Foundations of Economics
Mock Exam
Course Introduction
Foundations of Economics introduces students to the fundamental concepts, principles, and analytical tools of both microeconomics and macroeconomics. The course explores topics such as scarcity, opportunity cost, supply and demand, market structures, economic efficiency, the role of government, national income, inflation, unemployment, and fiscal and monetary policies. By examining real-world applications and contemporary economic issues, students develop a solid understanding of how economic forces shape the decisions of individuals, businesses, and governments, laying the groundwork for further study in economics and related disciplines.
Recommended Textbook
Economics Principles and Policy 13th Edition by William J. Baumol
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Page 2
Chapter 1: What Is Economics
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Sample Questions
Q1) Externalities are social costs that affect parties external to a particular economic transaction.
A)True
B)False
Answer: True
Q2) The dramatic increase in the standard of living since the Industrial Revolution
A)means that societies and individuals face no constraints.
B)has not meant unlimited abundance for societies or persons.
C)means that "opportunity cost" is a meaningless concept.
D)has reduced the choices open to persons.
E)has made economics less useful to persons.
Answer: B
Q3) Abstraction can lead to gross distortions of pertinent facts.
A)True
B)False
Answer: True
Q4) Economists disagree on most economic issues facing an economy.
A)True
B)False
Answer: False
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Chapter 2: The Economy: Myth and Reality
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Sample Questions
Q1) National defense made up the largest portion of federal expenditures in 2009.
A)True
B)False
Answer: False
Q2) Over the last several years and until recently, the United States has had lower unemployment rates than most European countries.
A)True
B)False
Answer: True
Q3) Antitrust laws are designed to promote competition.
A)True
B)False
Answer: True
Q4) The largest single portion of the federal budget is devoted to
A)National defense.
B)Medicare and Medicaid.
C)Social Security and unemployment compensation.
D)Education.
E)Interest payments on the national debt.
Answer: C
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Chapter 3: The Fundamental Economic Problem: Scarcity and
Choice
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Sample Questions
Q1) As a general rule, an increase in the capital available to a society
A)reduces the slope of the production possibilities frontier, making it shallower.
B)increases the slope of the production possibilities frontier, making it steeper.
C)shifts the production possibilities frontier outward, away from the origin.
D)shifts the production possibilities frontier inward, toward the origin.
E)makes the production possibilities frontier more bowed out.
Answer: C
Q2) A market system (market economy) depends on the market to
A)find the most efficient way of using resources.
B)determine how large the budget deficit should be.
C)decide how much government regulation there should be.
D)provide minimum incomes for everyone.
E)All of the above are correct.
Answer: A
Q3) Waiting in line to get a free ticket does not involve any opportunity cost.
A)True
B)False
Answer: False
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Chapter 4: Supply and Demand: an Initial Look
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Sample Questions
Q1) Equilibrium price and quantity are determined by the intersection of the demand and supply curves.
A)True
B)False
Q2) A demand curve shows the relationship between price and quantity demanded only so long as all other things are held constant.
A)True
B)False
Q3) During the Revolutionary War, the Pennsylvania legislature attempted to help the Continental Army by enacting
A)wage floors for soldiers in the army.
B)bonuses for soldiers who re-enlisted.
C)laws to buy food for the soldiers stationed in Pennsylvania.
D)price controls on essential commodities.
E)All of the above are correct.
Q4) Shortages normally accompany an effective price floor.
A)True
B)False
Q5) Distinguish the terms price ceiling and price floor.
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Chapter 5: Consumer Choice: Individual and Market Demand
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Sample Questions
Q1) Scarcity raises both price and marginal utility but generally reduces total utility.
A)True
B)False
Q2) Using Table 5-3, graph the marginal utility curve.
Q3) A change in the price of one good, such as staples, may affect the quantity demanded of another good, such as rubber bands.
A)True
B)False
Q4) An increase in a consumer's income will always increase the demand for a good.
A)True
B)False
Q5) Market demand curves may slope downward even if some individual demand curves do not because
A)the law of demand requires that this is true.
B)lower prices may bring more purchasers into the market.
C)merchants try to sell more at lower prices.
D)people believe expensive goods are better goods.
Q6) What are the properties of indifference curves?
Q7) What is marginal analysis?
7
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Chapter 6: Demand and Elasticity
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Sample Questions
Q1) Cross-elasticity of demand measures the responsiveness of the quantity demanded of one good to a change in the price of another good.
A)True
B)False
Q2) A unit-elastic demand curve never touches or crosses either of the axes.Why?
Q3) In Figure 6-7, which total expenditure curve belongs to a demand curve that is unit elastic throughout?
A)1
B)2
C)3
D)4
Q4) Elasticity of demand is calculated using percentage changes in both price and quantity.
A)True
B)False
Q5) How would an increase in cigarette taxes succeed according to the following criteria: collecting a large amount of tax revenue; distorting demand as little as possible; discouraging consumption of harmful commodities?
Q6) Why are time series data unlikely to give an accurate estimate of demand?
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Chapter 7: Production, Inputs, and Cost: Building Blocks for Supply Analysis
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Sample Questions
Q1) Cost curves in the long run differ from cost curves in the short run.
A)True
B)False
Q2) Production indifference curves show the combination of inputs that produce a given output.
A)True
B)False
Q3) When economies of scale exist,
A)production costs per unit increase as output expands.
B)production costs per unit decline as output expands.
C)total production costs decrease.
D)total production costs increase.
Q4) Marginal revenue product is essentially the additional revenue generating from selling one additional unit of output.
A)True
B)False
Q5) Labor is available at a wage of $10.The last worker hired by Cal's Corn Farm added 20 ears of corn, which Cal has priced at four ears for $1.What advice would you give Cal?
Q6) Explain why the long-run average cost is typically U-shaped.
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Chapter 8: Output, Price, and Profit: the Importance of Marginal Analysis
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Sample Questions
Q1) Economists assume that business firms attempt to maximize their profits. A)True
B)False
Q2) Total profit = Total revenue Total cost (including opportunity cost).? ?
Total profit defined in this way is called
A)accounting profit.
B)economic profit.
C)absolute profit.
D)relative profit.
Q3) Profit maximization occurs when MC = MR. A)True
B)False
Q4) In the case study discussed in the chapter, the electronics firm was losing money by selling its calculators at a price that was below average cost.
A)True B)False
Q5) An optimal level of output is one at which marginal profit > 0. A)True
B)False
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Chapter 9: Securities: Business Finance and the Economy:
the Tail That Wags the Dog
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Sample Questions
Q1) The term "random walk" means that stock prices are fairly predictable.
A)True
B)False
Q2) A partnership requires the agreement of most or all partners to any major decision.
A)True
B)False
Q3) "Plowback" is a preferred source of financing a corporation because
A)it is fairly easy, compared to issuing stocks.
B)it is not subject to double taxation.
C)selling bonds involves the high cost of money.
D)stock markets are subject to random walks.
Q4) The sale of new stocks by a corporation is one source of investment funds.
A)True
B)False
Q5) The sales of the 50 largest corporations in the U.S.economy amount to nearly 37 percent of GDP.
A)True
B)False
Q6) Explain why using leverage to purchase risky securities is so popular.
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Chapter 10: The Firm and the Industry Under Perfect Competition
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Sample Questions
Q1) If a competitive firm's short run average cost curve lies above the price of the product, we can conclude that the firm
A)is earning a huge profit.
B)is incurring losses.
C)is earning zero economic profits.
D)is earning a normal profit.
Q2) In Figure 10-6, the price at long-run equilibrium is
A)$5.
B)$10.
C)$20.
D)$35.
Q3) A firm facing a horizontal demand curve
A)cannot affect the price it receives for its output.
B)always produces at an output at which P = MR.
C)faces perfectly elastic demand for its product.
D)All of the above are correct.
Q4) In the short run, if price is below AC, maximizing profits really means minimizing total losses.
A)True B)False
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Chapter 11: Monopoly
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Sample Questions
Q1) A monopolist maximizes profit by producing the quantity at which MC = MR, just like a perfect competitor.
A)True
B)False
Q2) A market is not a pure monopoly if firms
A)can enter it freely.
B)sell unique products.
C)can exit the market freely.
D)require government permission to sell in the market.
Q3) In Figure 11-5, Crown Theater, a monopolist movie theater, will make a profit of ____ at its profit-maximizing price and quantity of theater tickets.
A)$450
B)$150
C)$300
D)$750
Q4) The U.S.Postal Service enjoys a monopoly position because of patent rights.
A)True
B)False
Q5) What are the reasons for preferring competition to monopoly?
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Chapter 12: Between Competition and Monopoly
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Sample Questions
Q1) Monopolistic competition tends to lead firms to have wasted capacity.Why?
Q2) In oligopoly, one expects
A)frequent introduction of new or redesigned products.
B)aggressive advertising campaigns.
C)intense marketing research into the impact of price changes.
D)All of the above are correct.
Q3) In the cigarette industry either R.J.Reynolds or Phillip Morris, for a time, raised prices twice a year by about 50 cents per carton.The other firms in the industry raised their prices by the same amount.Economists call this
A)predatory pricing.
B)a price war.
C)price leadership.
D)sales maximization.
Q4) A monopolistic competitor faces a horizontal demand curve.
A)True
B)False
Q5) What is a repeated game?
Hoe does this helps the players in a game?
Q6) How will price, output, and profit compare if firms maximize sales rather than profit?
Page 14
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Chapter 13: Limiting Market Power: Regulation and Antitrust
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Sample Questions
Q1) Service to consumers of deregulated products has generally not diminished.
A)True
B)False
Q2) Before the breakup of AT&T several years ago, profits on long-distance calls offset losses on basic residential service.This practice is known as
A)abuse of monopolistic power.
B)cream skimming.
C)cross-subsidization.
D)the Ramsey rule.
Q3) Airline deregulation led to the demise of many smaller airlines but large carriers were not materially affected.
A)True
B)False
Q4) What is the primary threat of monopoly and oligopoly to the public interest?
A)Cartels
B)Predatory pricing
C)Price wars
D)Monopoly power
Q5) Why is regulation necessary to achieve "universal service"?
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Chapter 14: The Case for Free Markets: the Price System
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Sample Questions
Q1) In an effort to prepare for war, the Defense Department is required by Congress to stockpile helium, once used to provide lift for blimps (phased out in the 1960s).About 100 years of total U.S.usage of helium is in storage.The Pentagon agrees to buy helium from producers at a price above what would otherwise prevail in the marketplace.Is this likely to result in efficiency?
Explain.
Q2) The assignment of inputs to specific industries by central planners is made difficult by
A)the interdependency among industries.
B)lack of data for decision making.
C)the danger of a chain reaction among industries if an error is made at any point.
D)All of the above are correct.
Q3) What is the rule for efficient output selection and how does the competitive market achieve it?
Q4) Laissez faire refers to a program of minimal interference in the market system. A)True B)False
Q5) What makes production-planning a daunting task for central planners?
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Chapter 15: The Shortcomings of Free Markets
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Sample Questions
Q1) Critics argue that society is depleting its energy resources far too quickly.The most likely explanation for this behavior is that
A)firms try to avoid making irreversible decisions about resource depletion.
B)investors expect interest rates to fall continuously in the future.
C)individuals tend to value their own well-being more highly than the well-being of future generations.
D)people do not have what Pigou called a "defective telescopic faculty."
Q2) Conscious manipulation of the interest rate causes it to become a less effective tool in allocating resources among time periods.
A)True
B)False
Q3) Unemployment insurance is often criticized because workers can extend the amount of time they are unemployed and thus increase the cost of the program.This phenomenon is best described as A)rent-seeking behavior.
B)moral hazard.
C)free riding.
Q4) What are private goods?
Mention two important attributes of private goods.
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Chapter 16: Externalities, the Environment, and Natural Resources
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Sample Questions
Q1) Empirical evidence indicates that imposing taxes on polluting emissions by firms
A)has no effect on the amount of pollution emitted.
B)does not give the government leeway to regulate more dangerous emissions differently than less dangerous emissions.
C)does reduce the amount of pollution emitted.
D)discourages firms from investing in new methods of pollution abatement.
Q2) Interest in environmental problems has intensified, perhaps because
A)for the first time in history in the 1970s people began to die from pollution-related diseases.
B)rising incomes have caused people to be more concerned with the quality of their lives.
C)the centrally planned economies are polluted.
D)All of the above are true.
Q3) Global warming of the past century, and especially in the past decade, is at least partly a consequence of human activities that have increased ____ in the atmosphere.
A)smog
B)PCBs
C)ozone
D)"greenhouse gases"
Page 18
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Chapter 17: Taxation and Resource Allocation
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Sample Questions
Q1) The average tax rate is
A)the ratio of additional taxes to an additional dollar of income.
B)the ratio of taxes to income.
C)the ratio of taxes to GDP.
D)the ratio of income to direct taxes.
Q2) How is state and local government funded and how does such funding differ from federal government funding?
Q3) If a tax is progressive, the average tax rate
A)remains the same as income rises.
B)rises as income rises.
C)falls as income rises.
D)falls with passage of time.
Q4) The corporate tax applies to firms' total revenues.
A)True
B)False
Q5) Which of the following is a direct tax?
A)excise tax
B)tax on corporate profits
C)property tax
D)sales tax
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Chapter 18: Pricing the Factors of Production
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Sample Questions
Q1) In 2013, interest payments were about ____ percent of national income.
A)0.51/2
B)1.29
C)3.2
D)4.0
Q2) The market level of rent
A)is entirely determined by the demand side.
B)is determined by its elastic supply.
C)is difficult to determine because of shifts on the supply side.
D)generally settles at levels below any rent controls favored politically.
Q3) If savers do not have fixed savings goals, the supply curve of loanable funds will generally be
A)horizontal.
B)downward sloping.
C)vertical.
D)upward sloping.
Q4) On the surface, usury laws are designed to protect consumers from exorbitant interest rates.
A)True
B)False
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Chapter 19: Labor and Entrepreneurship: the Human Inputs
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Sample Questions
Q1) Over 50 percent of all U.S.workers now belong to unions.
A)True
B)False
Q2) Income effect of lower wages implies
A)workers prefer leisure to work.
B)an increase in the productivity of labor.
C)a fall in the demand for labor.
D)workers would want to work more.
Q3) Explain the circumstances under which some component of labor income is economic rent.
Q4) Statistical studies in the United States have reached the conclusion that for most workers the response of labor supply to wage changes is
A)quite strong.
B)not very strong.
C)inverted.
D)always zero.
Q5) Teenage unemployment rates tend to be substantially higher than the overall unemployment rate.
A)True
B)False
21
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Chapter 20: Poverty, Inequality, and Discrimination
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Q1) Compared to most other industrialized nations, the United States has greater income inequality.
A)True
B)False
Q2) Prejudice leads, inevitably, to economic discrimination.
A)True
B)False
Q3) Affirmative action laws require employers to hire specified numbers of minorities.
A)True
B)False
Q4) A minority candidate may not have the same chances as a white candidate for a job simply based on an employer's misconceptions about minorities.
A)True
B)False
Q5) The United States has less income inequality than most other developed countries. A)True
B)False
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Chapter 21: Is Useconomic Leadership Threatened
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Q1) One protection that encouraged entrepreneurs in the U.S.was the enforceability of contracts by the courts.
A)True
B)False
Q2) Professor Gordon posits that the best years of U.S.growth are behind us because of four "headwinds," which are:
A)lackluster growth and poverty
B)demographids and education
C)debt and inequality
D)a and b only
E)b and c only
Q3) The U.S.debt problem is caused by the government only; individuals don't go into debt.
A)True
B)False
Q4) America's prosperity and economic growth is secure for the foreseeable future.
A)True
B)False
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Chapter 22: An Introduction to Macroeconomics
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Sample Questions
Q1) Which of the following items are included in GDP?
For those items not included, explain why they are not included in GDP.a.Jane buys newly issued shares of stock in Macro.com, Inc.b.Ross buys a new pair of jeans at a local department store.c.Joey has his mustache trimmed at his hair salon.d.Rachel buys an antique chest at a resale shop.e.Monica makes her own pasta sauce in her apartment.f.Phoebe grows her own herbs on her apartment balcony.g.Michael travels to Austria and buys wine and cheese.
Q2) In economics, aggregation refers to
A)collecting sample specimens for reclassification.
B)using small stones to pave an artistic walkway.
C)combining many markets into one overall economy.
D)using large computers to solve economic problems.
Q3) Technically speaking, in what year did the "Great Recession" end?
A)1933
B)1935
C)2007
D)2009
E)It had not ended as of 2011.
Q4) What are the two basic principles of aggregation?
Q5) Describe some of the steps used to combat inflation.What are their side-effects?
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Chapter 23: The Goals of Macroeconomic Policy
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Q1) If actual inflation is less than the expected rate of inflation, then probably
A)the borrower gains at the expense of the lender.
B)neither the borrower nor the lender gains.
C)the lender gains at the expense of the borrower.
D)the purchasing power of the borrower is increased.
Q2) If an investor had a $100,000 long-term capital gain on a $100,000 investment from 1984 to 2010, her real rate of return was most likely
A)equal to the expected rate of inflation.
B)positive.
C)very near zero..
D)negative.
Q3) Inflation affects borrowers and lenders differently.After signing a contract with a fixed nominal interest rate, it can be expected that
A)borrowers will hope that prices fall.
B)lenders will hope that prices rise.
C)lenders will hope that the purchasing power of money will fall.
D)borrowers will hope that prices rise.
Q4) High unemployment is socially wasteful.Why?
Q5) Distinguish between real rate of interest and nominal rate of interest.
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Chapter 24: Economic Growth: Theory and Policy
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Q1) Technological change was a major contributor to the productivity speed-up from 1995-2000.
A)True
B)False
Q2) A productivity decrease would be illustrated by a shift in the production function A)downward.
B)leftward.
C)upward.
D)rightward.
Q3) The threat of confiscated private property diminishes the incentive to invest. A)True
B)False
Q4) Productivity growth rates are usually higher in rich countries than in poor countries. A)True
B)False
Q5) What is convergence hypothesis? Why should we expect convergence in the long run?
Q6) Describe the three pillars of productivity growth.
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Chapter 25: Aggregate Demand and the Powerful Consumer
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Q1) Because of recent corporate downsizing, Chuck loses his job.The most likely effect on his consumption function is a(n)
A)movement downward along the function.
B)shift upward of the function.
C)shift downward of the function.
D)increase in consumption expenditures.
Q2) Changes in the price level affect household wealth more than household income.
A)True
B)False
Q3) In 1975, Congress passed a tax rebate to spur consumer spending.Consumers:
A)spent the entire amount of the tax savings, boosting the economy, as planned
B)did not spend any of the amount of the tax savings
C)saved a substantial share of the tax savings and spent the rest
D)saved a small portion of the tax savings, and spent the rest
Q4) Why is investment spending a highly volatile component?
Q5) The difference between Gross National Product and Net National Product is the A)rate of inflation.
B)statistical discrepancy encountered in calculating GDP.
C)difference between real versus nominal GDP.
D)depreciation of the economy's capital stock.
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Chapter 26: Demand-Side Equilibrium: Unemployment or Inflation
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Sample Questions
Q1) If inventory levels are decreasing, then we should expect business firms to A)decrease prices.
B)decrease output.
C)lay off workers.
D)increase output.
Q2) In Table 9-1, the equilibrium level of output is
A)2,500.
B)3,000.
C)3,500.
D)4,000.
Q3) If the multiplier is 4 and real GDP increases by $520 billion, the increase in investment spending must have been
A)$110 billion.
B)$120 billion.
C)$130 billion.
D)$140 billion.
Q4) The U.S.economy in 2009 was characterized by an excess level of output.This corresponds to a recessionary gap.
A)True
B)False
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Chapter 27: Bringing in the Supply Side: Unemployment and Inflation
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Sample Questions
Q1) An economic boom that creates an inflationary gap is usually followed later by A)falling prices.
B)a period of stagflation.
C)an increase of potential GDP.
D)an increase in aggregate supply.
Q2) Stagflation may follow an inflationary boom.
A)True
B)False
Q3) Figure 10-8 illustrates a period of
A)low unemployment and high inflation.
B)low unemployment and low inflation.
C)high unemployment and high inflation.
D)high unemployment and low inflation.
Q4) Aggregate supply can be thought of as
A)a fixed amount of output.
B)unrelated to the price level.
C)a schedule of output at different price levels.
D)the volume of goods at the ends of the production possibilities curve.
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Q5) Discuss some of the arguments that help explain why wages and prices rarely fall in a modern economy.
Chapter 28: Managing Aggregate Demand: Fiscal Policy
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Q1) Supply-side tax cuts designed to increase investment spending are attractive in theory, but in practice
A)the effect is the opposite of what theory suggests.
B)are less useful, because they take a long time to increase the capital stock.
C)they have no effect on the capital stock in the short or long run.
D)are powerful in the short run as capital stock rapidly increases, but the effect tapers off in the long run.
Q2) In Figure 11-3, which line represents the change in the consumption schedule caused by an increase in the personal income tax?
A)C in graph (a)
B)C2 in graph (a)
C)C in graph (b)
D)C2 in graph (b)
Q3) Why does a tax change affect aggregate demand?
A)A tax change alters saving by an equal amount.
B)A tax change alters imports and net exports.
C)A tax change alters government spending by an equal amount.
D)A tax change alters disposable income and consumption spending.
Q4) How do transfer payments function as negative taxes?
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Chapter 29: Money and the Banking System
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Sample Questions
Q1) An IOU held by a bank, and signed by a customer is a liability.
A)True
B)False
Q2) The money multiplier yielded by the deposit creation formula assumes that
A)banks hold no excess reserves.
B)banks hold excess reserves.
C)recipients of loans take some of the proceeds in cash.
D)recipients of loans do not redeposit their funds in other banks.
Q3) The net worth of a bank is
A)equal to the value of assets.
B)equal to the value of deposits.
C)equal to the value of liabilities.
D)the value of assets less liabilities.
E)the value of loans and securities.
Q4) Under the modern system of fractional reserve banking, banks
A)keep cash reserves equal to only a fraction of their deposit liabilities.
B)loan out their excess reserves at interest, which is the key to their profitability.
C)are always potentially vulnerable to runs.
D)All of the above are correct.
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Chapter 30: Monetary Policy: Conventional and
Unconventional
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Q1) In reality, commercial banks function most like ____ of the district Federal Reserve Banks.
A)stockholders
B)regulators
C)customers
D)competitors
Q2) The concept of "lender of last resort" is that when
A)lending decreases, the Fed will be the last to resort to higher interest rates.
B)borrowing increases, the Fed will be the last to increase lending.
C)commercial banks are hesitant to lend, the Fed will step in and increase reserves.
D)a borrower has tried everyone else, the Fed will lend directly to them.
Q3) Unconventional monetary policies include massive lending to banks and open-market purchases of assets other than Treasury bills.
A)True
B)False
Q4) Open market operations affect the supply of reserves.
A)True
B)False
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Chapter 31: He Financial Crisis and the Great Recession
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Q1) Mortgage-backed securities became a significant issue becauseI.housing prices fell across all regions.II.these securities were not as widely distributed as previously thought.
A)I above only
B)II above only
C)both I and II above
D)neither I nor II above
Q2) In 2008, the Fed utilized expansionary monetary policy which was made
A)more effective as banks held more excess reserves.
B)less effective as banks held more excess reserves.
C)more effective as banks held less excess reserves.
D)less effective as banks held less excess reserves.
Q3) If a 10-year Treasury bond pays 1.5% and a 10-year corporate bond pays 6.0%, what is the interest rate spread on this particular corporate bond?
A)4.0%
B)4.5%
C)7.5%
D)9.0%
Q4) Name some important lessons learned from the financial crisis.
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Chapter 32: The Debate Over Monetary and Fiscal Policy
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Q1) Which of the following would tend to decrease velocity?
A)an increase in interest rates
B)more frequent paychecks
C)expected decreases in inflation
D)more efficient payment systems
Q2) What are some examples of the unconventional monetary policy from the Federal Reserve in response to the 2007-2009?
Why were opponents concerned about these measures?
Q3) Describe an asset price bubble and give examples.Explain why it is extremely difficult if not impossible for the Federal Reserve to prevent such bubbles.
Q4) When will stabilization policy be most effective in combating recessions?
A)when AS is flat
B)when AS is very steep
C)when AS has a moderately upward slope
D)when AS has a moderately downward slope.
Q5) The differences between monetarist and Keynesian theories are more apparent than real.
A)True
B)False
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Chapter 33: Budget Deficits in the Short and Long Run
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Q1) The crowding-out effect is likely to be the strongest during periods of A)recession.
B)large budget surpluses.
C)high employment.
D)expanding money supply.
Q2) Future generations will be hurt by a high national debt if incurring the debt
A)was done to pay Social Security recipients.
B)resulted in heavy commitments to bail out business firms.
C)increased formation of capital.
D)slowed the formation of capital.
Q3) When (if at all) are budget deficits inflationary?
A)when AS is perfectly horizontal
B)when AS has a very steep slope
C)when AS has a downward slope
D)when AS intersects AD
Q4) Between the years of 2001 and 2003, what happened to the structural deficit?
A)It declined rapidly.
B)It fell steadily.
C)It increased steadily.
D)It remained fairly constant.
Page 35
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Chapter 34: The Trade-Off Between Inflation and Unemployment
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Q1) In Figure 17-8, which of the following movements would you associate with a "negative supply shock"?
A)A to B
B)A to C
C)C to E
D)D to E
Q2) The economy's self-correcting mechanism tends to push the unemployment rate back to a specific rate of unemployment.How?
Q3) In Figure 17-8, which of the following movements reflects the closing of a recessionary gap with an expansionary monetary and fiscal policy?
A)C to B
B)D to C
C)C to E
D)D to E
Q4) The period from the late 1990s to the winter of 2000 was marked by falling unemployment rates and falling inflation rates as well.How does economic theory explain this apparent violation of the Phillips curve model?
Q5) What is the effect of supply-side inflation on the short-run Phillips curve?
Page 36
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Chapter 35: International Trade and Comparative Advantage
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Q1) American producers often complain about dumping.What is dumping, and should it be prohibited?
Q2) If one country has an absolute advantage in every commodity, there is no reason for it to trade.
A)True
B)False
Q3) Many fear that cheap foreign labor will destroy American jobs; in reality, wages in A)the United States have risen spectacularly in the last 33 years as trade grew.
B)countries that export to the United States are very low relative to the United States and show no sign of rising.
C)countries that export to the United States have risen spectacularly in the last 33 years.
D)United States export industries are very low relative to wages in the same industry in other countries.
E)All of the above are correct.
Q4) Economists say that voluntary exchange makes both parties better off.What is the explanation that they offer to back up this conclusion?
Q5) Why is comparative advantage rather than absolute advantage the basis for trade?
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Chapter 36: The International Monetary System: Order or Disorder
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Sample Questions
Q1) Under a gold standard, a balance of payments deficit automatically
A)raised interest rates.
B)decreased exports.
C)increased domestic prices.
D)increased imports.
Q2) If exchange rates are determined in a floating rate system, what determines the value of a U.S.dollar in terms of euros?
A)government exchange rate policies
B)IMF rules and policies
C)demand and supply
D)central bank interventions
Q3) Speculation in exchange markets is often thought of as conducive to wild fluctuations in exchange rates.In practice it appears that speculators
A)have destabilized several currencies that were at sustainable equilibrium levels.
B)have no effect in fixed rate systems.
C)in fact tend to stabilize exchange rates rather than destabilize them.
D)All of the above are correct.
Q4) Explain three factors that would cause the dollar to appreciate.
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Chapter 37: Exchange Rates and the Macroeconomy
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Q1) If Mexico experiences a period of stable prices while the United States experiences rapid inflation, what will happen in Mexico?
A)an increase in aggregate supply
B)a decrease in aggregate supply
C)a decrease in aggregate demand
D)an increase in aggregate demand
Q2) Do you agree that currency depreciation will lead to an increase in the debt burden of the companies that borrow in foreign currency?
Explain with an example.
Q3) If European economies experience a period of sustained recession and the United States does not, what will happen in the United States?
A)an increase in aggregate supply
B)a decrease in aggregate supply
C)a decrease in aggregate demand
D)an increase in aggregate demand
Q4) Compare the effectiveness of fiscal policy in an open economy with mobile international capital to fiscal policy in a closed economy.Why is it different?
Use an appropriate diagram to illustrate your answer.
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