Economic Policy Analysis Midterm Exam - 11779 Verified Questions

Economic Policy Analysis

Midterm Exam

Course Introduction

Economic Policy Analysis examines the tools and frameworks used to evaluate, design, and implement policies aimed at achieving economic objectives. Through a combination of theoretical models and real-world case studies, the course explores how governments address issues such as market failures, income distribution, economic growth, and stabilization. Students learn to critically assess policy options, understand their trade-offs and impacts, and apply quantitative and qualitative methods to analyze policy effectiveness. The course fosters the development of practical skills for interpreting empirical evidence, forecasting economic outcomes, and making informed recommendations for policy interventions in various economic contexts.

Recommended Textbook

Principles of Macroeconomics 8th Edition by N. Gregory Mankiw

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Chapter 1: Ten Principles of Economics

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Q1) Coal is considered to be a non-renewable energy source.Which of the following statements is correct?

A)Coal is an unlimited resource.

B)Coal is a scarce resource.

C)Coal is a non-scarce resource.

D)Coal is not a resource.

Answer: B

Q2) In the broadest sense,economics is the study of A)production methods.

B)how society manages its scarce resources.

C)how households decide who performs which tasks.

D)the interaction of business and government.

Answer: B

Q3) Economics is the study of how society manages its A)limited wants and unlimited resources.

B)unlimited wants and unlimited resources.

C)limited wants and limited resources.

D)unlimited wants and limited resources.

Answer: D

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Chapter 1: Ten Principles of Economics: How People Make Decisions

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Q1) Suppose the cost of flying a 100-seat plane for an airline is $50,000 and there are 10 empty seats on a flight.The marginal cost of flying a passenger is

A)$50.

B)$500.

C)$50,000.

D)This cannot be determined from the information given.

Answer: D

Q2) High-school athletes who skip college to become professional athletes

A)obviously do not understand the value of a college education.

B)usually do so because they cannot get into college.

C)understand that the opportunity cost of attending college is very high.

D)are not making a rational decision since the marginal benefits of college outweigh the marginal costs of college for high-school athletes.

Answer: C

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4

Chapter 1: Ten Principles of Economics: How People Interact

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Q1) The collapse of communism in the Soviet Union and Eastern Europe took place mainly in the

A)1960s.

B)1970s.

C)1980s.

D)1990s.

Answer: C

Q2) Which of the following is a principle concerning how people interact?

A)Markets are usually a good way to organize economic activity.

B)Rational people think at the margin.

C)People respond to incentives.

D)All of the above are correct.

Answer: A

Q3) One advantage market economies have over centrally-planned economies is that market economies

A)provide an equal distribution of goods and services to households.

B)establish a significant role for government in the allocation of resources.

C)solve the problem of scarcity.

D)are more efficient.

Answer: D

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Chapter 1: Ten Principles of Economics: How the Economy

As a Whole Works

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Q1) Which of the following is an important cause of inflation in an economy?

A)increases in productivity in the economy

B)the influence of positive externalities on the economy

C)lack of property rights in the economy

D)growth in the quantity of money in the economy

Q2) In the early 1920s,

A)Germany experienced a very high rate of inflation.

B)the quantity of German money was declining rapidly.

C)the value of German money remained almost constant.

D)All of the above are correct.

Q3) In a particular country in 1999,the average worker had to work 20 hours to produce 55 units of output.In that same country in 2009,the average worker needed to work 28 hours to produce 77 units of output.In that country,the productivity of the average worker

A)increased by 2 percent between 1999 and 2009.

B)increased by 5 percent between 1999 and 2009.

C)remained unchanged between 1999 and 2009.

D)decreased by 3 percent between 1999 and 2009.

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Chapter 1: Ten Principles of Economics: Part A

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Q1) Refer to Scenario 1-4.What is your opportunity cost of studying economics?

Q2) Tracy quits her job,which pays $25,000 a year,to finish her college degree.Her annual college expenses are $12,000 for tuition and fees and $1,000 for books.What is her opportunity cost of attending college for the year?

Q3) Debbie quits her job,which pays $30,000 a year,to finish her college degree.Her annual college expenses are $10,000 for tuition,$2,000 for books,and $700 for food.What is her opportunity cost of attending college for the year?

Q4) What are the two basic types of economies?

Q5) Refer to Scenario 1-5.What is your opportunity cost of going to the movies?

Q6) Suppose that in Germany total annual output is worth $600 million and people work 40 million hours.In France total annual output is worth $700 million and people work 50 million hours.In which country do people enjoy a higher standard of living?

Q7) Explain the concept of market failure.

Q8) Economists use the term ------ to refer to an increase in the overall level of prices in the economy.

Q9) Give an example of government intervention that is intended to improve equality.

Q10) Refer to Scenario 1-2.What is your opportunity cost of working?

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Q11) Refer to Scenario 1-6.What is the company's marginal cost?

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Chapter 1: Ten Principles of Economics: Part B

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Q1) A rational decisionmaker takes an action if and only if the marginal cost exceeds the marginal benefit.

A)True

B)False

Q2) If wages for accountants rose,then accountants' leisure time would have a lower opportunity cost.

A)True

B)False

Q3) An individual deciding how to allocate her limited time is dealing with both scarcity and trade-offs.

A)True

B)False

Q4) Market failure occurs when no individual has the ability to substantially influence market prices.

A)True

B)False

Q5) In the short-run,society faces a tradeoff between inflation and unemployment.

A)True

B)False

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Chapter 2: Thinking Like an Economist

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Q1) Studying which of the following is helpful in learning to think like an economist?

A)theory.

B)case studies.

C)examples of economics in the news.

D)all of the above.

Q2) The language of economics is

A)needlessly arcane.

B)valuable because it provides a new and useful way of learning about the world.

C)easy to learn within a day.

D)unnecessary to learn for a thorough understanding of economics.

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Chapter 2: Thinking Like an Economist: The Economist As Scientist

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Q1) A macroeconomist - as opposed to a microeconomist - might study the effect of A)changes in the money supply on the inflation rate.

B)an increase in the gas tax on fuel consumption.

C)a technological advance on the natural gas industry.

D)a hurricane on prices in the orange industry.

Q2) In conducting their research,economists face an obstacle that not all scientists face;specifically,in economics,it is often impractical to A)make use of theory and observation.

B)rely upon the scientific method.

C)conduct laboratory experiments.

D)find articles or books that were written before 1900.

Q3) When constructing a production possibilities frontier,which of the following assumptions is not made?

A)The economy produces only two goods or two types of goods.

B)Firms produce goods using factors of production.

C)The technology available to firms is given.

D)The quantities of the factors of production that are available are increasing over the relevant time period.

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Chapter 2: Thinking Like an Economist: The Economist As Policy Adviser

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Q1) When economists are trying to help improve the world,they are

A)in the realm of positive economics rather than normative economics.

B)in the realm of macroeconomics rather than microeconomics.

C)scientists.

D)policy advisers.

Q2) Positive statements are not

A)descriptive.

B)prescriptive.

C)claims about how the world is.

D)made by economists speaking as scientists.

Q3) Which of the following is an example of a normative,as opposed to positive,statement?

A)Gasoline prices ought to be lower than they are now.

B)The federal government should raise taxes on wealthy people.

C)The social security system is a good system and it deserves to be preserved as it is.

D)All of the above are normative statements.

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Chapter 2: Thinking Like an Economist: Why Economists

Disagree

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Q1) Almost all economists agree that local and state governments should

A)eliminate subsidies to professional sports franchises.

B)increase subsidies to professional sports franchises.

C)copy economic policy from Washington,D.C.

D)prevent companies from outsourcing work.

Q2) President Ronald Reagan once joked that a Trivial Pursuit game designed for economists would

A)have no questions but hundreds of answers.

B)have 100 questions and 3,000 answers.

C)have 1,000 questions but no answers.

D)never produce a winner.

Q3) Which of the following is one of the basic reasons why economists often appear to give conflicting advice to policymakers?

A)similar opinions about the validity of economic theories

B)significant differences in education

C)differences in personal values

D)a reliance on normative statement for research theories

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Chapter

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Q1) Congressman Dearmark justified spending $3 million on a new entertainment complex in his district because it will create 450 new jobs for his residents.As a student of economics,you know that

A)this is a case of the "broken window fallacy."

B)this is a great use of taxpayer dollars.

C)this policy diverts money from spending somewhere else in the economy.

D)Both a and c are correct.

Q2) John Maynard Keynes described economics as an easy subject at which very few excel.Which of the following is not one of the reasons Keynes gave for why so few people excel at the study of economics?

A)An economist must also be a mathematician,historian,statesman,and philosopher in some degree.

B)An economist must understand symbols and speak in words.

C)An economist must be purposeful and disinterested in a simultaneous mood.

D)An economist must understand environmental science,regulation,and political science.

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Chapter 2: Thinking Like an Economist: Graphing a Brief Review

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Q1) A demand curve shows the relationship

A)between income and quantity demanded.

B)between price and income.

C)between price and quantity demanded.

D)among income,price,and quantity demanded.

Q2) The first number in any ordered pair is

A)the x-coordinate.

B)the y-coordinate.

C)the vertical location of the point.

D)the slope.

Q3) When income increases the slope of an individual's demand curve,the demand curve

A)turns positive.

B)becomes undefined.

C)remains negative.

D)becomes infinite.

Q4) The slope of a line is equal to

A)the change in the value of x divided by the change in the value of y.

B)the change in the value of y divided by the change in the value of x.

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C)the horizontal distance divided by the vertical distance.

D)the value of y divided by the value of x.

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Chapter 2: Thinking Like an Economist: Part A

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Q1) The institution that sets the nation's monetary policy is called the

Q2) Refer to Figure 2-15.Consider the production possibilities frontier for an economy that produces only sofas and cars.The opportunity cost of one sofa is

Q3) Refer to Figure 2-3.What are two elements not included in this figure that could be included in a more complex model?

Q4) Refer to Figure 2-14.Which point(s)on the graph is(are)efficient production possibilities?

Q5) Economists at which administrative department help formulate spending plans and regulatory policies?

Q6) Since 1946,the president of the United States has received guidance from a group comprised of three members and a staff of a few dozen economists known as the

Q7) Is the following a positive or normative statement? The federal minimum wage is lower than many state minimum wages.

Q8) Who would be more likely to study the inflation rate in the United States,a macroeconomist or a microeconomist?

Q9) The three main factors of production,or categories of inputs,used by firms to produce goods and services are

Page 15

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Chapter 2: Thinking Like an Economist: Part B

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Sample Questions

Q1) In surveys of professional economists,fourteen propositions were endorsed by an overwhelming majority of respondents.

A)True

B)False

Q2) When a production possibilities frontier is bowed outward,the opportunity cost of one good in terms of the other is constant.

A)True

B)False

Q3) "Society would be better off if the welfare system were abolished" is a normative statement,not a positive statement.

A)True

B)False

Q4) A circular-flow diagram is a visual model of the economy.

A)True

B)False

Q5) In the circular-flow diagram,factors of production are the goods and services produced by firms.

A)True

B)False

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Chapter 3: Interdependence and the Gains From Trade

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Sample Questions

Q1) People who provide you with goods and services

A)are acting out of generosity.

B)do so because they get something in return.

C)have chosen not to become interdependent.

D)are required to do so by the government.

Q2) When an economist points out that you and millions of other people are interdependent,he or she is referring to the fact that we all

A)rely upon the government to provide us with the basic necessities of life.

B)rely upon one another for the goods and services we consume.

C)have similar tastes and abilities.

D)are concerned about one another's well-being.

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Chapter 3: Interdependence and the Gains From Trade: A

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Q1) Refer to Figure 3-2.The fact that the line slopes downward reflects the fact that A)for Brazil,it is more costly to produce peanuts than it is to produce cashews.

B)Brazil will produce more peanuts and fewer cashews as time goes by.

C)Brazil faces a tradeoff between producing peanuts and producing cashews.

D)Brazil should specialize in producing cashews.

Q2) Refer to Figure 3-8.If the production possibilities frontiers shown are each for one day of production,then which of the following combinations of coffee and soybeans could Chile and Colombia together make in a given day?

A)4 pounds of coffee and 16 pounds of soybeans

B)8 pounds of coffee and 15 pounds of soybeans

C)16 pounds of coffee and 10 pounds of soybeans

D)24 pounds of coffee and 4 pounds of soybeans

Q3) Refer to Figure 3-2.If the production possibilities frontier shown is for 24 hours of production,then how long does it take Brazil to make one peanut?

A)1/10 hour

B)1/3 hour

C)3 hours

D)10 hours

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Chapter 3: Interdependence and the Gains From Trade:

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Q1) Ken and Traci are two woodworkers who both make tables and chairs.In one month,Ken can make 3 tables or 18 chairs,whereas Traci can make 8 tables or 24 chairs..Given this,we know that

A)Ken has an absolute advantage in chairs.

B)Ken has a comparative advantage in tables.

C)Traci has an absolute advantage in chairs.

D)Traci has a comparative advantage in chairs.

Q2) Which of the following statements is not correct?

A)Trade allows for specialization.

B)Trade has the potential to benefit all nations.

C)Trade allows nations to consume outside of their production possibilities curves.

D)Absolute advantage is the driving force of specialization.

Q3) Refer to Figure 3-14.Arturo and Dina would not be able to gain from trade if Dina's opportunity cost of one taco changed to

A)1/2 burrito.

B)3/4 burrito.

C)4/3 burritos.

D)2 burritos.

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Chapter 3: Interdependence and the Gains From Trade:

Applications of Comparative Advantage

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Q1) Suppose the U.S.and Japan both produce airplanes and televisions and the U.S.has a comparative advantage in the production of airplanes while Japan has a comparative advantage in the production of televisions.If the U.S.exports airplanes to Japan and imports televisions from Japan,

A)both countries,as a whole,will be better off.

B)all individuals in both countries will be better off.

C)both countries,as a whole,will be worse off.

D)all individuals in both countries will be worse off.

Q2) Suppose the United States has a comparative advantage over Mexico in producing pork.The principle of comparative advantage asserts that

A)the United States should produce more pork than what it requires and export some of it to Mexico.

B)the United States should produce a moderate quantity of pork and import the remainder of what it requires from Mexico.

C)the United States should refrain altogether from producing pork and import all of what it requires from Mexico.

D)Mexico has nothing to gain from importing United States pork.

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Chapter 3: Interdependence and the Gains From Trade:

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Q1) Which of the following is not an example of the principle that trade can make everyone better off?

A)Americans buy tube socks from China.

B)Residents of Maine drink orange juice from Florida.

C)A homeowner hires the kid next door to mow the lawn.

D)All of the above are examples of the principle that trade can make everyone better off.

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Chapter 3: Interdependence and the Gains From Trade:

Part A

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Q1) Refer to Scenario 3-2.Which country,if either,has a comparative advantage producing broccoli? Defend your answer using the numbers given.

Q2) The gains from specialization and trade are based on ------ advantage.

Q3) Sally can make 8 cups of soup per hour or 20 crackers per hour.Harry can make 10 cups of soup per hour or 30 crackers per hour.Can Sally and Harry gain from trade? If so,what is the range of prices of crackers for soup at which they would both find trade advantageous?

Q4) Refer to Scenario 3-1.Which if any good(s)does Greg have an absolute advantage producing?

Q5) Suppose that Venezuela produces beef and oil and it can switch production between each at a constant rate.If the most beef it can produce is 300 million pounds and the most oil it can produce is 50 million barrels,then what is the opportunity cost of a pound of beef and what is the opportunity cost of a barrel of oil?

Q6) What does a consumption possibilities frontier represent?

Q7) Frank can make 20 hot dogs an hour or 10 pints of potato salad an hour.Earnest can make 30 hot dogs an hour or 20 pints of potato salad an hour.Who has the comparative advantage making hot dogs and who has the comparative advantage making potato salad?

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Chapter 3: Interdependence and the Gains From Trade:

Part B

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Q1) A country can have a comparative advantage in the production of a good,even if it does not have an absolute advantage in the production of that good.

A)True

B)False

Q2) When there are two people and each is capable of producing two goods,it is possible for one person to have a comparative advantage over the other in both goods.

A)True

B)False

Q3) In one month,Moira can knit 2 sweaters or 4 scarves.In one month,Tori can knit 1 sweater or 3 scarves.Together,they could produce more output in total if Moira knits only sweaters and Tori knits only scarves.

A)True

B)False

Q4) Two countries can achieve gains from trade even if one country has an absolute advantage in the production of both goods.

A)True

B)False

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Chapter 4: The Market Forces of Supply and Demand

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Q1) The two words economists use most often are

A)inflation and trade.

B)supply and demand.

C)competition and prices.

D)markets and equilibrium.

Q2) The two words most often used by economists are

A)prices and quantities.

B)resources and allocation.

C)supply and demand.

D)efficiency and equity.

Q3) In a market economy,supply and demand are important because they

A)are direct policy tools used by government agencies to regulate the economy.

B)illustrate when an market is in equilibrium,but they are not helpful when a market is out of equilibrium.

C)can be used to predict the impact on the economy of various events and policies.

D)All of the above are correct.

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Chapter 4: The Market Forces of Supply and

Demand:Markets and Competition

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Q1) Assume a market is perfectly competitive.When a new producer enters the market,the

A)price in the market increases.

B)price in the market decreases.

C)price in the market does not change.

D)market is no longer a competitive market.

Q2) In a competitive market,the quantity of a product produced and the price of the product are determined by A)buyers.

B)sellers.

C)both buyers and sellers.

D)None of the above is correct.

Q3) The market for ice cream is a A)monopolistic market.

B)highly competitive market.

C)highly organized market.

D)Both b and c are correct.

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Chapter 4: The Market Forces of Supply and Demand: Demand

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Q1) Two goods are substitutes when a decrease in the price of one good

A)decreases the demand for the other good.

B)decreases the quantity demanded of the other good.

C)increases the demand for the other good.

D)increases the quantity demanded of the other good.

Q2) If a good is normal,then an increase in income will result in a(n)

A)increase in the demand for the good.

B)decrease in the demand for the good.

C)movement down and to the right along the demand curve for the good.

D)movement up and to the left along the demand curve for the good.

Q3) A downward-sloping demand curve illustrates

A)that demand decreases over time.

B)that prices fall over time.

C)the relationship between income and quantity demanded.

D)the law of demand.

Q4) Refer to Figure 4-1.The movement from point A to point B on the graph shows a(n)

A)decrease in demand.

B)increase in demand.

C)decrease in quantity demanded.

D)increase in quantity demanded.

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Chapter 4: The Market Forces of Supply and Demand: Supply

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Q1) The sum of all the individual supply curves for a product is called

A)total supply.

B)market supply.

C)aggregate supply.

D)total output.

Q2) Refer to Figure 4-15.Which of the following would cause the supply curve to shift from Supply A to Supply C in the market for beach towels?

A)an increase in the price of beach towels

B)an expectation by firms that the price of beach towels will increase in the very near future

C)a decrease in the price of cotton

D)a decrease in the number of firms selling beach towels

Q3) Suppose there is an increase in the price of steel.We would expect the supply curve for steel beams to

A)shift rightward.

B)shift leftward.

C)become flatter.

D)remain unchanged.

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Chapter 4: The Market Forces of Supply and Demand:

Supply and Demand Together

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Q1) If consumers view cappuccinos and lattés as substitutes,what would happen to the equilibrium price and quantity of lattés if the price of cappuccinos rises?

A)Both the equilibrium price and quantity would increase.

B)Both the equilibrium price and quantity would decrease.

C)The equilibrium price would increase,and the equilibrium quantity would decrease.

D)The equilibrium price would decrease,and the equilibrium quantity would increase.

Q2) Refer to Figure 4-20.In this market,equilibrium price and quantity,respectively,are

A)$15 and 400 units.

B)$20 and 600 units.

C)$25 and 500 units.

D)$25 and 800 units.

Q3) If the supply of a product decreases,then we would expect equilibrium price

A)to increase and equilibrium quantity to decrease.

B)to decrease and equilibrium quantity to increase.

C)and equilibrium quantity to both increase.

D)and equilibrium quantity to both decrease.

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Chapter 4: The Market Forces of Supply and

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Q1) The signals that guide the allocation of resources in a market economy are A)surpluses and shortages.

B)quantities.

C)government policies.

D)prices.

Q2) Who gets scarce resources in a market economy?

A)the government

B)whoever the government decides gets them

C)whoever wants them

D)whoever is willing and able to pay the price

Q3) Adam Smith suggested that an invisible had guides market economies.In this analogy,what is the baton that the invisible hand uses to conduct the economic orchestra?

A)the government

B)prices

C)subsidies

D)the Federal Reserve

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Chapter 4: The Market Forces of Supply and Demand: Part

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Q1) Refer to Scenario 4-1.What is the equilibrium quantity in this market?

Q2) Suppose goods A and B are substitutes.If the price of good A increases,will the demand for good B increase or decrease?

Q3) If the demand for a good increases at the same time as the supply of the same good decreases,what will happen to the equilibrium price and quantity of the good?

Q4) If corn is an input into the production of ethanol,will a decrease in the price of corn increase the supply of ethanol or decrease the supply of ethanol?

Q5) Refer to Figure 4-30.In this market for iPhones,the technology improves while all other factors remain constant.Which curve(s)shift(s)and in which direction?

Q6) According to the law of demand,when price increases the quantity demanded of a good

Q7) If the price of steel,an input into the production of automobiles,rises,and at the same time the price of gasoline rises,what will happen to the equilibrium price and quantity of automobiles?

Q8) Studies show that lower cigarette prices are associated with greater use of marijuana;therefore,tobacco and marijuana are

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Chapter 4: The Market Forces of Supply and Demand: Part

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Sample Questions

Q1) The law of supply states that,other things equal,when the price of a good falls,the quantity supplied falls as well.

A)True

B)False

Q2) Most studies have found that tobacco and marijuana are substitutes rather than complements.

A)True

B)False

Q3) When Mario's income decreases,he buys more pasta.For Mario,pasta is a normal good.

A)True

B)False

Q4) If a company making frozen orange juice expects the price of its product to be higher next month,it will supply more to the market this month.

A)True

B)False

Q5) The law of demand is true for most goods in the economy.

A)True

B)False

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Chapter 5: Elasticity and Its Applications

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Q1) When studying how some event or policy affects a market,elasticity provides information on the

A)equity effects on the market by identifying the winners and losers.

B)magnitude of the effect on the market.

C)speed of adjustment of the market in response to the event or policy.

D)number of market participants who are directly affected by the event or policy.

Q2) When studying how some event or policy affects a market,elasticity provides information on the A)change in the costs of production.

B)tradeoff between equality and efficiency.

C)effect on the budget deficit or surplus.

D)direction and magnitude of the effect.

Q3) In general,elasticity is a measure of

A)the extent to which advances in technology are adopted by producers.

B)the extent to which a market is competitive.

C)how firms' profits respond to changes in market prices.

D)how much buyers and sellers respond to changes in market conditions.

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Chapter 5: Elasticity and Its Applications: The Elasticity of Demand

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Q1) For a good that is a necessity,demand

A)tends to be inelastic.

B)tends to be elastic.

C)has unit elasticity.

D)cannot be represented by a demand curve in the usual way.

Q2) Refer to Figure 5-4.Assume the section of the demand curve from A to B corresponds to prices between $6 and $12.Then,when the price increases from $8 to $10,

A)the percent decrease in the quantity demanded exceeds the percent increase in the price.

B)the percent increase in the price exceeds the percent decrease in the quantity demanded.

C)sellers' total revenue increases as a result.

D)it is possible that the quantity demanded fell from 550 to 500 as a result.

Q3) The case of perfectly elastic demand is illustrated by a demand curve that is A)vertical.

B)horizontal.

C)downward-sloping but relatively steep.

D)downward-sloping but relatively flat.

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Chapter 5: Elasticity and Its Applications: The Elasticity of Supply

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Q1) A key determinant of the price elasticity of supply is the time period under consideration.Which of the following statements best explains this fact?

A)Supply curves are steeper over long periods of time than over short periods of time.

B)Buyers of goods tend to be more responsive to price changes over long periods of time than over short periods of time.

C)The number of firms in a market tends to be more variable over long periods of time than over short periods of time.

D)Firms prefer to change their prices in the short run rather than in the long run.

Q2) When a supply curve is relatively flat,the

A)sellers are not at all responsive to a change in price.

B)equilibrium price changes substantially when the demand for the good changes.

C)supply is relatively elastic.

D)supply is relatively inelastic.

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Q1) Refer to Scenario 5-4.The equilibrium quantity will

A)increase in both the milk and beef markets.

B)increase in the milk market and decrease in the beef market.

C)decrease in the milk market and increase in the beef market.

D)decrease in both the milk and beef markets.

Q2) The discovery of a new hybrid wheat would increase the supply of wheat.As a result,wheat farmers would realize an increase in total revenue if the

A)supply of wheat is elastic.

B)supply of wheat is inelastic.

C)demand for wheat is inelastic.

D)demand for wheat is elastic.

Q3) Refer to Scenario 5-4.The equilibrium price will

A)increase in both the milk and beef markets.

B)increase in the milk market and decrease in the beef market.

C)decrease in the milk market and increase in the beef market.

D)decrease in both the milk and beef markets.

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Page 35

Chapter 5: Elasticity and Its Applications: Part A

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Q1) Suppose you manage a baseball stadium.To pay the salary for a star player,you would like to increase the total revenue from ticket sales.Should you increase or decrease the price of a ticket to increase revenue? Explain.

Q2) When the Shaffers had a monthly income of $4,000,they usually ate out 8 times a month.Now that the couple makes $4,500 a month,they eat out 10 times a month.Compute the couple's income elasticity of demand using the midpoint method.Explain your answer.Is a restaurant meal a normal or inferior good to the couple?

Q3) What is the price elasticity of demand at any point on a perfectly inelastic demand curve?

Q4) Suppose the price elasticity of demand for a product is 1.3.If a supplier wants to increase revenue,what change should it make to price,if any?

Q5) Refer to Scenario 5-6.Using the midpoint method,what is the cross price elasticity of demand for landline and mobile service?

Q6) Suppose that good X has few close substitutes and that good Y has many close substitutes.Which good would you expect to have more price inelastic demand?

Q7) Refer to Scenario 5-2.Good X and Good Y are related as

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Chapter 5: Elasticity and Its Applications: Part B

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Q1) An advantage of using the midpoint method to calculate the price elasticity of demand is that it uses the metric system.

A)True

B)False

Q2) Measures of elasticity enhance our ability to study the magnitudes of changes in quantities in response to changes in prices or income.

A)True

B)False

Q3) Suppose that when the price rises by 20% for a particular good,the quantity demanded of that good falls by 10%.The price elasticity of demand for this good is equal to 2.0.

A)True

B)False

Q4) A government program that pays farmers not to plant corn on part of their land can help farmers not only through the subsidy payments to farmers who participate in the program but also by raising the market price of corn.

A)True

B)False

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Chapter 6: Supply Demand and Government Policies

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Q1) Policymakers use taxes

A)to raise revenue for public purposes but not to influence market outcomes.

B)both to raise revenue for public purposes and to influence market outcomes.

C)when they realize that price controls alone are insufficient to correct market inequities.

D)only in those markets in which the burden of the tax falls clearly on the sellers.

Q2) Price controls

A)always produce a fair outcome.

B)always produce an efficient outcome.

C)can generate inequities of their own.

D)All of the above are correct.

Q3) Rent-control laws dictate

A)the exact rent that landlords must charge tenants.

B)a maximum rent that landlords may charge tenants.

C)a minimum rent that landlords may charge tenants.

D)both a minimum rent and a maximum rent that landlords may charge tenants.

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Chapter 6: Supply Demand and Government Policies:

Controls on Prices

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Q1) Refer to Figure 6-13.If the government imposes a price floor of $7 on this market,then there will be

A)no surplus.

B)a surplus of 10 units.

C)a surplus of 15 units.

D)a surplus of 20 units.

Q2) Which of the following is the most likely explanation for the imposition of a price floor on the market for corn?

A)Policymakers have studied the effects of the price floor carefully,and they recognize that the price floor is advantageous for society as a whole.

B)Buyers and sellers of corn have agreed that the price floor is good for both of them and have therefore pressured policy makers into imposing the price floor.

C)Buyers of corn,recognizing that the price floor is good for them,have pressured policymakers into imposing the price floor.

D)Sellers of corn,recognizing that the price floor is good for them,have pressured policymakers into imposing the price floor.

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Chapter 6: Supply Demand and Government Policies: Taxes

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Q1) The mayor of Workerville proposes a local payroll tax to fund a new water park for the city.The mayor proposes to collect half the tax from workers and half the tax from firms.Workers will bear

A)an equal share of the tax in comparison to firms.

B)a greater share of the tax in comparison to firms.

C)a smaller share of the tax in comparison to firms.

D)All of the above are possible.

Q2) When a tax is levied on buyers of tea,

A)buyers of tea and sellers of tea both are made worse off.

B)buyers of tea are made worse off,and the well-being of sellers is unaffected.

C)buyers of tea are made worse off,and sellers of tea are made better off.

D)the well-being of both buyers of tea and sellers of tea is unaffected.

Q3) The tax burden will fall most heavily on sellers of the good when the demand curve

A)is relatively steep,and the supply curve is relatively flat.

B)is relatively flat,and the supply curve is relatively steep.

C)and the supply curve are both relatively flat.

D)and the supply curve are both relatively steep.

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Page 40

Chapter 6: Supply Demand and Government Policies: Part

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Q1) Refer to Figure 6-34.If the government imposes a tax of $6 per unit in this market,what price will buyers pay per unit after the tax is imposed?

Q2) Refer to Figure 6-33.Suppose a $3 per-unit tax is imposed on the sellers of this good.How much is the burden of this tax on the sellers in this market?

Q3) Refer to Scenario 6-1.If the government set a price floor at $7,would there be a shortage or surplus,and how large would be the shortage/surplus?

Q4) Refer to Scenario 6-1.What are the equilibrium price and quantity in the market for good X?

Q5) Refer to Figure 6-31.If the government set a price floor at $9,would there be a shortage or surplus,and how large would be the shortage/surplus?

Q6) Refer to Figure 6-31.If the government set a price ceiling at $9,would there be a shortage or surplus,and how large would be the shortage/surplus?

Q7) Refer to Scenario 6-1.If the government set a price ceiling at $8,would there be a shortage or surplus,and how large would be the shortage/surplus?

Q8) Does a binding price ceiling result in a shortage or a surplus in the market?

Page 41

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Chapter 6: Supply Demand and Government Policies: Part B

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Sample Questions

Q1) Workers with high skills and much experience are not typically affected by the minimum wage.

A)True

B)False

Q2) The distribution of the burden of a tax depends strictly on the elasticity of supply.

A)True

B)False

Q3) If a tax is imposed on the buyers of a product,then the tax burden will fall entirely on the buyers.

A)True

B)False

Q4) A binding price ceiling may not help all consumers,but it does not hurt any consumers.

A)True

B)False

Q5) A tax on sellers reduces the size of a market.

A)True

B)False

Page 42

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Chapter 7: Consumers Producers and the Efficiency of Markets

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Sample Questions

Q1) Which of the Ten Principles of Economics does welfare economics explain more fully?

A)The cost of something is what you give up to get it.

B)Markets are usually a good way to organize economic activity.

C)Trade can make everyone better off.

D)A country's standard of living depends on its ability to produce goods and services.

Q2) The study of how the allocation of resources affects economic well-being is called A)consumer economics.

B)macroeconomics.

C)willingness-to-pay economics.

D)welfare economics.

Q3) Which of the following statements is correct?

A)Buyers always want to pay less and sellers always want to be paid more.

B)Buyers always want to pay less and sellers always want to be paid less.

C)Buyers always want to pay more and sellers always want to be paid more.

D)Buyers always want to pay more and sellers always want to be paid less.

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43

Chapter 7: Consumers Producers and the Efficiency of

Markets: Consumer Surplus

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Sample Questions

Q1) Refer to Figure 7-1.If the price of the good is $200,then

A)consumer surplus is $150.

B)consumer surplus is $650.

C)producer surplus is $650.

D)producer surplus is $750.

Q2) Refer to Figure 7-3.When the price rises from P1 to P2,consumer surplus

A)increases by an amount equal to A.

B)decreases by an amount equal to B+C.

C)increases by an amount equal to B+C.

D)decreases by an amount equal to C.

Q3) Refer to Figure 7-4.When the price falls from P1 to P2,which area represents the increase in consumer surplus to existing buyers?

A)BDF

B)AFG

C)BCGD

D)ABC

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44

Chapter 7: Consumers Producers and the Efficiency of

Markets: Producer Surplus

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Sample Questions

Q1) Refer to Figure 7-16.If the price of the good is $600,then

A)consumer surplus is $800.

B)consumer surplus is $900.

C)producer surplus is $900.

D)producer surplus is $1,000.

Q2) David tunes pianos in his spare time for extra income.Buyers of his service are willing to pay $135 per tuning.One particular week,David is willing to tune the first piano for $115,the second piano for $125,the third piano for $140,and the fourth piano for $175.Assume David is rational in deciding how many pianos to tune.His producer surplus is

A)$-15.

B)$20.

C)$30.

D)$75.

Q3) A seller's opportunity cost measures the A)value of everything she must give up to produce a good. B)amount she is paid for a good minus her cost of providing it.

C)consumer surplus.

D)out of pocket expenses to produce a good but not the value of her time.

Page 45

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Chapter 7: Consumers Producers and the Efficiency of

Markets: Market Efficiency

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Q1) Producer surplus equals the A)value to buyers minus the amount paid by buyers.

B)value to buyers minus the cost to sellers.

C)amount received by sellers minus the cost to sellers.

D)amount received by sellers minus the amount paid by buyers.

Q2) Consumer surplus equals the A)value to buyers minus the amount paid by buyers.

B)value to buyers minus the cost to sellers.

C)amount received by sellers minus the cost to sellers.

D)amount received by sellers minus the amount paid by buyers.

Q3) Refer to Figure 7-27.Buyers who value this good less than the equilibrium price are represented by which line segment?

A)AC.

B)CK.

C)BC.

D)CH.

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Chapter 7: Consumers Producers and the Efficiency of

Markets: Conclusion Market Efficiency and Market Failure

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Q1) Inefficiency can be caused in a market by the presence of A)market power.

B)externalities.

C)imperfectly competitive markets.

D)All of the above are correct.

Q2) Market power refers to the

A)side effects that may occur in a market.

B)government regulations imposed on the sellers in a market.

C)ability of market participants to influence price.

D)forces of supply and demand in determining equilibrium price.

Q3) Externalities are

A)side effects passed on to a party other than the buyers and sellers in the market.

B)side effects of government intervention in markets.

C)external forces that cause the price of a good to be higher than it otherwise would be.

D)external forces that help establish equilibrium price.

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Chapter 7: Consumers Producers and the Efficiency of

Markets: Part A

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Q1) Refer to Figure 7-33.How much is total surplus in this market at the equilibrium price?

Q2) Refer to Scenario 7-1.If the market equilibrium price falls from $10 to $5,how much consumer surplus do consumers entering the market after the price drop receive?

Q3) Refer to Scenario 7-1.If the market equilibrium price falls from $10 to $5,how much additional consumer surplus do consumers initially in the market at the $10 price receive?

Q4) Refer to Figure 7-31.If the market equilibrium price rises from $25 to $35,how much is the producer surplus for the producers entering the market after the price increase?

Q5) Refer to Scenario 7-2.How much is total surplus at the equilibrium price in this market?

Q6) Refer to Scenario 7-2.How much is total consumer surplus at the equilibrium price in this market?

Q7) Refer to Figure 7-33.Suppose demand shifts such that consumers wish to purchase 12 fewer units at every price.How much is total producer surplus in this market at the new equilibrium price?

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Chapter 7: Consumers Producers and the Efficiency of

Markets: Part B

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Q1) For any given quantity,the price on a demand curve represents the marginal buyer's willingness to pay.

A)True

B)False

Q2) If the government imposes a binding price floor in a market,then the consumer surplus in that market will increase.

A)True

B)False

Q3) The willingness to pay is the maximum amount that a buyer will pay for a good and measures how much the buyer values the good.

A)True

B)False

Q4) Suppose there is an increase in supply that reduces market price.Consumer surplus increases because (1)consumer surplus received by existing buyers increases and (2)new buyers enter the market.

A)True

B)False

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Chapter 8: Application the Cost of Taxation

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Q1) To fully understand how taxes affect economic well-being,we must compare the A)consumer surplus to the producer surplus.

B)price paid by buyers to the price received by sellers.

C)reduced welfare of buyers and sellers to the revenue raised by the government.

D)consumer surplus to the deadweight loss.

Q2) Anger over British taxes played a significant role in bringing about the A)election of John Adams as the second American president.

B)American Revolution.

C)War of 1812.

D)"no new taxes" clause in the U.S.Constitution.

Q3) In 1776,the American Revolution was sparked by anger over A)the extravagant lifestyle of British royalty.

B)the crimes of British soldiers stationed in the American colonies.

C)British taxes imposed on the American colonies.

D)the failure of the British to protect American colonists from attack by hostile Native Americans.

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Chapter 8: Application the Cost of Taxation: The

Deadweight Loss of Taxation

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Q1) Refer to Figure 8-7.As a result of the tax,buyers effectively pay

A)$32 for each unit of the good,and sellers effectively receive $24 for each unit of the good.

B)$32 for each unit of the good,and sellers effectively receive $16 for each unit of the good.

C)$24 for each unit of the good,and sellers effectively receive $16 for each unit of the good.

D)$28 for each unit of the good,and sellers effectively receive $20 for each unit of the good.

Q2) Refer to Figure 8-8.The decrease in consumer and producer surpluses that is not offset by tax revenue is the area

A)C.

B)F.

C)G.

D)C+F.

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Chapter 8: Application the Cost of Taxation: The Determinants of

the Deadweight

Loss

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Q1) Refer to Figure 8-15.Panel (a)and Panel (b)each illustrate a $4 tax placed on a market.In comparison to Panel (b),Panel (a)illustrates which of the following statements?

A)When demand is relatively inelastic,the deadweight loss of a tax is smaller than when demand is relatively elastic.

B)When demand is relatively elastic,the deadweight loss of a tax is larger than when demand is relatively inelastic.

C)When supply is relatively inelastic,the deadweight loss of a tax is smaller than when supply is relatively elastic.

D)When supply is relatively elastic,the deadweight loss of a tax is larger than when supply is relatively inelastic.

Q2) As more people become self-employed,which allows them to determine how many hours they work per week,we would expect the deadweight loss from the Social Security tax to

A)increase,and the revenue generated from the tax to increase.

B)increase,and the revenue generated from the tax to decrease.

C)decrease,and the revenue generated from the tax to increase.

D)decrease,and the revenue generated from the tax to decrease.

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Page 52

Chapter 8: Application the Cost of Taxation: Deadweight

Loss and Tax Revenue As Taxes Vary

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Sample Questions

Q1) Refer to Figure 8-21.Suppose the market is represented by Demand 1 and Supply 1.At first the government places a $3 per-unit tax on this good.Then the government decides to raise the tax to $6 per unit.Compared to the original tax rate,the higher tax will

A)increase tax revenue and increase the deadweight loss from the tax.

B)not change tax revenue and increase the deadweight loss from the tax.

C)decrease tax revenue and increase the deadweight loss from the tax.

D)decrease tax revenue and decrease the deadweight loss from the tax.

Q2) Suppose the tax on gasoline is decreased from $0.60 per gallon to $0.40 per gallon.As a result,

A)tax revenue necessarily decreases.

B)the deadweight loss of the tax necessarily decreases.

C)the demand curve for gasoline necessarily becomes steeper.

D)the supply curve for gasoline necessarily becomes flatter.

Q3) When a country is on the downward-sloping side of the Laffer curves,a cut in the tax rate will

A)decrease tax revenue and decrease the deadweight loss.

B)decrease tax revenue and increase the deadweight loss.

C)increase tax revenue and decrease the deadweight loss.

D)increase tax revenue and increase the deadweight loss.

Page 53

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Chapter 8: Application the Cost of Taxation: Conclusion

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Q1) Taxes are costly to market participants because they A)transfer resources from market participants to the government.

B)alter incentives.

C)distort market outcomes.

D)All of the above are correct.

Q2) Taxes are of interest to

A)microeconomists because they consider how to balance equality and efficiency.

B)microeconomists because they consider how best to design a tax system.

C)macroeconomists because they consider how policymakers can use the tax system to stabilize economic activity.

D)All of the above are correct.

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Chapter 8: Application the Cost of Taxation: Part A

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Sample Questions

Q1) Refer to Figure 8-25.Suppose the government places a $4 tax per unit on this good.How much is producer surplus after the tax is imposed?

Q2) Suppose that the market for product X is characterized by a typical,downward-sloping,linear demand curve and a typical,upward-sloping,linear supply curve.If a $2 tax per unit results in a deadweight loss of $200,how large would be the deadweight loss from a $4 tax per unit?

Q3) Refer to Figure 8-25.Suppose the government places a $4 tax per unit on this good.How much is the deadweight loss from this tax?

Q4) Refer to Figure 8-26.Suppose the government places a $3 tax per unit on this good.What price will consumers pay for the good after the tax is imposed?

Q5) Refer to Figure 8-26.What are the equilibrium price and equilibrium quantity in this market?

Q6) Refer to Figure 8-29.If you were a policymaker choosing between a $3,$6,or $9 tax,which would you choose and why?

Q7) The demand for energy drinks is more elastic than the demand for milk.Would a tax on energy drinks or a tax on milk have a larger deadweight loss? Explain.

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Page 55

Chapter 8: Application the Cost of Taxation: Part B

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Sample Questions

Q1) Tax revenues increase in direct proportion to increases in the size of the tax.

A)True

B)False

Q2) The larger the deadweight loss from taxation,the larger the cost of government programs.

A)True

B)False

Q3) Economist Arthur Laffer made the argument that tax rates in the United States were so high that reducing the rates would increase tax revenue.

A)True

B)False

Q4) Economists use the government's tax revenue to measure the public benefit from a tax.

A)True

B)False

Q5) Taxes affect market participants by increasing the price paid by the buyer and decreasing the price received by the seller.

A)True

B)False

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Chapter 9: Application International Trade

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Q1) Which of the following is not an important question for economic policy raised by the experience of the textile industry?

A)How does international trade affect consumer well-being?

B)Who gains and who loses from free trade among countries?

C)How do the gains from trade compare to the losses?

D)Which argument for restricting free trade is politically feasible?

Q2) A logical starting point from which the study of international trade begins is

A)the recognition that not all markets are competitive.

B)the recognition that government intervention in markets sometimes enhances the economic welfare of the society.

C)the principle of absolute advantage.

D)the principle of comparative advantage.

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Chapter 9: Application International Trade: The

Determinants of Trade

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Q1) Suppose the nation of Canada forbids international trade.In Canada,you can obtain a hockey stick by trading 5 baseball bats.In other countries,you can obtain a hockey stick by trading 8 baseball bats.These facts indicate that

A)if Canada were to allow trade,it would export hockey sticks.

B)Canada has an absolute advantage,relative to other countries,in producing hockey sticks.

C)Canada has a comparative advantage,relative to other countries,in producing baseball bats.

D)All of the above are correct.

Q2) The nation of Wheatland forbids international trade.In Wheatland,you can buy 1 pound of corn for 3 pounds of fish.In other countries,you can buy 1 pound of corn for 2 pounds of fish.These facts indicate that

A)Wheatland has a comparative advantage,relative to other countries,in producing corn.

B)other countries have a comparative advantage,relative to Wheatland,in producing fish.

C)the price of fish in Wheatland exceeds the world price of fish.

D)if Wheatland were to allow trade,it would import corn.

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Chapter 9: Application International Trade: The Winners

and Losers From Trade

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Q1) Refer to Scenario 9-2.If Boxland prohibits international trade in cardboard,then the equilibrium price of a ton of cardboard is

A)$36 and the equilibrium quantity of cardboard is 74 tons.

B)$44 and the equilibrium quantity of cardboard is 88 tons.

C)$52 and the equilibrium quantity of cardboard is 96 tons.

D)$60 and the equilibrium quantity of cardboard is 100 tons.

Q2) When a country abandons a no-trade policy,adopts a free-trade policy,and becomes an exporter of a particular good,

A)consumer surplus increases and total surplus increases in the market for that good.

B)consumer surplus increases and total surplus decreases in the market for that good.

C)consumer surplus decreases and total surplus increases in the market for that good.

D)consumer surplus decreases and total surplus decreases in the market for that good.

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Chapter 9: Application International Trade: The Arguments for Restricting Trade

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Q1) A common argument in favor of restricting trade

A)concerns the strategy of bargaining.

B)is that efforts should be made to get new industries started.

C)emphasizes the belief that all countries should play by the same rules.

D)All of the above are correct.

Q2) Which of the following is the most accurate statement?

A)The one argument for restricting trade that almost all economists accept as valid is the infant-industry argument.

B)Almost all economists insist that it is never appropriate to protect "key" industries,even when there are legitimate concerns about national security.

C)The idea that one nation might want to threaten another nation with a trade restriction is associated with the protection-as-a-bargaining-chip argument for restricting trade.

D)The protection-as-a-bargaining-chip argument for restricting trade is also known as the infant-industry argument.

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Chapter 9: Application International Trade: Conclusion

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Q1) Most economists view the United States' experience with trade as

A)one from which no firm conclusions about the virtues of free trade can be reached,due to the relatively short history of international trade in the U.S.

B)one from which no firm conclusions about the virtues of free trade can be reached,due to the lack of trade within the U.S.throughout most of the early history of the U.S.

C)an ongoing experiment that confirms the virtues of free trade.

D)an ongoing experiment that calls into serious question the notion that free trade enhances the economic well-being of a nation.

Q2) Economists view the fact that Florida grows oranges,Texas pumps oil,and California makes wine as

A)confirmation of the virtues of free trade.

B)confirmation of the infant-industry argument.

C)confirmation that free trade agreements are not necessary.

D)confirmation that specialization in absolute advantage works.

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Chapter 9: Application International Trade: Part A

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Q1) Refer to Figure 9-26.Suppose the world price in this market is $7.If the country allows free trade,by how much do consumer surplus,producer surplus,and total surplus change with trade?

Q2) Refer to Figure 9-29.Suppose the country imposes a $1 per unit tariff.If the country allows trade with a tariff,how much is total surplus?

Q3) Refer to Scenario 9-3.Suppose the world price in this market is $8 per unit.If the country allows free trade,how much are consumer surplus,producer surplus,and producer surplus with trade?

Q4) Refer to Figure 9-29.Suppose the country imposes a $1 per unit tariff.If the country allows trade with a tariff,how much is tariff revenue?

Q5) Refer to Figure 9-29.If the country allows free trade,how much are consumer surplus,producer surplus,and total surplus with trade?

Q6) Suppose the world price of coffee is $2 per pound and Brazil's domestic price of coffee without trade is $3 per pound.If Brazil allows free trade,will Brazil be an importer or an exporter of coffee?

Q7) Refer to Figure 9-27.If the country allows free trade,how much are consumer surplus,producer surplus,and total surplus with trade?

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Chapter 9: Application International Trade: Part B

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Q1) Imposing a tariff on the import of a good is preferable to a quota because a tariff produces revenue for the government,while a quota never produces any revenue for a government.

A)True

B)False

Q2) The nation of Cranolia used to prohibit international trade,but now trade is allowed,and Cranolia is exporting furniture.Relative to the previous no-trade situation,buyers of furniture in Cranolia are now better off.

A)True

B)False

Q3) When markets open up to international trade,we know that total surplus will rise.

A)True B)False

Q4) Economists view free trade as a way to raise living standards both at home and abroad.

A)True

B)False

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Chapter 10: Measuring a Nations Income

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Q1) Which of the following questions is more likely to be studied by a microeconomist than a macroeconomist?

A)Why do prices in general rise by more in some countries than in others?

B)Why do wages differ across industries?

C)Why do national production and income increase in some periods and not in others?

D)How rapidly is GDP currently increasing?

Q2) A macroeconomist is interested in

A)explaining how changes in sellers' behavior affect prices of a particular good.

B)explaining price changes in a particular market.

C)explaining why the unemployment rate is higher.

D)All of the above are correct.

Q3) Which of the following statistics is usually regarded as the best single measure of a society's economic well-being?

A)the unemployment rate

B)the inflation rate

C)gross domestic product

D)the trade deficit

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64

Chapter 10: Measuring a Nations Income: The Economy's

Income and Expenditure

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Q1) In a simple circular-flow diagram,

A)households spend all of their income.

B)all goods and services are bought by households.

C)expenditures flow through the markets for goods and services,while income flows through the markets for the factors of production.

D)All of the above are correct.

Q2) For an economy as a whole,

A)wages must equal profit.

B)consumption must equal income.

C)income must equal expenditure.

D)consumption must equal saving.

Q3) For an economy as a whole,income must equal expenditure because

A)the number of firms is equal to the number of households in an economy.

B)individuals can only spend what they earn each period.

C)every dollar of spending by some buyer is a dollar of income for some seller.

D)every dollar of saving by some consumer is a dollar of spending by some other consumer.

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Page 65

Chapter 10: Measuring a Nations Income: The Measurement

of GDP

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Sample Questions

Q1) Al's Aluminum Company sells $1 million worth of aluminum to Shiny Foil Company,which uses the aluminum to make aluminum foil.Shiny Foil Company sells $4 million worth of aluminum foil to households.The transactions just described contribute how much to GDP?

A)$1 million

B)$3 million

C)$4 million

D)$5 million

Q2) A steel company sells some steel to a bicycle company for $150.The bicycle company uses the steel to produce a bicycle,which it sells for $250.Taken together,these two transactions contribute

A)$150 to GDP.

B)$250 to GDP.

C)between $250 and $400 to GDP,depending on the profit earned by the bicycle company when it sold the bicycle.

D)$400 to GDP.

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Chapter 10: Measuring a Nations Income: The Components of GDP

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Sample Questions

Q1) Net exports equal

A)exports plus imports.

B)exports minus imports.

C)imports minus exports.

D)GDP minus imports.

Q2) Household spending on education is included in

A)consumption,although it might be argued that it would fit better in investment.

B)investment,although it might be argued that it would fit better in consumption.

C)government spending,based on the fact that most higher-education students attend publicly-supported colleges and universities.

D)None of the above is correct;in general,household spending on services is not included in any component of GDP.

Q3) Which of the following subcomponents of GDP can be either positive or negative?

A)inventory investment

B)exports

C)government purchases

D)All of the above are correct.

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Page 67

Chapter 10: Measuring a Nations Income: Real Versus

Nominal GDP

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Sample Questions

Q1) Nominal GDP will definitely increase when

A)prices increase and output increases.

B)prices increase and output decreases.

C)prices decrease and output increases.

D)All of the above are correct.

Q2) Suppose an economy produces only eggs and ham.In 2009,100 dozen eggs are sold at $3 per dozen and 50 pounds of ham sold at $4 per pound.In 2010,the base year,eggs sold at $1.50 per dozen and ham sold at $5 per pound.For 2009,

A)nominal GDP is $400,real GDP is $500,and the GDP deflator is 80.

B)nominal GDP is $400,real GDP is $500,and the GDP deflator is 125.

C)nominal GDP is $500,real GDP is $400,and the GDP deflator is 80.

D)nominal GDP is $500,real GDP is $400,and the GDP deflator is 125.

Q3) A country reported nominal GDP of $100 billion in 2010 and $75 billion in 2009.It also reported a GDP deflator of 125 in 2010 and 120 in 2009.Between 2009 and 2010,

A)real output and the price level both rose.

B)real output rose and the price level fell.

C)real output fell and the price level rose.

D)real output and the price level both fell.

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Chapter 10: Measuring a Nations Income: Is GDP a Good Measure of Economic Well-Being

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Sample Questions

Q1) GDP is not a perfect measure of well-being;for example,

A)GDP excludes the value of volunteer work.

B)GDP does not address the distribution of income.

C)GDP does not address environmental quality.

D)All of the above are correct.

Q2) Many things that society values,such as good health,high-quality education,enjoyable recreation opportunities,and desirable moral attributes of the population,are not measured as part of GDP.It follows that

A)GDP is not a useful measure of society's welfare.

B)GDP is still a useful measure of society's welfare because providing these other attributes is the responsibility of government.

C)GDP is still a useful measure of society's welfare because it measures a nation's ability to purchase the inputs that can be used to help produce the things that contribute to welfare.

D)GDP is still the best measure of society's welfare because these other values cannot actually be measured.

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69

Chapter 10: Measuring a Nations Income: Part A

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Sample Questions

Q1) What three types of goods are included in investment spending?

Q2) Last quarter Newton computers produced 3,000 computers.Two thousand of these computers were sold to households,750 were sold to businesses,and 250 were added to Newton's inventory.How many of the computers should have been included in last quarter's GDP?

Q3) GDP excludes most of two types of production.List one.

Q4) The U.S.buys $500 billion of goods and $250 billion of services from foreign countries.Foreign countries buy $250 billion of goods and $300 billion of services from the U.S.What is net exports?

Q5) Calculate GDP for a country with investment of $2 trillion,government purchases of $3 trillion,capital depreciation of $1.5 trillion,consumption of $10 trillion,exports of $3.4 trillion,and imports of $3.9 trillion.

Q6) Nominal GDP is $15 trillion and real GDP is $10 trillion.What is the GDP deflator? Show your work.

Q7) GDP is defined as the market value of all final goods and services produced within a country in a given period of time.In spite of this definition,some production is left out of GDP.Explain why some final goods and services are not included.

Q8) How frequently is U.S.GDP reported? Is GDP adjusted for seasonality?

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Chapter 10: Measuring a Nations Income: Part B

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Sample Questions

Q1) GDP is the market value of all final goods and services produced by a country's citizens in a given period of time.

A)True

B)False

Q2) If a firm produces a good and then adds it to its inventory rather than selling it,for the purposes of GDP accounting the firm is considered to have "purchased" the good so it will count as part of that period's investment expenditures.

A)True

B)False

Q3) Additions to inventory subtract from GDP,and when the goods in inventory are sold,the reductions in inventory add to GDP.

A)True

B)False

Q4) The advantage of real GDP as a measure is the fact that it only increases.

A)True

B)False

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Chapter 11: Measuring the Cost of Living

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Q1) When the consumer price index rises,the typical family

A)has to spend more dollars to maintain the same standard of living.

B)can spend fewer dollars to maintain the same standard of living.

C)finds that its standard of living is not affected.

D)can offset the effects of rising prices by saving more.

Q2) The consumer price index is used to

A)convert nominal GDP into real GDP.

B)turn dollar figures into meaningful measures of purchasing power.

C)characterize the types of goods and services that consumers purchase.

D)measure the quantity of goods and services that the economy produces.

Q3) Which of the following statements is correct?

A)The CPI can be used to compare dollar figures from different points in time.

B)The percentage change in the CPI is a measure of the inflation rate,but the percentage change in the GDP deflator is not a measure of the inflation rate.

C)Compared to the consumer price index (CPI),the GDP deflator is the more common gauge of inflation.

D)The GDP deflator better reflects the goods and services bought by consumers than does the CPI.

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Chapter 11: Measuring the Cost of Living: The Consumer Price Index

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Q1) In addition to the consumer price index,the Bureau of Labor Statistics also calculates the

A)macroeconomic price index.

B)producer price index.

C)rental unit price index.

D)terms of trade.

Q2) In the basket of goods that is used to compute the consumer price index,which of the following categories of consumer spending is the largest?

A)education & communication

B)recreation

C)medical care

D)All of the above categories are about equal in magnitude.

Q3) For some racquet sports,there have been increases in the size of the racquets;also,the methods and materials used for making racquets have improved.To which problem in the construction of the CPI is this situation most relevant?

A)substitution bias

B)introduction of new goods

C)unmeasured quality change

D)income bias

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Chapter 11: Measuring the Cost of Living: Correcting

Economic Variables for the Effects of Inflation

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Sample Questions

Q1) Pauline is offered a Job in Minneapolis that pays $80,000.She is offered a similar job in Louisville that pays $71,200.Which pair of CPIs would ensure that the two salaries have the same purchasing power?

A)90 in Minneapolis and 83 in Louisville

B)90 in Minneapolis and 72 in Louisville

C)100 in Minneapolis and 89 in Louisville

D)105 in Minneapolis and 90 in Louisville

Q2) Refer to Scenario 24-3.In real terms,Josh Holloway's income amounts to about what percentage of Sue Holloway's income?

A)71 percent

B)141 percent

C)165 percent

D)198 percent

Q3) Dewey earned a salary of $75,000 in 2001 and $95,000 in 2006.The consumer price index was 177 in 2001 and 266 in 2006.Dewey's 2006 salary in 2001 dollars is

A)$47,768.36.

B)$63,214.29.

C)$84,550.00.

D)$142,768.36.

Page 74

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Chapter 11: Measuring the Cost of Living: Part A

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Q1) Michael Jordan's rookie salary in 1984 was $550,000.The CPI in 1984 was 103.9,while the CPI in 2010 was 218.1.What is Michael Jordan's rookie salary in 2010 dollars?

Q2) If the real interest rate is 6.8% and the inflation rate is 3.9%,what is the nominal interest rate?

Q3) What measure reflects the overall cost of goods and services produced domestically?

Q4) If the real value of an item bought ten years ago is less than it's nominal value at that time,what can one infer about the change in the overall price level during this ten year period?

Q5) Consumer spending in what category is the largest component of the CPI?

Q6) Suppose that the price of one gallon of milk was $0.25 in 1950,that the CPI in 1950 was 25,and that in 2000 the CPI was 200.What is the price of a 1950 gallon of milk in 2000 dollars?

Q7) Suppose that the price of one ear of corn was $0.05 in 1920,that the CPI in 1920 was 10,and that in 1990 the CPI was 180.What is the price of a 1920 ear of corn in 1990 dollars?

Q8) If the CPI was 120 in 1994,was 126 in 1995,and was 134.82 in 1996,what was the inflation rate in 1995 and in 1996?

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Chapter 11: Measuring the Cost of Living: Part B

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Sample Questions

Q1) In a period of inflation real interest rates will be greater than nominal interest rates.

A)True

B)False

Q2) Substitution bias occurs because the CPI ignores the possibility of consumer substitution toward goods that have become relatively less expensive.

A)True

B)False

Q3) The Bureau of Labor Statistics surveys consumers to determine a fixed basket of goods.

A)True

B)False

Q4) Kristine has a savings account at a bank.If the nominal interest rate she earns exceeds the rate of inflation,then her purchasing power increases over time.

A)True

B)False

Q5) The CPI is always 1 in the base year.

A)True

B)False

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Chapter 12: Production and Growth

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Q1) In which of the following countries did real GDP per person fall by about 13% from 2000 to 2014?

A)India

B)Singapore

C)Zimbabwe

D)None of the above are correct.

Q2) Average income in some East Asian countries,as measured by real GDP per person,has recently grown at an average annual rate that implies income will double about every

A)10 years.

B)15 years.

C)20 years.

D)25 years.

Q3) Which of the following countries has had the greatest productivity per worker within the last ten years?

A)Germany

B)Nigeria

C)Nicaragua

D)India

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Page 77

Chapter 12: Production and Growth: Economic Growth

Around the World

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Sample Questions

Q1) Countries that grew the fastest over the last 100 or so years had average growth rates of real income per person of about

A)1.5 percent per year.

B)2.0 percent per year.

C)2.5 percent per year.

D)3.0 percent per year.

Q2) Which of the following measures how the level of well-being in a country has changed over time?

A)level of nominal GDP per person.

B)growth rate of nominal GDP.

C)growth rate of real GDP.

D)growth rate of real GDP per person.

Q3) Which of the following is higher in Mali than in the United Kingdom?

A)Modern sanitation access

B)Income per person

C)Child mortality

D)Percent of the population enrolled in college

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Page 78

Chapter 12: Production and Growth: Productivity Its Role and Determinants

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Q1) Which of the following is a determinant of productivity?

A)human capital per worker

B)physical capital per worker

C)natural resources per worker

D)All of the above are correct.

Q2) Which of the following is correct?

A)Once adjustment is made for inflation,the prices of most natural resources have been about steady or falling.

B)Technological progress has allowed us to substitute renewable resources for some nonrenewable resources.

C)Technological progress has made once-crucial natural resources less necessary.

D)All of the above are correct.

Q3) In one day Madison Laundry washed 4,000 pounds of laundry with 5 workers who each worked 8 hours.What was its productivity?

A)4000 pounds of laundry

B)500 pounds of laundry per hour

C)100 pounds of laundry per hour

D)None of the above is correct.

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Chapter 12: Production and Growth: Economic Growth and Public Policy

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Q1) Which of the following is generally an opportunity cost of investment in human capital?

A)future job security

B)forgone present wages

C)increased earning potential

D)All of the above are correct.

Q2) Which of the following statements is correct?

A)In an economy-wide sense,property rights are an important prerequisite for the price system to work.

B)Property rights give people the ability to exercise authority over the resources they own.

C)Based on the available evidence,the existence of well-established and well-enforced property rights appears to be associated with an enhanced standard of living.

D)All of the above are correct.

Q3) If there are diminishing returns to capital,then

A)capital produces fewer goods as it ages.

B)old ideas are not as useful as new ones.

C)increases in the capital stock eventually decrease output.

D)increases in the capital stock increase output by ever smaller amounts.

Page 80

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Chapter 12: Production and Growth: Conclusion the

Importance of Long-Run Growth

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Q1) In order to promote growth in living standards,policymakers must A)protect property rights.

B)maintain political stability.

C)encourage the accumulation of factors of production.

D)All of the above

Q2) Economists differ in their views of the role of the government in promoting economic growth.A controversial idea is that government should A)lend support to the invisible hand by maintaining property rights and political stability. B)lower barriers and impediments to free trade.

C)encourage capital formation.

D)target and subsidize specific industries important for technological progress.

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Chapter 12: Production and Growth: Part A

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Q1) Refer to Figure 25-1.In order for the figure to make sense,do we have to assume that capital is the only determinant of output? Briefly explain.

Q2) What term do we use to refer to the understanding of the best ways to produce goods and services?

Q3) The catch-up effect says that countries with low income can grow faster than countries with higher income.However,in statistical studies that include many diverse countries we do not observe the catch-up-effect unless we control for other variables that affect productivity.Considering the determinants of productivity,list and explain some things that would tend to prohibit or limit a poor country's ability to catch up with the rich ones.

Q4) Why do we refer to physical capital as a produced factor of production?

Q5) Refer to Figure 25-1."When the amount of capital per worker increases by one unit,a poor country experiences a greater benefit than does a rich country." Does the figure illustrate this notion? Briefly explain.

Q6) When a country eliminates tariffs and other trade restrictions, intending to promote economic growth, it is pursuing _______ oriented policies.

Q7) Compare and contrast the population theories of Malthus and Kremer.

Q8) List the four determinants of an economy's productivity.

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Chapter 12: Production and Growth: Part B

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Q1) If your company opens and operates a branch in a foreign country,your company engages in foreign direct investment.

A)True

B)False

Q2) Assuming constant returns to scale,if two countries are otherwise the same,the one that is poorer grows faster.

A)True

B)False

Q3) Real GDP per person in rich countries,such as Germany,is sometimes more than 10 times that of poor countries like India.

A)True

B)False

Q4) In the United States in 2014 real GDP per person was about $56,000,while in some poor countries real GDP per person was less than $5,000.

A)True

B)False

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Chapter 13: Saving Investment and the Financial System

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Q1) When opening a print shop you need to buy printers,computers,furniture,and similar items.Economists call these expenditures

A)capital investment.

B)investment in human capital.

C)business consumption expenditures.

D)personal saving.

Q2) If you were to start a business delivering documents,you might need to purchase cell phones,bicycles,desks,and chairs.

A)These purchases are called capital investment.If you raise the funds to purchase them from others you are a saver.

B)These purchases are called capital investment.If you raise the funds to purchase them from others you are a borrower.

C)These purchases are called consumption.If you raise the funds to purchase them from others you are a saver.

D)These purchases are called consumption.If you raise the funds to purchase them from others you are a borrower.

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Chapter 13: Saving Investment and the Financial System: Financial Institutions in the US economy

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Q1) A particular stock pays an annual dividend of $2 per share and the annual dividend yield is 2.5 percent.The price of a share of this stock is

A)$2.05.

B)$5.00.

C)$80.00

D)$50.00.

Q2) By definition,equity finance

A)is accomplished when units of government sell bonds.

B)is accomplished when firms sell bonds.

C)is accomplished when firms sell shares of stock.

D)involves "fair" interest rates or dividend yields.

Q3) Owners of municipal bonds

A)are not required to pay federal income tax on the interest income.

B)usually receive a higher interest rate compared to bonds issued by corporations.

C)usually receive a higher interest rate compared to stock issued by corporations.

D)pay taxes on the dividends earned from these bonds.

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Chapter 13: Saving Investment and the Financial System:

Saving and Investment in the National Income Accounts

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Q1) For a closed economy,GDP is $11 trillion,consumption is $7 trillion,taxes are $2.5 trillion and the government runs a surplus of $1 trillion.What are private saving and national saving?

A)$1.5 trillion and $2.5 trillion,respectively

B)$2.5 trillion and $1.5 trillion,respectively

C)$2.5 trillion and $2.5 trillion,respectively

D)$1.5 trillion and $1.5 trillion,respectively

Q2) For an economy that engages in international trade,GDP is divided into four components.Which of the following items is not one of those components?

A)consumption.

B)national saving.

C)government purchases.

D)net exports.

Q3) A closed economy

A)does not engage in international trade of goods and services.

B)does not engage in international borrowing or lending.

C)both A and B

D)engages in international borrowing and lending.

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Chapter 13: Saving Investment and the Financial System:

The Market for Loanable Funds

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Q1) In 2002 mortgage rates fell and mortgage lending increased.Which of the following could explain both of these changes?

A)The demand for loanable funds shifted rightward.

B)The demand for loanable funds shifted leftward.

C)The supply of loanable funds shifted rightward.

D)The supply of loanable funds shifted leftward.

Q2) If there is a shortage of loanable funds,then

A)the quantity demanded is greater than the quantity supplied and the interest rate will rise.

B)the quantity demanded is greater than the quantity supplied and the interest rate will fall.

C)the quantity supplied is greater than the quantity demanded and the interest rate will rise.

D)the quantity supplied is greater than the quantity demanded and the interest rate will fall.

Q3) What is the source of the supply of loanable funds?

Q4) How do banks make profits?

Q5) The financial system is important because it helps to match one persons _____ with another persons _____.

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Chapter 13: Saving Investment and the Financial System:

Part A

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Q1) Stock in Frozen Dreams,an ice cream manufacturer,has a price to earnings ratio of 24.Is this comparatively high or low? What are two explanations for the size of this company's price to earnings ratio?

Q2) Which government policy raises the interest rate and raises investment spending?

Q3) An increase in the government budget deficit causes national saving to _____, the interest rate to _____, and investment to _____.

Q4) Public saving is the difference between ----- and -----.

Q5) List three characteristics of a bond that would make its interest rate higher than otherwise.

Q6) The income that households have left after paying their taxes and paying for their consumption is known as______.

Q7) In a closed economy, Y - C - G equals _____. The variable Y is _____, C is _____, and G is _____.

Q8) In a closed economy taxes are $750 billion,government transfers are $400 billion,government expenditures are $500 billion,and investment is $400 billion.What are private saving,public saving and national saving?

Q9) A higher interest rate makes _____ less attractive. Therefore the quantity of loanable funds demanded decreases. Page 88

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Chapter 13: Saving Investment and the Financial System:

Part B

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Q1) Anything other than a change in the interest rate that decreases national saving shifts the supply of loanable funds to the left.

A)True

B)False

Q2) When the U.S.government is in debt during a given year,it follows that its budget is in deficit for that year.

A)True

B)False

Q3) Managed mutual funds perform better on average than index funds because stock prices are usually a good predictor of a company's true value.

A)True

B)False

Q4) Banks and mutual funds are examples of financial markets.

A)True

B)False

Q5) National saving is equal to Y - T - C.

A)True

B)False

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Chapter 14: The Basic Tools of Finance

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Q1) Which of the following statements best describes the economist's view of finance and the financial system?

A)The financial system is very important to the functioning of the economy,and the tools of finance are often helpful to us as individuals when we find ourselves making certain decisions.

B)The financial system,while interesting,is not very important to the functioning of the economy;however,the tools of finance are often helpful to us as individuals when we find ourselves making certain decisions.

C)The financial system is very important to the functioning of the economy;however,the tools of finance are not particularly helpful to us as individuals since we seldom make decisions for which those tools are useful.

D)The field of finance is intimately concerned with the financial system and the tools of finance,and financial economists see great importance in them;however,the "mainstream" economist sees little value in studying financial markets or the tools of finance.

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Chapter 14: The Basic Tools of Finance: Present Value

Measuring the Time Value of Money

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Q1) You are better off choosing $400 in 4 years rather than $300 today if the interest rate is

A)lower than about 5.5 percent.

B)higher than about 5.5 percent.

C)lower than about 7.5 percent.

D)higher than about 7.5 percent.

Q2) Allen Steel Company is considering whether to build a new mill.If the interest rate rises,

A)the present value of the returns from the mill will fall,so Allen will be less likely to build the mill.

B)the present value of the returns from the mill will fall,so Allen will be more likely to build the mill.

C)the present value of the returns from the mill will rise,so Allen will be less likely to build the mill.

D)the present value of the returns from the mill will rise,so Allen will be more likely to build the mill.

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92

Chapter 14: The Basic Tools of Finance: Managing Risk

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Q1) You may be unwilling to buy a used car because you suspect the last owner found out the car was a lemon.You may treat a car you rented with a little less care than you would use on your own car.

A)Both examples primarily illustrate adverse selection.

B)Both examples primarily illustrate moral hazard.

C)The first example primarily illustrates adverse selection;the second primarily illustrates moral hazard.

D)The first example primarily illustrates moral hazard;the second primarily illustrates adverse selection.

Q2) Other things the same,as the stocks of a greater number of corporations are held in a portfolio,

A)risk increases at an increasing rate.

B)risk increases at a decreasing rate.

C)risk decreases at an increasing rate.

D)risk decreases at a decreasing rate.

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93

Chapter 14: The Basic Tools of Finance: Asset Valuation

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Q1) According to the efficient markets hypothesis,worse-than-expected news about a corporation will

A)have no effect on its stock price.

B)raise the price of the stock.

C)lower the price of the stock.

D)change the price of the stock in a random direction.

Q2) Suppose fundamental analysis indicates that XYZ Corporation's stock is undervalued.

A)This means its present value is less than its price.You should consider adding the stock to your portfolio.

B)This means its present value is less than its price.You shouldn't consider adding the stock to your portfolio.

C)This means its present value is more than its price.You should consider adding the stock to your portfolio.

D)This means its present value is more than its price.You shouldn't consider adding the stock to your portfolio.

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Chapter 14: The Basic Tools of Finance: Conclusion

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Q1) Stock market fluctuations

A)often go hand in hand with fluctuations in the economy more broadly.

B)rarely have anything to do with fluctuations in the economy more broadly.

C)have few,if any,macroeconomic implications.

D)are attributable to the widespread belief that the efficient markets hypothesis is correct.

Q2) Economists disagree as to whether

A)the stock price of a company should reflect the company's expected profitability.

B)the basic tools of finance reflect valid ideas.

C)stock prices reflect rational estimates of a company's true worth.

D)there is any relationship between stock market fluctuations and fluctuations in the economy more broadly.

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Chapter 14: The Basic Tools of Finance: Part A

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Sample Questions

Q1) Can insurance be thought of as diversification? Defend your answer.

Q2) The objective of diversification is to reduce risk.How does a person diversify a stock portfolio? How is risk measured?

Q3) You are a financial advisor and a client tells you he is concerned about the amount of risk in his portfolio.Assuming your client hasn't already done them,what two things can you suggest to reduce your client's risk? What additional information about reducing risk should you provide?

Q4) A company has an investment project that will cost $2 million today and yield a payoff of $3 million in 5 years.If the interest rate is 9%,should the firm undertake the project? Show evidence to support your answer.

Q5) If the interest rate is 8 percent,then what is the present value of $5,000 to be received in ten years?

Q6) Jack's Lock and Key is considering remodeling.It estimates that the remodeling will cost $6,000 and that as a result revenues will rise by $3,000 the first year,$2,500 the second year,$1,500 the third year and have no effect after then.If the interest rate is 5%,should Jack's remodel? Defend your answer by showing your work.

Q7) Refer to Scenario 27-2.Is Dave risk averse? Explain.

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Chapter 14: The Basic Tools of Finance: Part B

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Q1) A person's subjective measure of well-being or satisfaction is called aversion.

A)True

B)False

Q2) A person who is risk averse will like gaining $1,000 more than they will dislike losing $1,000.

A)True

B)False

Q3) Diversification cannot reduce market risk.

A)True

B)False

Q4) The concept of present value helps explain why the quantity of loanable funds demanded decreases when the interest rate increases.

A)True

B)False

Q5) If a savings account pays 5 percent annual interest,then the rule of 70 tells us that the account value will double in approximately 14 years.

A)True

B)False

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Chapter 15: Unemployment

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Q1) The natural rate of unemployment

A)varies less than the measured unemployment rate.

B)cannot be changed by government policy.

C)is closely associated with the ups and downs in economic activity.

D)is set by the Federal Reserve.

Q2) Cyclical unemployment refers to

A)the portion of unemployment created by job search.

B)short-run fluctuations around the natural rate of unemployment.

C)changes in unemployment due to changes in the natural rate of unemployment.

D)the portion of unemployment created by wages set above the equilibrium level.

Q3) Cyclical unemployment is closely associated with

A)long-term economic growth.

B)short-run ups and downs of the economy.

C)fluctuations in the natural rate of unemployment.

D)changes in the minimum wage.

Q4) To maintain their standard of living,most people rely on

A)government assistance.

B)their personal savings.

C)their labor earnings.

D)rental income.

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Chapter 15: Unemployment: Identifying Unemployment

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Q1) Sirius has just finished high school and started looking for his first job,but has not yet found one.Other things the same,the unemployment rate

A)and the labor-force participation rate both increase.

B)increases,and the labor-force participation rate is unaffected.

C)is unaffected,and the labor-force participation rate increases.

D)and the labor-force participation rate are both unaffected.

Q2) Olga owns her own business.Sven is an unpaid worker in his family's business.Who is included in the Bureau of Labor Statistics' "employed" category?

A)only Olga

B)only Sven

C)both Olga and Sven

D)neither Olga nor Sven

Q3) The reported unemployment rate should be viewed as

A)a useful but imperfect measure of joblessness.

B)clearly smaller than the true unemployment rate.

C)clearly larger than the true unemployment rate.

D)being very close to the true unemployment rate.

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Chapter 15: Unemployment: Job Search

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Q1) Economists would predict that,other things the same,the more generous unemployment compensation a country has,the

A)shorter the duration of each spell of unemployment and the higher the unemployment rate.

B)shorter the duration of each spell of unemployment and the lower the unemployment rate.

C)longer the duration of each spell of unemployment and the higher the unemployment rate.

D)longer the duration of each spell of unemployment and the lower the unemployment rate.

Q2) Wanda quit her job because she was unhappy at work.Arnold was fired from his landscaping job because his company was downsizing.Who is eligible for unemployment insurance benefits?

A)both Wanda and Arnold

B)Wanda but not Arnold

C)Arnold but not Wanda

D)neither Wanda nor Arnold

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Page 100

Chapter 15: Unemployment: Minimum-Wage Laws

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Q1) Minimum-wage laws are least likely to affect the wages paid to A)teenagers.

B)low-skill workers.

C)inexperienced workers.

D)highly-educated workers.

Q2) Minimum-wage laws

A)create unemployment.

B)do not apply in states with right-to-work laws.

C)affect highly-educated workers more than high school dropouts.

D)cause labor shortages,which further raise wages above equilibrium.

Q3) Which of the following is not correct?

A)Frictional unemployment results from the process of matching workers and jobs.

B)Structural unemployment results when the number of jobs is insufficient for the number of workers.

C)Minimum wages are the predominant reason for unemployment in the U.S.economy.

D)When a minimum-wage law forces the wage to remain above the level that balances supply and demand,it raises the quantity of labor supplied and reduces the quantity of labor demanded compared to the equilibrium level.

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Chapter 15: Unemployment: Unions and Collective Bargaining

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Sample Questions

Q1) Suppose that dental hygienists are unionized in the eastern region of the country but not in the western region.If the unionized workers in the eastern region abolished their unions,employment

A)and wages of dental hygienists in the eastern region would rise.

B)of dental hygienists in the eastern region would rise,but wages of dental hygienists in the eastern region would fall.

C)and wages of dental hygienists in the eastern region would fall.

D)of dental hygienists in the eastern region would fall,but wages of dental hygienists in the eastern region would rise.

Q2) Labor unions

A)raise wages in unionized industries.

B)create labor shortages in non-unionized industries.

C)play a larger role in the current U.S.economy than in European countries such as Norway and Sweden.

D)prefer to operate in states with right-to-work laws.

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Page 102

Chapter 15: Unemployment: The Theory of Efficiency Wages

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Q1) In which of the following situations should a firm pay efficiency wages?

A)A hiring manager can easily judge the quality of applicants,and after workers have worked for the firm a while,they tend not to look for other jobs.

B)A hiring manager can easily judge the quality of applicants,and after workers have worked for the firm a while,they tend to look for other jobs.

C)A hiring manager cannot easily judge the quality of applicants,and after workers have worked for the firm a while,they tend to look for other jobs.

D)A hiring manager cannot easily judge the quality of applicants,and after workers have worked for the firm a while,they tend not to look for other jobs.

Q2) Efficiency wages

A)increase frictional unemployment by keeping wages above equilibrium.

B)decrease frictional unemployment by keeping wages at equilibrium.

C)increase structural unemployment by keeping wages above equilibrium.

D)decrease structural unemployment by keeping wages at equilibrium.

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Chapter 15: Unemployment: Part A

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Q1) Briefly explain the four rationales for efficiency wages.

Q2) Refer to Figure 28-7.If the minimum wage increases from $100 to $125,how many additional workers will be unemployed?

Q3) Refer to Figure 28-7.If the minimum wage is equal to $125,what is the quantity of labor supplied,the quantity of labor demanded,and number unemployed?

Q4) In the town of Gotham the adult population is 560 thousand,the number unemployed is 25 thousand,and 185 thousand are not in the labor force.Calculate the unemployment rate.

Q5) List the main employment characteristics over which a labor union negotiates for its workers.

Q6) Write the formula for calculating the labor force participation rate.

Q7) What is the theory of efficiency wages? Provide four reasons that employers might pay efficiency wages.

Q8) An important determinant of a countrys standard of living is the amount of __________ it typically experiences.

Q9) Briefly summarize the advantages and disadvantages of unemployment insurance.

Q10) Most spells of unemployment are short,and most unemployment observed at any given time is long term.How can this be?

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Chapter 15: Unemployment: Part B

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Q1) The Bureau of Labor Statistics' "unemployed" category includes those who were not employed,were available for work,and had tried to find employment during the previous four weeks.

A)True

B)False

Q2) If the wage is kept above the equilibrium level because of minimum-wage laws,then the result is unemployment;if the wage is kept above the equilibrium level for some other reason,the result need not be unemployment.

A)True

B)False

Q3) Right-to-work laws give workers in a unionized firm the right to choose whether to join the union.

A)True

B)False

Q4) Both full-time and part-time workers are included in the Bureau of Labor Statistics' "employed" category.

A)True

B)False

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Page 105

Chapter 16: The Monetary System

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Q1) Money

A)is more efficient than barter.

B)makes trades easier.

C)allows greater specialization.

D)All of the above are correct.

Q2) The existence of money leads to

A)greater specialization in production,but not to a higher standard of living.

B)a higher standard of living,but not to greater specialization.

C)greater specialization and to a higher standard of living.

D)neither greater specialization nor to a higher standard of living.

Q3) As opposed to a payments system based on barter,a payments system based on money

A)requires a double coincidence of wants.

B)leads to less specialization.

C)makes trades less costly.

D)None of the above is correct.

Q4) When we say that trade is roundabout we mean that

A)people sometimes trade goods for goods.

B)trades require a double coincidence of wants.

C)currency is accepted primarily to make further trades.

D)people must spend time searching for the products they wish to purchase.

Page 106

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Chapter 16: The Monetary System: The Meaning of Money

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Q1) Which of the following is included in both M1 and M2?

A)savings deposits

B)demand deposits

C)small time deposits

D)money market mutual funds

Q2) All U.S.paper dollars read "This note is legal tender for all debts,public and private."

This statement represents which characteristic of US currency?

A)The U.S.operates under the gold standard.

B)U.S.paper money is commodity money.

C)U.S.paper money is fiat money.

D)U.S.paper money is a convenient store of wealth.

Q3) Which of the following is not included in either M1 or M2?

A)money market deposit accounts

B)large time deposit

C)demand deposits

D)money market mutual funds

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Chapter 16: The Monetary System: The Federal Reserve System

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Q1) The members of the Federal Reserve's Board of Governors

A)are elected to office by the public every fourteen years.

B)are nominated by the U.S.Senate banking committee and confirmed by the U.S.house of representatives.

C)are elected by bankers in each Federal Reserve Region.

D)are appointed by the president of the U.S.and confirmed by the U.S.Senate.

Q2) The New York Federal Reserve Bank

A)president always gets to vote at the FOMC meetings.

B)conducts open market transactions.

C)is one of 12 regional Federal Reserve Banks.

D)All of the above are correct.

Q3) The president of each regional Federal Reserve Bank is appointed by

A)the U.S.president with the approval of the Senate.

B)the Board of Governors.

C)the voting members of the Federal Open Market Committee.

D)the board of directors of that regional Federal Reserve Bank.

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Page 108

Chapter 16: The Monetary System: Banks and the Money Supply

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Q1) A bank has an 8 percent reserve requirement,$10,000 in deposits,and has loaned out all it can given the reserve requirement.

A)It has $80 in reserves and $9,920 in loans.

B)It has $800 in reserves and $9,200 in loans.

C)It has $1,250 in reserves and $8,750 in loans.

D)None of the above is correct.

Q2) If the reserve requirement is 12 percent and banks desire to hold no excess reserves,when a bank receives a new deposit of $1,000,

A)it must increase its required reserves by more than $150.

B)its total reserves initially increase by $120.

C)it will be able to make new loans up to a maximum of $880.

D)None of the above is correct.

Q3) When a bank loans out $1,000,the money supply

A)does not change.

B)decreases.

C)increases.

D)may do any of the above.

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Page 109

Chapter 16: The Monetary System: The Feds Tools of Monetary Control

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Q1) Reserve requirements are regulations concerning

A)the amount banks are allowed to borrow from the Fed.

B)the amount of reserves banks must hold against deposits.

C)reserves banks must hold based on the number and type of loans they make.

D)the interest rate at which banks can borrow from the Fed.

Q2) Suppose that in a country people gain more confidence in the banking system and so hold relatively less currency and more deposits.As a result,bank reserves will

A)decrease and the money supply will eventually decrease.

B)decrease and the money supply will eventually increase.

C)increase and the money supply will eventually decrease.

D)increase and the money supply will eventually increase.

Q3) If the Federal Reserve increases the interest rate on bank deposits at the Fed,banks will want to hold

A)fewer reserves,so the money multiplier will fall.

B)fewer reserves,so the money multiplier will rise.

C)more reserves,so the money multiplier will fall.

D)more reserves,so the money multiplier will rise.

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Page 110

Chapter 16: The Monetary System: Part A

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Q1) What is the change in the money supply when the Fed purchases $700 worth of bonds and the required reserve ratio is 14 percent assuming banks hold no excess reserves?

Q2) What is meant by the term "lender of last resort?" In what circumstances might the Fed be a lender of last resort?

Q3) The money multiplier is _____ when the reserve ratio is 12.5 percent.

Q4) Explain how each of the following changes the money supply.

a.the Fed buys bonds

b.the Fed auctions credit

c.the Fed raises the discount rate

d.the Fed raises the reserve requirement

Q5) How are Federal Reserve Board Governors selected?

Q6) What does the text mean by the question,"Where Is All the Currency?" How does it answer the question?

Q7) What is the difference between commodity money and fiat money? Why do people accept fiat money in trade for goods and services?

Q8) When the Fed purchases government bonds the money supply _____ and the federal funds rate _____.

Q9) Describe the role of the Federal Deposit Insurance Corporation (FDIC).

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Chapter 16: The Monetary System: Part B

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Q1) When you purchase school supplies at the book store using cash,you are using money as a medium of exchange.

A)True

B)False

Q2) Members of the Board of Governors of the Federal Reserve System are appointed for life.

A)True

B)False

Q3) U.S.dollars are an example of commodity money and hides used to make trades are an example of fiat money.

A)True

B)False

Q4) The discount rate is the rate the Federal Reserve charges banks for loans.By lowering this rate,the Fed provides banks with a greater incentive to borrow from it.

A)True

B)False

Q5) According to economists,"money" means the same thing as "wealth".

A)True

B)False

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Chapter 17: Money Growth and Inflation

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Q1) If the price level increased from 120 to 144,then what was the inflation rate?

A)24 percent.

B)25 percent.

C)20 percent.

D)17 percent.

Q2) If the price level increased from 200 to 250,then what was the inflation rate?

A)50 percent

B)25 percent

C)20 percent

D)None of the above is correct.

Q3) Inflation can be measured by the A)change in the consumer price index.

B)percentage change in the consumer price index.

C)percentage change in the price of a specific commodity.

D)change in the price of a specific commodity.

Q4) If the price level increased from 120 to 130,then what was the inflation rate?

A)1.1 percent.

B)7.7 percent.

C)10.0 percent.

D)8.3 percent.

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Chapter 17: Money Growth and Inflation: The Classical

Theory of Inflation

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Sample Questions

Q1) According to the assumptions of the quantity theory of money,if the money supply increases 5 percent,then

A)both the price level and nominal GDP would rise by 5 percent.

B)the price level would rise by 5 percent and nominal GDP would be unchanged.

C)the price level would be unchanged and nominal GDP would rise by 5 percent.

D)both the price level and nominal GDP would be unchanged.

Q2) When the money market is drawn with the value of money on the vertical axis,an increase in the price level causes a

A)shift to the right of the money demand curve.

B)shift to the left of the money demand curve.

C)movement to the left along the money demand curve.

D)movement to the right along the money demand curve.

Q3) Suppose that monetary neutrality and the Fisher effect both hold.An increase in the money supply growth rate increases

A)the inflation rate and real interest rates.

B)the inflation rate,but not real interest rates.

C)real interest rates,but not the inflation rate.

D)neither the inflation rate nor real interest rates.

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Chapter 17: Money Growth and Inflation: The Costs of Inflation

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Sample Questions

Q1) Inflation is problematic if

A)it is less than the percentage increase in nominal income.

B)it is less than the nominal return on saving.

C)it equals the growth rate of real GDP in the long run.

D)it distorts relative prices,causing a misallocation of resources.

Q2) Kaitlyn purchased one share of Northwest Energy stock for $200;one year later she sold that share for $400.The inflation rate over the year was 50 percent.The tax rate on nominal capital gains is 50 percent.What was the tax on Kaitlyn's capital gain?

A)$50

B)$75

C)$100

D)$200

Q3) U.S.tax laws allow taxpayers,in computing the amount of tax they owe,to use the real value,as opposed to the nominal value,of

A)both interest income and capital gains.

B)interest income but not capital gains.

C)capital gains but not interest income.

D)neither interest income nor capital gains.

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Chapter 17: Money Growth and Inflation: Conclusion

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Q1) Inflation costs are minimized during periods of A)hyperinflation.

B)large,unexpected deflation.

C)moderate inflation.

D)rapid money growth.

Q2) In order to maintain stable prices,a central bank must

A)maintain low interest rates.

B)keep unemployment low.

C)tightly control the money supply.

D)sell indexed bonds.

Q3) Inflation costs are minimized under which inflation rate?

A)-20 percent

B)5 percent

C)15 percent

D)575 percent

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116

Chapter 17: Money Growth and Inflation: Part A

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Q1) It takes more money to purchase the same amount of goods when prices __________.Therefore,the value of your money has__________.

Q2) Suppose the Fed sells government bonds.Use a graph of the money market to show what this does to the value of money.

Q3) The _____ interest rate tells you how fast the number of dollars in your bank account will rise over time, and it is the sum of the _____ interest rate and the _____.

Q4) During hyperinflations, people desire to hold less money and will go to the bank more frequently. This waste of resources due to the high rate of inflation is known as

Q5) List and define any two of the costs of high inflation.

Q6) Jackie saves $100 and receives $106 the next year.During the same year,the price of the basket of goods that she purchases increases from $100 to $104.What is nominal interest rate on Jackie's saving? What is the real interest rate on Jackie's saving? What was the inflation rate?

Q7) If inflation is less than expected,who is wealth redistributed to?

Q8) If the inflation rate was 10%,and the tax rate was 25%,and you deposited money in a bank account that paid 14%,what is after tax real interest rate? Show you work.

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Chapter 17: Money Growth and Inflation: Part B

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Q1) If the quantity of money demanded is greater than the quantity supplied,then the value of money rises.

A)True

B)False

Q2) Jimmy Carter,Ronald Reagan,and Gerald Ford are all U.S.presidents whose political careers were helped by inflation.

A)True B)False

Q3) The quantity theory of money can explain hyperinflations but not moderate inflation. A)True B)False

Q4) Hyperinflation is generally defined as inflation that exceeds 50 percent per month. A)True B)False

Q5) Dollar prices and relative prices are both nominal variables. A)True B)False

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Page 118

Chapter 18: Open Economy Macroeconomics Basic Concepts

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Q1) International trade

A)raises the standard of living in all trading countries.

B)lowers the standard of living in all trading countries.

C)leaves the standard of living unchanged.

D)raises the standard of living for importing countries and lowers it for exporting countries.

Q2) Which type(s)of economies interact with other economies?

A)only closed economies

B)only open economies

C)closed economies and open economies

D)neither closed nor open economies

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Chapter 18: Open Economy Macroeconomics Basic

Concepts: The International Flows of Goods and Capital

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Sample Questions

Q1) A German mutual fund sells euros to a U.S.bank for $20,000.The mutual fund then uses these dollars to purchase a bond issued by United Express,a U.S.delivery company.As a result of these two transactions,what happened to U.S.net capital outflow?

A)It fell by $40,000.

B)It fell by $20,000.

C)It was unchanged.

D)It rose by $20,000.

Q2) U.S- based Dell sells computers to an Irish company that pays with previously obtained U.S.currency.This exchange

A)increases U.S.net capital outflow because the U.S.acquires foreign-owned assets.

B)decreases U.S.net capital outflow because the U.S.acquires foreign-owned assets.

C)increases U.S.net capital outflow because the U.S.sells capital goods.

D)decreases U.S.net capital outflow because the U.S.sells capital goods.

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Chapter 18: Open Economy Macroeconomics Basic

Concepts: The Prices for International Transactions Real and Nominal Exchange Rates

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Sample Questions

Q1) Exchange rates are 100 yen per dollar,0.8 euro per dollar,and 12 pesos per dollar.A bottle of beer in New York costs 6 dollars,500 yen in Tokyo,6 euro in Munich,and 84 pesos in Cancun.Where is the most expensive and the cheapest beer,in that order?

A)Cancun,New York

B)Munich,Tokyo

C)Tokyo,Munich

D)New York,Cancun

Q2) If the price of a sofa is $800 in the U.S.and 2400 pesos in Argentina,and the exchange rate is 4 pesos per dollar,what is the real exchange rate?

A)3

B)4/3

C)3/4

D)None of the above is correct.

Q3) If the U.S.real exchange rate appreciates,U.S.exports to Europe

A)and European exports to the U.S.both rise.

B)and European exports to the U.S.both fall.

C)rise,and European exports to the U.S.fall.

D)fall,and European exports to the U.S.rise.

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Chapter 18: Open Economy Macroeconomics Basic

Concepts: A First Theory of Exchange-Rate Determination

Purchasing-Power Parity

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Sample Questions

Q1) From 1970 to 1998 the U.S.dollar

A)gained value compared to the Italian lira because inflation was higher in Italy.

B)gained value compared to the Italian lira because inflation was lower in Italy.

C)lost value compared to the Italian lira because inflation was higher in Italy.

D)lost value compared to the Italian lira because inflation was lower in Italy.

Q2) The ability to profit by purchasing wheat in the U.S.and selling it in China implies that the

A)nominal exchange rate is less than 1.

B)nominal exchange rate is greater than 1.

C)real exchange rate is less than 1.

D)real exchange rate is greater than 1.

Q3) According to purchasing-power parity,which of the following necessarily equals the ratio of the foreign price level divided by the domestic price level?

A)the real exchange rate,but not the nominal exchange rate

B)the nominal exchange rate,but not the real exchange rate

C)the real exchange rate and the nominal exchange rate

D)neither the real exchange rate nor the nominal exchange rate

Page 122

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Chapter 18: Open Economy Macroeconomics Basic

Concepts: Part A

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Sample Questions

Q1) While vacationing in Agra,India,the price of one night's stay at your hotel room rises from 6600 rupees to 7200 rupees.If the exchange rate was previously 55 rupees per dollar,what would the exchange rate need to be now in order for the number of dollars you pay for your room to remain the same? Does this imply the rupee depreciated or appreciated against the dollar?

Q2) The nominal exchange rate is 32 Russian rubles per dollar.The price of a bushel of wheat is 260 rubles in Russia and $7 in the U.S.

A.What is the real exchange rate? Show your work.

B.Can arbitragers make a profit?

C.If your answer to B is yes,where would arbitragers buy and where would they sell.

Q3) What does purchasing-power parity imply about the real exchange rate? Explain what this means.

Q4) Last month a country sold more goods and services to residents of foreign countries than it purchased from them.What does this imply about this country's trade balance?

Q5) A country recently had saving of 300 billion euros and domestic investment of 200 billion euros.What was the value of this country's net exports? Explain how you found your answer.

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Chapter 18: Open Economy Macroeconomics Basic

Concepts: Part B

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Sample Questions

Q1) If the purchasing power of the dollar is always the same at home and abroad,then the nominal exchange rate defined as units of foreign currency per dollar decreases if the U.S.price level rises more than the price level in foreign countries.

A)True B)False

Q2) If a U.S.firm buys Chinese toys using previously obtained Chinese currency,then both U.S.net exports and U.S.net capital outflow decrease.

A)True B)False

Q3) In the 1970s and 1980s the U.S.dollar depreciated against the German mark and appreciated against the Italian lira because U.S.inflation was lower than in Germany but higher than in Italy.

A)True B)False

Q4) Reductions in transportation costs help explain the increase in U.S.trade flows.

A)True B)False

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Chapter 19: A Macroeconomic Theory of the Open Economy

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Sample Questions

Q1) Over the past three decades,the United States has

A)generally had,or been very near to a trade balance.

B)had trade deficits in about as many years as it has trade surpluses.

C)persistently had a trade deficit.

D)persistently had a trade surplus.

Q2) The open-economy macroeconomic model examines the determination of

A)the output growth rate and the real interest rate.

B)unemployment and the exchange rate.

C)the output growth rate and the inflation rate.

D)the trade balance and the exchange rate.

Q3) The open-economy macroeconomic model includes

A)only the market for loanable funds.

B)only the market for foreign-currency exchange.

C)both the market for loanable funds and the market for foreign-currency exchange.

D)neither the market for loanable funds nor the market for foreign-currency exchange.

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Chapter 19: A Macroeconomic Theory of the Open

Economy: Supply and Demand for Loanable Funds and for Foreign-Currency Exchange

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Sample Questions

Q1) An increase in the real interest rate in the United States changes the quantity of loanable funds demanded because

A)U.S.residents will want to buy more foreign assets.

B)Foreign residents will want to buy more U.S.goods and services.

C)U.S.firms will want to purchase fewer U.S.capital goods.

D)All of the above are correct.

Q2) In the open economy macroeconomic model,the price that balances supply and demand in the market for foreign-currency exchange model is the

A)nominal exchange rate.

B)nominal interest rate.

C)real exchange rate.

D)real interest rate.

Q3) Other things the same,a higher real interest rate raises the quantity of

A)domestic investment.

B)net capital outflow.

C)loanable funds demanded.

D)loanable funds supplied.

Page 126

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Chapter 19: A Macroeconomic Theory of the Open

Economy: Equilibrium in the Open Economy

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Sample Questions

Q1) In the open-economy macroeconomic model,if the supply of loanable funds shifts right

A)the interest rate rises and the demand for dollars in the market for foreign currency exchange shifts right.

B)the interest rate rises and the demand for dollars in the market for foreign currency exchange shifts left.

C)the interest rate falls and the supply of dollars in the market for foreign-currency exchange shifts right.

D)the interest rate falls and the supply of dollars in the market for foreign currency exchange shifts left.

Q2) In the open-economy macroeconomic model,if a country's interest rate rises,its net capital outflow

A)rises and the real exchange rate rises.

B)falls and the real exchange rate falls.

C)rises and the real exchange rate falls.

D)falls and the real exchange rate rises.

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Chapter 19: A Macroeconomic Theory of the Open

Economy: How Policies and Events Affect an Open Economy

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Sample Questions

Q1) Suppose the U.S.removes an import quota on steel.U.S.exports

A)increase,the real exchange rate of the U.S.dollar appreciates,and U.S.net capital outflow increases.

B)increase,the real exchange rate of the U.S.dollar depreciates,and U.S.net capital outflow is unchanged.

C)decrease,the real exchange rate of the U.S.dollar appreciates,and U.S.net capital outflow is unchanged.

D)decrease,the real exchange rate of the U.S.dollar depreciates,and U.S.net capital outflow decreases.

Q2) If the U.S.government imposes a quota on imports of jet planes,then

A)net capital outflow rises.

B)net exports rise.

C)the exchange rate rises.

D)All of the above are correct.

Q3) When a country imposes an import quota,its

A)net exports rise and its real exchange rate appreciates.

B)net exports rise and its real exchange rate depreciates.

C)net exports fall and its real exchange rate depreciates

D)None of the above is correct.

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Chapter 19: A Macroeconomic Theory of the Open

Economy: Part A

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Sample Questions

Q1) If people in the U.S.choose to save a smaller percentage of income,what will happen to the interest rate,net capital outflow,the exchange rate,and net exports?

Q2) What happens to the quantity of loanable funds supplied when the interest rate rises? Explain why this change happens.

Q3) Suppose the U.S.government institutes a "Buy American" campaign,in order to encourage spending on domestic goods.What effect will this have on the U.S.trade balance?

Q4) If the exchange rate rises, foreign residents want to purchase ______ domestic goods and domestic residents want to purchase _____ foreign goods. In the market for foreign-currency exchange, these changes are shown as a _______ in the quantity of dollars ______.

Q5) If there is a shortage in the market for foreign-currency exchange,what happens to the exchange rate and to net exports?

Q6) Why do higher real interest rates lead to lower net capital outflow?

Q7) In the market for foreign-currency exchange, the source of the supply of dollars is _________. The supply curve is _________ because _____________.

Q8) Define net capital outflow.

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Chapter 19: A Macroeconomic Theory of the Open

Economy: Part B

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Sample Questions

Q1) In an open economy,the supply of loanable funds comes from national saving.

A)True

B)False

Q2) A tax credit for purchases of capital goods causes the interest rate to increase and the exchange rate to appreciate.

A)True

B)False

Q3) The primary focus of the open-economy macroeconomic model is the determination of GDP and the price level.

A)True

B)False

Q4) If C+I+G>Y,then net exports and net capital outflow are both greater than zero.

A)True

B)False

Q5) When a country imposes a trade quota,the demand for currency in the market for foreign exchange shifts to the right

A)True

B)False

Page 130

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Chapter 20: Aggregate Demand and Aggregate Supply

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Sample Questions

Q1) Which of the following explains why production rises in most years?

A)increases in the labor force

B)increases in the capital stock

C)advances in technological knowledge

D)All of the above are correct.

Q2) On average,over the last 50 years,real GDP has grown by about

A)3 percent per year.

B)2 percent per year.

C)1 percent per year.

D)4 percent per year.

Q3) During a recession the economy experiences

A)rising employment and income.

B)rising employment and falling income.

C)rising income and falling employment.

D)falling employment and income.

Q4) In October 2009,the official unemployment rate rose to A)10%.

B)8%.

C)6%

D)4%.

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Three Key Facts About Economic Fluctuations

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Q1) Refer to Figure 33-2.Line X is

A)investment spending.

B)real GDP.

C)unemployment rate.

D)CPI.

Q2) During recessions employment typically

A)falls substantially.As the recession ends,employment rises rapidly.

B)rises substantially.As the recession ends,employment declines gradually.

C)falls substantially.As the recession ends,employment rises gradually.

D)rises substantially.As the recession ends,employment declines rapidly.

Q3) During recessions which type of spending falls?

A)consumption and investment

B)investment but not consumption

C)consumption but not investment

D)neither consumption nor investment

Q4) Historically,as recessions have ended the unemployment rate declined

A)gradually to near zero.

B)rapidly to near zero.

C)gradually to a rate of about 5%-6%.

D)rapidly to a rate of about 5%-6%.

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Explaining Short-Run Economic Fluctuations

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Sample Questions

Q1) Most economists believe that in the short run

A)real and nominal variables are determined independently and that money cannot move real GDP away from its long-run trend.

B)real and nominal variables are determined independently but that money can temporarily move real GDP away from its long-run trend.

C)real and nominal variables are highly intertwined but that money cannot move real GDP away from its long-run trend.

D)real and nominal variables are highly intertwined and that money can temporarily move real GDP away from its long-run trend.

Q2) Economic variables we are most interested in are

A)real variables,but we usually observe nominal variables.

B)nominal variables,but we usually observe real variables.

C)real variables,which we usually observe.

D)nominal variables,which we usually observe.

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Chapter 20: Aggregate Demand and Aggregate Supply:

The Aggregate-Demand Curve

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Sample Questions

Q1) Changes in the price level affect which components of aggregate demand?

A)only consumption and investment

B)only consumption and net exports

C)only investment

D)consumption,investment,and net exports

Q2) The aggregate demand and aggregate supply graph has the

A)quantity of output on the horizontal axis.Output is best measured by real GDP.

B)quantity of output on the horizontal axis.Output is best measured by nominal GDP.

C)quantity of output on the vertical axis.Output is best measured by real GDP.

D)quantity of output on the vertical axis.Output is best measured by nominal GDP.

Q3) As the price level rises

A)people will want to buy more bonds,so the interest rate rises.

B)people will want to buy fewer bonds,so the interest rate falls.

C)people will want to buy more bonds,so the interest rate falls.

D)people will want to buy fewer bonds,so the interest rate rises.

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Chapter

The Aggregate-Supply Curve

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Sample Questions

Q1) The sticky-wage theory of the short-run aggregate supply curve says that the quantity of output firms supply will increase if

A)the price level is higher than expected making production more profitable.

B)the price level is higher than expected making production less profitable.

C)the price level is lower than expected making production more profitable

D)the price level is higher than expected making production less profitable

Q2) Which of the following is correct?

A)The short-run,but not the long-run,aggregate supply curve is consistent with the idea that nominal variables do not affect real variables.

B)The long-run,but not the short-run,aggregate supply curve is consistent with the idea that nominal variables do not affect real variables.

C)The long-run and short-run supply curves are both consistent with the idea that nominal variables affect real variables.

D)Neither the long-run nor the short-run aggregate supply curve is consistent with the idea that nominal variables affect real variables.

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Page 135

Chapter 20: Aggregate Demand and Aggregate Supply:

Two Causes of Economic Fluctuations

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Sample Questions

Q1) Suppose that during World War II the long-run aggregate supply curve shifted right.In order for price and output to have changed in the direction they did,what would have to have happened to aggregate demand?

A)It would have to have shifted left by less than aggregate supply shifted

B)It would have to have to shifted left by more than aggregate supply shifted.

C)It would have to have shifted right by less than aggregate supply shifted

D)It would have to have to shifted right by more than aggregate supply shifted.

Q2) Refer to Figure 33-6.Which of the long-run aggregate-supply curves is consistent with a recession?

A)LRAS₁

B)LRAS₂

C)LRAS₃

D)Both LRAS₁ and LRAS₃

Q3) During the 2008-2009 recession real GDP fell by about

A)2%

B)4%

C)6%

D)8%

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Chapter 20: Aggregate Demand and Aggregate Supply:

Part A

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Sample Questions

Q1) Suppose a country offers a new investment tax credit.Which curve(s)in the aggregate demand and aggregate supply model would be affected,and which way would it (they)shift?

Q2) What curve shows the quantity of goods and services that households,firms,the government,and customers abroad want to buy at each price level?

Q3) In the aggregate demand and aggregate supply model,the point where the aggregate demand curve crosses the long run aggregate supply curve,and the expected price level equals the actual price level,is known as what?

Q4) Explain the effect on output and price level from an increase in the short-run aggregate-supply curve.

Q5) Suppose people anticipate an increase in the expected price level.Which curve(s)in the aggregate demand and aggregate supply model would be affected,and which way would it (they)shift?

Q6) Make a list of things that would shift the aggregate demand curve to the right.

Q7) What do most economists believe concerning the relation between the price level and real output?

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Q8) What curve shows the quantity of goods and services that firms choose to produce and sell at each price level?

Chapter 20: Aggregate Demand and Aggregate Supply:

Part B

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Sample Questions

Q1) A decrease in the price level makes consumers feel wealthier,so they purchase more.This logic helps explain why the aggregate demand curve slopes downward.

A)True

B)False

Q2) When output rises,unemployment falls.

A)True

B)False

Q3) An increase in the money supply causes the interest rate to fall,investment spending to rise,and aggregate demand to shift right.

A)True

B)False

Q4) Most economists believe that classical theory describes the world in the short run but not in the long run.

A)True

B)False

Q5) Most economist agree that money changes real GDP in both the short and long run. A)True

B)False

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Chapter 21: The Influences of Monetary and Fiscal Policy on Aggregate Demand

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Sample Questions

Q1) A goal of monetary policy and fiscal policy is to

A)offset the shifts in aggregate demand and thereby eliminate unemployment.

B)offset shifts in aggregate demand and thereby stabilize the economy.

C)enhance the shifts in aggregate demand and thereby create fluctuations in output and employment.

D)enhance the shifts in aggregate demand and thereby increase economic growth

Q2) Shifts in the aggregate-demand curve can cause fluctuations in

A)neither the level of output nor the level of prices.

B)the level of output,but not in the level of prices.

C)the level of prices,but not in the level of output.

D)the level of output and in the level of prices.

Q3) Fiscal policy affects the economy

A)only in the short run.

B)only in the long run.

C)in both the short and long run.

D)in neither the short nor the long run.

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Page 139

Chapter 21: The Influences of Monetary and Fiscal Policy on

Aggregate Demand: How Monetary Policy Influences

Aggregate Demand

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Q1) According to liquidity preference theory,if there were a surplus of money,then

A)the interest rate would be above equilibrium and the quantity of money demanded would be too large for equilibrium.

B)the interest rate would be above equilibrium and the quantity of money demanded would be too small for equilibrium.

C)the interest rate would be below equilibrium and the quantity of money demanded would be too small for equilibrium.

D)the interest rate would be below equilibrium and the quantity of money demanded would be too large for equilibrium.

Q2) Refer to Figure 34-2.Assume the money market is always in equilibrium.Under the assumptions of the model,

A)the quantity of goods and services demanded is higher at P₂ than it is at P₁.

B)the quantity of money is higher at Y₁ than it is at Y₂.

C)an increase in r from r₁ to r₂ is associated with a decrease in Y from Y₁ to Y₂.

D)All of the above are correct.

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Chapter 21: The Influences of Monetary and Fiscal Policy on

Aggregate Demand: How Fiscal Policy Influences

Aggregate Demand

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Q1) Assume the MPC is 0.625.Assume there is a multiplier effect and that the total crowding-out effect is $12 billion.An increase in government purchases of $30 billion will shift aggregate demand to the

A)left by $60 billion.

B)left by $36 billion.

C)right by $68 billion.

D)right by $36 billion.

Q2) Assume the MPC is 0.65.Assuming only the multiplier effect matters,a decrease in government purchases of $20 billion will shift the aggregate demand curve to the

A)left by about $30.77 billion.

B)left by about $57.1 billion.

C)right by about $57.1 billion.

D)right by about $30.77 billion.

Q3) Refer to Figure 34-5.What is measured along the vertical axis of the graph?

A)the quantity of output

B)the amount of crowding out

C)the interest rate

D)the price level

Page 141

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Chapter 21: The Influences of Monetary and Fiscal Policy on

Aggregate Demand: Using Policy to Stabilize the Economy

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Sample Questions

Q1) Other things the same,automatic stabilizers tend to

A)raise expenditures during expansions and recessions.

B)lower expenditures during expansions and recessions.

C)raise expenditures during recessions and lower expenditures during expansions.

D)raise expenditures during expansions and lower expenditures during recessions.

Q2) It is likely that a constitutional amendment that required the government always to run a balanced budget would

A)contribute to a more stable level of output.

B)mitigate the crowding-out effect.

C)eliminate the economy's automatic stabilizers.

D)All of the above are correct.

Q3) The price of imported oil rises.If the government wanted to stabilize output,which of the following could it do?

A)increase government expenditures or increase the money supply

B)increase government expenditures or decrease the money supply

C)decrease government expenditures or increase the money supply

D)decrease government expenditures or decrease the money supply

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Page 142

Chapter 21: The Influences of Monetary and Fiscal Policy on

Aggregate Demand: Part A

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Sample Questions

Q1) Refer to Figure 34-14.Initial equilibrium exists at point A.A decline in prices will cause households to ----- their desired money holdings,moving the interest rate to -----.

Q2) The ease with which an asset can be converted into the medium of exchange is known as -----.

Q3) A decrease in taxes will shift aggregate demand to the -----,cause consumption to -----,and cause output to -----.Due to the crowding-out effect,investment will -----.

Q4) To increase output,policymakers can ----- the money supply,----- taxes,and/or ----- government purchases.

Q5) Suppose that the government increases expenditures by $150 billion while increasing taxes by $150 billion.Suppose that the MPC is .80 and that there are no crowding out or accelerator effects.What is the combined effects of these changes? Why is the combined change not equal to zero?

Q6) A decrease in the domestic ----- causes domestic goods to become less expensive relative to foreign goods and increases net exports.The increase in net exports causes a(n)----- in the quantity of domestic aggregate goods and services demanded and is known as the ----- effect.

Q7) The ----- is the most important automatic stabilizer.

Page 143

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Chapter 21: The Influences of Monetary and Fiscal Policy on

Aggregate Demand: Part B

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Q1) In liquidity preference theory,an increase in the interest rate,other things the same,decreases the quantity of money demanded,but does not shift the money demand curve.

A)True

B)False

Q2) Other things the same,an increase in taxes shifts aggregate demand to the left.In the short run this makes output fall which makes the interest rate rise.

A)True

B)False

Q3) According to the theory of liquidity preference,the interest rate adjusts to balance the supply of,and demand for,loanable funds.

A)True

B)False

Q4) Unemployment insurance and welfare programs work as automatic stabilizers. A)True

B)False

Q5) An increase in the money supply shifts the aggregate-supply curve to the right.

A)True

B)False

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Chapter 22: The Short Run Trade Off Between Inflation and Unemployment

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Q1) In the long run,

A)the natural rate of unemployment depends primarily on the level of aggregate demand.

B)inflation depends primarily upon the money supply growth rate.

C)there is a tradeoff between the inflation rate and the natural rate of unemployment.

D)All of the above are correct.

Q2) In the long run,

A)the natural rate of unemployment depends primarily on the level of aggregate demand.

B)inflation depends primarily upon the money supply growth rate.

C)there is a tradeoff between the inflation rate and the natural rate of unemployment.

D)All of the above are correct.

Q3) The misery index is supposed to measure the A)social cost of unemployment.

B)health of the economy.

C)lost output associated with a particular unemployment rate.

D)short-run tradeoff between inflation and unemployment.

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Chapter 22: The Short Run Trade Off Between Inflation and Unemployment:

The Phillips Curve

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Q1) The economy will move to a point on the short-run Phillips curve where unemployment is higher if

A)the inflation rate decreases.

B)the government increases its expenditures.

C)the Fed increases the money supply.

D)None of the above is correct.

Q2) If the short-run Phillips curve were stable,which of the following would be unusual?

A)an increase in government spending and a fall in unemployment

B)an increase in inflation and a decrease in output

C)a decrease in the inflation rate and a rise in the unemployment rate

D)a decrease in the money supply and a rise in the unemployment rate.

Q3) If the central bank decreases the money supply,then in the short run prices

A)rise and unemployment falls.

B)fall and unemployment rises.

C)and unemployment rise.

D)and unemployment fall.

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146

Chapter 22: The Short Run Trade Off Between Inflation and Unemployment:

Shifts in the Phillips Curve the Role of Expectations

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Sample Questions

Q1) Refer to Figure 35-6.If the economy starts at C and the money supply growth rate increases,then in the short run the economy moves to A)B.

B)D.

C)F.

D)None of the above is consistent with an increase in the money supply growth rate.

Q2) Suppose the central bank increases the growth rate of the money supply.In the long run,which of the following is unaffected by this change in policy?

A)the unemployment rate and the inflation rate

B)the unemployment rate but not the inflation rate

C)the inflation rate but not the unemployment rate

D)neither the inflation rate nor the unemployment rate

Q3) Friedman argued that the Fed could use monetary policy to peg

A)the level of real GDP.

B)the growth rate of real GDP.

C)the rate of unemployment.

D)None of the above is correct.

Page 147

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Chapter 22: The Short Run Trade Off Between Inflation and

Unemployment: Shifts in the Phillips Curve the Role of Supply Shocks

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Sample Questions

Q1) Refer to Figure 35-9.The shift of the aggregate-supply curve from AS₁ to AS₂ could be a consequence of

A)an increase in the money supply.

B)an adverse supply shock.

C)a decrease of output from Y₁ to Y₂.

D)a slow adjustment of people's expectation of the inflation rate.

Q2) In response to an adverse supply shock,suppose the Fed implements accommodating monetary policy.Which of the following occurs as a result of the accommodating monetary policy?

A)Aggregate demand shifts to the left,which increases inflation and increases unemployment in the short run.

B)Aggregate demand shifts to the left,which decreases inflation and increases unemployment in the short run.

C)Aggregate demand shifts to the right,which increases inflation and increases unemployment in the short run.

D)Aggregate demand shifts to the right,which increases inflation and decreases unemployment in the short run.

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Chapter 22: The Short Run Trade Off Between Inflation and Unemployment:

The Cost of Reducing Inflation

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Sample Questions

Q1) Refer to Monetary Policy in Mokania.The Bank of Mokania publicizes that it intends to reduce the inflation rate to 5%.If it actually reduces inflation to 3% and people were expecting inflation to fall only to 8%,then

A)unemployment falls but it would have fallen by more if the Bank of Mokania had reduced inflation to 5% rather than 3%.

B)unemployment falls but it would have fallen by less if the Bank of Mokania had reduced inflation to 5% rather than 3%.

C)unemployment rises but it would have risen by more if the Bank of Mokania had reduced inflation to 5% rather than 3%.

D)unemployment rises but it would have risen by less if the Bank of Mokania had reduced inflation to 5% rather than 3%.

Q2) Disinflation is a reduction in

A)the price level.

B)the inflation rate.

C)the consumer price index.

D)All of the above are correct.

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Page 149

Chapter 22: The Short Run Trade Off Between Inflation and Unemployment:

Part A

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Sample Questions

Q1) An increase in the natural rate of unemployment shifts the short-run Phillips curve to the -----.If the central bank sees the increase in the unemployment rate,but thinks the natural rate has remained the same and so wants to reduce unemployment,it would -------- the money supply growth rate.If it maintains this money supply growth rate,eventually the short run Phillips curve will shift ----- and unemployment will be

Q2) What is meant by accommodation?

Q3) U.S.net exports fall due to recessions in foreign countries.

A.According to the aggregate demand and supply model,what happens to the price level and output in the short run?

B.According to the short-run Phillips curve what happens to inflation and unemployment in the short run?

C.If the Fed wanted to reverse the effects of this shock on output,what should it do?

Q4) A central bank raises the money supply growth rate and keeps it higher. As the economy moves from the short-run equilibrium created by the increase in the money supply growth back to long-run equilibrium what happens to the unemployment rate?

Q5) What is meant by the natural rate of unemployment?

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Chapter 22: The Short Run Trade Off Between Inflation and Unemployment:

Part B

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Sample Questions

Q1) A low sacrifice ratio would make a central bank less willing to reduce the inflation rate.

A)True

B)False

Q2) The short-run Phillips curve indicates that expansionary monetary policy will temporarily raise the unemployment rate above its natural rate.

A)True

B)False

Q3) The long-run Phillips curve is consistent with monetary neutrality implied by the classical dichotomy.

A)True

B)False

Q4) Other things the same,an increase in aggregate demand reduces unemployment and raises inflation in the short run.

A)True

B)False

Q5) The short-run Phillips curve is based on the classical dichotomy. A)True B)False

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Chapter 23: Six Debates Over Macroeconomic Policy:

Should Monetary and Fiscal Policymakers Try to Stabilize the Economy

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Sample Questions

Q1) The economy goes into recession.Which of the following lists contains things policymakers could do to try to end the recession?

A)increase the money supply,increase taxes,increase government spending

B)increase the money supply,increase taxes,decrease government spending

C)increase the money supply,decrease taxes,increase government spending

D)decrease the money supply,increase taxes,decrease government spending

Q2) A policymaker in favor of stabilizing the economy would be likely to believe

A)recessions are a waste of resources.

B)economies must suffer through the booms and busts of the business cycle.

C)the long policy lags make implementing policy changes in response to recession too risky.

D)policy increases the magnitude of economic fluctuations.

Q3) Which of the following likely occurs when households and firms become more pessimistic?

A)increased spending

B)increased aggregate demand

C)increased real GDP

D)an increase in the unemployment rate

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Chapter 23: Six Debates Over Macroeconomic Policy:

Should the Government Fight Recessions With Spending

Hikes Rather Than Tax Cuts

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Sample Questions

Q1) Which of the following is correct? Investment tax credits

A)can increase investment,but stimulating investment is not a key to ending a recession.

B)can increase investment,which is a key to ending a recession.

C)can not increase spending on investment goods,but stimulating investment is not a key to ending a recession.

D)can not increase spending on investment goods,but stimulating investment is a key to ending a recession.

Q2) An increase in the money supply

A)reduces interest rates and shifts aggregate demand to the right.

B)reduces interest rates and shifts aggregate supply to the right

C)raises interest rates and shifts aggregate demand to the right.

D)raises interest rates and shifts aggregate supply to the right.

Q3) Stimulus spending in 2009 was used for

A)building roads and bridges.

B)providing aid to local and state governments.

C)making payments to the unemployed.

D)All of the above are correct.

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Chapter 23: Six Debates Over Macroeconomic Policy:

Should Monetary Policy Be Made by Rule Rather Than by Discretion

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Q1) Assume a central bank follows a rule that requires it to take steps to keep the price level constant.If the price level fell because of a decrease in aggregate demand and an increase in aggregate supply that kept output unchanged,then

A)the central bank would have to decrease the money supply which would decrease output.

B)the central bank would have to decrease the money supply which would increase output.

C)the central bank would have to increase the money supply which would decrease output.

D)the central bank would have to increase the money supply which would increase output.

Q2) If a government managed to reduce the time inconsistency problem by mandating that the central bank target inflation at a low rate,then

A)the long-run Phillips curve would shift right.

B)the long-run Phillips curve would shift left.

C)the short-run Phillips curve would shift up.

D)the short-run Phillips curve would shift down.

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Chapter 23: Six Debates Over Macroeconomic Policy:

Should the Central Bank Aim for Zero Inflation

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Sample Questions

Q1) Inflation reduction has the lowest cost when the efforts are

A)credible so that the sacrifice ratio is low.

B)credible so that the sacrifice ratio is high.

C)unexpected so that the sacrifice ratio is high.

D)unexpected so that the sacrifice ratio is low.

Q2) An individual would suffer lower losses or maybe even gain from an unexpectedly higher inflation rate if

A)she held much currency and on net was a lender.

B)she held much currency and on net was a borrower.

C)she held little currency and on net was a lender.

D)she held little currency and on net was a borrower.

Q3) Proponents of zero inflation argue that a successful program to reduce inflation

A)eventually reduces inflation expectations.

B)eventually raises real interest rates.

C)permanently decreases output.

D)permanently raises unemployment.

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Chapter 23: Six Debates Over Macroeconomic Policy:

Should the Government Balance Its Budget

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Q1) Last year a country's real GDP grew by 4%,it's inflation rate was 2.5%,and it's government budget deficit was about $250 billion.It's debt to GDP ratio was unchanged.About what was it's debt at the start of last year?

A)16.7 trillion

B)10.0 trillion

C)6.25 trillion

D)3.85 trillion

Q2) If the budget deficit were reduced,

A)interest rates and investment would increase.

B)interest rates would increase and investment would decrease.

C)interest rates and investment would decrease.

D)interest rates would decrease and investment would increase.

Q3) Suppose that a country has an inflation rate of about 2 percent per year and a real GDP growth rate of about 2.5 percent per year.Then the government can have a deficit of about

A)5 percent of GDP without raising the debt-to-income ratio.

B)4.5 percent of GDP without raising the debt-to-income ratio.

C)1.25 percent of GDP without raising the debt-to-income ratio.

D).5 percent of GDP without raising the debt-to-income ratio.

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Chapter 23: Six Debates Over Macroeconomic Policy:

Laws

Reformed

Encourage

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Sample Questions

Q1) Proponents of tax-law changes to encourage saving would

A)argue that corporate tax rates should be decreased.

B)increase the number of government benefits which are means-tested.

C)argue that state sales tax should be replaced with state income tax.

D)favor none of the above programs.

Q2) Eliminating double-taxation would likely

A)raise saving and primarily benefit people with lower incomes.

B)raise saving but primarily benefit people with higher incomes.

C)reduce saving but primarily benefit people with lower incomes.

D)reduce saving and primarily benefit people with higher income.

Q3) A reduction in the tax rate on interest income

A)would necessarily raise national saving.

B)would primarily benefit the wealthy.

C)both a and b are correct.

D)None of the above are correct.

Q4) Higher saving is associated with

A)a larger capital stock and a higher standard of living.

B)a larger capital stock but not a higher standard of living.

C)a higher standard of living but not a larger capital stock.

D)neither a higher standard of living nor a higher capital stock.

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Chapter 23: Six Debates Over Macroeconomic Policy:

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Q1) The six debates over macroeconomic policy exist mostly because A)economists disagree over basic issues such as the importance of saving for economic growth.

B)there are tradeoffs and people disagree about the best way to deal with them.

C)politicians offer misleading information.

D)people fail to clearly see the benefits or the costs of most changes.

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158

Chapter 23: Six Debates Over Macroeconomic Policy: Part

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Q1) According to political business cycle theory,if the Fed wanted to increase the chances of a President's re-election,what specific actions might it take?

Q2) List two of the three types of fiscal programs that the President and Congress emphasized in response to the 2008-2009 recession.

Q3) Suppose the nation's price level rises as a result of an increase in aggregate demand and a decrease in aggregate supply which leaves output unchanged.If the Fed is required to follow a rule that stabilizes the price level,what will the Fed do to the money supply and what impact will this have on total output in the economy?

Q4) If businesses become more pessimistic about the future,what fiscal policies could the government take to stabilize the economy?

Q5) A higher return on saving ------ the amount a household needs to save to achieve any target level of future consumption.This effect on saving is called the ------- effect.If the income effect is large enough,then a reduction in taxes on saving might ------ tax revenues.

Q6) Explain how it is possible for the government debt to grow forever.

Q7) What is meant by the political business cycle?

Q8) Is it possible that deficits do not burden future generations?

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Chapter 23: Six Debates Over Macroeconomic Policy: Part B

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Q1) One prominent debate over macroeconomic policy centers on the question of whether monetary and fiscal policy should be used to try to stabilize the economy.

A)True

B)False

Q2) If the central bank has discretion to make policy,it may create economic fluctuations that reflect the electoral calendar.This is called the political business cycle.

A)True

B)False

Q3) Proponents of zero-inflation policies acknowledge that the public is unconcerned about the inflation rate.

A)True

B)False

Q4) Tax laws do not give preferential treatment to some kinds of retirement saving. A)True

B)False

Q5) Social Security transfers wealth from younger generations to older generations. A)True

B)False

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Q1) Which of the following statements about state income taxes is correct?

A)Some states do not tax income at all.

B)If states tax income,they must follow federal guidelines for designing the tax structure.

C)States are not allowed to have a higher marginal tax rate than the federal marginal tax rate.

D)All of the above are correct.

Q2) Corporate profits are

A)included in payroll taxes.

B)exempt from taxes.

C)taxed twice,once as profit and once as dividends.

D)taxed to pay for Medicare.

Q3) The payroll tax differs from the individual income tax because the payroll tax is primarily earmarked to pay for

A)employer-provided pensions.

B)Social Security and Medicare.

C)employer-provided health benefits.

D)job loss and training programs.

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