Fundamentals of Economics
Exam Answer Key
Course Introduction
Fundamentals of Economics introduces students to the basic principles that govern economic behavior, decision-making, and the functioning of economies at both individual and societal levels. The course covers key concepts such as supply and demand, market structures, opportunity cost, elasticity, and the role of government in economic outcomes. Students explore how consumers, businesses, and governments interact within various types of economic systems, and analyze real-world issues such as inflation, unemployment, and international trade. The course lays a foundation for further study in both microeconomics and macroeconomics, equipping students with the analytical tools needed to understand and interpret economic events and policies.
Recommended Textbook Economics Principles and Applications 6th Edition by Robert E. Hall
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Page 2
Chapter 1: What Is Economics
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Sample Questions
Q1) Simplifying assumptions always affect the conclusions derived from an economic model.
A)True
B)False
Answer: False
Q2) Suppose a new freshman enters State U with the objective of having lots of fun while getting good grades.Suppose that Friday and Saturday night offer the best/most efficient times for having fun and the day time offers the best time for studying.She should
A) study every single waking hour.
B) party every single waking hour.
C) assume there is no tradeoff between fun and grades.
D) assume there is a constant tradeoff between fun and grades.
E) assume there is a tradeoff between fun and grades that reflects increasing opportunity cost.
Answer: E
Q3) Opportunity costs arise because of resource scarcity.
A)True
B)False
Answer: True
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Chapter 2: Scarcity,choice,and Economic Systems
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Sample Questions
Q1) A country currently is using all its land to produce wheat and grapes.However,the land most suited to growing grapes is being used to produce wheat,and the land most suited to growing wheat is being used to produce grapes.Which of the following statements is true?
A) Production of both wheat and grapes can be increased by shifting tracts of land to their best uses.
B) Production of both wheat and grapes can be increased only if more land becomes available.
C) production of wheat can increase only if production of grapes decreases.
D) Production of grapes can increase only if more labor and machinery become available.
E) Production of neither wheat nor grapes is possible without more land becoming available.
Answer: A
Q2) Specialization of labor typically leads to higher levels of productive inefficiency in an economy.
A)True
B)False
Answer: False
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Chapter 2: Scarcity, choice, and Economic Systems: Part A
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Sample Questions
Q1) In Figure 3-11,suppose that initially the market is in equilibrium as defined by the demand and supply curves D<sub>1</sub> and S<sub>1</sub>.Which price/quantity combination could result from an increase in consumers' incomes coupled with an improvement in technology?
A) $100 and 75,000
B) $100 and 100,000
C) $100 and 50,000
D) $120 and 75,000
E) $120 and 100,000
Answer: B
Q2) An increase in the price of gasoline will cause a(n)
A) an increase in the quantity of gasoline demanded
B) decrease in the quantity of gasoline demanded
C) no change in the quantity of gasoline demanded
D) increase in the demand for gasoline
E) decrease in the demand for gasoline
Answer: B
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Chapter 4: Working With Supply and Demand
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Sample Questions
Q1) A $10,000 federal subsidy per student in higher education would benefit
A) a student by exactly $10,000
B) a university by exactly
C) the student and the university in such a way that they would split the $10,000.
D) the student and the university in such a way that they would each get $10,000.
Q2) Figure 4-1 shows the supply and demand for socks.If a price floor of $10 per pair is imposed by the government
A) there will be a shortage of 14 pairs of socks
B) there will be a shortage of 10 pairs of socks
C) there will be neither a shortage nor a surplus of socks
D) there will be a surplus of 6 pairs of socks
E) there will be a surplus of 14 pairs of socks
Q3) A price floor on corn would have the effect of
A) creating a surplus regardless of the level at which the price floor is set
B) creating a surplus supply when the floor is above the equilibrium price
C) creating a shortage when the price floor is set below the equilibrium price
D) creating a shortage regardless of where the price floor is set
E) ensuring a more equitable distribution of the good among consumers
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6
Chapter 5: Elasticity
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Sample Questions
Q1) The supply of a good is more price elastic,
A) the fewer alternatives there are to producing the good in question
B) the more broadly the market for the good is defined
C) the longer the time horizon over which it is measured
D) the higher the cost of production
E) the more elastic the demand for that good.
Q2) Figure 5-4 shows the demand schedule for hockey pucks.What is the price elasticity of demand when the price changes from $2 per puck to $1 per puck (using the midpoint formula)?
A) 0.33
B) 0.15
C) 3.00
D) 1.00
E) none of these
Q3) Demand for goods in broader category definitions,such as "beverages",is usually less elastic than demand for more narrowly defined goods,such as "diet colas."
A)True
B)False
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Chapter 6: Consumer Choice
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Sample Questions
Q1) Steve is planning to divide his study time between English and calculus.It will take him two hours of study for each extra point in calculus and one hour of study to raise his English score by one point.He should allocate his time so that
A) the marginal utility of an hour spent studying calculus is twice the marginal utility of an hour spent studying English
B) the marginal utility of an hour spent studying English is twice the marginal utility of an hour spent studying calculus
C) the marginal utility per hour spent studying calculus equals the marginal utility per hour spent on English
D) he spends twice as much time on calculus as on English
E) he spends twice as much time on English as on calculus
Q2) A technological change that enables a student to learn more French in the same amount of study time
A) causes the budget line to rotate inward
B) causes an outward,parallel shift of the budget line
C) shifts the "demand curve" inward
D) is equivalent to a increase in the "price" of an hour spent studying French
E) makes the student better off
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Chapter 7: Production and Cost
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Sample Questions
Q1) Which of the following is true about the relationships among various cost curves?
A) When MC exceeds ATC,ATC must be rising.
B) When MC exceeds ATC,ATC could be rising or falling.
C) When ATC is falling,MC must exceed ATC.
D) When TC is rising,MC must exceed TC.
E) TC falls when AFC falls.
Q2) The minimum points of the average variable cost and average total cost curves occur where
A) the marginal cost curve lies below the average variable cost and average total cost curves
B) the marginal cost curve intersects those curves
C) wages are the lowest
D) the slope of total cost is the smallest
E) the elasticity of demand is unitary
Q3) The "short run" may vary in length from industry to industry.
A)True
B)False
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9
Chapter 8: How Firms Make Decisions: Profit Maximization
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Sample Questions
Q1) If a firm's short-run total cost curve lies above its total revenue curve at all output levels,the firm should
A) always shut down in the short run
B) always operate in the short run
C) operate in the short run if the maximum operating loss is less than its total fixed cost
D) operate in the short run if the minimum operating loss is less than its total fixed cost
E) operate in the short run if the average operating loss is less than its total fixed cost
Q2) If the firm in Figure 8-10 sells five units of output,then the price must equal
A) $60
B) $10
C) $250
D) $90
E) $50
Q3) Profit maximization occurs at the quantity where marginal cost equals marginal revenue.
A)True
B)False
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10
Chapter 9: Perfect Competition
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Sample Questions
Q1) The number of sellers in an industry,in part,defines its market
A) performance
B) standard
C) demand curve
D) structure
E) profile
Q2) Figure 9-4 shows marginal cost for a firm in a perfectly competitive market.Suppose that the market price is $20.What is the profit-maximizing level of output?
A) 0
B) 1
C) 4
D) 5
E) 6
Q3) The difference between price and average total cost is
A) a tax write off
B) total economic profit (or loss)
C) fixed cost
D) the profit (or loss)per unit of output
E) average variable cost
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Page 11
Chapter 9: Perfect Competition: Part A
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Sample Questions
Q1) In a perfectly competitive market,a technological advance allows all firms to earn higher economic profits in the long run.
A)True
B)False
Q2) One of the defining characteristics of a perfectly competitive market is
A) both buyers and sellers are well informed about the market
B) a small number of buyers
C) high barriers to entry
D) a small number of buyers but a large number of sellers
E) buyers are better informed about the market than sellers
Q3) Which of the following is not a characteristic of a perfectly competitive market
A) buyers and sellers are well informed about the market
B) standardized product
C) many buyers and few sellers
D) easy exit out of the industry
E) easy entry into the industry
Q4) Diminishing marginal returns are the reason why some industries have positively-sloped long-run average cost curves.
A)True
B)False
Page 12
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Chapter 10: Monopoly
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Sample Questions
Q1) A natural monopoly is producing an output level of 1,000 units per day.If the monopoly is broken up into 5 firms,then average total cost for each of the 5 firms
A) will exceed the monopolist's average total cost
B) will equal the monopolist's average total cost
C) will fall below the monopolist's average total cost
D) may equal or fall below the monopolist's average total cost
E) may equal or exceed the monopolist's average total cost
Q2) Marginal revenue equals the price of the last unit sold for the
A) perfect price discriminator
B) firm in monopolistic competition
C) oligopolistic price leader
D) foreign-owned domestic producer
E) export producer
Q3) A monopolist should shut down in the short run if
A) price is less than average variable cost
B) price is greater than average total cost
C) marginal revenue equals marginal cost
D) marginal revenue is less than marginal cost
E) price exceeds average fixed cost
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Page 13
Chapter 11: Monopolistic Competition and Oligopoly
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Sample Questions
Q1) Assume the firm in Figure 11-2 is currently producing 13 units of output and charging $380 each.The firm
A) will increase its profit if it raises its price and reduces its production level
B) will increase its profit if it lowers its price and expands its production level
C) cannot increase economic profit by changing its price and output since it is already maximizing its profit
D) will increase its profit if it raises its price and expands its production level
E) will increase its profit by lowering its price and reducing its production level
Q2) Firms in a monopolistically competitive market follow the same MR = MC profit maximization rule used by firms in other market structures. A)True
B)False
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14
Chapter 12: Labor Markets
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Sample Questions
Q1) Each of the following,except one,is a condition that characterizes a perfectly competitive labor market.Which is the exception?
A) Workers appear identical to firms.
B) Workers receive wages that are above their marginal revenue product (MRP).
C) There are no barriers to entering the labor market.
D) There are no barriers to exiting from the labor market.
E) There are many buyers of labor in the market.
Q2) Which of the following would prevent a labor market from being classified as perfectly competitive?
A) It is difficult for new workers to enter the market.
B) All workers have the same abilities.
C) Exiting the market is easy for workers who are currently in the market.
D) Both buyers and sellers of labor are well-informed about market conditions.
E) Each firm hires only a tiny fraction of the total labor in the market.
Q3) In a perfectly competitive labor market,the market labor supply curve
A) will be horizontal
B) will be vertical
C) will be upward sloping
D) will be downward sloping
E) could be downward sloping if firms produce inferior goods
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Chapter 12: labor Markets: Part A
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Sample Questions
Q1) The higher wage rate received by garbage collectors to compensate for the lower desirability of their job
A) would not exist in a competitive labor market
B) is a compensating wage differential
C) is caused by union negotiators
D) disappears in the long run
E) only applies when the garbage collecting market is an oligopoly
Q2) Consider two perfectly competitive labor markets for jobs that require different skills but are otherwise equivalent.One job currently pays a higher wage than the other job.This wage differential
A) cannot persist in the long run
B) can persist only if there are significant differences in the nonmonetary characteristics of the two jobs
C) can persist if workers in the lower-wage job lack the ability to gain the skills needed for the higher-wage job
D) will be eliminated as labor supply to the higher-wage job increases
E) is likely unrelated to different workers' endowments of talent and intelligence
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16
Chapter 13: Capital and Financial Markets
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Sample Questions
Q1) Any long-lasting tool that people use to produce goods and services is called
A) a product
B) machinery
C) capital
D) equipment
E) labor assistance
Q2) A car rental company will earn a net income of $6,000 per year on a new car for the first three years of its life.After three years,the car will be worthless.If the interest rate is 10 percent (0.10)per ear,what is the present value of the car to the car rental company? (Assume that each year's income is received at the end of the year. )
A) $16,413.22
B) $14,921.11
C) $18,000.00
D) $16,363.62
E) $13,523.67
Q3) The supply curve for a particular bond is horizontal.
A)True
B)False
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Chapter 14: Economic Efficiency and the Competitive Ideal
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Sample Questions
Q1) The benefit to some consumer of the last unit of a good consumed is
A) represented by the height of the supply curve at that quantity
B) negative if the producer is suffering economic loss
C) decreases at an increasing rate in a competitive product market
D) is zero
E) represented by the height of the demand curve at that quantity
Q2) If a perfectly competitive market is in equilibrium and market demand decreases,which of the following would happen?
A) both producer and consumer surplus would increase
B) both producer and consumer surplus would decrease
C) producer surplus would decrease and consumer surplus would increase
D) producer surplus would increase and consumer surplus would decrease
E) producer and consumer surplus would remain unchanged
Q3) The welfare loss due to a price floor
A) is caused by a decrease in quantity
B) is the dollar difference between producer surplus and consumer surplus
C) is measured as the area above the market price and below the demand curve
D) is measured as the area above both the market price and the supply curve
E) is a Pareto improvement
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Page 18
Chapter 15: Governments Role in Economic Efficiency
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Sample Questions
Q1) Robbery reduces economic efficiency by
A) creating voluntary exchanges
B) decreasing government spending
C) increasing unemployment
D) creating involuntary exchanges
E) lowering the number of potential Pareto improvements
Q2) One reason why it is difficult to regulate a natural monopoly is
A) the lack of relevant economic theory
B) determining what price the firm is actually charging its customers
C) determining the appropriate side payment
D) an information problem - the monopoly's managers have an incentive to overstate costs
E) an information problem - the monopoly's managers have an incentive to overstate revenues
Q3) A good is said to be excludable if
A) those who do not pay for it can be prevented from consuming it
B) those who do not produce the good can be prevented from consuming it
C) it is not traded in a public market
D) there is no rivalry in consuming it
E) its use can be continued indefinitely
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Chapter 16: Comparative Advantage and the Gains From International Trade
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Sample Questions
Q1) A quota decreases the volume of imports,whereas a tariff typically has no impact on the volume of imports.
A)True
B)False
Q2) A nation's comparative advantage
A) can almost always be traced to its natural resources
B) is often based on its natural resources
C) is often based on barriers to international trade
D) is reflected in the shape of its demand curve for imported goods
E) is a result of increasing marginal returns
Q3) Suppose that a nation has an absolute advantage in the production of all goods.In this instance,it
A) has no incentive to engage in international trade
B) is producing at a point on its production possibilities frontier
C) has no unemployment
D) also has a comparative advantage in the production of those goods
E) should specialize in producing the goods for which it has a lower opportunity cost than other countries
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Chapter 17: What Macroeconomics Tries to Explain
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Sample Questions
Q1) During a recession,both output and unemployment fall.
A)True
B)False
Q2) The United States has never experienced double-digit inflation.
A)True
B)False
Q3) Economists regard some inflation as good for the economy.
A)True
B)False
Q4) "Output fell 2 percent last quarter" is an example of a positive economic statement.
A)True
B)False
Q5) The occurrence of the Great Depression offered evidence that supported A) the classical theory of economics
B) the need for the government to practice the policy of laissez faire
C) the need for the government to control prices
D) Congress to take action to stop rising prices
E) the Keynesian idea that the government needed to guide the economy
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Chapter 18: Production, income, and Employment
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Sample Questions
Q1) If the full-employment rate of unemployment is 5 percent,and the economy is experiencing a 7 percent unemployment rate,what is the rate of cyclical unemployment?
A) 7 percent
B) 12 percent
C) -2 percent
D) 5 percent
E) 2 percent
Q2) If a firm bakes cookies and sells them for $1,000 while spending $100 on sugar,$150 on chocolate,$50 on other supplies,$300 on wages and $400 on rent,what is its value added?
A) $300
B) $0
C) $700
D) $200
E) $400
Q3) The Bureau of Economic Analysis estimates the size of the underground economy but many economists believe that the estimates are too low.
A)True
B)False
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Page 22
Chapter 19: The Price Level and Inflation
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Q1) Inflation reduces the average real income in the economy and redistributes purchasing power.
A)True
B)False
Q2) A labor union anticipates a 7 percent inflation rate in each of the next three years.It wants to obtain a 3 percent increase in real wages in each of those three years.To obtain this goal,the requisite nominal wage hike it should negotiate is
A) 7 percent each year
B) 3 percent each year
C) 10 percent each year
D) 10 percent the first year and 3 percent each year thereafter
E) 21 percent the first year and 3 percent each year thereafter
Q3) In the following index,which year is most likely to be the base period: 2003 = 123.3;2004 = 145.3;2005 = 111.4;2006 = 100;2007 = 94.3?
A) 2003
B) 2004
C) 2005
D) 2006
E) 2007
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Chapter 20: The Classical Long-Run Model
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Q1) According to the classical model,if the government wanted to increase employment,it could do so by increasing its own spending.That would lead firms to produce more output,for which they would need to hire more workers.
A)True
B)False
Q2) According to the classical model,if the government lowers its budget deficit,which of the following will occur?
A) The interest rate will rise,and consumption,investment and output will all decrease.
B) The interest rate will fall,consumption and investment will increase,but output will not change.
C) The interest rate will rise,and consumption,investment and output will all increase.
D) The interest rate will fall,and consumption,investment and output will all increase.
E) The interest rate will fall,consumption will not change,but investment and output will both increase.
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Chapter 20: Part A: The Classical Model in an Open Economy
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Q1) In the classical model,when an open economy has balanced trade,Say's law holds. A)True
B)False
Q2) Which of the following is a leakage in an open economy?
A) Planned investment
B) Imports
C) Exports
D) Government purchases
E) Money
Q3) In the classical model,even when a country runs a trade deficit,Say's law holds.
A)True
B)False
Q4) Which of the following is an injection in an open economy?
A) Saving
B) Imports
C) Exports
D) Taxes
E) Money
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Chapter 21: Economic Growth and Rising Living Standards
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Q1) An increase in the stock of human capital would
A) shift the production function upward,lowering productivity and raising living standards
B) shift the production function upward,raising productivity and living standards
C) cause the economy to move along a fixed production function,increasing both productivity and living standards
D) cause the economy to move along a fixed production function,reducing both productivity and living standards
E) shift the production function downward,reducing both productivity and living standards
Q2) Which of the following is a common way of measuring the average standard of living?
A) The unemployment rate plus the inflation rate
B) Real GDP divided by the price level
C) The unemployment rate multiplied by the population
D) Real GDP divided by the population
E) Inflation rate divided by the population
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Chapter 22: Economic Fluctuations
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Q1) When explaining expansions and recessions,the classical model is A) reliable
B) seriously flawed
C) the favorite explanatory tool of economists
D) overly focused on the labor market
E) sometimes accurate and sometimes not
Q2) Suppose a report on the internet indicates that job prospects for graduates are bright because full employment is achieved automatically.Economists are likely to A) be disappointed in the degree of economic understanding possessed by the author of the report
B) be excited about the earning potential of new entrants into the labor market
C) be anxious about inflationary indicators
D) anticipate a recession
E) encourage a tax cut to stimulate the economy
Q3) Since 1960,real GDP has fluctuated to some extent;however,there has been virtually no overall growth when the entire time span is considered.
A)True
B)False
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Chapter 23: The Short-Run Macro Model
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Q1) Refer to Figure 11-1.The graph shows
A) a negative and relatively stable relationship between real consumption and real disposable income
B) a negative,but unstable,relationship between real consumption and real disposable income
C) a positive,but unstable,relationship between real consumption and real disposable income
D) a positive and relatively stable relationship between real consumption and real disposable income
E) no discernible relationship between real consumption and real disposable income
Q2) Which of the following components of government spending and revenue serves as an automatic stabilizer?
A) the wealth effect
B) the multiplier
C) unemployment insurance
D) military spending
E) property taxes
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Chapter 24: Fiscal Policy
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Sample Questions
Q1) The major reasons why economists have grown increasingly skeptical about countercyclical fiscal policy are
A) irreversibility,forward looking behavior,and the reaction of the Federal Reserve.
B) irreversibility,forward looking behavior,and the negative effects of imports.
C) timing problems,irreversibility,and forward looking behavior,
D) timing problems,irreversibility,and the reaction of the Federal Reserve.
E) timing problems,irreversibility,forward looking behavior,and the reaction of the Federal Reserve.
Q2) In the long run,
A) the government's tax policies do not affect the rate of investment spending.
B) lower tax rates will have no effect on the average standard of living.
C) lower tax rates will lead to faster growth in the average standard of living.
D) higher tax rates will lead to slower growth in the average standard of living.
E) the debt and the deficit will converge to zero.
Q3) To be effective,countercyclical fiscal policy must be temporary.
A)True
B)False
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Page 29
Chapter 25: Money,banks,and the Federal Reserve
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Sample Questions
Q1) The unit of value function of money refers to how we think about and record a transaction,whereas the means of payment function refers to how we actually pay for the items.
A)True
B)False
Q2) A bank failure occurs when a bank
A) cannot call in its loans
B) spends all of its reserves
C) is unable to meet its depositors' requests to withdraw funds
D) cannot make any more loans
E) makes bad loans
Q3) In what year was the Federal Reserve System created?
A) 1790
B) 1861
C) 1879
D) 1913
E) 1935
Q4) The Federal Reserve tends to increase the money supply each year.
A)True
B)False
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Chapter 26: The Money Market and Monetary Policy
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Q1) If there is an excess supply of money,there is an excess
A) demand for bonds and the price of bonds will decrease
B) supply of bonds and the price of bonds will decrease
C) supply of bonds but the price of bonds will not change
D) supply of bonds and the price of bonds will increase
E) demand for bonds and the price of bonds will increase
Q2) If the aggregate expenditure line has shifted downward,which of the following is the most likely cause?
A) There have been reports of good economic news.
B) The Fed has conducted an open market sale of bonds.
C) Income tax rates have been lowered.
D) The Fed has conducted an open market purchase of bonds.
E) Exports have increased.
Q3) A new tool that the Fed started using in late 2008 was that it began to pay interest on the reserves banks hold in their federal reserve accounts.
A)True
B)False
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Chapter 26: Feedback Effects From GDP to the Money
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Q1) If the federal government announces a tax cut,which of the following is most likely in the short run?
A) A decrease in output,an increase in money demand,and an increase in the interest rate
B) An increase in output,a decrease in money demand,and a decrease in the interest rate
C) A decrease in output,a decrease in money demand,and a decrease in the interest rate
D) An increase in output,an increase in money demand,and a decrease in the interest rate
E) An increase in output,an increase in money demand,and an increase in the interest rate.
Q2) Crowding out occurs
A) when an increase in government spending crowds out tax revenues.
B) when an increase in government spending increases investment spending.
C) when an increase in government spending crowds out bonds.
D) when an increase in government spending crowds out other types of spending.
E) when an increase in government spending crowds out the money supply.
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Chapter 27: Aggregate Demand and Aggregate Supply
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Q1) In the long run,supply shocks
A) are of no concern
B) are automatically offset so that the full-employment level of output is restored
C) cause the long-run AS curve to shift
D) have no effect on the wage rate
E) are automatically offset so that output and the price level return to their original values
Q2) If the government announces a new increase in spending with no change in taxes,which of the following would most likely occur?
A) No change in the aggregate demand curve as well as no movement along it
B) A leftward shift of the aggregate demand curve
C) An upward movement along the aggregate demand curve
D) A rightward shift of the aggregate demand curve
E) A downward movement along the aggregate demand curve
Q3) The aggregate demand curve tells us the equilibrium level of real GDP corresponding to any price level.
A)True
B)False
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Chapter 28: Inflation and Monetary Policy
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Q1) If the Federal Reserve unexpectedly raised its interest rate target,which of the following would most likely occur?
A) The interest rate would increase and bond prices would rise.
B) The interest rate would decrease and bond prices would rise.
C) The interest rate would increase and bond prices would fall.
D) The interest rate would decrease and bond prices would fall.
E) The interest rate would increase but bond prices would not change.
Q2) If there is an increase in the price of oil and the Fed wishes to maintain price stability,what should it do?
A) Do nothing,because the self-correcting mechanism will adjust the economy
B) Sell bonds in the open market
C) Wait,because the price level seldom changes when there is an increase in the price of oil
D) Encourage firms to not adjust the wages they pay
E) Buy bonds in the open market
Q3) If the inflation rate is lower than expected,real income is redistributed from lenders to borrowers.
A)True
B)False
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Page 34
Chapter 29: Exchange Rates and Macroeconomic Policy
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Q1) The 1997-1998 Asian crisis began in .
A) China.
B) Japan.
C) Taiwan.
D) South Korea.
E) Thailand.
Q2) If Americans buy 100 million British pounds at an equilibrium exchange rate of $2 per pound,how many dollars are they supplying?
A) $2 million
B) $50 million
C) $2
D) $200 million
E) $100 million
Q3) Under a managed float,a country's central bank
A) buys or sells its currency in order to keep its money supply stable
B) buys or sells its currency in order to maintain a stable exchange rate
C) may sell its currency in order to prevent a depreciation
D) may buy a foreign currency in order to prevent its appreciation
E) prints money and uses it to buy foreign currency
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Page 35
Chapter 30: Appendix-finding Equilibrium GDP
Algebraically
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Q1) If net taxes are included in the model,the equation that shows consumption at each level of income is: C = a + b(Y - T)or C = a + bY - bT.
A)True
B)False
Q2) If I = $2,000,G = $4,000,T = $1,000,NX = $0,autonomous consumption = $1,000 and the marginal propensity to consume is 0.6,what is the equilibrium value of output?
A) $16,000
B) $7,000
C) $6,400
D) $3,840
E) $8,000
Q3) If autonomous consumption is $1,000,the MPC is 0.75,net taxes are $500,investment spending is $800,and government purchases equals $500,and NX = $0,what is equilibrium GDP?
A) $1,800
B) $1,925
C) $2,566.7
D) $7,200
E) $7,700
Page 36
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Chapter 31: Appendix: Capital and Leverage
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Sample Questions
Q1) Deleveraging is the process of reducing leverage,and therefore increasing the risk to capital from any further declines in asset prices.
A)True
B)False
Q2) Just as greater leverage multiplies a bank's potential profits,it also multiplies a bank's potential losses.
A)True
B)False
Q3) A financial institution's leverage ratio is defined as:
A) Profit / Revenue.
B) Total Assets / Shareholders' Equity.
C) Shareholders' Equity / Total Assets.
D) Value of Delinquent Loans / Value of All Loans.
E) Total Debt / Total Revenue.
Q4) One way to decrease leverage is increasing capital.
A)True
B)False
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