Economic Theory
Textbook Exam Questions
Course Introduction
Economic Theory is a foundational course that explores the fundamental principles, models, and analytical frameworks underlying economic behavior and decision-making. Students will examine both microeconomic and macroeconomic theories, including concepts such as supply and demand, market equilibrium, consumer and producer choice, market structures, and the role of government intervention. The course also addresses broader economic phenomena such as inflation, unemployment, economic growth, and international trade. Through rigorous analysis and problem-solving, students will develop a solid understanding of how economic agents interact within markets and how economies function at large.
Recommended Textbook
Economics Principles and Policy 13th Edition by
William J. Baumol
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Chapter 1: What Is Economics
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Q1) The 1981 tax reform act reduced taxes on high-income individuals.Many economists believed that high tax rates would deter high-income individuals from working and investing, thus slowing the growth of income.This illustrates the issue of
A)the equality-efficiency trade-off.
B)usury.
C)the effects of budget deficits on future generations.
D)the cost disease of the public sector.
E)the importance of externalities.
Answer: A
Q2) "Assume that all individuals have perfect information about prices now and in the future, that they have identical tastes, that all markets are competitive, and that there is no government." This statement is indicative of how economists
A)apply the law of supply and demand.
B)employ marginal analysis.
C)are prevented from getting correct answers.
D)abstract for analytic purposes.
E)use realistic assumptions to develop theory.
Answer: D
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Chapter 2: The Economy: Myth and Reality
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Sample Questions
Q1) Outputs include goods but not services.
A)True
B)False
Answer: False
Q2) Most American workers
A)are employed in the goods-producing sector.
B)are employed by government.
C)are employed in the service-producing sector.
D)are employed in the agricultural sector.
Answer: C
Q3) A tax is progressive if the ratio of taxes to income rises as income rises.
A)True
B)False
Answer: True
Q4) Workers earn more than half of the income generated by the production process.
A)True
B)False
Answer: True
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Chapter 3: The Fundamental Economic Problem: Scarcity and
Choice
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Q1) Because resources tend to be specialized, increased production of military goods tends to
A)decrease the opportunity cost of more military goods.
B)increase the opportunity cost of more non-military goods.
C)increase the opportunity cost of more military goods.
D)change the position of the production possibilities curve.
E)alter the slope of the production possibilities curve.
Answer: C
Q2) If a society uses the market system, it must rely solely on markets to solve all of its problems.
A)True
B)False
Answer: False
Q3) The principle of comparative advantage explains specialization and trade among countries but not among individuals.
A)True
B)False
Answer: False
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Chapter 4: Supply and Demand: an Initial Look
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Sample Questions
Q1) To be effective, a price floor must be
A)above the equilibrium price.
B)at the equilibrium price.
C)below the equilibrium price.
D)anywhere on the graph.
Q2) During the American Revolution, the Pennsylvania legislature enacted price controls on essential commodities.The result of this legislation was
A)a large increase in the availability of those items, ending shortages.
B)a severe shortage of those essential commodities.
C)an increase in the price of those items, thus alleviating shortages.
D)new efforts to increase production of those commodities.
E)a minor inconvenience as persons adjusted to the new law.
Q3) Assume that Figure 4-16 shows the supply of steak.An increase in the price of pork will change the supply from
A)S to S .
B)S to S .
C)S to S .
D)S to S .
Q4) List some of the problems that may arise when prices are controlled.
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Chapter 5: Consumer Choice: Individual and Market Demand
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Sample Questions
Q1) Market demand curves are found by
A)vertically summing individual demand curves.
B)horizontally summing individual demand curves.
C)summing individual demand curves in a parallel fashion.
D)adding the slopes of individual demand curves.
Q2) In Figure 5-19, the consumer experiences at point C
A)greater total utility than at point D.
B)greater total utility than at point E.
C)less total utility than at point D.
D)total utility equal to that experienced at point D.
Q3) In Figure 5-17, which of the marked points would an economist use to help him construct a single demand curve for X?
A)A and B
B)C and D
C)A and C
D)A and D
Q4) Economic theory has traditionally focused on optimality in decision-making.
A)True
B)False
Q5) Are there ever exceptions to the law of demand?
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Chapter 6: Demand and Elasticity
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Q1) As a price change persists over a long period of time, we should expect the demand elasticity to fall.
A)True
B)False
Q2) Which of the following goods will have the most inelastic demand at any time?
A)jewelry
B)Big Macs
C)electricity
D)pork chops
Q3) If the price of potatoes is reduced, consumers likely:
A)significantly more potatoes
B)significantly fewer potatoes
C)roughly the same quantity of potatoes
D)an unknown quantity of potatoes; in this situation, consumers' actions cannot be predicted
Q4) What are the main determinants of demand elasticity?
Explain their importance.
Q5) Total expenditure equals price times elasticity.
A)True
B)False
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Chapter 7: Production, Inputs, and Cost: Building Blocks for Supply Analysis
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Sample Questions
Q1) The marginal physical product of an input is the A)addition to output from using one more unit of an input.
B)extra amount of an input needed to produce one additional unit of output.
C)change in average physical product, given a change in the quantity of an input. D)slope of the production indifference curve for an output made using the input.
Q2) A production indifference curve describes the input combinations that will produce a given output.
A)True
B)False
Q3) At a given level of wheat output, one more unit of labor would produce 10 extra bushels, and one more unit of seed would produce 30 extra bushels.A unit of labor costs $6, and a unit of seed costs $12.The farmer should A)produce less wheat.
B)buy only seed.
C)buy more seed and less labor. D)buy less seed and more labor.
Q4) Input choices in the present are often affected by past decisions.
A)True
B)False
Page 9
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Chapter 8: Output, Price, and Profit: the Importance of Marginal Analysis
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Sample Questions
Q1) In reality, decisions made by firms may not always produce maximum total profit because some executives
A)are more motivated by altruism.
B)are more interested in market share than profits.
C)may push research and development to the point that profits decline.
D)All of the above are correct.
Q2) "As long as total revenue slopes up, marginal revenue must slope up also." Explain whether this statement is true or false.
Q3) Company A manufactures a single automotive component.It had total revenue of $100,000 and an economic profit of $20,000.What is the price of the component it manufactures?
A)($100,000/quantity sold).
B)($100,000/quantity produced).
C)($100,000/quantity sold) average cost of the product
D)($100,000/quantity produced) average cost of the product
Q4) Tour companies and cruise lines often offer last minute fares that are far below the prices paid by customers who have booked their trips far in advance.Use marginal analysis to explain this pricing tactic.
Q5) Given a demand curve, explain how total revenue may be calculated.
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Chapter 9: Securities: Business Finance and the Economy:
the Tail That Wags the Dog
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Sample Questions
Q1) Bond prices in the marketplace will fall when
A)interest rates fall.
B)the company is losing money.
C)interest rates rise.
D)the company is making money.
Q2) Corporations obtain funds when their previously issued stock is traded.
A)True
B)False
Q3) When institutional money managers use their computers to decide on large sales or purchases in the stock market, they are employing
A)the herd instinct.
B)the bandwagon effect.
C)program trading.
D)stock watering.
Q4) The term "random walk" means that stock prices are fairly predictable.
A)True
B)False
Q5) Write a short note on the regulation of the U.S.securities markets.
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Q6) Explain how "herd behavior" affects the stock market, and contributes to recession.
Chapter 10: The Firm and the Industry Under Perfect Competition
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Q1) Explain the reasoning behind the shutdown rules.When is it appropriate to operate with a loss?
Q2) Figure 10-2 shows demand and short-run cost curves for a perfectly competitive firm.At its profit-maximizing level of output, the firm's short-run TC is represented by area A)ADFO.
B)BGHC.
C)BGIO.
D)ADGIO.
Q3) Subsidizing firms that pollute will reduce pollution in the long run.
A)True
B)False
Q4) To own a taxicab in New York City, you must own a medallion.New York City regulates the number of official cabs by limiting the number of medallions.Explain why the New York cab industry is not competitive by reviewing the four conditions necessary for competition.NYC violates which one?
Q5) Perfectly competitive markets are not the most efficient type.
A)True
B)False
Q6) Profits or losses must be temporary for perfectly competitive firms.Why?
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Chapter 11: Monopoly
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Q1) The U.S.Postal Service enjoys a monopoly position because of patent rights.
A)True
B)False
Q2) In perfect competition, one result of the model was that there were no economic profits in the long run.In a monopoly, the firm typically earns a positive economic profit.Why is there this difference?
Q3) A major difference between a monopoly and perfect competition is that monopolies can earn an economic profit in the long run and a perfectly competitive firm cannot.
A)True
B)False
Q4) In Table 11-2, MC of the last unit produced at the profit-maximizing output is
A)$5.
B)$7.
C)$8.
D)$10.
Q5) The software industry has traits in common with monopoly markets.
A)True
B)False
Q6) Explain why a monopolist does not have a supply curve.
Page 13
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Chapter 12: Between Competition and Monopoly
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Sample Questions
Q1) Cartels are
A)difficult to organize.
B)difficult to preserve.
C)especially unlikely to succeed if the members sell many varied products.
D)All of the above are correct.
Q2) Which market is most likely to witness such actions and reactions as frequent new-product introductions, free samples, and aggressive advertising campaigns?
A)Oligopoly
B)Perfect competition
C)Monopoly
D)Monopolistic competition
Q3) Industries, where economies of scale dictate that only a few firms produce, will be efficient if the markets in which they sell are
A)perfect.
B)contestable.
C)close to each other.
D)protected from entry.
Q4) Why is oligopoly more difficult to model than competition or monopoly?
Q5) Monopolistic competition tends to lead firms to have wasted capacity.Why?
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Chapter 13: Limiting Market Power: Regulation and Antitrust
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Q1) Antitrust laws prohibit undesirable business practices by firms holding monopoly power.
A)True
B)False
Q2) Many industries are regulated in the United States, from railroads and electric utilities to cable TV.
A)True B)False
Q3) The current deregulatory movement began to change laws to deregulation in the A)early 1970s.
B)late 1970s.
C)early 1980s.
D)early 1990s.
Q4) Prices that maximize the public interest will always allow reasonable profits for firms.
A)True B)False
Q5) Service to consumers of deregulated products has generally not diminished. A)True B)False
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Chapter 14: The Case for Free Markets: the Price System
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Q1) Higher prices may serve the public interest when:
A)there is a shortage of goods or services available
B)there is an uneven distribution of traffic on alternate routes
C)higher prices never serve the public interest
D)both a and b
Q2) In a market system, prices are used to coordinate economic activity.
A)True
B)False
Q3) The necessity for choice, in economics, arises from
A)high incomes and many goods.
B)scarcity of economic means for satisfying economic wants.
C)scarcity of time and knowledge, and numerous similar goods.
D)All of the above are correct.
Q4) To promote economic efficiency, government should
A)keep all prices as low as possible.
B)keep all prices high so that people will save more money.
C)allow the market to set low prices for abundant goods and high prices for scarce goods.
D)never interfere with firms' price setting powers.
Q5) How does the task of production planning happen in a laissez-faire economy?
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Chapter 15: The Shortcomings of Free Markets
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Q1) Government often finds it difficult to cope with externalities because
A)costs and benefits are difficult to assess in monetary terms.
B)taxes and subsidies are ineffective in equating
C)government has no authority to impose fines for air and water pollution.
D)marginal private cost curves cannot be shifted.
Q2) The cost disease of personal services causes
A)the cost of health care to rise faster than the economy's rate of inflation.
B)legislators to blame declining standards of quality at public hospitals on greedy doctors or administrators.
C)legislators to propose price controls on insurance.
D)All of the above are correct.
Q3) The principle of "comparable worth" asserts that people with comparable, if not identical, skills and responsibilities should receive the same pay.If this principle were to become law, it would tend to
A)reduce the problem of the "cost disease of services."
B)exacerbate the problem of the "cost disease" of the service sector.
C)be irrelevant to the "cost disease" problem.
D)eliminate the problem of externalities.
Q4) Are national forests public goods? Explain.
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Chapter 16: Externalities, the Environment, and Natural Resources
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Q1) The observed change in the reserves of copper, lead, and zinc between 1960 and 1990 was most likely caused by
A)low prices discouraging exploration for new reserves.
B)a slowdown in demand growth.
C)high prices that stimulated exploration.
D)the discovery of substitutes.
Q2) Identify the economist who first addressed the environmental problem in terms of externalities.
A)Joseph Schumpeter
B)Maynard Keynes
C)A.C.Pigou
D)J.B.Say
Q3) Although pollution is caused by a failure of the market, many economists believe that the best way to protect the environment is to utilize the price mechanism.
A)True
B)False
Q4) Explain some important situations where direct controls have a clear advantage over taxes.
Q5) Explain why environmental damage would be classified as an externality.
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Chapter 17: Taxation and Resource Allocation
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Q1) What is the controversy surrounding property taxes as a source for school funding?
Q2) State and local governments typically spend most of their budgets on providing A)education.
B)public goods.
C)public welfare programs.
D)police protection and administrative services.
Q3) The money for Social Security payments to current retirees comes from
A)payroll taxes collected from those retirees when they were working.
B)income taxes collected from the current working population.
C)payroll taxes collected from the current working population.
D)only the interest earned now by the government on the invested Social Security trust fund.
Q4) The incidence of a tax refers to
A)who actually collects the tax.
B)how frequently the tax is collected.
C)who bears the economic burden of the tax.
D)how the tax affects prices or wages.
Q5) What is the flypaper theory of tax incidence?
This theory is typically wrong.Why?
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Chapter 18: Pricing the Factors of Production
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Q1) A usury ceiling will be effective depending on A)whether the usury rate is above 10 percent.
B)whether the usury rate is above 8 percent.
C)whether that rate is below what the equilibrium rate of interest would have been in a free market.
D)how well organized the lending institutions are.
Q2) What is the present value of an infinite stream of annual payments of $10,000 per year if the first payment is received one year from today?
Assume the interest rate is 10 percent.
A)$100,000
B)$1,000,000
C)$10,000,000
D)$1,000,000,000
Q3) The rate of interest is the price at which money is borrowed and loaned.
A)True
B)False
Q4) What is the distribution of national income currently among the owners of the factors of production-land, labor, capital, and entrepreneurship?
Q5) Explain the effect of a usury law.
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Chapter 19: Labor and Entrepreneurship: the Human Inputs
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Q1) The supply curve of truck drivers is upward sloping and demand curve is downward sloping.A reduction in the price of hauling freight by truck relative to the price of hauling freight by rail will ____ the equilibrium wage of truck drivers and ____ the number of drivers employed.
A)decrease; decrease
B)decrease; increase
C)increase; decrease
D)increase; increase
Q2) The number of persons who could become lawyers or surgeons is potentially quite large, yet these two groups earn fairly high incomes.One of the main reasons why they do is the
A)return on the investment of many years of training.
B)evening-out of their low income during schooling.
C)rent on their unique and rare talents.
D)scarcity value of their abilities.
Q3) The demand curve for labor slopes downward because
A)few workers work at low wages.
B)capital has been substituted for labor in most industries.
C)of the diminishing marginal product of labor.
D)All of the above are true.
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Chapter 20: Poverty, Inequality, and Discrimination
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Q1) The two ways to define poverty are which of the following?
A)relatively and absolutely
B)absolutely and definitely
C)definitely and conceptually
D)definitely and receptively
Q2) Economic discrimination occurs when two equal factors of production are paid differently.
A)True
B)False
Q3) Inheritance taxes tend to increase income inequality in the long run.
A)True
B)False
Q4) The total amount of income in a society is independent of how income is distributed. A)True
B)False
Q5) Is wage discrimination more likely in competitive or monopolistic markets?
Q6) Suppose a professor announces at the beginning of a course that he will give no failing grades because they are too damaging to self-esteem.How does such a policy affect equality and efficiency?
Page 22
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Chapter 21: Is Useconomic Leadership Threatened
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Q1) The U.S.debt problem is caused by the government only; individuals don't go into debt.
A)True
B)False
Q2) Compared to OECD countries, in the U.S.
A)the poverty level is above the OECD average, but inequality is below the average
B)the poverty level is below the OECD average, but inequality is above the average
C)both poverty and inequality levels are below the OECD average
D)both poverty and inequality levels are above the OECD average
Q3) Which of the following statements is true of entrepreneurs?
A)They have a talent for spotting new profit-making opportunities.
B)They are an indispensable ingredient to the U.S.'s unprecedented growth performance
C)They are an indispensable ingredient to the U.S.'s success over the centuries.
D)All of the above are true.
Q4) Compare the U.S.health care system to that of other countries.Are we getting superior health care for the money we spend?
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Chapter 22: An Introduction to Macroeconomics
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Q1) In contrast to the post-World War II period, before 1940 the government
A)actively intervened in the economy for stabilization purposes.
B)used aggregate demand management to avoid recessions.
C)rarely intervened in the economy to influence inflation or unemployment rates.
D)used government ownership to guarantee full employment.
Q2) While their respective subject matters differ greatly, both microeconomists and macroeconomists rely on the same basic tools; that is, both rely on
A)government contracts to promote research and publications.
B)demand-and-supply analysis.
C)the economic theory of John Maynard Keynes.
D)consumer protection laws and antitrust legislation.
Q3) Nominal GDP is calculated by using
A)prices set in a base year.
B)average prices in all major cities.
C)current prices
D)prices charged by initial producers.
Q4) Describe some of the steps used to combat inflation.What are their side-effects?
Q5) Macroeconomists pay little attention to the composition of aggregate output.
A)True
B)False
Page 24
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Chapter 23: The Goals of Macroeconomic Policy
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Q1) To protect themselves from the effects of inflation, lenders try to estimate the expected rate of inflation.
A)True
B)False
Q2) Potential GDP is an estimate of the economy's ability to produce goods and services if the
A)labor force is fully employed.
B)price level is stable.
C)trade balance is zero.
D)federal budget is balanced.
Q3) The growth of the labor force and the growth of labor productivity help determine the rate of GDP growth.
A)True
B)False
Q4) How is the unemployment rate calculated? Describe the three principal types of unemployment.
Q5) Businesses will want to borrow more funds as the real rate of interest decreases. A)True
B)False
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Chapter 24: Economic Growth: Theory and Policy
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Q1) Workforce quality arguments are very difficult to prove for the period of 1970 to 1990 because during that period SAT scores
A)and graduation rates increased.
B)increased and graduation rates decreased.
C)and school attendance rates decreased.
D)decreased and school attendance rates increased.
Q2) Which of the following would tend to shift the production function upward?
A)an increase in the number of hours worked
B)an increase in population
C)an increase in the size of the labor force
D)an increase in the level of technology
Q3) For a given technology and a given labor force, labor productivity will be ____ when the capital stock is ____.
A)higher; larger
B)lower; larger
C)lower; unchanged.
D)higher; smaller
Q4) Human capital includes the tools and equipment that human beings work with.
A)True
B)False
26
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Chapter 25: Aggregate Demand and the Powerful Consumer
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Q1) The difference between national income and disposable income is
A)residential investment.
B)federal deficits.
C)net exports.
D)financial investment.
E)the amount of taxes collected.
Q2) In Macronesia, the MPC is approximately .80.If disposable income changes from 1,000 billion pukas to 1,500 billion pukas, then consumption will change by a(n)
A)decrease of 500 billion pukas.
B)increase of 500 billion pukas.
C)increase of 400 billion pukas.
D)increase of 800 billion pukas.
Q3) The net export component of aggregate demand is defined as U.S.
A)imports minus U.S.exports.
B)imports plus U.S.exports.
C)exports minus U.S.imports.
D)exports minus taxes and customs duties.
Q4) The MPC can be used to predict the effect of a tax increase.
A)True
B)False
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Chapter 26: Demand-Side Equilibrium: Unemployment or
Inflation
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Q1) In Figure 9-3, at $3,000 billion GDP,
A)inventories will be falling, signaling businesses to decrease production.
B)inventories will be falling, signaling businesses to increase production.
C)planned saving increases planned investment.
D)inventories will be accumulating, signaling businesses to increase production.
Q2) If net exports decrease, the expenditure schedule will
A)get steeper.
B)get flatter.
C)shift upward.
D)shift downward.
Q3) If total spending exceeds total output, then
A)inventory levels will rise.
B)inventory levels will remain constant.
C)inventory levels will fall.
D)output will eventually decrease.
Q4) Injections include saving and taxes.
A)True
B)False
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Q5) Differentiate between an induced increase in consumption and an autonomous increase in consumption.How are they represented on a graph?
Chapter 27: Bringing in the Supply Side: Unemployment and Inflation
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Q1) The existence of an inflationary gap or an recessionary gap depends on the
A)aggregate supply only.
B)expenditure schedule.
C)leakages schedule.
D)injections schedule.
E)aggregate demand and aggregate supply schedules.
Q2) If aggregate quantity demanded exceeds aggregate quantity supplied, we can expect an unplanned
A)depletion of inventories, causing firms to raise prices.
B)depletion of inventories, causing firms to lower prices.
C)accumulation of inventories, causing firms to raise prices.
D)accumulation of inventories, causing firms to lower prices.
Q3) The principal way in which an economy self-corrects from an inflationary gap is through
A)deflation, which increases purchasing power.
B)inflation, which reduces purchasing power.
C)disinflation, which maintains purchasing power.
D)price level decreases, which stimulate production.
Q4) What causes the aggregate supply curve to have an upward slope in the short run, but a vertical slope in the long run?
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Chapter 28: Managing Aggregate Demand: Fiscal Policy
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Q1) Assume that the government is considering different policies to increase total expenditures in order to reduce unemployment.Which of the following would achieve this objective?
A)decreasing taxes
B)increasing government spending
C)increasing transfer payments
D)All of the above are correct.
Q2) Most tax payments increase as GDP increases.
A)True
B)False
Q3) Raising taxes or increasing transfer payments would reduce total spending.
A)True
B)False
Q4) Government spending influences spending indirectly.
A)True
B)False
Q5) Taxes constitute the difference between GDP and disposable income.
A)True
B)False
Q6) How do transfer payments function as negative taxes?
Page 30
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Chapter 29: Money and the Banking System
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Q1) The moral hazard problem refers to
A)difficulty banks have in satisfying the government's reserve requirement.
B)depositors making a run on the bank, even though the bank is insured.
C)banks taking on more risk in their lending because they know their depositors are insured.
D)banks issuing bank notes that compete with the government's currency.
Q2) On which of the following assets are you most likely to earn interest income?
A)cash and currency
B)checkable deposits
C)money market deposit accounts
D)gold and other precious metals
E)All of the above are correct.
Q3) An asset of a bank is
A)the value of money that is on deposit.
B)the amount a depositor may legally borrow.
C)something of value that the bank owes to a depositor.
D)something of value that a bank owns.
Q4) The value of the deposit multiplier is 1 divided by the required reserve ratio.
A)True
B)False
Page 31
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Chapter 30: Monetary Policy: Conventional and
Unconventional
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Q1) Assume that the banking system has $200 billion in reserves.There are no excess reserves in the system.If the reserve requirement is decreased from 10 percent to 8 percent, what will happen to the level of excess reserves in the system?
A)There will be a deficiency of $40 billion in reserves.
B)There will be a deficiency of $20 billion in reserves.
C)There will be $20 billion in excess reserves.
D)There will be $40 billion in excess reserves.
Q2) The Fed's principal objective is to
A)make profits to pay into the U.S.Treasury.
B)collect tax revenues.
C)supervise the business decisions of banks.
D)manage the money supply and interest rates.
Q3) In Figure 13-1, which panel shows the effect of a Fed open market sale on the interest rate?
A)Panel (A)
B)Panel (B)
C)Panel (C)
D)Panel (D)
Q4) Explain the concept of 'lender of last resort'.What is discount rate?
Page 32
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Chapter 31: He Financial Crisis and the Great Recession
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Q1) Why did observers at first believe that the damage from the impending subprime mortgage crisis would be too small to cause a recession?
Q2) If a 10-year Treasury bond pays 1.5% and a 10-year corporate bond pays 4.4%, then the spread on this particular corporate bond is 5.9%.
A)True
B)False
Q3) What was the lowest federal funds rate target the Fed set in response to the financial crisis?
A)0%
B)1.8%
C)2.0%
D)2.2%
Q4) In response to the economic downturn, the federal government enacted a fiscal stimulus bill with funding in excess of $700 billion.
A)True B)False
Q5) When the housing price bubble burst, there were some obvious effects on the economy, and some that were not so obvious.Explain these.
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Chapter 32: The Debate Over Monetary and Fiscal Policy
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Q1) If the Fed's monetary policy causes a substantial decrease in interest rates, what is the most likely impact on velocity?
A)It will decrease.
B)It will increase.
C)It will remain constant.
D)Velocity is unrelated to interest rates.
Q2) According to the monetarists, the velocity of money is
A)constant by definition.
B)highly variable and unpredictable.
C)constant as a matter of empirical proof.
D)not constant but predictable.
Q3) When analyzing how money affects income, we are analyzing the way in which a
A)stock affects another stock.
B)stock affects a flow.
C)flow affects another flow.
D)flow affects a stock.
Q4) If the velocity of circulation is 10 and the money supply is $250, the value of transactions will be $25.
A)True
B)False
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Chapter 33: Budget Deficits in the Short and Long Run
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Sample Questions
Q1) The policy mix that the Clinton administration sought in early 1993 was a
A)smaller budget deficit and tighter monetary policy.
B)smaller budget deficit and looser monetary policy.
C)larger budget deficit and looser monetary policy.
D)larger budget deficit and tighter monetary policy.
Q2) How sensitive is the structural deficit to the state of the economy?
A)It is insensitive to the state of the economy.
B)The structural deficit changes cyclically with the economy.
C)Changes in the structural deficit trigger opposite swings in the economy.
D)The structural deficit changes countercyclically with the economy.
Q3) Very recently, the debt-to-GDP ratio has been:
A)higher than usual.
B)lower than usual.
C)stabilized.
D)volatile.
Q4) A budget deficit will be least inflationary if the aggregate
A)demand curve is very steep.
B)demand curve is very flat.
C)supply curve is very flat.
D)supply curve is very steep.
Page 35
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Chapter 34: The Trade-Off Between Inflation and Unemployment
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Sample Questions
Q1) In the short run, fiscal and monetary policy cause unemployment and inflation to move in opposite directions because
A)the Fed and Congress rarely agree on policy.
B)one controls aggregate demand, the other controls aggregate supply.
C)both policies control only aggregate supply.
D)both policies control only aggregate demand.
Q2) If AD increases at a faster rate than AS, the result will be
A)demand-side inflation.
B)supply-side inflation.
C)falling prices.
D)stable prices.
Q3) Define the following terms and explain their importance to the study of macroeconomics:
a.Phillips curve
b.rational expectations
c.indexing
d.stagflation
Q4) The cure for inflation can come only from changes on the demand side.
A)True
B)False
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Chapter 35: International Trade and Comparative Advantage
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Q1) The way in which a country benefits from trade is that it can A)obtain goods at lower opportunity cost than producing them itself.
B)exploit economies of scale in production and lower the cost of goods it produces.
C)obtain a wider range of goods than it can produce for itself.
D)All of the above are benefits.
Q2) Figure 22-10 shows the effect on the market for disk drives of a(n) A)quota.
B)tariff.
C)export subsidy.
D)import subsidy.
E)export tax.
Q3) If nations begin to specialize in production for the purpose of trade, A)the utility from consumption will increase, but not the total output.
B)total world output will increase, as well as well being from consumption.
C)total world output will increase, but well being from consumption will not.
D)neither total output nor well being from consumption will change.
E)the impact on total output and well being cannot be predicted.
Q4) Discuss national defense, infant industry, and strategic trade as arguments for protection.
Page 37
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Chapter 36: The International Monetary System: Order or Disorder
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Q1) The dollar has depreciated if it buys less of a foreign currency.
A)True
B)False
Q2) If Japanese tourists visit Yellowstone Park, what is the effect in the foreign exchange market?
A)It will increase demand for Japanese yen.
B)It will decrease demand for Japanese yen.
C)It will increase supply of Japanese yen.
D)It will decrease supply of Japanese yen.
Q3) A country, such as Argentina in 2002, that is buying its own currency to maintain a given exchange rate
A)has a balance of payments surplus.
B)has an undervalued currency.
C)has an overvalued currency.
D)need not fear a "run" on its currency.
Q4) Under the Bretton Woods system of fixed exchange rates,
A)devaluations were frequent and small.
B)devaluations were usually unforeseen.
C)the IMF ensured that exchange rates were never changed.
D)speculators could profit from an attack on a weak currency.
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Chapter 37: Exchange Rates and the Macroeconomy
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Q1) An increase in the U.S.price level relative to the price level of U.S.trading partners will cause the aggregate expenditures function in the United States to
A)shift up.
B)shift down.
C)get flatter.
D)get steeper.
Q2) A depreciating currency makes foreign inputs cheaper and shifts the aggregate supply curve outward.
A)True
B)False
Q3) Which of the following usually leads to currency appreciation?
A)galloping inflation
B)relatively low interest rates
C)declining real GDP
D)fixed exchange rates
Q4) A depreciation of the dollar will cause an increase in the Consumer Price Index.
A)True
B)False
Q5) Discuss the opposing points of view on U.S.trade deficit.
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