If the marginal cost of keeping a doctor's office open one additional hour per day is $200, then the doctor should keep the office open for one extra hour
as long as the marginal benefit she recieves is just equal to or greater than $200
Rayburn Reed is a highly talented photographer. He has chosen to specialize in photography NOT because
his opportunity cost of pursuing another career is very low
In October, market analysts predict that the price of platinum will fall in November. What happens in the platinum market in October?
The supply curve shifts to the right
"Because apples and oranges are substitutes, an increase in the price of oranges will cause the demand for apples to increase. This initial shift in demand for apples results in a higher price for apples; this higher price will cause the demand curve for apples to shift to the right"
The statement is false because a change in the price of apples would not change the demand for apples
Individuals who have never been the best at doing anything...
can still have a comparative advantage in producing some product
The decision about what goods and services will be produced made in a market economy is made by
consumers and firms choosing which goods and services to buy or produce
Macroeconomics is the study of
the economy as a whole
Society faces a trade-off in all of the following situations except
when some previously unemployed workers find jobs
Economists use the word marginal to mean an extra benefit or cost of a decision. An optimal decision occurs when marginal benefit
equals marginal cost
A production possibilities frontier with a bowed outward shape indicates
increasing opportunity cost as more and more of one good is produced
The slope of a production possibilities frontier
measures the opportunity cost of producing one more unit of a good
Specializing in the production of a good or service in which one has a comparative advantage enables a country to do all of the following except
consume a combination of goods that lies outside its own production possibilities frontier
What type of economic analysis is concerned with the way things ought to be?
Normative Analysis
The three fundamental questions that any economy must address are
What goods and services to produce; how will these goods and services be produced; and who receives them
Economists assume that rational behavior is useful in explaining choices people make
even though people may not behave rationally all the time
Scarcity is
the situation in which unlimited wants exceed limited resources
Which of the following is a positive economic statement?
If the price of iPhones falls, a larger quantity of iPhones will be purchased
The highest valued alternative that must be given up to engage in an activity is the definition of
opportunity cost
By definition, economics is the study of
the choices people make to attain their goals, given their scarce resources
Who is faced with making trade-offs?
Every individual, no matter how rich or poor
What is the difference between an "increase in supply" and an "increase in quantity supplied"?
An "increase in supply" means the supply curve has shifted to the right while an "increase in quantity supplied" refers to a movement along a given supply curve in response to an increase in price
Adam Smith's invisible hand refers to
the process by which individuals acting in their own self-intresest bring about a market outcome that benefits society as a whole
What is absolute advantage?
The ability to produce more of a good than competitors using the same amount of resources
Bella can produce either a combination of 60 roses and 80 leaves or a combination of 70 roses and 55 leaves. If she now produces 60 roses and 80 leaves, what is the opportunity cost of producing an additional 10 roses?
25 leaves
What will shift the demand curve for a good?
a decrease in the price of a complementary good
During the recession of 2007-2009, despite falling income levels, the fast-food chain Subway experienced increased sales. The increase in demand for Subway despite the decline in income indicates that Subway is considered
inferior goods
If, in response to an increase in the price of chocolate, the quantity demanded of chocolate decreases economists would describe this as
a decrease in quantity demanded
Arlene quits her $125,000 a year job to take care of her ailing parents. What is the opportunity cost of her decision?
At least $125,000
At a product's equilibrium price
the product's demand curve crosses the product's supply curve
The law of demand implies that as the price of bagels increases, the...
quantity of bagels demanded will decrease
How does the increasing use of MP3 players affect the market for compact discs?
The demand curve for compact discs shifts to the left
Elvira decreased her consumption of bananas when the price of peanut butter increased. For Elvira, peanut butter and bananas are
complements in comsumption
When the price of bananas is lowered in order to increase sales this is evidence of a _________ of bananas.
If the Apple iPad and the Samsung Galaxy Tab are considered substitutes, then an increase in the price of the iPad will
increase the demand for the Galaxy Tab
To affect the market outcome, a price ceiling must be set
below the equilibrium price
A minimum wage law dictates
the lowest wage that firms may pay for labor
Economists have shown that the burden of a tax is the same whether the tax is collected from the buyer or the seller. Why, then, are gasoline and cigarette taxes imposed on sellers?
It is more difficult for buyers to keep track of their purchases, and for the government to verify that the right amount of tax revenue is collected
Which of the following increases labor productivity
inventions of new machinery, equipment, or software
In the loanable funds market, the vertical axis represents
interest rates
The demand for loanable funds market is best represented by
If you invest $50 in a bond that earns 8% interest per year, approximately how many years will it take for you to have $100?
9 years
Inflation is measured as
the percent change in the CPI
The PPI measures
the price level as experienced by producers
The percentage change CPI is a widely used measure of the
inflation rate
Real GDP is notttt
our best measure of economic growth
Which of the following will result in a fall in interest rates and an increase in investment?
Decrease in government expenditure
"Crowding out" of firm investment as a result of budget deficit could be due to...
an increase in government expenditure, resulting in higher interest rates and lower private investment
If government saving is positive, then
T - G > TR
How would the equilirium interest rate respond to a change from an income tax to a consumption tax?
The equilibrium intrest rate would fall
When the government runs a budget surplus, we would expect to see that
investment will rise
Inflation tends to _____ during the expansion phase of the business cycle and _____ during the recession phase of the business cycle
increase; decrease
Which of the following would contribute to a sustained high rate of economic growth in the long run in an economy?
growth in capital per hour and technological change
If the marginal propensity to consume is 0.25, then a $10,000 increase in disposable income will
increase consumption by $2,500
How does a decrease in marginal propensity to save affect the aggregate expenditure line?
It increases the slope of the line
The larger the MPC
the larger the multiplier
The multiplier makes the economy more sensitive to changes in
autonomous expenditure
The formula for the multiplier overstates the real world multiplier when we take into account the impact of changes in
GDP on imports, inflation, and the interest rate
If the economy is currently in equilibrium at a level of GDP that is below potential GDP, which of the following would move the economy back to potential GDP
an increase in business confidence
when aggregate expenditure is more than GDP, which of the following is true?
There was an unplanned decrease in inventories
An increase in the real interest rate will
cause consumers to spend less and save more
Disease, poor nutrition, and substandard health care in developing nations can reduce growth in an economy by
reducing human capital
Increases in the price level will
lower consumption because real wealth decreases
Firms in a small economy planned that inventories would grow over the past year by $30,000. Over that year, inventories actually grew by $400,000. This implies that
aggregate expenditure that year was less than GDP that year
When an economy faces diminishing returns,
the slope of the per-worker production function becomes flatter as capital per hour worked increases
If the per-worker production function shifts down
negative technological change has occurred in the economy
Suppose that in 2011 real GDP grew in Estonia by 5% and that the population increased by 3%. Therefore in 2011, Estonia experienced
economic growth and an increase in living standards
Which of the following policies would nottt help promote economic growth?
a law requiring that the funds in an individual retirement account be taxed
If inflation in the United States is lower than inflation in other countries, what will be the effect on net exports for the United States?
Net exports will rise as U.S. exports increase
Four ways for a country to promote long-run economic growth
stronger laws to protect property rights, political reform to decrease corruption, vaccinations against diseases, less strict regulations on foreign direct investment
A policy that offers parents a tax reduction based on how much they are saving for the children's college education should ______ the equilibrium level of loanable funds and ______ the rate of long-term growth.
increase; increase
Which of the following is included in both the U.S. GDP and U.S. GNP?
the value of all cars produced by General Motors in the U.S.
The GDP deflator in year 2 is 105, using year 1 as the base year. This means that the cost of good and services is
5% higher in year 2 than in year 1
Imagine that you $1,000 for one year and at the end of the year you repay the $,1000 plus $100 of interest. If the inflation rate was 7%, what was the real interest rate you paid?
3 percent
Structural unemployment is the result of
a persistent mismatch between the skills of workers and the requirements of the jobs
Using a broader measure of the unemployment rate where discouraged workers and part-time workers who wished to work full time were conunted as unemployed, the BLS estimates the unemployment rate in September 2011 would have ______ compared to the measured unemployment rate.
increased by more than 7 percentage points
Investment, as defined by economists, would include which of the following?
Taylor buys a new house
Which of the following explains the changes in the U.S. adult male labor force participation rate since 1948?
younger men are remaining in school longer as compared to the past
According tot he text, economists consider full employment to occur when
cyclical unemployment equals zero
Which of the following policies would reduce frictional unemployment?
building an online job database that helps workers find jobs
Suppose your grandfather earned a salary of $12,000 in 1964. If the CPI is 31 in 1964 and 219 in 2010, then the value of your grandfather's salary in 2010 dollars is approximately
$84, 775
The output of Mexican citizens who work in Texas would be included in the
gross domestic product of the United States
Which of the following would be directly counted in GDP in 2012?
kitchen cabinets purchased from Home Depot in 2012 to be installed in a house built in 1997
Which of the following describes a situation in which the person is hurt by inflation?
a person paid a fixed income during an inflationary period
You earned $30,000 in 1990, and your salary rose to $80,000 in 2011. If the CPI rose from 82 to 202 which of the following is true?
The purchasing power of your salary increased
Which of the following cause the unemployment rate as measured by the Bureau of Labor Statistics to overstate the true extent of joblessness?
People employed in the underground economy
If the BLS counted persons that are on active military service in the totals for employment, the labor force, or the working-age population, this would
decrease the measured unemployment rate
To reduce the bias in the consumer price index, the Bureau of Labor Statistics
updates the market basket every 2 years, rather than every 10 years
In 2010, which component of GDP had a negative value?
net exports
During a business cycle recession, total production _______ and total employment _______
decreases; increases
Which of the following would be the vest measure of the cost of living?
consumer price index
If an economy experiences inflation, the real interest rate will be
less than the nominal interest rate
Health insurance payment to an army would not be an example of a transfer payment because
the government is receiving something in return for their money
You lend $100 to a friend for one year at a nominal interest rate of 10%. Inflation during that year is 10%. As a result, you will receive $110 at the end of the year, but that money has a purchasing power of
Suppose Bob works for Mary as a proofreader. Mary and Bob fall in love, marry and have eight children. Bod stops working for Mary to care for the children. What will be the effect on GDP?
GDP will decrease
What would the price level and the quantity of final goods and services have to do to cause nominal GDP to decrease, but real GDP to increase?
The price level falls and the quantity of final goods and services produced rises
A country in which a significant fraction of domestic production takes place in foreign-woed factories and facilities is most likely a country where
GDP is much larger than GNP
Which of the following is likely to decrease measured GDP?
A greater number of women decide to stay at home and provide day care for their children
In the U.S. economy what is true about creating and destroying jobs?
Each year, many new jobs are created and many existing jobs are destroyed
Which of the following is true about the consumer price index?
It assumes that consumers purchase the same amount of each product in the market basket each month
The consumer price index does not
frequently update price changes, filter out price increases for quality improvements, or account for people switching to goods whose prices have fallen
Which of the following would be a consequence of substitution bias in the CPI?
Businesses would over-compensate employees for inflation when giving the cost of living rises
Efficiency wages cause unemployment because
firms pay wages that are above the market wage, causing the quantity of labor demanded to be less than the quantity of labor supplied
Which of the following goods is directly counted in GDP?
a 12-inch Subway sandwich purchased by a student
If real GDP in 2011 (using 2002 prices) is lower than nominal GDP of 2010, then
prices in 2011 are lower than prices in 2010
The best measure of income households actually have available to spend is
disposable personal income
The increased generosity of unemployment insurance programs in Canada as compared to the United States should
increase the duration of unemployment in Canada as compared tot he United States
An advantage of the household survey over the establishment survey of the labor market is that the household survey
includes the number of self-employed persons
A student who just graduated form college but has not found a job would most likely be
frictionally unemployed
Which of the following would decrease the unemployment rate?
government aid to retrain unemployed workers
To offset the effect of households and firms deciding to hold more of their money in checking account deposits and less in currency, the Federal Reserve could
Sell Treasury securities
A bank will consider a car loan to a customer ________ and a customer's checking account to be ________
an asset; a liability
Which of the following is not counted in M1?
credit card balances
The quantity equation states that the money supply
x the velocity of money = real output x the price level
Suppose that you deposit $2,000 in your bank and the required reserve ratio is 10 percent. The maximum loan your bank can make as a direct result of your deposit is
There is a strong link between changes in the money supply and inflation
in the long run, but not in the short run
The major assets on a bank's balance sheet are its
reserves, loans, and holdings of securities
money's most narrow definition is based on its function as a
medium of exchange
In an attempt to bring lenders and borrowers together following the financial crisis of 2008, the Federal Reserve made a large about of new funds available to financial markets. Any of these new funds that are loaned out by banks would be classified as ______ of the banks.
excess reserves
The quantity theory of money predicts that, in the long run, inflation results from the
money supply growing at a faster rate than real GDP
The largest proportion of M1 is made up of
According to the quantity theory of money, deflation will occur is the
money supply grows at a slower rate than real GDP
What are three consequences of hyperinflation?
Money loses value so rapidly that firms and individuals stop holding it, it causes an economy to suffer slow growth, and the price level grows in excess of hundreds of percentage points per year
In response to the destructive bank panics of the Great Depression, future bank panics are designed to be prevented by
The establishment of the Federal Deposit Insurance Corporation
Soldiers in a World War II prisoner-of-war camp
used cigarettes as money
Economies where goods and services are traded directly for other goods and services are called _______ economies.
Imagine that Kirsty deposits $10,000 of currency into her checking account deposit at Bank A and that the required reserve ration is 20%. As a result of Kirsty's deposit, Bank A's excess reserves increases by
Suppose Bill Gates deposits $20 million into his checking account at Wells Fargo Bank. If the required reserve ratio is 10%, what is the maximum change in money supply?
$180 million
Suppose there is a bank panic. What are four consequences?
Individual banks would have to shrink the value of loans they made
The economy would likely enter into a recession
Bank checking account balances would decrease
Bank total reserves would decrease
If households and firms decide to hold less of their money in checking account deposits and more in currency, then the money supply
will decrease
Gold is durable, acceptable to traders and has value other than money but it does not have
standardized quality
According to the quantity theory of money, the inflation rate equals
the growth rate of the money supply minus the growth rate of real output
In 1980, one Zimbabwean dollar was worth 1.47 U.S. dollars. By the end of 2008, the exchange rate was one U.S. dollar to 2 billion Zimbabwean dollars. When an economy experiences rapid increases in the price level such as what occurred in Zimbabwe, the economy is said to experience
Imagine that Kristy deposits $10,000 into her checking account at a bank that requires a reserve ration of 20%. As a result of Kristy's deposit, the bank's reserves immediately increase by
Commodity money
Has value independent of its use as money
The main tool that the Federal Reserve uses to conduct monetary policy is
open market operations
The sale of Treasury securities by the Federal Reserve will,
decrease the quantity of reserves held by banks
Which of the following determines the amount of money the banking system as a whole can create?
The quantity of bank reserves
Suppose you with draw $500 from your checking account deposit and bury it in a jar in your back yard. If the required reserve ration is 10%, checking account deposits in the banking system as a whole could drop up to a maximum of
Banks can continue to make loans until their
actual reserves equal their required reserves
Which of the following best describes how banks create money?
Banks create checking account deposits when making loans from excess reserves
A central bank like the Federal Reserve in the United States can help banks service a bank run by
acting as a lender of last resort
Which of the following is not a consequence of the Fed changing the reserve requirement?
Changes in the ratio are easily incorporated into banks' routine management
If credit card balances rise in the economy, then M1 will ____ and M2 will ______
not change; not change
A decrease in the discount rate ____ bank reserves and ____ the money supply if banks respond appropriately to the change in the rate.
increase; increase
Which of the following functions of money would be violated if inflation were high?
Store of value
If whole tomatoes were money, which of the following functions of money would be the hardest for tomatoes to satisfy?
Store of value
Dollar bills in the modern economy serve as money because
people have confidence that others will accept them as money
The required reserves of a bank equal its ____ the required reserve ratio.
deposits multiplied by
If a person withdraws $500 from his/her checking account and hold it as currency, then M1 will _____ and M2 will _____.
not change; not change
Suppose a bank has $100,000 in checking account deposits with no excess reserves and the required reserve ratio is 10%. If the Federal Reserve raises the required reserve ratio to 12%, then the bank will now have excess reserves of
In an economy with _____, there are more prices than in an economy with _____.
barter; money
Imagine that Kristy deposits $10,000 of currency into her checking account and the bank requires a reserve ratio of 20%. As a result of Kristy's deposit, checking account deposits in the banking system as a whole (including the original deposit) could eventually increase up to a maximum of
To increase the money supply, the Federal Reserve could
conduct an open market purchase of Treasury securities
Suppose a bank has $100 million in checking account deposits with no excess reserves and the required reserve ratio is 20%. If the Federal Reserve reduces the required reserve ratio to 15%, then the bank will now have excess reserves of
The M1 measure of the money supply equals
Currency + checking account balances + traveler's checks
Fiat money has
little to no intrinsic value and is authorized by the central bank or governmental body
If households choose to take some fraction of each check they deposit and hold it as currency, then the simple deposit multiplier ______ the real-world multiplier.
is greater than
Your roommate argues that he can think of no better situation than living in a deflationary economy, as prices of goods and services would continuously fall. You disagree and argue that during a deflation, people can be made worse off because
borrowers will have to pay increasing amounts in real terms over time
Which of the following would cause the short-run aggregate supply curve to shift to the right?
a technological advance
How do lower taxes affect aggregate demand?
They increase disposable income, consumption, and aggregate demand
An increase in the price level results in a __________ in the quantity of real GDP demanded because...
decrease; a higher price level reduces consumption, investment, and net exports
In the dynamic aggregated demand and aggregate supply model, if AD shifts faster than AS
inflation occurs
An increase in the price level will
move the economy up along a stationary aggregate demand curve
On the long-run aggregate supply curve, a decrease in the price level will
have no effect on the aggregate quantity of GDP supplied
Long-run macroeconomic equilibrium occurs when
aggregate demand equals short-run aggregate supply and they intersect at a point on the long-run supply curve
Last week, six Swedish dollars could purchase one U.S. dollar. This week, it takes eight Swedish dollars to purchase one U.S. dollar. This change in the value of the dollar will _____ exports from the U.S. to Sweden and _____ U.S. aggregate demand.
decrease; decrease
The basic aggregate demand and aggregate supply curve model helps explain
short term fluctuations in real GDP and the price level
Hurricane Katrina destroyed oil and natural gas refining capacity in the Gulf of Mexico which subsequently drove up natural gas, gasoline, and heating oil prices. Three years later, once the refining capacity was restored, theses prices came back down. The restoration of refining capacity should
shift the short-run aggregate supply curve to the right
If the short-run aggregate supply increases by less than the long-run aggregate supply, then at the short-run equilibrium,
GDP will be below potential GDP
If aggregate demand just increased, what may have caused it?
an increase in government purchases
Spending on the war in Afghani