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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

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