Economics for Business Final Exam
Course Introduction
Economics for Business introduces fundamental economic concepts and principles as they apply to real-world business environments. The course explores both microeconomic and macroeconomic factors influencing business decisions, such as supply and demand, market structures, pricing strategies, economic policy, and global economic trends. Students learn how businesses operate within various economic systems, analyze market dynamics, interpret economic indicators, and evaluate the impact of government regulation and international trade. By integrating theory with practical applications, the course equips students with the analytical tools necessary to make informed decisions and develop effective business strategies in a constantly changing economic landscape.
Recommended Textbook
Principles of Economics 5th Edition by Joshua Gans
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Page 2
Chapter 1: Ten Lessons From Economics
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Sample Questions
Q1) Public policies often alter the costs and benefits of private actions. Why is it important for policymakers to consider both the direct and indirect effects of public policies?
Answer: If policymakers don't consider how behaviour might be changed both directly and indirectly, their policies can have effects that they did not intend. The example used in the text is the seatbelt law.
Q2) From an economic point of view for most students, the largest single cost of a university education is:
A) transportation, parking and entertainment
B) tuition fees and books
C) the wages given up to attend university
D) room and board
Answer: D
Q3) The word 'economy' comes from the Greek word for:
A) 'one who manages a household'
B) 'one who participates in a market'
C) 'environment'
D) 'conservation'
Answer: A
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Page 3
Chapter 2: Thinking Like an Economist
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Sample Questions
Q1) Which of the following is the most accurate statement about economic models?
A) economic models attempt to mirror reality exactly
B) economic models are useful, but should not be used for policymaking
C) economic models cannot be used in the real world because they omit details
D) economic models omit many details to allow us to see what is truly important
Answer: D
Q2) Refer to Graph 2-1. In the graph shown, points A, B and C represent feasible or attainable outcomes for society.
A)True
B)False Answer: False
Q3) Economists may disagree on how the government can reduce unemployment.
A)True
B)False
Answer: True
Q4) Treating everyone equitably is a common value shared by all economists.
A)True
B)False Answer: False
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Chapter 3: Interdependence and the Gains From Trade
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Sample Questions
Q1) If two countries have identical opportunity costs, then:
A) one country must be more productive in producing all goods than the other
B) the benefits resulting from trade are increased
C) there are no gains from specialisation and trade
D) each country should specialise in the production of a particular commodity
Answer: C
Q2) As long as two people have different opportunity costs, each can gain from trade by being able to obtain a good at a price lower than his or her opportunity cost.
A)True
B)False
Answer: True
Q3) Jean grows rice at a higher cost than Lee. Suppose Lee catches fish at a higher cost than Jean. For this reason it only benefits Lee they trade.
A)True
B)False
Answer: False
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Page 5
Chapter 4: The Market Forces of Supply and Demand
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Sample Questions
Q1) The side of the market that deals with the willingness and ability to produce and sell is:
A) demand
B) competition
C) supply
D) a monopoly
Q2) Suppose that a decrease in the price of X results in less of good Y sold. This would mean that X and Y are:
A) complementary goods
B) substitute goods
C) unrelated goods
D) normal goods
Q3) When the price is higher than the equilibrium price:
A) suppliers will reduce prices to try to clear the market
B) suppliers will increase their prices to clear the market
C) buyers will change their tastes and desire more of the good
D) more sellers will enter the market as they expect prices to go higher
Q4) What is the practical purpose of ensuring ceteris paribus when explaining the results from a demand and supply model?
Q5) What does the term 'equilibrium' mean when applied to a market?
Page 6
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Chapter 5: Elasticity and Its Application
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Q1) If price changes and total revenue changes in the opposite direction, we can conclude that demand is relatively elastic.
A)True
B)False
Q2) Supply tends to be:
A) less price elastic in the long run
B) more price elastic in the long run
C) perfectly price inelastic in the long run
D) perfectly price inelastic in the short run
Q3) Given a linear demand curve has a constant slope, it follows that the elasticity of the linear demand curve is also always constant.
A)True
B)False
Q4) In Graph 5-5, which supply curve is perfectly inelastic?
A) S<sub>1</sub>
B) S<sub>2</sub>
C) S<sub>3</sub>
D) it is impossible to tell without more information
Q5) What is elasticity and why do economists use the concept?
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Chapter 6: Supply, Demand and Government Policies
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Sample Questions
Q1) According to Graph 6-3, which panel(s) best represent(s) a binding rent control in the long run?
A) panel a
B) panel b
C) neither panel
D) both panels
Q2) The equilibrium wages of teenagers tend to be:
A) low because teenagers are among the least skilled and least experienced workers
B) high because teenagers are among the strongest and most energetic workers
C) low because most teenagers live at home and don't require high wages
D) high because teenagers tend to join unions
Q3) A price floor is not binding if:
A) the price floor is higher than the equilibrium market price
B) the price floor is lower than the equilibrium market price
C) people are willing to buy as much when the price floor is imposed as they did before D) the government sets it
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) If demand increases, the price of a product, as well as producer surplus: A) increases
B) decreases C) remains the same
D) may increase, decrease or remain the same
Q2) Efficiency is related to the size of the economic pie, whereas equity is related to how the pie gets sliced and distributed.
A)True
B)False
Q3) Lucy often buys fish and is able to buy it for less than she is willing-to-pay. She later learns that fish has more health benefits than she realised. She now values fish even more than before. If the market price of fish does not change then:
A) Lucy's consumer surplus could go up or down
B) Lucy's consumer surplus will decrease
C) Lucy's consumer surplus will be unaffected because the price has not changed
D) Lucy's consumer surplus will increase
Q4) Consumer surplus is closely related to the demand curve for a product.
A)True
B)False
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Chapter 8: Application: The Costs of Taxation
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Sample Questions
Q1) A tax on a good:
A) raises the price buyers pay and lowers the price sellers receive
B) raises the price buyers pay and raises the price sellers receive
C) lowers the price buyers pay and lowers the price sellers receive
D) lowers the price buyers pay and raises the price sellers receive
Q2) The benefit received by buyers in the market for good X is measured by:
A) the market price
B) the total expenditure of buyers
C) consumer surplus
D) the total cost to sellers of producing the good X
Q3) Economists generally agree that the most important tax in the Australian economy is the tax on:
A) property
B) consumption
C) labour
D) income
Q4) How is the deadweight loss of a tax affected by the elasticities of demand and supply?
Q5) What factors must be taken into account in order to fully understand the effect of taxes on economic wellbeing?
10
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Chapter 9: Application: International Trade
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Sample Questions
Q1) When goods that are produced in China are sold to Australia, the goods are:
A) exported by Australia and imported by China
B) imported by Australia and exported by China
C) exported by Australia and exported by China
D) imported by Australia and imported by China
Q2) According to Graph 9-4, total surplus in New Zealand after the trade in kiwifruit is:
A) a + b
B) a + b + c
C) a + b + c + d
D) b + c + d
Q3) When Australia engages in international trade with India:
A) India reaps economic benefits and Australia loses
B) both India and Australia reap economic benefits
C) it is an equal trade-off so neither country benefits nor loses
D) India loses and Australia reaps economic benefits
Q4) If the domestic price of a good is low relative to the world price, the country has a comparative advantage in producing that good.
A)True
B)False
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Chapter 10: Externalities
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Sample Questions
Q1) Refer to Graph 10-3. At the private market outcome, the equilibrium price of kiwifruit will be:
A) P<sub>1</sub>
B) P<sub>2</sub>
C) P<sub>3</sub>
D) P<sub>4</sub>
Q2) According to the Coase theorem, which of the following conditions must hold, in order for private solutions to externalities to be possible? (i) bargaining costs are small (ii) property ownership/rights cannot be defined
(iii) the number of parties involved is large
A) (i), (ii) and (iii)
B) conditions (i) and (ii) only
C) condition (i) only
D) conditions (i) and (iii) only
Q3) Pigovian taxes:
A) encourage consumers to avoid sales taxes by shopping online
B) are frequently used to encourage exports
C) are rarely preferred to direct regulation
D) give factory owners an economic incentive to reduce pollution
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Page 12
Chapter 11: Public Goods and Common Resources
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Sample Questions
Q1) What characteristics do public goods and common resources have in common?
A) both types of good are non-rival
B) both types of good are excludable
C) both types of good are rival
D) both types of good are non-excludable
Q2) Economists can get some sense about what value people put on their own lives by:
A) evaluating their total asset portfolio
B) studying the risk they are willing to take in their investment decisions
C) comparing wages in risky and less risky occupations, controlling for other determinants of wages
D) None of the above will lead to sensible results
Q3) Private markets usually fail to provide lighthouses because:
A) lighthouses cost too much to build, relative to their benefits
B) government intervention makes it hard for private lighthouse owners to compete in the market
C) ship captains have incentives to use lighthouses without paying
D) lighthouses are valued very little by ship captains these days
Q4) Explain the difference between a common resource and a public good.
Q5) Explain the differences between public goods and private goods.
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Chapter 12: The Design of the Tax System
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Sample Questions
Q1) A tax on expensive speedboats that are purchased only by the wealthy is not likely to satisfy the condition of vertical equity on the basis that:
A) wealthy buyers are most likely to be subject to the implications of the flypaper theory of tax incidence
B) horizontal equity is most associated with a tax on luxury items
C) buyers can easily substitute other luxuries for expensive speedboats
D) it is very unlikely that the burden of the tax will fall on workers who make the expensive speedboats
Q2) Use an example to demonstrate the difference between marginal and average tax rates. What useful information is conveyed by each of these measures?
Q3) State and local governments:
A) are funded entirely by their own tax base
B) receive the majority of their tax revenues from company income tax
C) are generally not responsible for collecting sales tax
D) receive some of their funds from the federal government
Q4) Advocates for the poor claim that a sales tax on food is a regressive tax. Do you agree? Justify your position.
Q5) 'Tax loopholes increase the efficiency of tax systems'. Evaluate this statement.
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Chapter 13: The Costs of Production
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Sample Questions
Q1) If marginal cost is below average total cost, then average total cost:
A) is falling
B) is rising
C) is constant
D) may rise or fall depending on the size of fixed costs
Q2) Diminishing marginal product exists when the production function becomes flatter as inputs increase.
A)True
B)False
Q3) Examination of the costs of production is unnecessary to the field of industrial organisation.
A)True
B)False
Q4) To an economist, the field of industrial organisation answers which of the following questions?
A) How does the difference in the number of firms affect prices and efficiency of market outcomes?
B) Why are consumers subject to the law of demand?
C) Why do firms experience falling marginal product of labour?
D) Why do firms consider production costs when determining product supply?
Page 15
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Chapter 14: Firms in Competitive Markets
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Sample Questions
Q1) When new firms enter a perfectly competitive market:
A) entering firms will earn zero profit
B) profits of existing firms must fall
C) existing firms will see their costs rise
D) consumers will likely observe increasing prices
Q2) The production decisions of perfectly competitive firms follow the principle of economics that states that rational people:
A) consider sunk costs
B) think at the margin
C) equate prices to the average costs of production
D) will eventually leave markets that experience zero profit
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) In a competitive market, firms that increase prices experience increases in sales.
A)True
B)False
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Chapter 15: Monopoly
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Sample Questions
Q1) An appropriate way to measure the economic inefficiency of a monopoly is the:
A) number of consumers who are unable to purchase the product because of its high price
B) deadweight loss
C) low wages paid to the monopolist's workers
D) poor quality of service offered by monopoly firms
Q2) What is the monopolist's profit under the following conditions? The profit-maximising price charged for goods produced is $24. The intersection of the marginal-revenue and marginal-cost curves occurs where output is 15 units and marginal cost is $12.
A) $180
B) $200
C) $360
D) there is not enough information is given to answer this question
Q3) Refer to Graph 15-4. A benevolent social planner would cause the monopoly firm to operate at an output level:
A) above Q<sub>0</sub>
B) equal to Q<sub>0</sub>
C) below Q<sub>0</sub>
D) equal to zero
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Page 17
Chapter 16: Business Strategy
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Sample Questions
Q1) Total profit for an oligopolist is more than that of a perfectly competitive firm.
A)True
B)False
Q2) Refer to Table 16-3. As long as Robert and John operate as a profit-maximising monopoly, what will their weekly revenue be?
A) $270
B) $320
C) $350
D) $360
Q3) As the number of firms in an oligopolistic market grows larger, the price approaches:
A) the monopoly price
B) average cost
C) marginal revenue
D) marginal cost
Q4) Arming a country is a dominant strategy for each country is in an arms race.
A)True
B)False
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Chapter 17: Competition Policy
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Sample Questions
Q1) One problem with government regulation of monopolies is that:
A) a benevolent government is likely to be interested in generating profits for political gain
B) the government typically has little incentive to reduce costs
C) regulated industries typically have rising average costs
D) a government regulated outcome will increase the profitability of the monopoly
Q2) Some business practices that appear to reduce competition may have legitimate business purposes.
A)True
B)False
Q3) Under common law, courts will typically enforce contracts between competitors that reduce competition and increase prices.
A)True
B)False
Q4) The information obtained from a retail outlet can be considered a:
A) private good
B) cooperative good
C) collective good
D) public good
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Chapter 18: Monopolistic Competition
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Sample Questions
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) A new brewing company announces that it is releasing a new organic ale into the beer market. You can assume that the market for beer is characterised by monopolistic competition. According to the information provided, beer consumers are likely to experience what kind of externality as a result of the new ale?
A) product-variety
B) business-stealing
C) market price
D) advertising
Q3) The use of celebrity endorsements in advertising has enabled firms to differentiate their products.
A)True
B)False
Q4) How might a brand name ensure that customers buy high-quality goods?
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Chapter 19: The Markets for the Factors of Production
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Sample Questions
Q1) Refer to Graph 18-2. If the price of apples increases, the:
A) demand curve will shift up
B) demand curve will shift down
C) supply curve will shift up
D) supply curve will shift down
Q2) What is the best example of the diminishing product of labour on an orchard?
A) when only a few workers are hired, they pick from only the best (most productive and accessible) trees in the orchard
B) as more workers are hired, the orchard might become crowded with fruit pickers
C) as more workers are hired, workers are required to pick from trees that have fewer fruit
D) all of the above are good explanations
Q3) Refer to Table 18-1. What is the fourth worker's contribution to total revenue?
A) -$100
B) $0
C) $200
D) $400
Q4) Define the terms diminishing marginal product and the value of marginal product.
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Chapter 20: Earnings, Unions and Discrimination
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Sample Questions
Q1) Profit-maximising competitive firms cannot discriminate in the hiring of workers unless consumers exercise a preference for discrimination in product markets.
A)True
B)False
Q2) Why are the best athletes paid so much?
A) they spend more time studying at college than lesser athletes
B) there are many people who are just as good as they are
C) sports fans all want to see the very best athletes, rather than the mediocre ones
D) they do a job that is incredibly dangerous compared to mediocre athletes
Q3) What was the main reason the gender gap did not narrow during the post-war years?
A) many of the women who entered the labour force had not worked for quite some time and therefore lacked experience
B) employers were required to pay men more to do the same job women were doing C) women added more to marginal product than men
D) all of the above
Q4) Are unions good or bad for the economy?
Q5) What is the signalling theory of education?
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Chapter 21: Income Inequity and Poverty
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Q1) In the parable of the leaky bucket, a fundamental problem with government redistribution programs is identified. As long as the government only has 'leaky buckets' at its disposal:
A) full egalitarian policies will always dominate competing policy options
B) affirmative action programs are doomed to failure
C) equality of economic opportunity is an unattainable goal
D) it should not try to reach complete equality in income
Q2) Libertarianism identifies a role for government when:
A) an egalitarian distribution of income is inconsistent with market outcomes
B) attorneys are required to facilitate a free market exchange
C) the income distribution is altered by illegal means (e.g. theft)
D) workers lose their jobs as a result of structural changes in the economy
Q3) Political philosophers agree in their views about the role of government in altering the distribution of income.
A)True
B)False
Q4) Explain the concept of diminishing marginal utility and describe the role that it plays in the utilitarian argument for redistribution of income.
Q5) Explain what information is contained in the poverty rate statistic.
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Chapter 22: The Theory of Consumer Choice
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Q1) 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
Q2) A person consumes two goods: Coke and Snickers. Use a graph to demonstrate how the consumer adjusts his optimal consumption bundle when the price of Coke decreases. Carefully label all curves and axes. What will happen to consumption if Coke is a normal good? What will happen to consumption if Coke is an inferior good? (Remember to explain the possible change when the income effect dominates and when the substitution effect dominates).
Q3) In many developing countries there are sudden leaps in consumption from one good to another. An example is transport. At low levels of GDP, people often use bicycles or motor scooters. As income rises, there is often a dramatic switch to motor cars, such that bicycles and scooters are much rarer. How can these jumps be explained in terms of normal and inferior goods?
Q4) Which measure of elasticity can be weakly linked to Giffen goods?
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Chapter 23: Frontiers of Microeconomics
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Q1) The classic example of adverse selection is the market for oranges.
A)True
B)False
Q2) The field of information asymmetry:
A)tends to view human behaviour as less complex than that found in conventional economic theory
B)brings some of the insights from psychology into the study of economic issues
C)applies the tools of economics to understand the functioning of government
D)includes topics such as adverse selection and moral hazard
Q3) People frequently interpret evidence in a way that conforms to their own prior beliefs.
A)True
B)False
Q4) According to political economy, politicians:
A)are influenced by a self-interest motive
B)are never motivated by greed
C)are indifferent to getting re-elected
D)are selfless servants of the public good
Q5) How has the Internet helped markets respond to problems of asymmetric information in buying cars?
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Chapter 24: Measuring a Nations Income
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Q1) Over time, the three measures of GDP tend to arrive at the same result.
A)True
B)False
Q2) Sales made on eBay are all regarded as inputs to the GDP for the country.
A)True
B)False
Q3) For each of the following events, ceteris paribus, state the effect on GDP (does it increase/decrease/remain unchanged?) and why.
A. A few small boat builders decide to move from the production of simple boats for leisure use to the production of yachts for the America's Cup.
B. You are short of cash and you need more exercise so you sell your car for $1000.
C. The Australian Tax Office gets tough on illegal unrecorded activity (the underground economy )
D. A major oil spill occurs off the coastline of an area with high unemployment levels. Many of the local unemployed are employed to help with the clean-up.
Q4) Define GDP and explain why some products are excluded.
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Page 26
Chapter 25: Measuring the Cost of Living
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Q1) Most studies indicate that the CPI overstates increases in the cost of living by 0.5 to 2 percentage points each year.
A)True
B)False
Q2) For any given year, the CPI is:
A) the price of the basket of goods and services in the base year divided by the price of the basket in the given year, then multiplied by 100 B) higher than the previous year
C) the price of the basket of goods and services in the given year divided by the price of the basket in the base year, then multiplied by 100 D) the price of the basket of goods and services in the base year divided by the price of the basket in the given year, then divided by 100
Q3) The basket of goods has remained the same since 2000, as common consumer preferences have tended to stay constant.
A)True
B)False
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Chapter 26: Production and Growth
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Q1) Countries that devote a small share of GDP to investment, such as New Zealand, tend to have:
A) high growth rates
B) stable growth rates
C) low growth rates
D) very cyclical growth rates
Q2) The amount that a nation trades with others is determined by:
A) geography
B) the availability of natural sea ports
C) government policy
D) all of the above
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
Q4) New Zealand was the first country to sign a free trade agreement with China. What would be the reason for this, from the point of view of both parties?
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28
Chapter 27: Saving, Investment and the Financial System
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Q1) The type of bond that never matures is called:
A) the duration
B) the indefinite
C) the perpetuity
D) the term
Q2) Dividends are the only way shareholders increase their wealth owning shares.
A)True
B)False
Q3) When the $700 billion bailout occurred in 2008 did this send a dangerous signal to the banks?
Q4) Which of the following is not necessarily a motive for investment?
A) Desire to increase profits
B) Desire to improve market share in the long term
C) Desire to improve the status of the economy in the long term
D) Desire to satisfy consumer demand
Q5) Capital investments can be financed through:
A) borrowing money from a bank
B) borrowing money from a friend or relative
C) sharing ownership and profits with someone who has sufficient money
D) all of the above
29
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Chapter 28: The Natural Rate of Unemployment
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Q1) Identify the principal, the agent and the moral hazard inherent in each of the following situations.
a. In order to reduce personal injury claims, insurance companies successfully lobby legislators to pass laws requiring the use of seatbelts in automobiles.
b. A university provides free employee health insurance, which reduces the direct cost to the faculty and staff of visiting the doctor and the dentist.
Q2) According to the theory of efficiency wages, firms operate less efficiently if wages are above the equilibrium level.
A)True
B)False
Q3) Job search:
A) explains why firms pay higher than the competitive equilibrium wage
B) is due to the failure of wages to balance labour supply and labour demand
C) is the process of matching workers with appropriate jobs
D) all of the above
Q4) Explain when minimum laws are binding and result in unemployment.
Q5) Explain the worker-effort variant of efficiency wage theory with moral hazard.
Q6) What is the theory of efficiency wages?
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Chapter 29: The Monetary System
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Q1) When the Governor of the RBA gives a press conference, his comments are often an indicator of RBA intention. This has been dubbed as 'Open Mouth Operations', enabling the RBA to change retail bank policy without making a cash rate decision. Explain how this can be an effective method of managing the monetary policy? Explain your reasoning.
Q2) If the RBA sold government securities, then:
A) the money supply would increase
B) the money supply would not change
C) the money supply would decrease
D) none of the above
Q3) Store of value deteriorates when:
A) when only the cost of fruit and vegetables increases
B) when there are inflationary expectations
C) when there are deflationary expectations
D) none of the above
Q4) In the absence of money, people would have to rely on credit cards in order to obtain the things they needed.
A)True
B)False
Q5) Under what circumstances can banks not influence the supply of money?
Page 31
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Chapter 30: Inflation: Its Causes and Costs
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Q1) The irrelevance of monetary changes for nominal variables is called monetary neutrality.
A)True
B)False
Q2) If between when you purchase an asset and sell it, the general price level and the price of the asset both double, then you have realised a:
A) capital gain
B) real gain
C) capital loss
D) real loss
Q3) Why does the demand for money curve slope downwards to the right?
Q4) The principle of monetary neutrality implies that an increase in the money supply will:
A) decrease the price level
B) lower nominal interest rates
C) lower the unemployment rate
D) not affect real interest rates
Q5) What is the classical dichotomy, and to whom do we attribute it?
Q6) What are the costs of inflation?
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Chapter 31: Open-Economy Macroeconomics: Basic Concepts
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Q1) Arbitrage is the process of taking advantage of differences in prices in different markets.
A)True
B)False
Q2) Macroeconomic variables that describe an open economy's interactions in world markets include exchange rates, the trade balance and imports.
A)True
B)False
Q3) If the exchange rate changes from 100 yen per dollar to 105 yen per dollar, then the dollar has:
A) depreciated
B) appreciated
C) devalued
D) revalued
Q4) Appreciation of a currency will lead to:
A) an increase in net exports
B) a reduction in net exports
C) no change in net exports
D) any of the above is equally likely
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Chapter 32: A Macroeconomic Theory of the Open Economy
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Q1) According to the theory of purchasing-power parity, the demand curve is horizontal at the level of the real exchange rate that ensures parity of purchasing power at home and abroad.
A)True
B)False
Q2) Suppose that the government imposes a quota on imports. Explain why the result is a fall in imports and an equal fall in exports. (Hint: Think about what happens to net exports, and about what happens to the exchange rate.)
Q3) In the market for foreign-currency exchange, supply comes from net foreign investment, demand comes from the current account balance, and the real exchange rate balances supply and demand.
A)True
B)False
Q4) In the open economy:
A) Net foreign investment = Exports
B) Net foreign investment = Imports
C) Net foreign investment = Net exports
D) Net foreign investment = Exports - Imports
E) both C and D
Chapter 33: Aggregate Demand and Aggregate Supply
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Q1) Which statement is correct?
A) A movement along the AD curve results from a price change
B) The AS curve will shift leftwards if the labour force decreases
C) If there is excess aggregate demand at the current price level, the price level will rise
D) The long-run AS curve shows each firm is producing at its capacity and there is full employment
Q2) Suppose the manager of a firm sees that the firm's output is selling at a price 5 per cent higher than she expected. Explain why she might decide to increase the firm's production in this case. Suppose that inflation actually accounts for the overall price level being 5 per cent higher than the manager expected. Is her decision to increase production correct? Explain how such behaviour can result in an upward-sloping aggregate-supply curve.
Q3) The new Keynesian sticky-price theory suggests that an unexpected fall in the price level leaves some firms with higher-than-desired prices because of menu costs, causing sales to be depressed and inducing the firms to increase the quantity of goods and services they produce.
A)True
B)False
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Chapter 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand
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Q1) At a higher price level, the demand for money increases, the interest rate increases, and the demand for business and residential investment falls. Hence the aggregate-demand curve slopes downward.
A)True
B)False
Q2) Money pays no interest - if you keep a hundred-dollar bill for a year, then next year you will have a hundred dollars. Other assets earn interest - if you place $100 in a savings account or in government bonds, you will have more than $100 next year. Why, then, are people ever willing to hold money?
Q3) Suppose government purchases increase by $200 billion, that there is no crowding-out effect, and that the marginal propensity to consume is 0.75. What is the total effect of this increase in government purchases?
A) $150 billion
B) $267 billion
C) $800 billion
D) $600 billion
Q4) To eliminate a deflationary gap when the MPC is 0.75 and the deflationary gap is $500 million, investment will need to increase by how much?
Page 36
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Chapter 35: The Short-Run Trade-Off Between Inflation and Unemployment
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Q1) If macroeconomic policy expands aggregate demand, unemployment and inflation will both decline in the short run.
A)True
B)False
Q2) According to the theory of rational expectations, an announced policy of reducing the rate of growth of the money supply will result in people:
A) not changing their forecasts of inflation
B) increasing their forecasts of expected inflation
C) reducing their forecasts of expected inflation
D) doing none of the above
Q3) The sacrifice ratio is:
A) the sum of the inflation and unemployment rates
B) the percentage by which actual output falls below full employment output for every one percentage point that actual unemployment is above the natural rate of unemployment
C) the inflation rate divided by the unemployment rate
D) the number of percentage points of annual output that are lost in the process of reducing inflation by one percentage point
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Chapter 36: Five Debates Over Macroeconomic Policy
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Q1) Reducing inflation is a policy with temporary costs and permanent benefits.
A)True
B)False
Q2) Evaluate the following statement: 'Fiscal policy is a very precise tool for controlling aggregate demand. If the government wants to increase aggregate demand by $5 billion, all it has to do is to carry out exactly $5 billion worth of government spending.'
Q3) Which of the following statements is correct?
A) The benefits of reducing inflation to zero are permanent, and the costs are temporary
B) The benefits of reducing inflation to zero are temporary, and the costs are temporary
C) The benefits of reducing inflation to zero are permanent, and the costs are permanent
D) The benefits of reducing inflation to zero are temporary, and the costs are permanent
Q4) Economies can be left to find their own solution.
A)True
B)False
Q5) What are the costs of inflation for society?
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