Final Review. Multiple Choice Identify the choice that best completes the statement or answers the question.

Transcription

1 Final Review Multiple Choice Identify the choice that best completes the statement or answers the question. 1. Water is considered a scarce good because: A. not enough of it is available for all needs at zero cost. B. it does not have any uses. C. scarce goods are less expensive. D. not enough of it is available for all needs and because it is less expensive. E. the government controls the distribution of it. 2. Corner offices in high-rise office buildings usually cost more to rent than other offices. This fact best illustrates the economic principle of: A. marginal analysis. B. scarce resources. C. resources should be used as efficiently as possible to achieve society's goals. D. opportunity costs. E. one person s spending is another person s income 3. Manny is attending college and majoring in economics. Manny is improving his scarce resource of: A. land. B. labor. C. capital. D. human capital. E. natural resources. 4. Khalil is offered a free ticket to the opera. His opportunity cost of going to the opera is: A. zero the tickets were free. B. the price listed on the ticket. C. whatever Khalil would have done had he not gone to the opera. D. the price listed on the ticket plus whatever Khalil would have done had he not gone to the opera. E. the price listed on the ticket minus whatever Khalil could have received by selling it to another person in the parking lot. 5. Zoe's grandparents are excited about finally paying off their mortgage, because, as they say, Our cost of housing is now zero. Zoe should explain to them the economic principle of: A. marginal analysis: if the additional cost of housing is zero, then their additional benefit is also zero. B. opportunity cost: by living in the house, they are giving up the opportunity to sell the house, buy a smaller one, and pocket the difference. C. efficiency: if their cost of housing is now zero, they should let Zoe move in without charging her any rent. Zoe is better off, and her grandparents aren't hurt. D. equity: it is unfair that some people are still paying off their mortgage. E. negative externalities; by living in the house, her grandparents are denying another family the enjoyment of living in the house. 6. To encourage young people to go to college within their home state, state universities can: A. charge higher tuition to in-state students. B. award special scholarships to out-of-state students.

2 C. offer high-interest loans to in-state students. D. offer discounted textbooks to out-of-state students. E. offer lower tuition to in-state students. 7. Which of the following is a normative statement? A. International trade leads to expanded consumption opportunities. B. Higher expenditures on health care will reduce infant mortality rates. C. We would all be better off if we could reduce our dependence on oil imports. D. Increased defense spending will lead to higher budget deficits. E. Higher expenditures on education will increase literacy rates. 8. Which of the following is an example of a normative statement? A. The rate of unemployment is 4%. B. A high rate of economic growth is good for the country. C. The federal government spends half of its budget on national defense. D. Millions of Americans lack health insurance. E. Higher labor productivity will increase our standard of living. 9. Which of the following is an example of a normative statement? A. The rate of unemployment is 4%. B. A high rate of economic growth creates more jobs for the country. C. The federal government spends half of its budget on national defense. D. Everyone in America deserves to be covered by national health insurance. E. High school graduation rates in the U.S. are lower than they are in some European nations. 10. Which of the following demonstrates one of the three principles of economy-wide interactions? A. A student chooses to rent a movie with friends rather than study for an economics quiz. B. Your roommate offers to pay for the movie tickets if you drive to the theatre. C. A city builds a new public park on the grounds of an abandoned warehouse. D. Fearing a recession, Congress approved a White House proposal to send tax rebates to 2007 taxpayers. E. Because drivers were driving excessively fast, the city installed speed bumps in front of the elementary school. 11. Periods in which output and employment are falling are known as: A. recessions. B. booms. C. expansions. D. deflations. E. recoveries. 12. A business cycle is: A. a very deep and prolonged economic downturn. B. a period in which output and employment are rising. C. a period in which output and employment are falling. D. a period in which output is rising and unemployment are falling. E. a short-run alternation between economic upturns and downturns. 13. A period of rising real gross domestic product is an indicator of a(n): A. peak. B. trough. C. expansion. D. recession.

3 E. depression. 14. Suppose an economy experiences rising total output accompanied by increasing employment, this is generally known as: A. stagflation. B. recession. C. inflation. D. expansion. E. contraction. Figure 2-1: The Business Cycle 15. Use The Business Cycle Figure 2-1. The movement from point B to C is called: A. a trough. B. an expansion. C. a depression. D. a peak. E. a contraction. 16. An increase in the nation's overall price level is known as. A. long-term economic growth B. unemployment C. inflation D. deflation E. the national debt. 17. Inflation is a situation where: A. the average price level falls. B. the national debt rises. C. the average price level becomes negative. D. the real price level falls. E. the average price level increases. 18. When the overall price level decreases over time, this will: A. be referred to as inflation. B. be referred to as deflation. C. be referred to as long-run growth. D. be the result of an increase in economic production.

4 E. decrease real wages. 19. An economy is efficient if it is: A. possible to produce more of all goods and services. B. possible to produce more of one good without producing less of another. C. not possible to produce more of one good without producing less of another good. D. providing each person with an equal quantity of goods and services. E. entirely run by the government. 20. In Thailand, all the land, labor, and capital in society are used in a way that has fully exploited all opportunities to make everyone better off. This statement best represents the economic concept of: A. markets move toward equilibrium. B. resources should be used as efficiently as possible to achieve society's goals. C. markets usually lead to efficiency. D. when markets don't achieve efficiency, government intervention can improve society's welfare. E. one person s spending becomes another person s income. 21. Economists say an economy is efficient when: A. the problem of scarcity is eliminated. B. output is distributed equitably. C. all opportunities to make some people better off without making other people worse off have been taken. D. all opportunities to make some people worse off without making other people better off have been taken. E. resources are unlimited. 22. Resources are being used efficiently when: A. scarcity is no longer an issue. B. they are also used equitably. C. every opportunity to make people better off has been utilized. D. there are still gains from trade available. E. every citizen has an equal share of the resources. Figure 3-1: Guns and Butter

5 23. Based on the Guns and Butter Figure 3-1, points A, B, E, and F: A. indicate combinations of guns and butter that society can produce using all of its factors efficiently. B. show that the opportunity cost of more guns increases, but that of more butter decreases. C. indicate that society wants butter more than it wants guns. D. indicate constant costs for guns and increasing costs for butter. E. indicate that society is experiencing many idle resources. 24. Based on the Guns and Butter Figure 3-1, the combination of guns and butter at point H: A. can be attained, but would cost too much. B. is unattainable due to excessive government gun regulation. C. has no meaning since it does not relate to the preferences of consumers. D. is attainable but would increase unemployment. E. cannot be attained, given the level of technology and the factors of production available. 25. Suppose the state of Texoma decides to produce only two goods oil and football helmets. According to the production possibility curve, as oil production increases, the production of football helmets will: A. increase. B. not change. C. increase at a decreasing rate. D. decrease. E. increase at an increasing rate. Figure 3-5: Tom s Production Possibilities 26. Use the Tom's Production Possibilities Figure 3-5. In the figure, which point or points would represent (an) inefficient combination(s) of wine and wheat if Tom made that choice? A. A B. A and B C. C D. B and D E. C and D Figure 3-9: Strawberries and Submarines II

6 27. Use the Strawberries and Submarines Figure 3-9. Suppose the economy is now operating at point A. The first submarine, which is achieved at point B, would have an opportunity cost of million tons of strawberries. A. 50 B. 150 C. 400 D. 950 E Largetown has a linear production possibility curve and produces socks and shirts. The table below shows the number of units of labor necessary to produce one sock or one shirt. Number of hours of labor to produce one shirt Number of hours of labor to produce one sock 4 2 Scenario 3-1: Linear PPC 28. Use Scenario 3-1. Suppose Largetown has 80 hours of labor. Which of the following combinations of shirts and socks is not a feasible option for Largetown to produce? A. 20 shirts and zero socks B. 40 shirts and 40 socks C. 40 socks and zero shirts D. 10 shirts and 20 socks E. 20 shirts and 40 socks 29. The absolute value of the slope of the production possibility curve at any point: A. gives the price of the good on the vertical axis that must be given up to attain an additional unit of the good on the horizontal axis. B. is found by dividing the horizontal change by a vertical change. C. gives the quantity of the good on the vertical axis that must be given up to produce an additional unit of the good on the horizontal axis. D. gives the price of the good on the horizontal axis relative to the price of the good on the vertical axis. E. is equal to the monetary price of the good on the horizontal axis divided by the monetary price of the good on the vertical axis.

7 30. Japan, at the point at which it is currently producing, must give up the production of 75 computers to produce 25 additional cellular telephones. Which of the following is the opportunity cost of producing 3 computers? A. 1 cellular telephone B. 3 cellular telephones C. 22 cellular telephones D. 28 cellular telephones E. 1/3 of a cellular telephone 31. Who wrote The Wealth of Nations, a book that many credit with establishing economics as a discipline? A. Karl Marx B. David Ricardo C. Adam Smith D. John Maynard Keynes E. John Stuart Mill Coffee Salmon Brazil Alaska Table 4-1: Coffee and Salmon Production Possibilities 32. Use Table 4-1. The table shows the maximum amounts of coffee and salmon that Brazil and Alaska can produce if they just produce one good. The opportunity cost of producing 1 unit of coffee for Brazil is: A. 2 salmon. B. 1/4 salmon. C. 1 salmon. D. 1/2 salmon. E. 20 salmon 33. An economy is said to have a comparative advantage in the production of a good if it can produce that good: A. with more resources than another economy. B. with a higher opportunity cost than another economy. C. outside its production possibility curve. D. at a lower opportunity cost than another economy. E. with a higher level of quality than another economy. 34. Trade can be beneficial to an economy because: A. it results in a more efficient use of the combined resources of some of the trading countries, even though it reduces efficiency in others. B. more goods and services can be obtained at a lower opportunity cost. C. it prevents specialization in those activities in which countries have a comparative advantage. D. it prevents unemployment. E. it allows wealthy nations to exploit the natural resources of poorer nations. Sweden and Finland produce only two goods, herring and cell phones, and this table shows the maximum amount that each nation can produce of the two goods. Sweden Finland Herring 100,000 50,000 Cell phones 10,000 10,000

8 Table 4-3: Comparative Advantage I 35. Use Table 4-3. Finland has an absolute advantage in producing: A. cell phones only. B. herring only. C. both cell phones and herring. D. neither cell phones nor herring. E. a combination of cell phones and herring. Figure 4-2: Comparative Advantage Eastland and Westland produce only two goods, peaches and oranges, and this figure shows each nation's production possibility curve for the two goods. 36. Use the Comparative Advantage Figure 4-2. Eastland has a comparative advantage in producing: A. oranges only. B. peaches only. C. both oranges and peaches. D. neither oranges nor peaches. E. a combination of oranges and peaches. 37. If a country imposes a tariff on imported shoes, we expect the domestic price of shoes to and the total quantity of shoes consumed in the domestic market to. A. rise; be unaffected B. fall; rise C. rise; fall D. rise; rise E. fall; fall 38. A direct restriction on the quantity of an import is called a(n): A. quota. B. tariff. C. import subsidy. D. import restriction. E. export tax. 39. The Kansas market for corn is considered a competitive market. This means there are buyers and sellers of corn in Kansas. A. many; few

9 B. few; many C. many; one or two D. few; few E. many; many 40. A decrease in the price of eggs will result in a(n): A. increase in the demand for eggs. B. increase in the supply of eggs. C. greater quantity of eggs supplied. D. greater quantity of eggs demanded. E. decrease in the demand for eggs. 41. A decrease in the price of a good will result in: A. an increase in demand. B. an increase in supply. C. an increase in the quantity demanded. D. more being supplied. E. a rightward shift of the demand curve. 42. The law of demand implies that: A. consumers do not respond to price changes. B. consumers will buy more at lower prices. C. sellers will offer more to the market at higher prices. D. sellers will offer less to the market at lower prices. E. consumers will buy less at lower prices. 43. When the price of gas goes down and the demand for tires goes up, this means tires and gas are: A. substitutes. B. complements. C. both expensive. D. both inexpensive. E. both inferior goods. 44. You notice that when a new yoga class is offered at the student recreation center, some students from the other yoga classes go to the new class instead. This statement best represents the economic concept of: A. resources are scarce. B. the real cost of something is what you must give up to get it. C. people usually exploit opportunities to make themselves better off. D. markets move toward equilibrium. E. gains from trade. 45. Consider the supply curve for cotton shirts. An increase in the price of cotton will: A. increase the supply of cotton shirts. B. decrease the supply of cotton shirts. C. not shift the supply of cotton shirts. D. decrease the demand for cotton shirts. E. increase the quantity supplied of cotton shirts. 46. A technological advance in the production of automobiles will: A. increase the demand for automobiles. B. increase the supply of automobiles. C. decrease the demand for automobiles. D. decrease the supply of automobiles.

10 E. have no effect on the demand or supply of automobiles. 47. A decrease in supply is caused by: A. an increase in prices of goods that are substitutes in production. B. suppliers' expectations of lower prices in the future. C. an advancement in the technology for producing the good. D. an increase in the number of producers. E. a decrease in input prices. Figure 6-5: Demand and Supply of Wheat II 48. Use the Demand and Supply of Wheat II Figure 6-5. What is the equilibrium quantity in this wheat market? A. 12,000 bushels B. 2,000 bushels C. 10,000 bushels D. 6,000 bushels E. 8,000 bushels 49. A farmer finds that when he produces more corn, he also has more corn stalks that he can then sell as decorative ornaments. To the farmer, corn and corn stalks are: A. complements in production. B. substitutes in production. C. unrelated goods in production. D. inferior goods in production. E. luxury goods in production. Figure 6-6: Market for Candies

11 50. Use the Market for Candies Figure 6-6. Equilibrium occurs at a price of, and the equilibrium quantity is equal to. A. P 1; Q 5 B. P 2; Q 3 C. P 3; Q 2 D. P 1; Q 3 E. P 3; Q The market for milk is initially in equilibrium. Milk producers now engage in a costly advertising program to encourage milk drinking. Assume that the advertising campaign succeeds in shifting consumer tastes toward drinking milk and that milk producers provide more milk to the market. As a result, more milk producers enter the market. Standard demand and supply analysis tells us that: A. the equilibrium price and quantity of milk will rise. B. the equilibrium price and quantity of milk will fall. C. the equilibrium quantity of milk will rise, but we can't determine how the equilibrium price will be affected. D. the equilibrium price of milk will rise, but we can't determine how the equilibrium quantity will be affected. E. the equilibrium price will fall, and the equilibrium quantity of milk will rise. 52. You notice that the price of DVD players falls and the quantity of DVD players sold increases. This set of observations can be the result of the: A. demand for DVD players shifting to the right. B. demand for DVD players shifting to the left. C. supply of DVD players shifting to the right. D. supply of DVD players shifting to the left. E. simultaneous shifting of supply and demand to the left. 53. The market price of airline flights increased recently. Some economists suggest that the price increased because several airlines went out of business. If the economists are correct, it must be the case that: A. supply increased. B. supply decreased. C. demand increased. D. demand decreased. E. supply increased while demand also decreased. 54. If tortilla chips are a normal good, what happens to equilibrium price and quantity when there is an increase in income? A. Equilibrium price decreases and equilibrium quantity increases.

12 B. Equilibrium price decreases and equilibrium quantity decreases. C. Equilibrium price increases and equilibrium quantity increases. D. Equilibrium price increases and equilibrium quantity decreases. E. Equilibrium price increases and the equilibrium quantity stays the same. 55. The United States increases tariffs on imports of lumber from Canada, which causes the price of lumber to increase in the United States. The equilibrium price of new homes in the United States will and the equilibrium quantity of new homes in the United States will. A. increase; increase B. increase; decrease C. decrease; increase D. decrease; decrease E. stay the same; stay the same 56. Consider a Texaco gas station. If it introduces a new technology where customers pay at the pump, thus decreasing production costs, there will be: A. a shift to the right in the station's supply curve and lower gas prices. B. a shift to the left in the station's supply curve and higher gas prices. C. a shift to the right in the customers' demand curve and higher gas prices. D. a shift to the left in the customers' demand curve and lower gas prices. E. a shift to the right in the station's supply curve and higher gas prices. 57. A decrease in demand and a decrease in supply will lead to a(n) in equilibrium quantity and a(n) in equilibrium price. A. decrease; uncertain change B. uncertain change; increase C. uncertain change; decrease D. increase; uncertain change E. decrease; decrease 58. Given a supply curve that is positively sloped and a demand curve for a normal good that is negatively sloped, an increase in income will most likely result in: A. an increase in equilibrium price and quantity. B. a decrease in equilibrium price and an increase in equilibrium quantity. C. a decrease in both equilibrium price and quantity. D. an increase in equilibrium price and a decrease in equilibrium quantity. E. an increase in equilibrium price and an uncertain change in equilibrium quantity. 59. An increase in the price of wheat, an important ingredient in the production of bread, combined with an increase in the number of people consuming bread, will result in which of the following changes in the bread market? A. Both the equilibrium price and quantity will increase. B. Equilibrium quantity will decrease, but equilibrium price may decrease, increase, or stay the same. C. Both the equilibrium price and quantity will decrease. D. Equilibrium price will increase, but equilibrium quantity may decrease, increase, or stay the same. E. Equilibrium price will increase and quantity will decrease. 60. Rapidly increasing health costs have been a major political concern for several decades. Suppose that to control rising health costs the government sets the maximum price for a normal doctor's visit at $20, but the current market price is $40. Then:

13 A. more people will try to visit the doctor, but the doctor will see fewer patients. B. the same number of people will try to visit the doctor, and the doctor will see the same number of patients. C. more people will be able to see the doctor, since the price is lower. D. fewer people will try to see the doctor, and the doctors will see fewer patients. E. fewer people will try to see the doctor, and the doctor will see the same number of patients. 61. A maximum price set below the equilibrium price is a: A. demand price. B. supply price. C. price floor. D. price ceiling. E. quota limit. 62. Rent controls set a price ceiling below the equilibrium price and therefore: A. quantity supplied exceeds the quantity demanded. B. efficiency in the market is improved. C. a surplus of rental units will result. D. poor people will obviously be helped. E. quantity demanded exceeds the quantity supplied. 63. A price ceiling is: A. a maximum price sellers are allowed to charge for a good or service. B. the difference between the quantity supplied and quantity demanded. C. a minimum price buyers are required to pay for a good or service. D. caused by an inefficiently low quantity. E. a way for the government to assist producers who cannot operate at the equilibrium market price. Figure 8-4: Market for Blue Jeans 64. Use the Market for Blue Jeans Figure 8-4. Suppose the government believes blue jeans are too expensive and it wants to make sure blue jeans are affordable to more citizens. This type of price control is called a and the price would be set equal to. A. price floor; $100 B. price floor; $55 C. price ceiling; $55 D. price ceiling; $100

14 E. price ceiling, $80 Figure 8-5: Rent Controls 65. Use the Rent Controls Figure 8-5. Without rent controls, the equilibrium quantity is. A. Q 4 B. Q 1 C. Q 0 D. Q 3 E. Q Suppose the government sets a price floor of $2.85 per bushel on corn when the current price is $2.55. This price floor will: A. cause a surplus of corn. B. cause a shortage of corn. C. have no effect on the price of corn. D. shift the supply of corn to the right. E. shift the demand for corn to the left. Figure 8-7: Supply and Demand 67. Use the Supply and Demand Figure 8-7. In the market shown in the figure, a binding price floor is represented by: A. the price P 1.

15 B. the price P 2. C. the price P 3. D. point C. E. the distance between point B and point A. 68. When the government removes a binding price floor: A. quantity demanded would decrease and quantity supplied would increase. B. quantity demanded would increase and quantity supplied would decrease. C. an excess demand would develop. D. an excess supply would develop. E. market efficiency is lost. 69. Suppose the government sets a price floor below the current price of the good. This price floor will: A. result in an excess supply of the good. B. result in an excess demand for the good. C. have no effect on the price of the good. D. increase the quantity supplied of the good. E. create inefficiency. 70. An effective price floor would result in: A. a surplus of the good. B. a shortage of the good. C. a quantity control. D. an equilibrium price. E. allocative efficiency. Figure 8-16: Market I 71. Use the Market I Figure A surplus of the good would result if the price was equal to: A. $3. B. $9. C. $6. D. $0. E. $ Use the Market I Figure If a price floor of $6 was imposed on this market, this would: A. result in a surplus of the good. B. have no effect on this market. C. increase production of this good. D. increase consumer spending on this good.

16 E. result in a shortage of the good. 73. An upper limit on the quantity of a good that can be bought and sold is a: A. quota limit. B. price ceiling. C. price floor. D. tariff. E. minimum wage. Figure 10-1: Circular Flow Model 74. Use the Circular Flow Model Figure If the circular flow model is in equilibrium (the sum of money flows into each box is equal to the sum of the money flows out of that box), which of the following is likely to happen if there is an increase in imports? A. an increase in the nominal GDP B. a decrease in the nominal GDP C. a decrease in the unemployment rate D. an increase in the nominal GDP and in the unemployment rate E. an increase in exports 75. The market(s) that channel excess savings of households into investment spending by firms is(are) known as: A. the stock market. B. the financial markets. C. the international market. D. the bond market. E. the foreign exchange market. 76. Gross domestic product is the economy's total production of for a given time period. A. good and services B. final goods and services C. intermediate goods and services D. consumer goods and services E. stocks and bonds

17 77. The Boeing Corporation buys $3 million worth of steel from the Steel manufacturers, $2.5 million worth of computerized hardware and software, and $1 million worth of mechanical tools to manufacture a certain model of aircraft. Boeing Corporation sells this particular model of aircraft at $10 million. The value-added by Boeing is equal to: A. $3.5 million. B. $16.5 million. C. $13 million. D. $15.5 million. E. $10 million. 78. Which of the following best represents the equation for GDP? A. GDP = C+ I + G X + IM B. GDP = C + I + G + X IM C. GDP = C + I + G + Taxes Value Added D. GDP = C + I + G + Taxes + X + IM E. GDP = C + I + G + Taxes Transfers + X - IM 79. Households receive income in the form of all the following EXCEPT: A. wages. B. dividends. C. interest. D. investment spending. E. rent. 80. In the circular flow diagram, government purchases of goods and services are financed by: A. tax revenues. B. tax revenues net of transfer payments. C. government borrowing from financial markets. D. tax revenues plus government borrowing from financial markets. E. tax revenues net of transfer payments plus government borrowing from financial markets. 81. Within the circular flow diagram, the value of household income, the sum of wages, dividends, interest, and rent plus transfer payments equals the sum of: A. the value of household tax payments. B. consumer spending, private saving, and the value of household tax payments. C. the money supply. D. transfer payments and household tax payments. E. consumer spending and private saving. 82. Transfer payments: A. are a means by which government raises funds. B. represent a redistribution of funds from one individual to another individual in the economy. C. are counted in GDP. D. is another term for government taxation. E. reduce a household s ability to purchase goods and services. Product 2008 Output 2008 Prices Product 2009 Output 2009 Prices (base year) Peanut Butter 200 units $1 per unit Peanut Butter 250 $1.10 Jelly 100 units $2 per unit Jelly 100 $2.50 Table 11-1: Peanut Butter and Jelly Economy

18 83. Use Table A simple economy produces only peanut butter and jelly. Using the data in the attached table, from 2008 to 2009 real GDP by %. A. increased; 12.5 B. decreased; 50 C. increased; D. decreased; 12.5 E. increased; Use Table Nominal GDP in Year 2 is equal to: A. $40. B. $60. C. $100. D. $280. E. $ units of output 2008 price per unit 2009 units of output 2009 price per unit Gino s pizza Bruno s spaghetti Carlo s cookies Aldo s salad 4,000 3,000 2,000 5,000 $10 $9 $6 $7 4,000 1,000 1,000 2,000 $8 $6 $1 $4 Table 11-4: Pizza Economy III 85. Use Table Considering 2008 as the base year, real GDP in 2009 was: A. $47,000. B. $69,000. C. $72,000. D. $114,000. E. $55, If the price level in the economy and the nominal wages both doubled, then the real wages would: A. also double. B. increase by 50%. C. decrease by 20%. D. decrease by 50%. E. remain unchanged. Year Output Price per Unit 1 2 $ = base period Table 11-5: Price and Output Data

19 87. Use Table The value of Year 4's output in real dollars is: A. $5.20. B. $6. C. $24. D. $36. E. $ A person who is out of work, would like to work, but has given up looking for work, is called: A. unemployed. B. employed. C. a discouraged worker. D. a marginally productive worker. E. retired or disabled. 89. Anna recently moved to Boston in order for her husband Joe to begin a new job as an economics professor at Harvard. Anna is an experienced surgeon who is currently interviewing with several different hospitals in Boston. Anna is currently: A. seasonally unemployed. B. structurally unemployed. C. cyclically unemployed. D. counted as employed since she is likely to receive a job offer soon. E. frictionally unemployed. 90. If the actual unemployment rate is 7% and the cyclical unemployment rate is 2%, then the natural rate of unemployment is: A. 2%. B. 5%. C. 7%. D. 9%. E. 3.5% 91. Deviations in the actual rate of unemployment away from the natural rate of unemployment is called: A. seasonal unemployment. B. frictional unemployment. C. cyclical unemployment. D. structural unemployment. E. operational unemployment. 92. In 2007, the Bureau of Labor Statistics calculated the unemployment rate to be 7.5%. If the frictional unemployment was 3% and the structural unemployment was 2%, then the cyclical unemployment rate would be: A. 2.5%. B. 4.5%. C. 12.5%. D. 5.5%. E. 5%. 93. The sum of frictional and structural unemployment make up the: A. actual unemployment level. B. cyclical amount of unemployment. C. amount of unemployment in an economy during an expansion. D. amount of unemployment in an economy during a recession.

20 E. natural rate of unemployment. 94. Frictional unemployment: A. occurs only during expansions. B. is due to time workers spend in job search. C. is the difference between cyclical unemployment and the natural rate of unemployment D. hasn't occurred since the 1930s. E. has increased with the growth of internet websites that assist job seekers find job openings. 95. A wage offered by an employer that exceeds the equilibrium wage rate as an incentive for greater work effort and performance is known as the: A. minimum wage. B. equilibrium wage. C. efficiency wage. D. union wage. E. regulatory wage. 96. Amy just graduated from college. She recently quit her part time job to focus on finding a full time job which uses her skills she has acquired in college better. Amy is considered: A. structurally unemployed. B. out of the labor force. C. cyclically unemployed. D. employed since she is focusing on finding a full time job. E. frictionally unemployed. 97. Shoe-leather costs refer to the: A. effect of inflation on the prices of food, clothes, and other necessities. B. increased cost of transactions due to inflation. C. high price of leather goods. D. effect of inflation on transportation costs. E. effect of inflation on clothing. 98. When there is deflation in the economy: A. the general price level falls. B. the general price level increases. C. the nominal interest rate rises. D. the general price level becomes negative. E. the Consumer Price Index becomes negative. 99. The aggregate price level is: A. the average price of shares on the stock market. B. the average price of commodities. C. the overall level of prices in the economy. D. the average rate of inflation. E. the overall level of wages in the economy. Year Consumer Price Index (base year)

21 Table 15-1: The Consumer Price Index 100. Use Table The approximate rate of inflation in Year 5 is percent. A. 5 B. 10 C. 19 D. 20 E The consumer price index reflects the: A. changes in the prices of goods and services typically purchased by consumers. B. level of prices for intermediate goods and services purchased by business. C. level of prices for raw materials. D. prices of all goods and services computed from the ratio of nominal GDP to real GDP. E. average price of goods and services purchased by consumers If the multiplier equals 4, then the marginal propensity to save must be equal to: A. 1/4. B. 1/2. C. 3/4. D. 1/3 E. 1/ The MPC is the: A. change in saving divided by the change in disposable income. B. change in disposable income divided by the change in consumption. C. change in disposable income divided by the change in saving. D. change in consumption divided by the change in disposable income. E. change in consumption divided by the change in gross domestic product An increase in the MPC: A. increases the multiplier. B. shifts the autonomous investment line upward. C. decreases the multiplier. D. shifts the autonomous investment line downward. E. decreases the slope of the consumption function. Disposable Personal Income Consumption $100 $ Table 16-1: Income and Consumption 105. Use Table When disposable personal income is $300, the MPC is: A B C D

22 E Which of the following will shift the aggregate consumption function upward? A. Current disposable income rises. B. Consumer expectations turn more pessimistic about the future. C. The stock market is strong and wealth is rising. D. Current disposable income falls. E. Interest rates begin to increase An increase in the wealth of households, all other things unchanged, may be expected to result in the aggregate consumption function. A. no effect on B. an upward shift in C. a downward shift of D. a movement to the right along E. a steeper slope, but not a shift in 108. If the stock market crashes: A. the aggregate consumption function will shift up. B. the aggregate consumption function will shift down. C. unplanned inventory investment will be negative. D. GDP will increase. E. the value of household wealth will increase Consider the simple economy of Behr, whose government does not tax its citizens. The consumption function of Behr is given by: C = Y, where Y is income. The marginal propensity to consume in Behr is: A B C D E Planned investment spending: A. is positively related to the nominal, but not the real interest rate. B. is negatively related to both the real and nominal interest rates. C. is independent of the interest rate. D. is negatively related to the nominal, but positively related to the real interest rate. E. is positively related to both the nominal and the real interest rates When planned investment is less than actual investment, then there must be: A. unplanned inventory investment. B. unplanned inventory disinvestments. C. unplanned depreciation. D. unplanned technological progress. E. unplanned government budget deficits Planned investment spending will decrease if: A. the interest rate rises. B. firms expect the growth of real GDP to increase. C. firms are currently producing near full capacity. D. consumer expectations about future wealth grow more optimistic. E. firms have more optimistic expectations about future profits.

23 GDP (in billions) Disposable income (in billions) Consumption (in billions) $0 $0 $400 $ ,000 1,000 1, ,500 1,500 1, ,000 2,000 1, ,500 2,500 1, ,000 3,000 2, Table 16-3: The Economy of Albernia 113. Use Table What is the consumption function for Albernia? A. C = YD B. C = YD C. C = YD D. C = YD E. C = YD Planned Investment (in billions) 114. Whenever GDP exceeds planned aggregate expenditure, unplanned investment is ; whenever GDP falls short of planned aggregate expenditure, unplanned investment is. A. positive; negative B. negative; positive C. zero; positive D. zero; negative E. positive; zero 115. In the aggregate expenditures model, if real GDP exceeds aggregate expenditures, the economy will: A. contract, causing employment to decrease. B. expand, causing inflation. C. expand, causing employment to increase. D. neither contract nor expand, causing employment to remain constant. E. contract, causing GDP to rise. Scenario 16-3: Aggregate Consumption Function Use the following information to answer the next two questions. Suppose the aggregate consumption function is given by the following equation: C = 1, YD where C stands for consumption and YD stands for disposable income Use Scenario If aggregate disposable income equals $1000, then aggregate consumption equals: A. $1,000. B. $1,750. C. $2,000. D. $1,075. E. $ Planned investment spending is: A. investment firms plan to make during a given time period. B. inventory investment changes. C. not considered part of GDP. D. dependent only on interest rates. E. negatively related to the future growth rates of GDP.

24 118. Suppose the level of planned aggregate expenditure in an economy is $1000 while the real GDP is $800. According to the simple model developed in this chapter, where the aggregate price level is assumed to be constant, we can expect: A. inventories will stay the same since this is part of planned investment. B. inventories will decrease. C. inventories will increase. D. real GDP will fall further. E. there will be no change to inventories and no change to real GDP An increase in government spending on health care is likely to shift the: A. short-run aggregate supply curve to the right. B. short-run aggregate supply curve to the left. C. long-run aggregate supply curve to the left. D. aggregate demand curve to the left. E. aggregate demand curve to the right The only government policy that has a DIRECT effect on the aggregate demand curve is: A. changing the quantity of money. B. changing the tax rate. C. changing the level of government purchases of final goods and services. D. changing the level of government transfers. E. changing the interest rate Changes in aggregate demand can be caused by changes in: A. the stock of physical capital. B. business costs. C. raw materials costs. D. the expenses of complying with government regulations. E. technology The AD curve will shift left: A. because of the wealth and interest rate effects. B. if there is a decrease in household wealth. C. if the aggregate price level falls. D. if government decreases taxes paid by households. E. if net exports rise The short-run aggregate supply curve is positively sloped because: A. wages and other costs of production respond immediately to changes in prices. B. profit is lower when prices increase, so output decreases. C. workers are willing to work for lower wages rather than be laid off. D. higher prices lead to higher profit and higher output. E. higher prices lead to higher levels of productivity and higher output Which of the following will shift the short-run aggregate supply curve to the right? A. An economy-wide decrease in commodity prices. B. An increase in nominal wages. C. A decrease in productivity. D. A decrease in government purchases of goods and services. E. A decrease in personal income taxes A general increase in wages will result in the:

25 A. aggregate demand shifting to the right. B. aggregate demand shifting to the left. C. short-run aggregate supply shifting to the right. D. short-run aggregate supply shifting to the left. E. long-run aggregate supply shifting to the left In the long run, the aggregate price level has: A. no effect on the quantity of aggregate output. B. a positive effect on the quantity of aggregate output. C. a negative effect on the quantity of aggregate output. D. A positive impact on aggregate output, but no impact on employment. E. a positive impact on employment, but no impact on aggregate output A nation s potential output: A. is the level of output that the economy would produce if all prices, including nominal wages, were fully flexible. B. varies with the price level. C. is dependent on the level of consumer confidence. D. is greater in periods of expansion than in recessions. E. is the level of output the economy would produce if there was no unemployment An aggregate output level lower than potential output means: A. low inflation. B. high inflation. C. low unemployment. D. high unemployment. E. both high inflation and high unemployment In the short run, the equilibrium price level and the equilibrium level of total output are determined by the intersection of: A. LRAS and SRAS. B. LRAS and aggregate demand. C. SRAS and aggregate demand. D. potential output and LRAS. E. potential output and aggregate demand A decrease in aggregate demand will generate in real GDP and in the price level in the short run. A. an increase; no change B. a decrease; no change C. a decrease; a decrease D. no change; an increase E. a decrease; an increase 131. In the long run (as the economy self-corrects), an increase in aggregate demand will cause the price level to and potential output to. A. increase; increase B. decrease; decrease C. increase; increase D. decrease; remain stable E. increase; remain stable 132. A recessionary gap will be eliminated because there is pressure on wages, causing the.

26 A. downward; short-run aggregate supply curve to shift rightward. B. downward; short-run aggregate supply curve to shift leftward. C. downward; aggregate demand curve to shift rightward. D. upward; aggregate demand curve to shift to leftward. E. upward; short-run aggregate supply curve to shift rightward. Figure 19-7: AD AS Model II 133. Use the AD AS Model II Figure If the value of household wealth increases, which of the following will take place? A. SRAS curve will shift to the left. B. SRAS curve will shift to the right. C. AD curve will shift to the right. D. AD curve will shift to the left. E. LRAS curve will shift to the right A self-correcting recessionary gap results in: A. short-run aggregate supply that gradually increases. B. short-run aggregate supply that gradually decreases. C. aggregate demand that gradually increases. D. aggregate demand that gradually decreases. E. long-run aggregate supply that gradually increases. Figure 19-8: AD AS

27 135. Use the AD AS Figure Suppose the economy is in an inflationary gap where SRAS 1 intersects AD 2. The size of the gap is equal to A. Y 1-Y P. B. Y 1. C. Y 1-Y 2. D. Y P-Y 2. E. Y p/y 1 Figure 19-10: An Increase in Aggregate Demand 136. Use the An Increase in Aggregate Demand Figure At the Y 2 level of real GDP: A. an inflationary gap exists equal to the sum of Y 2 and Y P. B. an inflationary gap exists equal to the difference between Y 2 and Y P. C. the output at Y 2 is a long-run equilibrium. D. a recessionary gap exists equal to the difference between Y 2 and Y P. E. the economy will self-correct at output Y p and price level P In the short run, when the AD curve increases: A. the aggregate price level will rise and the aggregate output level will fall. B. the aggregate price level will rise and the aggregate output level will increase. C. the aggregate price level will fall and the aggregate output level will increase.

28 D. the aggregate price level will fall and the aggregate output level will decrease. E. the aggregate price level will remain constant and the aggregate output level will increase Stagflation occurs when: A. the aggregate price level and the aggregate output level both fall. B. the aggregate price level falls and the aggregate output level rises. C. the aggregate price level rises and the aggregate output level falls. D. the aggregate price level and the aggregate output level both rise. E. the aggregate price level rises and the nominal interest rate falls Keynesian economics propagates the economic ideas: A. that argue that the government intervention in the economy can be destabilizing. B. that argue that the government can help a depressed economy through fiscal and monetary policies. C. that argue that the private sector is perfectly capable to regulate itself. D. that argue that the free market system will always prevail. E. that economic recessions will self-correct without active government intervention Keynesians argue that a lack of spending is: A. not possible in an economy. B. possible and can lead to prolonged recessions. C. not helped by monetary or fiscal policy efforts. D. only evident during expansions. E. a key indicator of an economic boom Suppose the economy is experiencing a recessionary gap. To move equilibrium aggregate output closer to the level of potential output, the best fiscal policy option is to: A. decrease government purchases. B. decrease taxes. C. decrease government transfers. D. increase real interest rates. E. increase the money supply If the economy experiences a decline in overall spending, and thus a contraction, the government could counter this by: A. raising tax rates. B. decreasing government transfers. C. increasing government spending. D. decreasing the investment tax credit. E. decreasing the money supply. Figure 20-4: Inflationary and Recessionary Gaps

29 143. Use the Inflationary and Recessionary Gaps Figure At E 2, the economy: A. is in long-run equilibrium. B. has an inflationary gap. C. has a recessionary gap. D. is booming. E. would benefit from contractionary fiscal policy. Figure 20-5: Fiscal Policy I 144. Use the Fiscal Policy I Figure Suppose that this economy is in equilibrium at E 1. If there is a decrease in taxes, then: A. AD 2 will shift to the left, causing an increase in the price level and a decrease in real GDP. B. AD 2 will shift to the left, causing a decrease in the price level and a decrease in the real GDP. C. AD 1 will shift to the right, causing an increase in the price level and an increase in real GDP. D. AD 1 will shift to the right, causing a decrease in the price level and an increase in real

30 GDP. E. AD 1 will shift to the right, causing an increase in the price level and a decrease in real GDP Use the Fiscal Policy I Figure Suppose that this economy is in equilibrium at E 2. If there is an increase in taxes, then: A. AD 2 will shift to the left, causing an increase in the price level and a decrease in real GDP. B. AD 2 will shift to the left, causing a decrease in the price level and a decrease in the real GDP. C. AD 1 will shift to the right, causing an increase in the price level and an increase in real GDP. D. AD 1 will shift to the right, causing a decrease in the price level and an increase in real GDP. E. AD 2 will shift to the left, causing a decrease in the price level and an increase in the real GDP A contractionary fiscal policy: A. typically decreases a government budget deficit or increases a government budget surplus. B. may include increases in government spending. C. may include reductions in taxes. D. may include discretionary increases in transfer payments. E. may include a reduction in the money supply One of the shortcomings of fiscal policy is that: A. it has significant time lags which make it more effective. B. it takes effect immediately, thus it is the best policy to use at crunch time. C. it affects aggregate demand indirectly through the interest rate. D. it has time lags and sometimes it may end up destabilizing the economy as a result of these lags. E. changes to fiscal policy have very predictable and precise impacts on GDP and employment Assume that marginal propensity to consume is 0.8, and potential output is $800 billion. The tax multiplier is: A B C. 5. D. 4. E Assume that marginal propensity to consume is 0.8, and potential output is $800 billion. If current GDP is $850 billion: A. there is an inflationary gap. B. there is a recessionary gap. C. the economy is in long-run equilibrium. D. taxes should be decreased. E. transfer payments should be increased Which of the following would accurately characterize the portion of a firm's profit paid to the owner of one share of its stock? A. interest B. dividend C. stock

31 D. bond E. liabilities 151. A budget surplus would exist when which of the following occurs? A. Taxes are greater than government spending. B. Taxes are less than government spending. C. Taxes are less than government spending plus investment. D. Investment is less than government spending less taxes. E. Consumption spending is greater than savings In a closed economy, all investment spending must come from: A. government spending. B. domestic savings. C. foreign savings. D. government spending, domestic savings and foreign savings. E. consumption spending A difference between a closed and an open economy is that: A. in the latter, foreign savings complement domestic savings in financing investment spending. B. in the latter, the government is more open to the idea of financing investment spending than in the former. C. in the former, foreign savings complement domestic savings in financing investment spending. D. in the former, foreign savings finance more investment spending than in the latter. E. in the former, government budget deficits help to finance additional investment spending. Scenario 22-2: Open Economy S = I In an open economy suppose that GDP is $12 trillion. Consumption is $8 trillion and government spending is $2 trillion. Taxes are $0.5 trillion. Exports are $1 trillion and imports are $3 trillion Use Scenario How much is national saving? A. $4 trillion B. $3.5 trillion C. $2 trillion D. $5.5 trillion E. $3 trillion Scenario 22-3: Economy of Centralia Centralia has no trade and no government. GDP = $25 trillion. Consumption Spending = $18 trillion Use Scenario Consider the information on the economy of Centralia. Suppose that there is a new government in Centralia, and it has decided to impose taxes on its citizens in order to spend on infrastructure. Taxes = $3 trillion. Government Spending = Taxes. What is the level of investment spending in Centralia now? A. $7 trillion B. $4 trillion C. $18 trillion D. $4 trillion E. $10 trillion 156. From the standpoint of economic growth, banks are important to: