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
6.) Which of the following is NOT an economic cost?
C. economic profits
D. normal profits
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
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
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
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."
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."
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."
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.
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
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
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
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
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
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
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
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
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
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
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
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
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
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.
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
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.
15. If the demand and supply curves for product X are stable, a government-mandated increase in the price of X
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.
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.
17. Assume in a competitive market that price is initially above the equilibrium level. We can predict that price
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.
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.
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
22. With a downsloping demand curve and an upsloping supply curve for a product, a decrease in resource
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.
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.
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.
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.
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.
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.
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.
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.
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
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.
9. In calculating GDP, governmental transfer payments, such as social security or unemployment compensation,
A. not counted.
B. counted as investment spending.
C. counted as government spending.
D. counted as consumption spending.
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
D. added when calculating GDP because imports do not constitute production in the United States.
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.
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.
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.
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.
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.
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:
D. zero dollars.
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.
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.
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.
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.
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:
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.
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.
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.
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
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
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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
D. grows much faster in "leader countries" than in "follower countries."
14. Which of the following economic regions has experienced the least growth in real GDP
per capita since 1820?
B. Asia excluding Japan
C. Latin America
D. Western Europe
15. Which of the following economic regions has experienced the most growth in real GDP
per capita since 1820?
B. United States
C. Latin America
D. Western Europe
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
D. Catching up is possible as "follower countries" tend to grow faster than "leader countries."
17. Economic growth rates in follower countries:
A. tend to be lower than in leader countries because labor forces in follower countries are too
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.
18. Real GDP per capita in the United States (as of 2007) exceeds that of France primarily
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
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
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.
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
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.
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.
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.
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
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
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.
29. Suppose total output (real GDP) is $4000 and labor productivity is $8. We can conclude
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.
30. Suppose total output (real GDP) is $10,000 and worker-hours are 20,000. We can
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.
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.
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
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.
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.
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.
1. Recurring upswings and downswings in an economy's real GDP over time are called:
B. business cycles.
C. output yo-yos.
D. total product oscillations.
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
3. In which phase of the business cycle will the economy most likely experience rising real output and falling
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.
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.
8. Official unemployment statistics:
A. understate unemployment because individuals receiving unemployment compensation are counted as
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
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.
C. the everyday dynamics of a free labor market.
D. technological change.
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.
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.
12. The type of unemployment associated with recessions is called:
A. frictional unemployment.
B. structural unemployment.
C. cyclical unemployment.
D. seasonal unemployment.
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.
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.
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.
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.
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
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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
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.
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
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.
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.
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.
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.
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.
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.
23. If the marginal propensity to save is 0.2 in an economy, a $20 billion rise in investment spending will
A. GDP by $120 billion.
B. GDP by $20 billion.
C. saving by $25 billion.
D. consumption by $80 billion.
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.
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.
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.
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
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.
8. Assume that in a private closed economy consumption is $240 billion and investment is $50 billion, both at
the $280 billion level of domestic output. Thus:
A. saving is $10 billion.
B. unplanned decreases in inventories of $10 billion will occur.
C. the MPC is .80.
D. unplanned increases in inventories of $10 billion will occur
13. Other things equal, if a change in the tastes of American consumers causes them to purchase more foreign
goods at each level of U.S. GDP:
A. unemployment will decrease domestically.
B. U.S. GDP will fall.
C. inflation will occur domestically.
D. U.S. real GDP will rise.
16. If the multiplier in an economy is 5, a $20 billion increase in net exports will:
A. increase GDP by $100 billion.
B. reduce GDP by $20 billion.
C. decrease GDP by $100 billion.
D. increase GDP by $20 billion.
18. In a mixed open economy the equilibrium GDP exists where:
A. Ca + Ig + Xn intersects the 45-degree line.
B. Ca + Ig = Sa + T + X.
C. Ca + Ig + Xn + G = GDP.
D. Ca + Ig + Xn = Sa + T.
19. Other things equal, if $100 billion of government purchases (G) is added to private spending (C + Ig + Xn),
A. increase by $100 billion.
B. increase by less than $100 billion.
C. increase by more than $100 billion.
D. fall by $100 billion.
20. Assume the MPC is .8. If government were to impose $50 billion of new taxes on household income,
consumption spending would decrease by:
A. $100 billion.
B. $90 billion.
C. $40 billion.
D. $50 billion.
21. A $1 increase in government spending on goods and services will have a greater impact on the equilibrium
GDP than will a $1 decline in taxes because:
A. government spending is more employment-intensive than is either consumption or investment spending.
B. government spending increases the money supply and a tax reduction does not.
C. a portion of a tax cut will be saved.
D. taxes vary directly with income.
22. Which of the following is a correct statement of the impacts of a lump-sum tax?
A. Disposable income will increase by the amount of the tax and consumption at each level of GDP will decline
by the amount of the tax multiplied by the MPC.
B. Disposable income will decline by the amount of the tax and consumption at each level of GDP will decline
by the amount of the tax multiplied by the multiplier.
C. Disposable income will decline by the amount of the tax and consumption at each level of GDP will also
decline by the amount of the tax.
D. Disposable income will decline by the amount of the tax and consumption at each level of GDP will decline
by the amount of the tax multiplied by the MPC.
23. Which of the following is correct?
A. Government expenditures and taxes both increase GDP.
B. Government expenditures and taxes both decrease GDP.
C. Government expenditures increase, but taxes decrease, GDP.
D. Government expenditures decrease, but taxes increase, GDP.
24. Suppose government finds it can increase the equilibrium real GDP $45 billion by increasing government
purchases by $18 billion. On the basis of this information we can say that the:
A. MPS in this economy is .4.
B. MPC in this economy is .4.
C. balanced-budget multiplier does not apply in this economy.
D. multiplier is 3.
25. Suppose the multiplier is 4 and lump-sum taxes are increased by $16 in a closed economy. We can predict
A. GDP will increase by $64.
B. GDP will decrease by $64.
C. the aggregate expenditures schedule will shift downward by $12.
D. inflation will occur.
26. If MPC = .5, a simultaneous increase in both taxes and government spending of $20 will:
A. decrease GDP by $20.
B. decrease GDP by $40.
C. increase GDP by $20.
D. increase GDP by $40.
27. Equal increases in government purchases and taxes will:
A. increase the equilibrium GDP and the size of that increase varies directly with the size of the MPC.
B. increase the equilibrium GDP and the size of that increase is independent of the size of the MPC.
C. increase the equilibrium GDP and the size of that increase varies inversely with the size of the MPC.
D. decrease the equilibrium GDP and the size of that decrease is independent of the size of the MPC.
28. An inflationary expenditure gap is the amount by which:
A. equilibrium GDP falls short of the full-employment GDP.
B. aggregate expenditures exceed any given level of GDP.
C. saving exceeds investment at the full-employment GDP.
D. aggregate expenditures exceed the full-employment level of GDP.
29. A recessionary expenditure gap is:
A. the amount by which the full-employment GDP exceeds the level of aggregate expenditures.
B. the amount by which equilibrium GDP falls short of the full-employment GDP.
C. the amount by which investment exceeds saving at the full-employment GDP.
D. the amount by which aggregate expenditures exceed the full-employment level of GDP.
31. Assume the current equilibrium level of income is $200 billion as compared to the full-employment income
level of $240 billion. If the MPC is 0.625, what change in aggregate expenditures is needed to achieve full
A. a decrease of $12 billion
B. an increase of $25 billion
C. an increase of $10 billion
D. an increase of $15 billion
32. If the MPC is .50, all taxes are lump-sum taxes, and the equilibrium GDP is $40 billion below the
full-employment GDP, then the size of the recessionary expenditure gap is:
A. $40 billion.
B. $20 billion.
C. $60 billion.
D. $80 billion.
1. The aggregate demand curve:
A. is upsloping because a higher price level is necessary to make production profitable as production costs rise.
B. is downsloping because production costs decline as real output increases.
C. shows the amount of expenditures required to induce the production of each possible level of real output.
D. shows the amount of real output that will be purchased at each possible price level.
2. The real-balances effect indicates that:
A. an increase in the price level will increase the demand for money, increase interest rates, and reduce
consumption and investment spending.
B. a lower price level will decrease the real value of many financial assets and therefore reduce spending.
C. a higher price level will increase the real value of many financial assets and therefore increase spending.
D. a higher price level will decrease the real value of many financial assets and therefore reduce spending.
3. Which of the following explains why the aggregate demand schedule is downward sloping:
A. the real-balances effect
B. the interest-rate effect
C. the foreign purchases effect
D. all of the above
4. The economy's long-run aggregate supply curve:
A. slopes upward and to the right.
B. is vertical.
C. is horizontal.
D. slopes downward and to the right.
5. The aggregate supply curve:
A. is explained by the interest rate, real-balances, and foreign purchases effects.
B. gets steeper as the economy moves from the top of the curve to the bottom of the curve.
C. shows the various amounts of real output that businesses will produce at each price level.
D. is downsloping because real purchasing power increases as the price level falls.
7. Other things equal, an improvement in productivity will:
A. shift the aggregate demand curve to the left.
B. shift the aggregate supply curve to the left.
C. shift the aggregate supply curve to the right.
D. increase the price level.
8. Other things equal, a reduction in personal and business taxes can be expected to:
A. increase aggregate demand and decrease aggregate supply.
B. increase both aggregate demand and aggregate supply.
C. decrease both aggregate demand and aggregate supply.
D. decrease aggregate demand and increase aggregate supply
9. Graphically, demand-pull inflation is shown as a:
A. rightward shift of the AD curve along an upsloping AS curve.
B. leftward shift of the AS curve along a downsloping AD curve.
C. leftward shift of AS curve along an upsloping AD curve.
D. rightward shift of the AD curve along a downsloping AS curve.
10. Graphically, cost-push inflation is shown as a:
A. leftward shift of the AD curve.
B. rightward shift of the AS curve.
C. leftward shift of AS curve.
D. rightward shift of the AD curve.
15. If personal taxes were decreased and resource productivity increased simultaneously, the equilibrium:
A. output would rise.
B. output would fall.
C. price level would necessarily fall.
D. price level would necessarily rise.
1. If you are estimating your total expenses for school next semester, you are using money primarily as:
A. a medium of exchange.
B. a store of value.
C. a unit of account.
D. an economic investment.
2. If you place a part of your summer earnings in a savings account, you are using money primarily as a:
A. medium of exchange.
B. store of value.
C. unit of account.
D. standard of value.
3. The paper money used in the United States is:
A. National Bank Notes.
B. Treasury Notes.
C. United States Notes.
D. Federal Reserve Notes
4. In the United States, the money supply (M1) is comprised of:
A. coins, paper currency, and checkable deposits.
B. currency, checkable deposits, and Series E bonds.
C. coins, paper currency, checkable deposits, and credit balances with brokers.
D. paper currency, coins, gold certificates, and time deposits.
5. Which of the following is not part of the M2 money supply?
A. money market mutual fund balances
B. money market deposit accounts
D. large ($100,000 or more) time deposits
6. Assuming no other changes, if checkable deposits decrease by $40 billion and balances in money market
mutual funds increase by $40 billion, the:
A. M1 money supply will decline and M2 money supply will remain unchanged.
B. M1 and M2 money supplies will not change.
C. M1 and M2 money supplies will increase.
D. M1 and M2 money supplies will decline.
8. The purchasing power of money and the price level vary:
B. directly during recessions, but inversely during inflations.
C. directly, but not proportionately.
D. directly and proportionately.
10. The basic policy-making body in the U.S. banking system is the:
A. Federal Open Market Committee (FOMC).
B. Board of Governors of the Federal Reserve.
C. Federal Monetary Authority.
D. Council of Economic Advisers.
11. The Federal Open Market Committee (FOMC) is made up of:
A. the chair of the Board of Governors along with the 12 presidents of the Federal Reserve Banks.
B. the seven members of the Board of Governors along with the president of the New York Federal Reserve
C. the seven members of the Board of Governors of the Federal Reserve System along with the three members
of the Council of Economic Advisers.
D. the seven member of the Board of Governors of the Federal Reserve System along with the president of the
New York Federal Reserve Bank and four other Federal Reserve Banks presidents on a rotating basis.
12. The members of the Federal Reserve Board:
A. serve seven-year terms.
B. are appointed by the American Economic Association.
C. are elected by votes of the 12 presidents of the Federal Reserve Banks.
D. serve 14-year terms.
13. The seven members of the Board of Governors of the Federal Reserve System are:
A. appointed by the President with the confirmation of the Senate.
B. elected by Congress from a slate of nominees provided by the President.
C. appointed by the Senate Finance Committee.
D. appointed by the presidents of the twelve Federal Reserve Banks.
14. To say that the Federal Reserve Banks are quasi-public banks means that:
A. they are privately owned, but managed in the public interest.
B. they deal only with banks of foreign nations and do not have direct business contact with U.S. banks.
C. they deal only with commercial banks, and not the public.
D. they are publicly owned, but privately managed.
15. A bank that has assets of $85 billion and a net worth of $10 billion must have:
A. liabilities of $75 billion.
B. excess reserves of $10 billion.
C. liabilities of $10 billion.
D. excess reserves of $75 billion.
16. The reserves of a commercial bank consist of:
A. the amount of money market funds it holds.
B. deposits at the Federal Reserve Bank and vault cash.
C. government securities that the bank holds.
D. the bank's net worth.
17. Suppose a commercial bank has checkable deposits of $100,000 and the legal reserve ratio is 10 percent. If
the bank's required and excess reserves are equal, then its actual reserves:
A. are $30,000.
B. are $10,000.
C. are $20,000.
D. cannot be determined from the given information.
19. Excess reserves refer to the:
A. difference between a bank's vault cash and its reserves deposited at the Federal Reserve Bank.
B. minimum amount of actual reserves a bank must keep on hand to back up its customers deposits.
C. difference between actual reserves and loans.
D. difference between actual reserves and required reserves.
20. Suppose the reserve requirement is 20 percent. If a bank has checkable deposits of $4 million and actual
reserves of $1 million, it can safely lend out:
A. $1 million.
B. $1.2 million.
22. If you deposit a $50 bill in a commercial bank that has a 10 percent legal reserve requirement the bank will:
A. have $45 of additional excess reserves.
B. be capable of lending an additional $500.
C. be capable of lending an additional $50.
D. have $50 of required reserves.
23. The Federal funds market is the market in which:
A. banks borrow from the Federal Reserve Banks.
B. U.S. securities are bought and sold.
C. banks borrow reserves from one another on an overnight basis.
D. Federal Reserve Banks borrow from one another.
24. Suppose a commercial banking system has $100,000 of outstanding checkable deposits and actual reserves of $35,000. If the reserve ratio is 20 percent, the banking system can expand the supply of money by the maximum amount of: