Business Economics
Exam Solutions
Course Introduction
Business Economics explores the application of economic theories and quantitative methods to analyze business enterprises and the factors contributing to their diversity and performance. This course covers essential topics such as demand and supply analysis, production and cost structures, market organization, pricing strategies, and the impact of government policies on business decisions. By integrating core concepts from both microeconomics and macroeconomics, students learn to assess market conditions, evaluate business opportunities, and make informed decisions that enhance organizational efficiency and profitability in a dynamic global environment.
Recommended Textbook
Economics Principles and Policy 13th Edition by William J. Baumol
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37 Chapters
7778 Verified Questions
7778 Flashcards
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Page 2
Chapter 1: What Is Economics
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Sample Questions
Q1) To an economist, the cost of a college education
A)includes the income that the student could have earned during the time spent in college.
B)can be measured solely by the dollar cost of tuition, books, and other fees.
C)includes only the cost of schooling, not the cost of housing and food.
D)excludes financial aid in computation of the cost of schooling.
E)All of the above are correct.
Answer: A
Q2) The marginal cost of an airline ticket is the total cost of flying the plane divided by the number of passengers.
A)True
B)False
Answer: False
Q3) The tangent at point A on a curve has a positive slope.Therefore, the curve has a
A)positive slope at all points.
B)positive slope at point A.
C)negative slope at all points.
D)negative slope at point A.
Answer: B
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Chapter 2: The Economy: Myth and Reality
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Sample Questions
Q1) Progressive income taxes are designed to
A)make the distribution of income less equal.
B)leave unchanged the distribution of income.
C)let the market determine the distribution of income after taxes.
D)make the distribution of income more equal.
Answer: D
Q2) Imports from China represent ____ of total U.S.imports.
A)less than 20%
B)approximately 40%
C)approximately 60%
D)more than 80%
Answer: A
Q3) Which of the following is true about the United States?
A)There has only been one recession in U.S.history.
B)There have been recessions every couple of years throughout U.S.history.
C)Recessions have never occurred in the United States.
D)Recessions have occurred periodically in U.S.history.
E)Recessions in the United States have generally been worse than in other countries.
Answer: D
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Page 4
Chapter 3: The Fundamental Economic Problem: Scarcity and Choice
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Sample Questions
Q1) Adam Smith's book, one of the first systematic treatments of economics, was entitled
A)The Plan of the Ages.
B)The General Theory of Money, Taxes, and Income.
C)The Wealth of Nations.
D)Principles of Economics.
E)Concepts in Moral Philosophy.
Answer: C
Q2) All of the points inside a production possibilities frontier are ____; all of the points outside the production possibilities frontier are ____.
A)efficient, inefficient
B)optimal, irrational
C)attainable, unattainable
D)rational, zero-cost
E)unattainable, efficient
Answer: C
Q3) All actions and purchases, even those of wealthy people, involve a sacrifice.
A)True
B)False
Answer: True
Page 5
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Chapter 4: Supply and Demand: an Initial Look
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Sample Questions
Q1) Draw a graph of a market in equilibrium.Describe what might cause a change in demand or supply and how this would affect the diagram.Indicate how the equilibrium price and quantity will change.
Q2) A black market develops only when quantity demanded exceeds quantity supplied. A)True B)False
Q3) The demand curve for a good connects points describing how much consumers
A)actually bought at different prices during a particular period.
B)actually bought at different prices in different periods.
C)would have been willing and able to buy at different prices during a particular period. D)would have been willing and able to buy at different prices in different periods.
Q4) A change in the income of buyers will normally change demand. A)True B)False
Q5) The demand for a textbook written by Schwarz and Mobley is Q = 20,000 50P; supply is Q = 2,000 + 100P.Students complain about the high price of textbooks, resulting in a price ceiling and, unfortunately, a shortage of texts.Below what price will shortages occur?
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Page 6
Chapter 5: Consumer Choice: Individual and Market Demand
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Sample Questions
Q1) Martha initially buys the combination of pens and pencils shown as A in Figure 5-14.After the prices of both goods change, she buys combination B.It must be true that A)Martha prefers A to B.
B)Martha prefers B to A.
C)Martha is indifferent between A and B.
D)Martha's preferences between A and B cannot be determined from the information given.
Q2) Economists consider instances of increasing marginal utility to be A)normal.
B)impossible.
C)unusual, as in the case of addictions.
D)irrational.
Q3) When the price of a good changes but the price of the only other good bought by a consumer stays constant, his A)budget line shifts.
B)indifference curves shift.
C)budget line changes slope.
D)indifference curves change slope.
Q4) Are there ever exceptions to the law of demand?
Page 7
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Chapter 6: Demand and Elasticity
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Sample Questions
Q1) Arrange the following goods from least to most elastic, explaining your ordering: gasoline, Exxon gas, Exxon gas at a particular gas station.
Q2) Explain what happens to the magnitude of price elasticity of demand as price increases along a straight-line demand curve.
Q3) Elasticity is a measure of the responsiveness of change in quantity demanded to a change in price.
A)True
B)False
Q4) A decrease in the price of rice from 50 cents to 40 cents a pound increases consumption from 16 to 20 tons a week in Gainesville and from 160 to 200 tons in the larger city of Miami.The elasticity of demand for rice is
A)greater in Miami than in Gainesville, even taking into account the population difference.
B)greater in Gainesville than in Miami in spite of the population difference.
C)equal in Gainesville and Miami regardless of the population difference.
D)impossible to compare because of the population difference.
Q5) How can one tell from cross elasticity what kind of relationship exists between any two goods?
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Chapter 7: Production, Inputs, and Cost: Building Blocks for Supply
Analysis
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Sample Questions
Q1) If MPPa/Pa > MPPb/Pb, then the proportions of these two inputs is optimal.
A)True
B)False
Q2) In Table 7-1, the marginal physical product of labor after the addition of the fourth worker is
A)8.
B)7.
C)10.
D)5.
Q3) Marginal physical product measures the increase in total output that results from a one-unit increase in an input.
A)True
B)False
Q4) Which of the graphs in Figure 7-5 could be a firm's total fixed cost curve?
A)(a)
B)(b)
C)(c)
D)(d)
Page 9
Q5) Explain why the long-run average cost is typically U-shaped.
Q6) How long is the long run?
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Page 10
Chapter 8: Output, Price, and Profit: the Importance of Marginal Analysis
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Sample Questions
Q1) Decision making that seeks only solutions that are acceptable is called A)optimizing.
B)satisficing.
C)benchmarking.
D)maximizing.
Q2) Joe and Ed go to a diner that sells hamburgers for $5 and hot dogs for $3.They agree to split the lunch bill evenly.Ed chooses a hot dog.The marginal cost to Joe then of ordering a hamburger instead of a hot dog is
A)$1.
B)$2.
C)$2.50.
D)$3.
Q3) Profits will be maximized when the slope of the total revenue curve and the slope of the total cost curve are equal.
A)True
B)False
Q4) The state is considering adding a satellite campus to its major university.How can marginal analysis assist, even though the university does not attempt to maximize profits?
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Chapter 9: Securities: Business Finance and the Economy:
the Tail That Wags the Dog
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Sample Questions
Q1) A major advantage of the corporation is
A)limited taxes.
B)preferential treatment by state governments.
C)limited liability of individual owners.
D)limited numbers of owners and ease of decision making.
Q2) Stock prices can be described as "random walks" if there is no relationship between one day's prices and the following day's prices.
A)True
B)False
Q3) What is the stock market's role in achieving efficient use of resources?
Q4) Recently, Dow Chemical 8.5 percent bonds maturing in 2006 closed at $92 with a face value of 100.This means the Dow bonds
A)sold for $92 each.
B)increased in value $92 that day.
C)sold at 92 percent of par value.
D)had the year of maturity changed to 1992.
Q5) The basic disadvantage of a proprietorship is unlimited liability.
A)True
B)False
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Chapter 10: The Firm and the Industry Under Perfect Competition
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Sample Questions
Q1) Illustrate the cost curves and average revenue (demand) curve for the perfectly competitive firm in long-run equilibrium.
Q2) A market
A)may be an organized exchange.
B)refers to a set of sellers and buyers whose actions affect a commodity's price.
C)is that area in which buyers and sellers compete to affect a product price.
D)All of the above are correct.
Q3) If there are no profits in competitive equilibrium, why do firms produce? How can they stay in business?
Q4) Draw a graph showing the typical competitive firm losing money but continuing to operate.Explain why the firm continues to operate rather than shut down.
Q5) Zero economic profits for a perfectly competitive firm in the long run means
A)the firm must exit the industry.
B)the firm is in equilibrium.
C)the firm will shut down until the market improves.
D)average revenue is insufficient to cover long-run average cost.
Q6) What are the assumptions of the model of perfect competition?
Page 13
Explain why each is important for short-run and long-run equilibrium.
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Chapter 11: Monopoly
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Sample Questions
Q1) Which of the following can be said about a monopoly?
A)Monopolies are always inefficient and are therefore the least desirable form of market.
B)They can cause a shift in the demand curve to benefit society.
C)They may aid in innovation.
D)All of the above are correct.
Q2) The two basic reasons why a monopoly exists are barriers to entry and cost advantages.
A)True
B)False
Q3) At a given output level, a monopolist earns a profit only if the
A)slope of its TR curve exceeds the slope of his TC curve.
B)height of its MR curve exceeds the height of his MC curve.
C)height of its demand curve exceeds the height of his MR curve.
D)height of its demand curve exceeds the height of his ATC curve.
Q4) The average total cost curve of a natural monopoly is always
A)upward sloping.
B)horizontal.
C)downward sloping at all points.
D)downward sloping where it crosses the market demand curve for the good.
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Chapter 12: Between Competition and Monopoly
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Sample Questions
Q1) Game theory applies to problems that arise in A)perfect competition.
B)monopolies.
C)oligopolies.
D)pure competition.
Q2) A successful cartel may end up charging the ____ price and obtaining ____ profits.
A)monopolistic competition; zero economic
B)oligopoly; monopoly
C)monopoly; zero economic
D)monopoly; monopoly
Q3) In what way is monopolistic competition more like competition, and in what way is it more like monopoly?
Q4) In a perfectly contestable market in the long run, each firm
A)produces at the minimum point on its long-run average total cost curve.
B)earns a profit below its opportunity cost of capital.
C)avoids making capital expenditures.
D)All of the above are correct.
Q5) What are the advantages and disadvantages of resource allocation under monopolistic competition compared to perfect competition?
Page 15
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Chapter 13: Limiting Market Power: Regulation and Antitrust
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Sample Questions
Q1) Before the breakup of AT&T several years ago, profits on long-distance calls offset losses on basic residential service.This practice is known as
A)abuse of monopolistic power.
B)cream skimming.
C)cross-subsidization.
D)the Ramsey rule.
Q2) Setting price equal to marginal cost in a natural monopoly will lead to A)excess profits for the firm.
B)losses for the firm.
C)zero profits for the firm.
D)One cannot tell without further information.
Q3) Discuss some of the reasons why monopoly power is considered undesirable.
Q4) Which of the following acts prohibited predatory pricing?
A)Robinson-Patman Act
B)Tunney Act
C)Clayton Act
D)Sherman Act
Q5) The Antitrust Division of the Department of Justice carefully scrutinizes mergers.Why?
Page 16
Q6) What are the reasons that are usually given to justify regulation?
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Chapter 14: The Case for Free Markets: the Price System
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Sample Questions
Q1) Command economies are able to achieve greater allocative efficiency than market economies.
A)True
B)False
Q2) Which of the following carries out the distribution process by rationing goods on the basis of preferences and relative incomes?
A)Administered system
B)Government
C)Price system
D)Central planning
Q3) In an idealized laissez-faire world, the distribution of products is
A)the most efficient.
B)the most fair.
C)purely random.
D)unpredictable.
Q4) Government-imposed limits on price movements are likely to
A)increase economic efficiency.
B)decrease economic efficiency.
C)leave economic efficiency unchanged.
D)promote economic growth in the economy.
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Chapter 15: The Shortcomings of Free Markets
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Sample Questions
Q1) Government can deal with externalities through the use of taxes and subsidies.
A)True
B)False
Q2) A firm is generating detrimental externalities when
A) MSC is less than MPC.
B) MSC is the same as MPC.
C) MSC is greater than MPC.
D) MPC includes some incidental costs.
Q3) If long-term investments are increasing,
A)current consumption must be increasing.
B)interest rates must be relatively low.
C)interest rates must be relatively high.
D)the people must be experiencing a "defective telescopic faculty."
Q4) It was once common for people to have servants who helped with the cooking and cleaning.Use the cost disease of the personal services dilemma to explain why these services have declined, even though one would expect an increased use in this age of the two-worker household.
Q5) Externalities can be either detrimental or beneficial to others.
A)True
B)False
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Chapter 16: Externalities, the Environment, and Natural Resources
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Sample Questions
Q1) The position of the supply curve in the market for garbage removal
A)is irrelevant since the cost is fixed.
B)depends on the marginal cost of garbage removal.
C)depends on the demand for garbage removal services.
D)is unaffected by taxes levied per household amount of garbage.
Q2) Which of the following would not lead to more conservation?
A)higher prices for a resource
B)increased interest rates on bonds
C)public awareness of increasing scarcity
D)higher taxes on goods produced using the resource
Q3) Interest in environmental problems has intensified, perhaps because
A)for the first time in history in the 1970s people began to die from pollution-related diseases.
B)rising incomes have caused people to be more concerned with the quality of their lives.
C)the centrally planned economies are polluted.
D)All of the above are true.
Q4) What are the advantages of a tax system for pollution control?
Page 19
Q5) Explain some important situations where direct controls have a clear advantage over taxes.
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Chapter 17: Taxation and Resource Allocation
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Sample Questions
Q1) Many environmentalists have advocated a substantial increase in the gasoline tax to cut down the federal deficit and to reduce pollution due to auto emissions.Such a tax increase would be devastating to people who commute significant distances to work.In fact, it would provide an incentive to relocate closer to work or change jobs.Economists refer to such effects of taxes as the
A)burden of a tax.
B)regressive incidence of a tax.
C)incidence of a tax.
D)excess burden of a tax.
Q2) The method of financing the Social Security system until 1983 is best described as A)trust fund.
B)excise tax.
C)indirect tax.
D)"pay as you go."
Q3) Direct taxes are levied on specific economic activities.
A)True
B)False
Q4) What is the controversy surrounding property taxes as a source for school funding?
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Chapter 18: Pricing the Factors of Production
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Sample Questions
Q1) If the interest rate is r (expressed as a decimal number), the present value today of $1 to be received n years from today equals ____.
A)$1rn
B)$1(1 + r)n
C)$1/(1 + r)n
D)$1/(1 + n)r
Q2) The loan supply curve has a positive slope
A)for all savers.
B)only for savers with fixed accumulation targets.
C)for all savers except those with fixed accumulation goals.
D)only for those contemplating retirement.
Q3) Of all the payments made to factors of production in the United States in 2013, ____ received the lowest share.
A)land rents
B)labor
C)interest payments
D)corporate profits
Q4) How can bonuses to exceptional employees be considered economic rents?
Q5) Why is the supply of loanable funds often interest inelastic?
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Chapter 19: Labor and Entrepreneurship: the Human Inputs
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Sample Questions
Q1) The income effect is thought to offset the substitution effect among very high wage earners.
A)True
B)False
Q2) An investment in yourself is an investment in what economists call human capital.
A)True
B)False
Q3) A firm's demand curve for labor shifts when the A)price of its output changes.
B)wage rate changes.
C)number of available workers changes.
D)All of the above are correct.
Q4) The demand for labor is derived from the A)demand for leisure.
B)supply of labor.
C)demand for final-output goods.
D)supply of final-output goods.
Q5) What are the major goals that unions may pursue in labor negotiations? Are these ever in conflict with one another?
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Chapter 20: Poverty, Inequality, and Discrimination
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Sample Questions
Q1) Which of the following taxes tend to make income distribution in the United States more equal?
A)sales (i.e., excise) taxes
B)personal income taxes
C)payroll taxes
D)All of the above are correct.
Q2) An example of a policy to combat poverty is A)TANF.
B)food stamps.
C)Social Security.
D)All of the above are correct.
Q3) Large income differences will be eradicated if the market mechanism is working well.
A)True
B)False
Q4) Explain why greater equality is inevitably gained at the expense of efficiency.
Q5) In 1963, the government first adopted an official definition of poverty: families with incomes below $3,000.
A)True
B)False
23
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Chapter 21: Is Useconomic Leadership Threatened
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Q1) During periods of U.S.prosperity,
A)imports from other countries are undesirable
B)imports from other countries are sought out
C)countries importing goods to the U.S.may use their earnings to buy American goods
D)countries importing goods to the U.S.are unable to buy American goods
Q2) Which of the following statements is true of entrepreneurs?
A)They have a talent for spotting new profit-making opportunities.
B)They are an indispensable ingredient to the U.S.'s unprecedented growth performance
C)They are an indispensable ingredient to the U.S.'s success over the centuries.
D)All of the above are true.
Q3) The U.S.remains the world's economic leader in all respects.
A)True
B)False
Q4) Poverty is a mainstream event experienced by a majority of Americans.
A)True
B)False
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Chapter 22: An Introduction to Macroeconomics
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Q1) While their respective subject matters differ greatly, both microeconomists and macroeconomists rely on the same basic tools; that is, both rely on
A)government contracts to promote research and publications.
B)demand-and-supply analysis.
C)the economic theory of John Maynard Keynes.
D)consumer protection laws and antitrust legislation.
Q2) The period from 1983 to 1990 was characterized by
A)decreasing budget deficits and increasing trade surpluses.
B)persistently high inflation.
C)below average rates of real GDP growth.
D)consistent growth of real GDP and decreasing rates of inflation.
Q3) For a macroeconomist, the case for aggregation is based on two principles 1) the composition of demand and supply may not matter for some purposes, and 2)
A)during fluctuations markets normally move together.
B)individual markets allocate resources efficiently.
C)inflation, unemployment, and growth never go together.
D)individual markets distribute income efficiently.
Q4) Discuss some of the fundamental differences between microeconomics and macroeconomics.
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Chapter 23: The Goals of Macroeconomic Policy
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Q1) Full employment implies which of the following is reduced to zero?
A)cyclical unemployment only
B)frictional unemployment only
C)frictional and structural unemployment only
D)frictional, structural, and cyclical unemployment
Q2) Inflation tends to redistribute real income from lenders to borrowers.
A)True
B)False
Q3) Low inflation rates and high inflation rates impose different costs on society.
A)True
B)False
Q4) Which of the following groups would have the lowest unemployment rates?
A)high-school dropouts
B)married men
C)nonwhite teenagers
D)nonwhite women
Q5) Low inflation rates tend to accelerate into higher and higher rates of inflation.
A)True
B)False
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Chapter 24: Economic Growth: Theory and Policy
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Q1) The "cost disease of personal services" phenomenon helps explain why medical care has become so expensive.
A)True
B)False
Q2) Two of the three pillars of labor productivity growth responsible for the changes in the United States after 1995 are technological change and
A)labor force improvement.
B)labor force growth.
C)capital formation.
D)consumption growth.
Q3) Compared to the 1948 to 1973 period, the period from 1973 to 1995 can be characterized as a period of A)faster real GDP growth.
B)faster labor productivity growth.
C)slower labor productivity growth.
D)lower labor force growth.
Q4) For a given technology, a higher capital stock will decrease labor productivity.
A)True
B)False
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Chapter 25: Aggregate Demand and the Powerful Consumer
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Q1) In the national income accounts, the symbol G represents the A)government production of goods and services.
B)volume of goods and services purchased by the federal government.
C)value of goods and services purchased by the federal government.
D)value of goods and services purchased by all levels of government.
Q2) Based on the scatter diagram in Figure 8-1, if real disposable income is $800 billion, the consumption spending would be approximately
A)$800 billion.
B)$650 billion.
C)$540 billion.
D)$420 billion.
Q3) After years of hard work in the field of macroeconomics, you win the Nobel Prize in economics (currently about $1.5 million).What is the most likely effect of this prize on your consumption function?
A)It will shift downward temporarily.
B)It will shift upward temporarily.
C)It will shift downward permanently.
D)It will shift upward permanently.
E)none of the above
Page 28
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Chapter 26: Demand-Side Equilibrium: Unemployment or
Inflation
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Q1) Leakages are offset by investment and government spending in the circular flow model.
A)True
B)False
Q2) Economists before Keynes assumed that equilibrium GDP occurred
A)automatically.
B)only with the help of government stabilization.
C)if spending was generally greater than output.
D)only in socialist economies with central planning.
Q3) Assume that the MPC is 0.80 and investment rises by $50 million.How much additional saving will this generate in the second round of spending?
A)$10 million
B)$40 million
C)$50 million
D)$62.5 million
E)$250 million
Q4) A given income-expenditure diagram always assumes a variable price level.
A)True
B)False
29
Q5) What is a multiplier? How does the multiplier effect occur?
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Chapter 27: Bringing in the Supply Side: Unemployment and Inflation
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Sample Questions
Q1) The underlying cause of inflation is
A)labor unions demanding higher wages.
B)businesses charging higher prices.
C)government raising taxes.
D)increasing aggregate demand.
Q2) The aggregate supply curve slopes upward because as price rises the quantity of output supplied rises.
A)True
B)False
Q3) Suppose we observe an economy experience an economic expansion and high inflation.This means the expansion is attributed to A)growth in aggregate demand.
B)growth in aggregate supply.
C)a reduction in aggregate demand.
D)a reduction in aggregate supply.
Q4) An equilibrium point beyond a potential GDP is termed as A)deflationary gap.
B)recessionary gap.
C)inflationary gap.
D)acceleration gap
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Chapter 28: Managing Aggregate Demand: Fiscal Policy
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Sample Questions
Q1) Why did President George W.Bush feel the need for a stimulus package for the U.S.economy after September 11, 2001?
As a conservative, what type of fiscal stimulus would be most appealing to President Bush?
Q2) Expansionary fiscal policy can cause a rise in real GDP in combination with A)an increase in the price level.
B)a decrease in the price level.
C)no change in the price level.
D)a decrease in the price level if the aggregate supply curve is upward sloping.
Q3) In contrast to changes in government spending, tax changes affect spending
A)directly.
B)in the same proportion.
C)by a greater amount.
D)indirectly.
Q4) The primary goal of supply-side economics is to A)balance the federal budget.
B)reduce the balance of payments deficit.
C)reduce the money supply.
D)reduce inflation and increase growth at the same time.
Q5) How do transfer payments function as negative taxes?
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Chapter 29: Money and the Banking System
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Sample Questions
Q1) The net worth of a bank is defined as the difference between A)income and expenses.
B)assets and liabilities.
C)loans and deposits.
D)loans and reserves.
Q2) Liquidity can be defined as the
A)cash value of money.
B)value of money adjusted for inflation.
C)value of fiat money when used for spending.
D)ease with which an asset can be converted to a spendable asset.
Q3) Gold and silver have historically been the most common form of commodity money. A)True
B)False
Q4) A principal disadvantage of conventional checking accounts compared to money market mutual funds is that checking accounts
A)are less liquid.
B)often do not pay interest.
C)cannot be used as a store of value.
D)are not insured by deposit insurance.
Q5) What is the criticism leveled against deposit insurance by the FDIC?
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Chapter 30: Monetary Policy: Conventional and
Unconventional
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Sample Questions
Q1) If interest rates increase, what is most likely to happen to the total expenditure schedule?
A)It will increase because G increases.
B)It will decrease because I decreases.
C)It will decrease because (X - IM) decreases.
D)It will increase because I increases.
Q2) The principal difference between income and money is that income is a ____ and money is a ____.
A)schedule, curve
B)point, line
C)stock, flow
D)flow, stock
Q3) If the Fed buys a T-bill from an individual rather than from a bank, the effect on the money supply is
A)smaller because there is no multiplier process.
B)larger because of the multiplier process.
C)the same.
D)impossible to predict without knowing the value of the multiplier.
Q4) Why do economists insist on emphasizing the difference between money and income?
Page 33
Why is this difference important in macroeconomics?
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Chapter 31: He Financial Crisis and the Great Recession
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Q1) When the housing bubble burst, prices fell particularly severely in all of these states except:
A)Arizona.
B)California.
C)Nevada.
D)Florida
E)Prices fell severely in all of the above states.
Q2) As a result of Lehman's collapse, real GDP first began to fall in
A)the fourth quarter of 2007.
B)the second quarter of 2008.
C)the third quarter of 2008.
D)the first quarter of 2009.
Q3) The central idea behind the Troubled Asset Relief Program was for the Treasury to sell mortgage-backed securities to interested investors, wait for prices to increase, and then buy these securities back for a profit.
A)True
B)False
Q4) When the housing price bubble burst, there were some obvious effects on the economy, and some that were not so obvious.Explain these.
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Chapter 32: The Debate Over Monetary and Fiscal Policy
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Sample Questions
Q1) If nominal GDP is $7,700 billion and M1 is $1,000 billion, then velocity is
A)10.7.
B)7.7.
C)7.1.
D)7.0.
Q2) Which of the following was the result of the Federal Reserve's purchase of mortgage-backed securities in 2009?
A)MBS interest rates declined, home mortgage rates declined, and the Fed turned a profit on these operations.
B)MBS interest rates declined, home mortgage rates declined, but the Fed had a loss on these operations.
C)MBS interest rates increased, home mortgage rates declined, and the Fed turned a profit on these operations
D)MBS interest rates increased, home mortgage rates increased, but the Fed had a loss on these operations
Q3) Over long periods of time, M2 velocity has been relatively constant.
A)True
B)False
Q4) What are the important factors which determine the velocity of money?
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Chapter 33: Budget Deficits in the Short and Long Run
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Sample Questions
Q1) Explain why the portion of the national debt owed to foreigners is a serious matter, whereas the portion owed to U.S.citizens is of less concern.Why does the U.S.national debt pose less of a problem than the debts of Greece in 2010?
Q2) Expansionary fiscal policy normally lowers interest rates.
A)True
B)False
Q3) Crowding in can be defined as
A)an increase in the budget deficit increases demand so that investment increases.
B)tax incentives on investment encourage capital formation, an increase in aggregate supply.
C)consumption rises in a recovery, which increases demand for investment.
D)the budget deficit falls enough to lower interest rates to stimulate investment.
Q4) The deficit can be defined in simple terms as
A)Tax receipts government expenditures + transfers.
B)Tax receipts + government expenditures + transfers.
C)Government expenditures + transfers tax receipts.
D)Government expenditures transfers tax receipts.
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Chapter 34: The Trade-Off Between Inflation and Unemployment
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Sample Questions
Q1) Figure 17-4 shows four movements of the inflation rate and the unemployment rate.Which panel shows the movement associated with a "supply shock" like those of the 1970s?
A)1
B)2
C)3
D)4
Q2) In the short run, fiscal and monetary policy cause unemployment and inflation to move in opposite directions because
A)the Fed and Congress rarely agree on policy.
B)one controls aggregate demand, the other controls aggregate supply.
C)both policies control only aggregate supply.
D)both policies control only aggregate demand.
Q3) Adverse shocks such as the crop failures of 1972-1973 and the oil price increases of 1974 and 1979 pushed the economy's
A)aggregate supply curve outward.
B)Phillips curve inward toward the origin.
C)aggregate supply curve inward.
D)aggregate demand curve inward.
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Chapter 35: International Trade and Comparative Advantage
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Sample Questions
Q1) What matters most in determining efficient distribution of production over the world is
A)absolute advantage.
B)efficiency.
C)the stock of resources.
D)comparative advantage.
Q2) From Table 22-1, the United States
A)has an absolute advantage over Great Britain in the production of textiles.
B)has an absolute advantage over Great Britain in the production of wheat.
C)has a comparative advantage in the production of textiles.
D)should export textiles to Great Britain.
Q3) If one country has an absolute advantage in every commodity, there is no reason for it to trade.
A)True
B)False
Q4) Trade between two nations is complicated by
A)the variability in exchange rates of the respective nation's currencies.
B)different production techniques in the nations.
C)the age and experience of the respective nation's diplomats.
D)the variability in climate between the nations.
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Chapter 36: The International Monetary System: Order or Disorder
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Q1) The Big Mac index is a measure of how well the purchasing power parity theory works.
A)True
B)False
Q2) The advantage of a system of fixed exchange rates over one where exchange rates are flexible is that
A)the government gains more control over the economy.
B)floating exchange rates impose risks on importers and exporters from unpredictable exchange rates.
C)exchange controls become unnecessary.
D)fiscal and monetary policy can focus more on domestic conditions.
Q3) Inflation plays a major role in determining whether a currency is appreciating or depreciating.
A)True
B)False
Q4) Fixed exchange rates are determined in free markets by the forces of demand and supply.
A)True
B)False
Page 39
Q5) Discuss the problems associated with the Bretton Woods system.
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Chapter 37: Exchange Rates and the Macroeconomy
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Q1) Compare the effectiveness of monetary policy in an open economy with mobile international capital to monetary policy in a closed economy.Why is it different?
Use an appropriate diagram to illustrate your answer.
Q2) If the demand effect dominates during a currency depreciation, then
A)real GDP should fall.
B)real GDP should increase.
C)the price level should fall.
D)net exports should decrease.
Q3) International capital flows are purchases and sales of ____ across national borders.
A)goods
B)financial assets
C)services
D)commodities
Q4) Depreciation of the Japanese Yen would lead to
A)outward shift in the aggregate supply curve for Japan.
B)upward shift in the aggregate demand curve for Japan.
C)downward shift in the aggregate supply curve for Japan.
D)inward shift in the aggregate demand curve for Japan.
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