Economics
Study Guide Questions
Course Introduction
Economics is the study of how individuals, businesses, and governments make choices about allocating scarce resources to satisfy their unlimited wants and needs. This course introduces fundamental concepts such as supply and demand, market equilibrium, opportunity cost, and the role of incentives. Students will explore both microeconomic perspectives focusing on the behavior of households and firms and macroeconomic perspectives, which examine national and global economic trends, economic growth, unemployment, inflation, and fiscal and monetary policy. By analyzing real-world examples and economic models, students develop a deeper understanding of how economic principles apply to contemporary issues and decision-making.
Recommended Textbook
Macroeconomics 8th Edition by Andrew Abel
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15 Chapters
1417 Verified Questions
1417 Flashcards
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Chapter 1: Introduction to Macroeconomics
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67 Flashcards
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Sample Questions
Q1) A country is said to be experiencing inflation when
A)prices of most goods and services are rising over time.
B)prices of most goods and services are falling over time.
C)total output is rising over time.
D)total output is falling over time.
Answer: A
Q2) Assumptions for economic theories and models should be
A)rejected if they are not totally realistic.
B)logical rather than empirically testable.
C)simple and reasonable rather than complex.
D)maintained until overwhelming evidence to the contrary occurs.
Answer: C
Q3) Equilibrium in the economy means
A)unemployment is zero.
B)quantities demanded and supplied are equal in all markets.
C)prices are not changing over time.
D)tax revenues equal government spending,so the government has no budget deficit.
Answer: B
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Chapter 2: The Measurement and Structure of the National Economy
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Sample Questions
Q1) Capital goods are
A)not counted in GDP as final goods.
B)not used to produce other goods.
C)used up in the same period that they are produced.
D)goods used to produce other goods.
Answer: D
Q2) Historical analysis of real interest rates in the United States shows that
A)real interest rates were unusually low in both the 1970s and 1980s.
B)real interest rates were unusually high in both the 1970s and 1980s.
C)real interest rates were unusually low in the 1970s and unusually high in the 1980s.
D)real interest rates were unusually low in the 1980s,spurring the economic growth that occurred during the Reagan administration.
Answer: C
Q3) The expected real interest rate (r)is equal to
A)nominal interest rate minus inflation rate.
B)nominal interest rate minus expected inflation rate.
C)expected nominal interest rate minus inflation rate.
D)nominal interest rate plus expected inflation rate.
Answer: B
Page 4
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Chapter 3: Productivity, Output, and Employment
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Sample Questions
Q1) Which of the following events would lead to an increase in the marginal product of labor for every quantity of labor?
A)An increase in the real wage
B)A decrease in the real wage
C)A favorable supply shock such as a fall in the price of oil
D)An adverse supply shock,such as a reduced supply of raw materials
Answer: C
Q2) What two factors should you equate in deciding how many workers to employ?
A)The marginal product of labor and the marginal product of capital
B)The marginal product of labor and the real wage rate
C)The marginal product of labor and the real interest rate
D)The marginal product of capital and the real wage rate
Answer: B
Q3) An increase in the number of workers hired by a firm could result from
A)a decrease in the marginal product of labor.
B)a decrease in the marginal revenue product of labor.
C)an increase in the real wage.
D)a decrease in the real wage.
Answer: D
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Page 5
Chapter 4: Consumption, Saving, and Investment
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Sample Questions
Q1) The saving-investment diagram shows that a higher real interest rate due to a leftward shift of the saving curve
A)raises the profitability of investment for firms.
B)causes the amount of firms' investment to increase.
C)increases the total amount of saving because of the increase in the real interest rate.
D)causes the total amounts of saving and investment to fall.
Q2) If consumers believe that next year a recession will occur (in a closed economy),then the real interest rate ________ and investment ________.
A)falls; declines
B)falls; increases
C)rises; increases
D)rises; declines
Q3) Aunt Agatha has just left her nephew $5000.The most likely response is for her nephew to
A)increase current consumption,but not future consumption.
B)decrease current consumption,but increase future consumption.
C)increase future consumption,but not current consumption.
D)increase both current consumption and future consumption.
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Chapter 5: Saving and Investment in the Open Economy
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Sample Questions
Q1) In a large open economy like the United States,an increased government budget deficit which reduces national saving
A)reduces investment and improves the current account balance.
B)reduces investment and reduces the current account balance.
C)has no effect on investment,but reduces the current account balance.
D)has no effect on either investment or the current account balance.
Q2) Assume that an increase in Costa Rica's government budget deficit reduced desired national saving by 10 million colon.Assuming Costa Rica is a small open economy,you would expect the government's action to
A)increase the current account balance by exactly 10 million colon.
B)increase the current account balance by less than 10 million colon.
C)reduce the current account balance by exactly 10 million colon.
D)reduce the current account balance by more than 10 million colon.
Q3) If the Federal Reserve buys $3 billion worth of Japanese yen and sells $5 billion of euros,how does this affect the official settlements balance?
A)Falls by $2 billion
B)Rises by $2 billion
C)Rises by $3 billion
D)Falls by $5 billion
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Chapter 6: Long-Run Economic Growth
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Sample Questions
Q1) The bowed shape of the per-worker production function is caused by A)wealth effects that reduce labor supply.
B)diminishing marginal productivity of capital.
C)increasing marginal productivity of labor.
D)increasing marginal productivity of capital.
Q2) In the very long run,the level of consumption per worker can grow continually if A)the saving rate continually falls.
B)the population growth rate continually rises.
C)productivity continually improves.
D)the depreciation rate continually rises.
Q3) In the long run,an increase in the saving rate in a steady-state economy will cause
A)an increase in the capital-labor ratio and an increase in consumption per worker.
B)an increase in the capital-labor ratio and a decrease in consumption per worker.
C)a decrease in the capital-labor ratio and a decrease in consumption per worker.
D)a decrease in the capital-labor ratio and an increase in consumption per worker.
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Chapter 7: The Asset Market, Money, and Prices
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Sample Questions
Q1) The following are all functions of money EXCEPT
A)medium of exchange.
B)store of value.
C)unit of account.
D)source of anxiety.
Q2) If the income elasticity of money demand is 3/4 and income increases 8%,by about how much does the price level change?
A)Falls by 6%
B)Unchanged
C)Rises by 6%
D)Rises by 8%
Q3) If the interest elasticity of money demand is -0.1,by what percent does money demand change if the nominal interest rate rises from 2% to 3%?
A)-0.1%
B)5%
C)0%
D)-5%
Q4) What are the major components of M1? What are the major components of M2? Describe each component.
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Chapter 8: Business Cycles
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Sample Questions
Q1) An economic variable that moves in the opposite direction as aggregate economic activity (down in expansions,up in contractions)is called
A)procyclical.
B)countercyclical.
C)acyclical.
D)a leading variable.
Q2) Which of the following macroeconomic variables is procyclical and lags the business cycle?
A)Business fixed investment
B)Employment
C)Stock prices
D)Nominal interest rates
Q3) Which of the following macroeconomic variables would you include in an index of leading economic indicators?
A)Employment
B)Inflation
C)Real interest rates
D)Residential investment
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Chapter 9: The IS-LM/AD-AS Model
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Sample Questions
Q1) Describe the effects,in both the short run and the long run,of an increase in the money supply.Explain what happens to real output and the price level.
Q2) An increase in money supply causes the real interest rate to ________ and the price level to ________ in general equilibrium.
A)rise; rise
B)remain unchanged; fall
C)remain unchanged; rise D)fall; fall
Q3) A rise in the price of a bond causes the yield of the bond to A)rise.
B)fall.
C)remain unchanged.
D)rise if it's a short-term bond,fall if it's a long-term bond.
Q4) A decline in expected future output would cause the IS curve to A)shift up and to the right.
B)shift down and to the left.
C)remain unchanged.
D)shift up and to the right only if people face borrowing constraints.
Q5) Describe what happens to the FE line if government purchases increase.
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Chapter 10: Classical Business Cycle Analysis
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Sample Questions
Q1) Prescott's calibrated RBC model showed that the actual and simulated ________ of five key macroeconomic variables were very close.
A)magnitudes
B)slopes
C)volatilities
D)betas
Q2) The primary reason why the Fed cannot systematically surprise the public with its monetary policy is
A)the nonneutrality of money.
B)the presence of productivity shocks that generate real business cycles independent of the monetary side of the economy.
C)the presence of rational expectations among the public.
D)the presence of propagation mechanisms within the economy.
Q3) Analyze the short-run and long-run effects of an unanticipated decrease in the money supply in the misperceptions model.Tell what happens to output,the price level,and the expected price level in both the short run and long run.
Q4) Define real shocks,define nominal shocks,and give an example of each.
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Chapter 11: Keynesianism: The Macroeconomics of Wage and Price Rigidity
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Sample Questions
Q1) The following equations describe a Keynesian model of the economy.
(a)Find the full-employment equilibrium values of the real interest rate,consumption,investment,and the price level.
(b)Suppose government purchases decline to 175,with no change in taxes.What happens to the real interest rate,output,consumption,and investment in the short run (in which the price level is fixed)? What happens in the long run to the real interest rate,consumption,investment,and the price level?
(c)Suppose instead that government purchases rise to 225,with no change in taxes,starting from the equilibrium in part (a).What happens to the real interest rate,output,consumption,and investment in the short run (in which the price level is fixed)? What happens in the long run to the real interest rate,consumption,investment,and the price level?
Q2) According to Keynesians,the primary reason money is not neutral is
A)rational expectations.
B)price stickiness.
C)reverse causation.
D)misperceptions over the aggregate price level.
Q3) Why might firms pay an efficiency wage rather than a market-clearing wage?
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Chapter 12: Unemployment and Inflation
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Sample Questions
Q1) The reduction of the inflation rate is called
A)deflation.
B)disinflation.
C)unflation.
D)reflation.
Q2) Based on the expectations-augmented Phillips curve,if the natural rate of unemployment is 0.06,and if the actual inflation rate exceeds the expected inflation rate,then the unemployment rate is
A)less than 0.06
B)0)06.
C)more than 0.06.
D)0)06 plus 0.5 times the difference between actual and expected inflation.
Q3) Milton Friedman and Edmund Phelps questioned
A)the use of expectations in the Phillips curve.
B)the stability of the relationship between inflation and unemployment.
C)the existence of a natural rate of unemployment.
D)the existence of a full-employment level of output.
Q4) How is the sacrifice ratio measured? How big is the sacrifice ratio in the United States? In other countries? What problems are there in measuring the sacrifice ratio?
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Chapter 13: Exchange Rates,Business Cycles,and
Macroeconomic Policy in the Open Economy
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Sample Questions
Q1) If the real exchange rate rises 4%,domestic inflation is 2%,and foreign inflation is 0%,what is the percent change in the nominal exchange rate?
A)6%
B)4%
C)2%
D)0%
Q2) A decline in the domestic real interest rate would cause a ________ in net exports and a ________ in the exchange rate.
A)rise; rise
B)rise; fall
C)fall; rise
D)fall; fall
Q3) Under a system of fixed exchange rates,what happens if a country's currency is undervalued?
A)The central bank loses official reserve assets.
B)The central bank gains official reserve assets.
C)The currency depreciates.
D)The exchange rate falls.
Q4) What is purchasing power parity? Why might it not hold?
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Chapter 14: Monetary Policy and the Federal Reserve System
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Sample Questions
Q1) The new monetary policy tool that the Fed began using in 2008 is
A)changing the interest rate paid on reserves.
B)imposing a surcharge on credit cards.
C)putting a tax on all financial transactions.
D)borrowing from China.
Q2) Describe how the real interest rate changes in a Keynesian model if a shock shifts the IS curve down and to the right and the Fed changes its policy to keep output unchanged.
Q3) Vault cash is equal to $8 million,deposits by depository institutions at the central bank are $2 million,the monetary base is $30 million,and bank deposits are $100 million.The money multiplier is equal to
A)2)5.
B)3)0.
C)4)0.
D)5)0.
Q4) Changes in reserve requirements directly and immediately affect
A)the monetary base.
B)banks' holdings of securities.
C)the Fed's holdings of foreign exchange.
D)the money multiplier.
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Chapter 15: Government Spending and Its Financing
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Sample Questions
Q1) How is real seignorage revenue related to inflation? How does the quantity of real seignorage revenue change as inflation rises from zero to a positive level,to still higher levels?
Q2) A decreased government deficit created by a lump-sum tax increase will increase national saving if
A)the value of government bonds outstanding grows slower than the public's wealth.
B)it causes consumption to fall.
C)the government runs a primary surplus as a result.
D)the real interest rate is less than the growth rate of real GNP.
Q3) When did the United States suffer hyperinflation?
A)Revolutionary War
B)War of 1812
C)World War II
D)Korean War
Q4) The average cost of the distortion created by taxes
A)increases proportionately with the tax rate.
B)is lower when the tax rate is constant than when it fluctuates.
C)is higher when the tax rate is constant than when it fluctuates.
D)equals the square root of the tax rate.
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