Foundations of Macroeconomics Review Questions
Course Introduction
Foundations of Macroeconomics introduces students to the fundamental concepts and models that describe the behavior of the economy as a whole. The course covers topics such as national income determination, output and employment, inflation, unemployment, economic growth, and the roles of fiscal and monetary policy. Emphasis is placed on understanding how economies function at the aggregate level, interpreting key macroeconomic indicators, and analyzing the impact of government decisions on economic stability and growth. Students will explore real-world issues and current events to apply macroeconomic theories and learn how policy tools are used to influence overall economic performance.
Recommended Textbook
Principles of Macroeconomics 6th Edition by N. Gregory Mankiw
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Chapter 1: Ten Principles of Economics
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Sample Questions
Q1) Productivity is defined as the
A)amount of goods and services produced from each unit of labor input.
B)number of workers required to produce a given amount of goods and services.
C)amount of labor that can be saved by replacing workers with machines.
D)actual amount of effort workers put into an hour of working time.
Answer: A
Q2) Almost all variation in living standards is attributable to differences in countries' A)population growth rates.
B)productivity.
C)systems of public education.
D)taxes.
Answer: B
Q3) Large or persistent inflation is almost always caused by A)excessive government spending.
B)excessive growth in the quantity of money.
C)foreign competition.
D)higher-than-normal levels of productivity.
Answer: B
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Chapter 2: Thinking Like an Economist
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Q1) You know an economist has crossed the line from scientist to policy adviser when he or she
A)claims that the problem at hand is widely misunderstood by non-economists.
B)talks about the evidence.
C)makes normative statements.
D)makes a claim about how the world is.
Answer: C
Q2) In the circular-flow diagram, firms own the factors of production and use them to produce goods and services.
A)True
B)False
Answer: False
Q3) In the ordered pair (10,30), 10 is the y-coordinate and 30 is the z-coordinate. A)True
B)False
Answer: False
Q4) Two variables that have a negative correlation move in opposite directions.
A)True
B)False
Answer: True
Page 4
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Chapter 3: Interdependence and the Gains From Trade
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Sample Questions
Q1) Refer to Figure 3-7. If Bintu and Juba both spend all of their time making bowls, then total production is
A)2 bowls.
B)3 bowls.
C)4 bowls.
D)6 bowls.
Answer: D
Q2) The gains from trade are
A)evident in economic models, but seldom observed in the real world.
B)evident in the real world, but impossible to capture in economic models.
C)a result of more efficient resource allocation than would be observed in the absence of trade.
D)based on the principle of absolute advantage.
Answer: C
Q3) Opportunity cost measures the trade-off between two goods that each producer faces.
A)True
B)False
Answer: True
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Page 5
Chapter 4: The Market Forces of Supply and Demand
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Q1) When drawing a demand curve,
A)demand is measured along the vertical axis, and price is measured along the horizontal axis.
B)quantity demanded is measured along the vertical axis, and price is measured along the horizontal axis.
C)price is measured along the vertical axis, and demand is measured along the horizontal axis.
D)price is measured along the vertical axis, and quantity demanded is measured along the horizontal axis.
Q2) In a market, the price of any good adjusts until quantity demanded equals quantity supplied.
A)True
B)False
Q3) If there is a shortage of farm laborers, we would expect
A)the wage of farm laborers to increase.
B)the wage of farm laborers to decrease.
C)the price of farm commodities to decrease.
D)a decrease in the demand for substitutes for farm labor.
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Chapter 5: Elasticity and Its Application
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Q1) If the price elasticity of supply for wheat is less than 1, then the supply of wheat is
A)inelastic.
B)elastic.
C)unit elastic.
D)quite sensitive to changes in income.
Q2) The price elasticity of supply measures how responsive
A)equilibrium price is to equilibrium quantity.
B)sellers are to a change in buyers' income.
C)sellers are to a change in price.
D)consumers are to the number of substitutes.
Q3) If the price elasticity of supply is 1.2, and price increased by 5%, quantity supplied would
A)increase by 4.2%.
B)increase by 6%.
C)decrease by 4.2%.
D)decrease by 6%.
Q4) When demand is inelastic, a decrease in price increases total revenue.
A)True
B)False
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Chapter 6: Supply, Demand, and Government Policies
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Q1) The minimum wage was instituted to ensure workers
A)a middle-class standard of living.
B)employment.
C)a minimally adequate standard of living.
D)unemployment compensation.
Q2) Refer to Table 6-2. A price floor set at $5 will
A)be binding and will result in a surplus of 50 units.
B)be binding and will result in a surplus of 75 units.
C)be binding and will result in a surplus of 125 units.
D)not be binding.
Q3) The proportion of minimum-wage earners who are in families with incomes below the poverty line is
A)less than one-third.
B)between one-third and one-half.
C)between one-half and two-thirds.
D)greater than two-thirds.
Q4) Refer to Figure 6-26. A price ceiling set at $30 would create a shortage of 20 units.
A)True
B)False
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Chapter 7: Consumers, Producers, and the Efficiency of Markets
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Q1) Alex is willing to pay $10, and Bella is willing to pay $8, for 1 pound of ribeye steak. When the price of ribeye steak increases from $9 to $11,
A)Alex experiences a decrease in consumer surplus, but Bella does not.
B)Bella experiences a decrease in consumer surplus, but Alex does not.
C)both Bella and Alex experience a decrease in consumer surplus.
D)neither Bella nor Alex experiences a decrease in consumer surplus.
Q2) Suppose Katie, Kendra, and Kristen each purchase a particular type of cell phone at a price of $80. Katie's willingness to pay was $100, Kendra's willingness to pay was $95, and Kristen's willingness to pay was $80. Which of the following statements is correct?
A)For the three individuals together, consumer surplus amounts to $35.
B)Having bought the cell phone, Kristen is better off than she would have been had she not bought it.
C)Had the price of the cell phone been $95 rather than $80, Katie and Kendra definitely would have been buyers and Kristen definitely would not have been a buyer.
D)The fact that all three individuals paid $80 for the same type of cell phone indicates that each one placed the same value on that cell phone.
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Chapter 8: Application: The Costs of Taxation
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Sample Questions
Q1) Total surplus with a tax is equal to
A)consumer surplus plus producer surplus.
B)consumer surplus minus producer surplus.
C)consumer surplus plus producer surplus minus tax revenue.
D)consumer surplus plus producer surplus plus tax revenue.
Q2) Refer to Figure 8-11. The price labeled as P<sub>1</sub> on the vertical axis represents the price
A)received by sellers before the tax is imposed.
B)received by sellers after the tax is imposed.
C)paid by buyers before the tax is imposed.
D)paid by buyers after the tax is imposed.
Q3) Refer to Figure 8-8. One effect of the tax is to
A)reduce consumer surplus by $108.
B)reduce producer surplus by $72.
C)create a deadweight loss of $60.
D)All of the above are correct.
Q4) When a tax is imposed on sellers, producer surplus decreases but consumer surplus increases.
A)True
B)False
Page 10
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Chapter 9: Application: International Trade
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Q1) When a country allows international trade and becomes an importer of a good,
A)domestic producers of the good become better off.
B)domestic consumers of the good become worse off.
C)the gains of the winners exceed the losses of the losers.
D)All of the above are correct.
Q2) If a country allows trade and, for a certain good, the domestic price without trade is higher than the world price,
A)the country will be an exporter of the good.
B)the country will be an importer of the good.
C)the country will be neither an exporter nor an importer of the good.
D)Additional information is needed about demand to determine whether the country will be an exporter of the good, an importer of the good, or neither.
Q3) Free trade allows firms to realize economies of scale, resulting in higher costs of production.
A)True
B)False
Q4) How does an import quota differ from an equivalent tariff?
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Chapter 10: Measuring a Nations Income
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Sample Questions
Q1) Refer to Table 10-4. In 2011, this country's
A)real GDP was $900, and the GDP deflator was 150.2.
B)real GDP was $900, and the GDP deflator was 177.8.
C)real GDP was $1065, and the GDP deflator was 177.8.
D)real GDP was $1065, and the GDP deflator was 150.2.
Q2) Last year country A had a nominal GDP of $600 billion, a GDP deflator of 150 and a population of 40 million. Country B had a nominal GDP of $720 billion, a GDP deflator of 120 and a population of 50 million. From these numbers which country is likely to have had the higher standard of living?
A)Country A because it had the higher nominal GDP per person.
B)Country B because it had the higher nominal GDP per person.
C)Country A because it had the higher real GDP per person.
D)Country B because it had the higher real GDP per person.
Q3) Refer to Table 10-1. What were country A's imports in 2010?
A)-$32
B)$32
C)$88
D)$120
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Chapter 11: Measuring the Cost of Living
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Q1) In the United States, real interest rates were
A)high in the 1970s and 1990s.
B)low in the 1970s and 1990s.
C)high in the 1970s and low in the 1990s.
D)low in the 1970s and high in the 1990s.
Q2) Which of the following is correct?
A)The GDP deflator is better than the CPI at reflecting the goods and services bought by consumers.
B)The CPI is better than the GDP deflator at reflecting the goods and services bought by consumers.
C)The GDP deflator and the CPI are equally good at reflecting the goods and services bought by consumers.
D)The GDP deflator is more commonly used as a gauge of inflation than the CPI is.
Q3) Economists use the term inflation to describe a situation in which the economy's overall price level is rising.
A)True
B)False
Q4) Why does the GDP deflator give a different rate of inflation than the CPI?
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Page 13
Chapter 12: Production and Growth
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Sample Questions
Q1) Both Arnold and Will work 10 hours a day. Arnold can produce six baskets of goods per hour while Will can produce four baskets of the same goods per hour. It follows that Arnold's
A)productivity is greater than Will's.
B)output is greater than Will's.
C)standard of living is higher than Will's.
D)All of the above are correct.
Q2) The catch-up effect refers to the idea that poor countries, despite their best efforts, are not likely ever to experience the economic growth rates of wealthier countries.
A)True
B)False
Q3) Since 1870 Canadian and U.S real GDP per person grew from below to above that in the United Kingdom. The explanation for this is likely that productivity grew faster in Canada and the U.S. than in the United Kingdom.
A)True
B)False
Q4) Compare and contrast the population theories of Malthus and Kremer.
Q5) Why does a nation's standard of living depend on property rights?
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Chapter 13: Saving, Investment, and the Financial System
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Sample Questions
Q1) By definition, government purchases and taxes are zero for a closed economy.
A)True
B)False
Q2) Given that Monika's income exceeds her expenditures, Monika is best described as a
A)saver or as a supplier of funds.
B)saver or as a demander of funds.
C)borrower or as a supplier of funds.
D)borrower or as a demander of funds.
Q3) Which of the following would a macroeconomist consider as investment?
A)Marisa purchases a bond issued by Proctor and Gamble Corp.
B)Karlee purchases stock issued by Texas Instruments, Inc.
C)Charlie builds a new coffee shop.
D)All of the above are correct.
Q4) We interpret the meaning of "loanable funds" as the
A)flow of resources available from private saving.
B)flow of resources available to fund private investment.
C)resources borrowed by private investors and by government.
D)resources lent by private investors and by government.
Q5) What are the basic differences between bonds and stocks?
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Chapter 14: The Basic Tools of Finance
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Q1) Which of the following is correct concerning stock market irrationality?
A)Bubbles could arise, in part, because the price that people pay for stock depends on what they think someone else will pay for it in the future.
B)Economists almost all agree that the evidence for stock market irrationality is convincing and the departures from rational pricing are important.
C)Some evidence for the existence of market irrationality is that informed and presumably rational managers of mutual funds generally beat the market.
D)All of the above are correct.
Q2) You may be unwilling to buy a used car because you suspect the last owner found out the car was a lemon. You may treat a car you rented with a little less care than you'd use on your own car.
A)Both examples primarily illustrate adverse selection.
B)Both examples primarily illustrate moral hazard.
C)The first example primarily illustrates adverse selection; the second primarily illustrates moral hazard.
D)The first example primarily illustrates moral hazard; the second primarily illustrates adverse selection.
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Page 16
Chapter 15: Unemployment
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Sample Questions
Q1) People who are unemployed because of job search are best classified as A)cyclically unemployed.
B)structurally unemployed.
C)frictionally unemployed.
D)discouraged workers.
Q2) Refer to Figure 15-1. If the government imposes a minimum wage of $8, then unemployment will increase by A)0 workers.
B)2000 workers.
C)4000 workers.
D)7000 workers.
Q3) Which of the following is not correct?
A)When a union is present in a labor market, wages are not determined by the equilibrium of supply and demand.
B)Like any cartel, a union is a group of sellers acting together in the hope of exerting their joint market power.
C)The process by which unions and firms agree on the terms of employment is called a strike.
D)Most workers in the U.S. economy are not members of a union.
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Chapter 16: The Monetary System
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Q1) Which of the following can the Fed do to change the money supply?
A)change reserves or change the reserve ratio
B)change reserves but not change the reserve ratio
C)change the reserve ratio but not change the reserve ratio
D)neither change reserves nor change the reserve ratio
Q2) When the Fed purchases $200 worth of government bonds from the public, the U.S. money supply eventually increases by
A)more than $200.
B)exactly $200.
C)less than $200.
D)None of the above are correct.
Q3) The interest rate that the Fed charges banks that borrow reserves from it is the A)federal funds rate.
B)discount rate.
C)reserve requirement.
D)prime rate.
Q4) Are credit cards and debit cards money? What's the difference between credit and debit cards?
Q5) Which two of the Ten Principles of Economics imply that the Fed can profoundly affect the economy?
18
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Chapter 17: Money Growth and Inflation
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Q1) Which of the following statements about inflation is correct?
A)Evidence from studies indicates that, in U.S. newspapers, inflation is mentioned less frequently than other economic terms, such as unemployment and productivity.
B)People believe the inflation fallacy because they tend to believe too strongly in the principle of monetary neutrality.
C)Nominal incomes are determined by nominal factors; they are not affected by real factors.
D)Inflation does not in itself reduce people's real purchasing power.
Q2) Nominal GDP measures output of final goods and services in physical terms.
A)True
B)False
Q3) Consider the money market drawn with the value of money on the vertical axis. If money demand is unchanged and the price level rises, then
A)the money supply must have increased, perhaps because the Fed bought bonds.
B)the money supply must have increased, perhaps because the Fed sold bonds.
C)the money supply must have decreased, perhaps because the Fed bought bonds.
D)the money supply must have decreased, perhaps because the Fed sold bonds.
Q4) Explain how inflation affects savings.
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Chapter 18: Open-Economy Macroeconomic Models
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Q1) Refer to Table 18-2. Which currency(ies) is(are) less valuable than predicted by the doctrine of purchasing-power parity?
A)boloviano and dinar
B)yen and kroner
C)baht and kroner
D)baht
Q2) Stacey, a U.S. citizen, buys a bond issued by an Italian pasta manufacturer.
A)This purchase is foreign direct investment. By itself it increases U.S. net capital outflow.
B)This purchase is foreign direct investment. By itself it decreases U.S. net capital outflow.
C)This purchase is foreign portfolio investment. By itself it increases U.S. net capital outflow.
D)This purchase is foreign portfolio investment. By itself it decreases U.S. net capital outflow.
Q3) To increase domestic investment, a country must increase its saving.
A)True
B)False
Q4) What does purchasing-power parity imply about the real exchange rate?
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Chapter 19: A Macroeconomic Theory of the Open Economy
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Q1) In the open-economy macroeconomic model, the quantity of dollars demanded in the market for foreign-currency exchange
A)depends on the real exchange rate. The quantity of dollars supplied in the foreign-exchange market depends on the real interest rate.
B)depends on the real interest rate. The quantity of dollars supplied in the foreign-exchange market depends on the real exchange rate.
C)and the quantity of dollars supplied in the market for foreign-currency exchange depend on the real exchange rate.
D)and the quantity of dollars supplied in the market for foreign-currency exchange depend on the real interest rate.
Q2) In the open economy macroeconomic model, the price that balances supply and demand in the market for foreign-currency exchange model is the
A)nominal exchange rate.
B)nominal interest rate.
C)real exchange rate.
D)real interest rate.
Q3) Why do higher real interest rates lead to lower net capital outflow?
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Chapter 20: Aggregate Demand and Aggregate Supply
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Q1) Refer to U.S. Financial Crisis. U.S. net exports would
A)rise which by itself would increase aggregate demand.
B)rise which by itself would decrease aggregate demand.
C)fall which by itself would increase aggregate demand.
D)fall which by itself would decrease aggregate demand.
Q2) Other things the same, an increase in the expected price level shifts
A)short-run aggregate supply right.
B)short-run aggregate supply left.
C)aggregate-demand right.
D)aggregated-demand left.
Q3) When the price level falls
A)people want to hold less money.
B)the interest rate falls.
C)investment spending rises.
D)All of the above are correct.
Q4) When production costs rise,
A)the short-run aggregate supply curve shifts to the right.
B)the short-run aggregate supply curve shifts to the left.
C)the aggregate demand curve shifts to the right.
D)the aggregate demand curve shifts to the left.
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Chapter 21: The Influence of Monetary and Fiscal Policy on Aggregate Demand
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Q1) According to the theory of liquidity preference, the money supply
A)and money demand are positively related to the interest rate.
B)and money demand are negatively related to the interest rate.
C)is negatively related to the interest rate while money demand is positively related to the interest rate.
D)is independent of the interest rate, while money demand is negatively related to the interest rate.
Q2) When the interest rate decreases, the opportunity cost of holding money
A)increases, so the quantity of money demanded increases.
B)increases, so the quantity of money demanded decreases.
C)decreases, so the quantity of money demanded increases.
D)decreases, so the quantity of money demanded decreases.
Q3) In a certain economy, when income is $200, consumer spending is $145. The value of the multiplier for this economy is 6.25. It follows that, when income is $230, consumer spending is
A)$151.25.
B)$166.75.
C)$170.20.
D)$175.00.
Q4) What is the difference between monetary policy and fiscal policy?
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Chapter 22: The Short-Run Trade-Off Between Inflation and Unemployment
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Q1) In the long run, if the Fed decreases the rate at which it increases the money supply,
A)inflation and unemployment will be higher.
B)inflation will be higher and unemployment will be lower.
C)inflation will be lower and unemployment will be higher.
D)None of the above is correct.
Q2) Samuelson and Solow argued that when unemployment is high, there is
A)upward pressures on wages and prices.
B)upward pressures on wages and downward pressures on prices.
C)upward pressures on prices and downward pressures on wages.
D)downward pressures on wages and prices.
Q3) According to the short-run Phillips curve, if the central bank increases the money supply, then
A)inflation and unemployment will both fall.
B)inflation and unemployment will both rise.
C)inflation will fall and unemployment will rise.
D)inflation will rise and unemployment will fall.
Q4) What did Friedman and Phelps predict would happen if policymakers tried to move the economy upward along the Phillips curve? Did the behavior of the economy in the late 1960s and the 1970s prove them wrong?
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Chapter 23: Six Debates Over Macroeconomic Policy
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Q1) A higher rate of return on saving has
A)an income effect that discourages saving and a substitution effect that encourages saving.
B)an income effect that encourages saving and a substitution effect that discourages saving.
C)income and substitution effects that both decrease saving.
D)income and substitution effects that both increase saving.
Q2) Zero inflation
A)might be dangerous because it could lead to rapidly increasing prices.
B)would limit the flexibility of the labor market and so could at times raise unemployment.
C)would make it easy for the Central bank to create negative real interest rates.
D)is impossible to achieve in the real world.
Q3) A nation's saving rate is not a primary determinant of its long-run economic prosperity.
A)True
B)False
Q4) Which kind of lag is important for monetary policy? Which kind of lag is important for fiscal policy?
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