Course Introduction
Economic Theory
Exam Answer Key
Economic Theory explores the fundamental principles and models that underpin economic decision-making at both individual and collective levels. The course covers key concepts such as supply and demand, market equilibrium, consumer choice, production theory, and the behavior of firms within different market structures. Students will examine how economic agents interact, the impact of government intervention on markets, and the theoretical frameworks used to analyze economic outcomes. Through mathematical and graphical tools, the course provides a rigorous foundation for understanding and applying economic reasoning to real-world issues.
Recommended Textbook
Principles of Economics 4th Edition by N.
Gregory Mankiw
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Page 2
Chapter 1: Ten Principles of Economics
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Sample Questions
Q1) Define opportunity cost.What is the opportunity cost to you of attending college? What was your opportunity cost of coming to class today?
Answer: Whatever must be given up to obtain some item it its opportunity cost.Basically,this would be a person's second choice.The opportunity cost of a person attending college is the value of the best alternative use of that person's time.For most students this would be the income the student gives up by not working.A student's opportunity cost of coming to class was the value of the best opportunity the student gave up.(For most students,that seems to be sleep.)
Q2) A rational decision maker takes an action only if the
A)marginal benefit is less than the marginal cost.
B)marginal benefit is greater than the marginal cost.
C)average benefit is greater than the average cost.
D)marginal benefit is greater than both the average cost and the marginal cost. Answer: B
Q3) Trade with any nation can be mutually beneficial.
A)True
B)False
Answer: True
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Chapter 2: Thinking Like an Economist
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Sample Questions
Q1) In addition to advising the president,one duty of the Council of Economic Advisors is to
A)prepare the federal budget.
B)write government regulations.
C)advise Congress on economic matters.
D)write the annual Economic Report of the President.
Answer: D
Q2) Refer to Figure 2-1.Juan buys a new pair of shoes at a shoe store.To which of the arrows does this purchase directly contribute?
A)A only
B)A and B
C)C only
D)C and D
Answer: B
Q3) Refer to Figure 2-11.The opportunity cost of more doghouses increases as more doghouses are produced.
A)True
B)False
Answer: True
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Page 4
Chapter 3: Interdependence and the Gains From Trade
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Sample Questions
Q1) Suppose that a worker in Freedonia can produce either 6 units of corn or 2 units of wheat per year,and a worker in Sylvania can produce either 2 units of corn or 6 units of wheat per year.Each nation has 10 workers.For many years the two countries traded,each completely specializing according to their respective comparative advantages.Now,however,war has broken out between them and all trade has stopped.Without trade,Freedonia produces and consumes 30 units of corn and 10 units of wheat per year.Sylvania produces and consumes 10 units of corn and 30 units of wheat.The war has caused the combined yearly output of the two countries to decline by
A)10 units of corn and 10 units of wheat.
B)20 units of corn and 20 units of wheat.
C)30 units of corn and 30 units of wheat.
D)40 units of corn and 40 units of wheat.
Answer: B
Q2) Adam Smith
A)wrote An Inquiry into the Nature and Causes of the Wealth of Nations.
B)opposed free trade.
C)wrote The General Theory of Economics.
D)All of the above are correct.
Answer: A
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Page 5
Chapter 4: The Market Forces of Supply and Demand
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Sample Questions
Q1) The demand for a good or service is determined by
A)those who buy the good or service.
B)the government.
C)the producers who create the good or service.
D)those who supply the raw materials used in the production of the good or service.
Q2) Which of the following events would definitely result in a higher price in the market for Snickers?
A)Demand for Snickers increases and supply of Snickers decreases.
B)Demand for Snickers and supply of Snickers both decrease.
C)Demand for Snickers decreases and supply of Snickers increases.
D)Demand for Snickers and supply of Snickers both increase
Q3) If car manufacturers begin utilizing new labor-saving technology on their assembly lines,we would not expect
A)a smaller quantity of labor to be used.
B)the supply of cars to increase.
C)costs to the firm to fall.
D)individual car manufacturers to move up and to the right along their individual supply curves.
Q4) The behavior of buyers and sellers drives markets toward equilibrium.
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Chapter 5: Elasticity and Its Applications
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Sample Questions
Q1) The main reason for using the midpoint method to calculate an elasticity is that it
A)gives the same answer regardless of whether the price increases or decreases.
B)recognizes that prices are usually increasing, not decreasing.
C)rounds prices to the nearest dollar and quantities to the nearest whole unit.
D)uses fewer numbers than alternative methods.
Q2) The value of the price elasticity of demand for a good will be relatively large when
A)there are no good substitutes available for the good.
B)the time period in question is relatively short.
C)the good is a luxury as opposed to a necessity.
D)All of the above are correct.
Q3) If the quantity supplied responds only slightly to changes in price,then
A)supply is said to be elastic.
B)supply is said to be inelastic.
C)an increase in price will not shift the supply curve very much.
D)even a large decrease in demand will change the equilibrium price only slightly.
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7
Chapter 6: Supply, demand, and Government Policies
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Sample Questions
Q1) Refer to Figure 6-5.In this market,which of the following price controls would be binding?
A)a price ceiling of $2.00, and it would cause a shortage
B)a price ceiling of $5.00, and it would cause a surplus
C)a price floor of $2.00, and it would cause a shortage
D)All of the above are correct.
Q2) How does elasticity affect the burden of a tax? Justify your answer using supply and demand diagrams.
Q3) A tax on the sellers of jewelry will
A)increase the price the buyers pay and increase the effective price the sellers receive.
B)increase the price the buyers pay and decrease the effective price the sellers receive.
C)decrease the price the buyers pay and increase the effective price the sellers receive.
D)decrease the price the buyers pay and decrease the effective price the sellers receive.
Q4) A binding minimum wage in a competitive labor market creates unemployment.
A)True
B)False
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Page 8
Chapter 7: Consumers, producers, and the Efficiency of Markets
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Sample Questions
Q1) Refer to Figure 7-11.At the equilibrium,consumer surplus amounts to A)$24.
B)$36.
C)$48.
D)$72.
Q2) If the price of oak lumber increases,what happens to consumer surplus in the market for oak cabinets?
A)It increases.
B)It decreases.
C)It will not change consumer surplus; only producer surplus changes.
D)It depends on what event led to the increase in the price of oak lumber.
Q3) Total surplus in a market is
A)the total cost to sellers of providing the good minus the total value of the good to buyers.
B)the total value of the good to buyers minus the cost to sellers of providing the good.
C)the difference between consumer surplus and sellers' cost.
D)always smaller than producer surplus.
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Page 9
Chapter 8: Application: the Costs of Taxation
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Sample Questions
Q1) Refer to Figure 8-4.Consumer surplus before the tax was levied is represented by area
A)a.
B)A + B + C.
C)D + E + F.
D)F.
Q2) Which of the following would likely have the smallest deadweight loss relative to the tax revenue?
A)a head tax (that is, a tax everyone must pay regardless of what one does or buys)
B)an income tax
C)a tax on compact discs
D)a tax on caviar
Q3) When the government imposes taxes on buyers and sellers of a good,society loses some of the benefits of market efficiency.
A)True
B)False
Q4) A tax raises the price received by sellers and lowers the price paid by buyers.
A)True
B)False
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Chapter 9: Application: International Trade
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Sample Questions
Q1) Refer to Figure 9-13.A result of this country allowing international trade in computers is as follows:
A)The well-being of domestic computer producers is now higher in that they now sell more computers at a higher price per computer.
B)The effect on the well-being of domestic computer consumers is unclear in that they now buy more computers, but at a higher price per computer.
C)The effect on the well-being of the country is unclear in that domestic producer surplus increases, while the effect on domestic consumer surplus is unclear.
D)All of the above are correct.
Q2) Refer to Figure 9-11.With trade allowed,this country
A)exports 200 units of the good.
B)exports 400 units of the good.
C)imports 200 units of the good.
D)exports 800 units of the good.
Q3) Trade decisions are based on the principle of absolute advantage.
A)True
B)False
Q4) How does an import quota differ from an equivalent tariff?
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Page 11
Chapter 10: Externalities
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Sample Questions
Q1) Suppose that a firm produces electricity by burning coal.The production process creates a negative externality of air pollution.If the firm does not internalize the cost of the externality,it will produce where
A)the value of electricity to consumers equals the private cost of producing electricity.
B)the value of electricity to consumers equals the social cost of producing electricity.
C)the cost of the externality is maximized.
D)the transaction costs of private bargaining are minimized.
Q2) In the case of a technology spillover,the government can encourage firms to internalize a positive externality by
A)taxing production, which would decrease supply.
B)taxing production, which would increase supply.
C)subsidizing production, which would decrease supply.
D)subsidizing production, which would increase supply.
Q3) According to the Coase theorem,if private parties can bargain without cost,then the private market will solve the problem of externalities.
A)True
B)False
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Page 12
Chapter 11: Public Goods and Common Resources
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Sample Questions
Q1) Which of the following statements best describes the cause of "overrun and overtrampled" national parks?
A)Park administrators do not use the best science available to manage park resources.
B)National parks are treated as free goods by their visitors.
C)National parks do not charge entrance fees.
D)The price of entrance to national parks is higher than other forms of recreation.
Q2) Roads can be considered either public goods or common resources,depending on how congested they are.
A)True
B)False
Q3) Which of the following statements is correct?
A)Private goods are rival in consumption and excludable.
B)Public goods are rival in consumption but nonexcludable.
C)Collecting tolls on all roads is a practical solution to traffic congestion.
D)Governments serve their citizens best when they refrain from addressing market failures.
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13
Chapter 12: The Design of the Tax System
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Sample Questions
Q1) Refer to Table 12-7.What is the marginal tax rate for a person who makes $120,000?
A)25%
B)35%
C)45%
D)60%
Q2) Which of the following statements about a flat tax rate on personal income is correct?
A)A flat tax raises more revenue that a regressive tax.
B)A flat tax removes the incentives for tax avoidance through loopholes and other mechanisms.
C)Estonia and Russia have abandoned the use of a flat tax because they were unable to administer it.
D)When a flat tax rate is combined with a threshold that exempts some income, the rich will pay less under a flat tax system than they do under the present U.S.system.
Q3) Vertical equity is not consistent with a regressive tax structure.
A)True
B)False
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Chapter 13: The Costs of Production
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Sample Questions
Q1) Economic profit
A)will never exceed accounting profit.
B)is most often equal to accounting profit.
C)is always at least as large as accounting profit.
D)is a less complete measure of profitability than accounting profit.
Q2) Average total cost tells us the
A)total cost of the first unit of output, if total cost is divided evenly over all the units produced.
B)cost of a typical unit of output, if total cost is divided evenly over all the units produced.
C)cost of the last unit of output, if total cost does not include a fixed cost component.
D)variable cost of a firm that is producing at least one unit of output.
Q3) Refer to Figure 13-9.The three average total cost curves on the diagram correspond to three different
A)time horizons.
B)products.
C)firms.
D)factory sizes.
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15
Chapter 14: Firms in Competitive Markets
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Sample Questions
Q1) In a competitive market with identical firms,
A)an increase in demand in the short run will result in a new price above the minimum of average total cost allowing firms to earn a positive economic profit in the long run.
B)firms cannot earn positive economic profit in either the short run or long run.
C)firms can earn positive economic profit in the long run if the long-run market supply curve is upward sloping.
D)free entry and exit into the market requires that firms earn zero economic profit in the long run even though they may be able to earn positive economic profit in the short run.
Q2) Suppose a firm in a competitive market produces and sells 8 units of output and has a marginal revenue of $8.00.What would be the firm's total revenue if it instead produced and sold 4 units of output?
A)$4.00
B)$8.00
C)$32.00
D)$64.00
Q3) List and describe the characteristics of a perfectly competitive market.
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Page 16
Chapter 15: Monopoly
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Sample Questions
Q1) The proper level of government intervention is ambiguous when dealing with a monopoly.
A)True
B)False
Q2) Refer to Scenario 15-2.At Q = 500,the firm's marginal cost is
A)less than $30.
B)$30.
C)$34.
D)greater than $34.
Q3) Which of the following is the most likely reason the city council in New York City consistently denies licenses to independent van drivers selling rides to the public?
A)Allowing the vans to operate would reduce social welfare.
B)The van drivers engage in price discrimination.
C)Allowing the vans to operate would allow them to unfairly take advantage of poor residents.
D)The vans are a threat to the public transit monopoly, which makes campaign contributions to the city council members.
Q4) Why do economists usually prefer private ownership to public ownership of natural monopolies?
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Chapter 16: Oligopoly
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Sample Questions
Q1) The practice of requiring someone to buy two or more items together,rather than separately,is called
A)resale maintenance.
B)product fixing.
C)tying.
D)free-riding.
Q2) Refer to Table 16-16.What is grocery store 2's dominant strategy?
A)Grocery store 2 does not have a dominant strategy.
B)Grocery store 2 should always set a low price.
C)Grocery store 2 should always set a high price.
D)Grocery store 2 should set a low price when grocery store 1 sets a low price, and grocery store 2 should set a high price when grocery store 1 sets a high price.
Q3) Refer to Table 16-17.What is Heather's dominant strategy?
A)Heather has no dominant strategy.
B)Heather should always choose Clean.
C)Heather should always choose Don't Clean.
D)Heather has two dominant strategies, Clean and Don't Clean, depending on the choice Amy makes.
Q4) Explain the practice of tying and discuss why it is controversial.
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Chapter 17: Monopolistic Competition
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Sample Questions
Q1) Which of the following goods are not likely to be sold in monopolistically competitive markets?
A)Compact discs
B)Books
C)Cookies
D)Wheat
Q2) In monopolistically competitive markets,positive economic profits
A)suggest that some existing firms will exit the market.
B)suggest that new firms will enter the market.
C)are sustained through government-imposed barriers to entry.
D)are never possible.
Q3) Refer to Figure 17-5.This figure depicts a situation in a monopolistically competitive market.How much consumer surplus will be derived from the purchase of this product at the monopolistically competitive price?
A)$200.00
B)$312.50
C)$400.00
D)$800.00
Q4) Why does a typical monopolistically competitive firm face a downward-sloping demand curve?
19
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Chapter 18: The Markets for the Factors of Production
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Sample Questions
Q1) Refer to Scenario 18-1.If the price of fresh Pacific salmon were to decrease significantly,it is most likely that Gertrude would
A)reduce her demand for crew members.
B)hire more boats.
C)become a seller in at least one factor market.
D)hire more crew members.
Q2) For a competitive,profit-maximizing firm,the labor demand curve is the same as the A)marginal cost curve.
B)value of marginal product curve.
C)production function.
D)profit function.
Q3) If one were to consider a university as a business,the computers in the computer labs would be regarded by economists as A)technology flows.
B)mechanization flows.
C)part of the university's stock of capital.
D)a flow of services from the university's stock of capital.
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20
Chapter 19: Earnings and Discrimination
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Sample Questions
Q1) When comparing average wages for male and female workers in the United States,wages paid to females have been about 40 percent less than those paid to male workers.
A)True
B)False
Q2) The superstar phenomenon explains why professional athletes earn more than amateur athletes.
A)True
B)False
Q3) 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.
Q4) The "superstar" phenomenon can apply to which of these jobs?
A)high-school teacher
B)anchorperson for a national news program
C)heart surgeon
D)All of the above are correct.
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Chapter 20: Income Inequality and Poverty
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Sample Questions
Q1) In comparison to the average poverty rate,
A)children and the elderly are more likely to be poor.
B)Children and the elderly are less likely to be poor.
C)Children are more likely to be poor, but the elderly are less likely to be poor.
D)Children are less likely to be poor, but the elderly are more likely to be poor.
Q2) An example of a transitory change in income is the
A)annual cost of living adjustment to your salary.
B)increase in income that results from a job promotion linked to your education.
C)increase in income of California orange growers that results from an orange-killing frost in Florida.
D)All of the above are correct.
Q3) Labor earnings make up what part of total income in the U.S.economy?
A)all of it
B)three-fourths
C)one-half
D)one-fourth
Q4) What is meant by a perfectly equal distribution of income? Use a graph to depict such a situation.
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Page 22
Chapter 21: The Theory of Consumer Choice
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Sample Questions
Q1) Draw a budget constraint that is consistent with the following prices and income.
Income = 200
PY = 50
PX = 25
a.Demonstrate how your original budget constraint would change if income increases to 500.
b.Demonstrate how your original budget constraint would change if PY decreases to 20.
c.Demonstrate how your original budget constraint would change if PX increases to 40.
Q2) Economists represent a consumer's preferences using A)demand curves.
B)budget constraints.
C)indifference curves.
D)supply curves.
Q3) When two goods are strong complements,such as nickels and dimes,the indifference curves are straight lines.
A)True
B)False
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Chapter 22: Frontiers of Microeconomics
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Q1) Evidence from experiments in which real people play the ultimatum game supports the idea that people
A)are rational wealth-maximizers.
B)tend to be driven by fairness, without regard for their own self-interest.
C)are driven by both fairness and self-interest.
D)have trouble calculating their own levels of wealth.
Q2) As an alternative to pairwise majority voting,each voter could be asked to rank the possible outcomes,giving 1 point to her lowest choice,2 points to her second-lowest choice,3 points to her third-lowest choice,and so on.This voting method is called a(n)
A)median vote.
B)pairwise minority vote.
C)Borda count.
D)Arrow count.
Q3) Condorcet explained his paradox in a 1951 book called Social Choice and Individual Values.
A)True
B)False
Q4) How have insights from the field of psychology influenced the thinking of economists in recent years?
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Chapter 23: Measuring a Nations Income
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Q1) Suppose that over the last twenty-five years a country's nominal GDP grew to three times its former size.In the meantime,population grew by 40 percent and prices rose by 100 percent.What happened to real GDP per person?
A)It more than doubled.
B)It increased, but it less than doubled.
C)It was unchanged.
D)It decreased.
Q2) Suppose an apartment complex converts to a condominium,so that the former renters are now owners of their housing units.
A)The rent was included in GDP; the purchases of the condominiums are not included in GDP.
B)The rent was included in GDP, and so are the purchases of the condominiums.
C)The rent was not included in GDP; the purchases of the condominiums are included in GDP.
D)The rent was not included in GDP, and neither are the purchases of the condominiums.
Q3) Since it is counted as investment,why doesn't the purchase of earthmoving equipment from China by a U.S.corporation increase U.S.GDP?
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Page 25
Chapter 24: Measuring the Cost of Living
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Q1) The goal of the consumer price index is to measure changes in the A)costs of production
B)cost of living.
C)relative prices of consumer goods.
D)production of consumer goods.
Q2) Which among the following statements is correct about the relationship between inflation and interest rates?
A)There is no relationship between inflation and interest rates.
B)The interest rate is determined by the rate of inflation.
C)In order to fully understand inflation, we need to know how to correct for the effects of interest rates.
D)In order to fully understand interest rates, we need to know how to correct for the effects of inflation.
Q3) Refer to Table 24-3.Using 2002 as the base year,what was the inflation rate between 2002 and 2003?
A)-8.89 percent
B)-7.14 percent
C)3.75 percent
D)11.25 percent
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Chapter 25: Production and Growth
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Sample Questions
Q1) Which of the following is a renewable natural resource?
A)timber
B)coal
C)gold
D)All of the above are correct.
Q2) Over the last 100 years which of the following had growth rates higher than that of the United States?
A)the United Kingdom
B)Bangladesh
C)Brazil
D)None of the above is correct.
Q3) Once an idea enters society's pool of knowledge,the knowledge becomes a
A)societal good.
B)private good.
C)public good.
D)proprietary good.
Q4) Compare and contrast the population theories of Malthus and Kremer.
Q5) Productivity can be found as number of hours worked divided by output.
A)True
B)False
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Chapter 26: Saving, investment, and the Financial System
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Sample Questions
Q1) Suppose that in a closed economy GDP is $11 trillion,consumption is $7 trillion,taxes are $3 trillion and the government runs a surplus of $1 trillion.What are private saving and national saving?
A)$4 trillion and $1 trillion
B)$4 trillion and $5 trillion
C)$1 trillion and $2 trillion
D)$1 trillion and $1 trillion
Q2) PacknCamp Corporation has a stock price of $50,has issued 2,000,000 shares of stock,has retained earnings of $4 million dollars,and a dividend yield of 4 percent.The price-earnings ratio of PacknCamp is
A)25, which is high compared to historical standards of the market.
B)25, which is low compared to historical standards of the market.
C)12.5, which is low compared to historical standards of the market.
D)12.5, which is high compared to historical standards of the market.
Q3) As a money management fee,mutual funds usually charge their customers
A)between 0.5 and 2.0 percent of assets each year.
B)between 1.5 and 3.0 percent of assets each year.
C)nothing, because they receive commissions from the firms whose stock they buy.
D)a flat fee of about $50.
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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Sample Questions
Q1) Which of the following is not correct?
A)The higher average return on stocks than on bonds comes at the price of higher risk.
B)Risk-averse persons will take the risks involved in holding stocks if the average return is high enough to compensate for the risk.
C)Insurance markets reduce risk, but not by diversification.
D)Risk can be reduced by placing a large number of small bets, rather than a small number of large bets.
Q2) Susan puts $125 into an account and one year later has $135;what was the interest rate?
A)5 percent
B)7 percent
C)8 percent
D)10 percent
Q3) Write the rule of 70.Suppose that your great-great-grandmother put $50 in a savings account 100 years ago and the account is now worth $1,600.Use the rule of 70 to determine about what interest rate she earned.
Q4) List three different ways that a risk-averse person can reduce financial risk.
Q5) Discuss the statistical evidence concerning the efficient markets hypothesis.
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Chapter 28: Unemployment
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Q1) Suppose that telemarketers are not unionized.If they unionize,then the supply of labor in other sectors of the economy
A)decreases, raising wages in industries that are not unionized.
B)decreases, reducing wages in industries that are not unionized.
C)increases, raising wages in industries that are not unionized.
D)increases, reducing wages in industries that are not unionized.
Q2) John is a stockbroker.He has had several job offers,but he has turned them down because he thinks he can find a firm that better matches his tastes and skills.Curtis has looked for work as an accountant for some time.While the demand for accounts doesn't appear to be falling,there seems to be more people applying than jobs available.
A)John and Curtis are both frictionally unemployed.
B)John and Curtis are both structurally unemployed.
C)John is frictionally unemployed, and Curtis is structurally unemployed.
D)John is structurally unemployed, and Curtis is frictionally unemployed.
Q3) 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 29: The Monetary System
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Q1) In a fractional reserve banking system with no excess reserves and no currency holdings,if the central bank buys $100 million of bonds,
A)reserves and the money supply increase by less than $100 million.
B)reserves increase by $100 million and the money supply increases by $100 million.
C)reserves increase by $100 million and the money supply increases by more than $100 million.
D)both reserves and the money supply increase by more than $100 million.
Q2) Refer to Table 29-5.If the Bank of Springfield has lent out all the money it can given its deposits,then what is its reserve ratio?
A)1%
B)5%
C)10%
D)20%
Q3) Savings deposits are included in
A)M1 but not M2.
B)M2 but not M1.
C)M1 and M2.
D)neither M1 nor M2.
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Chapter 30: Money Growth and Inflation
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Q1) Wealth is redistributed from debtors to creditors when inflation is
A)high, but expected.
B)low, but expected.
C)unexpectedly high.
D)unexpectedly low.
Q2) The U.S.Treasury Department began issuing inflation-indexed bonds in early 1997.Since these assets are virtually risk free,both in terms of default risk and inflation risk,will they quickly replace all other kinds of assets that still entail risk of one kind or another,such as ordinary government bonds or corporate bonds? Explain.
Q3) When the money market is drawn with the value of money on the vertical axis,the price level increases if
A)money demand shifts right and decreases if money supply shifts right.
B)money demand shifts right and decreases if money supply shifts left.
C)money demand shifts left and decreases if money supply shifts right.
D)money demand shifts left and decreases if money supply shifts left.
Q4) The source of all four classic hyperinflations was high rates of money growth.
A)True
B)False
Q5) List and define any two of the costs of high inflation.
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Chapter 31: Open-Economy Macroeconomics: Basic Concepts
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Q1) Suppose the real exchange rate is 4/5 pounds of Chilean beef per pound of U.S.beef,a pound of U.S.beef costs $2 and the nominal exchange rate is 600 Chilean pesos per dollar.It follows that Chilean beef costs
A)960 pesos per pound.
B)1,200 pesos per pound.
C)1,500 pesos per pound.
D)None of the above is correct.
Q2) A Japanese firm buys lumber from the United States and pays for it with yen.Other things the same,Japanese
A)net exports increase, and U.S.net capital outflow increases.
B)net exports increase, and U.S.net capital outflow decreases.
C)net exports decrease, and U.S.net capital outflow increases.
D)net exports decrease, and U.S.net capital outflow decreases.
Q3) Most of the change from 1980 to 1987 in U.S.net capital outflow as a percent of GDP was due to a(n)
A)decrease in U.S.investment.
B)decrease in U.S.national saving.
C)increase in U.S.investment.
D)increase in U.S.national saving.
Page 33
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Chapter 32: A Macroeconomic Theory of the Open Economy
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Q1) When Mexico suffered from capital flight in 1994,U.S.demand for loanable funds
A)and U.S.net capital outflow rose.
B)and U.S.net capital outflow fell.
C)fell and U.S.net capital outflow rose.
D)rose and U.S.net capital outflow fell.
Q2) In the open-economy macroeconomic model,the key determinant of net capital outflow is the
A)nominal exchange rate.
B)nominal interest rate.
C)real exchange rate.
D)real interest rate.
Q3) If the real exchange rate of the U.S.dollar were above its equilibrium level,the real exchange rate of the U.S.dollar would appreciate.
A)True
B)False
Q4) When the government increases the government budget deficit,national saving decreases.
A)True
B)False
Page 34
Q5) Why do higher real interest rates lead to lower net capital outflow?
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Chapter 33: Aggregate Demand and Aggregate Supply
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Q1) Real GDP
A)is the current dollar value of all goods produced by the citizens of an economy within a given time.
B)measures economic activity and income.
C)is used primarily to measure long-run trends rather than short-run fluctuations.
D)All of the above are correct.
Q2) Refer to Figure 33-1.In the short run,a favorable shift in aggregate supply would move the economy from
A)A to B.
B)B to C.
C)C to D.
D)D to A.
Q3) In the mid-1970s the price of oil rose dramatically.This A)shifted aggregate supply left.
B)caused U.S.prices to fall.
C)was the consequence of OPEC increasing oil production.
D)All of the above are correct.
Q4) Make a list of expenditures whose sum equals GDP.
Q5) Make a list of things that would shift the aggregate demand curve to the right.
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Chapter 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand
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Q1) According to liquidity preference theory,if the quantity of money demanded is greater than the quantity supplied,the interest rate will
A)increase and the quantity of money demanded will decrease.
B)increase and the quantity of money demanded will increase.
C)decrease and the quantity of money demanded will decrease.
D)decrease and the quantity of money demanded will increase.
Q2) The government purchases multiplier is defined as
A)1/MPC.
B)1/(1 - MPC).
C)MPC/(1 - MPC).
D)(1 - MPC)/MPC.
Q3) The government buys a bridge.The owner of the company that builds the bridge pays her workers.The workers increase their spending.Firms that the workers buy goods from increase their output.This type of effect on spending illustrates
A)the multiplier effect.
B)the crowding-out effect.
C)the Fisher effect.
D)None of the above is correct.
Q4) What is the difference between monetary policy and fiscal policy?
Page 36
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Chapter 35: The Short Run Trade Off Between Inflation and Unemployment
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Q1) A movement to the right along a given short-run Phillips curve could be caused by
A)an increase in the natural rate of unemployment or expansionary monetary policy. B)expansionary monetary policy, but not an increase in the natural rate of unemployment.
C)an increase in the natural rate of unemployment or a contractionary monetary policy.
D)contractionary monetary policy, but not an increase in the natural rate of unemployment.
Q2) Refer to Figure 35-3.Starting from c and 3,in the long run,an increase in money supply growth moves the economy to
A)a and 1.
B)back to c and 3.
C)d and 4.
D)e and 5.
Q3) Fiscal policy cannot be used to move the economy along the short-run Phillips curve.
A)True
B)False
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Chapter 36: Five Debates Over Macroeconomic Policy
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Q1) Suppose the budget deficit is rising 3 percent per year and nominal GDP is rising 5 percent per year.The debt created by these continuing deficits is
A)sustainable, but the future burden on your children cannot be offset.
B)sustainable, and the future burden on your children can be offset if you save for them.
C)not sustainable, and the future burden on your children cannot be offset.
D)not sustainable, but the future burden on your children can be offset if you save for them.
Q2) If aggregate demand shifts because of a wave irrational exuberance,those who favor lean against the wind policy would advocate the
A)federal reserve increase the money supply or the government increase taxes.
B)federal reserve increase the money supply or the government decrease taxes.
C)federal reserve decrease the money supply or the government increase taxes.
D)federal reserve decrease the money supply or the government decrease taxes.
Q3) Suppose that changes in aggregate demand tended to be infrequent and that it takes a long time for the economy to return to long-run output.How would this affect the arguments of those who oppose using policy to stabilize output?
Q4) Why do many economists advocate a consumption tax rather than an income tax?
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