and excess reserves of $1 billion at a time when the reserve requirement is 20 percent. If the reserve requirement is now raised to 30 percent, the banking system then has: A) excess reserves of $2 billion. C) a deficiency of reserves of $.5 billion. B) neither an excess nor a deficiency of reserves. D) excess reserves of only $.5 billion. Answer: B

Type: A Topic: 3 E: 273-274 MA: 273-274 44. When the required reserve ratio is increased, the excess reserves of member banks are: A) reduced, but the multiple by which the commercial banking system can lend is unaffected. B) reduced and the multiple by which the commercial banking system can lend is increased. C) increased and the multiple by which the commercial banking system can lend is increased. D) reduced and the multiple by which the commercial banking system can lend is reduced. Answer: D

Type: A Topic: 3 E: 274 MA: 274 45. When the required reserve ratio is decreased, the excess reserves of member banks are: A) reduced, but the multiple by which the commercial banking system can lend is unaffected. B) reduced and the multiple by which the commercial banking system can lend is increased. C) increased and the multiple by which the commercial banking system can lend is increased. D) increased and the multiple by which the commercial banking system can lend is reduced. Answer: C

Type: A Topic: 3 E: 274 MA: 274 46. A decrease in the reserve ratio increases the: A) amount of actual reserves in the banking system. B) amount of excess reserves in the banking system. C) number of government securities held by the Federal Reserve Banks. D) ratio of coins to paper currency in the economy. Answer: B

Type: A Topic: 3 E: 273-274 MA: 273-274 47. An increase in the reserve ratio: A) increases the size of the spending income multiplier. B) decreases the size of the spending income multiplier. C) increases the size of the monetary multiplier. D) decreases the size of the monetary multiplier. Answer: D

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Use the following to answer questions 48-53: Answer the next question(s) on the basis of the following consolidated balance sheet of the commercial banking system. Assume that the reserve requirement is 20 percent. All figures are in billions and each question should be answered independently of changes specified in all preceding ones. Assets Reserves $ 200 Securities 300 Loans 500 Property 400 Liabilities and net worth Checkable deposits $1000 Capital stock 400

Type: A Topic: 3 E: 261 MA: 261 Status: New 48. Refer to the above data. The commercial banking system has excess reserves of: A) zero. B) $2 billion. C) $5 billion. D) $10 billion. Answer: A

Type: A Topic: 3 E: 262 MA: 262 Status: New 49. Refer to the above data. The monetary multiplier for the commercial banking system is: A) 5. B) 10. C) 15. D) 20. Answer: A

Type: A Topic: 3 E: 273-274 MA: 273-274 Status: New 50. Refer to the above data. If the Fed increased the reserve requirement from 20 percent to 25 percent, a deficiency of reserves in the commercial banking system of _____ would occur and the monetary multiplier would fall to ____. A) $50 billion; 5. B) $10 billion; 4 C) $50 billion; 4 D) $10 billion; 8 Answer: C

Type: A Topic: 3 E: 274 MA: 274 Status: New 51. Refer to the above data. If the Fed reduced the reserve requirement from 20 percent to 16 percent, excess reserves in the commercial banking system would increase by _____ and the monetary multiplier would rise to ____. A) $10 billion; 5 B) $40 billion; 6.25 C) $10 billion; 10 D) $40 billion; 12.5 Answer: B

Type: A Topic: 3 E: 274 MA: 274 Status: New 52. Refer to the above data. Suppose the Fed wants to increase the money supply by $1000 billion to drive down interest rates and stimulate the economy. To accomplish this it could lower the reserve requirement from 20 percent to: A) 10 percent. B) 12 percent. C) 14 percent. D) 12 percent. Answer: A

Type: A Topic: 3 E: 273-274 MA: 273-274 Status: New 53. Refer to the above data. Suppose the Fed wants to reduce the money supply by $200 billion to drive up interest rates and dampen inflation. To accomplish this it could increase the reserve requirement from 20 percent to: A) 22 percent. B) 25 percent.. C) 30 percent. D) 33 percent. Answer: B

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Discount rate

Type: D Topic: 4 E: 274 MA: 274 54. The discount rate is the interest: A) rate at which the central banks lend to the U.S. Treasury. B) rate at which the Federal Reserve Banks lend to commercial banks. C) yield on long-term government bonds. D) rate at which commercial banks lend to the public. Answer: B

Type: A Topic: 4 E: 274 MA: 274 55. A commercial bank can add to its actual reserves by: A) lending money to bank customers. B) buying government securities from the public. C) buying government securities from a Federal Reserve Bank. D) borrowing from a Federal Reserve Bank. Answer: D

Type: D Topic: 4 E: 274 MA: 274 56. The interest rate at which the Federal Reserve Banks lend to commercial banks is called the: A) prime rate. B) short-term rate. C) discount rate. D) Federal funds rate. Answer: C

Type: D Topic: 4 E: 274 MA: 274 57. The discount rate is the rate of interest at which: A) Federal Reserve Banks lend to commercial banks. B) savings and loan associations lend to some builders. C) Federal Reserve Banks lend to large corporations. D) commercial banks lend to large corporations. Answer: A

Type: D Topic: 4 E: 274 MA: 274 Status: New 58. Projecting that it might temporarily fall short of legally required reserves in the coming days, the Bank of Beano decides to borrow money from its regional Federal Reserve Bank. The interest rate on the loan is called the: A) prime rate. B) Federal funds rate. C) Treasury bill rate. D) discount rate. Answer: D

Type: D Topic: 4 E: 274 MA: 274 Status: New 59. When the Fed lends money to a commercial bank, the bank: A) increases its reserves and enhances its ability to extend credit to bank customers. B) decreases its reserves and reduces its ability to extend credit to bank customers. C) pays the Federal funds interest rate on the loan. D) pays the prime rate interest rate on the loan. Answer: A

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Type: C Topic: 4 E: 274 MA: 274 Status: New 60. Suppose that, for every 1-percentage point decline in the discount rate, commercial banks collectively borrow an additional $2 billion from Federal Reserve banks. Also assume that reserve ratio is 10 percent. If the Fed lowers the discount rate from 4.0 percent to 3.5 percent, bank reserves will: A) increase by $1 billion and the money supply will increase by $5 billion. B) decline by $1 billion and the money supply will decline by $10 billion. C) increase by $1 billion and the money supply will increase by $10 billion. D) increase by $10 billion and the money supply will increase by $100 billion. Answer: C

Type: C Topic: 4 E: 274 MA: 274 Status: New 61. Suppose that, for every 1-percentage point decline of the discount rate, commercial banks collectively borrow an additional $2 billion from Federal Reserve banks. Also assume that reserve ratio is 20 percent. If the Fed increases the discount rate from 4.0 percent to 4.25 percent, bank reserves will: A) increase by $.5 billion and the money supply will increase by $2.5 billion. B) decline by $.5 billion and the money supply will decline by $2.5 billion. C) increase by $.75 billion and the money supply will increase by $3.75 billion. D) increase by $1 billion and the money supply will increase by $5 billion. Answer: A

Type: F Topic: 4 E: 275 MA: 275 Status: New 62. Changes in the discount rate are: A) the most powerful and useful tool of monetary policy. B) less frequent than changes in the reserve requirement. C) more important than open-market operations. D) less important than open-market operations in implementing monetary policy. Answer: D

Monetary policy and the economy

Type: A Topic: 5 E: 277 MA: 277 63. Which of the following best describes the cause-effect chain of an easy money policy? A) A decrease in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP. B) A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP. C) An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP. D) An increase in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP. Answer: D

Type: A Topic: 5 E: 279 MA: 279 64. Upon which of the following industries is a tight money policy likely to be most effective? A) furniture B) clothing C) food processing D) residential construction Answer: D

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Type: C Topic: 5 E: 277 MA: 277 65. Assuming government wishes to either increase or decrease the level of aggregate demand, which of the following pairs are not consistent policy measures? A) a tax increase and an increase in the money supply B) a tax reduction and an increase in the money supply C) a reduction in government expenditures and a decline in the money supply D) a tax increase and an increase in the interest rate Answer: A

Type: A Topic: 5 E: 279 MA: 279 66. If the Federal Reserve authorities were attempting to reduce demand-pull inflation, the proper policies would be to: A) sell government securities, raise reserve requirements, and raise the discount rate. B) buy government securities, raise reserve requirements, and raise the discount rate. C) sell government securities, lower reserve requirements, and lower the discount rate. D) sell government securities, raise reserve requirements, and lower the discount rate. Answer: A

Type: A Topic: 5 E: 279 MA: 279 67. A contraction of the money supply: A) increases the interest rate and decreases aggregate demand. B) increases both the interest rate and aggregate demand. C) lowers the interest rate and increases aggregate demand. D) lowers both the interest rate and aggregate demand. Answer: A

Type: C Topic: 5 E: 278-279 MA: 278-279 68. If the Fed were to purchase government securities in the open market, we would anticipate: A) lower interest rates, an expanded GDP, and depreciation of the dollar. B) lower interest rates, an expanded GDP, and appreciation of the dollar. C) higher interest rates, a contracted GDP, and depreciation of the dollar. D) lower interest rates, a contracted GDP, and appreciation of the dollar. Answer: A

Type: D Topic: 5 E: 279 MA: 279 69. The purpose of a tight money policy is to: A) alleviate recessions. B) raise interest rates and restrict the availability of bank credit. C) increase aggregate demand and GDP. D) increase investment spending. Answer: B

Type: A Topic: 5 E: 278 MA: 278 70. Monetary policy is expected to have its greatest impact on: A) Xg. B) Ig. C) C. D) G. Answer: B

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Type: A Topic: 2 E: 278 MA: 278 71. Which of the following actions by the Fed would cause the money supply to increase? A) purchases of government bonds from banks. C) an increase in the discount rate. B) an increase in the reserve requirement. D) sales of government bonds to the public. Answer: A

Type: C Topic: 5 E: 278-279 MA: 278-279 72. Assume the economy is operating at less than full employment. An easy money policy will cause interest rates to ________. which will ___________ investment spending. A) decrease; decrease B) decrease; increase C) increase; increase D) increase; decrease Answer: B

Type: A Topic: 5 E: 276 MA: 276 73. Which of the following best describes the cause-effect chain of a tight money policy? A) A decrease in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP. B) A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP. C) An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP. D) An increase in the money supply will lower the interest rate, decrease investment spending, and increase aggregate demand and GDP. Answer: B

Type: C Topic: 5 E: 279 MA: 279 74. If the economy were encountering a severe recession, proper monetary and fiscal policies would call for: A) selling government securities, raising the reserve ratio, lowering the discount rate, and a budgetary surplus. B) buying government securities, reducing the reserve ratio, reducing the discount rate, and a budgetary deficit. C) buying government securities, raising the reserve ratio, raising the discount rate, and a budgetary surplus. D) buying government securities, reducing the reserve ratio, raising the discount rate, and a budgetary deficit. Answer: B

Type: C Topic: 5 E: 279 MA: 279 75. If severe demand-pull inflation was occurring in the economy, proper government policies would involve a government: A) deficit and the purchase of securities in the open market, a higher discount rate, and higher reserve requirements. B) deficit and the sale of securities in the open market, a higher discount rate, and lower reserve requirements. C) surplus and the sale of securities in the open market, a higher discount rate, and higher reserve requirements. D) surplus and the purchase of securities in the open market, a lower discount rate, and lower reserve requirements. Answer: C

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Type: A Topic: 5 E: 277 MA: 277 76. If the amount of money demanded exceeds the amount supplied, the: A) demand-for-money curve will shift to the left. C) interest rate will rise. B) money supply curve will shift to the right. D) interest rate will fall. Answer: C

Use the following to answer questions 77-79:
10
Interest rate (%) Price level

8 6 4 2 0 $10

Investment demand

AS

AD3 (I = 40) AD2 (I = 30) AD1 (I = 20)

20 30 40 Investment ($)

50

0 Real GDP ($)

Type: G Topic: 5 E: 276-277 MA: 276-277 77. Refer to the above diagrams. The numbers in parentheses after the AD1, AD2, and AD3, labels indicate the levels of investment spending associated with each curve, respectively. All numbers are in billions of dollars. If the interest rate is 8 percent and the goal of the Fed is full-employment output of Qf, it should: A) increase the interest rate from 8 percent to 10 percent. B) decrease the interest rate from 8 to 4 percent. C) decrease the interest rate from 8 to 6 percent. D) maintain the interest rate at 8 percent. Answer: C

Type: G Topic: 5 E: 276-277 MA: 276-277 78. Refer to the above diagrams. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve, respectively. All numbers are in billions of dollars. If the interest rate is 4 percent and the Fed desires to undo demand-pull inflation, it should: A) increase the interest rate from 4 percent to 6 percent. B) decrease the interest rate from 4 to 2 percent. C) increase investment spending by $20 billion. D) maintain the interest rate at 4 percent. Answer: A

Type: G Topic: 5 E: 276-277 MA: 276-277 79. Refer to the above diagrams. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve, respectively. All numbers are in billions of dollars. If the interest rate is 6 percent and the goal of the Fed is full-employment output of Qf, it should: A) increase the interest rate from 6 percent to 8 percent. B) decrease the interest rate from 6 to 4 percent. C) decrease the interest rate from 6 to 2 percent. D) maintain the interest rate at 6 percent. Answer: D

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Type: A Topic: 5 E: 275 MA: 275 80. The purpose of an easy money policy is to shift the: A) aggregate demand curve leftward. C) aggregate supply curve leftward. B) aggregate demand curve rightward. D) investment demand curve leftward. Answer: B

Use the following to answer questions 81-84:
Ms1 MS0 MS3

Interest rate (%)

6 3 Dm 0
$80 100 120 Amount of money demanded and supplied

Interest rate

9

Investment demand

0

$40 50 Investment

60

AS

Price level

AD1 (1=$40) AD3 (1=$60) AD2 (1=$50)

0

Real GDP

Qf

Type: G Topic: 5 E: 276-277 MA: 276-277 81. Refer to the above diagrams. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve. All figures are in billions. If the money supply is Ms1 and the goal of the monetary authorities is full-employment output Qf, they should: A) increase the money supply from $80 to $100. C) maintain the money supply at $80. B) increase the money supply from $80 to $120. D) decrease the money supply from $80 to $60. Answer: A

Type: G Topic: 5 E: 276-277 MA: 276-277 82. Refer to the above diagrams. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve. All figures are in billions. If aggregate demand is AD3 and the monetary authorities desire to reduce it to AD2, they should: A) increase the interest rate from 3 percent to 9 percent. B) increase the money supply from $100 to $120. C) decrease the money supply from $120 to $100. D) decrease the interest rate from 3 percent to 9 percent. Answer: C

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Type: G Topic: 5 E: 276-277 MA: 276-277 83. Refer to the above diagrams. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve. All figures are in billions. Which of the following would shift the money supply curve from Ms1 to Ms3? A) an increase in the discount rate B) purchases of U.S. securities by the Fed in the open market C) sales of U.S. securities by the Fed in the open market D) an increase in the reserve ratio Answer: B

Type: G Topic: 5 E: 276-277 MA: 276-277 84. Refer to the above diagrams. The numbers in parentheses after the AD1, AD2, and AD3 labels indicate the levels of investment spending associated with each curve. All figures are in billions. If the MPC for the economy described by the figures is .8: A) an increase in the money supply from $80 to $100 will shift the aggregate demand curve rightward by $50 billion at each price level. B) an increase in the money supply from $80 to $100 will shift the aggregate demand curve leftward by $40 billion at each price level. C) a decrease in the interest rate from 9 percent to 6 percent will shift the aggregate demand curve leftward by $100 billion at each price level. D) a decrease in the interest rate from 6 percent to 3 percent will shift the aggregate demand curve leftward by $50 billion at each price level. Answer: A

Type: A Topic: 5 E: 279 MA: 279 85. An increase in the money supply will: A) lower interest rates and lower the equilibrium GDP. B) lower interest rates and increase the equilibrium GDP. C) increase interest rates and increase the equilibrium GDP. D) increase interest rates and lower the equilibrium GDP. Answer: B

Type: A Topic: 5 E: 279 MA: 279 86. All else equal, when the Federal Reserve Banks engage in a tight money policy, the prices of government bonds usually: A) fall. B) rise. C) remain constant. D) move in the same direction as the bonds' interest rate yield. Answer: A

Type: A Topic: 5 E: 279 MA: 279 87. All else equal, when the Federal Reserve Banks engage in an easy money policy, the interest rates received on government bonds usually: A) fall. B) rise. C) remain constant. D) move in the same direction as the bonds' price. Answer: A

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Use the following to answer questions 88-91: Answer the next question(s) on the basis of the information in the following table.

Money supply $400 400 400 400 400

Money demand $600 500 400 300 200

Interest rate 2% 3 4 5 6

Investment (at interest rate shown) $700 600 500 300 200

Type: T Topic: 5 E: 276 MA: 276 88. Refer to the above table. The equilibrium interest rate in this economy is: A) 3 percent. B) 4 percent. C) 5 percent. D) 6 percent. Answer: B

Type: T Topic: 5 E: 277 MA: 277 89. Refer to the above table. An interest rate of 2 percent is not sustainable because: A) the demand for bonds in the bond market will fall and the interest rate will fall. B) the demand for bonds in the bond market will rise and the interest rate will fall. C) the supply of bonds in the bond market will decline and the interest rate will rise. D) the supply of bonds in the bond market will rise and the interest rate will rise. Answer: D

Type: T Topic: 5 E: 276 MA: 276 90. Refer to the above table. The amount of investment that will be forthcoming in this economy is: A) $700. B) $600. C) $500. D) $300. Answer: C

Type: T Topic: 5 E: 271-272 MA: 271-272 91. Refer to the above table. Suppose the legal reserve requirement is 10 percent and initially there are no excess reserves in the banking system. If the Fed wished to reduce the interest rate by 1 percentage point, it would: A) sell $10 of government bonds in the open market. B) buy $100 of government bonds in the open market. C) sell $100 of government bonds in the open market. D) buy $10 of government bonds in the open market. Answer: A

Type: A Topic: 5 E: 272 MA: 272 92. The price of government bonds and the interest rate received by a bond buyer are: A) positively related. B) unrelated. C) negatively related. D) independent of Federal Reserve open-market operations. Answer: C

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Type: A Topic: 5 E: 275 MA: 275 93. A tight money policy is designed to shift the: A) aggregate demand curve rightward. B) aggregate demand curve leftward. Answer: B

C) aggregate supply curve rightward. D) aggregate supply curve leftward.

Type: A Topic: 5 E: 277 MA: 277 94. If the economy is operating in the relatively steep (upper) portion of its aggregate supply curve, a reduction in the money supply will: A) increase the interest rate and increase employment. B) reduce the interest rate and increase employment. C) increase the interest rate and reduce the price level, assuming it is flexible downward. D) reduce the interest rate and increase the price level. Answer: C

Type: A Topic: 5 E: 277 MA: 277 95. The sale of government bonds by the Federal Reserve Banks to commercial banks will: A) increase aggregate supply. C) increase aggregate demand. B) decrease aggregate supply. D) decrease aggregate demand. Answer: D

Type: C Topic: 5 E: 276-277 MA: 276-277 96. Assume that the price level is flexible both upward and downward and that the Fed's policy is to keep the price level from either rising or falling. If aggregate supply increases in the economy, the Fed: A) will have to increase interest rates to keep the price level from falling. B) will have to reduce the money supply to keep the price level from rising. C) will have to increase the money supply to keep the price level from falling. D) can keep the price level stable without altering the money supply or interest rate. Answer: C

Type: C Topic: 5 E: 278 MA: 278 97. If the demand for money increases and the Fed wants interest rates to remain unchanged, which of the following would be appropriate policy? A) recall Federal Reserve Notes from circulation C) buy bonds in the open market B) raise the legal reserve requirement D) raise the discount rate Answer: C

Assessment/recent policy

Type: F Topic: 6 E: 281 MA: 281 98. Which of the following has bolstered the case for active monetary policy? A) budget surpluses B) increasing globalization of financial markets C) the success of monetary policy in helping the economy emerge from the 1990-1991 recession and sustain economic growth through the 1990s D) a decreasing role of banks and thrifts in the financial industry Answer: C

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Type: F Topic: 6 E: 281 MA: 281 99. According to studies and recent experience: A) globalization of financial markets has undermined the Fed's ability to change interest rates through monetary policy. B) the shrinking market share of banks and thrifts relative to other financial institutions has caused the Fed to lose control over the money supply and therefore its ability to affect interest rates. C) tight money policies work; easy money policies do not. D) the Fed has retained its ability to control the money supply and affect interest rates, even in the face of globalization of financial markets and the declining role of banks and thrifts in financial markets. Answer: D

Type: F Topic: 6 E: 281 MA: 281 100. One of the strengths of monetary policy relative to fiscal policy is that monetary policy: A) can be implemented more quickly. B) is subject to closer political scrutiny. C) does not produce a net export effect. D) entails a larger spending income multiplier effect on real GDP. Answer: A

Type: D Topic: 6 E: 281-282 MA: 281-282 101. The problem of cyclical asymmetry refers to the idea that: A) a tight money policy can force a contraction of the money supply, but an easy money policy may not achieve an expansion of the money supply. B) the monetary authorities have been less willing to use an easy money policy than they have a tight money policy. C) cyclical downswings are typically of longer duration than cyclical upswings. D) an easy money policy can force an expansion of the money supply, but a tight money policy may not achieve a contraction of the money supply. Answer: A

Type: A Topic: 6 E: 282 MA: 282 102. An easy money policy may be less effective than a tight money policy because: A) the Federal Reserve Banks are always willing to make loans to commercial banks which are short of reserves. B) fiscal policy always works at cross purposes with an easy money policy. C) changes in exchange rates complicate an easy money policy more than it does a tight money policy. D) commercial banks may not be able to find loan customers. Answer: D

Type: A Topic: 6 E: 282 MA: 282 103. An easy money policy may be frustrated if the: A) demand-for-money curve shifts to the left. B) investment-demand curve shifts to the left. Answer: B

C) saving schedule shifts downward. D) investment-demand curve shifts to the right.

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Type: A Topic: 6 E: 281 MA: 281 104. Some economists contend that the velocity of money often changes in such a way as to frustrate monetary policy. Which of the following statements is consistent with this thinking? A) An increase in the money supply will increase the interest rate and reduce the amount of money held as an asset. B) A decrease in the money supply will decrease the interest rate and increase the amount of money held as an asset. C) A decrease in the money supply will increase the interest rate and reduce the amount of money held as an asset. D) An increase in the money supply will lower the interest rate and reduce the amount of money held as an asset. Answer: C

Type: A Topic: 6 E: 281 MA: 281 105. A tight money policy could be offset by: A) a deterioration in the profit expectations of businesses. B) a budget surplus. C) a decline in the velocity of money. D) an increase in the velocity of money. Answer: D

Type: A Topic: 6 E: 282 MA: 282 106. Monetary policy is thought to be: A) equally effective in moving the economy out of a depression as in controlling demand-pull inflation. B) more effective in moving the economy out of a depression than in controlling demand-pull inflation. C) more effective in controlling demand-pull inflation than in moving the economy out of a depression. D) only effective in moving the economy out of a depression. Answer: C

Type: A Topic: 6 E: 281 MA: 281 107. Monetary policy: A) is less politically acceptable than is fiscal policy. B) will be weakened if the velocity of money changes in the same direction as the money supply. C) will be weakened if the velocity of money changes in the opposite direction as the money supply. D) is designed primarily to alter the velocity of money. Answer: C

Type: A Topic: 6 E: 282 MA: 282 108. The impact of monetary policy on investment spending may be weakened: A) because of the Treasury's desire for high interest rates. B) if velocity changes in the same direction as the money supply. C) if the investment-demand curve shifts to the right during inflation and to the left during recession. D) if the investment-demand curve is very flat. Answer: C

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Type: F Topic: 6 E: 282-283 MA: 282-283 109. Since 1980, U.S. monetary policy has been: A) highly erratic, causing rising inflation and unemployment. B) relatively successful in controlling inflation and promoting full employment. C) partly responsible for the increase in the natural rate of unemployment. D) of secondary importance to fiscal policy in stabilizing the economy. Answer: B

Type: A Topic: 6 E: 280 MA: 280 110. The Fed directly sets: A) the prime interest rate but not the Federal funds rate. B) both the Federal funds rate and the prime interest rate. C) neither the Federal funds rate nor the prime interest rate. D) the discount rate and the prime interest rate. Answer: C

Type: A Topic: 6 E: 280 MA: 280 111. Which of the following will likely accompany an easy money policy? A) a higher prime interest rate C) a higher discount rate B) a lower Federal funds rate D) higher income tax rates Answer: B

Type: A Topic: 6 E: 280 MA: 280 112. A Federal funds rate reduction that is caused by monetary policy will: A) increase the prime interest rate. C) increase the Fed's discount rate. B) decrease the size of the monetary multiplier. D) decrease the prime interest rate. Answer: D

Type: A Topic: 6 E: 281 MA: 281 113. To reduce the Federal funds rate, the Fed can: A) buy government bonds from the public. B) increase the discount rate. Answer: A

C) increase the prime interest rate. D) sell government bonds to commercial banks.

Type: A Topic: 6 E: 280 MA: 280 114. Generally, the prime interest rate: A) moves in the opposite direction as the Federal funds rate. B) remains constant over long periods of time. C) is highly inflexible downward. D) moves in the same direction as the Federal funds rate. Answer: D

Type: A Topic: 6 E: 280 MA: 280 115. To increase the Federal funds rate, the Fed can: A) buy government bonds from the public. B) decrease the discount rate. Answer: D

C) decrease the prime interest rate. D) sell government bonds to commercial banks.

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Type: A Topic: 6 E: 280 MA: 280 116. Recently, the Fed has communicated changes in its monetary policy by announcing changes in its policy targets for the: A) growth of the money supply. C) prime interest rate. B) Federal funds rate. D) U.S. dollar-foreign currency exchange rate. Answer: B

Type: A Topic: 6 E: 280 MA: 280 117. The prime interest rate: A) affects investment spending while the Federal funds rate affects consumption spending. B) affects consumption spending while the Federal funds rate affects investment spending. C) has no affect on exchange rates and net exports. D) affects investment spending while the Federal funds rate affects overnight borrowing of bank reserves. Answer: D

Type: F Topic: 6 E: 280 MA: 280 118. The Federal funds rate is: A) higher than the prime interest rate. B) lower than the prime interest rate. C) always equal to the Fed's discount rate. D) equal to the prime interest rate minus the Fed's discount rate. Answer: B

Type: F Topic: 6 E: 282 MA: 282 119. In recent years, the Federal Reserve has: A) paid closer attention to M1 than M2 in setting monetary targets. B) relied more on changes in the discount rate than open-market operations in establishing monetary policy. C) has increased M2 at a fixed annual rate, regardless of the health of the economy. D) taken an activist, pragmatic approach to monetary policy, paying close attention to interest rates. Answer: D

Type: A Topic: 6 E: 280 MA: 280 120. If the Fed wants to lower the Federal funds rate, it should: A) increase the discount rate. C) buy government securities in the open market. B) increase the reserve ratio. D) sell government securities in the open market. Answer: C

Type: A Topic: 6 E: 280 MA: 280 121. Other things equal, which of the following would increase the Federal funds rate? A) a decrease in loan demand in the Federal funds market B) a decrease in the reserve ratio C) Fed purchases of government securities from banks D) a decline in excess reserves in the banking system Answer: D

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Type: D Topic: 6 E: 280 MA: 280 Status: New 122. The benchmark interest rate that banks use as a reference point for a variety of consumer and business loans is the: A) Federal funds rate. B) prime interest rate. C) discount rate. D) Treasury bill rate. Answer: B

Type: A Topic: 6 E: 280 MA: 280 123. The prime interest rate usually: A) rises when the Federal funds rate rises. B) rises when the discount rate falls. C) falls when the Federal funds rate rises. D) falls when the Fed sells bonds in the open market. Answer: A

Type: F Topic: 6 E: 281 MA: 281 124. In 1999 and 2000 the Fed increased the Federal funds rate several times. The Fed's purpose was to: A) prevent rising inflation. C) stimulate economic growth. B) reduce the unemployment rate. D) strengthen the international value of the dollar. Answer: A

Type: F Topic: 6 E: 281 MA: 281 Status: New 125. Between January 2001 and June 2003, the Fed reduced the Federal funds rate from 6 percent to 1 percent. The Fed's purpose was to: A) prevent rising inflation. C) promote recovery from recession. B) reduce the public debt. D) strengthen the international value of the dollar. Answer: C

Type: A Topic: 6 E: 281 MA: 281 126. To reduce the Federal funds rate, the Fed would: A) increase the discount rate. B) increase the reserve requirement. Answer: D

C) sell government securities. D) buy government securities.

Type: A Topic: 6 E: 280 MA: 280 127. To increase the Federal funds rate, the Fed would: A) sell government securities. B) buy government securities. Answer: A

C) reduce the discount rate. D) decrease the reserve requirement.

Type: F Topic: 6 E: 286 MA: 286 128. In the last-half of the 1990s, Japan: A) successfully used monetary policy to overcome recession. B) had poor success using monetary policy to overcome recession. C) abandoned monetary policy in favor of fiscal policy in fighting inflation. D) successfully used monetary policy to reduce rapid inflation. Answer: B

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Type: F Topic: 6 E: 286 MA: 286 129. Compared with fiscal policy, monetary policy is: A) quicker and easier to implement. B) slower and more cumbersome to implement. C) more dependent on Congressional action. D) more likely to produce an offsetting net export effect. Answer: A

Use the following to answer questions 130-132:

(1) Interest 4% 5 6 7 8

(2) Investment $100 90 80 70 60

(3) Investment $80 70 60 50 40

Type: T Topic: 6 E: 276 MA: 276 130. Refer to the above table, in which investment is in billions. Suppose the Fed reduces the interest rate from 6 percent to 5 percent. Given columns (1) and (2), investment will: A) decline by $20 billion. C) decline by $10 billion. B) increase by $20 billion. D) increase by $10 billion. Answer: D

Type: T Topic: 6 E: 276 MA: 276 131. Refer to the above table, in which investment is in billions. Suppose the Fed reduces the interest rate from 6 to 5 percent at a time when the investment demand declines from that shown by columns (1) and (2) to that shown by columns (1) and (3). As a result of these two occurrences, investment will: A) increase by $10 billion. C) increase by $20 billion. B) decrease by $10 billion. D) decrease by $20 billion. Answer: B

Type: T Topic: 6 E: 280 MA: 280 132. The result demonstrated in the previous question illustrates: A) the crowding out problem. C) a potential weakness of monetary policy. B) the net export effect. D) a potential strength of monetary policy. Answer: C

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Type: D Topic: 6 E: 282 MA: 282 Status: New 133. Inflation targeting consists of the Fed: A) using monetary policy to reduce the annual inflation rate by a set amount each year until the rate of inflation is zero. B) using monetary policy to hold the price of a fixed basket of commodities (wheat, gold, pork, and so on) to a 1 to 2 percent annual increase. C) identifying the sources of inflation and recommending structural changes in the economy that would relieve upward price pressures. D) regularly stating an explicit goal for the rate of inflation over some future period, such as the following two years. Answer: D

Type: F Topic: 6 E: 283 MA: 283 Status: New 134. Proponents of inflation targeting say it would: A) remove the need for countercyclical fiscal policy. B) increase the transparency of monetary policy and increase Fed accountability. C) do away with the need for the Fed to engage in open market operations. D) help coordinate fiscal and monetary policy. Answer: B

Type: F Topic: 6 E: 283 MA: 283 Status: New 135. Proponents of inflation targeting say it would: A) remove the need for countercyclical fiscal policy. B) increase the transparency of monetary policy and increase Fed accountability. C) do away with the need for the Fed to engage in open market operations. D) help coordinate fiscal and monetary policy. Answer: B

International complications

Type: C Topic: 7 E: 283 MA: 283 136. Other things equal, a tight money policy will: A) decrease the international value of the dollar. B) increase GDP. Answer: C

C) reduce net exports. D) increase net exports.

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Use the following to answer questions 137-138:

AS

Price level

AD3 AD2 AD1

0

Real GDP

Type: G Topic: 7 E: 277 MA: 277 137. Refer to the above diagram. The shift of the aggregate demand curve from AD1 to AD2 might result from the Fed: A) selling bonds in the open market. C) increasing the reserve ratio. B) increasing the discount rate. D) buying bonds in the open market. Answer: D

Type: C Topic: 7 E: 277 MA: 277 138. Refer to the above diagram. Which of the following would explain why the policy described in the previous question might shift the aggregate demand curve to AD3 rather than to AD2? A) the domestic interest rate rises, the dollar depreciates, and net exports fall B) the domestic interest rate rises, the dollar appreciates, and net exports fall C) the domestic interest rate falls, the dollar depreciates, and net exports rise D) the domestic interest rate falls, the dollar appreciates, and net exports rise Answer: C

Type: A Topic: 7 E: 283, 286 MA: 283, 286 139. Other things equal, an easy money policy will: A) reduce net exports. B) increase interest rates. Answer: C

C) reduce the international value of the dollar. D) reduce GDP.

Type: C Topic: 7 E: 283, 286 MA: 283, 286 140. A particular change in money supply will produce a smaller net export effect: A) the steeper is the money demand curve. C) the steeper is the money supply curve. B) the flatter is the money demand curve. D) the flatter is the money supply curve. Answer: A

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Type: A Topic: 7 E: 283, 286 MA: 283, 286 141. Under some conditions, proper domestic monetary policy may be at odds with the goal of correcting a trade imbalance because: A) changes in the domestic interest rate cause changes in domestic investment spending. B) changes in the domestic interest rate tend to cause changes in the international value of the dollar. C) the domestic interest rate varies inversely with the value of the dollar. D) changes in the interest rate cause changes in domestic saving. Answer: B

Type: A Topic: 7 E: 283, 286 MA: 283, 286 142. The net export effect: A) strengthens the stimulative effect of an expansionary fiscal policy. B) weakens the stimulative effect of an easy money policy. C) strengthens the stimulative effect of an easy money policy. D) has no perceptible impact on stabilization policies. Answer: C

Type: A Topic: 7 E: 283, 286 MA: 283, 286 143. An easy money policy in the United States is most likely to: A) decrease the foreign demand for dollars and appreciate the international value of the dollar. B) decrease the foreign demand for dollars and depreciate the international value of the dollar. C) increase the foreign demand for dollars and appreciate the international value of the dollar. D) increase the foreign demand for dollars and depreciate the international value of the dollar. Answer: B

Type: A Topic: 7 E: 283, 286 MA: 283, 286 144. A tight money policy in the United States is most likely to: A) depreciate the international value of the dollar and increase American net exports. B) depreciate the international value of the dollar and decrease American net exports. C) appreciate the international value of the dollar and increase American net exports. D) appreciate the international value of the dollar and decrease American net exports. Answer: D

Type: A Topic: 7 E: 286 MA: 286 145. International flows of financial capital in response to interest rate changes in the United States: A) weaken domestic monetary policy through an offsetting net export effect. B) strengthen domestic monetary policy through a supporting net export effect. C) strengthen domestic fiscal policy through an offsetting net export effect. D) weaken domestic monetary policy through an offsetting real wealth effect. Answer: B

Type: A Topic: 7 E: 286 MA: 286 146. All else equal, an easy money policy in the United States: A) increases U.S. imports. C) reduces the foreign demand for U.S. dollars. B) increases the international value of the dollar. D) aggravates an existing U.S. trade deficit. Answer: C

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Type: A Topic: 7 E: 286 MA: 286 147. An easy money policy is appropriate for the alleviation of domestic: A) unemployment and compatible with the goal of correcting a trade deficit. B) unemployment and compatible with the goal of correcting a trade surplus. C) inflation and compatible with the goal of correcting a trade deficit. D) inflation and compatible with the goal of correcting a trade surplus. Answer: A

Type: A Topic: 7 E: 286 MA: 286 148. Assume the United States is experiencing a 6 percent annual rate of inflation and is also incurring a trade deficit. All else equal, the use of appropriate monetary policy to reduce inflation would: A) cause the dollar to depreciate in value. C) decrease the U.s. trade deficit. B) have no impact on the U.S. trade deficit. D) increase the U.S. trade deficit. Answer: D

Type: A Topic: 7 E: 286 MA: 286 149. Suppose the United States is experiencing an 8 percent rate of unemployment with stable prices and a trade deficit. All else equal, the use of appropriate monetary policy to reduce unemployment would: A) cause the dollar to appreciate in value. C) decrease the U.S. trade deficit. B) have no impact on the U.S. trade deficit. D) increase the U.S. trade deficit. Answer: C

Type: A Topic: 7 E: 286 MA: 286 150. Which of the following is correct? A) An easy money policy will cause the dollar to depreciate and will increase U.S. net exports. B) An easy money policy will cause the dollar to depreciate and will decrease U.S. net exports. C) An easy money policy will cause the dollar to appreciate and will increase U.S. net exports. D) An easy money policy will cause the dollar to appreciate and will decrease U.S. net exports. Answer: A

Type: A Topic: 7 E: 286 MA: 286 151. Which of the following is correct? A) A tight money policy will cause the dollar to appreciate and U.S. net exports to increase. B) A tight money policy will cause the dollar to appreciate and U.S. net exports to decrease. C) A tight money policy will cause the dollar to depreciate and U.S. net exports to increase. D) A tight money policy will cause the dollar to depreciate and U.S. net exports to decrease. Answer: B

AD-AS/policy summary

Type: A Topic: 8 E: 284-285 MA: 284-285 152. Other things equal, an increase in productivity will: A) reduce aggregate supply and increase real output. B) reduce both the interest rate and the international value of the dollar. C) increase both aggregate supply and real output. D) increase net exports, increase investment, and reduce aggregate demand. Answer: C

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Type: A Topic: 8 E: 284-285 MA: 284-285 153. Other things equal, an increase in input prices will: A) reduce aggregate supply and reduce real output. B) increase the interest rate and lower the international value of the dollar. C) increase aggregate supply and increase the price level. D) increase net exports, increase investment, and reduce aggregate demand. Answer: A

Type: A Topic: 8 E: 284-285 MA: 284-285 154. Other things equal, a tight money policy during a period of demand-pull inflation will: A) lower the interest rate, increase investment, and reduce net exports. B) lower the price level, increase investment, and increase aggregate demand. C) increase productivity, aggregate supply, and real output. D) increase the interest rate, reduce investment, and reduce aggregate demand. Answer: D

Type: A Topic: 8 E: 284-285 MA: 284-285 155. Other things equal, a reduction in income taxes would: A) reduce productivity and reduce aggregate supply. B) increase consumption and increase aggregate demand. C) increase the supply of money and reduce investment. D) increase government spending and increase aggregate demand. Answer: B

Type: A Topic: 8 E: 284-285 MA: 284-285 156. Other things equal, a depreciation of the U.S. dollar would: A) increase the price of imported resources and decrease aggregate supply. B) decrease net exports and aggregate demand. C) increase consumption, investment, net export, and government spending. D) decrease aggregate supply and decrease aggregate demand. Answer: A

Consider This Questions

Type: F E: 282 MA: 282 Status: New 157. (Consider This) The possible asymmetry of monetary policy is the central idea of the: A) invisible hand concept. B) ratchet analogy. C) pushing-on-a-string analogy. D) bandwagon effect. Answer: C

Type: F E: 282 MA: 282 Status: New 158. (Consider This) The pushing-on-a-string analogy makes the point that, monetary policy may be better at: A) controlling demand-pull inflation than cost-push inflation. B) pulling the aggregate demand curve leftward than pushing it rightward . C) pulling the unemployment rate downward than pushing the economic growth rate upward. D) keeping rapid inflation from occurring than reducing it once it has begun. Answer: B

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Last Word Questions

159.

Type: F E: 287 MA: 287 (Last Word) The current chair of the Board of Governors of the Federal Reserve System is: A) Lawrence Summers. B) John B. Taylor. C) Alan Greenspan. D) Regis Philbin. Answer: C

Type: A E: 287 MA: 287 160. (Last Word) Which of the following metaphors best fits the Fed's role in using monetary policy to stabilize the economy? A) Fed as a warrior B) Fed as a mechanic C) Fed as a fall guy D) Fed as a cosmic force Answer: B

Type: A E: 287 MA: 287 161. (Last Word) Which of the following metaphors best fits the tendency of the administration and congressional representatives to blame the Fed for the economy's difficulties? A) Fed as a warrior B) Fed as a mechanic C) Fed as a fall guy D) Fed as a cosmic force Answer: C

Type: A E: 287 MA: 287 162. (Last Word) Which of the following metaphors best fits the Fed's goal of maintaining price stability? A) Fed as a warrior B) Fed as a mechanic C) Fed as a fall guy D) Fed as a cosmic force Answer: A

True/False Questions

Type: A E: 279 MA: 279 163. The Fed reduces interest rates mainly by selling government securities. Answer: False

Type: A E: 279 MA: 279 164. The Fed increases interest rates mainly by selling government securities. Answer: True

Type: A E: 277 MA: 277 165. If the economy is operating in the relative flat (lower) part of its aggregate supply curve, a tight money policy will increase real output but not the price level. Answer: False

Type: F E: 281-282 MA: 281-282 166. In the last half of the 1990s monetary policy was highly effective in the United States but highly ineffective in Japan. Answer: True

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Chapter 15: Monetary Policy

Type: F E: 282 MA: 282 167. Alan Greenspan is the current chair of the Council of Economic Advisers. Answer: False

Type: F E: 273-284 MA: 273-284 168. A change in the reserve ratio will affect both the amount of the banking system's excess reserves and the multiple by which the system can lend on the basis of excess reserves. Answer: True

Type: A E: 280 MA: 280 169. The prime interest rate and the Federal funds rate normally change in opposite directions. Answer: False

Type: D E: 269 MA: 269 170. The largest single liability of the Federal Reserve Banks is their outstanding loans to commercial banks. Answer: False

Type: F E: 275 MA: 275 171. An easy money policy is one that reduces the supply of money. Answer: False

Type: A E: 278 MA: 278 172. Changes in the interest rate are more likely to affect investment spending than consumer spending. Answer: True

Type: A E: 279 MA: 279 173. The job of the Fed in limiting the supply of money may be made more complex if commercial banks initially have substantial excess reserves. Answer: True

Type: A E: 278 MA: 278 174. Other things equal, an easy money policy will shift the economy's aggregate demand curve to the right. Answer: True

Type: A E: 279 MA: 279 175. A tight money policy may be frustrated if the investment-demand curve shifts to the left. Answer: False

Type: A E: 279 MA: 279 176. A tight money policy reduces investment spending and shifts the economy's aggregate demand curve to the right. Answer: False

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CHAPTER 16

Extending the Analysis of Aggregate Supply

Topic 1. 2. 3. 4. 5. Short-run and long-run aggregate supply Extended AD-AS model Phillips Curve Long-run Phillips Curve Taxation and aggregate supply Consider This Last Word True-False

Question numbers 1-31 32-49 50-68 69-95 96-106 107-108 109-111 112-125

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Multiple Choice Questions Short-run and long-run aggregate supply

Type: D Topic: 1 E: 292 MA: 292 1. In terms of aggregate supply, a period in which nominal wages and other resource prices are unresponsive to price-level changes is called the: A) long run. B) short run. C) immediate market period. D) very long run. Answer: B

Type: D Topic: 1 E: 294 MA: 294 2. In terms of aggregate supply, a period in which nominal wages and other resource prices are fully responsive to price-level changes is called the: A) long run. B) short run. C) immediate market period. D) very long run. Answer: A

Type: D Topic: 1 E: 293 MA: 293 3. In the extended analysis of aggregate supply, the short-run aggregate supply curve is: A) vertical and the long-run aggregate supply curve is horizontal. B) horizontal and the long-run aggregate supply curve is vertical. C) upward sloping and the long-run aggregate supply curve is vertical. D) horizontal and the long-run aggregate supply curve is upward sloping. Answer: C

Chapter 16: Extending the Analysis of Aggregate Supply

Type: D Topic: 1 E: 294 MA: 294 4. In the extended analysis of aggregate supply, the long-run aggregate supply curve is: A) vertical and the short-run aggregate supply curve is horizontal. B) horizontal and the short-run aggregate supply curve is vertical. C) horizontal and the short-run aggregate supply curve is upward sloping. D) vertical and the short-run aggregate supply curve is upward sloping. Answer: D

Type: D Topic: 1 E: 292 MA: 292 5. In terms of aggregate supply, the short run is a period in which: A) the price level is constant. B) employment is constant. C) real output is constant. D) nominal wages and other resource prices are unresponsive to price-level changes. Answer: D

Type: D Topic: 1 E: 294 MA: 294 6. In terms of aggregate supply, the difference between the long run and the short run is that in the long run: A) th