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14.) When an economy is operating under conditions of full employment, the production of more of commodity A will mean the prod. of less of commodity B because:
A. of the law of increasing opportunity costs
B. economic wants are insatiable
C. resources are limited
D. resources are specialized and only imperfectly substitutable

C. resources are limited

20.) The marginal benefit curve is:
A. upward sloping because of increasing marginal opportunity costs
B. upward sloping because of successive units of a specific product yield less and less extra benefit
C. Downward sloping because of increasing marginal opportunity costs
D. Downward sloping because of successive units of a specific product yield less and less extra benefit

D. Downward sloping because successive units of a specific product yield less and less extra benefit

2.) Economic systems differ according to what two main characteristics?
A. Who owns the factors of production
B. the technology used in production, and the quantity and quality of natural resources
C. How goods are produced, and who gets them
D. The political system in place, and the degree of scarcity facing the economy

A. Who owns the factors of production

3.) Which of the following is a fundamental characteristic of the market system?
A. property rights
B. central planning by government
C. unselfish behavior
D. government-set wages and prices

A.

6.) Which of the following is NOT an economic cost?
A. wages
B. rents
C. economic profits
D. normal profits

C.

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

D.

11.) In a market eonomy the distribution of output will be determined primarily by:
A. consumer needs and preferences
B. the quantities and prices of the resources that households supply.
C. government regulations that provide a minimum income for all
D. a social consensus as to what distribution fo income is most equitable

B.

12.) The most efficient combination of resources in producing any output is the combination that:
A. comes closest to using the same quantities of land, labor, capital, and entrepreneurial ability
B. can be obtained for the smallest monetary outlay
C. uses the smallest total quantity of all resources
D. conserves most on the use of labor

B.

16.) The market system's answer to the fundamental question "What will be produced?" is essentially:
A. "Goods and services that are profitable."
B."Low cost goods and services."
C."Goods and services that can be produced using large amounts of capital."
D. "Goods and services that possess lasting value."

A.

17.) The market system's answer to the fundamental question "How will the system accommodate change?" is essentially:
A. "Through government leadership and direction."
B. "Through the guiding function of prices and the incentive function of profits."
C. "Through training and retraining programs."
D. "Through random trial and error."

B.

18.) The market system's answer to the fundamental question "How will the system promote progress?" is:
A. "Through government funded research programs."
B. "Through the redistribution of income..."
C. "Through training and retraining programs."
D. "Through the profit potential that encourages development of new technology."

D.

19.) Consumer sovereignty refers to the:
A. fact that resource prices are higher than product prices in capitalistic economies.
B. idea that the pursuit of self-interest is in the public interest.
C. idea that the decisions of producers and resource suppliers with respect to the kinds and amounts of goods produced must be appropriate to consumer demands.

C.

21.) The simple circular flow model shows that:
A. households are on the buyin gisde of both product and resource markets
B. businesses are on the selling side of both production and resource markets
C. households are on the selling side of the resource market and buying side of the product market
D. businesses are on the buying side of the product market and selling side of the resource market

C.

22.) In the resource market:
A. businesses borrow financial capital from households
B. businesses sell services to households
C. households sell resources to businesses
D. firms sell raw materials to households

C.

LOOK AT CHART ON PAGE 4 OF CHPT 2
23.) Refer to the above diagram. Flow (1) represents:
A. wage, rent, interest, and profit income
B. land, labor, capital, and entrepreneurial ability
C. goods and services
D. consumer expenditures

A.

24.) In terms of the circular flow diagram, businesses obtain revenue through the ______ market and make expenditures in the ______ market
A. product; financial
B. resource; product
C. product; resource
D. capital; product

C.

2.) The demand curve shows the relationshipi between:
A. money income and quantity demanded
B. price and production costs
C. price and quantity demanded
D. consumer tastes and the quantity demanded

C.

3.) The income and substitution effects account for:
A. the upward sloping supply curve
B. the downward sloping demand curve
C. movements along a given supply curve
D. the "other things equal" assumption

B.

4.) A recent study found that an increase in the Federal tax on beer (and thus an increase in the price of beer) would reduce the demand for marijuana. We can conclude that:
A. beer and marijuana are substitute goods
B. beer and marijuana are complimentary goods
C. beer is an inferior good
D. marijuana is an inferior good

B.

6.) If the demand curve for product B shifts to the right as the price of product A declines, then:
A. both A and B are inferior goods
B. A is a superior good and B is an inferior good
C. A is an inferior good and B is a superior good
D. A and B are complementary goods

D.

7.) An increase in consumer incomes will:
A. increase the demand for an inferior good
B. increase the supply of an inferior good
C. increase the demand for a normal good
D. decrease the supply for a normal good

C.

8.) If consumer incomes increase, the demand for product X:
A. will necessarily remain unchanged
B. may shift either to the right or left
C. will necessarily shift to the right
D. will necessarily shift to the left

B.

9.) Suppose an excise tax is imposed on product X. We would expect this tax to:
A. increase the demand for complementary good Y and decrease the demand for substitute product Z
B. decrease the demand for complementary good Y and increase the demand for substitute product Z
C. increase the demands for both complementary good Y and sub product Z
D. decrease the demands for both complementary good Y and sub product Z

B.

10.) By an increase in demand we mean that:
A. product price has fallen so consumers move down to a new point on the demand curve
B. the quantity demanded at each price in a set of prices is greater
C. the quantity demanded at each price in a set of prices is smaller
D. a leftward shift of the demand curve has occurred

B.

11. The law of supply indicates that:
A. producers will offer more of a product at high prices than they will at low prices.
B. the product supply curve is downsloping.
C. consumers will purchase less of a good at high prices than they will at low prices.
D. producers will offer more of a product at low prices than they will at high prices

A.

12. A leftward shift of a product supply curve might be caused by:
A. an improvement in the relevant technique of production.
B. a decline in the prices of needed inputs.
C. an increase in consumer incomes.
D. some firms leaving an industry.

D.

13. Assume a drought in the Great Plains reduces the supply of wheat. Noting that wheat is a basic ingredient in
the production of bread and that potatoes are a consumer substitute for bread, we would expect the price of
wheat to:
A. rise, the supply of bread to increase, and the demand for potatoes to increase.
B. rise, the supply of bread to decrease, and the demand for potatoes to increase.
C. rise, the supply of bread to decrease, and the demand for potatoes to decrease.
D. fall, the supply of bread to increase, and the demand for potatoes to increase.

B.

Check number 14, Chpt. 3

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15. If the demand and supply curves for product X are stable, a government-mandated increase in the price of X
will:
A. increase the supply of X and decrease the demand for X.
B. increase the demand for X and decrease the supply of X.
C. increase the quantity supplied and decrease the quantity demanded of X.
D. decrease the quantity supplied of X and increase the quantity demanded of X.

C.

16. At the current price there is a shortage of a product. We would expect price to:
A. increase, quantity demanded to increase, and quantity supplied to decrease.
B. increase, quantity demanded to decrease, and quantity supplied to increase.
C. increase, quantity demanded to increase, and quantity supplied to increase.
D. decrease, quantity demanded to increase, and quantity supplied to decrease.

B.

17. Assume in a competitive market that price is initially above the equilibrium level. We can predict that price
will:
A. decrease, quantity demanded will decrease, and quantity supplied will increase.
B. decrease and quantity demanded and quantity supplied will both decrease.
C. decrease, quantity demanded will increase, and quantity supplied will decrease.
D. increase, quantity demanded will decrease, and quantity supplied will increase.

C.

18. Which of the following statements is correct?
A. If demand increases and supply decreases, equilibrium price will fall.
B. If supply increases and demand decreases, equilibrium price will fall.
C. If demand decreases and supply increases, equilibrium price will rise.
D. If supply declines and demand remains constant, equilibrium price will fall.

B.

Chpt 3 19 and 20 - GRAPH

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21. If the supply and demand curves for a product both decrease, then equilibrium:
A. quantity must fall and equilibrium price must rise.
B. price must fall, but equilibrium quantity may either rise, fall, or remain unchanged.
C. quantity must decline, but equilibrium price may either rise, fall, or remain unchanged.
D. quantity and equilibrium price must both decline

C.

22. With a downsloping demand curve and an upsloping supply curve for a product, a decrease in resource
prices will:
A. increase equilibrium price and quantity.
B. decrease equilibrium price and quantity.
C. decrease equilibrium price and increase equilibrium quantity.
D. increase equilibrium price and decrease equilibrium quantity.

C.

23 Chpt 3

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24. An effective ceiling price will:
A. induce new firms to enter the industry.
B. result in a product surplus.
C. result in a product shortage.
D. clear the market.

C.

25. If a legal ceiling price is set above the equilibrium price:
A. a shortage of the product will occur.
B. a surplus of the product will occur.
C. a black market will evolve.
D. neither the equilibrium price nor equilibrium quantity will be affected.

D.

2. Suppose the total market value of all final goods and services produced in a particular country in 2006 was
$500 billion and the total market value of final goods and services sold was $450 billion. We can conclude that:
A. GDP in 2006 was $450 billion.
B. NDP in 2006 was $450 billion.
C. GDP in 2006 was $500 billion.
D. inventories in 2006 fell by $50 billion.

C.

3. By summing the dollar value of all market transactions in the economy we would:
A. be determining the market value of all resources used in the production process.
B. obtain a sum substantially larger than the GDP.
C. be determining value added for the economy.
D. be measuring GDP.

B

4. Tom Atoe grows tomatoes for home consumption. This activity is:
A. excluded from GDP in order to avoid double counting.
B. excluded from GDP because an intermediate good is involved.
C. productive but is excluded from GDP because no market transaction occurs.
D. included in GDP because it reflects production.

C

5. In national income accounting, consumption expenditures include:
A. purchases of both new and used consumer goods.
B. consumer durable goods and consumer nondurable goods, but not services.
C. consumer durable goods, consumer nondurable goods, and services.
D. changes in business inventories.

C

6. Gross investment refers to:
A. private investment minus public investment.
B. net investment plus replacement investment.
C. net investment after it has been "inflated" for changes in the price level.
D. net investment plus net exports.

B

7. Which of the following do national income accountants consider to be investment?
A. the purchase of an automobile for private, nonbusiness use
B. the purchase of a new house
C. the purchase of corporate bonds
D. the purchase of gold coins

B

8. Suppose that inventories were $40 billion in 2003 and $50 billion in 2004. In 2004, accountants would:
A. add $10 billion to other elements of investment in calculating total investment.
B. subtract $10 billion from other elements of investments in calculating total investment.
C. add $45 billion (= $90/2) to other elements of investment in calculating total investment.
D. subtract $45 billion (= $90/2) from other elements of investment in calculating total investment.

A

9. In calculating GDP, governmental transfer payments, such as social security or unemployment compensation,
are:
A. not counted.
B. counted as investment spending.
C. counted as government spending.
D. counted as consumption spending.

A

10. The value of U.S. imports is:
A. added to exports when calculating GDP because imports reflect spending by Americans.
B. subtracted from exports when calculating GDP because imports do not constitute spending by Americans.
C. subtracted from exports when calculating GDP because imports do not constitute production in the United
States.
D. added when calculating GDP because imports do not constitute production in the United States.

C

11. The ZZZ Corporation issued $25 million in new common stock in 2004. It used $18 million of the proceeds
to replace obsolete equipment in its factory and $7 million to repay bank loans. As a result, investment:
A. of $7 million has occurred.
B. of $25 million has occurred.
C. of $18 million has occurred.
D. has not occurred.

C

12. If depreciation exceeds gross investment:
A. the economy's stock of capital may be either growing or shrinking.
B. the economy's stock of capital is shrinking.
C. the economy's stock of capital is growing.
D. net investment is zero.

B

13. In 1933 net private domestic investment was a minus $6.0 billion. This means that:
A. gross private domestic investment exceeded depreciation by $6.0 billion.
B. the economy was expanding in that year.
C. the production of 1933's GDP used up more capital goods than were produced in that year.
D. the economy produced no capital goods at all in 1933.

C

14. Consumption of fixed capital (depreciation) can be determined by:
A. adding taxes on production and imports to NDP.
B. subtracting NDP from GDP.
C. subtracting net investment from GDP.
D. adding net investment to gross investment.

B

15 through 20

...

21. Value added refers to:
A. any increase in GDP that has been adjusted for adverse environmental effects.
B. the excess of gross investment over net investment.
C. the difference between the value of a firm's output and the value of the inputs it has purchased from others.
D. the portion of any increase in GDP that is caused by inflation as opposed to an increase in real output.

C

22. Setup Corporation buys $100,000 of sand, rock, and cement to produce redi-mix concrete. It sells 10,000
cubic yards of concrete at $30 a cubic yard. The value added by Setup Corporation is:
A. $300,000.
B. $100,000.
C. $200,000.
D. zero dollars.

C

25. NDP is:
A. NI minus net foreign factor income.
B. NI plus corporate income taxes.
C. GDP deflated for increases in the price level.
D. GDP minus taxes on production and imports.

A

26. The amount of after-tax income received by households is measured by:
A. discretionary income.
B. national income.
C. disposable income.
D. personal income.

C

27. Nominal GDP is:
A. the sum of all monetary transactions that occur in the economy in a year.
B. the sum of all monetary transactions involving final goods and services that occur in the economy in a year.
C. the amount of production that occurs when the economy is operating at full employment.
D. money GDP adjusted for inflation.

B

28. Real GDP refers to:
A. the value of the domestic output after adjustments have been made for environmental pollution and changes
in the distribution of income.
B. GDP data that embody changes in the price level, but not changes in physical output.
C. GDP data that reflect changes in both physical output and the price level.
D. GDP data that have been adjusted for changes in the price level.

D

31. If real GDP in a particular year is $80 billion and nominal GDP is $240 billion, the GDP price index for
that year is:
A. 100.
B. 200.
C. 240.
D. 300.

D

32. Suppose nominal GDP in 2002 was $100 billion and in 2003 it was $260 billion. The general price index in
2002 was 100 and in 2003 it was 180. Between 2002 and 2003 the real GDP rose by:
A. 160 percent.
B. 44 percent.
C. 37 percent.
D. 12 percent.

B

33. Historically, real GDP has increased less rapidly than nominal GDP because:
A. price indices have not reflected improvements in product quality.
B. the general price level has increased.
C. technological progress has resulted in more efficient production.
D. the general price level has declined.

B

38. Real GDP and nominal GDP differ because the real GDP:
A. is adjusted for changes in the volume of intermediate transactions.
B. includes the economic effects of international trade.
C. has been adjusted for changes in the price level.
D. excludes depreciation charges.

C

39. If nominal GDP rises:
A. real GDP may either rise or fall.
B. we can be certain that the price level has risen.
C. real GDP must fall.
D. real GDP must also rise

A

46. Which of the following activities is excluded from GDP, causing GDP to understate a nation's well-being?
A. the services of used-car dealers
B. the child-care services provided by stay-at-home parents
C. the construction of new houses
D. government expenditures on military equipment

B

47. GDP data are criticized as being inaccurate measures of economic welfare because:
A. they do not take into account changes in the amount of leisure.
B. they do not take into account all changes in product quality.
C. they do not take into account the adverse effects of economic activity on the environment.
D. of all of these considerations.

D

1. Economic growth is best defined as an increase in:
A. either real GDP or real GDP per capita.
B. nominal GDP.
C. total consumption expenditures.
D. wealth in the economy.

A

2. Real GDP per capita is found by:
A. adding real GDP and population.
B. subtracting population from real GDP.
C. dividing real GDP by population.
D. dividing population by real GDP.

C

3. Real GDP per capita:
A. cannot grow more rapidly than real GDP.
B. cannot grow more slowly than real GDP.
C. necessarily grows more rapidly than real GDP.
D. can grow either more slowly or more rapidly than real GDP.

D

4. Which of the following best measures improvements in the standard of living of a nation?
A. growth of nominal GDP
B. growth of real GDP
C. growth of real GDP per capita
D. growth of national income

C

5. If a nation's real GDP increases from 100 billion to 106 billion and its population jumps
from 200 million to 212 million, its real GDP per capita will:
A. remain constant.
B. fall by 6 percent.
C. rise by 6 percent.
D. fall by 12 percent.

A

6. For a nation's real GDP per capita to rise during a year:
A. consumption spending must increase.
B. real GDP must increase more rapidly than population.
C. population must increase more rapidly than real GDP.
D. investment spending must increase.

B

10. Given the annual rate of economic growth, the "rule of 70" allows one to:
A. determine the accompanying rate of inflation.
B. calculate the size of the GDP gap.
C. calculate the number of years required for real GDP to double.
D. determine the growth rate of per capita GDP.

C

11. At an annual growth rate of 7 percent, real GDP will double in about:
A. 11 ½ years.
B. 10 years.
C. 13 ½ years.
D. 9 years.

B

12. The Industrial Revolution and modern economic growth resulted in:
A. the average human lifespan more than doubling.
B. a major population shift from urban to rural areas.
C. increased production by local craftsmen.
D. all of these.

A

13. Real per capita GDP:
A. grows at approximately the same rate for all countries.
B. was much more equal across nations in 1820 than it is today.
C. has been about 20 times higher in the richer nations than the poorer nations for about 2000
years.
D. grows much faster in "leader countries" than in "follower countries."

B

14. Which of the following economic regions has experienced the least growth in real GDP
per capita since 1820?
A. Africa
B. Asia excluding Japan
C. Latin America
D. Western Europe

A

15. Which of the following economic regions has experienced the most growth in real GDP
per capita since 1820?
A. Japan
B. United States
C. Latin America
D. Western Europe

B

16. Which of the following statements is most accurate about the prospects for poorer
("follower") countries catching up with richer ("leader") countries?
A. Catching up is unlikely to occur because their growth rates are the same on average.
B. Catching up is unlikely to occur because richer countries tend to grow at a faster rate.
C. Catching up is possible, but only if growth rates in leader countries fall to zero or become
negative.
D. Catching up is possible as "follower countries" tend to grow faster than "leader countries."

D

17. Economic growth rates in follower countries:
A. tend to be lower than in leader countries because labor forces in follower countries are too
small.
B. tend to exceed those in leader countries because followers can cheaply adopt the new
technologies that leaders developed at relatively high costs.
C. will never bring real GDP per capita up to the same levels as in leader countries, even if
follower growth rates are greater than those in leader countries.
D. typically average about 2 percent per year.

B

18. Real GDP per capita in the United States (as of 2007) exceeds that of France primarily
because:
A. the United States had higher annual rates of growth than France from 1960 through 2007.
B. the United States has a much larger population than France.
C. the United States has a higher percentage of the working-age population in the labor force
and because U.S. employees average about 20 percent more hours worked per year.
D. European Union rules severely limit France's access to technologies developed outside the
region.

C

19 Strong property rights are important for modern economic growth because:
A. they allow governments to extract the gains from private citizens' investments.
B. people are more likely to invest if they don't fear that others can take their returns on
investment without compensation.
C. they ensure an equitable distribution of income.
D. business cycle fluctuations will be smaller and less likely to disrupt investment patterns

B

20. Which of the following institutional structures is most likely to promote growth?
A. A well-enforced system of patents and copyrights.
B. A tightly regulated market system.
C. A system of tariffs and other trade barriers to protect domestic companies.
D. All of these.

A

22. Which of the following is not a supply factor in economic growth?
A. the stock of capital
B. technological advance
C. the size and quality of the labor force
D. aggregate expenditures of households, businesses, and government

D

23. Economic growth can be portrayed as:
A. an outward shift of the production possibilities curve.
B. an inward shift of the production possibilities curve.
C. a movement from a point on to a point inside a production possibilities curve.
D. a movement from one point to another point on a fixed production possibilities curve.

A

24. Suppose that an economy's labor productivity and total worker-hours each grew by 3
percent between year 1 and year 2. We could conclude that this economy's:
A. real GDP remained constant.
B. capital stock increased by 3 percent.
C. production possibilities curve shifted inward.
D. production possibilities curve shifted outward.

D

25. Refer to the above graph. An increase in an economy's labor productivity would:
A. move the economy away from point A and toward point B.
B. move the economy away from point B and toward point A.
C. shift curve AB to CD.
D. shift curve CD to AB.

C

26. Labor productivity is defined as:
A. total output/worker-hours.
B. nominal GDP minus real GDP.
C. the ratio of real capital to worker-hours.
D. the annual increase in nominal GDP per worker

A

27 Which of the following is correct?
A. total output = labor productivity/worker-hours
B. labor productivity = worker-hours/total output
C. total output = worker-hours  labor productivity
D. worker-hours = labor productivity  total output

C

28 If the number of worker-hours in an economy is 100 and its labor productivity is $5 of
output per worker-hour, the economy's real GDP:
A. is $20.
B. is $500.
C. is $5000.
D. cannot be calculated.

B

29. Suppose total output (real GDP) is $4000 and labor productivity is $8. We can conclude
that:
A. real GDP per capita must be $500.
B. the price-level index must be greater than 100.
C. nominal GDP must be $500.
D. the number of worker-hours must be 500.

D

30. Suppose total output (real GDP) is $10,000 and worker-hours are 20,000. We can
conclude that:
A. real GDP per capita must be $200,000.
B. the price-level index must be less than 100.
C. labor productivity must be $0.5.
D. nominal GDP must be between $10,000 and $20,000.

C

31. The largest contributor to increases in the productivity of American labor is:
A. the reallocation of labor from agriculture to manufacturing.
B. improvements in labor quality.
C. increases in the quantity of capital.
D. technological advance.

D

32. More than half the growth of real GDP in the United States is caused by:
A. a falling price level.
B. the reallocation of labor from manufacturing to agriculture.
C. increases in the productivity of labor.
D. the use of fewer inputs of labor

C

33. A nation's infrastructure refers to:
A. its ability to realize economies of scale.
B. its stock of technological knowledge.
C. public capital goods such as highways and sanitation systems.
D. the productivity of its labor force.

C

34. Human capital refers to:
A. the skills and knowledge that enable a worker to be productive.
B. machinery used by labor in production.
C. the accumulated financial wealth of households.
D. physical capital owned by households rather than businesses.

A

35. Proponents of economic growth make all of the following arguments except:
A. Growth is the basic means of improving living standards.
B. It is easier to reduce poverty when the economy is growing than when it is not.
C. There is a direct relationship between a growing real GDP and rising pollution.
D. Growth provides an economic environment favorable to education and self-fulfillment.

C

1. Recurring upswings and downswings in an economy's real GDP over time are called:
A. recessions.
B. business cycles.
C. output yo-yos.
D. total product oscillations.

B

2. A recession is a period in which:
A. cost-push inflation is present.
B. nominal domestic output falls.
C. demand-pull inflation is present.
D. real domestic output falls

D

3. In which phase of the business cycle will the economy most likely experience rising real output and falling
unemployment rates?
A. expansion
B. recession
C. peak
D. trough

A

6. The natural rate of unemployment is:
A. higher than the full-employment rate of unemployment.
B. lower than the full-employment rate of unemployment.
C. that rate of unemployment occurring when the economy is at its potential output.
D. found by dividing total unemployment by the size of the labor force.

C

7. If the unemployment rate is 9 percent and the natural rate of unemployment is 5 percent, then the:
A. frictional unemployment rate is 5 percent.
B. cyclical unemployment rate and the frictional unemployment rate together are 5 percent.
C. cyclical unemployment rate is 4 percent.
D. natural rate of unemployment will eventually increase.

C

8. Official unemployment statistics:
A. understate unemployment because individuals receiving unemployment compensation are counted as
employed.
B. understate unemployment because discouraged workers are not counted as unemployed.
C. include cyclical and structural unemployment, but not frictional unemployment.
D. overstate unemployment because workers who are involuntarily working part time are counted as being
employed.

B

9. Cyclical unemployment results from:
A. a deficiency of aggregate spending.
B. the decreasing relative importance of goods and the increasing relative importance of services in the U.S.
economy.
C. the everyday dynamics of a free labor market.
D. technological change.

A

10. Unemployment involving a mismatch of the skills of unemployed workers and the skills required for
available jobs is called:
A. frictional unemployment.
B. structural unemployment.
C. cyclical unemployment.
D. compositional unemployment.

B

11. Which of the following constitute the unemployment occurring at the natural rate of unemployment?
A. frictional and cyclical unemployment
B. structural and frictional unemployment
C. cyclical and structural unemployment
D. frictional, structural, and cyclical unemployment.

B

12. The type of unemployment associated with recessions is called:
A. frictional unemployment.
B. structural unemployment.
C. cyclical unemployment.
D. seasonal unemployment.

C

13. The GDP gap measures the difference between:
A. NDP and GDP.
B. NI and PI.
C. actual GDP and potential GDP.
D. nominal GDP and real GDP.

C

14. A large negative GDP gap implies:
A. an excess of imports over exports.
B. a low rate of unemployment.
C. a high rate of unemployment.
D. a sharply rising price level.

C

15. If actual GDP is $340 billion and there is a positive GDP gap of $20 billion, potential GDP is:
A. $360 billion.
B. $660 billion.
C. $320 billion.
D. $20 billion.

C

16. Assume the natural rate of unemployment in the U.S. economy is 5 percent and the actual rate of
unemployment is 9 percent. According to Okun's law, the negative GDP gap as a percent of potential GDP is:
A. 4 percent.
B. 8 percent.
C. 10 percent.
D. 2 percent.

B

17. If actual GDP is less than potential GDP:
A. potential GDP will fall.
B. the price level will rise.
C. investment spending will fall.
D. the actual unemployment rate will be higher than the natural unemployment rate

D

20. Okun's law:
A. measures the tradeoff between the rate of inflation and the rate of unemployment.
B. indicates the number of years it will take for a constant rate of inflation to double the price level.
C. quantifies the relationship between nominal and real incomes.
D. shows the relationship between the unemployment rate and the size of the negative GDP gap.

D

21. Demand-pull inflation:
A. occurs when prices of resources rise, pushing up costs and the price level.
B. occurs when total spending exceeds the economy's ability to provide output at the existing price level.
C. occurs only when the economy has reached its absolute production capacity.
D. is also called cost-push inflation.

B

22. Inflation initiated by increases in wages or other resource prices is labeled:
A. demand-pull inflation.
B. demand-push inflation.
C. cost-push inflation.
D. cost-pull inflation.

C

23. Suppose that a person's nominal income rises by 5 percent and the price level rises from 125 to 130. The
person's real income will:
A. fall by about 1 percent.
B. remain constant.
C. rise by about 4 percent.
D. rise by about 1 percent.

D

24. If the nominal interest rate is 5 percent and the real interest rate is 2 percent, then the inflation premium is:
A. 8 percent.
B. 5 percent.
C. 3 percent.
D. 2 percent.

C

1. The most important determinant of consumption and saving is the:
A. level of bank credit.
B. level of income.
C. interest rate.
D. price level.

B

2. If Carol's disposable income increases from $1,200 to $1,700 and her level of saving increases from minus
$100 to a plus $100, her marginal propensity to:
A. save is three-fifths.
B. consume is one-half.
C. consume is three-fifths.
D. consume is one-sixth.

C

3. As disposable income increases, consumption:
A. and saving both increase.
B. and saving both decrease.
C. decreases and saving increases.
D. increases and saving decreases.

A

4. The average propensity to consume indicates the:
A. amount by which income exceeds consumption.
B. relationship between a change in saving and the consequent change in consumption.
C. percentage of total income that will be consumed.
D. percentage of a change in income that will be consumed.

C

5. Tessa's break-even level of income is $10,000 and her MPC is 0.75. If her actual disposable income is
$16,000, her level of:
A. consumption spending will be $14,500.
B. consumption spending will be $15,500.
C. consumption spending will be $13,000.
D. saving will be $2,500.

A

6. Which of the following is correct?
A. MPC + MPS = APC + APS
B. APC + MPS = APS + MPC
C. APC + MPC = APS + MPS
D. APC APS = MPC MPS

A

7. The wealth effect is shown graphically as a:
A. shift of the consumption schedule.
B. movement along an existing consumption schedule.
C. shift of the investment schedule.
D. movement along an existing investment schedule.

A

8. Which of the following will not cause the consumption schedule to shift?
A. a sharp increase in the amount of wealth held by households
B. a change in consumer incomes
C. the expectation of a recession
D. a growing expectation that consumer durables will be in short supply

B

15. Suppose that a new machine tool having a useful life of only one year costs $80,000. Suppose, also, that the
net additional revenue resulting from buying this tool is expected to be $96,000. The expected rate of return on
this tool is:
A. 80 percent.
B. 8 percent.
C. 2 percent.
D. 20 percent.

D

16. A decline in the real interest rate will:
A. increase the amount of investment spending.
B. shift the investment schedule downward.
C. shift the investment demand curve to the right.
D. shift the investment demand curve to the left.

A

17. Other things equal, a 10 percent decrease in corporate income taxes will:
A. decrease the market price of real capital goods.
B. have no effect on the location of the investment-demand curve.
C. shift the investment-demand curve to the right.
D. shift the investment-demand curve to the left.

C

19. If the inflation rate is 10 percent and the real interest rate is 12 percent, the nominal interest rate is:
A. 2 percent.
B. zero percent.
C. 10 percent.
D. 22 percent.

D

21. If the MPC is .70 and gross investment increases by $3 billion, the equilibrium GDP will:
A. increase by $10 billion.
B. increase by $2.10 billion.
C. decrease by $4.29 billion.
D. increase by $4.29 billion.

A

22. The multiplier effect indicates that:
A. a decline in the interest rate will cause a proportionately larger increase in investment.
B. a change in spending will change aggregate income by a larger amount.
C. a change in spending will increase aggregate income by the same amount.
D. an increase in total income will generate a larger change in aggregate expenditures.

B

23. If the marginal propensity to save is 0.2 in an economy, a $20 billion rise in investment spending will
increase:
A. GDP by $120 billion.
B. GDP by $20 billion.
C. saving by $25 billion.
D. consumption by $80 billion.

D

24. A $1 billion increase in investment will cause a:
A. (1/MPS) billion increase in GDP.
B. (MPS) billion increase in GDP.
C. (1 MPC) billion increase in GDP.
D. (MPC MPS) billion increase in GDP.

A

25. If the MPC is .6, the multiplier will be:
A. 4.0.
B. 6.0.
C. 2.5.
D. 1.67.

C

1. The level of aggregate expenditures in the private closed economy is determined by the:
A. expenditures of consumers and businesses.
B. intersection of the saving schedule and the 45-degree line.
C. equality of the MPC and MPS.
D. intersection of the saving and consumption schedules.

A

5. The equilibrium level of GDP in a private closed economy is where:
A. MPC = APC.
B. unemployment is about 3 percent of the labor force.
C. consumption equals saving.
D. aggregate expenditures equal GDP.

D

6. In a private closed economy, when aggregate expenditures exceed GDP:
A. GDP will decline.
B. business inventories will rise.
C. saving will decline.
D. business inventories will fall

D

7. If an unintended increase in business inventories occurs at some level of GDP, then GDP:
A. entails a rate of aggregate expenditures in excess of the rate of aggregate production.
B. may be either above or below the equilibrium output.
C. is too low for equilibrium.
D. is too high for equilibrium.

D

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