Economic Principles and Problems
Review Questions
Course Introduction
This course offers a comprehensive introduction to the fundamental principles of economics, exploring both microeconomic and macroeconomic concepts. Students will examine the mechanisms of supply and demand, consumer behavior, market structures, and the role of government in the economy. The course also addresses pressing economic issues such as unemployment, inflation, economic growth, and the impact of monetary and fiscal policies. Through real-world examples and problem-solving exercises, learners will develop an understanding of how economic theories apply to everyday decisions and contemporary societal challenges.
Recommended Textbook
Economics 4th Edition by R. Glenn Hubbard
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Page 2
Chapter 1: Economics: Foundations and Models
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Sample Questions
Q1) Which of the following are primarily macroeconomic topics and which are primarily microeconomic topics? a.gasoline prices
B)unemployment
C)inflation
D)health care costs
E)air pollution
F)economic growth
Answer: B, C, and F are primarily macroeconomic topics
Q2) Suppose the U.S.government encouraged new medical school graduates to take over existing practices from doctors wishing to retire by paying both the new and retiring doctors $100,000.These doctors would be exemplifying the economic idea that
A) people are rational.
B) people respond to economic incentives.
C) optimal decisions are made at the margin.
D) equity is more important than efficiency.
Answer: B
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Chapter
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Sample Questions
Q1) The Great Depression of the 1930s with a large number of workers and factories unemployed would be represented in a production possibilities frontier graph by
A) a point inside the frontier.
B) a point outside the frontier.
C) a point on the frontier.
D) an intercept on either the vertical or the horizontal axis.
Answer: A
Q2) It is possible to have a comparative advantage in producing a good or service without having an absolute advantage.
A)True
B)False
Answer: True
Q3) Which of the following is not a factor of production?
A) an acre of farmland
B) a drill press in a machine shop
C) the manager of the local tire shop
D) $1,000 in cash
Answer: D
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Chapter 3: Where Prices Come From: the Interaction of
Demand and Supply
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Sample Questions
Q1) In 2004,hurricanes damaged a large portion of Florida's orange crop.As a result of this,many orange growers were not able to supply fruit to the market.At the pre-hurricane equilibrium price (i.e.,at the initial equilibrium price),we would expect to see
A) a surplus of oranges.
B) the quantity demanded equal to the quantity supplied.
C) a shortage of oranges.
D) an increase in the demand for oranges.
Answer: C
Q2) If a firm has an incentive to increase supply now and decrease supply in the future,the firm expects that the
A) price of its product will be lower in the future than it is today.
B) price of its product will be higher in the future than it is today.
C) price of inputs will be lower in the future than they are today.
D) demand for the product will be lower in the future than it is today.
Answer: A
Q3) Market equilibrium occurs where supply equals demand.
A)True
B)False
Answer: False
Page 5
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Chapter 4: Economic Efficiency, government Price Setting, and Taxes
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Sample Questions
Q1) Refer to Figure 4-8.For each unit sold,the price sellers receive after the tax (net of tax)is
A) $20.
B) $22.
C) $27.
D) $32.
Q2) Suppose the demand curve for a product is horizontal and the supply curve is upward sloping.If a unit tax is imposed in the market for this product,
A) sellers bear the entire burden of the tax.
B) the tax burden will be shared among the government, buyers and sellers.
C) buyers bear the entire burden of the tax.
D) the tax burden will be shared by buyers and sellers.
Q3) Refer to Figure 4-5.What is the value of producer surplus after the imposition of the ceiling?
A) $40,000
B) $100,000
C) $300,000
D) $430,000
Q4) What is producer surplus? What does producer surplus measure?
Page 6
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Chapter 5: Externalities, environmental Policy, and Public Goods
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Sample Questions
Q1) Economist A.C.Pigou argued that to deal with a negative externality in production,the government should impose a tax equal to the cost of the externality.What did Pigou believe should be done in the case of a positive externality in consumption? How would his recommendation impact the demand and market equilibrium for the product which is generating the positive externality?
Q2) Anyone can purchase sulfur dioxide emissions allowances on the Chicago Mercantile Exchange.Several environmental groups have raised money to buy allowances (which they subsequently destroy).As part of their fund-raising,these groups have urged contributors to buy the allowances as gifts.As one newspaper story put it,"For the environmentalist in your life,here's a gift that is sold by the ton,fits in an envelope and will last forever." Source for quote: Randall Edwards,"Dear Santa: Please Bring Me Sulfur Dioxide for Christmas," Columbus Dispatch,December 19,1999.
What would be the impact on the price of the emission allowances in the market?
A) The price rises.
B) The price falls to zero.
C) The price falls but not to zero.
D) The price remains unchanged because the allowances purchased by the environmental groups are destroyed.
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Chapter 6: Elasticity: The Responsiveness of Demand and Supply
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Sample Questions
Q1) The price elasticity of supply for umbrellas is 2.Suppose you're told that following a price increase,quantity supplied increased by 30 percent.What was the percentage change in price that brought this about?
A) 60 percent
B) 15 percent
C) 6.7 percent
D) impossible to determine without additional information
Q2) Total revenue equals
A) price per unit times quantity sold.
B) price per unit times quantity supplied.
C) price per unit times change in quantity sold.
D) change in price per unit times quantity sold.
Q3) Rank these three items in terms of the elasticity of the demand for them at any given price,from most elastic to least elastic: hot beverages,coffee and Peets' Coffee.
A) hot beverages, coffee, Peets' Coffee
B) Peets' Coffee, coffee, hot beverages
C) coffee, Peets' Coffee, hot beverages
D) coffee, hot beverages, Peets' Coffee
Q4) Explain the relationship between price elasticity of demand and total revenue.
Page 8
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Chapter 7: The Economics of Health Care
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Sample Questions
Q1) If a buyer in an economic transaction has more information than the seller,the buyer benefits at the expense of the seller.This phenomenon is due to
A) moral hazard.
B) adverse selection.
C) economically irrational behavior.
D) gains from trade.
Q2) In most circumstances,employees do not pay taxes on the value of health insurance their employers provide them.
A)True
B)False
Q3) The Congressional Budget Office estimates that the payments to settle malpractice lawsuits and the premiums doctors pay for malpractice insurance account for ________ of health care costs in the United States.
A) between 20 and 30 percent
B) roughly half
C) less than 1 percent
D) a vast majority
Q4) What is adverse selection?
Q5) How can improvements in health increase a country's total income?
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Chapter 8: Firms, the Stock Market, and Corporate Governance
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Sample Questions
Q1) What is a primary market?
A) a market where primary inputs like steel are sold
B) a market where you can sell any bonds you own as a private investor
C) a market where a newly issued claims are sold to initial buyers by the borrowing firm
D) a market where you can sell any stocks you own as a private investor
Q2) Generally with bond ratings,the higher the rating,the ________ the interest rate an investor will receive and the ________ the the risk that the issuer of the bond will default.
A) higher; higher
B) higher; lower
C) lower; higher
D) lower; lower
Q3) Roderick received a $100 savings bond for his graduation.The bond pays $100 at maturity,which is in five years.If the interest rate is 6%,the bond has a present value of $90.09.
A)True
B)False
Q4) What is a corporate bond and what does it specify?
Q5) Define a partnership.
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Chapter 9: Comparative Advantage and the Gains From International Trade
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Sample Questions
Q1) Which of the following statements is true?
A) Japan is more dependent on foreign trade than is the United States.
B) Imports and exports account for over one-half of the GDP of Belgium.
C) France is the leading exporting country, accounting for 10 percent of total world exports.
D) Because the cost of labor used on farms is so high, the United States exports very little of its wheat, rice and corn crops.
Q2) Refer to Table 9-1.Select the statement that accurately interprets the data in the table.
A) Linda has a comparative advantage in dog bathing.
B) Sandy has an absolute advantage in dog bathing.
C) Sandy has a comparative advantage in dog bathing.
D) Linda has a comparative advantage in dog grooming and dog bathing.
Q3) Many people assume that if child workers in developing countries weren't working in factories,they would be in school.In fact,children in developing countries
A) split their time evenly between work and school.
B) usually have few good alternatives to work.
C) are only allowed to work if they have attended school up to age 15.
D) who work are relatively rare, as most do attend school full time.
Page 11
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Chapter 10: Consumer Choice and Behavioral Economics
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Sample Questions
Q1) The absolute value of the slope of the budget constraint is equal to A) the marginal rate of substitution between the two goods in question.
B) the price of good on the vertical axis divided by the price of the good on the horizontal axis.
C) the price of good on the horizontal axis divided by the price of the good on the vertical axis.
D) quantity of the good on the vertical axis divided by the quantity of the good on the horizontal axis.
Q2) Refer to Figure 10-4.Suppose the price of pizza increases while the price of hamburger remains constant.Then,the consumer's
A) indifference curve becomes more concave away from the origin.
B) indifference curve becomes straighter.
C) budget constraint moves inward toward the origin on the pizza axis while the hamburger intercept remains the same.
D) budget constraint moves outward away from the origin on the pizza axis while the hamburger intercept remains the same.
Q3) Why might network externalities result in products that contain inferior technologies?
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Chapter 11: Technology, production, and Costs
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Sample Questions
Q1) Over the past twenty years,the number of small family farms has fallen significantly and in their place there are fewer,but larger,farms owned by corporations.Which of the following best explains this trend?
A) diseconomies of scale in farming
B) economies of scale in farming
C) diminishing returns to labor in farming
D) declining productivity
Q2) The formula for total fixed cost is
A) TFC = TC + TVC.
B) TFC = TVC - TC.
C) TFC = TC/TVC.
D) TFC = TC - TVC.
Q3) Marginal cost is the
A) change in average cost when an additional unit of output is produced.
B) the additional output when total cost is increased by one dollar.
C) additional cost of producing an additional unit of output.
D) change in the price of inputs if a firm buys more inputs to produce an additional unit of output.
Q4) In economics,what is the difference between the short run and the long run?
Q5) What are economies of scale? What are diseconomies of scale?
Page 13
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Chapter 12: Firms in Perfectly Competitive Markets
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Sample Questions
Q1) Refer to Figure 12-6.Identify the firm's short-run supply curve.
A) the marginal cost curve
B) the marginal cost curve from a and above
C) the marginal cost curve from b and above
D) the marginal cost curve from d and above
Q2) The minimum point on the average variable cost curve is called the loss-minimizing point.
A)True
B)False
Q3) Refer to Figure 12-6.At price P<sub>1</sub>,the firm would
A) lose an amount equal to its fixed cost.
B) lose an amount more than fixed cost.
C) lose an amount less than fixed cost.
D) break even.
Q4) If,for a perfectly competitive firm,price exceeds the marginal cost of production,the firm should
A) increase its output.
B) reduce its output.
C) keep output constant and enjoy the above normal profit.
D) lower the price.
Page 14
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Chapter 13: Monopolistic Competition: The Competitive
Model in a More Realistic Setting
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Sample Questions
Q1) In the highly competitive fast-food restaurant market,brand name restaurants have a strong profit incentive to maintain high sanitary conditions and avoid any negative consequences.
A)True
B)False
Q2) If a monopolistically competitive firm breaks even,the firm
A) is earning an accounting profit and will have to pay taxes on that profit.
B) is earning zero accounting and zero economic profit.
C) should advertise its product to stimulate demand.
D) should expand production.
Q3) What are the most important differences between perfectly competitive markets and monopolistically competitive markets?
Q4) A monopolistically competitive firm that is earning profits will,in the long run,experience all of the following except A) new rivals entering the market.
B) a decrease in demand for its product.
C) demand for the firm's product becomes more elastic.
D) a decrease in the number of rival products.
Q5) What is the difference between the terms "marketing" and "advertising"?
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Chapter 14: Oligopoly: Firms in Less Competitive Markets
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Sample Questions
Q1) In an oligopoly market
A) the pricing decisions of all other firms have no effect on an individual firm.
B) individual firms pay no attention to the behavior of other firms.
C) advertising of one firm has no effect on all other firms.
D) one firm's pricing decision affects all the other firms.
Q2) Refer to Figure 14-2.If the government delays Gigacom's entry and Xenophone moves first,what is the likely outcome in the market?
A) Both offer internet service via cable line; Xenophone earns a profit of $6 million and Gigacom earns a profit of $9 million.
B) Both offer DSL internet service; Xenophone earns a profit of $8 million and Gigacom earns a profit of $7 million.
C) Xenophone offers DSL internet service and earns a profit of $5 million while Gigacom offer internet service via cable line and earns a profit of $6.5 million.
D) Xenophone offers internet service via cable line and earns a profit of $4 million while Gigacom offers DSL internet service and earns a profit of $4.5 million.
Q3) List the competitive forces in the five competitive forces model.
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Chapter 15: Monopoly and Antitrust Policy
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Sample Questions
Q1) Refer to Figure 15-6.What is the area that represents consumer surplus under a monopoly?
A) the triangle P<sub>0</sub>P<sub>1</sub>F
B) the triangle P<sub>0</sub>P<sub>2</sub>E
C) the trapezium P<sub>1</sub>P<sub>2</sub>EF
D) the rectangle P<sub>1</sub>P<sub>3</sub>HF
Q2) Microsoft hires marketing and sales specialists to decide what prices it should set for its products,whereas a wealthy corn farmer in Iowa,who sells his output in the world commodity market,does not.Why is this so?
A) because Microsoft is large enough to hire the best people in the field
B) because Microsoft could potentially lose sales if it sets prices indiscriminately
C) because the wealthy corn farmer is a price taker who chooses his optimal output independently of market price but Microsoft's optimal output depends on the price it selects
D) because unlike Microsoft, the wealthy corn farmer is probably a monopolist
Q3) What happens to a monopoly's revenue when it sells more units of its product?
Q4) Identify two ways by which the government controls monopolies?
Q5) Explain why the monopolist has no supply curve?
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Chapter 16: Pricing Strategy
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Sample Questions
Q1) Refer to Figure 16-2.Suppose Plato Playhouse charges a single price of Pd for each performance.Which of the following statements is true?
A) The company is selling more than the profit-maximizing quantity in the non-student market and less than the profit-maximizing quantity in the student market.
B) The company is selling less than the profit-maximizing quantity in the non-student market and more than the profit-maximizing quantity in the student market.
C) The company is selling less than the profit-maximizing quantity in both markets but it is maximizing its revenue.
D) The company is selling less than the profit-maximizing quantity in both markets.
Q2) Assuming zero transaction cost,if your local grocer buys oranges at a low price from an orchard and resells them to you at a higher price,then the grocer's revenue minus costs is known as
A) arbitrage profits.
B) transactions profits.
C) pure profits.
D) excess profits.
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Chapter 17: The Markets for Labor and Other Factors of Production
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Sample Questions
Q1) If the labor demand curve shifts to the right and the labor supply curve remains unchanged,what will happen to the equilibrium wage and the equilibrium level of employment? Illustrate your answer with a graph.
Q2) What is the substitution effect of a wage increase? What is the income effect of a wage increase? Under what conditions will a worker's labor supply curve become downward sloping?
Q3) Refer to Figure 17-3.Which of the following is true at W0?
A) The income effect is larger than the substitution effect.
B) The substitution effect is larger than the income effect.
C) The income effect and the substitution effect are equal.
D) The supply curve is positively sloped.
Q4) What is personnel economics?
Q5) The marginal revenue product of capital is
A) the cost to the firm of renting an additional unit of capital.
B) the change in the firm's revenue as a result of employing one more unit of capital, such as a machine.
C) the economic rent received by hiring an additional unit of capital.
D) the revenue generated by substituting capital for labor in the production process.
Page 19
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Chapter 18: Public Choice, taxes, and the Distribution of Income
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Sample Questions
Q1) Refer to Table 18-8.
a.Draw a Lorenz curve for each country.
b.Which country has the more equal distribution of income?
c.Based on the Lorenz curve for the two countries,can you determine which country has the more progressive tax system? Explain your answer.
Q2) Suppose in an effort to raise tax revenue,the state of Vermont decides to legalize the sale of marijuana.The state will charge a tax of $50 per ounce on each sale,and the state claims that retailers will bear the entire burden of this tax.Draw a graph illustrating the situation where retail outlets would bear the entire tax burden of $50 per ounce of marijuana.Explain what would need to be true about the demand for marijuana for retailers to bear the entire burden of this tax,and if this would likely occur if marijuana sales were actually legalized.
Q3) As the value of the Gini coefficient approaches one,
A) income distribution becomes less unequal.
B) income distribution becomes more unequal.
C) the percentage of the population under the poverty line increases.
D) the percentage of the population under the poverty line decreases.
Q4) Explain the effect of price elasticities of supply and demand on tax incidence.
Q5) What is the relationship between market failure and government failure?
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Chapter 19: GDP: Measuring Total Production and Income
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Q1) Suppose that nominal GDP in 2011 was less than real GDP in 2011.Given this information,we know for certain that
A) the price level in 2011 was greater than the price level in the base year.
B) the price level in 2011 was less than the price level in the base year.
C) real GDP in 2011 was less than real GDP in the base year.
D) real GDP in 2011 was greater than real GDP in the base year.
Q2) When consumers are less confident about their jobs or incomes,they are more likely to
A) reduce purchases of durable goods than nondurable goods.
B) reduce purchases of nondurable goods and increase purchases of durable goods.
C) increase investment spending and decrease consumption spending.
D) increase consumption spending and decrease investment spending.
Q3) Why do we not count the value of intermediate goods and services in gross domestic product? Does the value of intermediate goods and services show up in gross domestic product? If so,how?
Q4) How can a firm have a negative valued added,as supposedly some state-owned businesses did in the former Soviet Union? What has to be true for value added to be negative?
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Chapter 20: Unemployment and Inflation
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Q1) The United States has ________ social insurance programs,and generally has a ________ unemployment rate,as compared to Canada and Western Europe.
A) less generous; lower
B) less generous; greater
C) more generous; lower
D) more generous; greater
Q2) The nominal interest rate plus the inflation rate equals the real interest rate.
A)True
B)False
Q3) The natural rate of unemployment is the amount of unemployment
A) associated with the business cycle.
B) equal to frictional plus structural unemployment.
C) that exists when the economy goes into recession.
D) that exists when the economy is in an expansion.
Q4) When actual inflation is less than expected inflation,
A) borrowers lose and lenders gain.
B) borrowers gain and lenders lose.
C) borrowers and lenders both gain.
D) borrowers and lenders both lose.
Q5) Describe how inflation can be costly even if it is anticipated.
Page 22
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Chapter 21: Economic Growth, the Financial System, and Business Cycles
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Q1) Since 1950,the average length of a recession in the United States has been A) such that recessions barely exist.
B) less than a year.
C) between 1 and 2 years.
D) greater than 2 years.
Q2) In the United States,the average length of expansions from 1950 to 2009 was more than twice as long than they were from 1900 to 1950.
A)True
B)False
Q3) Since the 1950s,
A) the United States has not experienced a business cycle.
B) U.S. business cycle fluctuations have becomes more volatile.
C) U.S. business cycle fluctuations have become milder.
D) U.S. business cycle fluctuations have not changed.
Q4) Centrally-planned economies tend to grow more quickly than market economies.
A)True
B)False
Q5) Use the equations for public and private saving to demonstrate how total saving in the economy equals investment.
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Chapter 22: Long-Run Economic Growth: Sources and Policies
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Q1) Consider two countries,Alpha and Beta.In Alpha,real GDP per capita is $6,000.In Beta,real GDP per capita is $9,000.Based on the economic growth model,what would you predict about the growth rates in real GDP per capita across these two countries?
A) The growth rate of real GDP per capita will be lower in Alpha than it is in Beta.
B) The growth rate of real GDP per capita will be higher in Alpha than it is in Beta.
C) The growth rate of real GDP per capita in Alpha and Beta will be the same.
D) The economic growth model makes no predictions regarding differences in growth rates of real GDP per capita across the two countries.
Q2) You are an economic advisor to the president.You are asked to recommend a policy to promote long-term economic growth in the economy.Which of the following policies would you choose?
A) a reduction in sales taxes
B) an investment tax credit
C) a reduction in taxes on luxury yachts
D) all of the above
Q3) How do government policies that enforce property rights affect economic growth?
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Chapter 23: Aggregate Expenditure and Output in the Short Run
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Q1) Which of the following is a true statement about the multiplier?
A) The multiplier rises as the MPC rises.
B) The smaller the MPC, the larger the multiplier.
C) The multiplier is a value between zero and one.
D) The multiplier effect does not occur when autonomous expenditure decreases.
Q2) Given the equations for C,I,G,and NX below,what is the marginal propensity to consume? C = 2,000 + 0.9Y
I = 2,500
G = 3,000
NX = 400
A) -0.1
B) 0.1
C) 0.9
D) 2000
Q3) An increase in the price level results in a(n)________ in household consumption spending and a(n)________ in investment spending.
A) increase; decrease
B) increase; increase
C) decrease; decrease
D) decrease; increase
25
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Chapter 24: Aggregate Demand and Aggregate Supply Analysis
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Q1) Using aggregate demand and aggregate supply,explain what happens in the short run if the Federal Reserve lowers interest rates in the economy? Be sure to detail what happens to aggregate demand,the price level,the level of GDP,and unemployment.Assume that the economy is at full employment before the interest rate decrease.
Q2) If stricter immigration laws are imposed and many foreign workers in the United States are forced to go back to their home countries,
A) the long-run aggregate supply curve will shift to the right.
B) the long-run aggregate supply curve will shift to the left.
C) we will move up along the long-run aggregate supply curve.
D) we will move down along the long-run aggregate supply curve.
Q3) When the price level in the United States falls relative to the price level of other countries,________ will fall,________ will rise,and ________ will rise.
A) imports; exports; net exports
B) exports; imports; net exports
C) net exports; exports; imports
D) net exports; imports; exports
Q4) Explain how the aggregate demand and aggregate supply model can be made more dynamic.
Page 26
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Chapter 25: Money, banks, and the Federal Reserve System
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Q1) Which of the following functions of money would be violated if inflation were high?
A) unit of account
B) store of value
C) certificate of gold
D) medium of exchange
Q2) Liquidity increases as we move from the M1 to the M2 definition of the money supply.
A)True
B)False
Q3) The sale of Treasury securities by the Federal Reserve will,in general,
A) not change the money supply.
B) not change the quantity of reserves held by banks.
C) increase the quantity of reserves held by banks.
D) decrease the quantity of reserves held by banks.
Q4) If the required reserve ratio is 100 percent,could the Federal Reserve still change the money supply with open market operations? Explain whether they could or could not.
Q5) Would the invention of money,as opposed to barter,increase the growth rate of real GDP in a country over time? Why or why not?
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Chapter 26: Monetary Policy
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Q1) What is a banking panic,and what role did banking panics play in the decision by Congress to establish the Federal Reserve?
Q2) Refer to Figure 26-6.In the dynamic model of AD-AS in the figure above,if the economy is at point A in year 1 and is expected to go to point B in year 2,and the Federal Reserve pursues no policy,then at point B
A) there is pressure on wages and prices to rise.
B) the unemployment rate is very, very low.
C) firms are operating above their normal capacity.
D) the economy is below full employment.
E) incomes and profits are rising.
Q3) A monetary policy target is a variable that the Fed can affect directly,which then affects one or more of the Fed's policy goals.
A)True
B)False
Q4) When the Fed uses contractionary policy,
A) the price level rises higher than it would if the Fed did not pursue policy.
B) the price level rises less than it would if the Fed did not pursue policy.
C) it does not change the price level.
D) it causes inflation.
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Chapter 27: Fiscal Policy
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Q1) Expansionary fiscal policy involves
A) increasing government purchases or decreasing taxes.
B) increasing taxes or decreasing government purchases.
C) increasing the money supply and decreasing interest rates.
D) decreasing the money supply and increasing interest rates.
Q2) Refer to Figure 27-1.Suppose the economy is in short-run equilibrium below potential GDP and Congress and the president lower taxes to move the economy back to long-run equilibrium.Using the static AD-AS model in the figure above,this would be depicted as a movement from
A) A to B.
B) B to C.
C) C to B.
D) B to A.
E) A to E.
Q3) Tax cuts on business income increase aggregate demand by increasing
A) business investment spending.
B) consumption spending.
C) government spending.
D) wage rates.
Q4) What is expansionary fiscal policy? What is contractionary fiscal policy?
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Chapter 28: Inflation, unemployment, and Federal Reserve Policy
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Q1) Use the information below to explain adjustments that move the economy to a long-run equilibrium.Assume that firms and workers have adaptive expectations.
The current unemployment rate = 4%.
The natural rate of unemployment = 6%.
Last year's inflation rate = 3%.
This year's inflation rate = 4%.
Q2) An increase in the inflation rate increases employment only if the increase in inflation is unexpected.
A)True
B)False
Q3) If the Fed decided to reverse its policy actions implemented during the heart of the recession,the Fed would be acting to try to prevent
A) a decrease in unemployment.
B) an increase in unemployment.
C) an increase in deflation.
D) an increase in inflation.
Q4) When will an increase in aggregate demand not result in lower unemployment rates in the short run?
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Chapter 29: Macroeconomics in an Open Economy
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Q1) Suppose that domestic investment in Japan is 20.2% of GDP,and Japanese national savings is 24% of GDP.What is Japan's foreign investment as a percentage of GDP?
A) 1.19%
B) 3.8%
C) 27.8%
D) 44.2%
Q2) If the United States has a net export surplus,which of the following must be true?
A) The balance on the financial account must equal the balance on the current account.
B) Net foreign investment must be positive as well.
C) Domestic private saving must be greater than net foreign investment.
D) Domestic public saving must be greater than net foreign investment.
Q3) How is the impact of contractionary monetary policy different in an open economy than in a closed economy?
Q4) Contractionary monetary policy should increase foreign financial investment in the United States.
A)True
B)False
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Chapter 30: The International Financial System
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Q1) In the United States today,how much gold will the Federal Reserve give you in exchange for $1?
A) none
B) $1 worth of gold (based on the market price of an ounce of gold at the time you redeem the gold)
C) 1 ounce of gold
D) 1/35th of an ounce of gold
Q2) South Korea,Indonesia,Malaysia,and Thailand all pegged their currencies to the dollar at one point in time.Because some of these currencies were overvalued at the pegged rate,speculators anticipated these countries would abandon the peg and speculators began selling those currencies.Explain how this speculation would affect the ability of a country to maintain a pegged exchange rate.
Q3) Refer to Figure 30-3.If the Thai government pegs its currency to the dollar at a value above $.03/baht,we would say the currency is
A) undervalued.
B) overvalued.
C) parity valued.
D) equilibrium valued.
Q4) What is the difference between a devaluation and a revaluation of a currency?
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