Foundations of Economics Exam Review
Course Introduction
Foundations of Economics introduces students to the basic principles and tools of economic analysis. This course covers key concepts such as scarcity, opportunity cost, supply and demand, market structures, and the role of government in the economy. Students will learn how individuals, businesses, and governments make decisions regarding the allocation of limited resources, and how these decisions affect market outcomes and economic welfare. The course provides a solid grounding in both microeconomics and macroeconomics, equipping students with analytical skills to understand real-world economic issues and policy debates.
Recommended Textbook
Principles of Economics Arab World Edition 2nd Edition by Gregory Mankiw
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Page 2
Chapter 1: Ten Principles of Economics
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Sample Questions
Q1) Define opportunity cost.What is the opportunity cost to you of attending college? What was your opportunity cost of coming to class today?
Answer: Whatever must be given up to obtain some item it its opportunity cost.Basically,this would be a person's second choice.The opportunity cost of a person attending college is the value of the best alternative use of that person's time,as well as the additional costs the person incurs by making the choice to attend college.For most students this would be the income the student gives up by not working plus the cost of tuition and books,and any other costs they incur by attending college that they would not incur if they chose not to attend college.A student's opportunity cost of coming to class was the value of the best opportunity the student gave up.(For most students,that seems to be sleep.)
Q2) In a market economy,economic activity is guided by
A)the government.
B)corporations.
C)central planners.
D)self-interest and prices.
Answer: D
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Page 3
Chapter 2: Thinking Like an Economist
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Sample Questions
Q1) In the ordered pair (17,75),75 is the
A)horizontal location of the point.
B)the slope.
C)the x-coordinate.
D)the y-coordinate.
Answer: D
Q2) Which of the following areas of study typifies microeconomics as opposed to macroeconomics?
A)the impact of minimum-wage laws on employment in the fast food industry
B)the effect of changes in household saving rates on the growth rate of national income
C)the impact of faster money growth on the rate of inflation
D)a comparison of alternative tax policies and their respective impacts on the rate of the nation's economic growth
Answer: A
Q3) The opportunity cost of something is what you give up to get it.
A)True
B)False
Answer: True
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4
Chapter 3: Interdependence and the Gains From Trade
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Sample Questions
Q1) By definition,imports are
A)people who work in foreign countries.
B)goods in which a country has an absolute advantage.
C)limits placed on the quantity of goods leaving a country.
D)goods produced abroad and sold domestically.
Answer: D
Q2) Refer to Table 3-1.Andia has an absolute advantage in the production of A)wheat and Zardia has an absolute advantage in the production of beef.
B)beef and Zardia has an absolute advantage in the production of wheat.
C)both goods and Zardia has an absolute advantage in the production of neither good.
D)neither good and Zardia has an absolute advantage in the production of both goods.
Answer: D
Q3) Refer to Table 3-5.Falda has an absolute advantage in the production of A)wheat. B)cloth.
C)both goods.
D)neither good.
Answer: A
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Chapter 4: The Market Forces of Supply and Demand
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Sample Questions
Q1) Which of the following would most likely serve as an example of a monopoly?
A)a bakery in a large city
B)a bank in a large city
C)a local cable television company
D)a small group of corn farmers
Q2) Soup is an inferior good if the demand
A)for soup falls when the price of a substitute for soup rises.
B)for soup rises when the price of soup falls.
C)curve for soup slopes upward.
D)for soup falls when income rises.
Q3) In a perfectly competitive market,buyers and sellers are price setters.
A)True
B)False
Q4) If the price of a good is low,
A)firms would increase profit by increasing output.
B)the quantity supplied of the good could be zero.
C)the supply curve for the good will shift to the left.
D)firms can and should raise the price of the product.
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Chapter 5: Elasticity and Its Application
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Sample Questions
Q1) Good news for farming can be bad news for farmers because the
A)supply curve for an individual farmer is usually perfectly elastic.
B)supply curve for an individual farmer is usually perfectly inelastic.
C)demand for basic foodstuffs is usually inelastic,meaning that factors that shift supply to the right decrease total revenues to sellers.
D)demand for basic foodstuffs is usually elastic,meaning that factors that shift supply to the right increase total revenues to sellers.
Q2) Refer to Figure 5-2.As price falls from Pa to Pb,which demand curve represents the most elastic demand?
A)D1
B)D2
C)D3
D)All of the above are equally elastic.
Q3) For a horizontal demand curve,
A)the slope is undefined,and the price elasticity of demand is equal to 0.
B)the slope is equal to 0,and the price elasticity of demand is undefined.
C)both the slope and price elasticity of demand are undefined.
D)both the slope and price elasticity of demand are equal to 0.
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Chapter 6: Supply,demand,and Government Policies
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Sample Questions
Q1) In a free market,the price of housing adjusts to eliminate the shortages that give rise to undesirable landlord behavior.
A)True
B)False
Q2) Economic policies often have effects that their architects did not intend or anticipate.
A)True
B)False
Q3) If a binding price floor is imposed on the video game market,then
A)the quantity of video games demanded will decrease.
B)the quantity of video games supplied will increase.
C)a surplus of video games will develop.
D)All of the above are correct.
Q4) One common example of a price ceiling is rent control.
A)True
B)False
Q5) How does elasticity affect the burden of a tax?
Justify your answer using supply and demand diagrams.
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Chapter 7: Consumers, producers, and the Efficiency of Markets
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Sample Questions
Q1) Which of the following equations is valid?
A)Consumer surplus = Total surplus - Cost to sellers
B)Producer surplus = Total surplus - Consumer surplus
C)Total surplus = Value to buyers - Amount paid by buyers
D)Total surplus = Amount received by sellers - Cost to sellers
Q2) Total surplus in a market will increase when the government
A)imposes a binding price floor or a binding price ceiling on that market.
B)imposes a tax on that market.
C)Both a and b are correct.
D)Neither a nor b is correct.
Q3) Producer surplus equals
A)Value to buyers - Amount paid by buyers.
B)Amount received by sellers - Costs of sellers.
C)Value to buyers - Costs of sellers.
D)Value to buyers - Amount paid by buyers + Amount received by sellers - Costs of sellers.
Q4) Total surplus = Value to buyers - Costs to sellers.
A)True
B)False
9
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Chapter 8: Application: The Costs of Taxation
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Sample Questions
Q1) Refer to Figure 8-1.Suppose the government imposes a tax of P' - P'''.Total surplus before the tax is measured by the area
A)I+Y.
B)J+K+L+M.
C)L+M+Y.
D)I+J+K+L+M+Y.
Q2) When a tax is imposed on a good,consumer surplus decreases and producer surplus remains unchanged.
A)True
B)False
Q3) Refer to Figure 8-10.Suppose the government imposes a tax that reduces the quantity sold in the market after the tax to Q2.The size of the tax is
A)P0-P2.
B)P2-P8.
C)P2-P5.
D)P5-P8.
Q4) A tax raises the price received by sellers and lowers the price paid by buyers.
A)True
B)False
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Chapter 9: Application: International Trade
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Sample Questions
Q1) A quota is
A)a tax placed on imports.
B)a limit on the quantity of imports.
C)a tax on exports to other countries.
D)an excess of exports over imports.
Q2) When a country that imported a particular good abandons a free-trade policy and adopts a no-trade policy,
A)producer surplus increases and total surplus increases in the market for that good.
B)producer surplus increases and total surplus decreases in the market for that good.
C)producer surplus decreases and total surplus increases in the market for that good.
D)producer surplus decreases and total surplus decreases in the market for that good.
Q3) If a country's domestic price of a good is lower than the world price,then that 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) When the production of a good results in a positive externality,the social value curve is
A)below the demand curve,indicating that the total value to society is less than the private benefit.
B)above the demand curve,indicating that the total value to society is greater than the private benefit.
C)identical to the demand curve,indicating that the total cost to society is the equal to the private benefit.
D)above the supply curve,indicating that the total cost to society exceeds the private cost.
Q2) Refer to Figure 10-10.The graph represents a market in which A)there is no externality.
B)there is a positive externality.
C)there is a negative externality.
D)The answer cannot be determined from inspection of the graph.
Q3) Social welfare can be enhanced by allowing firms to trade their rights to pollute.
A)True
B)False
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Page 12
Chapter 11: Public Goods and Common Resources
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Sample Questions
Q1) Goods that are not rival in consumption include both
A)private goods and common resources.
B)club goods and public goods.
C)common resources and public goods.
D)private goods and club goods.
Q2) 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.
Q3) Economists think that the best way to determine the value of a human life is to
A)evaluate the value of a person's expected earnings in the labor market.
B)evaluate the risks people are willing to take and what they would have to be paid to take them.
C)determine a person's accumulated wealth at the time of death.
D)do nothing; human life is priceless.
Q4) The pollution market failure is an example of the free rider problem.
A)True
B)False
Page 13
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Chapter 12: The Design of the Tax System
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Sample Questions
Q1) Under a progressive tax system,the marginal tax rate could be equal to the average tax rate only when a taxpayer
A)has a very high income.
B)has a very low income.
C)is self-employed.
D)invests in a retirement plan.
Q2) An efficient tax system is one that imposes small
A)deadweight losses and administrative burdens.
B)marginal rates and deadweight losses.
C)administrative burdens and transfers of money.
D)marginal rates and transfers of money.
Q3) Which tax system requires higher-income taxpayers to have lower tax rates,even though they pay a larger amount of tax when compared to lower-income taxpayers?
A)a proportional tax
B)a progressive tax
C)a regressive tax
D)a lump-sum tax
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Chapter 13: The Costs of Production
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Sample Questions
Q1) Jacqui decides to open her own business and earns 50,000 dollars in accounting profit the first year.When deciding to open her own business,she turned down three separate job offers with annual salaries of 30,000,40,000,and 45,000 dollars.What is Jacqui's economic profit from running her own business?
A)-55,000 dollars
B)-5,000 dollars
C)5,000 dollars
D)20,000 dollars
Q2) Which of the following statements is correct?
A)Opportunity costs equal explicit minus implicit costs.
B)Economists consider opportunity costs to be included in a firm's total revenues.
C)Economists consider opportunity costs to be included in a firm's costs of production.
D)All of the above are correct.
Q3) The typical total-cost curve is U-shaped.
A)True
B)False
Q4) The production function depicts a relationship between which two variables? Also,draw a production function that exhibits diminishing marginal product.
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Page 15
Chapter 14: Firms in Competitive Markets
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Sample Questions
Q1) One of the defining characteristics of a perfectly competitive market is
A)a small number of sellers.
B)a large number of buyers and a small number of sellers.
C)a similar product.
D)significant advertising by firms to promote their products.
Q2) If a competitive firm is currently producing a level of output at which marginal revenue exceeds marginal cost,then
A)a one-unit increase in output will increase the firm's profit.
B)a one-unit decrease in output will increase the firm's profit.
C)total revenue exceeds total cost.
D)total cost exceeds total revenue.
Q3) Refer to Figure 14-2.If the market price is P1,in the short run the firm will earn
A)positive economic profits.
B)negative economic profits but will try to remain open.
C)negative economic profits and will shut down.
D)zero economic profits.
Q4) Describe the difference between average revenue and marginal revenue.Why are both of these revenue measures important to a profit-maximizing firm?
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Page 16
Chapter 15: Monopoly
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Sample Questions
Q1) The practice of selling the same goods to different customers at different prices,but with the same marginal cost,is known as
A)price segregation.
B)price discrimination.
C)arbitrage.
D)monopoly pricing.
Q2) A patent gives a single person or firm the exclusive right to sell some good or service forever.
A)True
B)False
Q3) Refer to Figure 15-3.If the monopoly firm wants to maximize its profit,it should operate at a level of output equal to A)Q1.
B)Q2.
C)Q3.
D)Q4.
Q4) Describe how government is involved in creating a monopoly.Why might the government create one? Give an example.
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Chapter 16: Monopolistic Competition
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Q1) A monopolistically competitive firm is currently earning a positive economic profit.If other firms enter the market,we would expect that the added competition will cause this firm to adjust its output such that it
A)will operate closer to its efficient scale.
B)will operate further from its efficient scale.
C)will no longer be at its efficient scale.
D)might move either closer to or further from its efficient scale.
Q2) Some firms have an incentive to advertise because they sell a
A)homogeneous product and charge a price equal to marginal cost.
B)homogeneous product and charge a price above marginal cost.
C)differentiated product and charge a price equal to marginal cost.
D)differentiated product and charge a price above marginal cost.
Q3) It has been said that many of the patrons in McDonald's restaurants in foreign locations are American tourists.A likely reason why many Americans dine at McDonald's while vacationing abroad is
A)they can't get enough McDonald's food when they are at home.
B)they know and trust the quality associated with the McDonald's brand name.
C)the food at local restaurants is of inferior quality.
D)that Americans,by their nature,are not very adventurous.
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Page 18
Chapter 17: Oligopoly
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Sample Questions
Q1) In a game,a dominant strategy is
A)the best strategy for a player to follow only if other players are cooperative.
B)the best strategy for a player to follow,regardless of the strategies followed by other players.
C)a strategy that must appear in every game.
D)a strategy that leads to one player's interests dominating the interests of the other players.
Q2) If duopolists individually pursue their own self-interest when deciding how much to produce,the amount they will produce collectively will
A)be less than the monopoly quantity.
B)be equal to the monopoly quantity.
C)be greater than the monopoly quantity.
D)Any of the above are possible.
Q3) A tit-for-tat strategy,in a repeated game,is one in which a player starts by cooperating and then does whatever the other player did last time.
A)True
B)False
Q4) Outline the purpose of antitrust laws.What do they accomplish?
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Page 19
Chapter 18: The Market for the Factors of Production
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Q1) Refer to Figure 18-7.If the relevant labor supply curve is S<sub>2</sub> and the current wage is W<sub>1</sub>,
A)there is a surplus of labor.
B)the quantity of labor demanded exceeds the quantity of labor supplied.
C)an increase in the minimum wage could restore equilibrium in the market.
D)firms will need to raise the wage to restore equilibrium.
Q2) If the output price of a product rises,the demand for capital will increase,raising the rental price of capital.
A)True
B)False
Q3) Which of the following is an example of a firm's derived demand?
A)Workers with higher levels of education earn more,on average,than workers with lower levels of education.
B)Factors that decrease the demand for labor will decrease the equilibrium wage.
C)A tractor manufacturer's demand for assembly-line workers is inseparably linked to the supply of tractors.
D)Factors that increase the demand for labor will increase the equilibrium wage.
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Page 20
Chapter 19: Earnings and Discrimination
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Q1) If men,on average,earn 20 percent more than women in a particular occupation,
A)this is clear evidence of discrimination.
B)some of this differential could be due to differences in educational levels.
C)some of this differential could be due to differences in human capital.
D)Both b and c are correct.
Q2) Consumers are often a primary source of discrimination in labor markets.
A)True
B)False
Q3) A competitive market may be consistent with a discriminatory wage differential if A)firms' customers have discriminatory preferences.
B)the wage differential is explained by a compensating differential.
C)the wage differential is explained by differences in human capital.
D)All of the above are correct.
Q4) Which of the following would be considered human capital?
A)the financial capital a person earns over a lifetime of investing
B)the machinery a worker uses to produce a product
C)the training a worker receives when starting a new job
D)the break room in a factory where employees go to have coffee
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Chapter 20: Income Inequality and Poverty
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Q1) The utilitarian justification for redistributing income is based on the assumption of diminishing marginal utility.
A)True
B)False
Q2) Utilitarianism is
A)a liberal religion that focuses on individual rights.
B)a political philosophy that believes the government should choose policies deemed to be just by an impartial observer.
C)a political philosophy that believes the government should not redistribute income.
D)a political philosophy that believes the government should choose policies to maximize the total utility of society.
Q3) Libertarians believe that the government should enforce individual rights to ensure that all people have the same opportunities to use their talents to achieve success.
A)True
B)False
Q4) What is meant by a perfectly equal distribution of income?
Use a graph to depict such a situation.
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Chapter 21: The Theory of Consumer Choice
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Q1) Consider two goods,books and CDs.The slope of the consumer's budget constraint is measured by the
A)consumer's income divided by the price of CDs.
B)relative price of books and CDs.
C)consumer's marginal rate of substitution.
D)number of books purchased divided by the number of CDs purchased.
Q2) Consider the indifference curve map and budget constraint for two goods,X and Y.Suppose the good on the horizontal axis,X,is normal.When the price of X increases,the substitution effect
A)and income effect both cause an increase in the consumption of X.
B)causes a decrease in the consumption of X,and the income effect causes an increase in the consumption of X.However,the substitution effect is greater than the income effect.
C)causes an increase in the consumption of X,and the income effect causes a decrease in the consumption of X.However,the substitution effect is greater than the income effect.
D)and income effect both cause a decrease in the consumption of X.
Q3) Giffen goods violate the law of demand.
A)True
B)False
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Chapter 22: Frontiers of Microeconomics
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Q1) Employers can try to overcome the moral-hazard problem involving their employees by
A)paying their employees more often.
B)paying their employees below-equilibrium wages since the employees will likely shirk some of their responsibilities.
C)better monitoring their employees' work efforts.
D)requiring their employees to take a pre-employment work effort test.
Q2) In economics,a difference in access to relevant knowledge is called a(n)
A)relevancy frontier.
B)knowledge gap.
C)information asymmetry.
D)information equilibrium.
Q3) Refer to Table 22-3.Which of the following statements is correct?
A)In a pairwise election,"library" beats "ice rink."
B)In a pairwise election,"ice rink" beats "community center."
C)In a pairwise election,"library" beats "community center."
D)All of the above are correct.
Q4) How have insights from the field of psychology influenced the thinking of economists in recent years?
Q5) Explain the Condorcet paradox.To which type of voting system does it apply?
Page 24
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Chapter 23: Measuring a Nations Income
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Q1) Which of the following is included in GDP?
A)the market value of rental housing services,but not the market value of owner-occupied housing services.
B)the market value of owner-occupied housing services,but not the market value of rental housing services
C)both the market value of rental housing services and the market value of owner-occupied housing services
D)neither the market value of owner-occupied housing services nor the market value of rental housing services.
Q2) International data on GDP and socioeconomic variables
A)are inconclusive about the relationship between GDP and the economic well-being of citizens.
B)suggest that poor nations actually might enjoy a higher standard of living than do rich nations.
C)leave no doubt that a nation's GDP is closely associated with its citizens' standard of living.
D)indicate that there are few real differences in living standards around the world,in spite of the large differences in GDP between nations.
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Chapter 24: Measuring the Cost of Living
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Q1) By far the largest category of goods and services in the CPI basket is A)housing.
B)transportation.
C)education & communication.
D)food & beverages.
Q2) A decrease in the price of domestically produced industrial robots will be reflected in
A)both the GDP deflator and the consumer price index.
B)neither the GDP deflator nor the consumer price index.
C)the GDP deflator but not in the consumer price index.
D)the consumer price index but not in the GDP deflator.
Q3) When the relative price of a good increases,consumers respond by buying
A)a larger quantity of that good and a larger quantity of substitutes for that good.
B)a larger quantity of that good and a smaller quantity of substitutes for that good.
C)a smaller quantity of that good and a larger quantity of substitutes for that good.
D)a smaller quantity of that good and a smaller quantity of substitutes for that good.
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Chapter 25: Production and Growth
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Q1) Country A has a population of 1,000,of whom 800 work 8 hours a day to make 128,000 final goods.Country B has a population of 2,000,of whom 1,800 work 6 hours a day to make 270,000 final goods.
A)Country A has higher productivity and higher real GDP per person than country B.
B)Country A has lower productivity and lower real GDP per person than country B.
C)Country A has higher productivity,but lower real GDP per person than country B.
D)Country B has lower productivity,but higher real GDP per person than country B.
Q2) Inward-oriented policies
A)include imposing tariffs and other trade restrictions.
B)have generally increased productivity and growth in the countries that pursued them. C)promote the production of goods and services that the country produces most efficiently.
D)All of the above are correct.
Q3) An increase in a country's saving rate permanently raises its productivity.
A)True
B)False
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Chapter 26: Saving,investment,and the Financial System
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Q1) If the government currently has a budget deficit,then
A)it does not necessarily have a debt.
B)its debt is increasing.
C)government expenditures are greater than taxes.
D)All of the above are correct.
Q2) If Japan goes from a small budget deficit to a large budget deficit,it will reduce
A)private saving and so shift the supply of loanable funds left.
B)investment and so shift the demand for loanable funds left.
C)public saving and so shift the supply of loanable funds left.
D)None of the above is correct.
Q3) As an alternative to selling shares of stock as a means of raising funds,a large company could,instead,
A)invest in physical capital.
B)use equity finance.
C)sell bonds.
D)purchase bonds.
Q4) Public saving is equal to national saving minus private saving.
A)True
B)False
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Chapter 27: The Basic Tools of Finance
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Q1) As the interest rate increases,what happens to the present value of a future payment?
Explain why changes in the interest rate will lead to changes in the quantity of loanable funds demanded and investment spending.
Q2) Fourteen years ago William put money in his account at First National Bank.William decides to cash in his account and is told that his money has quadrupled.According to the rule of 70,what rate of interest did Alfred earn?
A)5 percent
B)7 percent
C)10 percent
D)14 percent
Q3) An asset market is said to experience a speculative bubble when
A)the price of the asset rises above what appears to be its fundamental value.
B)the price of the asset appears to follow a random walk.
C)the market cannot establish an equilibrium price for the asset.
D)the asset is a natural resource and its supply is manipulated by foreign nations and foreign firms.
Q4) Give an example of adverse selection and an example of moral hazard using homeowners insurance.
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Chapter 28: Islamic Finance
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Q1) Which of the following modes of Islamic financing is the most popular gobally?
A)Equity Financing
B)Lease Financing
C)Asset Financing
D)Derivatives Financing
Q2) Uncertainty in a transaction is known as:
A)Gharar.
B)Haram.
C)Riba.
D)Takaful.
Q3) In your own words outline the key differences between Islamic and conventional financing.
Q4) Islamic banks provide savings accounts (also called Wadiah)and can use the funds for whatever investment it decides upon without informing the savings account holders,although the bank must guarantee the deposit principal against any damage or loss.
A)True
B)False
Q5) Explain in your own words the three key principles of Islamic finance.
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Chapter 29: Unemployment
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Q1) Refer to Table 29-3.What is the adult male population in Meditor?
A)50 million
B)90 million
C)130 million
D)135 million
Q2) Refer to Labor Force Statistics by Age.In the proper order,which age group has the highest unemployment rate and which has the highest participation rate?
A)under 55,under 55
B)under 55,55 and older
C)55 and older,under 55
D)55 and older,55 and older
Q3) Paying efficiency wages means that wages are
A)above equilibrium and profits are higher than otherwise.
B)above equilibrium and profits are lower than otherwise.
C)below equilibrium and profits are higher than otherwise.
D)below equilibrium and profits are lower than otherwise.
Q4) The adult population must equal the sum of the employed and the unemployed.
A)True
B)False
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Chapter 30: The Monetary System
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Q1) What is the difference between money and wealth?
Q2) In a system of 100-percent-reserve banking,
A)banks do not make loans.
B)currency is the only form of money.
C)deposits are banks' only assets.
D)All of the above are correct.
Q3) Which of the following will not help to prevent bank runs?
A)government insurance of deposits
B)fractional reserve banking
C)100% reserve banking
D)All of the above prevent bank runs.
Q4) Economists use the term "money" to refer to A)all wealth.
B)all assets,including real assets and financial assets.
C)all financial assets,but not real assets.
D)those types of wealth that are regularly accepted by sellers in exchange for goods and services.
Q5) The Federal Reserve is a privately operated commercial bank.
A)True
B)False
32
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Chapter 31: Money Growth and Inflation
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Q1) The idea that inflation by itself reduces people's purchasing power is called
A)the inflation tax.
B)menu costs.
C)the inflation fallacy.
D)shoeleather costs.
Q2) Inflation distorts savings when real interest income,rather than nominal interest income,is taxed.
A)True
B)False
Q3) Monetary neutrality means that a change in the money supply
A)does not change real GDP.Most economists think this is a good description of the economy in the short run and in the long run.
B)does not change real GDP.Most economists think this is a good description of the economy in the long run but not the short run.
C)does change real GDP.Most economists think this is a good description of the economy in the short-run and the long run.
D)does change real GDP.Most economists think this is a good description of the economy in the long run but not the short run.
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Chapter 32: Open-Economy Macroeconomic Models
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Q1) An Italian company builds and operates a pasta factory in the United Arab Emirates.This is an example of Italian
A)foreign direct investment that increases Italian net capital outflow.
B)foreign direct investment that decreases Italian net capital outflow.
C)foreign portfolio investment that increases Italian net capital outflow.
D)foreign portfolio investment that decreases Italian net capital outflow.
Q2) If a country sells more goods and services abroad than it purchases abroad,it has positive net exports and a trade surplus.
A)True
B)False
Q3) Purchasing-power parity implies that the nominal exchange rate given as foreign currency per unit of U.S.currency must rise if the price levels in
A)foreign countries rise.
B)the United States rises.
C)both countries rise.
D)both countries fall.
Q4) List the factors that might influence a country's exports,imports,and trade balance.
Q5) What does purchasing-power parity imply about the real exchange rate?
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Chapter 33: A Macroeconomic Theory of the Open Economy
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Q1) The key determinant of net capital outflow is the real interest rate.
A)True
B)False
Q2) If the budget deficit increases,then
A)an increase in the interest rate increases net capital outflow.
B)an increase in the interest rate decreases net capital outflow.
C)a decrease in the interest rate increases net capital outflow.
D)a decrease in the interest rate decreases net capital outflow.
Q3) A large and sudden movement of funds out of a country is called A)arbitrage.
B)capital flight.
C)crowding out.
D)capital mobility.
Q4) If the government of a country with a zero trade balance started with a budget deficit and moved to a budget surplus,domestic investment would
A)rise and there would be a trade surplus.
B)rise and there would be a trade deficit.
C)fall and there would be a trade surplus.
D)fall and there would be a trade deficit.
Page 35
Q5) What effect do protectionist policies have on the trade deficit?
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Chapter 34: Aggregate Demand and Aggregate Supply
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Q1) Other things the same,if the price level rises,then domestic interest rates
A)rise,so domestic residents will want to hold more foreign bonds.
B)rise,so domestic residents will want to hold fewer foreign bonds.
C)fall,so domestic residents will want to hold more foreign bonds.
D)fall,so domestic residents will want to hold fewer foreign bonds.
Q2) Illustrate the classical analysis of growth and inflation with aggregate demand and long-run aggregate supply curves.
Q3) Which of the following decreases in response to the interest-rate effect from an increase in the price level?
A)both investment and consumption
B)consumption but not investment
C)investment but not consumption
D)neither investment nor consumption
Q4) If aggregate demand shifts right,then eventually price level expectations rise.This increase in price level expectations causes the aggregate demand curve to shift to the left back to its original position.
A)True
B)False
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Chapter 35: The Influence of Monetary and Fiscal Policy on Aggregate Demand
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Q1) A decrease in government spending initially and primarily shifts
A)aggregate demand to the right.
B)aggregate demand to the left.
C)aggregate supply to the right.
D)neither aggregate demand nor aggregate supply.
Q2) A policy that results in slow and steady growth of the money supply is an example of
A)an "easy" monetary policy.
B)a "passive" monetary policy.
C)a "practical" monetary policy.
D)an "active" monetary policy.
Q3) If the MPC is 4/5,the multiplier is 5/4.
A)True
B)False
Q4) During a recession unemployment benefits rise.This rise in benefits makes aggregate demand higher than otherwise.
A)True
B)False
Q5) Explain why the interest rate is the opportunity cost of holding currency.What is the benefit of holding currency?
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Chapter 36: The Short-Run Trade-Off Between Inflation and Unemployment
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Q1) Disinflation would eventually cause
A)the short-run and the long run Phillips curve to shift right.
B)the short-run and the long run Phillips curve to shift left.
C)the short-run Phillips curve but not the long run Phillips curve to shift right.
D)the short-run Phillips curve but not the long run Phillips curve to shift left.
Q2) A central bank announces it will decrease the inflation rate by 10 percentage points.People are skeptical of the announcement,but do expect the central bank will reduce inflation by 5 percentage points and so expected inflation falls by 5 percentage points.If the central bank decreases inflation by only 3 percentage points then the unemployment rate will fall.
A)True
B)False
Q3) An increase in the inflation rate permanently reduces the natural rate of unemployment.
A)True
B)False
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Chapter 37: Six Debates Over Macroeconomic Policy
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Q1) According to the political business cycle theory,if the central bank wanted to see an incumbent re-elected,prior to the election it might
A)lower the discount rate and sell bonds.
B)lower the discount rate and buy bonds.
C)raise the discount rate and sell bonds.
D)raise the discount rate and buy bonds.
Q2) Why might government expenditures be more appropriate than tax cuts to counter recessions?
Is there any evidence for this thinking?
Q3) Explain how it is possible for the government debt to grow forever.
Q4) Suppose a country has had a high and relatively stable inflation rate for a long time.How might this affect the costs and benefits of inflation reduction?
Q5) Those who desire that policymakers stabilize the economy would advocate which of the following when aggregate demand is insufficient to ensure full employment?
A)Decrease the money supply.
B)Decrease taxes.
C)Decrease government expenditures.
D)Do nothing and let markets correct themselves.
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