Combo with "ECON 2301 – Exam I" and 2 others

#1) The economic way of thinking will help you
A) make decisions in financing your home.
B) decide whether the U.S. government should encourage or discourage immigration.
C) make better decisions concerning your education.
D) all of the above
D) all of the above
2) Economics is best defined as the
A) study of how people make choices to satisfy their wants.
B) study of individual self-interests.
C) study of how government can most efficiently raise funds by taxation.
D) process by which goods are sold in free markets.
A) study of how people make choices to satisfy their wants.
3. Economic resources are
A. all the items that people would purchase if they had limited wants.
B. all the unlimited items that people would purchase with limited income.
C. items of value that are used to make other things that satisfy people’s wants.
D. the total planned expenditures throughout the nation.
C. items of value that are used to make other things that satisfy people’s wants.
4. Macroeconomics is the study of
A) aggregate economic variables.
B) output in particular industries.
C) prices in particular industries.
D) all of the above.
A) aggregate economic variables.
5. Microeconomics is the study of
A) the behavior of the economy as a whole.
B) how rising prices affect the level of employment in the economy.
C) how individuals and firms make decisions.
D) the effect that money has in the economic system.
C) how individuals and firms make decisions.
6. Macroeconomics is concerned with
A) individual business firms.
B) specific industries.
C) individual consumers.
D) a nation’s entire economy.
D) a nation’s entire economy.
7. Microeconomics examines the
A) total household expenditures.
B) behavior of the economy as a whole.
C) aggregate business spending.
D) decision making undertaken by individual households.
D) decision making undertaken by individual households.
8) The way that a society uses to allocate resources to satisfy human wants is called
A) an economic system.
B) an assumption.
C) realism.
D) a physical science.
A) an economic system.
8. What is the type of economic system that relies on one central authority to make economic decisions?
A) Free market
B) Price system
C) Command and control
D) Mixed economic system
C) Command and control
9. What is the type of mechanism that answers the basic economic questions through a decentralized decision making process?
A) Market system
B) Dictatorship
C) Command and control
D) Mixed economic system
A) Market system
10. Under a pure price system, the decision of resource allocation is made by
A) the head of the government.
B) a queen or king.
C) individuals who own the resources.
D) no one.
C) individuals who own the resources.
11. In a market system, the what, how and for whom questions in economics are determined by
A) those who are not in the market.
B) buyers and sellers together.
C) the central authority.
D) no one.
B) buyers and sellers together.
12. A mixed economic system is best described as an economy with a mix of
A) state and federal governments.
B) domestic and foreign buyers.
C) free markets and government control.
D) for-profit organizations and not-for-profit organizations.
C) free markets and government control.
13. When studying individuals’ economic behavior, economists assume that
A) individuals understand the rationale for all their actions.
B) individuals act as if they were rational.
C) only educated people act as if they were rational.
D) self-interest is of limited relevance in predicting an individual’s actions.
B) individuals act as if they were rational.
14. In economics, the concept that individuals are motivated by self-interest and respond predictably to opportunities for gain is known as
A) rational self-interest.
B) altruism.
C) sufficiency.
D) empiricism.
A) rational self-interest.
15. Economists assume people behave rationally, which means that people
A) never make a mistake.
B) do not intentionally make decisions that make themselves worse off.
C) have the necessary information to always make correct decisions.
D) always understand the consequences of their decisions.
B) do not intentionally make decisions that make themselves worse off.
16. The potential rewards that are available to an individual if a particular activity is undertaken are known as
A) premiums.
B) gifts.
C) incentives.
D) intrinsic values.
C) incentives.
17. Incentives are
A) potential rewards available if a particular activity is undertaken.
B) ineffective as a device to get people to behave in a certain fashion.
C) inappropriate ways to obtain a certain kind of behavior.
D) useless when people behave rationally.
A) potential rewards available if a particular activity is undertaken.
18. Rational self-interest means
A) always increasing your wealth.
B) pursuing what makes you better off.
C) pursuing activities that maximize income.
D) always pursuing activities that are consistent with your faith.
B) pursuing what makes you better off.
19. Holding all variables constant but one and assessing the impact of the one variable that has changed is an example of using
A) the ceteris paribus assumption.
B) an economic model based on unrealistic assumptions.
C) a flawed economic model.
D) an untestable proposition.
A) the ceteris paribus assumption.
20. Which of the following is an example of an application of the ceteris paribus assumption?
A) An analysis of how price changes affect how much of a good people will purchase when all other factors are held constant
B) An analysis of how people purchase more goods when prices decline and income increases
C) After reading an article on the dangers of high-fat diets, an individual buys less red meat when prices increase
D) An analysis of how worker productivity increases when a firm invests in new machines and training programs
A) An analysis of how price changes affect how much of a good people will purchase when all other factors are held constant
21. Why is economics called an empirical science?
A) because economics has been used to both create and destroy empires
B) because economics uses impressions to evaluate the usefulness of its models
C) because economics relies on real-world data to determine the usefulness of a model
D) because economics utilizes intuition rather than data to evaluate a model’s worth
C) because economics relies on real-world data to determine the usefulness of a model
22. An appropriate test of the effectiveness of an economic model is
A) the number of variables contained within the model.
B) the model’s ability to predict future economic activity.
C) the number of economists who have worked on the model.
D) the number of assumptions which the economist has made.
B) the model’s ability to predict future economic activity.
23. The hypothesis that people are nearly, but not fully rational, cannot possibly fully examine every available choice, and utilize simple rules of thumb in making decisions is known as the
A) irrationality hypothesis.
B) ceteris paribus hypothesis.
C) individual aggregation hypothesis.
D) bounded rationality hypothesis.
D) bounded rationality hypothesis.
24. According to proponents of behavioral economics, because every possible choice cannot be considered, an individual will tend to fall back on methods of making decisions that are simpler than trying to sort through every single possibility, known as
A) rules of thumb.
B) rational options.
C) irrational choices.
D) normative decisions.
A) rules of thumb.
25. “All Americans should have access to health care” is an example of
A) a positive statement.
B) a microeconomic argument.
C) a factual statement.
D) a normative statement.
D) a normative statement.
1. Scarcity is caused by
A) unlimited wants running up against limited economic resources.
B) lazy workers.
C) mechanical breakdowns at factories.
D) shortages.
A) unlimited wants running up against limited economic resources.
2. Scarcity implies that people must
A) be miserable.
B) be selfish.
C) make choices.
D) not be selfish.
C) make choices.
3. The conversion of resources into consumer goods or services is called
A) human capital.
B) production.
C) opportunity cost.
D) absolute advantage.
B) production.
4. If the quantity desired of something exceeds the amount available at zero price, that item is called
A) a service.
B) an economic good.
C) an intangible good.
D) a bad.
B) an economic good.
5. At a zero price, which of the following conditions is TRUE for an economic good?
A) Its quantity supplied exceeds its quantity demanded.
B) Its quantity demanded exceeds its quantity supplied.
C) Its quantity demanded equals its quantity supplied.
D) Scarcity disappears.
B) Its quantity demanded exceeds its quantity supplied.
6. The most basic concept in economics is
A) wealth.
B) income.
C) scarcity.
D) spending.
C) scarcity.
7. Economic goods are
A) abundant goods, about which we must constantly make decisions about their best use.
B) all imaginable items from which individuals derive satisfaction or happiness.
C) goods that are scarce, for which the quantity demanded exceeds the quantity supplied at a zero price.
D) goods that are scarce, for which the quantity demanded exceeds the quantity supplied at any price.
C) goods that are scarce, for which the quantity demanded exceeds the quantity supplied at a zero price.
8. Scarcity exists because
A) the majority of people in the world are poor.
B) people are too greedy and refuse to share what they have with others.
C) human wants exceed what can be produced with the limited resources available.
D) not enough new technology is being used to eliminate scarcity.
C) human wants exceed what can be produced with the limited resources available.
9. Scarcity and shortages differ in that
A) scarcity is caused by natural disasters and shortages are caused by mistakes people make.
B) scarcity is a condition of human life while shortages are usually temporary phenomena related to an imbalance between the amount desired and the amount produced.
C) scarcity is a type of shortage but shortage is a broader concept.
D) shortages apply to resource markets while scarcity applies to product markets.
B) scarcity is a condition of human life while shortages are usually temporary phenomena related to an imbalance between the amount desired and the amount produced.
10. A man-made resource such as a building or a machine is an example of which resource?
A) Entrepreneurial ability
B) Labor
C) Physical capital
D) Human capital
C) Physical capital
11. A person goes to college to become an engineer. This is an example of an
A) investment in physical capital.
B) investment in human capital.
C) increase in entrepreneurship.
D) increase in labor.
B) investment in human capital.
12. In economics, physical capital includes
A) money.
B) bank accounts.
C) machinery.
D) shares of stock.
C) machinery.
13. Economic bads are items
A) for which the produced quantity is less than the amount desired at a positive price.
B) for which the desired quantity is less than what nature provides at a zero price.
C) that individuals desire but which receive social disapproval.
D) that receive social approval but which governments dislike.
B) for which the desired quantity is less than what nature provides at a zero price.
14. The value of the best alternative sacrificed to obtain something you want is referred to as
A) explicit cost.
B) opportunity cost.
C) marginal cost.
D) sunk cost.
B) opportunity cost.
15. In the above figure, the opportunity cost of moving from producing 50 guitars and 50 ukuleles to producing 25 guitars and 75 ukuleles is
A) 25 guitars.
B) 75 ukuleles.
C) 25 ukuleles.
D) 50 guitars.
A) 25 guitars.
16. In the above figure, as more ukuleles are produced, the opportunity cost in terms of guitars is
A) decreasing.
B) increasing.
C) constant.
D) zero.
B) increasing.
17. The production possibilities curve represents the maximum feasible production combinations resulting from
A) the mix of current resources that utilizes all available inputs using current technology.
B) a fixed amount of demand by consumers.
C) the lack of trade-offs in production.
D) the lack of technology used in production.
A) the mix of current resources that utilizes all available inputs using current technology.
18. Using the above table, what is the opportunity cost of moving from alternative C to alternative D?
A) 60 loaves of bread
B) 2 loaves of bread
C) 30 loaves of bread
D) 1/2 loaf of bread
A) 60 loaves of bread
19. Using the above table, what is the opportunity cost of moving from alternative C to alternative B?
A) 1/2 a pizza pie
B) 60 pizza pies
C) 90 pizza pies
D) 30 pizza pies
D) 30 pizza pies
20. People always face trade-offs because
A) they always have more than one use for their time and money.
B) they buy goods with money.
C) trading takes place in a market economy.
D) they can make themselves better off through trade.
A) they always have more than one use for their time and money.
21. The production possibilities curve represents
A) the total amount of stocks and bonds that exist in the economy.
B) the trade-off between human capital and physical capital that exists.
C) all possible combinations of total output that can be produced.
D) society’s needs.
C) all possible combinations of total output that can be produced.
22. A technological improvement can cause the production possibilities curve to shift outward because
A) it increases costs and contributes to lower production rates.
B) maximum feasible outputs of both goods increase.
C) production will fall, but jobs will be saved.
D) it causes increases in unemployment.
B) maximum feasible outputs of both goods increase.
23. Why is efficiency desirable?
A) It results in an equal distribution of income.
B) It results in zero unemployment.
C) It makes best use of the finite resources we have.
D) It is the most politically popular solution.
C) It makes best use of the finite resources we have.
24. The trade-off between current consumption and the production of capital goods is also a trade-off between
A) the future cost for capital goods and future cost of consumption goods.
B) having fewer needs and more wants in the future.
C) satisfying the needs of the poor and the wants of the wealthy.
D) current consumption and future consumption.
D) current consumption and future consumption.
25. Comparative advantage is
A) when a country can produce a good at a lower opportunity cost compared to other countries.
B) when a country can produce all goods more quickly than any other country.
C) when the production possibilities curve shifts outward to the right.
D) only for individuals and not countries.
A) when a country can produce a good at a lower opportunity cost compared to other countries.
26. The ability to produce a good at a lower opportunity cost that others is known as
A) comparative advantage.
B) absolute advantage.
C) specialization.
D) marginal cost production.
A) comparative advantage.
27. When two countries specialize in the production of different goods and trade with each other, it is most likely each country will
A) export the goods in which it has a comparative advantage.
B) export the goods in which it has an absolute advantage.
C) import the goods in which it has a comparative advantage.
D) import the goods in which it has an absolute advantage.
A) export the goods in which it has a comparative advantage.
28. The reason that most of the coffee that is consumed in the United States comes from Colombia is that
A) Colombia has an absolute advantage in producing coffee relative to the United States.
B) Colombia has a comparative advantage in producing coffee relative to the United States.
C) coffee cannot be grown in the United States.
D) government trade disincentives regarding Colombian coffee make such trade possible.
B) Colombia has a comparative advantage in producing coffee relative to the United States.
29. In economics, international trade is based on the existence of
A) absolute advantage between countries.
B) relative advantage between countries.
C) comparative advantage between countries.
D) output advantage between countries.
C) comparative advantage between countries.
30. International trade between two nations increases the standard of living of both nations due to
A) specialization and gains from absolute advantage.
B) specialization and gains from comparative advantage.
C) high tariffs.
D) political intervention.
B) specialization and gains from comparative advantage.
1. The law of demand states that:
A. price and quantity demanded are inversely related.
B. the larger the number of buyers in a market, the lower will be product price.
C. price and quantity demanded are directly related.
D. consumers will buy more of a product at high prices than at low prices.
A. price and quantity demanded are inversely related.
2. Economists use the term demand to refer to:
A. a particular price-quantity combination on a stable demand curve.
B. the total amount spent on a particular commodity over a stipulated time period.
C. an upsloping line on a graph that relates consumer purchases and product price.
D. a schedule of various combinations of market prices and amounts demanded.
D. a schedule of various combinations of market prices and amounts demanded.
3. The relationship between quantity supplied and price is _____ and the relationship between quantity demanded and price is _____.
A. direct, inverse
B. inverse, direct
C. inverse, inverse
D. direct, direct
A. direct, inverse
4. When the price of a product increases, a consumer is able to buy less of it with a given money income. This describes:
A. the cost effect.
B. the inflationary effect.
C. the income effect.
D. the substitution effect.
C. the income effect.
5. When the price of a product rises, consumers shift their purchases to other products whose prices are now relatively lower. This statement describes:
A. an inferior good.
B. the rationing function of prices.
C. the substitution effect.
D. the income effect.
C. the substitution effect.
6. Which of the following would not shift the demand curve for beef?
A. a widely publicized study that indicates beef increases one’s cholesterol
B. a reduction in the price of cattle feed
C. an effective advertising campaign by pork producers
D. a change in the incomes of beef consumers
B. a reduction in the price of cattle feed
7. A rightward shift in the demand curve for product C might be caused by:
A. an increase in income if C is an inferior good.
B. a decrease in income if C is a normal good.
C. a decrease in the price of a product that is a close substitute for C.
D. a decrease in the price of a product that is complementary to C.
D. a decrease in the price of a product that is complementary to C.
8. If X is a normal good, a rise in money income will shift the:
A. supply curve for X to the left.
B. supply curve for X to the right.
C. demand curve for X to the left.
D. demand curve for X to the right.
D. demand curve for X to the right.
9. College students living off-campus frequently consume large amounts of ramen noodles and boxed macaroni and cheese. When they finish school and start their careers, their consumption of these goods frequently declines. This suggests that ramen noodles and boxed macaroni and cheese are:
A. inferior goods.
B. normal goods.
C. complementary goods.
D. substitute goods.
A. inferior goods.
10. Refer to the above diagram. A decrease in supply is depicted by a:
A. move from point x to point y.
B. shift from S1 to S2.
C. shift from S2 to S1.
D. move from point y to point x.
C. shift from S2 to S1.
11. A leftward shift of a product supply curve might be caused by:
A. an improvement in the relevant technique of production.
B. a decline in the prices of needed inputs.
C. an increase in consumer incomes.
D. some firms leaving an industry.
D. some firms leaving an industry.
12. An improvement in production technology will:
A. increase equilibrium price.
B. shift the supply curve to the left.
C. shift the supply curve to the right.
D. shift the demand curve to the left.
C. shift the supply curve to the right.
13. Suppose product X is an input in the production of product Y. Product Y in turn is a substitute for product Z. An increase in the price of X can be expected to:
A. decrease the demand for Z.
B. increase the demand for Z.
C. have no effect on the demand for Z.
D. decrease the supply of Z.
B. increase the demand for Z.
14. One reason that the quantity of a good demanded increases when its price falls is that the:
A) price decline shifts the supply curve to the left.
B) lower price shifts the demand curve to the left.
C) lower price shifts the demand curve to the right.
D) lower price increases the real incomes of buyers, enabling them to buy more.
D) lower price increases the real incomes of buyers, enabling them to buy more.
15. Refer to the above data. Equilibrium price will be:
A. $4.
B. $3.
C. $2.
D. $1.
C. $2.
16. Refer to the above data. If price was initially $4 and free to fluctuate, we would expect:
A. quantity supplied to continue to exceed quantity demanded.
B. the quantity of wheat supplied to decline as a result of the subsequent price change.
C. the quantity of wheat demanded to fall as a result of the subsequent price change.
D. the price of wheat to rise.
B. the quantity of wheat supplied to decline as a result of the subsequent price change.
17. If a product is in surplus supply, its price:
A. is below the equilibrium level.
B. is above the equilibrium level.
C. will rise in the near future.
D. is in equilibrium.
B. is above the equilibrium level.
18. At the equilibrium price:
A. quantity supplied may exceed quantity demanded or vice versa.
B. there are no pressures on price to either rise or fall.
C. there are forces that cause price to rise.
D. there are forces that cause price to fall.
B. there are no pressures on price to either rise or fall.
19. Refer to the above diagram. A price of $20 in this market will result in:
A. a shortage of 50 units.
B. a surplus of 50 units.
C. a surplus of 100 units.
D. a shortage of 100 units.
D. a shortage of 100 units.
20. If we say that a price is too high to clear the market, we mean that:
A. quantity demanded exceeds quantity supplied.
B. the equilibrium price is above the current price.
C. quantity supplied exceeds quantity demanded.
D. the price of the good is likely to rise.
C. quantity supplied exceeds quantity demanded.
21. If the supply and demand curves for a product both decrease, then equilibrium:
A. quantity must fall and equilibrium price must rise.
B. price must fall, but equilibrium quantity may either rise, fall, or remain unchanged.
C. quantity must decline, but equilibrium price may either rise, fall, or remain unchanged.
D. quantity and equilibrium price must both decline.
C. quantity must decline, but equilibrium price may either rise, fall, or remain unchanged.
22. In the above market, economists would call a government-set minimum price of $40 a:
A. price ceiling.
B. price floor.
C. equilibrium price.
D. fair price.
A. price ceiling.
23. Refer to the above diagram. Rent controls are best illustrated by:
A. price A.
B. quantity E.
C. price C.
D. price B.
A. price A.
24. An effective price floor on wheat will:
A. force otherwise profitable farmers out of business.
B. result in a shortage of wheat.
C. result in a surplus of wheat.
D. clear the market for wheat.
C. result in a surplus of wheat.
25. Price ceilings and price floors:
A. cause surpluses and shortages respectively.
B. make the rationing function of free markets more efficient.
C. interfere with the rationing function of prices.
D. shift demand and supply curves and therefore have no effect on the rationing function of prices.
C. interfere with the rationing function of prices.
1. An economic system in which relative prices change to reflect changes in supply and demand for different commodities is known as a
A. socialist system.
B. communist system.
C. queuing system.
D. market system.
D. market system.
2. In a market system, which component conveys information about what is relatively scarce and what is relatively abundant?
A. The number of producers
B. The number of consumers
C. Prices
D. The amount of government regulation
C. Prices
3. The signaling aspect of the market system refer to
A. legal requirements for contracts and exchanges.
B. the price of the good to the consumer and producer.
C. the voluntary character of the exchange.
D. transaction costs of carrying out exchanges.
B. the price of the good to the consumer and producer.
4. The rationing function of prices means that
A. government is responsible for setting the prices of basic foods.
B. all goods and services are produced by large firms.
C. businesses determine what goods consumers should purchase.
D. buyers and sellers synchronize their decisions through the price system.
D. buyers and sellers synchronize their decisions through the price system.
5. Hospitals announce that there are not enough nurses available to keep them fully staffed. Economically speaking, what does this announcement mean?
A. The market wage for trained nurses is currently above the equilibrium wage.
B. There is currently a surplus of nurses in this market.
C. The market wage for nurses will eventually rise to the market clearing wage.
D. The market will adjust very rapidly to correct this imbalance because anyone can be a nurse without any training.
C. The market wage for nurses will eventually rise to the market clearing wage.
6. Relative scarcities are indicated by
A. supply and demand being out of equilibrium.
B. surpluses.
C. excess demand and excess supply.
D. relative prices.
D. relative prices.
7. What would happen in the market for bread if its demand increased but the price was NOT allowed to change?
A. There would be a surplus of bread.
B. There would be a shortage of bread.
C. The supply of bread would increase.
D. The supply of bread would decrease.
B. There would be a shortage of bread.
8. If the government imposed a price ceiling on gasoline above this good’s current market clearing price, there would be
A. a shortage of gasoline. at the ceiling price.
B. a surplus of gasoline at the ceiling price.
C. an increase in the price of gasoline.
D. no change in the price of gasoline.
D. no change in the price of gasoline.
9. An effective price ceiling occurs when
A. the government sets a maximum price for a good above the equilibrium price.
B. the government sets a minimum price for a good above the equilibrium price.
C. the government sets a minimum price for a good below the equilibrium price.
D. the government sets a maximum price for a good below the equilibrium price.
D. the government sets a maximum price for a good below the equilibrium price.
10. An effective rent control will
A. lead to a surplus of housing units.
B. keep rents below the competitive market level.
C. keep rents above the competitive market level.
D. be set at the price where quantity supplied equals quantity demanded.
B. keep rents below the competitive market level.
11. In the United States, government-imposed price supports are most often associated with
A. agricultural products.
B. industrial products.
C. consumer electronics.
D. commercial building products.
A. agricultural products.
12. An example of a quantity restriction is
A. the minimum wage.
B. an import quota.
C. rent controls.
D. price supports in agriculture
B. an import quota.
13. A supply restriction that restricts the amount of a good that can be imported is a(n)
A. price floor.
B. price ceiling.
C. black market.
D. import quota.
D. import quota.
14. ) An unexpected import restriction imposed on mangoes by the USDA
A) will reduce the price of mangoes in the United States.
B) will increase the price of mangoes in the United States.
C) will discourage American producers of mangoes.
D) will reduce the price of mango juice in the United States.
B) will increase the price of mangoes in the United States.
15. When consumers would have been willing to pay higher prices at various quantities consumed than the market clearing price, the differences are called
A. consumer surplus.
B. monopoly profits.
C. opportunity cost.
D. deadweight loss.
A. consumer surplus.
16. If Niki is willing to pay up to $5 for an ice-cream bar but she actually pays $2 for it. The consumer surplus of the ice-cream bar for Niki
A. is $2.
B. is $3.
C. is $7.
D. cannot be determined without information about the market structure.
B. is $3.
17. When producers would have been willing to accept lower prices at various quantities produced than the market clearing price, the differences are called
A. producer surplus.
B. monopoly profits.
C. opportunity cost.
D. deadweight loss.
A. producer surplus.
18. The total gains from trade within a price system is
A) the area beneath the market demand curve and above the market clearing price plus the area above the market supply curve and beneath the market clearing price.
B) the area beneath the market supply curve and above the market clearing price plus the area above the market demand curve and beneath the market clearing price.
C) the area beneath the market demand curve and above the market clearing price minus the area beneath the market supply curve and beneath the market clearing price.
D) always equal to zero.
A) the area beneath the market demand curve and above the market clearing price plus the area above the market supply curve and beneath the market clearing price.
19. The total amount of consumer surplus and producer surplus is at its maximum when
A. consumers and producers are allowed to trade at the market clearing price.
B. the government imposes a price floor that is higher than the market clearing price.
C. the government imposes a price ceiling that is lower than the market clearing price.
D. free market exchanges do not exist.
A. consumers and producers are allowed to trade at the market clearing price.
20. As compared to the market clearing price, the total amount of consumer surplus and producer surplus is
A) greater for a government-imposed price floor that is higher than that market clearing price.
B) greater for a government-imposed price ceiling that is lower than that market clearing price.
C) the same as a government-imposed price floor that is higher than that market clearing price.
D) smaller for a government-imposed price ceiling that is lower than that market clearing price.
D) smaller for a government-imposed price ceiling that is lower than that market clearing price.
1. Market failure occurs when
A) a good is too expensive for the market to provide.
B) an unrestrained market economy leads to too few or too many resources going to a specific economic activity.
C) one good is superior to another and drives it out of the market.
D) the stock market experiences a very large loss.
A) a good is too expensive for the market to provide.
2. Which of the following statements is NOT true about the price system?
A) The price system allows resources to flow from low-valued uses to high-valued uses.
B) The price system encourages the production of public goods.
C) Individuals have freedom to purchase what they want.
D) The price system allows for economic efficiency.
B) The price system encourages the production of public goods.
3. In its most ideal form, a price system allows
A) firms to act in such a way that they eliminate scarcity.
B) consumers to satisfy all their wants.
C) resources to move from lower-valued uses to higher-valued uses through voluntary exchange.
D) government policy makers to allocate resources to the uses which they consider to be in the best interests of society.
C) resources to move from lower-valued uses to higher-valued uses through voluntary exchange.
4. A negative externality such as pollution can be corrected by
A) a subsidy to producers.
B) a tax on producers.
C) a subsidy to consumers.
D) a stimulus to production.
B) a tax on producers.
5. According to the above figure, if steel mills ignore the cost of pollution, the equilibrium quantity of steel will most likely be
A) Q1.
B) Q2.
C) Q2 – Q1.
D) none of the above.
A) Q1.
6. A government subsidy is typically used
A) to correct a negative externality.
B) to provide a government-inhibited good.
C) to reduce inflation.
D) to correct a positive externality.
D) to correct a positive externality.
7. Public goods are
A) rival and exclusive.
B) rival, but not exclusive.
C) exclusive, but not rival.
D) neither exclusive nor rival.
D) neither exclusive nor rival.
8. In the United States, the idea that the federal government should undertake actions to stabilize business activity
A) was established in the Declaration of Independence.
B) is a relatively new idea that developed in the years during and after the Great Depression.
C) has been around since the early 1700s.
D) developed during World War I.
B) is a relatively new idea that developed in the years during and after the Great Depression.
9. An important characteristic of private goods is
A) the nonexclusion principle.
B) the principle of rival consumption.
C) the principle of joint consumption.
D) the principle of conspicuous consumption.
B) the principle of rival consumption.
10. By definition, a government-sponsored good
A) is a good that is deemed socially desirable.
B) is a good that should be available only to upper-income groups.
C) is always provided at a zero price.
D) does not affect society’s general welfare.
A) is a good that is deemed socially desirable.
11. Social Security and Medicare are clear examples of
A) capitalism.
B) market-determined services.
C) market failures and externalities.
D) governmental intervention in the market.
D) governmental intervention in the market.
12. According to your text, which of the following represents the largest source of tax receipts for the Federal government?
A) sales taxes
B) individual income taxes
C) corporate income taxes
D) property taxes
B) individual income taxes
13. Government payment of a per-unit subsidy for medical care causes the out-of-pocket price that consumers pay for care to be
A) less than the price that producers receive for providing care.
B) greater than the price that producers receive for providing care.
C) greater than the market clearing price without the subsidy.
D) equal to zero.
A) less than the price that producers receive for providing care.
14. According to your text, one reason for flat or falling achievement scores even in the face of substantially higher education subsidies may be that
A) the additional funds are being siphoned off by dishonest school board members.
B) some of the funds are going to social services rather than to enhance learning activities.
C) students are so unmotivated that no amount of spending will ever improve scores.
D) most parents do not support the schools or their children’s educational activities.
B) some of the funds are going to social services rather than to enhance learning activities.
15. One reason the Medicare system costs so much is
A) the amount of medical services is determined by the equilibrium of supply and demand.
B) the supply of medical services does not respond to price changes.
C) supply and demand analysis does not apply.
D) beneficiaries are entitled to receive services for which the per-unit cost exceeds their own personal out-of-pocket payment.
D) beneficiaries are entitled to receive services for which the per-unit cost exceeds their own personal out-of-pocket payment.
16. Government spending as a percent of national income
A) peaked during the Reagan administration.
B) peaked during World War II.
C) has been steadily climbing since 1850.
D) has been almost constant this century.
B) peaked during World War II.
17. The largest spending category for state governments is
A) welfare.
B) health care.
C) education.
D) highway construction.
C) education.
18. All of the following are assumptions of both market and public-sector decision making EXCEPT:
A) Decisions are based on majority rule.
B) Decisions are motivated by individuals’ self-interest.
C) Opportunity costs exist in decisions.
D) Choices reflect incentives faced by decision makers.
A) Decisions are based on majority rule.
19. Scarcity
A) affects both market and public sector decision making.
B) affects market, but not public sector decision making.
C) affects public sector, but not market decision making.
D) is really not an issue in such a wealthy nation as the United States.
A) affects both market and public sector decision making.
20. The market and public sector are similar in that
A) there is competition amongst the participants in both sectors.
B) the resources used in both sectors are scarce.
C) the participants in both sectors react to incentives.
D) All of the above are true.
D) All of the above are true.
1. The government budget constraint implies that
A) government borrowings = government spending+ transfers – taxes and user charges.
B) government borrowings = taxes and user charges + government spending – transfers
C) government spending = transfers – taxes and user charges – government borrowing.
D) government spending = government borrowing – transfers – taxes and user charges
A) government borrowings = government spending+ transfers – taxes and user charges.
2. The main source of government funding is
A) user fees.
B) taxes.
C) borrowing.
D) transfer payments.
B) taxes.
3. The marginal tax rate shows
A) the percentage of income which a typical family pays in tax.
B) the average rate of taxation in the economy.
C) the deductions which are permitted for child care and medical expenses.
D) the extra tax due on an extra dollar of income.
D) the extra tax due on an extra dollar of income.
4. Suppose the tax rate on the first $10,000 of income is 0 percent; 10 percent on the next $20,000; 20 percent on the next $20,000; 30 percent on the next $20,000; and 40 percent on income over $70,000. Family A has an income of $120,000 and Family B an income of $55,000. What is the tax bill of each?
A) $48,000 for A and $16,500 for B
B) $32,000 for A and $6600 for B
C) $32,000 for A and $7500 for B
D) $34,000 for A and $7500 for B
C) $32,000 for A and $7500 for B
5. An example of a regressive tax is the
A) corporate income tax.
B) personal income tax.
C) Social Security tax.
D) state inheritance tax.
C) Social Security tax.
6. The average tax rate can be calculated by which of the following formulas?
A) The change in taxes due divided by the change in taxable income
B) The change in taxable income divided by the change in taxes due
C) Total taxes due divided by total taxable income
D) Total taxable income divided by total taxes due
C) Total taxes due divided by total taxable income
7. The federal income tax code of the United States is
A) progressive.
B) proportional.
C) regressive.
D) progressive for individuals but proportional for married couples.
A) progressive.
8. The tax base is
A) the minimum amount of tax revenue that government must collect each year.
B) the maximum amount of tax revenue that government must collect each year.
C) the sum of all incomes earned in the United States.
D) the value of all goods, services, incomes, or wealth subject to taxation.
D) the value of all goods, services, incomes, or wealth subject to taxation.
9. Suppose you purchased 100 shares of stock in 2010 for $25 a share and you sell them today for $50 a share. If the capital gains tax is 28 percent, your tax liability is
A) $70.
B) $700.
C) $2500.
D) indeterminate without knowing the inflation rate.
B) $700.
10. Corporate profits are
A) taxed at too low a rate.
B) taxed only when a stockholder sells his or her shares of stock.
C) taxed twice—once by the corporate tax system, and again by personal tax system when they are paid to stockholders as dividends.
D) taxed three times—once by the corporate tax system, again by the personal tax system, and again as capital gains.
C) taxed twice—once by the corporate tax system, and again by personal tax system when they are paid to stockholders as dividends.
11. The distribution of tax burdens among various groups in society is referred to as
A) sectioning.
B) regressive placement.
C) zero-base budgeting.
D) tax incidence.
D) tax incidence.
12. Which of the following is an argument that the incidence of corporate taxation falls entirely on consumers?
A) Corporations pass their tax burdens on to consumers by charging higher prices equal to the amount of the tax.
B) Corporations pass their tax burdens on to consumers because consumers ultimately work for the corporations.
C) Corporations always evade taxes so that consumers ultimately bear the tax burdens as taxpayers.
D) Most taxes on consumers are collected by corporations through sales taxes.
A) Corporations pass their tax burdens on to consumers by charging higher prices equal to the amount of the tax.
13. Which of the following forms of taxation accounts for the largest share of taxes received by state and local governments?
A) sales, excise, and gross receipts taxes
B) personal and corporate income taxes
C) license and permit fees
D) property taxes
A) sales, excise, and gross receipts taxes
14. Local government expenditures depend on which taxes?
A) Revenues from licenses and permits
B) Local property, sales, and excise taxes
C) Capital gains taxes
D) Social Security taxes
B) Local property, sales, and excise taxes
15. The earnings that a corporation saves for investment in other productive activities are
A) capital gains.
B) tax incidence.
C) transfers in kind.
D) retained earnings.
D) retained earnings.
16. A current concern about Social Security is that
A) funds set aside by past generations to pay benefits for future generations are growing too rapidly and may trigger inflation.
B) promised benefit payouts are growing more rapidly than likely sources of revenues, indicating a future inability to keep the system operating.
C) continued political bickering between the president and Congress could lead to an end to any funding of the program.
D) the payroll taxes used to fund the program are being eliminated as part of an effort to generate employment increases, thus leaving the program bankrupt.
B) promised benefit payouts are growing more rapidly than likely sources of revenues, indicating a future inability to keep the system operating.
17. Ultimately, the real burden of paying for Social Security benefits will be paid for by
A) taxes levied on workers.
B) Social Security trust fund bonds.
C) new federally issued Treasury bills.
D) a new tax levied on businesses.
A) taxes levied on workers.
18. Which of the following statements is TRUE of static tax analysis?
A) A government receives lower tax revenues by raising the tax rate.
B) A government receives higher tax revenues by raising the tax rate.
C) A government cannot change it tax revenues by changing the tax rate.
D) A change in the tax rate can raise or lower tax revenues, depending on other factors.
B) A government receives higher tax revenues by raising the tax rate.
19. Static tax analysis assumes that
A) an increase in a tax rate may lead to a decrease in the tax base.
B) an increase in a tax rate will lead to an increase in the tax base.
C) an increase in a tax rate will leave the tax base unchanged.
D) the tax base will always remain unchanged.
C) an increase in a tax rate will leave the tax base unchanged.
20. How would the market for coffee be affected if the government charged an excise tax of $1.00 on each unit of coffee sold?
A) There would be a shortage of coffee.
B) The demand for coffee would increase.
C) The demand for coffee would decrease.
D) The supply curve would shift up vertically by $1.00.
D) The supply curve would shift up vertically by $1.00.
21. The demand and supply of a product is given in the above table. A unit tax of $2 is imposed on the product. The equilibrium quantity for this product after the tax is imposed is equal to
A) 30 units.
B) 25 units.
C) 20 units.
D) 15 units.
C) 20 units.
22. Using the above table, a unit tax of $2 is imposed on the product. The equilibrium price of this product after the tax is imposed is
A) $5.
B) $4.
C) $3.
D) $2.
C) $3.
23. Using the above table, a unit tax of $2 is imposed on the product. How much of the tax is paid by the producer?
A) $2.
B) $1.
C) $3.
D) unable to determine.
B) $1.
24. A state tax assessed specifically on cigarettes is an example of
A) an excise tax.
B) a consumption tax.
C) a social tax.
D) a tariff.
A) an excise tax.
25. If a new unit excise tax is levied on bottles of wine, the
A) demand for wine shifts to the left.
B) demand for wine shifts to the right.
C) supply of wine shifts to the right.
D) supply of wine shifts to the left.
D) supply of wine shifts to the left.
1. Recurring upswings and downswings in an economy’s real GDP over time are called:
A. recessions.
B. business cycles.
C. output yo-yos.
D. total product oscillations.
B. business cycles.
2. During a severe recession, we would expect output to fall the most in:
A. the healthcare industry.
B. the clothing industry.
C. agriculture.
D. the construction industry.
D. the construction industry.
3. The production of durable goods varies more than the production of nondurable goods because:
A. durables purchases are nonpostponable.
B. durables purchases are postponable.
C. the producers of nondurables have monopoly power.
D. producers of durables are highly competitive.
B. durables purchases are postponable.
4. A recession is defined as a period in which:
A. cost-push inflation is present.
B. nominal domestic output falls.
C. demand-pull inflation is present.
D. real domestic output falls.
D. real domestic output falls.
5. Which of the following is true of unemployment?
A) It is defined as the number of people actively looking for work who do not have jobs.
B) The result is that the economy operates inside its production possibilities curve.
C) There are psychological consequences associated with unemployment.
D) All of the above.
D) All of the above.
6. Refer to the above information. The labor force in Scoob is:
A. 95 million.
B. 102 million.
C. 105 million.
D. 145 million.
B. 102 million.
7. Refer to the above information. The unemployment rate in Scoob is:
A. 2.5 percent.
B. 3.2 percent.
C. 5.0 percent.
D. 6.9 percent.
D. 6.9 percent.
8. Refer to the above information. If the natural rate of unemployment in Scoob is 5 percent, then:
A. structural unemployment is about 3 percent.
B. frictional unemployment is about 2 percent.
C. cyclical unemployment is about 2 percent.
D. hidden unemployment is about 5 percent.
C. cyclical unemployment is about 2 percent.
9. Which of the following is true about the labor force?
A) It includes those over 16 ages old and are employed.
B) It includes those over 16 ages old and are unemployed.
C) Both A and B are correct.
D) None of the above is correct.
C) Both A and B are correct.
10. Cyclical unemployment results from:
A. a deficiency of spending on goods and services.
B. the decreasing relative importance of goods and the increasing relative importance of services in the U.S. economy.
C. the everyday dynamics of a free labor market, with workers voluntarily changing jobs.
D. technological change.
A. a deficiency of spending on goods and services.
11. Which of the following constitute the types of unemployment occurring at the natural rate of unemployment?
A. Frictional and cyclical unemployment.
B. Structural and frictional unemployment.
C. Cyclical and structural unemployment.
D. Frictional, structural, and cyclical unemployment.
B. Structural and frictional unemployment.
12. Which of the following types of unemployment is directly associated with insufficient overall demand for goods and services?
A. Search unemployment
B. Wait unemployment
C. Cyclical unemployment
D. Frictional unemployment.
C. Cyclical unemployment
13. Inflation is best described as a situation in which
A) relative prices are changing.
B) some prices are rising faster than others.
C) relative prices are changing, but the purchasing power of the dollar is unchanged.
D) the average of all prices are on a sustained rise over a period of time.
D) the average of all prices are on a sustained rise over a period of time.
14. The faster the drop in the purchasing power of money, the faster the
A) drop in the inflation rate.
B) drop in the deflation rate.
C) increase in the deflation rate.
D) increase in the inflation rate.
D) increase in the inflation rate.
15. If the Consumer Price Index rises from 300 to 333 in a particular year, the rate of inflation in that year is:
A. 11 percent.
B. 33 percent.
C. 91 percent.
D. 10 percent.
A. 11 percent.
16. Suppose medical care makes up 5 percent of the CPI index, and that prices rise in the medical care area faster than in the rest of the economy. An elderly couple spends 15 percent of their income on medical care. For this couple, the CPI
A) understates the inflation rate because of the importance of medical care for this family.
B) overstates the inflation rate because this family is not typical of the country as a whole.
C) understates the inflation rate because the CPI always understates inflation.
D) is a good measure of inflation since the bias inherent in the CPI is offset by the increased emphasis on health care for this family.
A) understates the inflation rate because of the importance of medical care for this family.
17. The broadest indication of economy-wide inflation is captured by the
A) Consumer Price Index.
B) Gross Domestic Product (GDP) deflator.
C) Producer Price Index.
D) Personal Consumption Expenditure Index.
B) Gross Domestic Product (GDP) deflator.
18. The CPI tends to overstate the true inflation rate because
A) we cannot know what the true inflation rate is.
B) it fails to consider the effects of new products in the marketplace.
C) the market basket actually selected is inappropriate.
D) the market basket fails to weigh housing costs sufficiently.
B) it fails to consider the effects of new products in the marketplace.
19. 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:
A. fall by about 20 percent.
B. fall by about 2 percent.
C. rise by about 15 percent.
D. rise by about 25 percent.
C. rise by about 15 percent.
1. The simple circular flow of income shows that the total income in an economy equals
A) total profits earned by firms.
B) all taxes paid by households.
C) the total amount of money supplied by the government.
D) total expenditures.
D) total expenditures.
2. Refer to the above figure. The top two arrows of the figure refer to the product markets. The bottom arrows refer to the factor markets. Which arrow represents the total monetary value of all goods and services?
A) Arrow A
B) Arrow B
C) Arrow C
D) Arrow D
A) Arrow A
3. The value of total output and total income in the simple circular flow model
A) are measures of the economy’s level of savings.
B) include only intermediate goods.
C) are equal to each other.
D) are related in the sense that national income is less than national product.
C) are equal to each other.
4. Households receive a total income of $5 million. Of this, $3.5 million are wages received for labor services, $1 million are rental payments, and $250,000 are interest payments received. What are the costs of production and profits equal to respectively?
A) $5 million; $500,000
B) $5 million; $250,000
C) $4.75 million; $250,000
D) $4.75 million; 0
B) $5 million; $250,000
5. How much of each dollar spent by a consumer ultimately becomes income to someone else?
A) 100 percent
B) 67 percent
C) It depends on how much labor was needed to produce the good the consumer buys.
D) It depends on how much overhead there is in the distribution channel that delivers the good from the manufacturer to the consumer.
A) 100 percent
6. A nation’s gross domestic product (GDP):
A. can be found by summing C + Ig + G + Xn.
B. is the dollar value of the total output produced by its citizens, regardless of where they are living.
C. can be found by summing C + S + G + Xn.
D. is always some amount less than its NDP.
A. can be found by summing C + Ig + G + Xn.
7. The GDP is the:
A. monetary value of all final goods and services produced within a nation in a particular year.
B. national income minus all nonincome charges against output.
C. monetary value of all economic resources used in producing a year’s output.
D. monetary value of all goods and services, final and intermediate, produced in a specific year.
A. monetary value of all final goods and services produced within a nation in a particular year.
8. National income accountants can avoid multiple counting by:
A. including transfers in their calculations.
B. counting both intermediate and final goods.
C. only counting final goods.
D. only counting intermediate goods.
C. only counting final goods.
9. If intermediate goods and services were included in GDP:
A. the GDP would then have to be deflated for changes in the price level.
B. nominal GDP would exceed real GDP.
C. the GDP would be overstated.
D. the GDP would be understated.
C. the GDP would be overstated.
10. Which of the following is a final good or service?
A. a haircut
B. fertilizer purchased by a farm supplier
C. diesel fuel bought for a delivery truck
D. Chevrolet windows purchased by a General Motors assembly plant
A. a haircut
11. Tom Atoe grows tomatoes for home consumption. This activity is:
A. excluded from GDP in order to avoid double counting.
B. excluded from GDP because an intermediate good is involved.
C. productive but is excluded from GDP because no market transaction occurs.
D. included in GDP because it reflects production
C. productive but is excluded from GDP because no market transaction occurs.
12. In national income accounting, consumption expenditures include:
A. purchases of both new and used consumer goods.
B. consumer durable goods and consumer nondurable goods, but not services.
C. consumer durable goods, consumer nondurable goods, and services.
D. changes in business inventories.
C. consumer durable goods, consumer nondurable goods, and services.
13. Which of the following is not economic investment?
A. the purchase of a drill press by the Ajax Manufacturing Company
B. the purchase of 100 shares of AT&T by a retired business executive
C. construction of a suburban housing project
D. the piling up of inventories on a grocer’s shelf
B. the purchase of 100 shares of AT&T by a retired business executive
14. In calculating GDP, governmental transfer payments, such as social security or unemployment compensation, are:
A. not counted.
B. counted as investment spending.
C. counted as government spending.
D. counted as consumption spending.
A. not counted.
15. GDP is a
A) stock because it measures income for the entire country.
B) stock because it measures wealth at a distinct point in time.
C) flow because dollar values are used.
D) flow because it measures income over a period of time.
D) flow because it measures income over a period of time.
16. In the treatment of U.S. exports and imports, national income accountants:
A. subtract exports, but add imports, in calculating GDP.
B. subtract both exports and imports in calculating GDP.
C. add both exports and imports in calculating GDP.
D. add exports, but subtract imports, in calculating GDP.
D. add exports, but subtract imports, in calculating GDP.
17. The components of the expenditure approach to measuring GDP include all of the following EXCEPT
A) net exports.
B) government purchases of goods and services.
C) expenditures for business investments.
D) the implicit payments for unpaid household work.
D) the implicit payments for unpaid household work.
18. Refer to the above data. The gross domestic product is:
A. $326.
B. $282.
C. $307.
D. $300.
C. $307.
19. Refer to the above data. The net domestic product is:
A. $233.
B. $255.
C. $230.
D. $348.
B. $255.
20. Refer to the above data. The national income is:
A. $265.
B. $223.
C. $208.
D. $346.
A. $265.
1. Economic growth is best defined as an increase in:
A. either real GDP or real GDP per capita.
B. nominal GDP.
C. total consumption expenditures.
D. wealth in the economy.
A. either real GDP or real GDP per capita.
2. Growth is advantageous to a nation because it:
A. promotes faster population growth.
B. lessens the burden of scarcity.
C. eliminates the economizing problem.
D. slows the growth of wants.
B. lessens the burden of scarcity.
3. Refer to the above table. Between years 1 and 2, real GDP grew by __________ percent in Alta.
A. 3
B. 4
C. 5
D. 10
C. 5
4. Refer to the above table. Between years 1 and 2, real GDP per capita grew by approximately __________ percent in Alta.
A. 3
B. 4
C. 5
D. 10
B. 4
5. Refer to the above table. Between years 2 and 3:
A. Alta’s real GDP grew more rapidly than Zorn’s real GDP.
B. real GDP fell in Zorn.
C. population growth reduced Alta’s real GDP growth to zero.
D. population fell in Alta.
A. Alta’s real GDP grew more rapidly than Zorn’s real GDP.
6. If the economy’s real GDP doubles in 18 years, we can:
A. not say anything about the average annual rate of growth.
B. conclude that its average annual rate of growth is about 5.5 percent.
C. conclude that its average annual rate of growth is about 2 percent.
D. conclude that its average annual rate of growth is about 4 percent.
D. conclude that its average annual rate of growth is about 4 percent.
7. Which of the following institutional structures is most likely to promote growth?
A. A well-enforced system of patents and copyrights.
B. A tightly regulated market system.
C. A system of tariffs and other trade barriers to protect domestic companies.
D. All of these.
A. A well-enforced system of patents and copyrights.
8. Which of the following institutional arrangements is most likely to promote growth?
A. Patents and copyrights that expire quickly and are loosely enforced.
B. Strong government control over resource allocation decisions.
C. Unrestricted trade between nations.
D. All of these.
C. Unrestricted trade between nations.
9. A competitive market system:
A. encourages growth by allowing producers to make profitable investment decisions based on market signals.
B. encourages growth by ensuring that everyone in society will receive a decent standard of living.
C. discourages growth because firms busy competing have no time to innovate or invest.
D. discourages growth unless government protects domestic firms from foreign competition.
A. encourages growth by allowing producers to make profitable investment decisions based on market signals.
10. The formula for the computation of labor productivity is
A) real GDP/population.
B) real GDP/number of workers.
C) nominal GDP/population.
D) nominal GDP/number of workers.
B) real GDP/number of workers.
11. In order to be able to consume more in the future, you have to consume
A less today and save the difference.
B) more today to increase supply.
C) more consumer goods.
D) fewer capital goods.
A less today and save the difference.
12. An increase in a country’s saving rate will tend to cause which of the following in the long run?
A) a reduction in per capita real GDP
B) an increase in economic growth
C) an increase in the unemployment rate
D) an increase in the rate of inflation
B) an increase in economic growth
13. One of the implications of new growth theory is that economic growth arises from
A) limits on international trade.
B) investments in knowledge.
C) financial safety nets for the poor, such as Medicaid.
D) reductions in the birth rate.
B) investments in knowledge.
14. Free trade is viewed as key to economic development because
A) it encourages a faster spread of technology.
B) it encourages a country’s exports only.
C) it brings in expensive new technology.
D) none of the above is correct.
A) it encourages a faster spread of technology.
15. A nation’s infrastructure refers to:
A. its ability to realize economies of scale.
B. its stock of technological knowledge.
C. public capital goods such as highways and sanitation systems.
D. the productivity of its labor force.
C. public capital goods such as highways and sanitation systems.
16. Which of the following is a true statement?
A) The most important sources of economic growth are the quantity and quality of the land and other natural resources a country controls.
B) The most important source of economic growth is the rate of population growth since a growing population stimulates demand for goods and services, and provides the labor to produce the goods and services.
C) The most important sources of economic growth are the new ideas generated by entrepreneurs in an economic system that permits them to capture the rewards of their entrepreneurial activities.
D) The most important source of economic growth is the extent to which the government directly enters into decisions where research and development activities should be directed and who should be involved in research and development activity.
C) The most important sources of economic growth are the new ideas generated by entrepreneurs in an economic system that permits them to capture the rewards of their entrepreneurial activities.
17. Other things equal, if a full-employment economy reallocated a substantial quantity of its resources to capital goods, we would expect:
A. present consumption to rise.
B. future consumption to fall.
C. a lower rate of growth of real GDP.
D. labor productivity to rise.
D. labor productivity to rise.
18. Human capital refers to:
A. the skills and knowledge that enable a worker to be productive.
B. machinery used by labor in production.
C. the accumulated financial wealth of households.
D. physical capital owned by households rather than businesses.
A. the skills and knowledge that enable a worker to be productive.
19. Critics of economic growth:
A. contend that growth and industrialization reduce pollution.
B. argue that economic growth does not resolve socioeconomic problems such as an unequal distribution of income and wealth.
C. point out that growth results in greater economic security for workers.
D. say that its benefits accrue nearly exclusively to white males.
B. argue that economic growth does not resolve socioeconomic problems such as an unequal distribution of income and wealth.
20. Over the past several decades, the percentage of women in the paid U.S. workforce has:
A. increased in spite of declining wages for women.
B. decreased because relatively more women are staying home to raise their children.
C. increased due to higher wages, expanded job accessibility, changing preferences and attitudes, and other factors.
D. increased for unmarried women, but decreased for married women.
C. increased due to higher wages, expanded job accessibility, changing preferences and attitudes, and other factors.
1. The long-run aggregate supply curve can be thought of as the
A) level of output that the nation is currently producing.
B) full-employment level of real GDP.
C) level of real GDP associated with a constant price level.
D) level of output for which real GDP equals nominal GDP.
full-employment level of real GDP.
2. Over time in a growing economy, the long run aggregate supply curve will
A) move so as to match the short run aggregate supply (SRAS) curve.
B) shift outward to the right.
C) shift inward to the left.
D) become increasingly steep.
shift outward to the right.
3. An increase in the level of prices of goods and services will do what to the long-run aggregate supply curve?
A) Shift it to the right
B) Shift it to the left
C) Not shift the curve at all
D) Depends upon the long-run aggregate demand curve
Not shift the curve at all
4. Aggregate demand reflects
A) planned total spending in the economy.
B) planned total production in the economy.
C) both spending and production in the economy.
D) planned demand for consumer goods only.
planned total spending in the economy.
5. The aggregate demand curve shows that, if other factors are held constant,
A) higher price levels will result in lower total planned spending.
B) higher price levels will result in higher total planned spending.
C) higher price levels will result in lower interest rates.
D) lower price levels will result in inflationary conditions.
higher price levels will result in lower total planned spending.
6. According to the interest rate effect, an increase in the price level, if other factors are held constant, will lead to
A) a reduction in total real spending on interest-rate-sensitive goods.
B) an increase in the stock of real wealth held by the public.
C) an outward shift of the aggregate demand curve.
D) an increase in the real interest rate.
a reduction in total real spending on interest-rate-sensitive goods.
7. The interest rate effect operates through
A) credit markets by changing borrowing costs.
B) the purchasing power of individuals’ checking accounts.
C) government spending levels.
D) labor supply.
credit markets by changing borrowing costs.
8. When a change in the price level causes a change in the purchasing power of currency, which then changes planned real expenditures at all income levels, it is called
A) the real-balance effect.
B) the substitution effect.
C) the open-economy effect.
D) the interest rate effect.
the real-balance effect.
9. One reason that the aggregate demand curve slopes downward is because
A) higher price levels increase real wealth and consumption.
B) higher price levels reduce net exports.
C) higher price levels reduce interest rates.
D) higher price levels increase investment.
higher price levels reduce net exports.
10. The wealth effect is another term for the
A) substitution effect.
B) the indirect effect.
C) the real-balance effect.
D) the interest rate effect.
the real-balance effect.
11. An increase in the money supply will cause which of the following to occur?
A) a rightward shift of the aggregate supply curve
B) a leftward shift of the aggregate demand curve
C) a leftward shift of the aggregate supply curve
D) a rightward shift of the aggregate demand curve
a rightward shift of the aggregate demand curve
12. Economic growth will be associated with a constant price level when
A) the increase in aggregate demand exactly equals the increase in long-run aggregate supply.
B) the increase in aggregate demand is more than the increase in long-run aggregate supply.
C) the increase in aggregate demand is less than the increase in long-run aggregate supply.
D) the increase in aggregate demand is accompanied by a reduction in short-run aggregate supply.
the increase in aggregate demand exactly equals the increase in long-run aggregate supply.
13. Over the last twenty years, real GDP in the U.S. economy has increased and there has been inflation. This indicates that
A) aggregate demand has increased while aggregate supply has been constant.
B) aggregate demand has been constant while aggregate supply has increased.
C) aggregate demand has increased more than aggregate supply.
D) aggregate demand has increased less than aggregate supply.
aggregate demand has increased more than aggregate supply.
20. 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:
A. 2 percent.
B. 3 percent.
C. 5 percent.
D. 7 percent.
D. 7 percent.
14. If consumers’ confidence in the economy rises,
A) aggregate demand will shift leftward and the price level will rise.
B) aggregate demand will shift leftward and the price level will fall.
C) aggregate demand will shift rightward and the price level will rise.
D) aggregate demand will shift rightward and the price level will fall.
aggregate demand will shift rightward and the price level will rise.
15. Demand-side inflation occurs when
A) increases in aggregate demand are not matched by increases in aggregate supply.
B) increases in aggregate supply outstrip increases in aggregate demand.
C) aggregate demand falls more rapidly than aggregate supply.
D) long-run aggregate demand rises faster than short-run aggregate supply.
increases in aggregate demand are not matched by increases in aggregate supply.
16. In looking back over the past 40 years, which of the following has the U.S. economy experienced?
A) Persistent deflation
B) Consistent inflation at a slow constant rate
C) Persistent inflation
D) Years of both inflation and deflation
Persistent inflation
17. Refer to the above figure. Suppose the economy’s initial equilibrium is represented by the intersection of LRAS1 and AD1. Suppose there is a persistent reduction in labor force participation, which reduces total planned production at any given price level. The resulting change in the economy’s long-run equilibrium position would be represented by a
A) movement from A to C.
B) movement from A to B.
C) movement from B to C.
D) movement from C to A.
A) movement from A to C.
18. Refer to the above figure. A movement from B to C would be NOT be the result of
A) an increase in foreign income levels.
B) an increase in government spending.
C) an increase in worker productivity.
D) an increase in consumption spending.
C) an increase in worker productivity.
19. Refer to the above figure. A movement from B to D would be a result of
A) an increase in the quantity of money in circulation.
B) an increase in labor productivity.
C) an increase in government expenditures.
D) an increase in the marginal income tax rate.
an increase in labor productivity.
20. Refer to the above figure. Suppose the economy’s initial equilibrium is represented by the intersection of LRAS1 and AD1. Now there is an increase in labor productivity which increases total planned production at any given price level and aggregate demand remains stable. The resulting change in the economy’s long-run equilibrium position would be represented by a
A) movement from B to D.
B) movement from C to D.
C) movement from C to B.
D) movement from A to B.
movement from B to D
1. Whom among the following was a classical economist?
A. Adam Smith
B. C. Pigou
C. David Ricardo
D. all of the above
D. all of the above
2. Classical economists assumed that
A) prices were sticky.
B) individuals suffered from money illusion.
C) wages were inflexible.
D) none of the above.
D) none of the above.
3. “Supply creates its own demand” is known as
A) Smith’s law.
B) Say’s law.
C) the circular flow.
D) the Ricardian dilemma.
B) Say’s law.
4. If a consumer buys less gasoline because gas prices increased by 10 percent, even though all other prices have also increased by 10 percent, then
A) the consumer is paying too close attention to changes in relative prices.
B) wages and prices are too flexible.
C) the consumer has been fooled by money illusion.
D) inflation is not a problem in the economy.
C) the consumer has been fooled by money illusion.
5. Which of the following is an example of money illusion?
A) An individual is willing to work more hours when the nominal wage rises by 5 percent and the overall price level rises by 4 percent.
B) An individual is willing to work more hours when the nominal wage rises by 5% and the overall price level rises by 7 percent.
C) An individual will neither increase nor decrease the number of hours she is willing to work when the nominal wage rises by 5 percent and the overall price level rises by 5 percent.
D) none of the above.
B) An individual is willing to work more hours when the nominal wage rises by 5% and the overall price level rises by 7 percent.
6. According to the circular flow of income and output,
saving causes
A) total output to fall.
B) consumption expenditures and total output to fall.
C) consumption expenditures to fall short of total output.
D) investment spending to fall.
C) consumption expenditures to fall short of total output.
7. A congressman states, “If a government attempts to increase employment through increased government spending, all we will end up with is a higher price level.” This congressman assumes that the
A) aggregate demand curve is a horizontal line.
B) aggregate demand curve is a vertical line.
C) aggregate supply curve is a horizontal line.
D) aggregate supply curve is a vertical line.
D) aggregate supply curve is a vertical line.
8. Q: How many economists does it take to screw in a light bulb?
A: None. If the light bulb really needed changing, market forces would have already caused it to happen. This joke represents the view of
A) classical economists.
B) Keynesian economists.
C) economists who conclude that money illusion is widespread.
D) economists who conclude that wages and prices are inflexible.
A) classical economists.
9. The Keynesian model is basically
A) a long-run theory.
B) a short-run theory.
C) a combination of long- and short-run theories.
D) a theory about the economy in both the long run and the short run.
B) a short-run theory.
10. A decrease in aggregate demand will cause
A) prices to fall according to classical economists, and unemployment to increase according to Keynes.
B) prices to fall and unemployment to increase according to both classical economists and Keynes.
C) aggregate supply to fall according to classical economists, and prices to fall according to Keynes.
D) aggregate supply to fall according to Keynes, and unemployment to increase according to classical economists.
A) prices to fall according to classical economists, and unemployment to increase according to Keynes.
11. The Keynesian short-run aggregate supply (SRAS) curve is
A) upward sloping.
B) vertical.
C) horizontal.
D) downward sloping.
C) horizontal.
12. The above figure presents the view of the economy according to
A) Keynesian economics.
B) classical economics.
C) microanalysis.
D) Ricardian economics.
A) Keynesian economics.
13. Refer to the above figure. Suppose the current aggregate demand is represented by AD2. If aggregate demand falls to line AD3, then
A) the new equilibrium will be at j.
B) the new equilibrium will be at k.
C) the new equilibrium real Gross Domestic Product (GDP) will be x.
D) a new price level will be established at a.
C) the new equilibrium real Gross Domestic Product (GDP) will be x.
14. Keynes and his followers believed that
A) capitalism was one economic system that guaranteed full employment.
B) wages and prices in the short run were flexible.
C) the economy could not operate at any level of real Gross Domestic Product (GDP) less than full capacity.
D) there was no guarantee that a capitalist economy would reach a full employment equilibrium.
D) there was no guarantee that a capitalist economy would reach a full employment equilibrium.
15. A major hurricane causes production problems in Gulf Coast region of the United States. This would cause
A) the short-run aggregate supply curve to shift to the left, but there would be no effect on the long-run aggregate supply curve.
B) the short-run aggregate supply curve to shift to the left, and the long-run aggregate supply curve would shift to the right.
C) both the short-run and the long-run aggregate supply curves to shift to the right in equal amounts.
D) both the short-run and the long-run aggregate supply curves to shift to the left, but the long-run aggregate supply curve would shift more than the short-run curve.
A) the short-run aggregate supply curve to shift to the left, but there would be no effect on the long-run aggregate supply curve.
16. In the Keynesian model, an aggregate demand shock
A) will cause the aggregate demand curve to shift, leading to a change in the price level and real GDP.
B) will cause the aggregate demand curve to shift, leading to a change in the price level but not real GDP.
C) will cause the aggregate demand curve to shift, leading to a change in real GDP but not the price level.
D) will not lead to a shift of the aggregate demand curve.
A) will cause the aggregate demand curve to shift, leading to a change in the price level and real GDP.
17. Suppose we observe the price level increasing and real GDP decreasing. An explanation for this is that
A) the dollar weakened and the effect on aggregate supply was less than the effect on aggregate demand.
B) the dollar weakened and the effect on aggregate supply was greater than the effect on aggregate demand.
C) the dollar strengthened and the effect on aggregate supply was less than the effect on aggregate demand.
D) the dollar strengthened and the effect on aggregate supply was greater than the effect on aggregate demand.
B) the dollar weakened and the effect on aggregate supply was greater than the effect on aggregate demand.
18. Equilibrium real GDP rises after the dollar strengthened. From this, we can conclude that
A) the increase in aggregate demand was greater than the decrease in aggregate supply.
B) the decrease in aggregate demand was less than the increase in aggregate supply.
C) the decrease in aggregate demand was more than the increase in aggregate supply.
D) the increase in aggregate demand was less than the decrease in aggregate supply.
B) the decrease in aggregate demand was less than the increase in aggregate supply.
19. In the original Austin Powers, Dr. Evil is cryogenically frozen for thirty years (from the late 1960s to the late 1990s). Upon his return he hatches a plan to extort one million dollars from various world governments. His henchmen are unimpressed. What type(s) of inflation
have made Dr. Evil’s proposed blackmail amount seem too small?
A) cost-push inflation
B) demand-pull inflation
C) both cost-price and price-pull inflation
D) both cost-push and demand-pull inflation
D) both cost-push and demand-pull inflation
20. The exchange rate last month was $1 = 1.15 euros. This month it is $1 = 1.35 euros. We can say that the value of the dollar
A) fell; causing net exports to increase and aggregate demand to rise.
B) fell; causing net exports to decrease and aggregate demand to fall.
C) increased; causing net exports to decrease and aggregate demand to fall.
D) increased; causing net exports to decrease and aggregate demand to rise.
C) increased; causing net exports to decrease and aggregate demand to fall.
1. Which of the following represents the relationship between disposable income (DI), consumption (C), and saving (S)?
A) DI + C = S
B) DI = C + S
C) DI = C * S
D) DI = C – S
B) DI = C + S
2. When you purchase Gap clothing and baseball tickets
A) you are buying consumption goods.
B) you are buying capital goods.
C) you are consuming intermediate goods.
D) you are buying physical capital.
A) you are buying consumption goods.
3. The income-expenditure model of real GDP determination is due to the work of
A) Adam Smith.
B) J. B. Say.
C) John Maynard Keynes.
D) Roger Miller.
C) John Maynard Keynes.
4. Which of the following is considered investment?
A) Maina purchases a new car for commuting to and from work.
B) Jane purchases a new car for commuting to and from school.
C) Johnny buys a new car for his wife as an anniversary gift.
D) James purchases a new car to replace an old car in his cab business.
D) James purchases a new car to replace an old car in his cab business.
5. Investment is
A) a flow concept and is made up of fixed investment and inventory investment.
B) a flow concept and is made up of fixed investment.
C) a stock concept and is made up of fixed investment and inventory investment.
D) a stock concept and is made up of fixed investment.
A) a flow concept and is made up of fixed investment and inventory investment.
6. Nonconsumable goods that firms use to make other goods are
A) consumption goods.
B) capital goods.
C) dissaving.
D) the MPC.
B) capital goods.
7. How is investment defined as an economic concept?
A) Investment is primarily the market value of all shares of stock held by the public.
B) Investment is primarily the market value of all equipment, buildings, and inventories held by corporations, partnerships, and proprietorships.
C) Investment is primarily the sum of expenditures by businesses on new capital goods that will yield a future stream of income.
D) Investment is primarily the portion of your savings held in an interest-earning account.
C) Investment is primarily the sum of expenditures by businesses on new capital goods that will yield a future stream of income.
8. According to the above table, if real Gross Domestic Product (GDP) is $30,000, planned saving equals
A) $2,000.
B) $3,000.
C) $4,000.
D) $5,000.
C) $4,000.
9. According to the above table, the marginal propensity to consume is
A) 0.6.
B) 0.5.
C) 0.75.
D) 0.8.
D) 0.8.
10. According to the above table, if real Gross Domestic Product (GDP) equals $30,000, what is the average propensity to consume?
A) 0.67
B) 0.75
C) 0.8
D) 0.87
D) 0.87
11. The break-even point on the consumption function represents the point where
A) consumption equals spending.
B) income equals consumption plus spending.
C) consumption is zero.
D) consumption equals income.
D) consumption equals income.
12. Which of the following statements is true?
A) APC + APS = 1
B) APC + APS < 1 C) APC + MPS = 1 D) APC + APS + MPC + MPS = 1
A) APC + APS = 1
13. In the above figure, point E represents the level of real GDP at which planned saving equals planned investment. At point A,
A) unplanned inventories increase.
B) changes in inventories cannot be determined.
C) unused industrial capacity exists in the economy.
D) unplanned inventories decrease.
D) unplanned inventories decrease.
14. When the economy is operating at the equilibrium level of GDP, we know that
A) total planned real consumption expenditures equal real GDP.
B) planned real investment spending equals real net exports of zero.
C) total planned real expenditures equal real GDP.
D) real net exports equal inventory changes.
C) total planned real expenditures equal real GDP.
15. Refer to the above figure. The equilibrium level of real GDP occurs
A) at point A.
B) to the right of point A.
C) to the left of point A.
D) at the undetermined point on the graph depending upon the level of investment.
A) at point A.
16. Refer to the above table. The equilibrium real GDP is
A) $12 trillion.
B) $13 trillion.
C) $14 trillion.
D) $15 trillion.
C) $14 trillion.
17. Refer to the above table. If real GDP is $12 trillion, total planned expenditures and unplanned inventory changes are respectively
A) $14 trillion and 0.
B) $13.2 trillion and -$0.8 trillion.
C) $12.4 trillion and -$0.4 trillion.
D) $12.4 trillion and $0.4 trillion.
C) $12.4 trillion and -$0.4 trillion.
18. Refer to the above table. When real GDP equals $16 trillion,
A) government expenditures will increase.
B) the economy is in equilibrium.
C) unplanned inventories will increase.
D) unplanned inventories will decrease.
C) unplanned inventories will increase.
19. The size of the multiplier depends on
A) the level of autonomous investment.
B) the marginal propensity to consume.
C) the level of net exports.
D) the level of autonomous consumption.
B) the marginal propensity to consume.
20. Suppose government spending decreases by $100 billion and the marginal propensity to consume (MPC) is 0.8. Given this information, this decrease in government spending will cause a(n)
A) increase in equilibrium real GDP equal to $500 billion.
B) increase in equilibrium real GDP equal to $800 billion.
C) decrease in equilibrium real GDP equal to $500 billion.
D) decrease in equilibrium real GDP equal to $800 billion.
C) decrease in equilibrium real GDP equal to $500 billion.
1. When the government deliberately alters its level of spending and/or taxes in order to achieve specific national economic goals, it is exercising
A) monetary policy.
B) discretionary fiscal policy.
C) a Ricardian policy.
D) a laissez-faire policy.
B) discretionary fiscal policy.
2. Which of the following would shift the aggregate demand curve to the right?
A) An increase in government spending
B) An increase in taxes
C) An increase in interest rates
D) An increase in input prices
A) An increase in government spending
3. Fiscal policy is defined as
A) the design of a tax system to transfer income from the rich to the poor.
B) the use of Congressional power to pursue social and political goals.
C) the discretionary changing of government expenditures and/or taxes to achieve national
economic goals.
D) the use of the taxing power of the government to redistribute wealth in a socially acceptable manner.
C) the discretionary changing of government expenditures and/or taxes to achieve national
economic goals.
4. Refer to the above figure. If the economy is currently operating at point C, then there is
A) a stable long-run equilibrium situation.
B) a recessionary gap.
C) an inflationary gap.
D) unemployment.
C) an inflationary gap.
5. Refer to the above figure. Suppose the U.S. economy is currently operating at point C. Which of the following actions would you recommend to the president of the United States?
A) Reduce taxes to stimulate investment, consumption and net exports.
B) Increase government spending while holding taxes constant.
C) Engage in contractionary fiscal policy by reducing government spending.
D) Reduce the interest rate to stimulate investment minimizing the crowding out effect.
C) Engage in contractionary fiscal policy by reducing government spending.
6. Suppose the current level of real GDP is below the full-employment level of real GDP. Which of the following represents a fiscal policy action that could be implemented to reduce the size of this recessionary gap?
A) Increase government spending.
B) Decrease interest rates.
C) Increase the money supply.
D) all of the above
A) Increase government spending.
7. Fiscal policy may end up being destabilizing to an economy because
A) there is never a long enough time lag.
B) the economy is almost always at full employment.
C) the President may have different goals than Congress.
D) various time lags associated with fiscal policy cause the policy changes to take effect too late to solve the problem it was supposed to solve.
D) various time lags associated with fiscal policy cause the policy changes to take effect too late to solve the problem it was supposed to solve.
8. The concept that increased government spending will lead to lower investment and consumer spending is referred to as the
A) inflationary effect.
B) crowding-out effect.
C) aggregate demand effect.
D) Keynesian effect.
B) crowding-out effect.
9. Supply-side economics focuses on tax cuts to stimulate
A) aggregate demand by reducing saving.
B) aggregate supply by increasing production.
C) government spending.
D) military research.
B) aggregate supply by increasing production.
10. If the government increases spending but does not raise taxes,
A) aggregate demand will increase without any effect on the price level.
B) borrowing by the government will take place.
C) the government will have to sell some assets, such as oil and national parks.
D) the government will have to either lower expenditures or raise taxes the next year.
B) borrowing by the government will take place.
11. Refer to the above figure. If the economy is at E and the government wants to increase aggregate demand to , but the increase in spending
only shifts the aggregate demand curve to , then
A) complete crowding out has occurred.
B) some crowding out has occurred.
C) the increased borrowing caused interest rates to fall.
D) the short-run aggregate supply curve is steeper than the figure indicates.
B) some crowding out has occurred.
12. Refer to the above figure. Suppose the economy is at E and the government uses an
expansionary fiscal policy to move the aggregate demand curve to . In the end, the aggregate demand curve is still . A possible reason for this is that
A) the economy is already at full employment.
B) the increased borrowing causes higher interest rates, which encourage people to save more and increase investment spending due to the extra saving.
C) people increase saving because they anticipate higher future taxes, resulting in a reduction in current consumption spending that offsets the increased government spending.
D) some of the increased government spending is not counted in GDP.
C) people increase saving because they anticipate higher future taxes, resulting in a reduction in current consumption spending that offsets the increased government spending.
13. Expansionary fiscal policy falls short of its goal. Some economists claim it is due to
indirect crowding out. What evidence would be consistent with this claim?
A) An increase in consumer spending occurred.
B) The interest rate increased.
C) Saving decreased.
D) The price level decreased.
B) The interest rate increased.
14. Supply-side economists argue that decreasing marginal tax rates
A) increases productivity and shifts the AS curve to the right.
B) increases productivity and shifts the AS curve to the left.
C) increases productivity and shifts the AD curve to the left.
D) due to the Ricardian equivalence, has no impact on the economy.
A) increases productivity and shifts the AS curve to the right.
15. The notion that a decline in tax rates and other incentives will spur individuals and firms to increase productivity is typically referred to as
A) demand-side economics.
B) Ricardian equivalence.
C) supply-side economics.
D) Keynesian economics.
C) supply-side economics.
16. If the federal government borrows from the private sector to pay for increased budget
deficits and interest rates increase, this will cause
A) a decrease in planned investment and planned consumption.
B) an increase in planned investment and planned consumption.
C) a decrease in planned investment and an increase in planned consumption.
D) an increase in planned investment and a decrease in planned consumption.
A) a decrease in planned investment and planned consumption.
17. In the traditional Keynesian model, if the government increases government spending,
A) the C + I + G + X line will shift down but the aggregate demand curve will not shift.
B) the C + I + G + X line will shift down and the aggregate demand curve will shift to the left.
C) the C + I + G + X line will shift up and the aggregate demand curve will shift to the right.
D) the C + I + G + X line will shift up but the aggregate demand curve will not shift.
C) the C + I + G + X line will shift up and the aggregate demand curve will shift to the right.
18. If the price level is fixed, then an increase in government spending will lead to
A) a larger increase in nominal GDP than in real GDP.
B) a smaller increase in nominal GDP than in real GDP.
C) no increase in either nominal GDP or real GDP.
D) an increase in nominal GDP by the same amount as an increase in real GDP.
D) an increase in nominal GDP by the same amount as an increase in real GDP.
19. The traditional Keynesian approach concludes that an increase in government spending
A) generates a greater increase in investment spending.
B) generates an equal increase in total spending because government spending makes up part of total spending.
C) generates a greater increase in total spending because consumption spending increases as incomes increase.
D) has no effect on total spending because consumers increase saving by an equal amount.
C) generates a greater increase in total spending because consumption spending increases as incomes increase.
20. According the traditional Keynesian approach, an increase in government spending is effective in lowering unemployment if
A) the price level is fixed.
B) the price level is flexible.
C) the price level does not exist.
D) Ricardian equivalence occurs, regardless of the price level.
A) the price level is fixed.
1. In the current year, a nation’s government spending equals $1.5 trillion and its revenues
are $1.9 trillion. Which of the following is true?
A) The nation’s national debt equals $0.4 trillion.
B) This nation has a current year budget surplus of $0.4 trillion.
C) This nation is currently running a budget deficit of $0.4 trillion.
D) The nation has a current year trade surplus of $0.4 trillion.
B) This nation has a current year budget surplus of $0.4 trillion.
2. Public debt is held as
A) corporate bonds and common stocks of the largest companies.
B) Federal Reserve Notes.
C) U.S. Notes.
D) Treasury Bills, Treasury Notes, Treasury Bonds, and U.S. Savings Bonds.
D) Treasury Bills, Treasury Notes, Treasury Bonds, and U.S. Savings Bonds.
3. Which of the following is true when a budget deficit exists?
A) Government expenditures exceed tax revenues.
B) Tax revenues exceed government expenditures.
C) A trade surplus exists.
D) Dissaving exists.
A) Government expenditures exceed tax revenues.
4. If the government has no debt initially, but then has annual revenues of $10 billion per year for 4 years and annual expenditures of $10.5 billion per year for 4 years, then the government has
A) a budget surplus of $0.5 billion per year and a debt of $2 billion at the end of the 4 years.
B) a budget deficit of $0.5 billion per year and a budget surplus of $2 billion at the end of the 4 years.
C) a budget deficit of $0.5 billion per year and a debt of $2 billion at the end of the 4 years.
D) a budget surplus of $0.5 billion per year and a surplus of $2 billion at the end of
the 4 years.
C) a budget deficit of $0.5 billion per year and a debt of $2 billion at the end of the 4 years.
5. What is true about government budget deficits and surpluses since 1940?
A) Balanced budgets have been more common than government budget deficits or government budget surpluses.
B) There have been more government budget surpluses than government budget deficits.
C) There have been more government budget deficits than government budget surpluses.
D) The number of government budget deficits is about the same as the number of government budget surpluses.
C) There have been more government budget deficits than government budget surpluses.
6. Between the years 1998 and 2001, the U.S. government experienced
A) budget surpluses.
B) balanced budgets.
C) budget deficits.
D) contractionary budget cycles.
A) budget surpluses.
7. When the Social Security Administration holds U.S. Treasury Bonds
A) interagency borrowing has occurred and the government owes itself.
B) there is a balanced budget.
C) an entitlement has occurred.
D) the gross public debt has increased.
A) interagency borrowing has occurred and the government owes itself.
8. Media reports often suggest that the increasing public debt is a burden on future generations. What they mean is that
A) it reduces the current level of investment.
B) it makes predicting future unemployment levels unpredictable.
C) it causes deflation.
D) it reduces both nominal and real interest rates.
A) it reduces the current level of investment.
9. Are federal budget deficits related to trade deficits?
A) Yes. If U.S. consumers buy too many imported goods, they do not have funds to save, and a budget deficit results.
B) No. The budget deficit is entirely a domestic matter, while the trade deficit only affects U.S. citizens who travel abroad.
C) Yes. Higher deficit spending goes up results in more government borrowing, and foreign residents who lend funds to the U.S. government have fewer resources to spend U.S. export goods.
D) Yes, but only if the quality of U.S. goods and services is deteriorating.
C) Yes. Higher deficit spending goes up results in more government borrowing, and foreign residents who lend funds to the U.S. government have fewer resources to spend U.S. export goods.
10. What is the short-run effect of increased deficit spending on an economy experiencing a
recessionary gap?
A) Aggregate demand increases, and the gap closes.
B) Aggregate supply increases, closing the gap.
C) Aggregate demand decreases, and the gap widens.
D) Aggregate demand will increase, creating an inflationary gap.
A) Aggregate demand increases, and the gap closes.
11. The largest component of U.S. federal spending that contributes to the U.S. government budget deficit is
A) entitlements.
B) military spending.
C) interest expenses.
D) salaries of government employees.
A) entitlements.
12. What is the difference between the short run and the long run when there is full employment and the government engages in deficit spending?
A) Real GDP will increase in both the short run and the long run.
B) Real GDP will increase in the long run but not the short run.
C) Real GDP will increase in the short run but not the long run.
D) Real GDP will not increase in either the long run or the short run.
C) Real GDP will increase in the short run but not the long run.
13. Suppose the economy is initially experiencing a recessionary gap. A reduction in the size of the budget deficit will cause which of the following in the short run?
A) a reduction in the size of the recessionary gap and increase in real GDP.
B) an increase in the size of the recessionary gap and decrease in real GDP.
C) an increase in inflation and increase in aggregate supply.
D) an inflationary gap.
B) an increase in the size of the recessionary gap and decrease in real GDP.
14. Guaranteed benefits under government programs such as Social Security or Medicare
are called
A) discretionary spending.
B) controllable expenditures.
C) entitlements.
D) automatic stabilizers.
C) entitlements.
15. The fastest growing component of the annual federal budgets since 2000 is
A) the education budget.
B) entitlement payments.
C) funding for health research.
D) funding for NASA.
B) entitlement payments.
16. In the short run, a fiscal policy action that results in a reduction in the size of the budget
deficit will cause
A) an increase in real GDP with stable prices if the economy was below full employment.
B) a reduction in real GDP with falling prices if the economy was below or at full employment.
C) an inflationary gap if the economy was initially operating at full employment.
D) an inflationary gap if the economy was initially operating below full employment.
B) a reduction in real GDP with falling prices if the economy was below or at full employment.
17. According to the text, approximately what percentage of U.S. net public debt is held by
foreign residents?
A) 20%
B) 50%
C) 800%
D) 90%
B) 50%
18. Which of the following statements is correct?
A) Since the mid-1940s, expenditures on national defense have increased considerably as a percentage of total federal government spending.
B) Since the mid-1940s, expenditures on income security and health programs have increased considerably as a percentage of total federal government spending.
C) Taken together, expenditures on national defense and on income security and health programs now account for less than half of all federal government spending.
D) Expenditures on national defense now account for more than twice as much federal government spending as expenditures on income security and health programs.
B) Since the mid-1940s, expenditures on income security and health programs have increased considerably as a percentage of total federal government spending.
19. By approximately how much would the federal government have to raise each worker’s annual taxes to eliminate the current federal budget deficit?
A) Between $50 and $100 per year
B) Between $500 and $1,000 per year
C) Between $1,500 and $2,500 per year
D) Between $5,000 and $7,000 per year
D) Between $5,000 and $7,000 per year
20. How does the federal government finance a budget deficit?
A) It redeems its IOUs.
B) It purchases U.S. Treasury bonds.
C) It cuts spending on entitlement programs.
D) It borrows funds by selling Treasury bonds.
D) It borrows funds by selling Treasury bonds.