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Chapter 10
Competition in the Global Marketplace:
Should We Protect Ourselves from International Trade?


Multiple Choice Questions

1. Which of the following statements is most accurate?
a. Historically, there has been conflict between groups wanting to suppress trade and groups wanting to peg exchange rates
B. Since the late 1940s, import restrictions have fallen
c. Resentment of imports always increases during economic expansions
d. The U.S. government engaged in a free trade campaign up to the end of World War II
e. None of the above

2. Which of the following is part of the "protectionist" perspective on international trade?
a. Imports are responsible for crowding out domestic goods from the market and thereby reduce American jobs
b. Trade restrictions are needed to protect key industries vital to national security
c. Imports should be restricted to remedy the balance of trade deficit
d. Both (a) and (c)
E. All of the above

3. In a free market, who benefits from voluntary exchange?
a. Buyers
b. Sellers
C. Both buyers and sellers
d. The government only
e. Nobody

4. Why is international trade important? International trade
a. Increases the variety and availability of consumer goods in an economy
b. Expands the production possibilities of a nation's economy
c. Increases an economy's GDP
d. Allows nations to specialize in the production of goods according to comparative advantage
E. Does all of the above


5. Which of the following is not used as a protectionist argument?
a. Imports crowd U.S. goods out of the market
b. Imports reduce the demand for domestic labor leading to higher unemployment
c. Our industries cannot compete successfully against those in other countries that pay much lower wages
D. Imports raise living standards above what they would otherwise be
e. All of the above are used as protectionist arguments

6. The fundamental reason countries engage in trade is that
A. It enables each country to improve its standard of living
b. Domestic markets are continually shrinking
c. Powerful special interest groups benefit from exchange
d. Trade allows countries to save some of their resources for the future
e. All of the above

7. Omega can produce either two microcomputers or ten TV sets. Alpha can produce one microcomputer or five TV sets. Which of the following statements is correct?
a. Alpha has a comparative disadvantage in producing both products
b. Both countries have a comparative advantage in producing microcomputers
C. The countries are unlikely to engage in trade in these two items
d. Labor costs are obviously too high in Alpha
e. All of the above

8. Which of the following will give rise to U.S. demand for foreign exchange?
a. U.S. sales of airplanes to Japanese buyers
b. U.S. investments abroad
c. U.S. purchases of French perfume
D. Both (b) and (c)
e. All of the above


9. A country has a comparative advantage in the production of any good that it can produce
a. At a lower absolute cost than can other countries
b. With less labor than can other countries
C. With a smaller sacrifice of some alternative good or service than can other countries
d. For export
e. All of the above

10. Which of the following is not a reason that countries have comparative advantages in the production of some goods and comparative disadvantages in the production of other goods? Differences in
a. Technological "know-how."
B. Exchange rates
c. Literacy rates
d. Natural resources
e. Labor force quality

Questions 11 - 15 refer to the graph below.



11. Assuming an initial combination of 75 million loaves of bread and 150 million gallons of milk, the country represented would refuse to enter into any trade relationships in which the cost of importing
A. Bread exceeds two gallons of milk per loaf
b. Milk exceeds one loaf of bread per gallon
c. Milk exceeds two loaves of bread per gallon
d. Both (a) and (b)
e. None of the above

12. The opportunity cost of a million gallons of milk is how many millions of loaves of bread for this country?
A. 0.5
b. 1
c. 2
d. 150
e. 300

13. The opportunity cost of a million loaves of bread is how many millions of gallons of milk for this country?
a. .5
b. 1
C. 2
d. 150
e. 300

14. If this country has a comparative advantage in the production of bread and produces only bread while trading with another country for milk, which of the following is true of its consumption possibilities curve?
a. It shifts out parallel to the PPC
b. Its vertical intercept increases
C. Its horizontal intercept increases
d. All of the above
e. None of the above


15. If this country has a comparative advantage in the production of milk and produces only milk while trading with another country for bread, which of the following is true of its consumption possibilities curve?
a. It shifts out parallel to the PPC
B. Its vertical intercept increases
c. Its horizontal intercept increases
d. All of the above
e. None of the above

Questions 16 - 20 refer to the graph below.


16. Without trade, the Republic of Alpha's production possibilities curve is AB. If consumption along the curve A1B is possible with trade, Alpha must have a comparative advantage in the production of
a. Bread
B. Milk
c. Both bread and milk
d. Neither bread nor milk
e. It cannot be determined with the information given


17. Without trade, the Republic of Alpha's production possibilities curve is AB. With no trade, Alpha's consumption possibilities curve is
A. AB
b. A1B
c. CB
d. C1B
e. CC1

18. Without trade, the Republic of Alpha's production possibilities curve is AB. The cost of producing bread in Alpha (in terms of millions of gallons of
milk) is
a. .5
b. 1
C. 2
d. 100
e. 200

19. Without trade, the Republic of Alpha's production possibilities curve is AB. For Alpha to be willing to trade milk for bread, a million loaves of bread would have to cost less than
a. 0.5 million gallons of milk
b. 1 million gallons of milk
C. 2 million gallons of milk
d. 0.5 million loaves of bread
e. Alpha would not trade milk for bread

20. If Alpha produces 100 million loaves of bread, with trade (and consumption possibilities curve A1B) it can consume how many gallons of milk?
a. 0
b. 100
c. 200
D. 300
e. 400


21. An exchange rate is
A. The price of one country's currency in terms of the monetary units of another country
b. The rate at which one good exchanges for another
c. The price of gold in terms of the U.S. dollar
d. The fee charged for exchanging one currency for another
e. None of the above

22. Which of the following demands Kenyan Shillings?
a. U.S. importers of Kenyan goods
b. U.S. investors in Kenya
c. U.S. tourists visiting Kenya
D. All of the above
e. None of the above

23. Which of the following supplies Kenyan Shillings?
A. U.S. exporters to Kenya
b. Kenyan tourists returning home
c. U.S. importers of Kenyan goods
d. All of the above
e. None of the above

24. The largest part of U.S. demand for foreign currencies arises from
a. Increases in investments abroad
B. Imports of merchandise
c. Gifts that persons in the U.S. sent abroad
d. Foreign aid transfers from the U.S. to developing countries
e. None of the above

25. The largest part of the U.S. supply of foreign currency arises from
a. Investments made by foreigners in the U.S
B. Exports of merchandise
c. Net investment income
d. Gifts that persons abroad send persons in the U.S
e. None of the above


Questions 26 - 30 refer to the graph below.


26. In equilibrium, the price of a British pound, in terms of U.S. dollars, is
A. $1.50
b. $1.25
c. $.8
d. $.67
e. None of the above

27. In equilibrium, the price of a U.S. dollar, in terms of British pounds, is
a. $1.50
b. $1.25
c. $.8
D. $.67
e. None of the above

28. Which of the following could cause an increase in the equilibrium exchange rate?
a. An increase in U.S. investment in Britain
b. An increase in U.S. imports from Britain
c. An increase in the number of U.S. tourists traveling to Britain
D. All of the above
e. None of the above


29. Pegging the exchange rate at $1.25
a. Imposes a price floor
B. Results in a balance of payments problem
c. Will increase British demand for U.S. exports
d. Will increase U.S. demand for British imports
e. Will do of the above

30. Pegging the exchange rate at $1.25 will result in
a. A shortage of ≤20 million pounds per month
b. A surplus of ≤20 million pounds per month
C. A shortage of ≤40 million pounds per month
d. A surplus of ≤40 million pounds per month
e. None of the above

Questions 31 - 35 refer to the graph below.



31. If D and S are the relevant supply and demand curves, an increase in Nigerian travelers to the U.S. would result in which of the following changes in the graph? A movement from
A. S to S1
b. S1 to S
c. R1 to r
d. Q2 to q1
e. Q to q

32. Which of the following could cause a shift in the supply curve from S to S1? An increase in
A. U.S. exports to Nigeria
b. Nigerian exports to the U.S
c. U.S. travelers to Nigeria
d. All of the above
e. None of the above

33. An increase in U.S. investment in Nigeria will have which effect on r? It will
A. Increase
b. Decrease
c. Remain the same
d. Be pegged at r1
e. Not be able to be determined

34. If D and S are the relevant demand and supply curves, pegging the exchange rate at r1. Will result in
a. A shortage of q2q Niara per month
b. A surplus of q2q Niara month
C. A shortage of q2q1 Niara per month
d. A surplus of q2q1Niara pounds per month
e. None of the above


35. If D and S are the relevant demand and supply curves, pegging the exchange rate at r1
a. Imposes a price floor
B. Results in a balance of payments problem
c. Will increase British demand for U.S. exports
d. Will increase U.S. demand for British imports
e. Will do all of the above

36. Import restrictions, like tariffs and quotas, can protect domestic jobs
a. At a low price
b. By changing the consumption tastes of domestic buyers
C. At a high price
d. Without any effect on an economy
e. By changing the structure of the economy

37. Free trade can result in what impact on an economy?
A. A net increase or decrease in overall employment
b. A reduction in the efficiency of an economy
c. Free trade always harms an economy
d. Free trade always increases total employment
e. No impact at all

38. The exchange rate ceiling on the dollar price of the pound will result in
a. A surplus of pounds
B. A balance of payments deficit
c. A balance of payments surplus
d. An increase in U.S. exports to Great Britain
e. Undervaluation of the dollar relative to the pound


39. Which of the following curves represents the maximum combination of goods and services that can be consumed in an economy when all its resources are efficiently used?
a. Market demand curve
b. Production possibilities curve
c. Market supply curve
D. Consumption possibilities curve
e. Resource possibilities curve

40. With international trade, which of the following curves for an economy will shift outward?
A. Consumption possibilities
b. Production possibilities
c. Demand
d. Supply
e. Marginal revenue

41. A nation that enjoys a lower opportunity cost in the production of goods, relative to another nation, is said to have a(n)
a. Market advantage
b. Absolute advantage
C. Comparative advantage
d. Relative cost advantage
e. Production advantage

42. Suppose that on Mars, Martians must give up 2 widgets to produce 1 gadget. On Venus, Venusians must give up ½ widget to produce 1 gadget. Which of the following is true?
a. Venus has a comparative advantage in gadgets
b. Mars has a comparative disadvantage in gadgets
c. Venus should specialize in gadgets and trade with Mars for widgets
d. Mars should specialize in widgets and trade with Venus for gadgets
E. All of the above


43. The price of one nation's currency in terms of another is called
A. The exchange rate
b. The international trade rate
c. A tariff
d. A balance of trade account
e. The capital account

44. Assuming everything else constant, an increase in the demand for Russian rubles will
a. Reduce the price of rubles
B. Increase the exchange rate for rubles
c. Cause a surplus of rubles
d. Reduce exports to Russia
e. All of the above

45. Economists generally agree that international trade restrictions
a. Improve economic well-being and the general standard of living
B. Generate significant costs to consumers in the form of higher prices and reduced quantity of goods
c. Increase Gross Domestic Product and lower the rate of unemployment in the long run
d. Are important to the overall health of the economy
e. Reduce the severity of business cycles by limiting recessions

46. The primary factor affecting the demand for any nation's currency is
a. The nation's current standing with the United Nations
B. The demand for the products produced by that nation
c. The size of the nation's domestic economy
d. The amount of gold reserves held by that nation
e. None of the above

47. Which of the following are forms of international trade restrictions?
a. Tariffs
b. Quotas
c. Voluntary restraint agreements
D. All of the above
e. None of the above


48. What do you call taxes placed on imports?
A. Tariffs
b. Quotas
c. Voluntary restraint agreements
d. Exchange rates
e. Dumping taxes

49. Which of the following will occur when a tariff is placed on imported sugar?
a. The price of imported sugar will rise
b. The price of domestic sugar will rise
C. The price of imported and domestic sugar will rise
d. The price of sugar will fall
e. More sugar will become available in the marketplace

50. Which of the following is a true statement?
a. Quotas increase the availability of imported goods
b. Tariffs reduce the price of domestically produced goods
c. Unlike tariffs, quotas will reduce the price of imports
D. Quotas result in greater profits for foreign producers
e. A $1,000 tariff on Japanese cars will result in a $1,000 increase in their price

51. A tariff leads to a leftward shift of the _______curve, resulting in ______ prices and __________ imports.
a. Demand; lower; greater
b. Supply; lower; lower
C. Supply; higher; lower
d. Demand; higher; lower
e. Consumption possibilities; higher; lower

52. Which of the following will NOT result from a tariff?
a. Higher import prices
b. Higher prices of goods for consumers
c. Less availability of goods for consumers
D. Price increases for exported goods
e. Import duty revenue for the government


53. When a quota is enforced on an imported good, the supply curve for that good
a. Shifts to the left
b. Becomes horizontal at the import's price
C. Becomes vertical at the quota limit
d. Shifts to the right
e. Becomes non-existent

54. Which of the following statements about quotas is FALSE? Quotas
a. Reduce the availability of imported goods for consumers
B. Reduce the profits of foreign producers
c. Increase the price of imports
d. Increase the price of domestically produced substitutes
e. Are used as a means to restrict international trade

55. Which of the following is a likely result of a country engaging in free trade?
a. Jobs are lost in the export sector
b. Jobs are gained in the import sector
C. The price of imports falls
d. Product variety decreases
e. All of the above

56. Protecting an industry that is vital to national security from international competition is
a. The infant industry argument
b. An economic, rather than political, argument
C. The key industry argument
d. An argument against protectionism
e. None of the above

57. A new industry producing cutting-edge products should
a. Be protected from international competition, according to the key industry argument
B. Be protected from international competition, according to the infant industry argument
c. Not be protected until later stages, when the market is fully developed
d. Not be protected, according to the infant industry argument
e. None of the above


58. Environmental damage must be addressed in international trade agreements when a country's actions create
a. Property rights
B. Negative externalities
c. Positive externalities
d. Private goods
e. Military output

59. Which of the following is used as an argument against free trade by protectionists?
a. Environmental quality
b. Human rights
c. Infant industries
d. Key industries
E. All of the above

60. Which of the following statements regarding human rights and international trade is correct?
A. Protectionists believe free trade leads to exploitation of workers in LDCs
b. Free trade advocates believe it is efficient to exploit workers in LDCs
c. Protectionists believe free trade leads to increased opportunity for poor workers
d. Free trade advocates believe trade decreases job growth in LDCs
e. The WTO estimates that free trade has led to an increase in poverty rates in LDCs

61. What do you call it when producers sell abroad at a price below their cost of production or their domestic price?
a. Limit pricing
b. Voluntary restraint of trade
c. Price discrimination
D. Dumping
e. Gouging


62. Which organization is charged with settlement of international trade disputes?
A. The WTO
b. The EU
c. NAFTA
d. GATT
e. The UN

63. What do you call an alliance of nations that share common external tariffs? A(n)
a. Free trade area
b. International trade consortium
C. Customs union
d. Trade pact area
e. Cartel of nations

64. Which of the following best describes NAFTA? It is a(n)
A. Free trade area
b. International trade consortium
c. Customs union
d. Trade pact area
e. Cartel of nations

65. Most __________ have been banned under the World Trade Organization.
a. Tariffs
b. Voluntary restraint agreements
C. Quotas
d. Import duties
e. Customs unions

66. The European Union is an example of a(n)
a. Free trade area
b. International trade consortium
C. Customs union
d. Trade pact area
e. Cartel of nations


67. The multi-national currency adopted by members of the European Union is called the
A. Euro
b. Dollar
c. Ruble
d. Franc
e. Peso

68. Which of the following statements is true?
a. The euro increases the cost of international trade between members of the European Union
b. The European Union is a free trade zone and not a customs union
C. The euro reduces the cost of trade between members of the European Union
d. Common market treaties are becoming less popular around the world
e. All of the above statements are true

69. In which part of the globe are you most likely to find nations belonging to a common market treaty?
a. North America
b. Asia
c. Europe
d. Africa
E. Everywhere

70. Which of the following statements about NAFTA is FALSE?
a. NAFTA is a free trade zone and not a customs union
b. Canada, Mexico, and the U.S. are the only three members of NAFTA
c. It is difficult to empirically measure the economic effects of NAFTA on the U.S. economy
D. In the long run, NAFTA will increase the number of low-paid jobs in the U.S
e. NAFTA is based on the belief that nations, in the aggregate, gain economically from free international trade


71. What have researchers concluded about the net effect of NAFTA on the number of jobs in the U.S. economy?
a. NAFTA has increased the number of U.S. jobs
b. NAFTA has had no effect on the number of U.S. jobs
c. NAFTA has significantly reduced the number of U.S. jobs
D. The number of U.S. jobs has increased in some sectors of the economy, while in other sectors it has reduced the number of jobs
e. No one has examined this issue yet

72. What should happen once the euro has been completely integrated into the economies of the European Union (EU)?
A. International trade between EU members will increase due to lower transaction costs of trade
b. Consumer prices will increase and income will fall
c. Trade between EU members will decrease due to the increased costs of using a multi-national currency
d. EU members will only trade with other members and stop trading with the rest of the world
e. None of the above

73. Which of the following is a customs union of nations?
a. NAFTA
b. WTO
C. EU
d. GATT
e. UN

74. Which of the following established a free trade zone?
a. EU
b. GATT
c. UN
d. WTO
E. NAFTA


75. Since the introduction of the General Agreement on Tariffs and Trade (GATT) in the 1940s,
a. Tariffs and import quotas have increased dramatically
B. Tariffs around the world have fallen from an average of 40% to about 4%
c. Common market treaties have become more difficult to negotiate and enforce
d. The imposition of tariffs has been declared to be "unfair" in most situations
e. Dumping has become a widespread practice between member nations

76. The United States currently enforces an embargo against
A. Cuba
b. Saudia Arabia
c. The European Union
d. a) and b) only
e. All of the above

77. Embargos
a. Are import quotas set to 0
b. Are export quotas set to 0
c. May be imposed for political reasons
d. May be imposed for economic reasons
E. All of the above

78. Outsourcing is the practice of
a. Obtaining raw materials from suppliers in other countries
b. Manufacturing product in another country by opening a factory in that nation
C. Purchasing customer services from suppliers in another country where the costs of these services are lower than domestic suppliers
d. Selling goods to another country
e. Answers b and c are both examples of outsourcing


79. The World Trade Organization, or WTO, has been unpopular with many environmentalists because
a. It produces a great deal of pollution
b. It does not do enough in its activities to enforce pollution regulations
c. It is allowing pollution rights licenses to be sold by nations to one another
D. It encourages developing nations to emphasize jobs at the expense of environment
e. The WTO does not have a pollution control agency



True / False Questions

80. Protectionists want to reduce foreign competition with U.S. goods and services.
TRUE

81. Support for protectionism increases during economic expansions.
FALSE

82. Free traders maintain that world output is greatest if all countries are free to engage in voluntary exchanges.
TRUE

83. A country should strive to export more than it imports over time.
FALSE

84. Engaging in exchange enables a country to shift its production possibilities curve outward.
FALSE

85. Countries should trade for goods in which they have a comparative advantage.
FALSE


86. If a country has a comparative advantage in the production of one good, it must have a comparative disadvantage in the production of some other good.
TRUE

87. It is efficient for an economy to save service jobs by preventing outsourcing.
FALSE

88. An exchange rate is the price of one country's currency in terms of the currency of another.
TRUE

89. A country's population as a whole will benefit from import restrictions.
FALSE

90. Everyone in the economy benefits from free trade.
FALSE

91. For many years, U.S. citizens have earned more investment income abroad than foreigners have earned in the U.S.
TRUE

92. Foreign investment in the U.S. provides foreign currencies to import goods.
TRUE

93. Trade deficits are important only to the extent that they lead to overall balance of payments problems.
TRUE


94. To preserve jobs in the U.S., the U.S. should enact legislation lowering the quantities of Japanese autos that it imports.
FALSE

95. Engaging in trade allows a country to shift its consumption possibilities curve outward but leaves its production possibilities curve unchanged.
TRUE

96. In terms of the value of jobs saved, the voluntary restrictions on Japanese cars imported to the U.S. in the early 1980s were efficient.
FALSE

97. Free trade would reduce U.S. well-being because we could not compete with the low-wage countries of the world.
FALSE

98. International trade makes it possible for an economy to shift its production possibilities curve outward.
FALSE

99. As with trade between regions of one country, trade between countries benefits both.
TRUE

100. Since resources are sent out of the country, international trade generally results in a reduction in an economy's GDP.
FALSE


101. International trade increases the variety and availability of consumer goods in an economy.
TRUE

102. Free trade arguments are sound only if trade is between countries whose workers earn roughly the same.
FALSE

103. Trade between individuals in two different countries would not occur unless both parties believed that it made them better off.
TRUE

104. Tariffs increase both the price of imports and domestically produced goods.
TRUE

105. A $100 per unit tariff on South African diamonds will increase the price by $100.
FALSE

106. Both tariffs and quotas result in higher prices and lower quantities for consumers.
TRUE

107. Foreign producers who hold quota rights may earn greater profits with the imposition of a quota.
TRUE

108. A voluntary restraint agreement is a quota without the force of law.
TRUE


109. Quotas result in lower prices of both imported and domestically produced goods.
FALSE

110. All forms of international trade restrictions result in higher prices and lower quantities of goods for domestic consumers.
TRUE

111. Pegging the exchange rate will eliminate balance of payment deficits.
FALSE

112. Pegging the exchange for French francs below its equilibrium level will generate a shortage of francs.
TRUE

113. NAFTA is a customs union between the U.S., Canada, and Mexico.
FALSE

114. The European Union is a free trade area.
FALSE

115. International trade disputes between nations are settled through the actions of the World Trade Organization.
TRUE

116. Dumping occurs when producers sell abroad at a price below the cost of production.
TRUE


117. Dumping is not considered an unfair trade practice in most parts of the world.
FALSE

118. Members of the WTO must agree to treat all other members as equals and provide them with "most favored nation" status.
TRUE

119. The WTO prohibits member nations from imposing tariffs on other members.
FALSE

120. There is more international trade today than at any time in the past.
TRUE

121. Since the 1940s, tariffs around the world have fallen from an average of 40 percent.
TRUE

122. The euro will increase the transaction costs of trade between nations who are members of the European Union (EU).
FALSE

123. The euro will be integrated into the economies of western Europe with very few costs.
TRUE

124. Common market treaties are decreasing in popularity and importance around the world.
FALSE


125. Most tariffs have been outlawed by the World Trade Organization (WTO).
FALSE

126. Very few members of the World Trade Organization (WTO) are also members of a common market treaty.
FALSE

127. Today, custom unions or free trade zones can be found on every populated continent of the world.
TRUE

128. In the short-run, common market treaties such as NAFTA both create and destroy jobs in member nations.
TRUE

129. In recent years, "protectionists" have won the battle with "free traders."
FALSE

130. An embargo occurs when one nation volunteers to restrict its exports of a product.
FALSE

131. The intent of an embargo is to raise the price of a country's exports.
FALSE
Chapter 13
Unemployment and Inflation:
Can We Find a Balance?


Multiple Choice Questions

1. A person is considered unemployed if the person is
a. Seeking a job requiring greater qualifications than the person possesses and no one is willing to hire the person for such a job
b. Offered a job for which the person is qualified but prefers not to work
C. Qualified for a job, willing to work, but unable to find work for over 30 days
d. Out of school during Christmas vacation and cannot find work during that period
e. All of the above

2. Which of the following people is considered unemployed?
a. A truck driver with a high school education who has been laid off his job and is now training to be a computer programmer
b. An individual who is currently not working nor actively seeking employment
C. A secretary who is currently not working and who seeks employment using secretarial skills
d. All of the above
e. None of the above

3. An auto factory worker who is unemployed because a robot now has his job is a victim of
A. Structural unemployment
b. Cyclical unemployment
c. Underemployment
d. Frictional unemployment
e. Seasonal unemployment

4. Which of the following individuals is considered part of the labor force?
a. An unemployed farmer
b. A college graduate looking for his first job
c. A retired teacher working as a sales clerk
d. A department store Santa during December
E. All of the above

5. When individuals want to work, but give up looking for a job because they feel there will never be one available, they are considered
a. Pessimistic
b. Lazy
C. Discouraged
d. Part of the labor force
e. Unemployed

6. Which of the following individuals is part of the labor force?
a. A 15-year-old worker at a fast food restaurant
b. A paid prison worker at the prison carpentry shop
c. A college student attending school full-time
d. A stay-at-home dad
E. None of the above

7. The unemployment rate
A. For blacks is roughly twice the rate for whites
b. For women is lower than that of men
c. For teenagers is below the rate for the labor force as a whole
d. Is equal for males and females, blacks and whites, and young and old workers
e. Is none of the above


8. Technological change in an industry that historically required specific labor skills will lead to
a. Frictional unemployment
B. Structural unemployment
c. Cyclical unemployment
d. Seasonal unemployment
e. No changes in unemployment

9. People who are in the process of changing jobs are classified in the category of
A. Frictional unemployment
b. Involuntary unemployment
c. Structural unemployment
d. Cyclical unemployment
e. Seasonal unemployment

10. A college graduate looking for her first job is considered
A. Frictionally unemployed
b. Involuntarily unemployed
c. Structurally unemployed
d. Cyclically unemployed
e. Seasonally unemployed

11. A farmer who has lost his farm due to increased agricultural productivity is considered
a. Frictionally unemployed
b. Involuntarily unemployed
C. Structurally unemployed
d. Cyclically unemployed
e. Seasonally unemployed

12. A factory worker who loses a job because of a decrease in aggregate demand is
a. Frictionally unemployed
b. Involuntarily unemployed
c. Structurally unemployed
D. Cyclically unemployed
e. Seasonally unemployed


13. The full-employment unemployment rate is
a. 0
b. Inconsistent with price stability
c. The rate that reflects cyclical unemployment
d. 10%
E. None of the above

14. Between 1960 and 2008, the unemployment rate has
a. Steadily increased
b. Steadily fallen
c. Been below 6% over the entire period
d. Ranged from 1% to 12%
E. None of the above

15. Unemployment rates tend to rise when
a. Inflation rates rise
b. Aggregate demand is high
c. The economy goes through an expansion
D. There is a recession
e. Interest rates are low

16. A major cause of involuntary unemployment is
a. A wage rate below equilibrium
b. Not enough demand for labor
c. Too much supply of labor
d. Laziness
E. A wage rate above equilibrium

17. The unemployment rate will not fall to zero because of
a. Cyclical unemployment
B. Frictional unemployment
c. Welfare
d. Voluntary unemployment
e. All of the above


18. Which of the following types of unemployment is considered long-term, hardcore unemployment?
a. Cyclical
B. Structural
c. Frictional
d. Seasonal
e. None of the above

19. A poorly educated, unskilled teenager currently unemployed is an example of
a. Frictional unemployment
b. Cyclical unemployment
C. Structural unemployment
d. Seasonal unemployment
e. None of the above

20. People who are unemployed due to a downturn in economic activity are classified in the category of
a. Frictional unemployment
b. Structural unemployment
c. Seasonal unemployment
D. Cyclical unemployment
e. Voluntary unemployment

21. When General Motors lays workers off because of a decrease in aggregate demand, it causes
A. Cyclical unemployment
b. Frictional unemployment
c. Seasonal unemployment
d. Structural unemployment
e. None of the above


22. Unemployment below the full employment rate is a measure of
a. Underemployment
b. Structural unemployment
C. Cyclical unemployment
d. Seasonal unemployment
e. None of the above

23. The highest unemployment rate is found among
A. People between the ages of 16 and 19
b. Females
c. Ethnic groups
d. The elderly
e. Children

24. Which of the following best describes when the economy is experiencing inflation? When
a. The price of an essential good increases dramatically
b. The prices of many goods go up
C. There is a rise in the general level of prices
d. All prices remain the same or increase; no prices fall
e. The value of the dollar increases

25. Which price index is also known as the cost-of-living index?
A. Consumer price index
b. Wholesale price index
c. Implicit price deflator
d. GDP deflator
e. All of the above

26. If inflation is not observable in the form of rising prices, it is called
A. Suppressed
b. Repressed
c. Deflation
d. Dynamic
e. None of the above

27. Price index numbers for a series of years show
a. If money GDP is growing
b. If real GDP is growing
c. If all prices are rising
D. The average price level for each year as a percentage of the base year
e. None of the above
28. If the consumer price index is 100 in 2007 and is 120 in 2009, then the rate of inflation between 2007 and 2009 is
a. 10%
B. 20%
c. 15%
d. 5%
e. Unable to be calculated without further information

29. The best description of the growth of the money supply since 1960 is that it has
a. Increased steadily
b. Increased rapidly during the 1980's
c. Decreased steadily
d. Decreased rapidly during the 1960's
E. Shown patterns of both fast and slow growth over the decades

30. When inflation redistributes income from one group in the economy to another, it is an example of which effect?
A. Equity
b. Efficiency
c. Output
d. Input
e. None of the above

31. If inflation causes the demand for houses to increase more rapidly than the demand for other goods, the economy has experienced which effect
of inflation?
a. Equity
B. Efficiency
c. Output
d. Input
e. None of the above


32. If inflation stimulates production and employment, the economy experiences which of the following effects of inflation?
a. Equity
b. Efficiency
C. Output
d. Input
e. None of the above

33. Which of the following is most likely be hurt by inflation?
A. People on fixed incomes
b. People whose wages rise faster than prices
c. Landholders
d. Borrowers
e. None of the above

34. Suppose a family spends $20,000 on a basket of goods in 2008. Suppose the same basket costs $22,000 in 2009. Using 2008 as the base year, the price index for 2009 is
a. 105
b. 102
c. 111
D. 110
e. None of the above

35. The effect of inflation on production and employment is known as
a. An incomes policy
b. The equity effects of inflation
c. The efficiency effects of inflation
D. The output effects of inflation
e. Fiscal policy


36. Federal income taxes are levied on the basis of nominally stated tax brackets, and there is a nominal upward adjustment in salaries and wages during inflation. Therefore, what is true of federal tax collections during inflation? They will
a. Decrease in both real and nominal terms
b. Increase in both real and nominal terms
c. Increase in real terms
D. Increase in nominal terms
e. Stay the same

37. Which of the following statements is correct? Inflation
a. Benefits creditors at the expense of debtors
b. Increases the purchasing power of the dollar
c. Increases the real value of savings
D. Arbitrarily "taxes" fixed income groups
e. Iincreases real wages

38. The effects of inflation on the distribution of income are called
a. An incomes policy
B. The equity effects of inflation
c. The efficiency effects of inflation
d. The output effects of inflation
e. None of the above
39. The effect that inflation has on the allocation of resources is known as
a. An incomes policy
b. The equity effects of inflation
C. The efficiency effects of inflation
d. The output effects of inflation
e. None of the above
40. In the circular flow diagram, economic units are classified as
a. Imports and exports
B. Households and producers
c. Taxpayers and governments
d. Subsidy receivers and taxpayers
e. Producers and sellers
41. The circular flow of economic activity developed in the text is a model of the
A. Flow of goods, resources, payments and expenditures between the sectors of the economy
b. Influence of government on business behavior
c. Influence of business on consumers
d. Role of unions and government in the economy
e. Interaction among taxes, prices, and profits
42. Which of the following statements concerning the circular flow is FALSE?
a. The circular flow of economic activity shows how the overall economy operates
B. The circular flow emphasizes the independence of economic variables
c. There are two circular flows involved in the economy
d. The circular flow shows that real income is determined by physical goods and services produced in the economy
e. None of the above
43. Aggregate demand
A. Represents the sum of the demands by all purchasers of goods and services in an economy
b. Is comprised of the purchases of goods and services only by consumers
c. Excludes imports and exports
d. Assumes that governments do not purchase goods and services
e. None of the above
44. The aggregate demand curve will shift to the right
a. When the government raises taxes
b. If investors reduce their purchases of plant and equipment
C. If consumer confidence increases
d. If prices fall
e. None of the above


45. The marginal propensity to consume is
a. Consumption divided by Income
b. The change in consumption
C. The change in consumption divided by the change in income
d. Unaffected by changes in income
e. All of the above


46. The marginal propensity to consume plus the marginal propensity to save
a. Represents what happens as a result of income changes
b. Must always sum to 1
c. Must always sum to 0
D. A and B
e. None of the above


47. Investment spending is sensitive to
a. Interest rates
b. Expectations by producers about the return on investment
c. The confidence of investors
D. All of the above
e. None of the above


48. A trade deficit will occur in an economy
a. When spending exceeds income
b. When the value of exports exceeds the value of imports
C. When the value of exports is less than the value of imports
d. When an economy is expanding
e. When an economy is in recession

49. Assuming a marginal propensity to consume three-fourths, the spending multiplier is
a. 1
b. 2
c. 3
D. 4
e. None of the above
50. The spending multiplier is 3. Government purchases increase $100 billion at the same time government tax collections increase $100 billion. The increase in national income will be
a. Zero
b. Less than $100 billion
C. $100 billion
d. In excess of $100 billion
e. It cannot be determined


51. The determinants of aggregate supply are
A. Resources, prices, and technology
b. Interest rates
c. Consumer wealth
d. Real income
e. All of the above
52. Ameeta spends $400 when her income is $500. When she receives a $100 raise (bringing her total income to $600), she spends $480. Her MPC is
a. 0.4
b. 0.5
c. 0.6
D. 0.8
e. 1.0

53. The psychological law of consumption tells us the marginal propensity to consume will be
a. Less than 0
B. Greater than 0 but less than 1
c. Equal to 1
d. Greater than 1 but less than 10
e. Greater than 10

54. If the MPC is 0.8, the spending multiplier equals
a. 0.2
b. 0.8
c. 1.25
D. 5.0
e. 8.0

55. If the MPS is .4, the spending multiplier equals
a. 0.4
b. 0.6
c. 1.67
D. 2.5
e. 4.0
56. Which of the following is a component of aggregate demand?
a. Consumption
b. Investment
c. Government spending
d. Exports and imports
E. All of the above



Questions 57 - 62 refer to the graph below.


57. Given short run aggregate supply S0, what level of aggregate demand is necessary for the economy to reach full employment?
a. Lower than D1
B. D0
c. D1
d. D2
e. Higher than D2


58. Given D0 and S0, an increase in aggregate demand would lead to which of the following?
a. Higher unemployment
b. Lower unemployment
C. Inflation
d. Deflation
e. Recession

59. Given S1 and D1, which of the following changes reduces unemployment? A shift to
a. D0
b. D2
c. S0
D. All of the above
e. None of the above

60. Which of the following would cause a shift from D1 to D2?
A. An increase in investment
b. A decrease in consumption
c. An increase in imports
d. An increase in saving
e. All of the above


61. Which of the following would cause a shift from S1 to S0?
A. A decrease in resource prices
b. An decrease in unemployment
c. An increase in the price of labor
d. An increase in consumption
e. All of the above


62. Demand-pull inflation is illustrated by a movement from
a. S0 to S1
b. S1 to S0
C. D0 to D2
d. D1 to D0
e. q1 to q0
63. If the economy is initially at full employment, an increase in aggregate demand will result in
A. Demand-pull inflation
b. Profit-push inflation
c. Cost-push inflation
d. Unemployment
e. Underemployment

64. To expand the level of economic activity, it is necessary that
a. Total leakages exceed total injections
b. Government expenditures exceed tax collections
C. Total injections exceed total leakages
d. Imports exceed exports
e. (c) and (d) above

65. Leakages in the circular flow consist of
a. Savings, taxes, and exports
b. Savings, investment, and exports
c. Government spending, investment, and exports
D. Savings, taxes, and imports
e. Investment, taxes, and imports

66. Injections in the circular flow consist of
a. Savings, exports, and investments
b. Savings, exports, and taxes
c. Government spending, savings, and exports
D. Government spending, investment, and exports
e. None of the above

67. Aggregate supply can be increased by
a. Reduced incentives to save
b. Higher taxes
c. Increases in government spending
D. Policies to induce more saving
e. None of the above

68. The Phillips curve depicts the relationship between
a. Output and inflation
b. Savings and investment
C. Unemployment and inflation
d. Imports and exports
e. None of the above

69. Economists in the 1960s believed that the Phillips curve relationship would
a. Allow governments to end inflation
b. Provide governments a means to control recessions
c. Discourage imports
D. Provide policies that would trade off unemployment for inflation
e. None of the above

70. Economic policy makers in the 1960s held that governments could
A. Engage in expansionary and contractionary policies to manage the economy
b. Spend their way out of business cycles
c. Eliminate unemployment
d. Choose how much to produce
e. None of the above

71. After the events of the 1970s, economists learned that
a. Attempts to trade off unemployment and inflation would only work for a short period of time
b. Shocks to the aggregate supply could alter the relationships between unemployment and inflation
c. The Phillips curve relationship was not stable
d. The Phillips curve shifted over time
E. All of the above

72. By how much must investment spending increase to increase output by $500 if the MPC is 0.8?
A. $100
b. $300
c. $400
d. $500
e. More than $500

73. A useful measure of the size of the workforce, that is, the number of individuals who are willing and able to work, is
a. The current population survey
b. The unemployment rate
c. The rate of job growth
D. The labor force participation rate
e. There are no useful measures of this information, due to the difficulties of gathering the sample

74. In an economy like that of the US, due to a variety of institutional and social factors, wages tend to be
a. Very flexible
b. Flexible during recessions
c. Highly rigid
d. Affected only by Congressional legislation
E. Sticky

75. Which of the following factors in an economy contribute to "sticky" wages?
a. Flexible working conditions
b. Competitive labor markets
C. Collective bargaining agreements
d. Highly mobile capital equipment
e. Investment flexibility








True / False Questions


76. Unemployment affects both the current and future production of goods and services.
TRUE

77. If leakages exceed injections, unemployment will result.
TRUE

78. Involuntary unemployment occurs when wage rates are too low, i.e., below competitive levels.
FALSE

79. Cyclical unemployment is due primarily to a decline in aggregate supply.
FALSE

80. Structural unemployment results from people changing jobs.
FALSE

81. Frictional unemployment refers to persons who are unemployed because the economy is in a recession.
FALSE

82. As an economy approaches full employment, real output declines.
FALSE

83. Frictional unemployment is long-run event for particular individuals.
FALSE

84. The unemployment rate is the same for all demographic groups.
FALSE

85. Full employment means that everyone in the labor force has a job.
FALSE

86. An equilibrium level of national income implies the economy is operating at full employment.
FALSE

87. Frictional unemployment is involuntary.
FALSE

88. Structural unemployment results from the economy experiencing a recession.
FALSE

89. Cyclical unemployment occurs because workers have no marketable job skills.
FALSE

90. A certain amount of frictional and structural unemployment occurs even at full employment.
TRUE

91. Frictional unemployment can be reduced by education and training.
FALSE

92. An economy reaches full employment when there is no cyclical unemployment.
TRUE

93. Full employment may be reached even though there is frictional and structural unemployment.
TRUE

94. Structural unemployment is long run event for particular individuals.
TRUE

95. Frictional unemployment could be reduced by decreasing the minimum wage.
FALSE

96. All unemployed workers are unemployed for the same reason.
FALSE

97. Cyclical unemployment is involuntary.
TRUE

98. When frictional unemployment exists, labor services are voluntarily unemployed.
TRUE

99. As a group, women suffer from the highest unemployment rate.
FALSE

100. The lowest unemployment rate is found for those between the ages of 16 and 19.
FALSE

101. Economic growth or improved technology would be shown on an aggregate demand - aggregate supply diagram as an increase in AD, AS remaining constant.
FALSE

102. An increase in government purchases financed by an equal increase in tax collections will increase national income.
TRUE

103. An increase in the marginal propensity to consume will increase the size of the multiplier.
TRUE

104. The marginal propensity to consume is usually greater than one.
FALSE

105. An increase in trade deficit will increase unemployment in the U.S.
TRUE

106. An increase in the federal budget deficit will increase unemployment.
FALSE

107. An increase in imports would expand the level of employment.
FALSE

108. The AD-AS relationship is not affected by circular flow relationships.
FALSE

109. Inflation means that prices are too high.
FALSE

110. A price index shows the absolute changes in price that occur over time in a list of different products and services.
FALSE

111. If the economy is operating at a less-than-full employment level, an increase in aggregate demand may result in an increase in the price level as well as an increase in the level of employment.
TRUE

112. Inflation may affect the distribution of income in the economy and may increase national output.
TRUE

113. Inflation is not equitable because it arbitrarily changes the pattern of income distribution.
TRUE

114. The consumer price index is a true cost-of-living index.
FALSE

115. Demand-pull inflation ends once full employment is reached.
FALSE

116. During inflation, some prices may be rising and some may be falling.
TRUE

117. The effects of inflation on resource allocation are the equity effects of inflation.
FALSE

118. Inflation may have a stimulating effect on production and employment.
TRUE


119. The labor force participation rate has been steadily increasing in recent years.
FALSE

120. Unemployment rates since 2007 have increased due to rising structural unemployment. FALSE

121. Since 1960, inflation rates were highest during the 1970s.
TRUE


122. When a Phillips curve is drawn, it shows an inverse relationship between inflation and unemployment rates.
TRUE


123. Phillips curve is another name for a production possibilities curve.
FALSE



124. The Phillips curve has displayed a stable relationship between inflation and unemployment since the 1960s.
FALSE



125. Expansionary and contractionary policies have not proved to be effective tools to control unemployment and inflation in the American economy.
TRUE


126. The oil embargo during the early 1970s showed how stable the relationship is between unemployment and inflation rates.
FALSE


127. Shifts in the aggregate supply function can cause shifts in the Phillips curve.
TRUE


128. The relationship shown by the Phillips curve, which implies a tradeoff between inflation and unemployment rates, is a long-run phenomenon.
FALSE