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Terms in this set (198)
Which of the following will shift the production possibilities curve to the right?
→ A technological advance that allows farmers to produce more output from given inputs.
The economic perspective entails:
→ a comparison of marginal benefits and marginal costs in decision making.
"Economics is concerned with how individuals, institutions, and society make optimal choices under conditions of scarcity." This statement is:
→ positive and correct.
An increase in money income:
→ shifts the consumer's budget line to the right.
Suppose that a university decides to spend $1 million to upgrade personal computers and scientific equipment for faculty rather than spend $1 million to
expand parking for students. This example illustrates:
→ opportunity costs.
If all discrimination in the United States were eliminated, the economy would:
→ produce at some point closer to its production possibilities curve.
Refer to the diagram. Which of the following is a normative statement?
→ Point C is superior to point B because it is important to enhance the future of society.
Refer to the diagram. The combination of computers and bicycles shown by point G is:
→ unattainable given currently available resources and technology.
Innovation lagged in the centrally planned economies because:
→ enterprises resisted innovation in fear that their production targets would be raised.
Which of the following statements is true about risk management in market systems versus command systems?
→ Market systems manage risk better because entrepreneurs taking risks bear the costs of poor decisions, where in command systems
government decision makers don't bear those costs.
"Under central planning, some group has to decide how to get the necessary inputs produced in the right amounts and delivered to the right places at the right
time. This is a nearly impossible task without markets and profits." This quotation best identifies the:
→ coordination problem under central planning.
The market system's answer to the fundamental question "Who will get the goods and services?" is essentially:
→ "Those willing and able to pay for them."
"Consumer sovereignty" means that:
→ buyers determine what will be produced based on their "dollar votes" for the goods and services offered by sellers.
The invisible hand refers to the:
→ notion that, under competition, decisions motivated by selfinterest promote the social interest
The presence of market failures implies that:
there is an active role for government, even in a market system.
Economic profits and losses:
are essential to the reallocation of resources from less desired to more desired goods.
The market system's answer to the fundamental question "How will the system promote progress?" is essentially:
→ "Through the profit potential that encourages development of new technology."
Specialization in production is important primarily because it:
→ results in greater total output.
Suppose that an individual sees a tremendous opportunity to produce and sell a new product but dismisses the idea because there is no way to exploit this
opportunity for personal gain. This situation best identifies the:
incentive problem under communist central planning.
Risk management in command economies:
→ tends to be done poorly because decision makers are insulated from the risk of making a poor decision
Property rights are important because they:
encourage cooperation by improving the chances of mutually agreeable transactions.
If consumer desire for product X increases, all of the following will occur except:
→ a decrease in the quantity of resources employed in industry X.
A market system tends to restrict business risk to owners and investors. This results in which of the following benefits?
→ Firms focus attention on prudent risk management, as it is profitable to manage risk.
Firms are motivated to minimize production costs because:
→ competitive pressures in the market will drive out higher cost producers.
An effective price floor will:
→ result in a product surplus.
College students living off campus frequently consume large amounts of ramen noodles and boxed macaroni and cheese. When they finish school and start
careers, their consumption of both goods frequently declines. This suggests that ramen noodles and boxed macaroni and cheese are:
→ inferior goods.
If consumer incomes increase, the demand for product X:
→ may shift either to the right or left.
If an economy produces its most wanted goods but uses outdated production methods, it is:
→ not achieving productive efficiency.
A leftward shift of a product supply curve might be caused by:
→ some firms leaving an industry.
The relationship between quantity supplied and price is _____ and the relationship between quantity demanded and price is _____.
→ direct; inverse
An effective price floor on wheat will:
→ result in a surplus of wheat.
The income and substitution effects account for:
→ the downwardsloping demand curve.
Increasing marginal cost of production explains:
→ why the supply curve is upsloping.
Refer to the diagram, in which S1 and D1 represent the original supply and demand curves and S2 and D2 the new curves. In this market:
→ an increase in demand has been more than offset by an increase in supply.
A decrease in the price of digital cameras will:
→ shift the demand curve for memory cards to the right.
The upward slope of the supply curve reflects the:
→ law of supply.
A product market is in equilibrium:
→ where the demand and supply curves intersect.
The equilibrium price and quantity in a market usually produce allocative efficiency because:
→ marginal benefit and marginal cost are equal at that point.
Which of the following will cause the demand curve for product A to shift to the left?
→ An increase in money income if A is an inferior good.
Suppose that in 2007, Ford sold 500,000 Mustangs at an average price of $18,800 per car; in 2008, 600,000 Mustangs were sold at an average price of
$19,500 per car. These statements:
→ suggest that the demand for Mustangs increased between 2007 and 2008.
If an economy wants to increase its current level of investment, it must:
→ sacrifice current consumption.
The figure depicts a situation where:
→ prices are flexible, but output is constant.
Real GDP is preferred to nominal GDP as a measure of economic performance because:
→ nominal GDP uses current prices and thus may over or understate true changes in output.
Which of the following is an example of a supply shock?
→ A dramatic increase in energy prices increases production costs for firms in the economy.
In situations of sticky prices and negative demand shocks, we would expect firms to:
→ build up inventories before reducing production.
When demand shocks lead to recessions, it is mainly due to:
→ price inflexibility.
Refer to the figure. Assuming this market is representative of the economy as a whole, this economy:
→ is capable of always producing at its optimal capacity.
If the prices of all goods and services rose, but the quantity produced remained unchanged, what would happen to nominal and real GDP?
→ Nominal GDP would rise, but real GDP would be unchanged.
Which of the following is used to measure directly the average standard of living across countries?
→ GDP per person.
Prices tend to be sticky because:
→ firms are worried that frequent price changes would annoy consumers.
Why are economists concerned about inflation?
→ Inflation lowers the standard of living for people whose income does not increase as fast as the price level.
Refer to the figures. As the economy moves from the very short run to the longer run, we would expect:
→ the representation of the economy to move from Figure B to Figure A.
Why are high rates of unemployment of concern to economists?
→ There is lost output that could have been produced if the unemployed had been working.
→ occur when sellers face unexpected changes in the availability and/or prices of key inputs.
Refer to the figures. Which figure(s) represent(s) a situation where prices are flexible?
→ A only.
Which of the following results from firms holding inventories?
→ Firms can maintain production levels and adjust inventories in response to demand shocks.
Which of the following statements best describes how firms respond to demand shocks under conditions of inflexible prices?
→ Firms respond to shorterterm demand shocks by adjusting inventories; more persistent changes in demand result in changes in production levels
Which of the following best explains why prices tend to be inflexible even when demand changes?
→ Firms may be reluctant to change prices for fear of setting off a price war or losing customers to rivals.
Which of the following is an example of a demand shock?
→ Consumers become worried about job loss and buy fewer goods and services than expected.
Tom Atoe grows fruits and vegetables for home consumption. This activity is:
→ productive but is excluded from GDP because no market transaction occurs.
If real disposable income fell during a particular year, we can conclude that:
→ none of these necessarily occurred.
Which of the following is a final good or service?
→ A haircut purchased by a father for his 12 yearold son.
Suppose that GDP was $200 billion in year 1 and that all other components of expenditures remained the same in year 2 except that business inventories
increased by $10 billion. GDP in year 2 is:
→ $210 billion.
If there are no statistical discrepancies, NDP (net domestic product) is:
→ NI minus net foreign factor income.
Which of the following transactions would be included in GDP?
Assume an economy that makes only one product and that year 3 is the base year. Output and price data for a fiveyear period are as follows. Answer the question on the basis of these data.
Refer to the data. In determining real GDP, the nominal GDP for:
→ years 1 and 2 must be inflated.
Suppose that GDP was $200 billion in year 1 and that all other components of expenditures remained the same in year 2 except that business inventories fell
by $10 billion. GDP in year 2 is:
→ $190 billion.
If in some year gross investment was $120 billion and net investment was $65 billion, then in that year the country's capital stock:
→ increased by $65 billion.
Arthur sells $100 worth of cotton to Bob. Bob turns the cotton into cloth, which he sells to Camille for $300. Camille uses the cloth to make prom dresses that
she sells to Donita for $700. Donita sells the dresses for $1,200 to kids attending the prom. The total contribution to GDP of this series of transactions is:
Real GDP measures:
→ current output at base year prices.
Suppose nominal GDP in 2009 was $100 billion and in 2010 it was $260 billion. The general price index in 2009 was 100 and in 2010 it was 180. Between
2009 and 2010 the real GDP rose by approximately:
→ 44 percent.
Assume an economy that is producing only one product. Output and price data for a three year period are as follows. Answer the question on the basis of
Refer to the data. The nominal GDP for year 3 is:
→ 125 percent higher than the nominal GDP for year 1.
Setup Corporation buys $100,000 of sand, rock, and cement to produce readymix concrete. It sells 10,000 cubic yards of concrete at $30 a cubic yard. The
value added by Setup Corporation is:
In comparing GDP data over a period of years, a difference between nominal and real GDP may arise because:
→ the price level may change over time.
If intermediate goods and services were included in GDP:
→ the GDP would be overstated.
Suppose that an economy's labor productivity and total worker hours each grew by 3 percent between year 1 and year 2. We could conclude that this
→ production possibilities curve shifted outward.
At an annual growth rate of 7 percent, real GDP will double in about:
→ 10 years.
Refer to the graph. Growth of production capacity is shown by the:
→ shift from AB to CD.
Which of the following best measures improvements in the standard of living of a nation?
→ Growth of real GDP per capita.
Which of the following statements is most accurate about modern economic growth?
→ Modern economic growth is characterized by sustained and ongoing increases in living standards.
For comparing changes in potential military strength and political preeminence, the most meaningful measure of economic growth would be changes in:
→ total real output.
If the growth trend of labor productivity is 3 percent per year, the number of years that it will take for the standard of living to double will be about:
→ 23 years.
Which of the following would not be expected to increase labor productivity?
→ An increase in the size of the labor force.
Refer to the diagram. The most likely cause of a shift from AB to CD would be a(n):
→ increase in productivity.
Refer to the list. As distinct from the demand and efficiency factors of economic growth, the supply factors of economic growth are:
→ 1, 2, 5, and 6 only.
Strong property rights are important for modern economic growth because:
→ people are more likely to invest if they don't fear that others can take their returns on investment without compensation.
For a nation's real GDP per capita to rise during a year:
→ real GDP must increase more rapidly than population.
If a nation's real GDP is growing by 5 percent per year, its real GDP will double in approximately:
→ 14 years.
→ encourages growth by promoting the rapid spread of new inventions and innovations.
If the number of workerhours in an economy is 100 and its labor productivity is $5 of output per workerhour, the economy's real GDP:
→ is $500.
Which of the following would most likely move the economy into a recession in the short term?
→ The central bank printing less money than was anticipated.
If both the real interest rate and the nominal interest rate are 3 percent, then the:
→ inflation premium is zero.
What is the primary reason that changes in total spending lead to cyclical changes in output and employment?
→ Prices are sticky in the short run.
Refer to the given information. If the members of the underground economy are presently counted as part of the unemployed when in fact they are employed,
the official unemployment rate is overstated by about:
→ 5 percentage points.
Refer to the given information. If the natural rate of unemployment in Scoob is 5 percent, then:
→ cyclical unemployment is about 2 percent.
The consumer price index was 177.1 in 2001 and 179.9 in 2002. Therefore, the rate of inflation in 2002 was about:
→ 1.6 percent.
Assuming the total population is 100 million, the civilian labor force is 50 million, and 47 million workers are employed, the unemployment rate is:
→ 6 percent.
If the consumer price index falls from 120 to 116 in a particular year, the economy has experienced:
→ deflation of 3.33 percent.
Who is least likely to be hurt by unanticipated inflation?
→ An owner of a small business.
In which of the following cases would real income rise?
→ Nominal income rises by 2 percent and the price level remains unchanged.
→ reduces the real burden of the public debt to the federal government.
The aggregate cost of unemployment can be measured by the:
→ amount by which potential GDP exceeds actual GDP.
Suppose that a person's nominal income rises from $10,000 to $12,000 and the consumer price index rises from 100 to 105. The person's real income will:
→ rise by about 15 percent.
Suppose that lenders want to receive a real rate of interest of 5 percent, and that they expect inflation to remain steady at 2 percent in the coming years.
Based on this, lenders should charge a nominal interest rate of:
Under which of the following circumstances would we observe the greatest increase in real income?
→ Nominal income falls by 2 percent and the price level falls by 10 percent.
Unlike demand pull inflation, cost push inflation:
→ is self limiting.
Assume the natural rate of unemployment in the U.S. economy is 5 percent and the actual rate of unemployment is 9 percent. According to Okun's law, the
negative GDP gap as a percent of potential GDP is:
If a $100 billion decrease in investment spending causes income to decline by $100 billion in the first round of the multiplier process and by $75 billion in the
second round, income will eventually decline by
→ $400 billion.
An upward shift of the saving schedule suggests:
→ that the APC has decreased and the APS has increased at each GDP level.
At the point where the consumption schedule intersects the 45degree line:
→ the APC is 1.00.
Refer to the given diagram, which shows consumption schedules for economies A and B. We can say that the:
→ MPC is greater in A than in B.
The most important determinant of consumption and saving is the:
→ level of income.
Assume a machine that has a useful life of only one year costs $2,000. Assume, also, that net of such operating costs as power, taxes, and so forth, the
additional revenue from the output of this machine is expected to be $2,300. The expected rate of return on this machine is:
→ 15 percent.
If 100 percent of any change in income is spent, the multiplier will be:
→ infinitely large.
Refer to the figure. The consumption schedule indicates that:
→ up to a point consumption exceeds income but then falls below income.
The greater is the marginal propensity to consume, the:
→ smaller is the marginal propensity to save.
Which of the following will not cause the consumption schedule to shift?
→ A change in consumer incomes.
One can determine the amount of any level of total income that is consumed by:
→ multiplying total income by the APC.
Refer to the given diagram. Suppose an economy's consumption schedule shifts from C1 to C2 as shown in the diagram. We can say that its:
→ MPC and APC at each income level have both increased.
The multiplier effect indicates that:
→ a change in spending will change aggregate income by a larger amount.
Refer to the given diagram. Suppose the economy's saving schedule shifts from S1 to S2 as shown in the given diagram. We can say that its:
→ MPS has increased.
If the economy is in equilibrium at $400 billion of GDP and the fullemployment GDP is $500 billion:
→ GDP will remain at $400 billion unless aggregate expenditures change.
Which aggregate expenditure schedule AE in the diagram for a private closed economy implies the largest MPC, assuming investment is the same at each
level of income?
In an aggregate expenditures diagram, equal increases in government spending and in lump sum taxes will:
→ shift the aggregate expenditures line upward.
It is true that:
→ equal increases in government spending and taxes increase the equilibrium GDP.
If the marginal propensity to consume in an economy is .8, net exports are zero, and government spending is $33 billion at each level of real GDP, the slope
of the economy's aggregate expenditures schedule will be:
Refer to the diagram for a private closed economy. Gross investment:
→ is independent of the level of GDP.
Suppose that a mixed open economy is producing at its equilibrium income and that net exports are zero. If at the equilibrium income the public sector's
budget shows a surplus
→ planned investment must exceed saving.
All else equal, a large decline in the real interest rate will shift the:
→ investment schedule upward.
Refer to the diagram for a private closed economy. At the equilibrium level of GDP, the APC and APS:
→ are 5/6 and 1/6 respectively.
At equilibrium real GDP in a private closed economy:
→ aggregate expenditures and real GDP are equal.
Refer to the diagrams. Other things equal, curve B will shift upward when:
→ curve A shifts to the right.
An upward shift of the aggregate expenditures schedule might be caused by:
→ a decrease in imports, with no change in exports.
If the dollar appreciates relative to foreign currencies, we would expect:
→ a country's net exports to fall.
At the equilibrium GDP for a private open economy:
→ net exports may be either positive or negative.
If the marginal propensity to consume is .9 in a private closed economy, a $20 billion decline in investment spending will decrease:
→ saving by $20.
An increase in taxes of a specific amount will have a smaller impact on the equilibrium GDP than will a decline in government spending of the same amount
→ some of the tax increase will be paid out of income that would otherwise have been saved.
Imports have the same effect on the current size of GDP as:
Which of the following would reduce GDP by the greatest amount?
→ A $20 billion decrease in government spending.
The foreign purchases effect suggests that an increase in the U.S. price level relative to other countries will:
→ increase U.S. imports and decrease U.S. exports.
Suppose that nominal wages fall and productivity rises in a particular economy. Other things equal, the aggregate:
→ supply curve will shift rightward.
An increase in aggregate expenditures resulting from some factor other than a change in the price level is equivalent to:
→ a rightward shift of the aggregate demand curve in the ADAS model.
Suppose that technological advancements stimulate $20 billion in additional investment spending. If the MPC = .6, how much will the change in investment
increase aggregate demand?
→ $50 billion.
Use the following diagrams for the U.S. economy to answer the following question.
Which of the diagrams best portrays the effects of declines in the prices of imported resources?
The shape of the immediateshortrun aggregate supply curve implies that:
→ total output depends on the volume of spending.
If aggregate demand decreases, and as a result, real output and employment decline but the price level remains unchanged, it is most likely that:
→ the price level is inflexible downward and a recession has occurred.
Which of the diagrams best portrays the effects of an increase in resource productivity?
If investment decreases by $20 billion and the economy's MPC is .5, the aggregate demand curve will shift:
→ leftward by $40 billion at each price level.
Other things equal, an improvement in productivity will:
→ shift the aggregate supply curve to the right.
In the diagram, a shift from AS3 to AS2 might be caused by an increase in:
An increase in investment spending caused by higher expected rates of return will:
→ shift the aggregate expenditures curve upward and the aggregate demand curve to the right.
Which of the following is incorrect?
→ When the price level increases, real balances increase and businesses and households find themselves wealthier and therefore increase
Which of the following would most likely shift the aggregate demand curve to the right?
→ An increase in stock prices that increases consumer wealth.
Refer to the diagrams, in which AD1 and AS1 are the "before" curves and AD2 and AS2 are the "after" curves. Other things equal, a decline in net exports
caused by the foreign purchases effect of a pricelevel increase is depicted by the:
→ move from point a to point b in panel (B).
When aggregate demand declines, wage rates may be inflexible downward, at least for a time, because of:
→ wage contracts.
When deriving the aggregate demand (AD) curve from the aggregate expenditures model, an increase in U.S. product prices would cause an increase in:
→ interest rates and lower investment expenditures.
Refer to the diagram. Assume that G and T1 are the relevant curves, the economy is currently at B, and the fullemployment GDP is A. This economy has
→ actual budget surplus.
An appropriate fiscal policy for a severe recession is:
→ a decrease in tax rates.
Refer to the diagram in which T is tax revenues and G is government expenditures. All figures are in billions. In this economy:
→ tax revenues vary directly with GDP, but government spending is independent of GDP.
Refer to the diagram in which T is tax revenues and G is government expenditures. All figures are in billions. If GDP is $400:
→ the budget will be balanced.
In an aggregate demandaggregate supply diagram, equal decreases in government spending and taxes will:
→ shift the AD curve to the left.
Which one of the following might offset a crowdingout effect of financing a large public debt?
→ An increase in public investment.
Refer to the diagram. Assume that G and T1 are the relevant curves, the economy is currently at A, and the fullemployment GDP is B. This economy has
→ cyclically adjusted budget surplus.
Discretionary fiscal policy will stabilize the economy most when:
→ deficits are incurred during recessions and surpluses during inflations.
Refer to the diagram, in which Qf is the fullemployment output. The shift of the aggregate demand curve from AD3 to AD2 is consistent with:
→ a contractionary fiscal policy.
Which of the following best describes the builtin stabilizers as they function in the United States?
→ Personal and corporate income tax collections automatically rise and transfers and subsidies automatically decline as GDP rises.
The actual budget deficit of the federal government in 2009 was about $1.4 trillion. On the basis of this information, it:
→ cannot be determined whether the government engaged in expansionary or contractionary fiscal policy in 2009.
If government increases the size of its cyclically adjusted surplus, we can:
→ assume that government is having a contractionary effect on the economy.
Refer to the data. A 10 percent proportional tax on income would:
→ reduce the size of the multiplier and make the economy more stable.
If the MPC in an economy is .8, government could shift the aggregate demand curve rightward by $100 billion by:
→ decreasing taxes by $25 billion.
Countercyclical discretionary fiscal policy calls for:
→ deficits during recessions and surpluses during periods of demandpull inflation.
Stock market price quotations best exemplify money serving as a:
→ unit of account.
Assuming no other changes, if checkable deposits increase by $40 billion and currency in circulation decreases by $40 billion, the:
→ M1 money supply will not change.
Refer to the table. The value of the dollar in year 2 is:
Collateralized default swaps:
→ insured holders of loanbacked securities in case the underlying loans were not repaid.
During periods of rapid inflation, money may cease to work as a medium of exchange:
→ because people and businesses will not want to accept it in transactions.
A checking account entry is money because it:
→ performs the functions of money.
What is the primary function of the Term AssetBacked Securities Loan Facility?
→ Provide funding support for collateralized securities such as student, auto, and credit card loans.
Other things equal, an excessive increase in the money supply will:
→ decrease the purchasing power of each dollar.
Checkable deposits are classified as money because:
→ they can be readily used in purchasing goods and paying debts.
Which role of the Federal Reserve was expanded directly as a result of the PDCF and TSLF?
→ Lender of last resort.
A $70 price tag on a sweater in a department store window is an example of money functioning as a:
→ unit of account.
When economists say that money serves as a unit of account, they mean that it is:
→ a monetary unit for measuring and comparing the relative values of goods.
Assuming no other changes, if checkable deposits decrease by $40 billion and balances in money market mutual funds increase by $40 billion, the:
→ M1 money supply will decline and the M2 money supply will remain unchanged.
To say money is socially defined means that:
→ whatever performs the functions of money extremely well is considered to be money.
In defining money as M1, economists exclude time deposits because:
→ they are not directly or immediately a medium of exchange.
If you are estimating your total expenses for school next semester, you are using money primarily as:
→ a unit of account.
If you place a part of your summer earnings in a savings account, you are using money primarily as a:
→ store of value.
The money supply is backed:
→ by the government's ability to control the supply of money and therefore to keep its value relatively stable.
A bank that has liabilities of $150 billion and a net worth of $20 billion must have:
→ assets of $170 billion.
Commercial banks monetize claims when they:
→ make loans to the public.
A single commercial bank must meet a 25 percent reserve requirement. If the bank has no excess reserves initially and $5,000 of cash is deposited in the
bank, it can increase its loans by a maximum of:
Assume the Standard Internet Company negotiates a loan for $5,000 from the Metro National Bank and receives a checkable deposit for that amount in
exchange for its promissory note (IOU). As a result of this transaction:
→ the supply of money is increased by $5,000.
If the reserve requirement is 10 percent, what amount of excess reserves does a bank acquire when a business deposits a $500 check drawn on another
The primary purpose of the legal reserve requirement is to:
→ provide a means by which the monetary authorities can influence the lending ability of commercial banks.
A fractional reserve banking system:
→ is susceptible to bank "panics" or "runs."
If a portion of the loans extended by commercial banks is taken as cash rather than as checkable deposits, the maximum money creating potential of the
commercial banking system will:
If the monetary authorities want to reduce the monetary multiplier, they should:
→ raise the required reserve ratio.
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