Business Economics
Textbook Exam Questions
Course Introduction
Business Economics explores the fundamental principles and tools of economics as they apply to business decision-making. The course examines how organizations operate within various market structures and how economic theories such as supply and demand, production and costs, pricing strategies, and market behavior influence managerial choices. Students will learn to analyze the impact of government policies, macroeconomic trends, and global economic factors on business environments. Through case studies and real-world applications, the course aims to equip future business leaders with the economic reasoning and analytical skills necessary for effective problem-solving, strategic planning, and value creation in dynamic markets.
Recommended Textbook Economics Principles and Policy 13th Edition by
William J. Baumol
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Chapter 1: What Is Economics
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Q1) In the early 1800s, there was a smallpox outbreak in a remote part of Russia.The government sent in a large group of army doctors, but they were too late to stop the epidemic.Thirty years later, there was another smallpox scare.A local statistician cautioned the government against a similar response, noting the increased mortality and high number of army doctors during the earlier epidemic.Was the statistician providing good advice?
Answer: The statistician confused correlation with causation.The doctors were not the cause of the smallpox deaths.If the statistician were correct, then we should get rid of hospitals, since so many people die there.One cannot conclude that the army doctors could have helped thirty years later; this would require additional data comparing smallpox deaths with and without medical assistance.
Q2) The United States has been willing to trade off greater efficiency for greater wage equality.
A)True
B)False
Answer: False
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Chapter 2: The Economy: Myth and Reality
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Q1) The majority of American workers are employed in the service sector of the economy.
A)True
B)False
Answer: True
Q2) Capitalism and free enterprise are common, and the United States
A)has just begun to move in that direction after years of central planning.
B)has gone further in that direction than almost any other country.
C)is becoming more "free," but is not as capitalistic as many others.
D)is considering a major change to "free up" its economy as many others have.
E)is leading the move toward greater central planning and control.
Answer: B
Q3) A minority of American women work outside of the home.
A)True
B)False
Answer: False
Q4) A tax is progressive if the ratio of taxes to income rises as income rises.
A)True
B)False
Answer: True
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Chapter 3: The Fundamental Economic Problem: Scarcity and
Choice
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Q1) Which of the following events create an outward shift of the production possibilities curve?
A)The United States moves resources from the production of goods for domestic production to the production of goods for export.
B)Tax reductions reduce the cost and increase the volume of investment in factories, machinery, and research and development.
C)There is an exodus of young people to another country where there is more political freedom.
D)The unemployment rate falls from 33 percent to 12 percent.
Answer: B
Q2) If Japan and the United States engage in trade, and Japan gains as a result of the trade, does that mean the United States has lost in some manner?
Answer: If economic agents engage in voluntary trade, then neither party has been made worse off, and at least one of them has been made better off.Voluntary trade, by definition, is not coercive, and an economist would not expect someone to trade in the expectation of becoming worse off.Instead, economists would expect both parties to gain-although the gains may not be equal in size.
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Chapter 4: Supply and Demand: an Initial Look
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Q1) The presence of scalpers (people selling tickets at a price above the quoted price, P*) at a recent Super Bowl game suggests that the market for stadium seats could be represented by which graph in Figure 4-20?
A)1
B)2
C)3
D)4
Q2) How will an increase in price tend to affect demand?
A)Demand will increase.
B)Demand will decrease.
C)Demand will not change.
D)Uncertain.
Q3) Even though prices may change frequently, they can be expected to gravitate toward equilibrium.
A)True
B)False
Q4) Distinguish the terms price ceiling and price floor.
Q5) Price supports increase the supply of affordable milk for U.S.families.
A)True
B)False
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Chapter 5: Consumer Choice: Individual and Market Demand
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Q1) Economic theory has traditionally focused on optimality in decision-making. A)True
B)False
Q2) Americans choose cola over other flavors 70 percent of the time.Analysts say this is because cola's flavor is more robust and durable.Orange soda, for example, suffers from flavor fatigue faster than cola.Also, because cola contains caffeine, people may be addicted to the stimulant.Which panel in Figure 5-1 best illustrates these facts?
A)1
B)2
C)3
D)4
Q3) An increase in a family's income will cause its budget line to A)become steeper.
B)become flatter (less steep).
C)move closer to the origin.
D)move away from the origin.
E)become more convex toward the origin.
Q4) What is a budget line? What does its slope indicate?
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Chapter 6: Demand and Elasticity
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Q1) The elasticity measure which has been employed by the courts to assess the degree of market competition is
A)price elasticity of demand.
B)income elasticity of demand.
C)cross elasticity of demand.
D)inverse elasticity of demand.
Q2) As one moves down a straight-line demand curve away from the vertical axis, demand becomes less elastic and then inelastic.
A)True
B)False
Q3) Elasticity is a measure of the responsiveness of change in quantity demanded to a change in price.
A)True
B)False
Q4) If there are many close substitutes available for a good, its elasticity of demand will be higher.
A)True
B)False
Q5) How might a court use cross elasticity in an antitrust case?
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Chapter 7: Production, Inputs, and Cost: Building Blocks for Supply
Analysis
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Q1) The "law" of diminishing returns rests on the "law" of variable input proportions.
A)True
B)False
Q2) In Figure 7-7 at 100 units, AVC equals
A)8.
B)800.
C)100.
D)1,000.
Q3) Marginal cost is the
A)change in total cost resulting from the purchase of one more unit of the variable input.
B)change in total cost resulting from the production of one more unit of output.
C)difference between total fixed cost and total variable cost.
D)difference between total cost and total expenditure.
Q4) The major incentive for cost minimization is the A)power of shareholders in the company.
B)fear of top management by workers.
C)discipline imposed by the market system.
D)impact on U.S.corporations of taxing by the government.
Page 9
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Chapter 8: Output, Price, and Profit: the Importance of Marginal Analysis
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Q1) Why is the total profit curve shaped like a hill?
Q2) To find its profit-maximizing output level, a firm should operate where
A)AVC = MC.
B)MC = MR.
C)TFC = TVC.
D)AFC = AVC.
Q3) Marginal revenue is the addition to total revenue resulting from the addition of one unit to total output.
A)True
B)False
Q4) If at an output of 4,000 units Sloan Company is making an economic profit and marginal profit is $20 per unit, the firm should A)reduce output to maximize total profit.
B)increase output until marginal profit falls to zero.
C)do whatever is necessary to increase marginal profit.
D)There is not enough information to make a decision.
Q5) Any change in a firm's fixed costs will change its profit-maximizing level of output.
A)True
B)False
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Chapter 9: Securities: Business Finance and the Economy:
the Tail That Wags the Dog
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Q1) A technique that can be employed to make a portfolio less risky than any of its individual securities is
A)plowback.
B)diversification.
C)programmed trading.
D)speculation.
Q2) A corporation's income is taxed
A)immediately after it is deposited in the bank.
B)only before it is distributed to its owners.
C)only after it is distributed to owners.
D)both before and after it is distributed to owners.
Q3) When a business has been profitable and needs to invest, its preferred method of financing will likely be
A)plowback.
B)stock issue.
C)bond sales.
D)equal issues of stocks and bonds.
Q4) Corporations produce most of the output in the United States.
A)True
B)False
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Chapter 10: The Firm and the Industry Under Perfect Competition
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Q1) Helga owns Viking, Inc., started with her $100,000 inheritance.Helga's accountant informs her that her firm earned a profit of $100,000 last year, and that if she chooses to invest the money she can expect a 10% return.If Helga did not run Viking, she would not work.What were Helga's economic profits last year?
A)Zero
B)$100,000
C)$90,000
D)$95,000
Q2) Sally Rand owns a ceiling fan company.She sells 1,000 ceiling fans at $50 each.Each fan costs her $20.She uses her own money to buy the fans; she withdraws the money from her savings account where it earns 5 percent interest.Before going into the ceiling fan business, she worked as a fan-dancer at $25,000 a year.Should Sally remain in business?
Q3) In a long-run equilibrium in a perfectly competitive market, firms are selling at a price equal to average cost.
A)True
B)False
Q4) If there are no profits in competitive equilibrium, why do firms produce? How can they stay in business?
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Chapter 11: Monopoly
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Q1) A natural monopoly is defined as an industry in which one firm
A)can produce the entire industry output at a lower average cost than a larger number of firms could.
B)can produce the entire industry output at a lower marginal cost than a larger number of firms could.
C)is very large relative to other firms that could enter the industry.
D)can earn higher profits if it is the only firm in the industry rather than if other firms also enter the industry.
Q2) The presence of large sunk costs often serves as a naturally imposed barrier to entry.
A)True
B)False
Q3) Price discrimination only occurs under monopoly.
A)True
B)False
Q4) A monopolist can earn a positive economic profit, even in the long run.
A)True
B)False
Q5) Explain why marginal revenue is less than price for a monopolist.
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Chapter 12: Between Competition and Monopoly
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Q1) The behavior of the perfectly competitive firm:
A)theoretically leads to an inefficient allocation of resources.
B)maximizes the benefits to consumers, given the resources available to the economy.
C)reduces output in order to raise prices in the short-term.
D)results in excess capacity and inefficiency.
Q2) Under perfect competition and monopolistic competition, profits are zero in long-run equilibrium.
A)True
B)False
Q3) Oligopolistic firms never collude because they have almost no incentive to do so.
A)True
B)False
Q4) 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
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Chapter 13: Limiting Market Power: Regulation and Antitrust
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Q1) On balance, does market power promote or retard technological innovation?
Q2) Under a tying contract,
A)the price a buyer must pay for a good is tied to the size of his purchase.
B)a customer agrees as a condition of buying a good to purchase one or more additional goods from the same seller.
C)a firm agrees to allow members of its competitors' boards of directors to sit on its board.
D)a firm agrees to pay an intermediary for having arranged a business deal for the firm.
Q3) A regulatory agency concerned with "universal service" must
A)prevent high profits in all markets.
B)prevent entry in high-profit markets.
C)prevent cross-subsidization.
D)guarantee marginal cost pricing.
Q4) All large firms have monopoly power.
A)True
B)False
Q5) Service to consumers of deregulated products has generally not diminished.
A)True
B)False
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Chapter 14: The Case for Free Markets: the Price System
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Q1) Under a laissez-faire system,
A)government organizes production and distribution of goods.
B)a small bureaucracy of central planners tells firms what to produce and how to produce it.
C)costs of production and consumers' demands determine the output mix.
D)firms try to produce the goods that they think are good for consumers.
Q2) Scarcity is illustrated graphically by a production possibilities frontier. A)True
B)False
Q3) What is the rule for efficient output selection and how does the competitive market achieve it?
Q4) In a free-market economy, the pricing mechanism always operates to A)produce an equitable distribution of income.
B)provide an efficient allocation of resources.
C)correct any inequality in distribution of output.
D)equate consumers' desires with ability to pay.
Q5) Higher efficiency in the economy can be reached if prices are held low by law. A)True B)False
Page 16
Q6) What makes production-planning a daunting task for central planners?
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Chapter 15: The Shortcomings of Free Markets
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Q1) Explain whether the market produces too little, too much, or the right amount: (a) of goods with detrimental externalities; (b) of goods with public good characteristics.
Q2) Is increased production of a good beneficial to society?
A)Yes, because scarcity is such an overriding concern.
B)Yes, because more is always better.
C)Maybe, it depends on what is foregone.
D)No, because increased production does not increase utility.
Q3) The interest rate is the opportunity cost of transferring spending power between time periods.However, the market mechanism may fail to provide adequately for future economic growth.List the reasons why a market might fail.
Q4) In the allocation of resources between present and future
A)the market works imperfectly.
B)the market works perfectly.
C)centrally planned economies are more efficient than market economies.
D)the invisible hand guarantees efficiency in market economies.
Q5) Productivity growth tends to affect all industries to the same degree.
A)True
B)False
Q6) What do you mean by Coase theorem?
Page 17
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Chapter 16: Externalities, the Environment, and Natural Resources
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Q1) If one tracks the prices of critical metals, one sees that
A)they have risen more slowly than the general rate of inflation.
B)they have risen about as rapidly as the general rate of inflation.
C)the prices indicate increasing scarcity of the metals.
D)the prices have fluctuated too wildly to conclude anything.
Q2) Under perfect competition the price of a depletable resource whose cost of extraction is not changing must rise at
A)the same rate as the increase in GDP.
B)the same rate as the increase in consumer prices.
C)the same rate as the rate of interest.
D)a rate higher than the increase in the rate of interest.
Q3) Rising prices of resources leads to inefficient resource use by industry.
A)True
B)False
Q4) To protect the environment, governments in the United States have mainly used
A)legally enforceable direct controls on pollution.
B)taxes on goods whose production creates pollution.
C)direct taxes on emissions.
D)discretionary guidelines suggested to polluting firms.
Q5) How do rising prices slow resource depletion?
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Chapter 17: Taxation and Resource Allocation
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Q1) Why do many economists rate the income tax high in efficiency and equity terms?
Q2) Which of the following best reflects the ability-to-pay philosophy of taxation?
A)an excise tax on coffee
B)an excise tax on gasoline
C)a progressive income tax
D)a tax on residential property
Q3) When a tax is imposed on an item, it can generally be said that the incidence of the tax is
A)entirely on the buyer.
B)entirely on the seller.
C)on both the buyer and seller.
D)not determined in this manner.
Q4) A tax has an excess burden whenever
A)people are unable to alter their behavior to avoid paying it.
B)government seeks to raise it.
C)it raises a great deal of revenue.
D)it induces people to change their behavior.
Q5) Above a certain income the marginal social security tax drops to zero.
A)True
B)False
Page 19
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Chapter 18: Pricing the Factors of Production
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Q1) A sum of money received at a future date
A)is worth less than the same sum of money received today.
B)is worth more than the same sum of money received today.
C)has the same value as the same sum of money received today.
D)is worth less than the same sum of money received yesterday.
Q2) The nation's stock of capital can increase only when net new investment takes place.
A)True
B)False
Q3) In 2013 ____ of national factor income consisted of employee compensation.
A)90 percent
B)50 percent
C)60 percent
D)70 percent
Q4) What are the factors that contribute to productivity growth in the market economy and which of them is considered most important?
Q5) Economists consider rent seeking activity to be highly productive. A)True
B)False
Q6) Distinguish between invention and innovation.
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Chapter 19: Labor and Entrepreneurship: the Human Inputs
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Q1) Union leaders who focus on increasing the size of their union will generally accept a wage just above the competitive level.
A)True
B)False
Q2) The job market for which group always seems to have higher unemployment than the labor force as a whole? Why?
Q3) The substitution effect is thought to dominate the behavior of low-wage workers.
A)True
B)False
Q4) Currently, college graduates are earning about ____ more than high school grads over the course of their careers.
A)$100,000
B)$1,000,000
C)25%
D)60%
Q5) A monopsony is a market situation in which there is only one seller. A)True B)False
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Chapter 20: Poverty, Inequality, and Discrimination
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Q1) Roughly what was the median level of household income in the U.S.in 2012?
A)50,000
B)60,000
C)70,000
D)80,000
Q2) Prejudice leads, inevitably, to economic discrimination.
A)True
B)False
Q3) Define discrimination.Why does discrimination occur and what evidence exists that it does occur?
Q4) Discrimination can come from many groups of people, including employers and fellow employees.
A)True
B)False
Q5) Competition reduces some but not all discrimination.Where can one expect competition to reduce discrimination, and where is discrimination likely to go on even if there is competition?
Q6) How does the idea of a leaky bucket relate to the study of income distribution?
Q7) Discuss the major programs to combat poverty and evaluate them on the basis of work incentives.
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Chapter 21: Is Useconomic Leadership Threatened
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Q1) One of the most controversial public policy issues in recent decades is the size and growth of the U.S.budget deficit and public debt.Discuss where we are, compared to other countries, and how we got here.
Q2) The best hope for continued growth of the U.S.economy probably lies in:
A)a return of manufacturing to the U.S.
B)innovation
C)patents
D)decreasing poverty
Q3) The U.S.switched from being a creditor nation to a debtor nation in:
A)the 1970s
B)the 1980s
C)the 1990s
D)2008-2009
Q4) The future of the U.S as leader of the economic world:
A)is likely to continue for generations to come
B)will be sustained in the next generation, but not beyond
C)requires U.S.action in several critical economic areas
D)requires a return of manufacturing to the U.S.
Q5) Explain what protections and rules are in place for entrepreneurs, which encourages them to innovate.
Page 23
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Chapter 22: An Introduction to Macroeconomics
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Q1) Poor Asian countries may have per-capita GDP's that may be less than $250.Why is this somewhat misleading for comparative purposes?
A)Most rich country GDP is nonmarket activity.
B)A significant amount of poor country GDP is nonmarket activity.
C)Poor countries do not use dollars.
D)Poor countries have few resources.
Q2) Since the end of World War II, the economy of the United States has been more influenced by stabilization policy.One of the undesirable side effects of this has been that the economy now has a greater tendency to suffer from
A)more severe recessions and depressions.
B)higher levels of unemployment and lower rates of employment growth.
C)lower rates of growth in real and nominal GDP.
D)more persistent periods of inflation.
Q3) Gross Domestic Product is calculated by adding together
A)the number of goods and services produced in the economy.
B)money value of final goods and services.
C)number of workers employed in national production.
D)all commodities but not services produced in the economy.
Q4) What are the two basic principles of aggregation?
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Chapter 23: The Goals of Macroeconomic Policy
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Q1) Cyclical unemployment occurs when real GDP falls below potential GDP.
A)True
B)False
Q2) Older Americans living on a pension and therefore on a fixed income, tend to be made
A)better off when prices rise.
B)better off when inflation rates rise.
C)worse off when prices rise.
D)worse off when prices fall.
Q3) If inflation is expected by both borrowers and lenders, then we would expect
A)real rates to be higher than nominal rates of interest.
B)real rates to be equal to nominal rates of interest.
C)real rates to be lower than nominal rates of interest.
D)nominal rates of interest to be less than the expected inflation rate.
Q4) Labor productivity is calculated by dividing GDP by A)population.
B)the price level.
C)capital stock
D)labor force.
Q5) Distinguish between real rate of interest and nominal rate of interest.
Page 25
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Chapter 24: Economic Growth: Theory and Policy
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Q1) Compared to workers in poor countries, workers in richer countries have
A)lower productivity but higher wages.
B)higher productivity and higher wages.
C)higher productivity but lower wages.
D)the same productivity but higher wages.
Q2) In general, as productivity levels decrease, the potential for productivity growth
A)decreases.
B)increases.
C)remains the same.
D)decreases if GDP decreases.
Q3) A country's level of well being is determined primarily by its level of A)population growth.
B)educational attainment.
C)capital stock growth.
D)natural resource growth.
Q4) Because the Soviet Union educated more scientists and engineers than the United States, their level of economic growth was higher.
A)True
B)False
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Chapter 25: Aggregate Demand and the Powerful Consumer
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Q1) Government spending is an injection in the sense that it
A)increases the amount of total spending.
B)increases the size of the federal deficit.
C)decreases the amount of household saving.
D)decreases the amount of taxes paid.
Q2) 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.
Q3) The system of measurement for expressing macroeconomic data is called A)national income accounting.
B)balance of payment accounting.
C)generally accepted accounting principles.
D)double entry bookkeeping.
Q4) Changes in the price level affect household wealth more than household income.
A)True
B)False
Q5) What is disposable income?
How is it calculated?
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Chapter 26: Demand-Side Equilibrium: Unemployment or
Inflation
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Q1) Businesses in the United States cut their investment projects by $30 billion.If the MPC is 2, what will be the impact on the national income (Y)?
A)Y will fall by $15 billion.
B)Y will fall by $30 billion.
C)Y will fall by $60 billion.
D)Y will fall by $120 billion.
Q2) Assume a simple macroeconomic model.When inventories rise unexpectedly,
A)income is above its equilibrium value.
B)income will rise until it reaches its equilibrium value.
C)total spending is higher than total output.
D)All of the above.
Q3) Using the standard 45-degree line diagram, how does a decrease in investment spending effect the expenditure schedule?
A)It increases the slope of the expenditure schedule.
B)It decreases the slope of the expenditure schedule.
C)It shifts the expenditure schedule downward.
D)It shifts the expenditure schedule upward.
Q4) Why do booms and recessions tend to be transmitted across national borders?
Q5) Why does the aggregate demand curve slope downward?
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Chapter 27: Bringing in the Supply Side: Unemployment and Inflation
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Q1) Using the aggregate demand/aggregate supply model, explain the difference in the employment prospects of the graduates of 2007 and 2009.
Q2) A period of stagflation is the normal aftermath of a period of
A)excess aggregate supply.
B)deficient aggregate demand.
C)excess aggregate demand.
D)high unemployment rates.
Q3) The money wage rate has little effect on the supply curve.It mainly affects the aggregate demand curve.
A)True
B)False
Q4) The self-correcting mechanism would be expected to be very rapid in an economy with
A)a large multiplier.
B)flexible prices.
C)rigid wages.
D)high labor productivity.
Q5) Using the concepts of aggregate demand and aggregate supply, explain how the economy reaches an equilibrium level of real GDP and price level.
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Chapter 28: Managing Aggregate Demand: Fiscal Policy
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Q1) What are the policies usually advocated by supply side economists? How do they justify these proposals?
Q2) When government spending is added to the basic macroeconomic model, the multiplier for G would
A)be higher than the multiplier for autonomous spending.
B)be lower than the multiplier for autonomous spending.
C)be equal to the multiplier for autonomous spending.
D)have no relationship to the autonomous spending multiplier.
Q3) Define the following terms and explain their significance to the study of macroeconomics:
a.fiscal policy
b.transfer payments
c.effect of income taxes on the multiplier
d.supply-side tax cuts
Q4) Why did President Obama want to repeal the Bush era tax cuts on upper income taxpayers?
How would the repeal of these tax cuts impact aggregate demand and to what degree? How did the economic conditions in 2010 make such a repeal less likely to take place?
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Chapter 29: Money and the Banking System
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Q1) Fiat money is
A)always backed by gold or silver.
B)useful in buying Italian cars.
C)only backed by government decree.
D)not as liquid as precious metals.
Q2) Nowadays, most observers believe that monetary policy
A)is less important than fiscal policy.
B)is more important than fiscal policy.
C)and fiscal policy are equally important.
D)and fiscal policy are both unimportant.
Q3) The narrowest definition of the money supply (M1) includes A)cash and travelers' checks.
B)cash, travelers' checks, and savings account balances.
C)cash, checking account balances, and travelers' checks.
D)cash, bank deposits, and money market accounts.
Q4) Systemic risks are most likely to exist with regard to A)small governments.
B)large governments.
C)small financial institutions.
D)large financial institutions.
31
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Chapter 30: Monetary Policy: Conventional and
Unconventional
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Q1) Individual banks always respond quickly and significantly to changes in the discount rate.
A)True
B)False
Q2) The Fed's founders viewed the Fed as a means of maintaining the money supply during economic contractions and as a lender of last resort.
A)True
B)False
Q3) Critics of Fed independence argue that
A)monetary policy and fiscal policy are necessarily inconsistent.
B)political control ensures low rates of inflation.
C)monetary policy run by specialists is inherently inflationary.
D)unelected officials are undemocratic.
Q4) If the Fed raises the discount rate, what will be the effect on the money supply?
A)It will decrease the money supply.
B)It will increase the money supply.
C)No change in the money supply.
D)Not enough data to give an answer.
Q5) Explain the concept of 'lender of last resort'.What is discount rate?
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Chapter 31: He Financial Crisis and the Great Recession
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Q1) As a result of the Great Recession, most financial markets hit bottom around
A)September 2008
B)March 2009
C)September 2009
D)March 2010
Q2) Which of the following are accurate arguments suggesting that the fiscal stimulus did work?
A)Real GDP growth moved from negative to positive in 2009.
B)Employment increased in 2009.
C)The economy has natural self-correcting mechanisms.
D)The return on bailout assets reduced the deficit.
Q3) Which of the following was a lesson from the 2007-2009 financial crisis?
A)The financial system needed more leverage in order to operate.
B)The job of stabilizing the economy should be assigned exclusively to monetary policy.
C)Monetary policy is finished once the Fed reduces the federal funds rate to zero.
D)The business cycle still exists.
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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Q1) After September 11, 2001, a small group of economists argued that the economy's self-correcting mechanism would work to counteract the recessionary effects of the attack.
A)True
B)False
Q2) Advocates of fixed rules believe that politicians focus more on re-election than on sound policy.
A)True
B)False
Q3) Which of the following policies would a Keynesian expect to produce the largest increase in income?
A)a reduction in government spending of $100 billion
B)an increase in transfer payments of $100 billion
C)an increase in government spending of $100 billion
D)a tax cut of $100 billion
Q4) When the Fed decreases the money supply, interest rates
A)rise, causing velocity to fall.
B)fall, causing velocity to fall.
C)rise, causing velocity to rise.
D)fall, causing velocity to rise.
34
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Chapter 33: Budget Deficits in the Short and Long Run
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Q1) Economists who argue in favor of rapid deficit reduction claim that deficit reduction will
A)reduce crowding in, reduce interest rates, and increase AS.
B)stimulate AD and productivity.
C)trigger crowding in, increase investment, and increase AS.
D)reduce crowding out, increase investment, and increase AS.
Q2) The Federal Reserve may choose to monetize the debt in order to
A)reduce the burden of the national debt.
B)shift the supply curve of money outward.
C)shift the demand curve for money inward.
D)reduce the volume of reserves in commercial banks.
Q3) Why does the government not have to repay debt, as do private individuals?
A)Because the government can ignore creditors and refuse payment.
B)Because the government, as a dictatorship, is unresponsive to demands for repayment.
C)Because the government has no debt, it owes it to itself.
D)Because the government does not have a finite life, as do individuals.
Q4) In 2009, the Social Security System ran a surplus of approximately $137 billion.
A)True
B)False
Page 35
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Chapter 34: The Trade-Off Between Inflation and Unemployment
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Q1) Policies to lower the natural rate of unemployment include
A)proposals to raise the minimum wage rate.
B)mandated prison sentences for drug dealers.
C)retraining programs and employment services.
D)changes in the tax laws.
Q2) If business fluctuations are from demand-side forces,
A)monetary and fiscal policy will move inversely.
B)interest rates and budget deficits will move inversely.
C)unemployment and inflation will move inversely.
D)unemployment and budget deficits will move inversely.
Q3) Which of the following observations concerning the Phillips curve is not true?
A)They are normally upward-sloping.
B)They are more commonly constructed for price inflation.
C)They depict the inverse relation between wage inflation and unemployment.
D)They depict the rate of unemployment on the horizontal axis.
Q4) The Phillips curve explains the trade-off between inflation and unemployment.
A)True
B)False
Page 36
Q5) The economy's self-correcting mechanism tends to push the unemployment rate back to a specific rate of unemployment.How?
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Chapter 35: International Trade and Comparative Advantage
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Q1) Which of the following positions would a mercantilist support?
A)Trade in manufacturing goods is good for the US.
B)Imports to the U.S.from Japan are beneficial to the U.S.
C)Exports from Japan to the U.K.are beneficial to Japan.
D)Movement of labor from UK to US is beneficial to US.
Q2) How does the imposition of a tariff reduce the price of imports?
A)At the lower quantity supplied, the price to the importer is lower than if there were free trade.
B)At the lower quantity demanded, the price to the importer is lower than if there were free trade.
C)Supply of the product is increased from domestic production, reducing the price of the imports.
D)Demand for the product is decreased, so that price must fall.
Q3) A quota brings a more serious misallocation of resources than a tariff.
A)True
B)False
Q4) Wages in most other countries have increased as a percentage of U.S.wages in the past 33 years.
A)True
B)False
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Chapter 36: The International Monetary System: Order or Disorder
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Q1) Which of the following do most economists consider to be the most basic measure of a nation's international transactions?
A)balance on current account
B)balance on capital account
C)balance of merchandise trade
D)balance on long-term capital
Q2) If a currency increases in value in response to market forces, this process is known as
A)reflation.
B)revaluation.
C)appreciation.
D)value-added.
Q3) Under a gold standard, a balance of payments surplus automatically
A)raised interest rates.
B)increased exports.
C)increased domestic prices.
D)decreased imports.
Q4) The gold standard established fixed exchange rates among all countries.
A)True
B)False
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Chapter 37: Exchange Rates and the Macroeconomy
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Q1) If Mexico experiences a period of stable prices while the United States experiences rapid inflation, what will happen in the United States?
A)an increase in U.S.imports
B)an increase in U.S.exports
C)a decrease in U.S.imports
D)an increase in U.S.net exports
Q2) Do you agree that currency depreciation will lead to an increase in the debt burden of the companies that borrow in foreign currency?
Explain with an example.
Q3) Which of the following usually leads to currency appreciation?
A)galloping inflation
B)relatively low interest rates
C)declining real GDP
D)fixed exchange rates
Q4) Foreign trade will have no impact on real GDP when
A)exports exceed imports.
B)exports equal imports.
C)imports exceed exports.
D)exports equal zero.
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