A rational decisionmaker takes an action if and only if the marginal cost exceeds the marginal benefit.
One way that governments can improve market outcomes is to ensure that individuals are able to own and exercise control over their scarce resources.
In the circular flow diagram, one loop represents the flow of goods and services, and the other loop represents the flow of factors of production.
Historical episodes allow economists to illustrate and evaluate economic theories of the present.
A reduction in an input price will cause a change in quantity supplied, but not a change in supply.
When an economy is operating inside its production possibilities frontier, we know that
there are unused resources or inefficiencies in the economy.
Refer to Figure above. the shift of the production possibilities frontier from A to B illustrates
For the Figure Below. What is the value of the deadweight loss after the imposition of the price floor?
$600, and the value of consumer surplus after the imposition of the price floor is $1,500
Increasing opportunity cost along a bowed out production possibilities frontier occurs because
some factors of production are not equally suited to producing both goods or services.
Specializing in the production of a good or service in which one has a comparative advantage enables a country to do which of the following?
consume a combination of goods that lies outside its own production possibilities frontier.
Laws that restrict the smoking of cigarettes in public places are examples of government ________ in the market:
Suppose that a decrease in the price of good X results in fewer units of good Y being sold. This implies that X and Y are
The term used to describe a situation in which markets do not allocate resources efficiently is
Published in 1776, _________ was written by Adam Smith.
An Inquiry into the Nature and Causes of the Wealth of Nations
If a surplus exists in a market, then we know that the actual price is
above the equilibrium price and quantity supplied is greater than quantity demanded.
Refer to Figure above. If the price is $25, then there would be an
excess supply of 300 and the price would fall.
Which of the following is not a rationing mechanism used by landlords in cities with rent control?
When a binding price floor is imposed on a market to benefit sellers,
some sellers benefit and some sellers are harmed.
Refer to Figure above. When the price ceiling applies in this market and the supply curve for gasoline shifts from S1 to S2,
a shortage will occur at the new market price of P2.
Economics promotes which of the following as the way to make the best decision?
Continue an enjoyable activity up to the point where its marginal benefit equals its marginal cost.
The production possibilities frontier is a graph that shows the various combinations of output that an economy
Which of these statements best represents the law of demand?
When the price of a good decreases, buyers purchase more of the good.
Government policies can change the costs and benefits that people face. Those policies have the potential to
All of the above are correct.
When calculating the cost of college, which of the following should you probably not include?
The cost of rent for your off-campus apartment.
The basic principles of economics suggest that
government should become involved in markets when those markets fail to produce efficient or fair outcomes.
If the demand for a product decreases, then we would expect
equilibrium price and equilibrium quantity to both decrease.
To say that a price ceiling is binding is to say that the price ceiling
causes quantity demanded to exceed quantity supplied.
For economists, statements about the world are of two types:
positive statements and normative statements.
A minimum wage that is set above a market's equilibrium wage will result in
an excess supply of labor, that is, unemployment.
Guns and butter are used to represent the classic societal tradeoff between spending on
national defense and consumer goods.
If there is public dissaving, investment spending in the economy will decline, holding everything else constant.
Accumulating a greater number of inputs will ensure that an economy will experience economic growth.
If the current year CPI is 90, then the price level has decreased 10 percent since the base year.
If consumption is $1800, GDP is $4300, government purchases are $1000, imports are $700, and investment is $1200, then exports are $300.
Real GDP per capita is calculated by dividing the value of real GDP for a country by the country's adult population.
What is investment in a closed economy if you have the following economic data?
Y=$10 trillion ; C=$5 trillion ; Tr-$2 trillion ; G=$2 trillion
Increasing the amount of consumption spending and reducing the amount of savings ________ investment expenditures, and ________ long-run economic growth in the economy.
Someone who is available for work but has not actively looked for work in the previous week would be classified as
not in the labor force.
Which of the following increases labor productivity?
inventions of new machinery, equipment, or software.
Which of the following statistic is usually regarded as the best single measure of a society's economic well-being?
gross domestic product
Oceania buys $40 of wine from Escudia and Escudia buys $100 of wool from Oceania. Supposing that this is the only trade that these countries do. What are the net exports of Oceania and Escudia, in that order?
$60 and -$60
Which of the following is not a cause of the changing role of women in American society over the past several decades?
scientists have shown that women are better employees than men.
An American company operates a fast food restaurant in Romania. Which of the following statements is accurate?
The value of the goods and services produced by the restaurant is included in Romanian GDP, but not US GDP.
In a closed economy, private saving is equal to which of the following? (Y=GDP ; C=Consumption ; G=Government purchases ; T=Taxes ; and Tr=Transfers)
Gross domestic product is defined as
the market value of all final goods and services produced within a country in a given period of time.
In an imaginary economy, consumers buy only shirts and pants. The fixed basket consists of 6 shirts and 4 pairs of pants. A shirt cost $20 in 2006 and $25 in 2007. A pair of pants cost $30 in 2006 and $40 in 2007. Using 2006 as the base year, which of the following statements is correct?
The rate of inflation is 29.17% in 2007.
Gross domestic product understates the total production of final goods and services because of the omission of
The value of what a US owned McDonald's produces in South Korea is included in the US ______ and the South Korean ______.
One problem with the consumer price index stems from the fact that, over time, consumers tend to buy larger quantities of goods that have become relatively less expensive and smaller quantities of goods that have become relatively more expensive. This problem is called
When economists refer to intangible items, they are referring to such things as
consulting services and dental care, and the value of such items is included in GDP.
Refer to Figure above. At the equilibrium wage, how many workers are unemployed?
0, and if the government imposes a minimum wage of $4, then unemployment will increase by 0 workers.
According to the text, economists consider full employment to occur when
the unemployment rate consists of only frictional and structural unemployment.
The response of investment spending to an increase in the government budget deficit is called
The table below pertains to Pieway, an economy in which the typical consumer's basket consists of 10 bushels of peaches and 15 bushels of pecans. Refer to Table above. The cost of the basket in 2006 was
$240, and if 2005 is the base year, then the inflation rate in 2006 was 20 percent.
Suppose an economy's production consists only of corn and soybeans. In 2005, 20 bushels of corn are sold at $4 per bushel and 10 bushels of soybeans are sold at $2 per bushel. In 2004, the price of corn was $2 per bushel and the price of soybeans was $1 per bushel. Using 2004 as the base year, it follows that, for 2005,
nominal GDP is $100, real GDP is $50, and the GDP deflator is 200.
Which of the following causes of unemployment is associated with a wage rate above the market equilibrium level?
All of the above are correct.
If real GDP per capita doubles between 2005 and 2020, what is the average annual growth rate of real GDP per capita?
Unemployment that results because the number of jobs available in some labor markets may be insufficient to give a job to everyone who wants one is called
Suppose a basket of goods and services has been selected to calculate the CPI and 2002 has been chosen as the base year. In 2002, the basket's cost was $75.00 ; in 2004, the basket's cost was $79.50 ; and in 2006, the basket's cost was $85.86. The value of the CPI was
All of the above are correct.
The demand for loanable funds is downward sloping because the _______ the interest rate, the ______ the number of profitable investment projects a firm can undertake, and the ________ the quantity demanded of loanable funds.
lower ; greater ; greater
An economy's natural rate of unemployment is
the amount of unemployment that the economy normally experiences.
In 2004, based on concepts similar to those used to estimate US employment figures, the Japanese adult non-institutionalized population was 109.684 million, the labor force was 65.760 million, and the number of people employed was 62.630 million. According to these numbers, the Japanese labor-force participation rate and unemployment rate were about
60% and 4.8%
Refer to Figure below. Which of the following is consistent with the graph depicted above?
New government regulations decrease the profitability of new investment.
A sharp increase in the divorce rate increases the numbers of lawyers hired to determine divorce settlements. This will
increase GDP and decrease well being in the economy.
Which of the following best describes an assumption economists make about human behavior?
They assume that rational behavior is useful in explaining choices people make even though people may not behave rationally all the time.
Lydia runs a small nail salon in the town of New Hope. She is debating whether she should extend her hours of operation. Lydia figures that her sales revenue will depend on the number of hours the nail salon is open as shown in the table above. She would have to hire a worker for those hours at a wage rate of $10 per hour. Refer to Table 1. Using marginal analysis, determine how many hours should Lydia extend her nail salon's hours of operations?
Every society faces economic trade-offs. This means
producing more of one good means less of another good can be produced.
In a market economy, ________ interact in markets to decide the answers to the fundamental economic questions.
households and firms
Competition forces firms to produce and sell products as long as the ______ to consumers exceeds the _____ of production.
marginal benefit ; marginal cost
The slope of a production possibilities frontier
measures the opportunity cost of producing one more unit of a good.
Refer to Figure above. _______ is (are) inefficient in that not all resources are being used.
Point A, and point C is (are) unattainable with current resources.
Increasing marginal opportunity cost implies that
the more resources already devoted to any activity, the payoff from allocating yet more resources to that activity increases by progressively smaller amounts.
Refer to Figure above. If the economy is currently producing at point Y, what is the opportunity cost of moving to point W?
0 million tons of paper.
Suppose your expenses for this term are as follows: tuition: $5,000 ; room and board: $3,000 ; books and other educational supplies: $500. Further, during the term, you can only work part-time and earn $4,000 instead of your full-time salary of $10,000. What is the opportunity cost of going to college this term, assuming that your room and board expenses would be the same even if you did not go to college?
If you can produce more of something than others with the same resources, you have
an absolute advantage.
Refer to Figure above. Which country has a comparative advantage in the production of coconuts?
The ability to exercise control over one's own resources within the confines of the law refers to
one's property rights.
It is possible to have a comparative advantage in producing a good or service without having an absolute advantage.
The idea underlying Adam Smith's invisible hand is that people tend to behave in ways that go unnoticed in society.
What is the difference between an "increase in demand" and an "increase in quantity demanded"?
An "increase in demand" is represented by a rightward shift of the demand curve while an "increase in quantity demanded" is represented by a movement along a given demand curve.
Holding everything else constant, an increase in the price of MP3 players will result in
a decrease in the quantity of MP3 players demanded.
The income effect of a price change refers to the impact of a change in
the price of a good on a consumer's purchasing power.
If an increase in income leads to a decrease in the demand for popcorn, then popcorn is
an inferior good.
If, in the market for oranges, the supply has increased then
the supply curve for oranges has shifted right.
Refer to Figure above. An increase in the number of firms in the market would be represented by a movement from
S1 to S2.
Refer to Figure above. Assume that the graphs in this figure represent the demand and supply curves for Fruitopia, a soft drink. Which panel describes what happens in the market for Fruitopia when the price of Snapple, a substitute product, decreases?
The difference between the highest price a consumer is willing to pay for a good and the price the consumer actually pays is called
Marginal benefit is equal to the ______ benefit to a consumer receives from consuming one more unit of a good or service.
The total amount of producer surplus in a market is equal to
the area above the market supply curve and below the market price.
The Figure above shows the market for tiger shrimp. The market is initially in equilibrium at a price of $15 and a quantity of 80. Now suppose producers decide to cut output to 40 in order to raise the price to $18. What is the value of consumer surplus at a price of $18? And what is the value of the deadweight loss at a price of $18?
$60 , $100
_________ is maximized in a competitive market when marginal benefit equals marginal cost.
If consumers believe the price of iPhones will decrease in the future, this will cause the demand for iPhones to decrease now.
An increase in the number of firms in a market will cause the quantity of a good supplied to increase.
In response to a surplus the market price of a good will fall; as the price falls ,the quantity demanded will increase and quantity supplies will decrease until equilibrium is reached.
If real GDP in a small country in 2005 is $8 billion and real GDP in the same country in 2006 is $8.3 billion, the growth rate of real GDP between 2005 and 2006
If the growth rate of real GDP rises from 3% to 4% per year, then the number of years required to double real GDP will decrease from
23.3 years to 17.5 years.
Refer to Figure above. Which of the following is consistent with the graph depicted above?
Technological change increases the profitability of a new investment.
Refer to Figure above. Crowding out of firm investment as a result of a budget deficit is illustrated by the movement from ______ in the graph above.
A to B
If GDP grew 3% in 1970, 2.2% in 1971 and 2.5% in 1972 then what is the average annual growth rate over this period?
Workers in high-income countries have _____ to work with than do workers in low-income countries.
more physical capital.
An increase in the government budget deficit will shift the ______ curve for loanable funds to the ______ and the equilibrium real interest rate will ______.
supply ; left ; rise
Which of the following goods would see the largest decline in demand during a recession?
If the central bank can act as a lender of last resort during a banking panic, banks can
satisfy customer withdrawal needs and eventually restore the public's faith in the banking system.
Open market operations refer to the purchase or sale of ______ to control the money supply.
US Treasure securities by the Federal Reserve
The three main monetary policy tools used by the Federal Reserve to manage the money supply are
open market operations, discount policy, and reserve requirements.
Using the quantity equation, if the velocity of money grows at 5 percent, the money supply grows at 10 percent, and real GDP grows at 4 percent, then the inflation rate will be
Dollar bills in the modern economy serve as money because
people have confidence that others will accept them as money.
The M1 measure of the money supply equals
currency plus checking account balances plus traveler's checks.
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
The aggregate expenditure model focuses on the relationship between _____ and _____ in the short run, assuming ____ is constant.
total spending ; real GDP ; the price level
Consumption spending is $22 million, planned investment spending is $7 million, actual investment spending is $7 million, government purchases are $9 million, and net export spending is $3 million. Based on this information, which of the following is true?
Aggregate expenditure is equal to GDP.
Suppose a bank has $100 million in checking account deposits with no excess reserves and the required reserve ratio is 10 percent. If the Federal Reserve reduces the required reserve ratio to 4 percent, then the bank can make a maximum loan of
Refer to Table above. Given the consumption schedule in the table above, the marginal propensity to save is
If firms are more optimistic that future profits will rise and remain strong for the nest few years, then
investment spending will rise.
Refer to Figure above. If the US economy is currently at point N, which of the following could cause it to move to point K?
Household expect future income to decline.
When Javier's income increases by $5,000, he spends and additional $3,750. This implies that his marginal propensity to consume is 0.75.
Gross domestic product in the economy is measured by the
dollar value of all final goods and services produced in the economy.
A car that is produced in 2010 is not sold until 2011. According to the definition of GDP, in which year's GDP should it be counted?
Consumption spending is $4.5 billion, gross private domestic investment is $3 billion, and government expenditures are $2 billion. If GDP is $14 billion, which of the following could be true regarding exports and imports in the economy?
Exports are $15 billion, and imports are $10.5 billion.
The underground economy can be described as
economic activity that is hidden from the government to avoid taxes or because the activity is illegal.
The _______ is a measure of the price level and is calculated by dividing _____ by ______ and multiplying by 100.
GDP deflator ; nominal GDP ; real GDP
Refer to Table above. Suppose that a very simply economy produces three good: cameras, legal services, and books. Suppose that the quantities produced and their corresponding prices for 2006 and 2009 are shown in the table above. What is the GDP deflator in 2006 if 2009 is the base year?
If the GDP deflator is 142, by how much have the prices changed since the base year?
Prices have increased by 42%.
The most widely used measure of inflation is based on which of the following price indexes?
the consumer price index
Refer to Table above. Suppose that the data in the table above reflect price levels in the economy. What is the inflation rate between 2008 and 2009?
Refer to Table above. Suppose an economy has only three goods and the typical family purchases the amounts given in the table above. If 2004 is the base year, then what is the CPI for 2009?
The CPI in 1990 was 131, and the CPI in 2008 was 215. If you earned a salary of $40,000 in 1990, what would be a salary with equivalent purchasing power in 2008?
You borrow $10,000 from a bank for one year at a nominal interest rate of 5%. The CPI over that year rises from 180 to 200. What is the real interest rate you are paying?
If the number of unemployed workers is 19 million, the number in the working-age population is 500 million, and the unemployment rate is 4%, what is the labor force participation rate?
Government spending on transfer payments is included in government purchases when calculating GDP because it results in the production of new goods and services.
If the CPI falls from 142 to 140 between two consecutive years, this implies that prices fell by 2% between those two years.
The CPI in 2008 was 217, while the CPI in 1980 was 82. If you had $5,000 in 1980, its equivalent purchasing power in 2008 would be $10,850.
Monetary policy refers to the actions the Federal Reserve takes to manage
the money supply and interest rates to pursue its economic objectives.
Which of the following are goals of monetary policy?
price stability, economic growth, and high employment
The money demand curve has a negative slope because
lower interest rates cause households and firms to switch from financial assets to money.
Refer to Figure above. In the figure above, the money demand curve would move from Money demand1 to Money demand2 if
the price level increased.
Refer to Figure above. In the figure above, the movement from point A to point B in the money market would be caused by
an open market sale of Treasury securities by the Federal Reserve.
An increase in the domestic interest rate relative to other interest rates should
decrease consumption spending.
If the Fed pursues expansionary monetary policy then
the money supply will increase, interest rates will fall, and GDP will rise.
Which of the following characterizes the Fed's ability to prevent recessions?
The Fed is able to keep a recession shorter and milder than it would otherwise be.
In which of the following situations would the Fed conduct contractionary monetary policy?
The Fed is concerned that aggregate demand would continue to exceed the growth in potential GDP.
The body that is responsible for dating the beginning and ending dates for a recession is
the National Bureau of Economic Research.
The Taylor rule helps explain the relationship between the Fed's _____ and _____.
federal funds target ; economic conditions
Inflation targeting is a framework for carrying out monetary policy whereby
the central bank commits to achieving a publicly announced level of inflation.
Contractionary monetary policy refers to the Fed's decreasing the money supply and decreasing interest rates to decrease real GDP.
An argument in favor of the Federal Reserve adopting inflation targeting is that in the long run, the Fed can have an impact on inflation but not on real GDP.
Maintaining a strong dollar in international currency markets is one of the monetary policy goals of the fed.
The marginal propensity to consumer measures the average amount of wealth that a consumer spends in a given period of time.
If the rate of growth in real GDP exceeds the rate of growth in the money supply, the quantity theory of money predicts inflation.
If planned investment is equal to actual investment, then aggregate expenditure is equal to GDP.
On the 45-degree line diagram, for points that lie above the 45-degree line,
planned aggregate expenditure is greater than GDP.
In the United States, each bank panic in the late nineteenth and early twentieth centuries was accompanied by
Refer to Figure above. In the figure above, the movement from point A to point B in the money market would be caused by
an increase in the price level.
An increase in real GDP
increases the buying and selling of goods and increases the demand for money as a medium of exchange.
Refer to Figure above. If the U.S. economy is currently at point K, which of the following could cause it to move to point N?
The price level in the United States falls relative to the price level in other countries.
If aggregate expenditure is greater than GDP, how will the economy reach macroeconomic equilibrium?
Inventories will decline, and GDP and employment will rise.
An unplanned decrease in inventories results in
actual investment that is less than planned investment.
If the Federal Open Market Committee wants to decrease the money supply through open market operations it will
sell U.S. Treasury Securities.
The five most important variables that determine the level of ______ are disposable income, wealth, expected future income, price level, and interest rate.
Which of the following is not an argument against inflation targeting?
Inflation targeting makes monetary policy ineffective because the targets are publicly announced.
Consumption is $5 million, planned investment spending is $8 million, government purchases are $10 million, and net exports are equal to $2 million. If GDP during that same time period is equal to $23 million, what unplanned changes in inventories occurred?
There was an unplanned decrease in inventories equal to $2 million.
Consider the following T-account for the National City Bank. If the required reserve ratio is lowered to 8 percent, how much can National City loan out?
If an increase in autonomous consumption spending of $25 million results in a $100 million increase in equilibrium real GDP, then
the MPC is 0.75.
The Fed seeks to promote stability of financial markets because
resources are lost when there is not an efficient matching of savers and borrowers.
Suppose the Fed increases the money supply. Which of the following is true?
At the original interest rate, the quantity of money demanded is less than the quantity of money supplied.
Which is not one of the criteria necessary for a commodity to make a suitable medium of exchange?
It should have intrinsic value.
Which of the following situations is one in which the Fed will potentially pursue expansionary monetary policy?
Potential GDP is forecasted to be higher than equilibrium GDP.
The consumption function describe the relationship between
consumption spending and disposable income.
When the Fed increases the money supply,
the interest rate falls and this stimulates investment spending.
U.S. net export spending falls when
the growth rate of U.S. GDP is faster than the growth rate of GDP in other countries.
The marginal propensity to consume is defined as
the change in consumption divided by the change in disposable income.
If households in the economy decide to take money out of checking account deposits and put this money into savings accounts, this will initially
decrease M1 and not change M2.
According to the quantity theory of money, if the money supply grows at 6%, real GDP grows at 2%, and the velocity of money is constant, then the inflation rate will be
Rising prices erode the value of money as a _____ and as a ______.
medium of exchange; store of value
Suppose that the economy is producing above potential GDP and the Fed implements the correct change in monetary policy, but not until after the economy has passed the peak of the boom. Then
the Fed's contractionary policy will result in too large of a decrease in GDP.