Fundamentals of Economics Review Questions
Course Introduction
Fundamentals of Economics introduces students to the essential concepts and principles that underpin economic theory and practice. The course explores both microeconomics, which examines how individuals and businesses make choices regarding resource allocation, and macroeconomics, which looks at the broader economy, including topics such as inflation, unemployment, and economic growth. Students will learn about supply and demand, market equilibrium, consumer behavior, production costs, and the role of government in the economy. Through real-world examples and basic analytical tools, this course provides a solid foundation for further study in economics and helps students develop critical thinking skills to analyze economic issues affecting society.
Recommended Textbook
Principles of Economics 5th Edition by Joshua Gans
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36 Chapters
4743 Verified Questions
4743 Flashcards
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Chapter 1: Ten Lessons From Economics
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149 Verified Questions
149 Flashcards
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Sample Questions
Q1) The word 'economy' comes from the Greek word for:
A) 'one who manages a household'
B) 'one who participates in a market'
C) 'environment'
D) 'conservation'
Answer: A
Q2) Which of the following resources is least likely to meet the definition of scarcity?
A) whales
B) air
C) ice-cream
D) computers
Answer: B
Q3) A good example of a monopoly is:
A) a commercial fishing boat operating in the inshore fishery
B) an eco-tourist business that has sole rights to take visitors into a reserve
C) a large computer company with many business software products
D) a bookstore in a large city
Answer: B
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3
Chapter 2: Thinking Like an Economist
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147 Flashcards
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Sample Questions
Q1) Which of the following concepts is illustrated by the production possibilities frontier?
A) equity
B) conservation
C) efficiency
D) liquidity
Answer: C
Q2) Which of the following is an example of a normative statement?
A) the quantity supplied of a good will fall if the price falls
B) reducing pollution is too important to worry about the costs
C) technological progress will increase the potential growth rate of the economy
D) none of the above are normative statements
Answer: B
Q3) The circular flow diagram illustrates the:
A) flow of goods and services from households to firms
B) flow of spending on goods and services from households to firms
C) flow of factors of production from firms to households
D) flow of spending on goods and services flows from firms to households
Answer: B
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Chapter 3: Interdependence and the Gains From Trade
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153 Flashcards
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Sample Questions
Q1) Trade allows a country to consume outside its production possibilities frontier.
A)True
B)False
Answer: True
Q2) Refer to Table 3-2. The opportunity cost of one kg of butter for John is:
A) 3/2 kg of rice
B) 4/3 kg of rice
C) 3/4 kg of rice
D) 2/3 kg of rice
Answer: B
Q3) Refer to Table 3-2. For John the opportunity cost of one kg of rice:
A) 3/4 kg of butter
B) 3/2 kg of butter
C) 4/3 kg of butter
D) 2/3 kg of butter
Answer: A
Q4) Explain the difference between absolute advantage and comparative advantage.
Answer: Absolute advantage refers to the producer who can produce a product at a lower cost in terms of the resources used in production. Comparative advantage refers to the producer who can produce a product at a lower opportunity cost.
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Chapter 4: The Market Forces of Supply and Demand
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222 Flashcards
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Sample Questions
Q1) The internet has enabled markets to move towards the competitive model.
A)True
B)False
Q2) At the equilibrium price, quantity demanded is equal to quantity supplied.
A)True
B)False
Q3) When the price is higher than the equilibrium price:
A) suppliers will reduce prices to try to clear the market
B) suppliers will increase their prices to clear the market
C) buyers will change their tastes and desire more of the good
D) more sellers will enter the market as they expect prices to go higher
Q4) All else being constant, an increase in the number of cattle delivered to an auction to be marketed would:
A) represent an increase in demand for cattle at the auction
B) represent an increase in the supply of cattle at the auction
C) represent a decrease in the number of sellers at the auction
D) have no effect on the demand or supply at the auction
Q5) The Latin phrase ceteris paribus means 'other things changing'.
A)True
B)False
Page 6
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Chapter 5: Elasticity and Its Application
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Sample Questions
Q1) Income elasticity of demand measures how:
A) the quantity demanded changes as consumer income changes
B) consumer purchasing power is affected by a change in the price of a good
C) the price of a good is affected when there is a change in consumer income
D) many units of a good a consumer can buy given a certain income level
Q2) If the price elasticity of demand is equal to zero, demand is unit elastic.
A)True
B)False
Q3) Supply is said to be inelastic if the quantity supplied responds substantially to changes in the price and elastic if the quantity supplied responds only slightly to price.
A)True
B)False
Q4) In any market, total revenue is the price:
A) divided by the price elasticity of demand
B) multiplied by the quantity
C) plus the quantity
D) multiplied by the quantity minus the costs of production
Q5) What is elasticity and why do economists use the concept?
Q6) What is the price elasticity of demand?
Page 7
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Chapter 6: Supply, Demand and Government Policies
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Sample Questions
Q1) Rent subsidies and wage subsidies are better than price controls at helping the poor because they have no costs associated with them.
A)True
B)False
Q2) In which panel(s) in Graph 6-1 would there be a shortage for a good at the market price?
A) panel a
B) panel b
C) panel a and panel b
D) neither panel a nor panel b
Q3) Suppose the government imposes a binding price ceiling on interest rates in the mortgage lending market. What would benefit from such actions and who would bear the costs?
Q4) A tax on the sellers of coffee will:
A) reduce the equilibrium price of coffee and increase the equilibrium quantity
B) increase the equilibrium price of coffee and reduce the equilibrium quantity
C) increase the equilibrium price of coffee and increase the equilibrium quantity
D) reduce the equilibrium price of coffee and reduce the equilibrium quantity
Q5) To what does the term tax incidence refer?
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Chapter 7: Consumers, Producers and the Efficiency of Markets
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Sample Questions
Q1) Refer to Table 7-2. If the market price is $1000, the producer surplus in the market will be:
A) $700
B) $750
C) $2250
D) $3700
Q2) Normative analysis refers to what:
A) is
B) should be
C) maximises efficiency
D) is politically correct
Q3) Nick's willingness to sell his homemade chocolate chip biscuits is $4 per dozen. He sells them and realises a producer surplus of $4 per dozen. Nick sells his biscuits for:
A) $2 a dozen
B) $8 a dozen
C) $10 a dozen
D) $12 a dozen
Q4) In what way(s) are free-market outcomes, where supply equals demand, beneficial to society?
Page 9
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Chapter 8: Application: The Costs of Taxation
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Sample Questions
Q1) If the supply of labour is inelastic, the deadweight loss from labour taxes is large.
A)True
B)False
Q2) According to Graph 8-3, the total surplus (consumer, producer and government) before the tax is:
A) $6400
B) $4800
C) $2400
D) $1200
Q3) Since the amount of land is fixed, the total supply of land is:
A) relatively elastic
B) perfectly elastic
C) perfectly inelastic
D) relatively inelastic
Q4) The demand for bread is less elastic than the demand for donuts; hence, ceteris paribus, a tax on bread will create a larger deadweight loss than will the same tax on donuts.
A)True B)False
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Chapter 9: Application: International Trade
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Sample Questions
Q1) Import quotas make domestic buyers better off and domestic sellers worse off.
A)True
B)False
Q2) Suppose that you are advising Russian policy makers on trade issues, and the issue of protection for the Russian vodka industry comes up. You argue in favour of free trade but the policymakers are convinced that some protection is needed. They are leaning in favour of an import quota. What will you tell them about the relative effects of import quotas and equivalent tariffs on the wellbeing of Russian vodka producers, Russian vodka consumers and the Russian government budget?
Q3) According to Graph 9-7, producer surplus after trade would be:
A) $21 600
B) $25 200
C) $43 200
D) $50 400
Q4) Import quotas and tariffs both cause the quantity of imports to fall.
A)True
B)False
Q5) What are the arguments in favour of trade restrictions and what are the counter-arguments?
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Chapter 10: Externalities
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Sample Questions
Q1) Private markets fail to reach a socially optimal level when positive consumption externalities are present because:
A) private benefit equals social benefit at the private market solution
B) private costs exceed private benefits at the private market solution
C) social value exceeds private value at the private market solution
D) private costs exceed social benefit at the private market solution
Q2) Private owners of restored historical buildings are not likely to capture the full benefit of restoration so they tend to discard them too quickly. Many local governments respond to this problem by: (i) condemning historic buildings to make room for new development
(ii) regulating the destruction of historic buildings
(iii) providing tax breaks to owners of historic buildings who restore them.
A) (i), (ii) and (iii) are all used
B) only (i) and (iii) are used
C) only (ii) and (iii) are used
D) only (i) and (ii) are used
Q3) Firms that can reduce pollution easily will be willing to sell their emissions permits.
A)True
B)False
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Chapter 11: Public Goods and Common Resources
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Sample Questions
Q1) In nearly all cases the government can make everyone better off by raising taxes to pay for certain goods that the market fails to provide.
A)True
B)False
Q2) Which of the following would be considered a private good?
A) a visit to an uncongested amusement park
B) a public beach
C) local cable television service
D) a bottle of natural mineral water
Q3) Why do elephants face the threat of extinction while cows do not?
A) cattle are a valuable source of income for many people and elephants have no market value
B) there is a high demand for products that come only from the cow
C) there are still lots of cattle that roam free, while most elephants are in zoos
D) cattle are owned by ranchers, while elephants are owned by no-one
Q4) Explain the differences between public goods and private goods.
Q5) An ice-cream cone is an example of a public good.
A)True
B)False
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Chapter 12: The Design of the Tax System
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154 Flashcards
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Sample Questions
Q1) Tax evasion can occur unintentionally.
A)True
B)False
Q2) Part of the deadweight loss from taxing labour earnings is that people will:
A) work less
B) be reluctant to hire accountants to file their tax returns
C) low tax liabilities will universally be worse off than under some other tax policy
D) work more
Q3) The administrative burden of a tax includes:
A) the amount of money people pay as income taxes
B) the reduction in the size of a market because of the tax
C) the time and effort of completing tax forms that is imposed on taxpayers who comply with the tax
D) the cost of administering programs that use tax revenue
Q4) Deadweight losses from taxation are associated with:
A) taxes that distort the incentives that people face
B) taxes that target expenditures on survivor's benefits for social security
C) taxes that have no efficiency losses
D) lump-sum taxes
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Chapter 13: The Costs of Production
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Sample Questions
Q1) Refer to Table 13-1. The average variable cost of producing 3 kayaks is:
A) $2
B) $2.33
C) $3
D) $4
Q2) The shape of the total cost curve is unrelated to the shape of the production function.
A)True
B)False
Q3) Those things that must be forgone to acquire a good are called:
A) competitors
B) substitutes
C) opportunity costs
D) explicit costs
Q4) Marginal cost tells us the:
A) amount total cost rises when price rises by one unit
B) amount fixed cost rises when price rises by one unit
C) amount total cost rises when output rises by one unit
D) amount fixed cost rises when output rises by one unit
Q5) Explain why the long-run average total cost curve has a U-shape.
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Chapter 14: Firms in Competitive Markets
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Sample Questions
Q1) Refer to Table 14-1. If the farmer chooses to maximise profit, the appropriate output level is where marginal cost is equal to:
A) seven parrots
B) 12 parrots
C) 15 parrots
D) 20 parrots
Q2) Refer to Graph 14-9. An increase in market supply from Supply<sub>0</sub> to Supply<sub>1</sub> is most likely the result of:
A) existing firms changing their cost structure
B) existing firms in the market increasing their level of production beyond Q<sub>1</sub>
C) the entrance of new firms in the market
D) all of the above
Q3) At its current level of production, a profit-maximising firm in a competitive market receives $12.50 for each unit it produces, and faces an average total cost of $10. At the market price of $12.50 per unit, the firm's marginal cost curve crosses the marginal revenue curve at an output level of 1000 units. What is the firm's current profit? What is likely to occur in this market and why?
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Page 16
Chapter 15: Monopoly
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Sample Questions
Q1) The profit-maximising level of output for a monopoly firm is where:
A) marginal revenue equals average total cost
B) marginal revenue equals marginal cost
C) marginal cost equals average revenue
D) average total cost equals demand
Q2) Describe how government is involved in creating a monopoly. Why might the government create one? Give an example.
Q3) In the market for home heating, consumers typically have several options (e.g. electricity, heating fuel, natural gas, propane, etc.), yet we often think of firms in this industry as behaving like monopolists. Using your understanding of monopoly, discuss the context in which your electricity provider is a monopolist. Is this characterisation universally applicable? Carefully explain your answer.
Q4) Average revenue for a monopoly is the marginal revenue divided by the quantity produced.
A)True
B)False
Q5) A monopoly is likely to set the price of its product equal to its marginal cost.
A)True
B)False
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Chapter 16: Business Strategy
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184 Flashcards
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Sample Questions
Q1) The only way a cartel is able to maintain its market power is if:
A) all the members of cartel continue to cooperate
B) the product has horizontal demand curve
C) the product has an inelastic demand for their product
D) the government uses competition law to break-up the cartel
Q2) Refer to Table 16-6. The Nash equilibrium for this game is for:
A) both firms to over-fish
B) firm A to over-fish and firm B to fish sustainably
C) firm B to over-fish and firm A to fish sustainably
D) both firms to fish sustainably
Q3) According to the information provided, if Irun fails to live up to the production agreement and overproduces, which of the following statements will be true of Urun's condition?
A) Urun's profit will be maximised by holding its production constant
B) Urun will be hurt more if it follows suit and increases production
C) Urun will invariably be worse off than before the agreement was broken
D) Urun will counter by decreasing its production in order to maintain price stability
Q4) What is OPEC and how effective was it at colluding to maintain high prices for its product?
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Chapter 17: Competition Policy
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Sample Questions
Q1) Private ownership of a monopoly cannot benefit society.
A)True
B)False
Q2) Suppose Peach Computers has entered into a resale price maintenance agreement with Computer Super Stores Inc. (CSS Inc.) but not with CompuMart. In this case:
A) CompuMart will benefit from customers who go to CSS Inc. for information about different computers.
B) CSS Inc. will sell Peach computers at a lower price than CompuMart.
C) the wholesale price of Peach computers will be different for CSS Inc. than it is for CompuMart
D) Peach computers will never increase profits by having a resale price maintenance agreement with all retail outlets that sell its products.
Q3) When regulators use a marginal-cost pricing strategy to regulate a natural monopoly, the regulated monopoly:
A) has no incentive to exit the industry
B) will experience a price below average total cost
C) may rely on a government subsidy to remain in business
D) both B and C are true
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Chapter 18: Monopolistic Competition
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Sample Questions
Q1) In the long run, the profit for a monopolistically competitive firm moves to the competitive level due to:
A) moving demand for its product
B) rising average total cost
C) rising average variable cost
D) the cost of advertising
Q2) The product-variety externality associated with monopolistic competition arises because in monopolistically competitive markets firms try to differentiate their products.
A)True
B)False
Q3) Movies that prominently display name-brand consumer products are most likely sending a message about:
A) subliminal satisfaction from consumption
B) psychological manipulation
C) product quality
D) product price
Q4) Why does a typical monopolistically competitive firm face a downward-sloping demand curve?
Q5) How might a brand name ensure that customers buy high-quality goods?
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Chapter 19: The Markets for the Factors of Production
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Sample Questions
Q1) What happens to the labour supply curves in both countries when New Zealand workers immigrate to the Australia?
A) labour supply increases in Australia and decreases in New Zealand
B) labour supply increases in New Zealand and decreases in Australia
C) labour supply decreases in New Zealand and decreases in Australia
D) labour supply increases in Australia and increases in New Zealand
Q2) Competitive firms that maximise profit will hire workers until the value of the marginal product:
A) begins to fall
B) begins to rise
C) equals the wage
D) equals the price of the final good
Q3) The relationship between labour productivity and wages is that if:
A) wages rise then labour productivity will rise
B) labour productivity falls then wages will rise
C) labour productivity rises then wages will rise
D) none of the above
Q4) Using the theory of wage determination, explain why wages in developing countries are typically quite low.
Q5) Define the terms diminishing marginal product and the value of marginal product.
Page 21
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Chapter 20: Earnings, Unions and Discrimination
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Sample Questions
Q1) Given that there are statistical differences in human capital across both age groups and gender, then this is likely to:
A) explain all of the differences in average wage rates across age classifications
B) explain some of the differences in average wage rates across gender classifications
C) be unrelated to wage rate differences across gender classifications, since both men and women are required to complete requirements for a high-school certificate
D) explain none of the differences in average wage rates across gender classifications
Q2) Which of the following statements represents the idea behind signalling in education?
A) the more naturally productive someone is, the more they are inclined to educate themselves
B) education can turn an unproductive person into a productive person
C) most university graduates wouldn't be half as productive if it were not for the years they spend in the classroom
D) all of the above
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Chapter 21: Income Inequity and Poverty
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Sample Questions
Q1) According to utilitarianism, the government should choose policies to maximise the total utility of everyone in society.
A)True
B)False
Q2) In-kind transfers are:
A) non-monetary goods and services given to the poor
B) benefits that are transferred to the rich
C) provided by kindly and caring people
D) obtained primarily by the middle class
Q3) In the parable of the leaky bucket, a fundamental problem with government redistribution programs is identified. As long as the government only has 'leaky buckets' at its disposal:
A) full egalitarian policies will always dominate competing policy options
B) affirmative action programs are doomed to failure
C) equality of economic opportunity is an unattainable goal
D) it should not try to reach complete equality in income
Q4) Discuss the permanent income hypothesis of income distribution.
Q5) Income inequality is something that occurs in all countries.
A)True
B)False
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Chapter 22: The Theory of Consumer Choice
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Sample Questions
Q1) Select the true statements that follow. When the indifference curve is tangent to the budget constraint, a consumer: (i) cannot be made better off without increasing his or her income
(ii) is consuming the best combination of two goods that are attainable (iii) must be on a linear indifference curve
A) (i) only
B) (i) and (ii)
C) (i) and (iii)
D) (ii) and (iii).
Q2) Refer to the information provided. If Amy decides to spend 80 hours a week playing tennis, and the rest of her time photographing, how much income will she have available to spend on consumption goods?
A) $640
B) $3200
C) $6400
D) $16 000
Q3) The income and substitution effects work in opposite directions.
A)True
B)False
Q4) Which measure of elasticity can be weakly linked to Giffen goods?
Page 24
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Chapter 23: Frontiers of Microeconomics
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Sample Questions
Q1) The median voter is the voter exactly in the middle of a distribution.
A)True
B)False
Q2) Given asymmetric information, car insurance companies might encourage risky drivers to identify themselves by distributing a driving history questionnaire.
A)True
B)False
Q3) The lack of caution exhibited by individuals and families who are privately insured is an example of moral hazard.
A)True
B)False
Q4) What are the implications of the median voter theorem?
Q5) Political economy is also referred to as public:
A)goods
B)choice
C)provision
D)policy
Q6) What are two implications of the Condorcet paradox?
Q7) What properties did Arrow assume a society would want in a voting system?
Page 25
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Chapter 24: Measuring a Nations Income
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Sample Questions
Q1) Gross domestic product measures:
A) the total income of everyone in the economy
B) the total expenditure on the economy's output of goods and services
C) both A and B
D) neither A nor B
Q2) Suppose an economy produces two products: meat pies and hamburgers. In 2011, 20 meat pies are sold at $5 each, and eight hamburgers are sold at $50 each. In 2010, the base year, the price of meat pies was $10 each, and the price of kebabs was $75 each. Therefore:
A) the real 2005 GDP is $800, and the GDP deflator is 62.5
B) the real 2005 GDP is $800, and the GDP deflator is 160
C) the real 2005 GDP is $500, and the GDP deflator is 62.5
D) the real 2005 GDP is $500, and the GDP deflator is 160
Q3) GDP is considered a good measure of economic wellbeing. However, GDP is not a perfect measure of wellbeing. Why? Discuss factors that are not included in GDP but that affect whether people are better off.
Q4) Over time, the three measures of GDP tend to arrive at the same result.
A)True
B)False
Q5) Define GDP and explain why some products are excluded. To view all questions and flashcards with answers, click on the resource link above.
Page 26
Chapter 25: Measuring the Cost of Living
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Sample Questions
Q1) If the CPI were 100 in the base year and 110 in the following year, the inflation rate would be:
A) 110 per cent
B) 100 per cent
C) 11 per cent
D) 10 per cent
Q2) Which is the most accurate statement about the CPI?
A) When the CPI increases, the average family has to spend less to maintain its standard of living
B) When the CPI increases, the average family has to spend more to maintain its standard of living
C) When the CPI increases, the standard of living of the average family increases
D) The CPI has nothing to do with the average family's standard of living
Q3) When the overall level of prices in the economy is increasing, we say that the economy is experiencing:
A) economic growth
B) unemployment
C) inflation
D) deflation
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Page 27
Chapter 26: Production and Growth
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Sample Questions
Q1) Which of the following statements is correct?
A) Technological knowledge is the society's understanding about how the world works, whereas human capital refers to the resources spent transmitting this understanding to the labour force
B) Human capital is the society's understanding about how the world works, whereas technological knowledge refers to the resources spent transmitting this understanding to the labour force
C) Technological knowledge is the bridge that links physical and natural resources to human capital
D) Technological knowledge is the society's understanding about human capital
Q2) The growth of real GDP is:
A) a good gauge of productivity
B) a good gauge of economic prosperity
C) a good gauge of economic progress
D) a good gauge of living standard
Q3) Suppose that the average weekly income in a nation was $120 in 1952, and the growth rate of average income is 3.5 per cent per year. About how high will average national weekly income be in 2012?
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Chapter 27: Saving, Investment and the Financial System
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Sample Questions
Q1) Import receipts are not an addition to a country's GDP.
A)True
B)False
Q2) The national income accounting identity S = I shows that saving and investment are equal for every individual household or firm.
A)True
B)False
Q3) What would happen to investment if the government were to increase the tax on interest income?
A) Investment spending would fall
B) Investment spending would rise
C) Investment would be unaffected
D) Investment could rise, fall or remain unchanged
Q4) When the $700 billion bailout occurred in 2008 did this send a dangerous signal to the banks?
Q5) The price of a share in the newspaper is the last price at which the share was traded.
A)True
B)False
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Chapter 28: The Natural Rate of Unemployment
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Q1) Job search:
A) explains why firms pay higher than the competitive equilibrium wage
B) is due to the failure of wages to balance labour supply and labour demand
C) is the process of matching workers with appropriate jobs
D) all of the above
Q2) Most of the economy's unemployment problem is attributable to the relatively few workers who are jobless for long periods of time.
A)True
B)False
Q3) According to the theory of efficiency wages, firms operate less efficiently if wages are above the equilibrium level.
A)True
B)False
Q4) Which of the following equations is correct?
A) Labour force = Population - Labour not in the labour force
B) Labour force = Population - Number of unemployed
C) Labour force = Number of employed + Number of unemployed
D) Labour force = Adult population - Number of unemployed
Q5) Explain when minimum laws are binding and result in unemployment.
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Chapter 29: The Monetary System
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Q1) The gold standard is used as the basis for a nation's money supply.
A)True
B)False
Q2) Money with intrinsic value is called fiat money, and money without intrinsic value is called commodity money.
A)True
B)False
Q3) Which of the following will lead to an increase in reserves in the banking system and which will lead to a decrease in the level of reserves?
a. The public deposits more notes and coins than they withdraw.
b. The Government runs a budget surplus.
c. The RBA buys government securities or other financial assets from the public or from financial institutions.
d. Public debt matures
e. The RBA buys government securities or other financial instruments.
Q4) Under what circumstances can banks not influence the supply of money?
Q5) What was the purpose of the deposit guarantee scheme in Australian and NZ banks?
Q6) Discuss the problems the RBA has controlling the money supply in a system of fractional-reserve banking.
Page 31
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Chapter 30: Inflation: Its Causes and Costs
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Q1) When money is neutral, an increase in the rate of inflation from 2 per cent to 5 per cent will _____.
A) increase the nominal interest rate by 3percentage points
B) increase the real interest rate by 3 percentage points
C) decrease the nominal interest rate by 3 percentage points
D) increase the nominal interest rate by less than 3 percentage points
Q2) Calculate the velocity of money for each of the following situations:
a. The money supply is 1000, the price level is 20 and output is 200
b. The money supply is 50, the price level is 100 and output is 20
c. The money supply is 25, the price level is 25 and output is 200
d. The money supply is 800, the price level is 2 and output is 300
Q3) High inflation and high deflation can both be regarded as a major economic problems.
A)True
B)False
Q4) The relative price of oil is a(n):
A) actual variable
B) monetary variable
C) nominal variable
D) real variable
Page 32
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Chapter 31: Open-Economy Macroeconomics: Basic Concepts
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Q1) Which of the following factors does not affect a country's exports, imports and net exports?
A) Transportation costs
B) The government's international trade policy
C) Exchange rates
D) All of the above affect exports, imports and net exports
E) None of the above affect a country's exports, imports and net exports
Q2) While making investment decisions, investors compare:
A) the real interest rates offered on the bonds
B) the nominal interest rates offered on the bonds
C) the market prices of the bonds
D) all of the above
E) none of the above
Q3) Net exports of a country are:
A) the same as exports
B) the value of imports minus the value of exports
C) the value of exports minus the value of imports
D) the same as imports
Q4) What are the more important variables that affect net foreign investment?
Q5) List five factors that may influence a country's demand for goods traded?
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Chapter 32: A Macroeconomic Theory of the Open Economy
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Q1) In Graph 32-1, an increase in the government budget deficit causes the equilibrium interest rate to:
A) be unchanged
B) increase from r<sub>1</sub> to r<sub>2</sub> in panel (a)
C) increase from E<sub>1</sub> to E<sub>2</sub> in panel (c)
D) decrease from r<sub>2</sub> to r<sub>1</sub> in panel (a)
E) both B and C
Q2) Fears about governments in Europe being able to finance their debts are unfounded, as they have a strong economy.
A)True
B)False
Q3) A large and sudden movement of funds out of a country is called:
A) capital mobility
B) capital outflow
C) liquidity preference
D) capital flight
Q4) Explain how net foreign investment is part of the demand for loanable funds and simultaneously part of the supply of dollars in the foreign exchange market.
Page 34
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Chapter 33: Aggregate Demand and Aggregate Supply
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Q1) In the long run, the shift in aggregate demand is reflected fully in the inflation rate and not at all in the level of output.
A)True
B)False
Q2) The long-run aggregate supply is called:
A) potential output
B) full-employment output
C) natural rate of output
D) all of the above
Q3) Mundell-Fleming's effect implies that a currency depreciation:
A) increases net exports and decreases the quantity of goods and services demanded
B) decreases net exports and increases the quantity of goods and services demanded
C) increases net exports and increases the quantity of goods and services demanded
D) decreases net exports and decreases the quantity of goods and services demanded
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Chapter 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand
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Q1) If there is a major increase in economic activity, an appropriate policy for government would be to:
A) encourage individuals to save more
B) increase the budget surplus
C) tighten up monetary policy
D) all of these
Q2) To eliminate a deflationary gap when the MPC is 0.75 and the deflationary gap is $500 million, investment will need to increase by how much?
Q3) Suppose that equilibrium in the money market is described by the equation M = aP/r, where M is the money supply, P is the price level, r is the interest rate and a is a constant. Suppose that investment is described by the equation I = b - kr, where b and k are constants. Using the equation Y = C + I + G (where Y is GDP, C is consumption and G is government spending), show that a higher price level leads to lower GDP.
Q4) John Maynard Keynes proposed the model of the money market called the liquidity preference theory.
A)True
B)False
Q5) Define expansionary and contractionary fiscal policy, giving examples of each.
Page 36
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Chapter 35: The Short-Run Trade-Off Between Inflation and Unemployment
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Q1) If the long-run Phillips curve shifts to the right, the economy will have _____ for any given rate of money growth and inflation.
A) lower unemployment and lower output
B) lower unemployment and higher output
C) higher unemployment and lower output
D) higher unemployment and higher output
Q2) A. W. Phillips was a New Zealand economist.
A)True
B)False
Q3) An increase in expected inflation:
A) shifts the short-run Phillips curve to the left
B) increases the unemployment rate along the Phillips curve
C) decreases the unemployment rate along the Phillips curve
D) shifts the short-run Phillips curve to the right
Q4) A typical estimate of the sacrifice ratio is five. According to Sargent, the sacrifice ratio could be much smaller than suggested by previous estimates.
A)True
B)False
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Chapter 36: Five Debates Over Macroeconomic Policy
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Q1) Which of the following is the benefit of reducing inflation to zero?
A) Eliminating shoe leather costs
B) Eliminating menu costs
C) Eliminating the confusion and inconvenience resulting from a changing unit of account
D) All of the above
Q2) Which of the following is not the cost of inflation?
A) Menu costs
B) Tax distortions
C) Arbitrary redistributions of wealth
D) All of the above
Q3) In the 1970s, the Australian government decided to charge fees for university education.
A)True
B)False
Q4) What are the problems of discretionary monetary policy? How can we avoid these problems?
Q5) There are some situations in which running a budget deficit is justifiable.
A)True
B)False
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