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. The problem of scarcity is confronted by: A. industrialized societies. B. pre-industrialized societies. C. societies governed by communist philosophies. D. all societies. E. rural, but not urban, societies. 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. Which is not an example of a resource? A. Land B. Labor C. Capital D. Production E. Oil reserves 4. If the state government allocates additional spending on education, the opportunity cost is: A. zero. B. the dollar amount of the additional spending. C. only considered if additional taxes need to be raised to fund the spending. D. measured in terms of the alternative uses for that money. E. measured in terms of the number of additional students that graduate from high school. 5. Economists tend to believe that to change people's behavior you must: A. appeal to their concern for society. B. change their incentives. C. legislate the change. D. appeal to their religious values. E. encourage them to vote. 6. Alison is offered two jobs: one pays a salary of $45,000 per year and offers 3 weeks of vacation while the other offer provides 2 weeks of vacation and a salary of $54,000. What is the opportunity cost for Alison if she chooses the job offer of $54,000? A. $45,000 plus the 3 weeks of vacation B. $45,000 per year C. One week of vacation D. Two weeks of vacation E. $9000 and one week of vacation. 7. The current rate of unemployment of 5% is too high. This is an example of: A. a normative statement. B. a positive statement. C. the circular-flow model. D. comparative advantage. E. a testable hypothesis.

2 8. Which of the following is most likely a macroeconomic question rather than a microeconomic question? A. Are prescription drug prices rising faster than the overall rate of inflation? B. Are consumers buying more bottled water and less fruit juice? C. Are salaries for nurses rising or falling? D. Should a tax be levied on each ton of carbon a factory emits? E. Is the national unemployment rate rising or falling? 9. Which of the following would most likely be a microeconomic question? A. Should I go to business school or take a job? B. Have wages been rising more slowly than consumer prices have been rising? C. What government policies should be adopted to promote full employment and growth in the economy as a whole? D. What determines the level of output for the economy as whole? E. If taxes are lowered, with the national debt rise or fall? 10. Economic models are: A. created and used in order to duplicate reality. B. useless if they are simple. C. made generally of wood, plastic, and/or metal. D. often useful in forming economic policy. E. rarely testable using the scientific method. 11. Which of the following measures is typically used as an indicator of the conditions in the labor market? A. The unemployment rate B. The population growth rate C. The inflation rate D. the trade deficit E. The rate at which real gross domestic product is changing. 12. A pattern of expansion, then recession, then expansion again is a(n): A. annual trend. B. secular trend. C. business cycle. D. consumer cycle. E. productivity cycle. 13. 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. 14. 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. 15. Equity means that: A. everyone gets an equal share of the goods and services produced. B. everyone gets his or her fair share of the goods and services produced. C. more of some goods and services can be produced only if the production of others is reduced. D. more of all goods and services may be produced. E. individuals can consume a good only if he or she is able to afford the market price.

3 16. An economy has achieved if it pass up any opportunities to make some people better off without making others worse off. A. efficiency; does not B. equity; does C. efficiency; does D. equity; does not E. specialization; does not Figure 3-1: Guns and Butter 17. Based on the Guns and Butter Figure 3-1, if the economy were producing 8 units of guns and 12 units of butter per period: A. this is a possible choice, but would involve unemployment and/or inefficiency. B. the notion of increasing opportunity cost is invalidated. C. the economy is still efficient but has made a decision not to buy as much as it could. D. something must be done to reduce the amount of employment. E. the economy would be able to increase gun production, but only if butter production was decreased. 18. All points outside the production possibility curve represent: A. efficient production points. B. inefficient production points. C. nonfeasible production points. D. economic growth. E. a surplus of economic resources. 19. The production possibility curve will shift outward for which of the following reasons? A. a decrease in the labor force B. an upgrade of capital to the best available technology that is currently available C. better technology that improves worker productivity D. a decrease in the unemployment rate E. war, famine or pestilence. Quantity of Hours of Study Time Quantity of Hours of Leisure Time Table 3-3: Trade-off of Study Time and Leisure time

4 20. Use Table 3-3. A student sleeps 8 hours per day and divides the remaining time between study time and leisure time. The table shows the combinations of study and leisure time that can be produced in the 16 waking hours of each day. If a student decides to consume one additional hour of leisure time, how many hours of study time must be given up? A. 4 B..25 C. 1 D. 16 E Use Table 3-3. A student sleeps 8 hours per day and divides the remaining time between study time and leisure time. The table shows the combinations of study and leisure time that can be produced in the 16 waking hours of each day. Suppose the student completes a speed-reading course that allows him to do the same amount of studying in half as many hours. Which of the following is now true of his opportunity costs? A. The opportunity cost of both leisure and of studying has increased. B. The opportunity cost of studying has increased. C. The opportunity cost of leisure has decreased. D. There is no change in the opportunity costs. E. The opportunity cost of leisure has increased. Alternatives A B C D E F Consumer goods per period Capital goods per period Table 3-4: Production Possibilities Schedule 22. Use Table 3-4. If the economy produces 4 units of consumer goods per period, it also can produce at most units of capital goods per period. A. 30 B. 28 C. 10 D. 18 E Use Table 3-4. If the economy produces 24 units of capital goods per period, it also can produce at most units of consumer goods per period. A. 5 B. 4 C. 3 D. 2 E. 1

5 Figure 3-9: Strawberries and Submarines II 24. Use the Strawberries and Submarines II Figure 3-9. Point F: A. it is unattainable, all other things unchanged. B. is attainable if the quantity and/or quality of factors decreases. C. is attainable if the economy is able to reach full employment. D. is feasible, but not efficient. E. it is unattainable until the production possibility curve shifts inward. Figure 3-11: Production Possibilities and Circular-Flow Diagram 25. Use the Production Possibilities and Circular-Flow Diagram Figure Assume the figures represent the same economy. Suppose that in the circular-flow diagram there is a significant decrease in the amount of labor that is flowing to the firms that produce coconuts. If all other variables remain unchanged, then this adjustment in the economy would be best represented in the production possibilities figure by a move from point A toward: A. point A (no movement would occur). B. point B (an increase in fish production). C. point C (a decrease in coconut production). D. point D (an outward shift of the entire curve). E. point B (an increase in coconut production).

6 26. Alexander has a straight line or linear production possibility curve when he produces soybeans and corn. If he uses all of his resources for soybean production, he can produce 200 bushels of soybeans; if he uses all of his resources for corn production, he can produce 400 bushels of corn. Which of the following combinations of corn and soybeans are not possible for him to produce? A. 200 bushels of soybeans and zero bushels of corn B. 600 bushels of corn and 200 bushels of soybeans C. 400 bushels of corn and zero bushels of soybeans D. 100 bushels of soybeans and 200 bushels of corn E. 50 bushels of soybeans and 300 bushels of corn 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 27. Use Scenario 3-1. If Largetown has 80 hours of labor, what is the maximum number of socks it can produce? A. 40 socks B. 20 socks C. 2 socks D. 4 socks E. 80 socks 28. Use Scenario 3-1. If Largetown decides to devote half of its 80 hours of labor time toward the production of socks and half of the time to the production of shirts, what is the maximum number of socks and shirts it can produce? A. 10 shirts and 20 socks B. 20 shirts and 10 socks C. 30 socks and 30 shirts D. 30 socks and zero shirts E. 20 shirts and 40 socks Combination Good Z Good X A 0 75 B 5 70 C D E F 25 0 Table 3-5: Production of Good Z and Good X in Urbanville 29. Use Table 3-5. If Urbanville is currently producing at Combination F, what is the opportunity cost of a move to Combination E? A. 5Z B. 20Z C. 25X D. 0X E. 25Z 30. At the point at which it is currently producing, Britain must give up the production of 75 hats to produce 25 additional sweaters. The opportunity cost of producing 4 sweaters is hats. A. 4 B. 3 C. 71 D. 79 E. 12

7 31. On a production possibility curve, opportunity cost is: A. the decrease in the output of one good when the output of the other good is increased. B. the rate at which people are willing to exchange goods as determined by demand and supply. C. the dollar cost of the good given up to get another good. D. independent of the slope of the curve. E. the cost of moving from an interior point to the production possibility curve. 32. Beth and Alice decide to trade services. Beth promises to do Alice's taxes, and in exchange, Alice will create several spreadsheets for Beth's household budget. This mutual agreement of trade will most likely: A. be beneficial to both individuals. B. hurt both individuals. C. help Beth, but hurt Alice. D. help Alice, but hurt Beth. E. neither help nor hurt these individuals as they are not exchanging money for these services. 33. If the opportunity cost of manufacturing machinery is higher in the United States than in Britain and the opportunity cost of manufacturing sweaters is lower in the United States than in Britain, then the United States will: A. export both sweaters and machinery to Britain. B. import both sweaters and machinery from Britain. C. export sweaters to Britain and import machinery from Britain. D. import sweaters from Britain and export machinery to Britain. E. neither import, nor export goods with Britain. 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 Table 4-3: Comparative Advantage I 34. Use Table 4-3. Sweden has an absolute advantage in producing: A. cell phones only. B. a combination of cell phones and herring. C. both cell phones and herring. D. neither cell phones nor herring. E. herring only. 35. Use Table 4-3. The opportunity cost of producing 1 unit of cell phones for Sweden is: A. 10 units of herring. B. 1/5 unit of herring. C. 5 units of herring. D. 1/10 unit of herring. E. 10 units of cell phones. 36. Use Table 4-3. The opportunity cost of producing 1 unit of cell phones for Finland is: A. 10 units of herring. B. 1/5 unit of herring. C. 5 units of herring. D. 1/10 unit of herring. E. 5 units of cell phones.

8 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. 37. Use the Comparative Advantage Figure 4-2. Westland 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. 38. Dr. Colgate is a dentist who employs an assistant, Ms. Crest. If Dr. Colgate worked all day at the front desk, she could answer 40 phone calls. If she worked all day with patients, she could clean the teeth of 40 patients. If Ms. Crest worked all day at the front desk, she could answer 60 phone calls. If she worked all day with patients, she could clean the teeth of 20 patients. Which of the following is true? A. Dr. Colgate has an absolute advantage in answering phones. B. Ms. Crest has a comparative advantage in answering phones. C. Ms. Crest has an absolute advantage in cleaning patients' teeth. D. Dr. Colgate has a comparative advantage in answering phones. E. Dr. Colgate has an absolute advantage in answering phones and an absolute advantage in cleaning patients teeth. 39. Mark and Julie are going to sell brownies and cookies for their third annual bake sale fund- raiser. In one day, Mark can make 40 brownies or 20 cookies and Julie can make 15 brownies or 15 cookies. Based on this information, has the comparative advantage in making brownies and has the comparative advantage in making cookies. A. Mark; Julie B. Mark; Mark C. Julie; Mark D. Julie; Julie E. neither person; Julie 40. In a single growing season, the country of Pastoral can raise 100 tons of beef or produce 1,000 boxes of tulips. In the same growing season, the country of Bucolic can raise 50 tons of beef or produce 750 boxes of tulips. Without trade, the price of beef: A. is higher in Pastoral than in Bucolic. B. is lower in Pastoral than in Bucolic. C. is the same in Pastoral as in Bucolic. D. cannot be determined in either country. E. will be determined through trade negotiations between countries.

9 Figure 4-3: Production Possibility Curve for Jackson and Tahoe 41. Use Production Possibility Curve for Jackson and Tahoe Figure 4-3. The figure shows the production possibility curves for two countries, Jackson and Tahoe. Without trade, Jackson produces and consumes 30 units of cattle and 80 units of wheat, while Tahoe produces and consumes 80 units of cattle and 60 units of wheat. Assume each nation specializes completely, based on comparative advantage and the price of 1 unit of cattle equals 2 units of wheat. If Jackson exports 120 units of wheat to Tahoe, Tahoe will export units of cattle to Jackson. A. 120 B. 60 C. 240 D. 200 E Taken collectively, people in nations that engage in international trade are not likely to: A. consume more than they were able to consume in the absence of trade. B. raise their standards of living. C. gain from lower opportunity costs of production. D. be made worse off. E. achieve faster rates of economic growth. 43. If a country removes a tariff on imported shoes, we expect the domestic price of shoes to and the quantity of shoes consumed in the domestic market to. A. fall; fall B. fall; rise C. rise; fall D. rise; rise E. fall; be unaffected 44. An example of a quota is a: A. limit on the total number of Honda automobiles imported from Japan. B. regulation specifying that each imported Honda automobile must meet certain emission exhaust guidelines. C. tax of 10% of the value of each Honda automobile imported from Japan. D. subsidy from the Japanese government of $500 for each Honda automobile imported into the United States. E. a subsidy from the United States government of $500 for each Honda automobile imported into the United States.

10 Figure 4-8: Market for Melons in Meloncholy II 45. Use the Market for Melons in Meloncholy II Figure 4-8. In the graph, the demand curve illustrates the domestic demand for melons and the supply curve illustrates the domestic supply of melons. Suppose the country opens to trade and finds the world price to be equal to $10. This means that Meloncholy will: A. import 42 units of melons. B. export 42 units of melons. C. not find it beneficial to trade. D. import 30 units of melons. E. export 8 units of melons. 46. Use the Market for Melons in Meloncholy II Figure 4-8. In the graph, the demand curve illustrates the domestic demand for melons and the supply curve illustrates the domestic supply of melons. Suppose producers lobby effectively for the imposition of a tariff that raises the world price to $15. As a result, tariff revenue accruing to government will equal: A. $150. B. $200. C. $50. D. $5. E. $ Raclette is a popular wintertime dish in Switzerland. It is essentially melted Raclette cheese over boiled new potatoes. If the price of this cheese decreased, we would expect: A. an increase in demand for the cheese. B. an increase in demand for new potatoes. C. there to be no effect on the demand for either the cheese or the new potatoes. D. an increase in demand both for the cheese and for the new potatoes. E. a decrease in the demand for new potatoes 48. A good is normal if: A. when income increases, the demand remains unchanged. B. when income increases, the demand decreases. C. when income increases, the demand increases. D. income and the demand are unrelated. E. when income decreases, the demand increases. 49. 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.

11 50. An inverse relationship between price and quantity is represented by: A. the demand curve. B. the supply curve. C. the production possibility frontier. D. equilibrium. E. the marginal cost curve. 51. 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. 52. A market is composed of three individuals, Nicholas, Benjamin, and Alexander. Their individual demand schedules are given below and are as follows: Nicholas Benjamin Alexander Price Quantity Demanded Price Quantity Demanded Price Quantity Demanded Based on this information, which of the following market demand schedules accurately portrays this market? A. Price Quantity Demanded B. Price Quantity Demanded C. Price Quantity Demanded D. Price Quantity Demanded E. Price Quantity Demanded

12 Figure 6-1: Supply of Coconuts 53. Use the Supply of Coconuts Figure 6-1. If there is an expectation on the part of coconut suppliers that the price of coconuts will be significantly higher in the very near future, then the movement in the model to reflect today's market behavior would be: A. A to B. B. B to A. C. A to C. D. B to E. E. E to B. Price Quantity Demanded Quantity Supplied Table 6-4: Competitive Market for Good Z 54. Use Table 6-4. The equilibrium price and quantity in this market are, respectively: A. $5 and 40 units. B. $20 and 60 units. C. $10 and 30 units. D. $15 and 20 units. E. $10 and 60 units. 55. A shift of a demand curve to the right, all other things unchanged, will: A. increase equilibrium price and quantity. B. decrease equilibrium price and quantity. C. decrease equilibrium quantity and increase equilibrium price. D. increase equilibrium quantity and decrease equilibrium price. E. increase equilibrium price while leaving equilibrium quantity unchanged.

13 Figure 7-1: Demand and Supply of Gasoline 56. Use the Demand and Supply of Gasoline Figure 7-1. What might cause the supply curve to shift from S 2 back to the initial supply curve S 1? A. The Organization of Petroleum Exporting Countries (OPEC. restricts the production of crude oil. B. The government decreases the per-gallon tax on gasoline production. C. Americans want to buy more gasoline. D. Technology in the refinement of gasoline greatly improves. E. The price of crude oil decreases. 57. The market price of airline flights increased recently. Some economists suggest that the price increased because there has been an increase in the number of business travelers. If the economists are correct, it must be the case that: A. supply increased. B. supply decreased. C. supply increased while demand also decreased. D. demand decreased. E. demand increased. 58. Consider the market for corn. What happens if there is an increased demand for corn tortillas and, at the same time, a new corn seed becomes available that increased the per-acre yield dramatically? A. Price and quantity both decrease. B. The change in price is uncertain, quantity decreases. C. The change in price is uncertain, quantity increases. D. Price increases, the change in quantity is uncertain. E. Price and quantity both increase. 59. The market for gasoline is in equilibrium. You have heard that the price of crude oil is falling because of new oil discoveries. You are also aware that the number of car and truck drivers is steadily rising. Knowing this, you predict that the price of gasoline will and the quantity of gasoline bought and sold will. A. rise; rise if the demand increase is larger than the supply increase B. rise if the demand decrease is larger than the supply decrease; fall C. fall if the supply increase is larger than the demand increase; rise D. rise; rise E. rise if the demand increase is larger than the supply increase; fall

14 60. Suppose the input costs associated with manufacturing hair-replacement medication decreases over time. This would lead to: A. an increase in the supply of such treatments, lower prices, and an increase in the equilibrium quantity. B. a decrease in quantity supplied and lower prices. C. an increase in demand and higher prices. D. a decrease in the supply of such treatments, higher prices, and a decrease in the equilibrium quantity. E. a decrease in demand and lower prices. 61. An increase in price and an ambiguous change in quantity is most likely caused by: A. a shift to the left in demand and no shift in supply. B. a shift to the left in supply and no shift in demand. C. a shift to the right in supply and a shift to the left in demand. D. a shift to the right in supply and a shift to the right in demand. E. a shift to the left in supply and a shift to the right in demand. 62. A price control is: A. when a firm controls the price of the good it produces. B. a government policy used to keep prices artificially low, but never used to keep prices artificially high. C. an upper limit on the quantity of some good that can be bought or sold. D. a tax placed on the sale of a good which controls the market price. E. a legal restriction on how high or low a price in a market may go. Rent (per apartment per month) Quantity Demanded (millions of apartments) Quantity Supplied (millions of apartments) $1, , , , , Scenario 8-1: Market for Apartments

15 63. Use Scenario 8-1. This figure represents a competitive market for apartments. If a government price ceiling at $900 is now imposed on this market (in the name of fairness), then an inefficiency will result in the form of a: A. surplus of 0.6 million apartments. B. shortage of 0.6 million apartments. C. surplus of 0.2 million apartments. D. shortage of 0.2 million apartments. E. shortage of 2.1 million apartments. 64. 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. 65. Price ceilings that lead to shortages will impose costs on society because they: A. will eliminate long waiting lines. B. may result in black market prices, which are lower than the market-determined price would be. C. lead to a smaller quantity offered on the market. D. help businesses instead of consumers. E. eliminate dead weight losses. Figure 8-2: Price Control 66. Use the Price Control Figure 8-2. In the graph, an effective price ceiling would be the price indicated at and a would exist as the difference between. A. point b; surplus; points f and e B. point b; shortage; points f and e C. point d; shortage; points i and h D. point d; surplus; points e and h E. point d; shortage; points g and h

16 Figure 8-5: Rent Controls 67. 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 2 Figure 8-6: Supply and Demand 68. Use the Supply and Demand Figure 8-6. In the market shown in the figure, a price ceiling of P 1 causes: A. a shortage equal to the distance AB. B. a surplus equal to the distance AB. C. a shortage equal to the distance DE. D. no change to the market. E. a surplus equal to the distance BC.

17 Figure 8-8: Shrimp Market 69. Use Shrimp Market Figure 8-8. If the government wants to limit shrimp sales to 500 pounds, it could impose a: A. price floor of $15. B. price floor of $10. C. price ceiling of $10. D. price floor of $15 or a price ceiling of $10. E. impose a price ceiling of $ The likely result of a price floor is: A. a transfer of wealth from producers to consumers. B. a shortage of the good at a price below the market equilibrium price. C. a surplus of the good at a price below the market equilibrium price. D. a shortage of the good at a price above the market equilibrium price. E. a surplus of the good at a price above the market equilibrium price. 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. $15.

18 72. Use the Market I Figure If a price floor of $15 was imposed on this market, government would need to buy units of the good, and spend a total amount of on its purchase. A. 5; $75 B. 10; $150 C. 9; $135 D. 9; $81 E. 5; $15 Price (unit) Quantity Demanded (units) Quantity Supplied (units) $1.10 9,000 3, ,000 5, ,000 7, ,000 9, ,000 1,100 Table 9-1: Market for Fried Twinkies 73. Use Table 9-1. Using the table, if the government imposes a quota on the fried Twinkie market of 5,000, the quota rent (per fried Twinkie. collected by the fried Twinkie producers will be: A. $1.20. B. $0.30. C. $1.50. D. $1.00. E. $0.10. 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 consumer spending? A. a reduction in investment spending equal to the increase in consumer spending B. a decrease in the nominal GDP C. an increase in the unemployment rate D. a decrease in the inflation rate E. an increase in the nominal GDP

19 75. Use the Circular Flow Model Figure What is disposable income in this economy? A. $0 B. $100 C. $400 D. $500 E. $ 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. 77. A nation's exports minus its imports: A. equals its private investment. B. is net exports. C. is always equal to a positive number. D. is equal to net transfer payments. E. can be equal to a positive number or zero, but never a negative number. 78. An intermediate good would be: A. a new boat purchased by a professor to be used on vacation. B. lumber used in building a house. C. payments to military personnel. D. a professor's salary. E. the natural gas used to heat the professor s home. Personal consumption expenditures $500 Gross private domestic investment 200 Net exports -5 State and local government purchases of goods 200 and services Federal government purchases of goods and 100 services Imports 15 Table 10-4: Measuring GDP (billions of dollars) 79. Use Table GDP is: A. $500 billion. B. $850 billion. C. $995 billion. D. $1,000 billion. E. $980 billion. 80. A laptop computer purchased by an accounting firm is considered to be: A. consumption spending. B. government spending. C. private saving. D. a pre-tax dividend. E. investment spending. 81. Suppose that nominal GDP is $1000 in 2006 and nominal GDP is $1500 in If the overall price level between 2006 and 2007, we could say that real GDP. A. increased by more than 50%; stayed constant. B. increased by less than 50%; decreased. C. increased by more than 50%; increased. D. increased by 50%; increased. E. increased by 50%; stayed constant.

20 82. Real GDP is the same as A. current dollar GDP. B. interest rate adjusted GDP. C. nominal GDP. D. value added GDP. E. inflation adjusted GDP. 83. Jim has a part-time job and would prefer to have a full-time job, but has been unable to find full-time work. Jim's labor market status is classified as: A. a discouraged worker. B. an underemployed worker. C. an unemployed worker. D. out of the labor force. E. semi-retired worker. Scenario 12-2: Employment Rate In a group of ten people, there are three retirees, two part time workers, two discouraged workers, one unemployed worker, and two full time workers. 84. Use Scenario For this group, the labor force participation rate is: A. 30%. B. 60%. C. 70%. D. 80%. E. 50%. 85. Last week Stephanie quit her job as a copy-writer at an advertising agency. She has spent the past few days browsing the help-wanted ads, but hasn't found anything that matches her skills. Stephanie is best classified as: A. structurally unemployed. B. frictionally unemployed. C. a discouraged worker. D. out of the labor force. E. cyclically unemployed. Figure 13-2: Effect of Minimum Wage

21 86. Use the Effect of Minimum Wage Figure Suppose the labor market is in equilibrium at E when the government introduces a minimum wage of W F. One problem that may arise is that the quantity of labor supplied would, resulting in structural unemployment. A. decrease to Q D B. stay at Q E C. increase to Q S D. stay at W E E. decrease to zero. 87. The natural rate of unemployment is: A. the rate of unemployment that exists during recessions. B. equal to the sum of frictional and cyclical unemployment. C. equal to the sum of frictional and structural unemployment. D. cyclical unemployment less frictional unemployment. E. equal to the actual rate of unemployment less frictional unemployment. 88. The invention of ATM machines reduced: A. menu costs of inflation. B. shoe-leather costs of inflation. C. unit-of-account costs of inflation. D. seignorage. E. search costs of inflation. 89. The costs arising from the way inflation makes money a less reliable unit of measurement are known as: A. shoe-leather costs. B. menu costs. C. unit-of-account costs. D. medium of exchange costs. E. search costs. 90. 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. 91. You have gone to the bank to borrow money for one year. The nominal rate is 7.5%. The real rate of interest is 4%. Over the course of the year, overall prices increased by 4%. This rate of inflation hurt the because the actual rate of inflation was than the anticipated rate of inflation. A. borrower; lower B. borrower; higher C. lender; higher D. lender; lower E. lender; equal to 92. High rates of inflation often result in people spending inordinate amounts of time trying to make transactions and finding ways to keep the real value of their money from decreasing. This is an example of costs. A. productivity B. menu C. efficiency wage D. unit-of-account E. shoe-leather

22 93. If the cost of a market basket is $150 in Year 1 and $200 in Year 2, the price index for Year 1 with a Year 2 base is: A. 75. B C D E You read in the newspaper that the CPI in 2008 was 120, you will conclude that a typical market basket in 2008 would have cost A. 20 percent more than the same market basket purchased in B. 120 percent more than the same market basket purchased in C. 20 percent more than the same market basket purchased in the base year. D. 120 percent more than the same market basket purchased in the base year. E. 20 percent less than the same market basket purchased in the base year. 95. If your disposable income increases from $10,000 to $15,000 and your consumption increases from $9,000 to $12,000, your MPC is: A B C D E The MPC plus the MPS must: A. equal the value of the multiplier. B. equal 1. C. be less than 1. D. be greater than 1. E. equal zero. Figure 16-1: Consumption and Real GDP 97. Use the Consumption and Real GDP Figure The marginal propensity to consume in this example is: A. 0. B. 0.5 C D E

23 98. Use the Consumption and Real GDP Figure If real GDP were $12 trillion, consumption would be trillion. A. $5 B. $7 C. $9 D. $11 E. $ If the multiplier is 4, and investment spending falls by $100 billion, the change in equilibrium income will be: A. -$40 billion. B. $400 billion. C. $25 billion. D. $25 billion. E. $400 billion If the consumption function were plotted on the vertical axis of a graph, with disposable income on the horizontal axis: A. the slope of the line would be negative and determined by the marginal propensity to save. B. the horizontal axis intercept would be determined by the level of autonomous consumption. C. the slope of the line would be positive and determined by the marginal propensity to consume. D. the vertical axis intercept would be determined by the current interest rate. E. the vertical axis intercept would be determined by the marginal propensity to consume. Scenario 16-2: Income-Expenditure Equilibrium Suppose GDP is $8,000, autonomous consumption is $500, and planned investment spending is $200. The marginal propensity to consume is Use Scenario At the current level of GDP, how much is unplanned inventory investment? A. $1,100 B. $900 C. $900 D. 0 E. $ Use Scenario If GDP is $3,000, how much is unplanned inventory investment? A. 0 B. $600 C. $100 D. $100 E. $ Unplanned inventory investment leads to: A. prices increasing. B. production increasing. C. firms hiring more workers. D. production decreasing. E. a stronger economy In the aggregate expenditures model, if aggregate expenditures equal $800 billion and real GDP equals $600 billion: A. unplanned inventory accumulation equals $200 billion. B. unplanned inventory accumulation equals $200 billion. C. Consumption spending plus investment spending equals $200 billion. D. Planned investment spending equals $200 billion. E. Planned investment spending equals $200 billion.

24 105. If the slope of the aggregate expenditures curve = 0.75, the multiplier is equal to: A. 1. B. 4. C. 5. D. 3. E If investment spending increases, the planned aggregate spending line: A. becomes flatter. B. shifts down. C. becomes steeper. D. shifts up. E. is unaffected If the planned aggregate spending rises by $10 billion and the MPC is.75, then GDP changes by: A. $2.5 billion. B. - $10 billion. C. $10 billion. D. $40 billion. E. - $40 billion If the planned aggregate spending rises by $25 billion and the MPC is.8, then GDP changes by: A. $25 billion. B. $125 billion. C. - $25 billion. D. $250 billion. E. $100 billion The value of the multiplier will be smaller: A. the larger is the value of the MPS. B. the larger is the value of the MPC. C. if the MPC equals the MPS. D. if the MPC + MPS equals 1. E. as the ratio of MPC/MPS is closer to zero The interest rate effect of an aggregate price level change causes: A. the long-run aggregate supply curve to be vertical. B. the aggregate demand curve to be negatively sloped. C. the short-run aggregate supply curve to be positively sloped. D. the aggregate demand curve to be positively sloped. E. the short-run aggregate demand curve to be vertical Suppose that a presidential candidate who promised large personal income tax cuts is elected. Which of the following is most likely to occur? A. A decrease in short-run aggregate supply. B. A decrease in aggregate demand. C. An increase in short-run aggregate supply. D. An increase in aggregate demand. E. A movement down the aggregate demand curve As a result of a decrease in the value of the dollar in relation to other currencies, American imports decrease and exports increase. Consequently, there is a(n): A. increase in short-run aggregate supply. B. decrease in the quantity of aggregate output supplied in the short run. C. increase in aggregate demand. D. decrease in the quantity of aggregate output demanded. E. decrease in long-run aggregate supply.

25 Figure 17-2: Shift of the Aggregate Demand Curve 113. Use the Shift of the Aggregate Demand Curve Figure An increase in aggregate demand is illustrated by a movement from: A. AD 1 to AD 2. B. point C to point A. C. point B to point A. D. point C to point E. E. point E to point C 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 When the aggregate price level falls, the purchasing power of assets rises which leads to: A. an increase in the quantity of aggregate output demanded. B. a decrease in the quantity of aggregate output demanded. C. a shift in the AD curve to the right. D. a shift in the AD curve to the left. E. a shift in the SRAS curve to the right The wealth effect explains why: A. the aggregate demand curve slopes downward since changes in aggregate price levels change the purchasing power of peoples' assets. B. the short-run aggregate supply curve slopes upward since an increase in wealth leads to more consumption. C. the short-run aggregate supply curve shifts since changes in wealth affect production. D. the aggregate demand curve slopes upward since wealth allows consumers to purchase more regardless of the price level. E. the long-run aggregate supply curve is vertical as there is no relationship between aggregate price level and aggregate output in the long run The short-run aggregate supply curve slopes upward because of: A. wage and price stickiness. B. wage and price flexibility. C. increasing technology. D. a reduction in resource availability at higher price levels. E. higher levels of productivity at higher price levels.

26 118. The shows the positive relationship between the aggregate price level and the quantity of aggregate output supplied in the economy. A. aggregate demand curve B. short-run aggregate supply curve C. aggregate spending curve D. long-run aggregate supply curve E. Phillips curve 119. The short-run aggregate supply curve may shift to the right if: A. productivity increases. B. nominal wages increase. C. personal income taxes decrease. D. commodity prices rise. E. government spending increases A rise in labor productivity is most likely to result in: A. an increase in aggregate demand. B. a decrease in aggregate demand. C. a decrease in short-run aggregate supply. D. a decrease in long-run aggregate supply. E. an increase in short-run aggregate supply If nominal wages fall, then short-run aggregate: A. supply shifts to the right. B. supply shifts to the left. C. demand shifts to the right. D. demand shifts to the left. E. supply becomes vertical A general increase in wages will result in the: 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 if all prices, including the nominal wage, rate doubled, then aggregate output supplied would: A. double. B. increase, but by less than double. C. fall. D. remain unchanged. E. increase by more than double 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 The level of output that the economy would produce if all prices, including nominal wages, were fully flexible is called: A. real GDP. B. Keynesian GDP. C. structural GDP. D. potential output. E. recessionary output.

27 126. Stagflation is a combination of: A. increasing unemployment and increasing inflation. B. decreasing unemployment and decreasing inflation. C. increasing unemployment and decreasing inflation. D. decreasing unemployment and increasing inflation. E. increasing unemployment and deflation A negative demand shock can cause: A. a liquidity trap. B. crowding out. C. a recessionary gap. D. an inflationary gap. E. an economic expansion Suppose the equilibrium aggregate price level is rising and the equilibrium level of real GDP is falling. Which of the following most likely caused these changes? A. An increase in short-run aggregate supply. B. An increase in aggregate demand. C. A decrease in short-run aggregate supply. D. A decrease in aggregate demand. E. An increase in short-run aggregate supply and an increase in aggregate demand In the long run (as the economy self-corrects), a decrease in aggregate demand, all other things unchanged, will cause the price level to and potential output to. A. increase; increase B. decrease; decrease C. increase; remain stable D. decrease; remain stable E. decrease; increase 130. If the SRAS curve intersects the aggregate demand curve to the right of LRAS, the result will be: A. a recessionary gap. B. an inflationary gap. C. cyclical unemployment. D. long-run equilibrium. E. crowding out. Figure 19-4: An Increase in Aggregate Demand 131. Use the An Increase in Aggregate Demand Figure The short-run equilibrium at Y 2 and P 2 : A. creates pressure for nominal wages to fall as workers seek to restore lost purchasing power. B. creates pressure for prices to fall, since real GDP exceeds the potential real GDP. C. results in a recessionary gap. D. results in an inflationary gap. E. indicates that cyclical unemployment is unusually high.

28 132. As an inflationary gap is eliminated through self-correcting adjustment, the equilibrium price level and the equilibrium real output. A. increases; decreases B. increases; increases C. decreases; decreases D. decreases; increases E. remains constant; decreases 133. Suppose the economy is in a short-run equilibrium, where the actual output is greater than potential output, then the economy is in: A. an inflationary gap, nominal wages will increase and SRAS will shift to the left until the actual GDP is equal to the potential GDP in the long run. B. a recessionary gap, nominal wages will decrease and AD will shift to the left until the actual GDP is equal to the potential GDP in the long run. C. an inflationary gap, prices of goods will increase and AD will shift to the right until the economy is in long-run equilibrium. D. a recessionary gap, prices of goods will decrease and LRAS will shift to the left until the economy is in long-run equilibrium. E. a recessionary gap, nominal wages will increase and SRAS will shift to the right until the economy is in long-run equilibrium A negative demand shock, holding everything else constant: A. shifts AD to the left and results in lower aggregate price levels and lower real GDP in the short run. B. shifts SRAS to the left and results in lower aggregate price levels and lower real GDP in the short run. C. moves the economy downward along the AD curve. D. moves the economy upwards along the AD curve. E. shifts AD to the left and results in lower aggregate price levels and higher real GDP in the short run John Maynard Keynes believed that the: A. government should only intervene when there is a recession but let the boom run its course. B. government should not interfere with the economy and should let the economy self correct. C. government should only intervene when there is a boom but let the recession run its course. D. government should not use fiscal and monetary policies, as these policies have long term adverse effects on the economy. E. government should actively try to mitigate the effects of recessions by using fiscal and monetary policies Fiscal policy involves: A. deliberate changes in the money supply. B. deliberate changes in taxation and/or government spending. C. changes in interest rates in specific markets. D. changes which only correct recessionary problems. E. deliberate changes to the international value of the U.S. dollar A change in taxes or a change in government transfers affects consumption through a change in: A. autonomous consumption. B. the marginal propensity to save. C. disposable income. D. government spending. E. investment demand.

29 Figure 20-3: North Placid Government 138. Use the North Placid Government Figure Using the accompanying figure, which of the following would be the appropriate response on the part of the North Placid government? A. Increase government spending to close the recessionary gap. B. Decrease government transfer payments to close the recessionary gap. C. Decrease taxes to close the inflationary gap. D. Increase taxes to close the recessionary gap. E. Increase taxes to close the inflationary gap A cut in taxes, therefore shifting the aggregate demand curve to the. A. decreases government transfers and consumption; right B. increases disposable income and consumption; right C. decreases the marginal propensity to save and consumption; left D. increases corporate profits and investment; left E. increases disposable income and investment; left Figure 20-4: Inflationary and Recessionary Gaps

30 140. Use the Inflationary and Recessionary Gaps Figure The movement from AD 1 to AD 3 could be caused by: A. increased government purchases. B. decreased government transfers. C. increased taxes. D. decreased government purchases E. decreasing the money supply Use the Inflationary and Recessionary Gaps Figure The movement from AD 3 to AD 1 would be caused by: A. increased government purchases. B. increased government transfers. C. increasing the money supply. D. decreased taxes. E. increased taxes Decreasing funding to explore space: A. will shift the short-run aggregate supply curve to the left. B. will shift the short-run aggregate supply curve to the right. C. will shift the aggregate demand curve to the left. D. will shift the aggregate demand curve to the right. E. will shift the long-run aggregate supply curve to the right Contractionary fiscal policy includes: A. decreasing taxes. B. increasing taxes. C. increasing the money supply. D. increasing government expenditures. E. increasing the discount rate. Figure 20-8: Fiscal Policy Options 144. Use the Fiscal Policy Options Figure If the aggregate demand curve is AD", of the choices below, the most appropriate discretionary fiscal policy would be to: A. increase government spending and decrease income tax rates. B. increase government spending and maintain income tax rates. C. decrease government spending and decrease income tax rates. D. decrease government spending and maintain income tax rates. E. increase government spending and increase transfer payments.

31 Figure 20-9: AD AS 145. Use the AD AS Figure Consider an economy that is producing an output level of Y 1. Then the economy is in: A. a recessionary gap and expansionary fiscal policy can remove the gap. B. a budgetary gap and expansionary fiscal policy can close the gap. C. an inflationary gap and expansionary fiscal policy can remove the gap. D. a recessionary gap and contractionary fiscal policy can remove the gap. E. an inflationary gap and contractionary fiscal policy can remove the gap When potential output is less than actual aggregate output: A. the economy faces an inflationary gap. B. the SRAS curve intersects the AD curve to the left of the LRAS curve. C. government needs to follow an expansionary policy to correct this problem. D. a decrease in taxes would solve this problem. E. the SRAS curve intersects the AD curve on the LRAS curve 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 Government spending increases to provide funding for tuition assistance for qualified college students. Which of the following is likely to result? A. Automatic stabilizers will increase the contractionary impact of the decrease in aggregate demand. B. Automatic stabilizers will decrease the contractionary impact of the increase in aggregate demand. C. Automatic stabilizers will increase the expansionary impact of the increase in aggregate demand. D. Automatic stabilizers will decrease the expansionary impact of the increase in aggregate demand. E. Automatic stabilizers will have no impact on the increase in government spending and aggregate demand.

32 149. 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 D. bond E. liabilities 150. A stock in a company is: A. a share of ownership of a company held by a shareholder. B. an IOU that pays interest. C. a portion of a firm's profits paid to stock owners. D. part of private savings. E. the interest payment on borrowing A bond is: A. a share of ownership of a company held by a shareholder. B. an IOU that pays interest. C. a portion of a firm's profits paid to stock owners. D. part of private savings. E. the interest payment on borrowing The government saves when it: A. has a balanced budget. B. has a budget deficit. C. has a budget surplus. D. borrows by selling bonds. E. spends more than it collects in tax revenue 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 In a closed economy, the savings-investment spending identity is: A. I = GDP C G + (IM NX). B. NS = GDP I. C. NS = GDP + (C T + TR) + (T TR G). D. I = GDP C G. E. I = GDP + C + G 155. According to the savings-investment spending identity : A. savings = investment spending B. government spending = tax receipts C. total income = consumption spending + savings D. savings = investment spending + consumption spending E. savings = investment spending = tax receipts 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.

33 156. Use Scenario How much is national saving? A. $4 trillion B. $3.5 trillion C. $2 trillion D. $5.5 trillion E. $3 trillion 157. Which of the following qualify as an asset from the viewpoint of a household? A. a student loan B. mortgage C. credit card debt D. car loan E. a house 158. A financial asset is: A. the same as a physical asset like a car. B. a claim that entitles the owner to future income from the seller. C. the value of accumulated savings. D. another term for capital. E. the earnings potential of a college degree Which of the following financial assets is likely to be the most liquid? A. stocks B. bonds C. mutual funds shares D. bank demand deposits E. individual retirement accounts (IRAs) 160. In an open economy: A. a country with a positive capital inflow will also have a situation where X are greater than IM. B. savings of foreigners may be supporting investment spending. C. capital inflows are always negative. D. investment spending equals national savings. E. the budget balance is negative A government currently has a budget deficit in an open economy. A. the government is spending less than its tax revenue. B. exports minus imports are negative. C. exports minus imports are positive. D. the government is spending more than its tax revenue. E. private savings is negative. This means that: 162. Which of the following assets is the MOST liquid? A. checkable bank deposits B. currency C. stocks D. money market mutual funds E. bonds 163. Buying the latest compact disc with a $20 bill means money is functioning as a: A. medium of exchange. B. store of value. C. unit of account. D. standard of deferred payment. E. form of near money.

34 164. When people use money to buy a DVD, they are using money as: A. a medium of exchange. B. a store of value. C. a unit of account. D. a store of account. E. a factor of production. Monetary Aggregates (in billions) Currency in circulation $500 Money market funds 550 Time deposits 800 Savings deposits 1110 Checkable bank deposits 380 Traveler s checks 15 American Express gift cards 25 Table 23-1: Monetary Aggregates 165. Use Table Consider the information in the table. The value of M1 is: A. $880 billion. B. $895 billion. C. $2005 billion. D. $920 billion. E. $1050 billion Suppose you transfer $500 from your savings account to your checking account. With this transaction, M1 and M2. A. increased; decreased B. increased; stayed the same C. decreased; decreased D. stayed the same; decreased E. increased; increased 167. Fiat money is: A. the same as commodity money. B. money backed by a government's decree that it be accepted as a means of payment. C. money which is backed by gold or silver. D. used in barter exchanges. E. a near money. Reserves $20,000 Loans Assets Liabilities Deposits Table 25-1: Balance Sheet 168. Use Table If the reserve ratio is 25%, loans are: A. $5,000. B. $15,000. C. $60,000. D. $80,000. E. $20,000.

35 169. The existence of banks: A. results in the money supply being larger than the amount of currency in circulation. B. inhibits the creation of money. C. makes the money supply equal to the amount of currency in circulation. D. results in the money supply being less than the amount of currency in circulation. E. creates an economic system that is inferior to the barter economy Suppose the reserve ratio is 20%. If Sam deposits $500 into his checking account, his bank can increase loans by: A. $500. B. $2,500. C. $100. D. $400. E. $ Suppose your grandma sends you $100 for your birthday and you deposit $100 into your checking account at the local bank. The reserve ratio is 10%. Based upon this deposit, the bank's reserves have increased by and the bank's checkable deposits have increased by. A. $100; $100 B. $100; $90 C. $90; $100 D. $10; $100 E. $110; $ Suppose a bank receives a $5,000 deposit, and the reserve ratio is 25%. Based on this deposit alone, the bank can loan out: A. $4,500. B. $4,000. C. $3,750. D. $3,500. E. $2, Suppose a bank receives a $5,000 deposit, and the reserve ratio is 25%. The bank is required to keep in reserve an amount equal to: A. $1,250. B. $1,000. C. $200. D. $500. E. $1, The Federal Reserve System is the for the United States. A. government entity that collects taxes. B. government-owned bank C. U.S. Treasury Bank D. largest private banking corporation in the world. E. central bank 175. If the Fed increases the discount rate: A. the money supply is likely to decrease. B. the money supply is likely to increase. C. the money supply is not likely to change. D. the federal funds rate must decrease. E. nominal interest rates will fall To the money supply, the Fed could. A. increase; lower the reserve requirements B. decrease; lower the discount rate C. increase; raise the federal funds rate D. decrease; conduct open-market purchases E. increase; lower income taxes.

36 177. To decrease the money supply, the central bank could: A. lower the discount rate. B. make open-market sales. C. increase the discount rate. D. lower the federal funds rate spread. E. increase the 30-year mortgage rate When the Fed decreases bank's reserves through an open-market operation: A. deposits increase, currency in circulation increases, and the monetary base remains the same. B. the monetary base decreases, the money multiplier decreases, and the money supply increases. C. loans increase, the federal funds rate rises, and the discount rate rises. D. the monetary base decreases, loans decrease, and the money supply decreases. E. the monetary base decreases, loans decrease, and the money multiplier decreases Suppose that the reserve ratio is 10% when the Fed buys $100,000 of U.S. Treasury bills from the banking system. If the banking system does NOT want to hold any excess reserves, will be added to the money supply. A. $666,667 B. $111,111 C. $250,000 D. $1,000,000 E. $900, When banks borrow and lend reserves from each other, they are participating in the market. A. subprime mortgage B. long-term capital C. money D. federal funds E. foreign exchange 181. Suppose that the money supply increases by $150 million after the Federal Reserve has engaged in an open market purchase of $50 million. Then the reserve ratio is: A B C D E If the Federal Reserve wants to increase the money supply, it will: A. sell U.S. Treasury bills. B. cut taxes across the board. C. lower the reserve requirement. D. increase the discount rate. E. increase the federal funds rate The interest earnings one gives up to hold more liquid assets are: A. an opportunity cost. B. a transactions cost. C. an asset of the company. D. a liability of the company. E. stock dividends According to the liquidity preference model, the equilibrium interest rate is determined by: A. the supply and demand for loanable funds. B. the supply and demand for money. C. the government. D. the U.N. E. the central bank.

37 Figure 28-1: Money Market II 185. Use the Money Market II Figure Equilibrium in this money market will occur at interest rate and quantity of money. A. r 2 ; Q 0 B. r 0 ; Q 2 C. r 2 ; Q 2 D. r 1 ; Q 2 E. r 1 ; Q A decrease in the supply of money, with no change in demand for money, will lead to in the equilibrium quantity of money and in the equilibrium interest rate. A. an increase; an increase B. an increase; a decrease C. a decrease; an increase D. a decrease; a decrease E. No change; an increase Figure 28-2: A Money Market 187. Use the A Money Market Figure The accompanying graph shows the money market. In this market, the equilibrium interest rate is: A. r 1. B. r 2. C. r 3. D. M 0. E. r 3 r 1

38 188. A business will want to borrow to undertake an investment project when the rate of return on that project is: A. less than the interest rate. B. greater than the interest rate. C. greater than the exchange rate. D. equal to the inflation rate. E. less than the inflation rate. Figure 29-3: Loanable Funds Market 189. Use the Loanable Funds Market Figure The equilibrium interest rate and total quantity of lending are: A. 8% and $2 trillion. B. 2% and $5 trillion. C. 10% and $1 trillion. D. 6% and $3 trillion. E. 4% and $5 trillion. Figure 29-4: Supply of Loanable Funds

39 190. Use the Supply of Loanable Funds Figure According to the accompanying figure, when the interest rate rises from 6% to 8%, then the: A. supply of loanable funds rises by $20 billion. B. quantity supplied of loanable funds rises by $20 billion. C. supply of loanable funds falls by $10 billion. D. quantity supplied of loanable funds falls by $20 billion. E. quantity supplied of loanable funds rises by $40 billion. Figure 29-8: Market for Loanable Funds II 191. Use the Market for Loanable Funds II Figure An increase in government borrowing will shift the demand for loanable funds to the: A. left and increase the interest rate. B. left and decrease the interest rate. C. right and increase the interest rate. D. right and decrease the interest rate. E. right and have no impact on the interest rate. Project Rate of Return on investment Cost of investment F 20% $500 G H 16 1,000 I J 12 2,000 K 10 1,500 L 8 1,200 M Table 29-2: Investment Projects 192. Use Table If the market interest rate declines from 15% to 11%, then the amount of investment demanded will increase by: A. $200. B. $1,000. C. $2,000. D. $2,200. E. $800.

40 193. A decrease in the demand for loanable funds would most likely be caused by a(n): A. decrease in the market interest rate. B. decrease in corporate income tax rates. C. increase in the amount of expected business opportunities. D. decrease in the amount of expected business opportunities. E. decrease in private savings An increase in the demand for loanable funds would most likely be caused by a(n): A. increase in the market interest rate. B. increase in business tax rates. C. increase in the amount of expected business opportunities D. decrease in the amount of expected business opportunities. E. increase in private savings Crowding out is a phenomenon: A. where an increase in government's budget surplus decreases the overall investment spending. B. where overproduction in the goods market leads to a sharp drop in the aggregate price level. C. where an increase in government spending causes an equal decrease in consumption spending. D. where an increase in imports causes the overall domestic production to fall. E. where an increase in government's budget deficit causes the overall investment spending to fall Investment projects are undertaken when the rate of return is: A. positive. B. greater than the equilibrium interest rate. C. equal to the equilibrium interest rate. D. less than the equilibrium interest rate E. greater than the inflation rate The federal budget tends to move toward as the economy. A. deficit; contracts B. deficit; expands C. surplus; contracts D. a balanced budget; contracts E. a balanced budget; expands 198. If the government's total revenues are less than its total expenditures, then it has a budget: A. deficit. B. surplus. C. balance. D. equality. E. tariff Public debt is: A. Taxes Government purchases Government transfers. B. government debt held by foreigners. C. government debt held by individuals and institutions outside the government. D. the government deficit divided by GDP. E. government debt held by other branches of the government Government spending that results in persistent deficits, government borrowing, and a reduction in private investment is referred to as: A. implicit liabilities. B. transfer payments. C. trade deficits. D. automatic stabilizers. E. crowding out.

41 Final review Answer Section MULTIPLE CHOICE 1. ANS: D PTS: 1 DIF: E REF: Module 1 2. ANS: B PTS: 1 DIF: E REF: Module 1 3. ANS: D PTS: 1 DIF: E REF: Module 1 SKL: Fact-Based 4. ANS: D PTS: 1 DIF: M REF: Module 1 5. ANS: B PTS: 1 DIF: E REF: Module 1 SKL: Fact-Based 6. ANS: C PTS: 1 DIF: E REF: Module 1 7. ANS: A PTS: 1 DIF: E REF: Module 1 8. ANS: E PTS: 1 DIF: E REF: Module 1 9. ANS: A PTS: 1 DIF: E REF: Module ANS: D PTS: 1 DIF: M REF: Module 2 SKL: Fact-Based 11. ANS: A PTS: 1 DIF: E REF: Module 2 SKL: Fact-Based 12. ANS: C PTS: 1 DIF: E REF: Module ANS: C PTS: 1 DIF: E REF: Module ANS: E PTS: 1 DIF: E REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: E REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: E REF: Module 3 SKL: Fact-Based 19. ANS: C PTS: 1 DIF: M REF: Module 3 SKL: Fact-Based 20. ANS: C PTS: 1 DIF: E REF: Module ANS: E PTS: 1 DIF: D REF: Module ANS: C PTS: 1 DIF: E REF: Module 3

42 23. ANS: D PTS: 1 DIF: E REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: E REF: Module ANS: E PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: E PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: D REF: Module ANS: B PTS: 1 DIF: D REF: Module ANS: D PTS: 1 DIF: M REF: Module 4 SKL: Fact-Based 43. ANS: C PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: E REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module 4

43 47. ANS: B PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: E REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: D PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: E REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: E PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: D REF: Module ANS: C PTS: 1 DIF: D REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: E PTS: 1 DIF: D REF: Module ANS: E PTS: 1 DIF: E REF: Module ANS: D PTS: 1 DIF: M REF: Module ANS: D PTS: 1 DIF: E REF: Module ANS: C PTS: 1 DIF: M REF: Module 8 SKL: Fact-Based 66. ANS: C PTS: 1 DIF: M REF: Module ANS: E PTS: 1 DIF: E REF: Module ANS: D PTS: 1 DIF: M REF: Module ANS: D PTS: 1 DIF: M REF: Module ANS: E PTS: 1 DIF: M REF: Module 8

44 71. ANS: E PTS: 1 DIF: E REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: E PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: E REF: Module ANS: B PTS: 1 DIF: E REF: Module ANS: B PTS: 1 DIF: E REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: E PTS: 1 DIF: M REF: Module ANS: E PTS: 1 DIF: M REF: Module ANS: E PTS: 1 DIF: E REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: E PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: E REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: E REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: E PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: E PTS: 1 DIF: M REF: Module 16

45 96. ANS: B PTS: 1 DIF: E REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: D REF: Module ANS: E PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: D REF: Module ANS: D PTS: 1 DIF: D REF: Module ANS: D PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: D PTS: 1 DIF: M REF: Module ANS: D PTS: 1 DIF: D REF: Module ANS: B PTS: 1 DIF: D REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: D PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: E REF: Module ANS: A PTS: 1 DIF: M REF: Module 18

46 120. ANS: E PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: D PTS: 1 DIF: M REF: Module ANS: D PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: D PTS: 1 DIF: E REF: Module ANS: A PTS: 1 DIF: E REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: D PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: D PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: D REF: Module ANS: A PTS: 1 DIF: D REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: E PTS: 1 DIF: M REF: Module 20 SKL: Fact-Based 136. ANS: B PTS: 1 DIF: E REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: E PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: E PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: D REF: Module ANS: B PTS: 1 DIF: E REF: Module 20 SKL: Fact-Based

47 144. ANS: D PTS: 1 DIF: M REF: Module ANS: E PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: D PTS: 1 DIF: D REF: Module ANS: D PTS: 1 DIF: D REF: Module ANS: B PTS: 1 DIF: E REF: Module ANS: A PTS: 1 DIF: E REF: Module ANS: B PTS: 1 DIF: E REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: A PTS: 1 REF: Module ANS: D PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: E REF: Module ANS: C PTS: 1 DIF: D REF: Module ANS: E PTS: 1 DIF: E REF: Module ANS: B PTS: 1 DIF: E REF: Module ANS: D PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: D PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: E REF: Module 23 SKL: Fact-Based 163. ANS: A PTS: 1 DIF: E REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: E REF: Module ANS: C PTS: 1 DIF: M REF: Module 25

48 169. ANS: A PTS: 1 DIF: M REF: Module ANS: D PTS: 1 DIF: E REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: E PTS: 1 DIF: E REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: D PTS: 1 DIF: M REF: Module ANS: D PTS: 1 DIF: M REF: Module ANS: D PTS: 1 DIF: E REF: Module 27 SKL: Fact-Based 181. ANS: C PTS: 1 DIF: D REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: E REF: Module ANS: B PTS: 1 DIF: E REF: Module ANS: C PTS: 1 DIF: E REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: E REF: Module ANS: B PTS: 1 DIF: E REF: Module ANS: D PTS: 1 DIF: E REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: D PTS: 1 DIF: D REF: Module 29

49 193. ANS: D PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: E PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: E REF: Module ANS: A PTS: 1 DIF: E REF: Module ANS: A PTS: 1 DIF: E REF: Module ANS: C PTS: 1 DIF: E REF: Module ANS: E PTS: 1 DIF: M REF: Module 30