Economic Principles and Policy
Pre-Test Questions
Course Introduction
Economic Principles and Policy provides students with a comprehensive understanding of the fundamental concepts and analytical tools used in economics. The course explores core microeconomic and macroeconomic principles such as supply and demand, market structures, inflation, unemployment, and economic growth. Emphasis is placed on how these principles underpin public policy decisions, examining real-world economic issues including taxation, government spending, regulation, and international trade. Through case studies and policy analysis, students will develop the ability to critically evaluate the impact of various policy interventions on individuals, businesses, and society as a whole.
Recommended Textbook
Principles of Economics 4th Edition by
N. Gregory Mankiw
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Chapter 1: Ten Principles of Economics
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Sample Questions
Q1) A company that formerly produced software went out of business because too many potential customers bought illegally-produced copies of the software instead of buying the product directly from the company.This instance serves as an example of A)market power.
B)market failure.
C)inadequate enforcement of property rights.
D)the invisible hand at work.
Answer: C
Q2) Which of the following is the best example of a marginal change?
A)After graduating college, Audrey's income increases from $500 per month to $3,000 per month.
B)Morgan gets a raise at her part-time job and is now paid $7.25 per hour instead of $7.00.
C)Housing prices in an area increase by 40 percent when a new interstate is built that passes nearby.
D)A hard freeze wipes out half of the orange crop in Florida and the price of orange juice doubles.
Answer: B
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3
Chapter 2: Thinking Like an Economist
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Sample Questions
Q1) By scientific method we mean
A)the use of modern electronic testing equipment to understand the world.
B)the dispassionate development and testing of theories about how the world works.
C)the use of controlled laboratory experiments to understand the way the world works.
D)finding evidence to support preconceived theories about how the world works.
Answer: B
Q2) Which of the following terms are most closely associated with the study of economics?
A)force and acceleration
B)torts and venues
C)ego and cognitive dissonance
D)comparative advantage and deadweight loss
Answer: D
Q3) While the scientific method is applicable to studying natural sciences,it is not useful in studying an economic system.
A)True
B)False
Answer: False
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4
Chapter 3: Interdependence and the Gains From Trade
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Sample Questions
Q1) Refer to Figure 3-2.Suppose Jerry's production possibilities frontier is based on 4 hours of work.Jerry requires
A)1/4 hour to produce 1 pound of ice cream and 3/8 hour to produce 1 pound of cones.
B)1/2 hour to produce 1 pound of ice cream and 3/4 hour to produce 1 pound of cones.
C)1 hour to produce 1 pound of ice cream and 2/3 hour to produce 1 pound of cones.
D)1 hour to produce 1 pound of ice cream and 3/2 hours to produce 1 pound of cones.
Answer: C
Q2) Refer to Table 3-1.The farmer has an absolute advantage in A)potatoes, and the rancher has a comparative advantage in meat. B)meat, and the rancher has a comparative advantage in potatoes. C)neither good, and the rancher has a comparative advantage in potatoes. D)neither good, and the rancher has a comparative advantage in meat.
Answer: A
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Chapter 4: The Market Forces of Supply and Demand
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Sample Questions
Q1) Which of the following events could shift the demand curve for gasoline to the left?
A)Income of gasoline buyers rises, and gasoline is a normal good.
B)Income of gasoline buyers falls, and gasoline is an inferior good.
C)Public service announcements are run on television, encouraging people to walk or ride bicycles instead of driving cars.
D)The price of gasoline rises.
Q2) In a market economy,
A)supply determines demand and, in turn, demand determines prices.
B)demand determines supply and, in turn, supply determines prices.
C)the allocation of scarce resources determines prices and, in turn, prices determine supply and demand.
D)supply and demand determine prices and, in turn, prices allocate scarce resources.
Q3) Which of the following is not a determinant of demand?
A)the price of a resource that is used to produce the good
B)the price of a complementary good
C)the price of the good next month
D)the price of a substitute good
Q4) The behavior of buyers and sellers drives markets toward equilibrium.
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Page 6
Chapter 5: Elasticity and Its Applications
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Sample Questions
Q1) When the price of a good is $5,the quantity demanded is 100 units per month;when the price is $7,the quantity demanded is 80 units per month.Using the midpoint method,the price elasticity of demand is about
A)0.22.
B)0.67.
C)1.33.
D)1.50.
Q2) For which of the following goods is the income elasticity of demand likely highest?
A)water
B)diamonds
C)hamburgers
D)housing
Q3) As we move downward and to the right along a linear,downward-sloping demand curve,
A)slope and elasticity both remain constant.
B)slope changes but elasticity remains constant.
C)slope and elasticity both change.
D)slope remains constant but elasticity changes.
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Chapter 6: Supply, demand, and Government Policies
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Sample Questions
Q1) Refer to Figure 6-3.In panel (b),with the price floor in effect,there will be
A)a shortage of wheat.
B)equilibrium in the market.
C)a surplus of wheat.
D)an excess demand for wheat.
Q2) Which of the following characterizations is correct?
A)Rent control and the minimum wage are both examples of price ceilings.
B)Rent control is an example of a price ceiling and the minimum wage is an example of a price floor.
C)Rent control is an example of a price floor and the minimum wage is an example of a price ceiling.
D)Rent control and the minimum wage are both examples of price floors.
Q3) Refer to Figure 6-14.As the figure is drawn,who directly pays the tax to the government?
A)The buyers pay the full tax to the government.
B)The sellers pay the full tax to the government.
C)A portion of the tax is paid to the government by buyers and the remaining portion is paid to the government by sellers.
D)As the figure is drawn, any of the above is possible.
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Page 8
Chapter 7: Consumers, producers, and the Efficiency of Markets
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Sample Questions
Q1) A simultaneous increase in both the demand for radios and the supply of radios would imply that
A)both the value of radios to consumers and the cost of producing radios has increased.
B)both the value of radios to consumers and the cost of producing radios has decreased.
C)the value of radios to consumers has decreased and the cost of producing radios has increased.
D)the value of radios to consumers has increased and the cost of producing radios has decreased.
Q2) Refer to Table 7-5.At a price of $4.00,total surplus is
A)more than it would be at the equilibrium price.
B)less than it would be at the equilibrium price.
C)the same as it would be at the equilibrium price.
D)There is insufficient information to make this determination.
Q3) Laissez-faire is a French expression which literally means
A)to make do.
B)to get involved.
C)whatever works.
D)allow them to do.
Page 9
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Chapter 8: Application: the Costs of Taxation
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Sample Questions
Q1) Refer to Figure 8-4.The total surplus (consumer,producer,and government)with the tax is represented by area
A)C + E.
B)A + B + C.
C)D + E + F.
D)A + B + D + F.
Q2) The supply curve and the demand curve for cigars are straight lines.Suppose the equilibrium quantity in the market for cigars is 1,000 per month when there is no tax.Then a tax of $0.50 per cigar is imposed.The effective price paid by buyers increases from $1.50 to $1.90 and the effective price received by sellers falls from $1.50 to $1.40.The government's tax revenue amounts to $475 per month.Which of the following statements is correct?
A)The demand for cigars is less elastic than the supply of cigars.
B)The tax causes a decrease in consumer surplus of $390 and a decrease in producer surplus of $97.50.
C)The deadweight loss of the tax is $12.50.
D)All of the above are correct.
Q3) Illustrate on three demand-and-supply graphs how the size of a tax (small,medium and large)can alter total revenue and deadweight loss.
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Page 10
Chapter 9: Application: International Trade
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Sample Questions
Q1) Refer to Scenario 9-1.If trade in tomatoes is allowed,the A)price paid by American consumers of tomatoes is unchanged relative to the no-trade situation.
B)total well-being of American producers of tomatoes is diminished relative to the no-trade situation.
C)total well-being of American consumers of tomatoes is enhanced relative to the no-trade situation.
D)total well-being of the United States is enhanced relative to the no-trade situation.
Q2) Refer to Figure 9-6.With trade,Wales
A)imports Q - Q units of cheese.
B)exports Q - Q units of cheese.
C)imports Q - Q units of cheese.
D)exports Q - Q units of cheese.
Q3) A tax on an imported good is called a A)quota.
B)tariff.
C)supply tax.
D)trade tax.
Q4) How does an import quota differ from an equivalent tariff?
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Chapter 10: Externalities
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Sample Questions
Q1) A gasoline tax is designed to correct each of the following problems except A)traffic congestion.
B)traffic accidents.
C)air pollution.
D)EPA regulations.
Q2) Which of the following statements is correct?
A)Taxes are more difficult to administer than regulations.
B)Taxes provide incentives for firms to adopt new methods to reduce negative externalities.
C)Command-and-control policies provide incentives for private decisionmakers to solve their problems on their own.
D)Corrective taxes distort incentives.
Q3) Why can't private individuals always internalize an externality without the help of government?
A)Legal restrictions prevent side payments between individuals.
B)Transactions costs may be too high.
C)Side payments between individuals are inefficient.
D)Side payments between individuals violate equity standards.
Q4) Why are efficiency taxes preferred to regulatory policies as methods remedy externalities?
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Chapter 11: Public Goods and Common Resources
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Sample Questions
Q1) Most goods in our economy are allocated in markets,where buyers pay for what they receive and sellers are paid for what they provide.
A)True
B)False
Q2) Private markets usually fail to provide lighthouses because
A)lighthouses cost too much to build relative to their benefits.
B)government intervention makes it hard for private lighthouse owners to compete in the market.
C)ship captains have incentives to use lighthouses without paying.
D)lighthouses are valued very little by ship captains these days.
Q3) Which of the following is not considered a public good?
A)national defense
B)basic research
C)fire protection
D)fighting poverty
Q4) Raising the entrance fee at Yellowstone National Park would not
A)potentially increase park revenues.
B)potentially decrease the number of visitors.
C)allow market forces to correct for the externality.
D)make the national park a private good.
Page 13
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Chapter 12: The Design of the Tax System
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Sample Questions
Q1) A tax levied on the total amount spent in retail stores is called
A)a sales tax.
B)an excise tax.
C)a retail tax.
D)an income tax.
Q2) You are trying to design a tax system that will simultaneously achieve both of the following goals: 1)two people with the same total income would pay taxes of the same amount,and 2)a high-income person would pay a higher fraction of income in taxes than a low-income person.Which of the following tax systems could achieve both goals?
A)a lump-sum tax
B)a regressive tax
C)a progressive tax
D)a proportional tax
Q3) Refer to Table 12-2.Surbhi is a single person whose taxable income is $150,000 a year.What is her total tax due in 2002?
A)$22,072
B)$41,679.50
C)$43,789.75
D)$54,000
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Page 14
Chapter 13: The Costs of Production
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Sample Questions
Q1) Suppose a certain firm is able to produce 165 units of output per day when 15 workers are hired.The firm is able to produce 176 units of output per day when 16 workers are hired (holding other inputs fixed).Then the marginal product of the 16th worker is
A)10 units of output.
B)11 units of output.
C)16 units of output.
D)176 units of output.
Q2) Marginal cost equals
A)total cost divided by quantity of output produced.
B)total output divided by the change in total cost.
C)the slope of the total cost curve.
D)the slope of the line drawn from the origin to the total cost curve.
Q3) The use of specialization to achieve economies of scale is one reason modern societies are as prosperous as they are.
A)True
B)False
Q4) What are opportunity costs? How do explicit and implicit costs relate to opportunity costs?
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Chapter 14: Firms in Competitive Markets
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Sample Questions
Q1) Firms in competitive markets are said to be price takers.
A)True
B)False
Q2) As a general rule,profit-maximizing producers in a competitive market produce output at a point where
A)marginal cost is increasing.
B)marginal cost is decreasing.
C)marginal revenue is increasing.
D)price is less than marginal revenue.
Q3) Tommy's Tires operates in a perfectly competitive market.If tires sell for $50 each and average total cost per tire is $40 at the profit-maximizing output level,then in the long run
A)more firms will enter the market.
B)some firms will exit from the market.
C)the equilibrium price per tire will rise.
D)average total costs will fall.
Q4) List and describe the characteristics of a perfectly competitive market.
Q5) Describe the difference between average revenue and marginal revenue.Why are both of these revenue measures important to a profit-maximizing firm?
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Chapter 15: Monopoly
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Sample Questions
Q1) Price discrimination requires the firm to
A)separate customers according to their willingness to pay.
B)differentiate between different units of its product.
C)engage in arbitrage.
D)use coupons.
Q2) If one were to compare a competitive market to a monopoly that engages in perfect price discrimination,one could say that
A)in both cases, total social welfare is the same.
B)total social welfare is higher in the competitive market than with the perfectly price discriminating monopoly.
C)in both cases, some potentially mutually beneficial trades do not occur.
D)consumer surplus is the same in both cases.
Q3) Round-trip airline tickets are usually cheaper if you stay over a Saturday night before you fly back.What is the reason for this price discrepancy?
A)Airlines are practicing imperfect price discrimination to raise their profits.
B)Airlines charge a different rate based on the different nature of peoples' travel needs.
C)Airlines are attempting to charge people based on their willingness to pay.
D)All of the above are correct.
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Chapter 16: Oligopoly
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Sample Questions
Q1) If all of the oligopolists in a market collude to form a cartel,total profit for the cartel is less than that of a monopolist.
A)True
B)False
Q2) Refer to Table 16-3.Assume that there are two digital cable TV companies operating in this market.If they are able to collude on the price and quantity of subscriptions to sell,what price (P)will they charge,and how many subscriptions (Q)will they sell collectively?
A)P = $40, Q = 12,000
B)P = $60, Q = 9,000
C)P = $80, Q = 6,000
D)P = $100, Q = 3,000
Q3) Refer to Table 16-11.This table shows a game played between two players,A and B.The payoffs in the table are shown as (Payoff to A,Payoff to B).Which outcome is the Nash equilibrium in this game?
A)Up-Right
B)Up-Left
C)Down-Right
D)Down-Left
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Page 18
Chapter 17: Monopolistic Competition
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Sample Questions
Q1) If a firm in a monopolistically competitive market successfully uses advertising to decrease elasticity of demand for its product,
A)the firm will be able to increase its markup over marginal cost.
B)the firm will eventually have to lower price to remain competitive.
C)it will increase the welfare of society.
D)it will reduce average total cost.
Q2) In both perfect competition and monopolistic competition,
A)each firm is, in many ways, like a monopoly.
B)each firm sells a product that is at least slightly different from those of other firms.
C)each firm faces a downward-sloping demand curve.
D)each firm has many competitors.
Q3) Refer to Figure 17-6.The maximum total short-run economic profit for the monopolistically competitive firm in this figure is
A)$1,000.
B)$2,000.
C)$3,000
D)$5,000.
Q4) List five goods that are likely sold in a monopolistically competitive market.
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Page 19
Chapter 18: The Markets for the Factors of Production
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Sample Questions
Q1) Suppose that workers immigrate to Minnesota from Canada.Which of the following correctly describes what would happen in the market for labor in Minnesota?
A)The equilibrium wage would increase, as would the quantity of labor.With more workers, the added output from an extra worker is larger.
B)The equilibrium wage would decrease, as would the quantity of labor.With fewer workers, the added output from an extra worker is smaller.
C)The equilibrium wage would decrease, and the quantity of labor would increase.With more workers, the added output from an extra worker is smaller.
D)The equilibrium wage would decrease, and the quantity of labor would increase.With more workers, the added output from an extra worker is larger.
Q2) Refer to Figure 18-3.The shift of the labor supply curve from S to S could possibly be explained by
A)technological progress.
B)a change in the price of firms' output.
C)a change in workers' attitudes toward the work-leisure tradeoff.
D)All of the above are correct.
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Chapter 19: Earnings and Discrimination
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Sample Questions
Q1) Discrimination may persist even in competitive markets when the source of the discrimination is
A)employer prejudice.
B)customer prejudice.
C)wage prejudice.
D)Both a and b are correct.
Q2) Which of the following is the most important source of human capital?
A)education
B)effort
C)chance
D)physical strength
Q3) In the early 20th century,streetcar seating which was segregated by race
A)was a result of economic discrimination by railroad company managers.
B)was less profitable than streetcar seating that didn't have restrictions.
C)was strongly supported by private streetcar companies.
D)led to higher revenue and lower costs for streetcar companies.
Q4) The signaling theory of education maintains that workers who complete specific levels of education enhance their productivity through education.
A)True
B)False
Page 21
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Chapter 20: Income Inequality and Poverty
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Q1) Explain how a "leaky bucket" can be used to illustrate the utilitarian argument that governments should not attempt to completely equalize individual incomes.
Q2) Economists study poverty and income inequality in order to answer which of the following questions?
A)What are people's wages?
B)How does labor-force experience affect wages?
C)How much inequality is there in society?
D)How do people adjust their behavior due to taxation?
Q3) The poverty line is an absolute standard and is based on the cost of providing an adequate diet.
A)True
B)False
Q4) Suppose that income is subject to increasing marginal utility.From a utilitarian perspective,
A)some income redistribution from rich to poor would increase social welfare.
B)some income redistribution from poor to rich would increase social welfare.
C)any income redistribution would probably reduce social welfare.
D)any income redistribution would probably increase social welfare.
Q5) Explain the relationship between labor earnings and the distribution of income.
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Chapter 21: The Theory of Consumer Choice
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Q1) Suppose Olivia is planning for retirement in a two-period world.In the first period Olivia is young and earns $1 million,and in the second period Olivia is old and retired and earns nothing.The interest rate is initially 10 percent,but then it falls to 7 percent.Which of the following must be true?
A)After the interest rate falls, the substitution effect will induce Olivia to consume more when she is young.
B)After the interest rate falls, the substitution effect will induce Olivia to consume less when she is young.
C)After the interest rate falls, the income effect will induce Olivia to consume more when she is young.
D)After the interest rate falls, the income effect will induce Olivia to consume less when she is young.
Q2) The substitution effect of a price change is the change in consumption that results from the movement to a different indifference curve.
A)True
B)False
Q3) List and briefly explain each of the four properties of indifference curves.
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Page 23
Chapter 22: Frontiers of Microeconomics
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Q1) Which of the following relationships involves asymmetric information?
A)Patients can look up information regarding certain prescription drugs giving them the same information as their doctors.
B)Consumer Reports allows customers of DVD players to know as much about the quality of various players as the store salesperson.
C)Car Fax allows car buyers to obtain used-vehicle histories providing them with the same information as the dealership salesperson.
D)The batter in a baseball game must guess whether the pitcher is going to throw a fastball, curveball, or change-up.
Q2) The problem of moral hazard is a problem of hidden action.
A)True
B)False
Q3) According to the median voter theorem,majority rule will
A)always produce an inconclusive outcome.
B)produce the outcome least preferred by the median voter.
C)produce the outcome most preferred by the median voter.
D)produce an outcome that is inconsistent with transitive preferences.
Q4) Explain the Condorcet paradox.To which type of voting system does it apply?
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Page 24
Chapter 23: Measuring a Nations Income
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Q1) When an American doctor opens a practice in Bermuda,his production there is part of U.S.GDP.
A)True
B)False
Q2) A recession is always associated with
A)declining real GDP.
B)slow but positive growth of real GDP.
C)rising inflation.
D)the end of a war.
Q3) If you buy a burger and fries at your favorite fast food restaurant,
A)neither GDP nor consumption will be affected because you would have eaten at home had you not bought the meal at the restaurant.
B)GDP will be higher, but consumption spending will be unchanged.
C)GDP will be unchanged, but consumption spending will be higher.
D)both GDP and consumption spending will be higher.
Q4) Which of the following is not included in GDP?
A)unpaid cleaning and maintenance of houses
B)services such as those provided by lawyers and hair stylists
C)the estimated rental value of owner-occupied housing
D)production of foreign citizens living in the United States
Page 25
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Chapter 24: Measuring the Cost of Living
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Q1) When the quality of a good improves,the purchasing power of the dollar
A)increases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.
B)increases, so the CPI understates the change in the cost of living if the quality change is not accounted for.
C)decreases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.
D)decreases, so the CPI understates the change in the cost of living if the quality change is not accounted for.
Q2) A German automobile company produces cars in the United States,with some of those cars being exported to other nations and some of them being sold within the United States.If the prices of these cars increase,then
A)the GDP deflator and the CPI will both increase.
B)the GDP deflator will increase and the CPI will be unchanged.
C)the GDP deflator will be unchanged and the CPI will increase.
D)the GDP deflator and the CPI will both be unchanged.
Q3) Why does the GDP deflator give a different rate of inflation than does the CPI?
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Chapter 25: Production and Growth
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Q1) The dictator of Turan has recently begun to arbitrarily seize farms belonging to his political opponents,and he has given the farms to his friends.His friends don't know much about farming.The courts in Turan have ruled that the seizures are illegal,but the dictator has ignored the rulings.Other things equal,we would expect that the growth rate in Turan will
A)fall temporarily, but will return to where it was when the new owners learn how to farm.
B)increase because the total amount of human capital in the country will increase as the new owners learn how to farm.
C)fall and remain lower for a long time.
D)not be affected unless widespread civil disorder or civil war results.
Q2) In the country of Krypton,the price of lead increased from $20 per pound to $21 per pound during a time when the overall price level increased by 5 percent.During this period,the real price of lead
A)increased.
B)decreased.
C)stayed the same.
D)might have increased, decreased or stayed the same; more information is needed to be sure.
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Chapter 26: Saving, investment, and the Financial System
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Q1) Nastech Pharmaceuticals announced they have developed a nasal spray that would reduce hunger cravings.Other things the same we'd expect
A)the demand for existing shares of stock in this company decreased, so the price fell.
B)the demand for existing shares of stock in this company increased, so the price rose.
C)the supply of stock of existing shares of stock in this company decreased, so the price fell.
D)the supply of stock of existing shares of stock in this company increased, so the price rose.
Q2) Suppose a country repealed its investment tax credit.The effects of this are represented by shifting the
A)demand for and the supply of loanable funds to the right.
B)demand for and the supply of loanable funds to the left.
C)supply of loanable funds to the right and the demand for loanable funds to the left.
D)None of the above is correct.
Q3) Draw and label a graph showing equilibrium in the market for loanable funds.
Q4) What are the basic differences between bonds and stocks?
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Chapter 27: The Basic Tools of Finance
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Q1) 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.
Q2) If the interest rate is r% then the rule of 70 says that your savings will double about every
A)70/(1-r) years.
B)70/(1+r) years.
C)70/r years.
D)70(1+r)/r years.
Q3) According to the efficient markets hypothesis,at any moment in time,the market price is the best estimate of the company's value based on publicly available information.
A)True
B)False
Q4) Discuss the statistical evidence concerning the efficient markets hypothesis.
Q5) What's the difference between firm-specific risk and market risk? Will diversification eliminate one or both? Explain.
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Chapter 28: Unemployment
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Q1) Anna has just finished high school and started looking for her first job,but has not yet found one.As a result,the unemployment rate
A)increases, and the labor-force participation rate is unaffected.
B)increases, and the labor-force participation rate increases.
C)is unaffected, and the labor-force participation rate increases.
D)increases, and the labor-force participation rate decreases.
Q2) Cyclical unemployment refers to
A)the relation between the probability of unemployment and a worker's changing level of experience.
B)how often a worker is likely to be employed during her lifetime.
C)year-to-year fluctuations of unemployment around its natural rate.
D)long-term trends in unemployment.
Q3) Refer to Labor Stats.What is the adult female labor force in Meditor?
A)35 million
B)40 million
C)70 million
D)105 million
Q4) Why have labor-force participation rates for women in the United States increased since World War II while labor-force participation rates for men have decreased?
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Chapter 29: The Monetary System
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Q1) Suppose a bank has a 10 percent reserve requirement,$4,000 in deposits,and has loaned out all it can given the reserve requirement.
A)It has $40 in reserves and $3,960 in loans.
B)It has $400 in reserves and $3,600 in loans.
C)It has $444 in reserves and $3,556 in loans.
D)None of the above is correct.
Q2) Which of the following is a function of money?
A)a unit of account
B)a store of value
C)medium of exchange
D)All of the above is correct.
Q3) Bank runs and the accompanying increase in the money multiplier caused the U.S.money supply to rise by 28 percent from 1929 to 1933.
A)True
B)False
Q4) Marc puts prices on surfboards and skateboards at his sporting goods store.He is using money as a unit of account.
A)True
B)False
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Chapter 30: Money Growth and Inflation
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Q1) You put money in an account and earn a real interest rate of 6 percent,inflation is 2 percent,and your marginal tax rate is 20 percent.What is your after-tax real rate of interest?
A)4.8 percent
B)3.2 percent
C)2.8 percent
D)None of the above is correct.
Q2) Over the last 70 years the average annual U.S.inflation rate was about
A)2 percent implying that prices have increased 10-fold.
B)4 percent implying that prices have increased 10-fold.
C)2 percent implying that prices have increased 16-fold.
D)4 percent implying that prices increased about 16-fold.
Q3) The principle of monetary neutrality implies that an increase in the money supply will
A)increase real GDP and the price level.
B)increase real GDP, but not the price level.
C)increase the price level, but not real GDP.
D)increase neither the price level nor real GDP.
Q4) Define each of the symbols and explain the meaning of M × V = P × Y.
Q5) Why did farmers in the late 1800s dislike deflation?
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Chapter 31: Open-Economy Macroeconomics: Basic Concepts
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Q1) Suppose that the real exchange rate between the United States and Vietnam is defined in terms of baskets of goods.Other things the same,which of the following will increase the real exchange rate (that is increase the number of baskets of Vietnamese goods a basket of U.S.goods buys)?
A)an increase in the quantity of Vietnamese currency that can be purchased with a dollar
B)an increase in the price of U.S.baskets of goods
C)a decrease in the price in Vietnamese currency of Vietnamese goods
D)All of the above are correct.
Q2) From 2000-2004 net capital outflow as a percent of GDP became a
A)larger positive number.
B)smaller positive number.
C)larger negative number.
D)smaller negative number
Q3) Mike,a U.S.citizen,buys $1,000 worth of cheese from France.His action alone
A)increases U.S.imports by $1,000 and increases U.S.net exports by $1,000.
B)increases U.S.imports by $1,000 and decreases U.S.net exports by $1,000.
C)increases U.S.exports by $1,000 and increases U.S.net exports by $1,000.
D)increases U.S.exports by $1,000 and decreases U.S.net exports by $1,000.
Q4) How do we find the real exchange rate from the nominal exchange rate?
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Chapter 32: A Macroeconomic Theory of the Open Economy
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Q1) Refer to Figure 32-5.If the economy were initially in equilibrium at r and E and the government removed import quotas,the exchange rate would
A)appreciate to E .
B)appreciate to E .
C)depreciate to E .
D)depreciate to E .
Q2) In the open-economy macroeconomic model,the market for loanable funds identity can be written as
A)S = I
B)S = NCO
C)S = I + NCO
D)S + I = NCO
Q3) At the equilibrium interest rate in the open economy macroeconomic model,the amount that people want to save equals the desired quantity of
A)net capital outflow.
B)domestic investment.
C)net capital outflow plus domestic investment.
D)foreign currency supplied.
Q4) What effect do protectionist policies have on the trade deficit?
Page 34
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Chapter 33: Aggregate Demand and Aggregate Supply
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Q1) An increase in the price level and a reduction in real GDP could be created by A)a fall in stock prices.
B)natural disasters such as hurricanes and famines.
C)declining government expenditures.
D)tax rebates.
Q2) The long-run trend in real GDP is upward.How is this possible given business cycles? What explains the upward trend?
Q3) A short period of falling incomes and rising unemployment is called a A)depression.
B)recession.
C)expansion.
D)business cycle.
Q4) An increase in the money supply
A)and the investment tax credit both cause aggregate demand to shift right.
B)and the investment tax credit both cause aggregate demand to shift left.
C)causes aggregate demand to shift right, while the investment tax credit causes aggregate demand to shift left.
D)causes aggregate demand to shift left, while the investment tax credit causes aggregate demand to shift right.
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Chapter 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand
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Q1) 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?
Q2) Assume the money market is initially in equilibrium.If the price level decreases,then according to liquidity preference theory there is an excess
A)supply of money until the interest rate increases.
B)supply of money until the interest rate decreases.
C)demand for money until the interest rate increases.
D)demand for money until the interest rate decreases.
Q3) Which of the following shifts money demand right?
A)an increase in the interest rate or an increase in the price level
B)an increase in the interest rate but not an increase in the price level
C)an increase in the price level but not an increase in the interest rate
D)neither an increase in the interest rate nor an increase in the price level
Q4) For the most part,fiscal policy affects the economy in the short run while monetary policy primarily matters in the long run.
A)True
B)False
Page 36
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Chapter 35: The Short Run Trade Off Between Inflation and Unemployment
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Q1) If policymakers decrease aggregate demand,then in the long run
A)prices will be lower and unemployment will be higher.
B)prices will be lower and unemployment will be unchanged.
C)inflation and unemployment will be unchanged.
D)None of the above is correct.
Q2) Refer to Monetary Policy in Hyperion.Suppose Hyperion has had the same inflation rate for a long time.Which,if either,of the following ideas imply that the unemployment rate in Hyperion would be above the natural rate.
A)both the Classical dichotomy and the long-run Phillips curve
B)the Classical dichotomy, but not the long run Phillips curve
C)the long-run Phillips curve, but not the Classical dichotomy
D)neither the long-run Phillips curve nor the Classical dichotomy
Q3) Which of the following is disinflation?
A)prices stay the same.
B)prices fall.
C)prices rise at a slower rate than they used to.
D)prices rise as a faster rate than they used to.
Q4) Monetary policy of the early 1980s cut inflation by more than half.
A)True
B)False
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Chapter 36: Five Debates Over Macroeconomic Policy
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Q1) If inflation falls it
A)causes people to put in more effort to keep money balances low.When inflation is unexpectedly low it redistributes wealth from lenders to borrowers.
B)causes people to put in more effort to keep money balances low.When inflation is unexpectedly low it redistributes wealth from borrowers to lenders.
C)causes people to put in less effort to keep money balances low.When inflation is unexpectedly low it redistributes wealth from lenders to borrowers.
D)causes people to put in less effort to keep money balances low.When inflation is unexpectedly low it redistributes wealth from borrowers to lenders.
Q2) The effects of a decline in the value of financial assets,such as stocks,on consumption and the economy might be offset by
A)increasing government spending.
B)decreasing the money supply.
C)increasing taxes.
D)None of the above is correct.
Q3) Why do many economists advocate a consumption tax rather than an income tax?
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