Economic Theory Exam
Bank
Course Introduction
Economic Theory explores the fundamental principles that govern the allocation of scarce resources and the behavior of individuals, firms, and institutions within different economic systems. This course examines both microeconomic and macroeconomic frameworks, introducing key concepts such as supply and demand, market equilibrium, consumer choice, production and costs, market structures, and the role of government intervention. Students gain a rigorous understanding of how economic agents make decisions, how markets coordinate those decisions, and how economic theories underpin real-world policy issues and business strategies.
Recommended Textbook Principles of Economics 5th Edition by Joshua Gans
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36 Chapters
4743 Verified Questions
4743 Flashcards
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Page 2
Chapter 1: Ten Lessons From Economics
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Sample Questions
Q1) When the government redistributes income from the rich to the poor, society benefits since there are more poor than rich.
A)True
B)False
Answer: False
Q2) Societies face trade-offs because of scientific improvements to technology.
A)True
B)False
Answer: True
Q3) While the 'invisible hand' cannot guarantee efficiency, it is better at guaranteeing equity.
A)True
B)False
Answer: False
Q4) The opportunity cost of something is not what you give up to get something else.
A)True
B)False
Answer: False
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Page 3
Chapter 2: Thinking Like an Economist
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Sample Questions
Q1) Which of the following concepts is illustrated by the production possibilities frontier?
A) equity
B) conservation
C) efficiency
D) liquidity
Answer: C
Q2) The circular-flow diagram has two loops to illustrate the flows of:
A) goods and the flow of dollars
B) energy and wastes
C) dollars and the flow of services
D) dollars and the flow of goods and services
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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Page 4
Chapter 3: Interdependence and the Gains From Trade
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Sample Questions
Q1) Refer to Table 3-4. If England and Spain trade according to the principle of comparative advantage, Spain will export which product to England?
A) bread
B) both bread and cheese
C) cheese
D) Spain cannot benefit from trade with England
Answer: C
Q2) Refer to Table 3-2. For John the opportunity cost of one kg of rice:
A) 3/4 kg of butter
B) 3/2 kg of butter
C) 4/3 kg of butter
D) 2/3 kg of butter
Answer: A
Q3) It takes Sandy one week to write three poems or to write a song. The opportunity cost to Sandy of one poem is 1/3 of a song.
A)True
B)False
Answer: True
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Chapter 4: The Market Forces of Supply and Demand
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Sample Questions
Q1) New Zealand exports possum skins that are used to make leather products. What determinants of demand would be influenced by the following events?
a. New Zealand's possum skin industry is recognised as having conservation benefits as possums are a feral pest in New Zealand.
b. incomes in China grow rapidly
c. the price of calf leather becomes more expensive
Q2) Other things being equal, explain the effect each of the following situations will have on either the demand or supply of corn. Explain also what the effect will be on equilibrium price and quantity.
a. corn is now considered by doctors to be the most healthy vegetable
b. there is a decline in the amount of land used to grow corn
c. producers expect the price of corn to fall in the future
d. the price of peas, a substitute for corn, goes up
e. corn is a normal good and incomes fall
f. the price of fertiliser rises
Q3) Surpluses drive price up, whereas shortages drive price down.
A)True
B)False
Q4) Why would Qantas be interested in the cost of fuel?
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Chapter 5: Elasticity and Its Application
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Q1) Price elasticity of supply is defined as the percentage change in quantity supplied divided by the percentage change in price.
A)True
B)False
Q2) The concept of elasticity is used to:
A) analyse how much the economy is capable of expanding
B) analyse supply and demand with greater precision
C) determine the level of government invention in the economy
D) calculate consumer credit purchases
Q3) Price elasticity over any range of a demand curve is measured by the slope of the demand curve over that range.
A)True
B)False
Q4) The price elasticity of demand measures how responsive:
A) buyers are to a change in price
B) buyers are to a change in advertising by sellers
C) sellers are to a change in price
D) buyers are to a change in their tastes
Q5) What is elasticity and why do economists use the concept?
Q6) What is the price elasticity of supply?
Page 7
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Chapter 6: Supply, Demand and Government Policies
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Sample Questions
Q1) When analysing the economic effects of government policies:
A) supply and demand are the most useful tools of analysis
B) one finds that the effects are always those stated in the legislation
C) supply and demand are not useful, since they apply only to unregulated markets
D) one usually finds them to be the random outcome of economic shocks
Q2) Workers with high levels of skill and experience are not affected by the minimum wage because:
A) they belong to unions
B) they are not legally guaranteed the minimum wage
C) they generally earn wages less than the minimum wage
D) their equilibrium wages are well above the minimum wage
Q3) According to Graph 6-4, when the supply curve for gasoline shifts from S<sub>1</sub> to S<sub>2</sub>:
A) the price will increase to P<sub>3</sub>
B) a surplus will occur at the new market price of P<sub>2</sub>
C) the market price will stay at P<sub>1</sub> due to the price ceiling
D) a shortage will occur at the price ceiling of P<sub>2</sub>
Q4) To what does the term tax incidence refer?
Q5) What are common arguments offered for and against the minimum wage?
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Chapter 7: Consumers, Producers and the Efficiency of Markets
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Sample Questions
Q1) A consumer's willingness to pay is:
A) always equal to the market price
B) the maximum amount he or she is prepared to pay for a good C) the average amount he or she is prepared to pay for a good D) always more than the market price
Q2) Lee is willing and able to pay $300 for a particular MP3 player but is able to buy it for $199. Lee's consumer surplus is:
A) $0
B) $101
C) $199
D) $300
Q3) Total surplus in a market can be measured as the area below the supply curve and the area above the demand curve.
A)True
B)False
Q4) Many countries allow people to visit national parks, lakes or rivers for free. If a good is free in the sense of having zero market price, does this mean that the consumer surplus is also zero?
Q5) Use the information in Table C to graph a supply curve for this product.
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Chapter 8: Application: The Costs of Taxation
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Sample Questions
Q1) Studies indicate that if income tax rates in Sweden had been reduced, income tax collections would have:
A) fallen
B) risen
C) remained constant
D) risen, fallen or remained constant (the studies were inconclusive)
Q2) According to Graph 8-3, producer surplus before the tax equals:
A) $1200
B) $2400
C) $3200
D) $4800
Q3) A tax levied on the supplier of a product shifts the:
A) supply curve upwards or to the left
B) supply curve downwards or to the right
C) demand curve upwards or to the right
D) demand curve downwards or to the left
Q4) If the supply of labour is inelastic, the deadweight loss from labour taxes is large.
A)True
B)False
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Chapter 9: Application: International Trade
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Sample Questions
Q1) The infant industry argument:
A) is based on the belief that protecting industries when they are young will pay off later
B) is based on the belief that protecting industries producing goods and services for infants is necessary if a country is to have healthy children
C) has the support of most economists
D) has proven to be correct in nearly all cases
Q2) If a country allows trade and the domestic price of a good is lower than the world price:
A) the country will become an exporter of the good.
B) the country will become an importer of the good
C) the country will neither export nor import the good
D) additional information about demand is needed to determine whether the country will export or import the good
Q3) Many economists oppose the infant industry argument because it is difficult to remove.
A)True
B)False
Q4) How does an import quota differ from an equivalent tariff?
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11
Chapter 10: Externalities
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Sample Questions
Q1) Refer to Graph 10-5. Which of the graphs shown best depicts the case of a positive consumption externality?
A) panel (a)
B) panel (b)
C) panel (c)
D) panel (d)
Q2) Which of the following are characteristics of tradeable pollution permits? (i) they are a scarce resource
(ii) they can be traded in a market governed by supply and demand
(iii) they eventually lead to an efficient elimination of all pollution
A) (i), (ii) and (iii)
B) (iii) only
C) (i) and (iii) only
D) (i) and (ii) only
Q3) Education has negative externalities for society.
A)True
B)False
Q4) What is meant by 'internalising' an externality? How can a negative externality be internalised?
Q5) Explain the difference between market equilibrium and social optimum.
Page 12
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Chapter 11: Public Goods and Common Resources
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Sample Questions
Q1) Which of the following statements is true?
A) no single individual can eliminate poverty because the problem is so large
B) private charities use taxes to escape the free-rider problem
C) there would be no poverty problem if it was left up to private charity
D) everyone agrees on what role the government should play in fighting poverty
Q2) If Jack and Joe are the only two fishermen in town and neither is bothered by the other's fishing, the fishing lake is not a common resource.
A)True
B)False
Q3) Government intervention becomes increasingly necessary to solve the problem of common resources as the population grows larger.
A)True
B)False
Q4) Fire protection is a good example of a natural monopoly good because:
A) it is non-excludable
B) it is rival
C) protecting an extra house is unlikely to reduce the protection available to others
D) all of the above are true
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13
Chapter 12: The Design of the Tax System
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Sample Questions
Q1) Vertical equity states that taxpayers with similar abilities to pay should contribute the same amount, while horizontal equity states that taxpayers with a great ability to pay taxes should contribute a larger amount.
A)True
B)False
Q2) An efficient tax system is one that generates a lot of revenue even if the administrative burden is high
A)True
B)False
Q3) Vertical equity and horizontal equity are associated with:
A) the benefits principle of taxation
B) the ability-to-pay principle of taxation
C) taxes that have no deadweight losses
D) falling marginal tax rates
Q4) Tax evasion is another term for tax avoidance.
A)True
B)False
Q5) Advocates for the poor claim that a sales tax on food is a regressive tax. Do you agree? Justify your position.
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Chapter 13: The Costs of Production
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Sample Questions
Q1) How would a production function that exhibits decreasing marginal product affect the shape of the total cost curve? Explain or draw a graph.
Q2) Diminishing marginal product suggests that the marginal:
A) product of an extra worker is less than the previous worker's marginal product
B) cost of an extra worker is less than the previous worker's marginal cost
C) product of an extra worker is greater than the previous worker's marginal product
D) cost of an extra worker is unchanged
Q3) Refer to Table 13-2. Adrienne has received an order for 3000 boxes of chocolates for next week. If she expects that the trend in the marginal product of labour will continue in the same direction, it is most likely that her best decision will be to:
A) hire about 12 new workers and hope she can satisfy the order
B) commit to meeting the order and then take three weeks to complete the job
C) not commit to meeting the order until she can move to a larger room and hire more workers to box the chocolates
D) close her business until she is able to hire more productive workers
Q4) Explain why the long-run average total cost curve has a U-shape.
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Page 15
Chapter 14: Firms in Competitive Markets
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Sample Questions
Q1) Sunk costs are relevant to decisions about business strategy, as huge amounts of time have been invested in ensuring that the business is set up for success.
A)True
B)False
Q2) Refer to Graph 14-5. When market price is P<sub>5</sub>, a profit-maximising firm's profits can be represented by the area:
A) (P<sub>5</sub> - P<sub>4</sub>) * Q<sub>3</sub>
B) P<sub>5</sub> * Q<sub>3</sub>
C) (P<sub>5</sub> - P<sub>3</sub>) * Q<sub>2</sub>
D) when market price is P<sub>5</sub> there are no profits
Q3) When firms in a competitive market have different costs, it is likely that:
A) the market will no longer be considered competitive
B) free entry and exit in the market is likely to be violated C) some firms will earn economic profits in the long run D) long-run market supply will be downward-sloping
Q4) Why would a firm in a perfectly competitive market always choose to set its price equal to the current market price? If a firm set its price below the current market price, what effect would this have on the market?
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Page 16
Chapter 15: Monopoly
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Sample Questions
Q1) Suppose a drug patent runs out, the market consequences of this are? (i) the price will increase (ii) the price will converge on the marginal cost (iii) the quantity sold will increase
A) (i) and (ii)
B) (ii) and (iii)
C) (i) and (iii)
D) (i), (ii) and (iii)
Q2) A monopoly firm is able to charge a price that is higher than their marginal revenue. A)True
B)False
Q3) Refer to Graph 15-2. If the monopoly firm is currently producing output at a level of Q<sub>3</sub>, reducing output will always cause profit to:
A) increase as long as output is at least Q<sub>2</sub>
B) increase as long as output is at least Q<sub>1</sub>
C) remain unchanged
D) decrease
Q4) Is a publisher of a hugely popular book able to exercise monopoly power?
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Page 17
Chapter 16: Business Strategy
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Sample Questions
Q1) Suppose a cartel collapses. The firms resume individual rather than collusive production. This outcome:
A) may or may not be desirable for society as a whole
B) is not a concern because collusion is not a dominant strategy
C) is worse for society because profits for the firms will be lower D) is desirable for society as a whole
Q2) If there is an increase in the number of firms in an oligopoly, what effect would this have on the market if:
(a) they act independently of each other, and
(b) they collude and enforce a cartel agreement?
Q3) An agreement among firms over production and price is called:
A) collusion
B) conspiracy
C) multinational corporation
D) trade arrangement
Q4) An imperfectly market that has only two firms is called:
A) a duopoly
B) a split monopoly
C) a triopoly
D) a binary market
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Chapter 17: Competition Policy
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Sample Questions
Q1) Under common law, courts will typically enforce contracts between competitors that reduce competition and increase prices.
A)True
B)False
Q2) Which of the following is necessarily a problem with competition laws?
A) they promote competition
B) they limit monopoly power
C) they may target a business whose practices appear to be anti-competitive but in fact have legitimate purposes
D) all of the above
Q3) Corporatisation is the process of providing incentives to make them behave more like private owners.
A)True
B)False
Q4) In New Zealand, the telephone lines (and cabinets) have been unbundled recently. Explain what this means in regards to tying and discuss why it is beneficial for social outcomes.
Q5) What is resale price maintenance, predatory pricing and tying?
Q6) Explain the practice of tying and discuss why it is controversial.
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Chapter 18: Monopolistic Competition
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Q1) Excess capacity:
A) is a characteristic of rising average total cost curves
B) is solely a characteristic of mark-up pricing
C) tells economists little about the desirability of a market outcome
D) is the primary source of market inefficiency in monopolistically competitive markets
Q2) Counterfeiting of goods is a rational market outcome of the success of a brand
A)True
B)False
Q3) As some incumbent firms exit a monopolistically competitive market, profits of existing firms:
A) decline and product diversity in the market decreases
B) rise and product diversity in the market increases
C) rise and product diversity in the market decreases
D) decline and product diversity in the market increases
Q4) A small number of sellers in a market makes rigorous competition:
A) less likely and strategic interactions among them vitally important
B) less likely and strategic interactions among them unimportant
C) more likely and strategic interactions among them vitally important
D) more likely and strategic interactions among them unimportant
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Chapter 19: The Markets for the Factors of Production
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Sample Questions
Q1) Describe the process by which the market for capital and the market for land reach equilibrium. As part of your description, elaborate on the role of the stock of the resource versus the flow of services from the resource.
Q2) Refer to Table 18-1. A profit-maximising firm will hire workers as long as the value of the marginal product of labour equals or exceeds:
A) $500
B) $400
C) $300
D) $200
Q3) Basically, competitive firms hire workers up to the point that the benefit they receive from the worker equals which of the following?
A) the wage paid to the worker
B) both the price of the final good and the wage paid to the worker
C) the price of the final good only
D) none of the above
Q4) The demand for apple pickers is derived from the demand for apples.
A)True
B)False
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Chapter 20: Earnings, Unions and Discrimination
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Q1) Evidence of differences in average wages of Aboriginal workers compared to white workers:
A) is solely indicative of differences in productivity between races
B) does not alone provide conclusive evidence of discrimination
C) is seldom used to provide evidence of discriminatory bias
D) provides conclusive evidence of broad patterns of discrimination on the basis of race
Q2) Some economists suggest that international trade has led to an expanding wage gap between high-skill and low-skill workers.
A)True
B)False
Q3) 'The gender pay gap provides evidence of widespread, severe, ongoing discrimination by employers and fellow workers'. Evaluate this statement.
Q4) In a study done by Daniel Hamermesh and Jeff Biddle, physically attractive individuals were found to command a 'beauty premium' in the labour market. Based on your experience with university lecturers, do you think there is likely to be a beauty premium for lecturers? Explain your answer with appropriate examples.
Q5) Why can Roger Federer command a high sponsorship bonus?
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Page 22
Chapter 21: Income Inequity and Poverty
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Q1) Diminishing marginal utility suggests that:
A) the poor receive more satisfaction than the rich from the last dollar they respectively spend
B) more is always preferred to less
C) the poor are less efficient at spending money than the rich
D) the wellbeing of society is maximised when the distribution of income is equal
Q2) The income distribution in a society is:
A) mostly determined by government taxation policies
B) mostly determined by rental income
C) mostly determined by the geographical location of taxpayers
D) mostly determined by factors that determine wages
Q3) Because people can borrow when they are young, the life cycle theory would suggest that a standard of living depends on:
A) aggregate income rather than annual personal income
B) income averaged across seasons rather than across years
C) annual extended family income rather than annual personal income
D) lifetime income rather than annual income
Q4) Explain what information is contained in the poverty rate statistic.
Q5) Discuss the permanent income hypothesis of income distribution.
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Chapter 22: The Theory of Consumer Choice
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Q1) The backward bending portion of an individual labour supply curve is indicative of:
A) a desire to increase work effort (hours) as wage rate rises
B) dominant income effects at higher levels of income
C) dominant income effects at lower levels of income
D) a desire to reduce work effort (hours) as wage rate falls
Q2) Because indifference curves are linear for each type of good, the marginal rate of substitution is the same at all points on a given indifference curve.
A)True
B)False
Q3) Refer to Graph 22-3. Using the figure in panel (a), what is ratio of the price of X to the price of Y (i.e. PX/PY)?
A) 50/1
B) 5/1
C) 1/5
D) 1/50
Q4) Second-hand clothing is an example of a normal good.
A)True
B)False
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Chapter 23: Frontiers of Microeconomics
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Q1) Loss aversion means that commitment strategies that generate potential losses are more likely to change behaviour than strategies that generate the equivalent money gain.
A)True
B)False
Q2) An implication of asymmetric information in the insurance market is that people in average health may be encouraged to purchase health insurance.
A)True
B)False
Q3) A way for employers to reduce shirking is to offer workers higher than equilibrium wages.
A)True
B)False
Q4) People frequently interpret evidence in a way that conforms to their own prior beliefs.
A)True
B)False
Q5) What are the implications of the median voter theorem?
Q6) How might a car insurance company screen drivers for risky behaviour?
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Chapter 24: Measuring a Nations Income
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Q1) Consumption is spending by households on goods and services, including household purchases of new housing.
A)True
B)False
Q2) Since black market and non-market measures are excluded from measures of GDP, the GDP measure tends to:
A) overestimate the total production of an economy
B) underestimate the total production in an economy
C) not make a significant difference in determining the total production of an economy
D) lead one to the conclusion that GDP measures are not very useful to anyone but market economists
Q3) Sandra decides to hire her neighbour's son to water her lawn and feed her dog this year instead of doing those tasks herself as she did last year. Since the same work is done in either case, GDP is unaffected by the change.
A)True
B)False
Q4) Define GDP and explain why some products are excluded.
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Chapter 25: Measuring the Cost of Living
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Q1) In 2010, nominal GDP is $500 million and real GDP is $550 million. What is the GDP deflator?
A) -50
B) 50
C) 91
D) 110
Q2) An increase in the price of domestically produced industrial robots will be reflected in:
A) both the GDP deflator and the CPI
B) neither the GDP deflator nor the CPI
C) the GDP deflator but not in the CPI
D) the CPI but not in the GDP deflator
Q3) The basket of goods cost $160 in the year 2005 and $424 in the year 2006. What is the CPI in 2006 when the base year is 2005?
A) 38
B) 265
C) 160
D) 678
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Chapter 26: Production and Growth
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Q1) According to the rule of 70, if a variable grows at the rate of x% per year, then that variable doubles in approximately 70/x years.
A)True
B)False
Q2) The production function is given as Y = AF(L, K, H, N), where Y is the quantity of output,
A is the level of available production technology, L is the quantity of labour, H is the quantity of human capital and N is the quantity of natural resources. This equation provides:
A) a summary for the four determinants of productivity
B) a summary for the four determinants of production
C) a foundation for measuring inflation
D) a measure of the availability of natural resources
Q3) Which of the following statements is correct for the period 1950-2000?
A) Japan has been an economic superpower
B) Bangladesh has experienced huge economic growth
C) Mexico's real GDP per person has decreased
D) at the beginning of the period, Mexico had higher real GDP per person than Japan
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Chapter 27: Saving, Investment and the Financial System
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Q1) When James Tobin received a Nobel prize in economics, partly for demonstrating theoretically the rationale for diversifying a portfolio of assets, Charles Kindleberger, President of the American Economic Association, remarked that Tobin had received the prize for proving that 'it doesn't pay to put all your eggs in one basket'. Why might a saver decide to diversify his or her portfolio of assets?
Q2) The national income accounting identity S = I shows that saving and investment are equal for every individual household or firm.
A)True
B)False
Q3) A budget deficit:
A) raises the interest rate
B) lowers the interest rate
C) does not affect the interest rate
D) shifts the supply curve for loanable funds to the right
Q4) The financial system moves the economy's scarce resources from:
A) the government to citizens
B) higher-valued uses to lower-valued uses
C) savers to borrowers
D) borrowers to savers
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Chapter 28: The Natural Rate of Unemployment
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Q1) Economists and policymakers should focus on solving problems of short-term unemployment, since long-term unemployment will be resolved eventually.
A)True
B)False
Q2) Why is job-search unemployment inevitable?
Q3) Unemployment rate is:
A) Number of unemployed × 100 Population
B) Number of unemployed × 100 Adult population
C) Number of unemployed × 100 Labour force
D) Number of unemployed × 100
Number of employed
Q4) Firms may find it profitable to pay wages above the equilibrium level in order to give workers an incentive to avoid shirking their responsibilities.
A)True
B)False
Q5) Explain the worker-effort variant of efficiency wage theory with moral hazard.
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Chapter 29: The Monetary System
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Q1) One of the functions of money comes from the use of money to transfer purchasing power to the future. This is called:
A) medium of exchange
B) unit of account
C) store of value
D) measure of liquidity
Q2) All that is required for fiat money to circulate successfully in an economic system is for the government to declare that it is legal tender.
A)True
B)False
Q3) Under a fractional-reserve banking system, banks:
A) hold only a fraction of their deposits as reserves
B) generally lend out a majority of their deposits
C) can create money by lending out reserves
D) all of the above
Q4) The term wealth is used to refer to the total of all stores of value, including both money and non-monetary assets.
A)True
B)False
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Chapter 30: Inflation: Its Causes and Costs
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Q1) High inflation and high deflation can both be regarded as a major economic problems.
A)True
B)False
Q2) An increase in the money supply:
A) increases the ability of the economy to produce goods and services, increases the demand for goods and services, and increases the price level
B) leaves unchanged the ability of the economy to produce goods and services, increases the demand for goods and services and increases the price level
C) leaves unchanged the ability of the economy to produce goods and services, increases the demand for goods and services and decreases the price level
D) leaves unchanged the ability of the economy to produce goods and services, decreases the demand for goods and services, and decreases the price level
Q3) How do the relative-price distortions caused by inflation create a misallocation of resources?
Q4) Explain inflation tax. How does government collect the inflation tax and who pays this tax?
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Chapter 31: Open-Economy Macroeconomics: Basic Concepts
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Q1) General price levels in any country change to:
A) balance demand for goods and supply of goods
B) balance demand for services and supply of services
C) balance demand for money and supply of money
D) balance demand for goods and services, and supply of goods and services
Q2) Economists should be concerned about the possibility that the world's developing countries will use the world's savings to finance investment and growth, leaving the industrial countries with insufficient funds for their own capital accumulation.
A)True
B)False
Q3) If the nominal exchange rate is 70 yen per dollar, and a tonne of wheat sells for $100 in Australia, and for 14 000 yen in Japan, then the real exchange rate is:
A) 2
B) 0.7
C) 0.5
D) 20 000
Q4) If a kilo of coffee costs $20 in Australia and 3000 yen in Japan, what is the nominal exchange rate according to the purchasing-power parity theory?
Page 33
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Chapter 32: A Macroeconomic Theory of the Open Economy
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Q1) A strong domestic dollar, ceteris paribus, may have minimal impact on export industries.
A)True
B)False
Q2) Which of the following statements is not correct when the government runs a budget deficit?
A) The supply of loanable funds decreases
B) The interest rate rises
C) Net foreign investment increases
D) The real exchange rate appreciates
Q3) If exports are greater than imports, the country is said to have a:
A) trade advantage
B) trade balance
C) trade surplus
D) trade deficit
Q4) The demand for loanable funds comes from domestic investment and net foreign investment.
A)True
B)False
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Chapter 33: Aggregate Demand and Aggregate Supply
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Q1) The new classical misperceptions theory states that:
A) changes in the relative price can temporarily mislead consumers, and lead to an upward-sloping aggregate-supply curve
B) changes in the overall price can temporarily mislead suppliers, and lead to an upward-sloping aggregate-supply curve
C) changes in the overall price can temporarily mislead consumers, and lead to an upward-sloping aggregate-supply curve
D) changes in the relative price can temporarily mislead suppliers, and lead to an upward-sloping aggregate-supply curve
Q2) When production costs rise, in the short run:
A) the aggregate-supply curve shifts down to the right
B) the aggregate-demand curve shifts down to the left
C) the aggregate-demand curve shifts up to the right
D) the aggregate-supply curve shifts up to the left
E) both the aggregate-demand curve and the aggregate-supply curve shift to the left
Q3) Explain three alternative reasons why a fall in the price level increases the quantity of goods and services demanded.
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Chapter 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand
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Q1) The government-purchases multiplier is defined as:
A) 1 - (1/MPC)
B) 1/(MPC - 1)
C) 1 - (MPC - 1)
D) 1/(1 - MPC)
Q2) In the long run, the interest rate and inflation rate adjust to accommodate a fixed level of output. In the short run, the interest rate and output adjust to accommodate a predetermined level of prices.
A)True
B)False
Q3) The lag problem associated with monetary policy is due to:
A) the fact that firms make investment plans far in advance
B) the political process
C) the time it takes for monetary policy to affect the interest rate
D) none of the above
Q4) Changes in monetary policy can only be viewed in terms of a changing target for the interest rate.
A)True
B)False
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Q5) Define expansionary and contractionary fiscal policy, giving examples of each.
Chapter 35: The Short-Run Trade-Off Between Inflation and Unemployment
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Q1) Phillips's discovery in the UK was supported by a similar negative correlation between inflation and unemployment in data for the United States.
A)True
B)False
Q2) According to rational expectations theory, a credible commitment to low inflation increases the cost of disinflation, because people are rational.
A)True
B)False
Q3) A typical estimate of the sacrifice ratio is five. According to Sargent, the sacrifice ratio could be much smaller than suggested by previous estimates.
A)True
B)False
Q4) According to the textbook, the sacrifice ratio should be ignored when attempting to reduce inflation beyond acceptable targets as continued inflation has dire consequences.
A)True
B)False
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Chapter 36: Five Debates Over Macroeconomic Policy
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Q1) There are some situations in which running a budget deficit is justifiable.
A)True
B)False
Q2) The Reserve Bank of New Zealand re-negotiated its inflation target band in 2003 from 0 per cent-3 per cent p.a. to 1 per cent-3 per cent p.a. Explain why this shift may have occurred.
Q3) The charter of the RBA gives the institution specific recommendations about what goals it should pursue; and the Act tells the RBA how to pursue whatever goals it might choose.
A)True
B)False
Q4) Some economists believe that policymakers should not try to stabilise the economy. What is the reason?
A) The policymakers' goal is economic boom
B) Policy effects occur immediately
C) Economic conditions change over time
D) None of the above
Q5) A nation's saving rate is a key determinant of its long-run economic prosperity.
A)True
B)False
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