General Economics
Exam Questions
Course Introduction
General Economics provides students with a foundational understanding of basic economic principles, concepts, and analytical tools. The course covers both microeconomics and macroeconomics, exploring topics such as supply and demand, market structures, the role of government, economic indicators, and the fundamentals of production and consumption. Emphasis is placed on how individuals, businesses, and governments make decisions about resource allocation, as well as the impact of those decisions on both domestic and global economies. Through real-world examples and applications, students will develop the ability to critically assess economic issues and policies.
Recommended Textbook
Economics Principles and Policy 12th Edition by
William J. Baumol
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Page 2
Chapter 1: What Is Economics?
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Sample Questions
Q1) There are frequently market solutions that the government can use to deal with externalities.
A)True
B)False
Answer: True
Q2) Economic theory simplifies relationships to explain how the relationships interact.
A)True
B)False
Answer: True
Q3) The steepness of a curve is partially determined by the units of measurement.
A)True
B)False
Answer: True
Q4) Over the past century, the main factor responsible for rising living standards in the United States has been productivity growth.
A)True
B)False
Answer: True
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Page 3
Chapter 2: The Economy: Myth and Reality
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Sample Questions
Q1) Teenage employment in the United States has risen in the last two decades.
A)True
B)False
Answer: False
Q2) The federal government employs more civilians than state and local governments.
A)True
B)False Answer: False
Q3) Over the last several years the United States has had lower unemployment rates than most European countries.
A)True
B)False
Answer: True
Q4) The personal income tax is the single largest source of revenue for the federal government.
A)True
B)False
Answer: True
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Page 4
Chapter 3: The Fundamental Economic Problem: Scarcity and Choice
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Sample Questions
Q1) In a market system, ____ distributes goods among consumers in accord with their tastes and preferences, using voluntary exchange to determine who gets what.
A) a price system
B) a regulatory framework
C) a democratic government
D) a closed system
Answer: A
Q2) A market system (market economy) depends on the market to
A) find the most efficient way of using resources.
B) determine how large the budget deficit should be.
C) decide how much government regulation there should be.
D) provide minimum incomes for everyone.
E) All of the above are correct.
Answer: A
Q3) Firms are encouraged by the profit motive to use inputs efficiently.
A)True
B)False
Answer: True
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Chapter 4: Supply and Demand: An Initial Look
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Sample Questions
Q1) What factors are held constant along a given demand curve for a good?
A) the price of the good
B) the technology used to produce the good
C) the supply of the good
D) consumer incomes and the prices of other goods
Q2) If the demand for steak shifts to the right, the most likely explanation is that
A) the price of cattle feed has fallen.
B) consumer income has risen.
C) the price of steak has fallen.
D) cattle production has fallen.
Q3) When price is below the equilibrium level, there is a shortage of the commodity being sold.
A)True
B)False
Q4) The price for labor is the wage rate.What happens to the demand for labor if wages increase?
A) It increases.
B) It decreases.
C) It does not change.
D) Uncertain-economic theory has no answer to this question.
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Chapter 5: Consumer Choice: Individual and Market Demand
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Sample Questions
Q1) Figure 5-5 shows a consumer budget line for French fries and hamburgers.The household allocates a budget for these two goods..If the price of an order of french fries is $2, how much income is allocated to fries and burgers combined?
A) $2
B) $4
C) $20
D) $40
Q2) The market demand curve is the horizontal summation of all individual demand curves.
A)True
B)False
Q3) All decisions involve opportunity cost.
A)True
B)False
Q4) What is a budget line? What does its slope indicate?
Q5) Voluntary exchange requires that there must be mutual gain.
A)True
B)False
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Q6) What is the relationship between marginal utility and an individual demand curve?
Chapter 6: Demand and Elasticity
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Sample Questions
Q1) Elasticity is a measure of the responsiveness of change in quantity demanded to a change in price.
A)True
B)False
Q2) If the price of gasoline rises by 20 percent and consumption of gasoline falls 5 percent,
A) demand is elastic.
B) demand is unit-elastic.
C) demand is inelastic.
D) elasticity of demand cannot be calculated.
Q3) The price elasticity of a horizontal demand curve is always A) infinitely large.
B) zero.
C) one.
D) increasing as price increases.
Q4) The unit-elastic demand curve bends in the middle toward the origin of the graph and at either end moves closer to the axes.
A)True
B)False
Q5) What are the main determinants of demand elasticity? Explain their importance.
Page 8
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Chapter 7: Production, Inputs, and Cost: Building Blocks for Supply Analysis
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Sample Questions
Q1) The least costly combination of inputs is influenced by the relative prices of inputs.
A)True
B)False
Q2) In Figure 7-7 at 100 units, AVC equals
A) 8.
B) 800.
C) 100.
D) 1,000.
Q3) In Table 7-3, diminishing returns set in with picker
A) 3.
B) 4.
C) 5.
D) 6.
E) 9.
Q4) The firm can calculate all points on its total cost curve if it knows
A) its production function.
B) the prices of inputs and of output.
C) its average cost at its optimal output level.
D) the prices of inputs and its production function.
Page 9
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Chapter 8: Output, Price, and Profit: The Importance of Marginal Analysis
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Sample Questions
Q1) Michael Jordan averaged 35 points per game over a 100-game season.During the playoff round of 10 games, he averaged 50 points, and in the five-game championship series, he led the Chicago Bulls to victory, averaging 40 points.For the entire season, how many points did Jordan score, what was his average, and did the championship series pull his previous average up or down?
Q2) Total profit is maximized
A) where the difference between total revenue and total cost is greatest.
B) at that output level where marginal revenue equals average cost.
C) where total revenue is at a maximum.
D) at the point where all variable costs are covered.
Q3) If a person who weighs 100 lbs.is riding in an elevator and is joined by a person weighing 120 lbs., what happens to the average weight of persons on the elevator?
A) It falls.
B) It rises.
C) It stays the same.
Q4) When a firm's fixed costs increase it should raise its prices in order to maximize profits.
A)True
B)False
Page 10
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Chapter 9: Securities: Business Finance, and the Economy:
The Tail that Wags the Dog?
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Sample Questions
Q1) Which of the following exchanges handles numerous technology companies including Intel and Microsoft?
A) NASDAQ
B) NYSE
C) AMEX
D) None of the above handle technology stocks.
Q2) A corporation has legal status like an individual citizen.
A)True
B)False
Q3) What are the advantages and disadvantages of organizing a business as a partnership or a corporation?
Q4) Double taxation of corporate earnings
A) tends to restrict the activities of corporate firms.
B) causes stockholders to earn a lower return than they would on other securities of comparable risk.
C) results in more investment in research and development.
D) All of the above are correct.
Q5) An investor is trying to decide whether to put his funds into stocks or bonds.He expects rising interest rates over the next year and higher inflation.Your advice?
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Chapter 10: The Firm and the Industry under Perfect Competition
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Sample Questions
Q1) For a perfectly competitive firm, marginal revenue equals average revenue because the
A) firm's supply curve is horizontal.
B) industry's demand curve is horizontal.
C) firm's demand curve is horizontal.
D) industry's supply curve is horizontal.
Q2) A perfectly competitive firm has a horizontal demand curve because it can sell as much as it wants at the market price.
A)True
B)False
Q3) At a perfectly competitive firm's short-run equilibrium level of output,
A) P = MR = MC.
B) P = MR, but MR does not equal MC.
C) P = MC, but MR does not equal MC.
D) MR = MC and P < MR.
Q4) The entry of new firms into a perfectly competitive market shifts the demand curve outward.
A)True
B)False
Q5) Explain how the short-run supply curve of the competitive firm is derived.
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Chapter 11: Monopoly
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Sample Questions
Q1) In Figure 11-2, at what quantity would the monopolist maximize profit?
A) E
B) F
C) G
D) H
Q2) It is not true in the long run of monopolies that A) other firms seeking positive economic profit enter the market.
B) they earn positive economic profit.
C) they sell their output at a price greater than marginal cost.
D) they benefit from barriers to entry.
Q3) The Red Cross is virtually the only operator of blood banks in the United States.In Figure 11-1 are the demand and cost curves facing the Red Cross blood bank.If the Red Cross were to set price and quantity at the level that it would obtain in the long run in a competitive industry, how much blood would it sell?
A) OA
B) OB
C) OD
D) OC
Q4) What arguments have been advanced in defense of price discrimination?
Q5) Why is the advent of monopoly likely to shift cost curves?
Page 13
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Chapter 12: Between Competition and Monopoly
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Sample Questions
Q1) The demand curve facing a monopolistically competitive firm is generally
A) steeper than the demand curve that would face a perfectly competitive firm in the same industry.
B) less elastic than the demand curve that would face a monopoly in the same industry.
C) steeper and more elastic than the demand curve that would face a perfectly competitive firm in the same industry.
D) flatter than the demand curve that would face a monopoly in the same industry.
Q2) What is the long-run effect on the demand curve of a monopolistically competitive firm when more firms enter the market?
A) Demand curve shifts to left.
B) Demand curve remains the same.
C) Demand curve shifts to right.
D) Demand curve become flatter.
Q3) The kinked demand curve model is based on the assumption that rival firms will match a price cut but ignore a price increase.
A)True
B)False
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Chapter 13: Limiting Market Power: Regulation and Antitrust
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Sample Questions
Q1) The antitrust laws are sometimes used by companies to reduce competition in their markets rather than enhance it.
A)True
B)False
Q2) One of the clear effects of deregulation was
A) lower prices of many services.
B) increased entry of new firms into regulated industries.
C) lower income to unions working in regulated industries.
D) all of the above.
Q3) What are the reasons that are usually given to justify regulation?
Q4) An economist is told that concentration in the cement industry has increased.He can safely conclude that
A) cement production must have fallen in the industry.
B) competition in the cement industry has decreased.
C) there are fewer cement producers than before.
D) All of the above are correct.
Q5) In most industries, deregulation has led to lower prices.
A)True
B)False
Q6) Discuss some of the reasons why monopoly power is considered undesirable.
Page 15
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Chapter 14: The Case for Free Markets I: The Price System
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Sample Questions
Q1) The price mechanism solves the "for whom" problem by assigning high prices to goods in high demand and letting customers choose whether to purchase them.
A)True
B)False
Q2) MC and MU are set equal to one another in a market economy because
A) producers and consumers are free to communicate with one another.
B) producers and consumers both respond to the same price.
C) consumers must accept the prices set by producers.
D) producers must accept the price set by consumers.
Q3) When box lunches are handed out at an elementary school, Jimmy (who loves chocolate and hates raisins) gets a raisin cookie and Johnny (who hates chocolate and loves raisins) gets a chocolate chip cookie.This is an example of inefficiency in
A) output selection.
B) production planning.
C) product distribution.
D) market segmentation.
Q4) Assuming one can derive a correct input-output table, are there still any reasons to prefer the market to central planning?
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Page 16
Chapter 15: The Shortcomings of Free Markets
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Sample Questions
Q1) The Rand Corporation estimates that the external costs imposed by alcohol consumption (for example, deaths caused by drunk drivers) to be 48 cents per ounce consumed.Taxes on alcohol amount to 23 cents per ounce consumed.This information suggests:
(i) alcohol is overconsumed; (ii) alcohol taxes should be raised.Which of these statements is correct?
A) i and ii
B) i not ii
C) ii not i
D) neither i nor ii
Q2) Which of the following is not true for a public good?
A) Marginal cost of serving public good to one more person is zero.
B) Free rider problem arises in case of public goods.
C) Exclusion is not possible in most of the public goods.
D) Public goods include only material commodities.
Q3) Education is subsidized because it generates beneficial externalities.
A)True
B)False
Q4) Why do markets tend to underproduce public goods?
Q5) What are private goods? Mention two important attributes of private goods.
Page 17
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Chapter 16: The Market's Prime Achievement: Innovation and Growth
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Sample Questions
Q1) It required less labor time to buy a college education in 1995 than it did in 1965.
A)True
B)False
Q2) Why has the free market system produced the most rapid rates of growth of any economic system?
Q3) In the United States, the financing for innovation has been increasingly supplied by
A) large oligopolistic enterprises.
B) independent inventors
C) newly founded entrepreneurial firms.
D) small enterprises.
Q4) Provide examples of efforts undertaken by large businesses to contain the risks inherent in the innovation process.
Q5) In a perfectly competitive industry, firms will earn zero economic profits from innovation.
A)True
B)False
Q6) Do free markets spend enough on R&D activities? Explain your answer.
Q7) Distinguish between invention and innovation.
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Chapter 17: Externalities, the Environment, and Natural Resources
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Sample Questions
Q1) Air quality in most U.S.cities has ____ since World War II. A) worsened
B) improved
C) remained unchanged
D) improved slightly before a recent deterioration
Q2) In the last three decades, air quality in American cities has improved.
A)True
B)False
Q3) Direct controls often require long legal proceedings before they can be effective.
A)True
B)False
Q4) Briefly and concisely define the following terms.
a.voluntarism
b.direct controls
c.depletable resource
Q5) Externalities can create a threat to environmental quality.
A)True
B)False
Q6) Explain why environmental damage would be classified as an externality.
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Chapter 18: Taxation and Resource Allocation
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Sample Questions
Q1) Economists generally think that the ____ tax is among the best ways to raise revenue.
A) property
B) personal income
C) sales
D) value-added
Q2) When demand for a product is very inelastic, the burden of a tax falls mainly on
A) producers.
B) consumers.
C) tax collectors.
D) people who drop out of the market.
Q3) The Bush tax cuts of 2001
A) made federal income taxes more progressive.
B) made federal income taxes perfectly proportional.
C) made federal income taxes less progressive.
D) had no effect on the progressivity of the federal income tax system.
Q4) One major problem with Social Security is that it is a "pay as you go" system.
A)True
B)False
Q5) Explain the purpose of payroll taxes.Is it a proportional form of tax?
Page 20
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Chapter 19: Pricing the Factors of Production
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Sample Questions
Q1) As the rate of interest on borrowed funds increases, the quantity of investment funds demanded diminishes.
A)True
B)False
Q2) Demand for inputs is a derived demand because
A) it is derived from the need for income.
B) it corresponds to the derived supply of the inputs.
C) producers want the input to produce the finished good.
D) it is downward sloping.
Q3) The derived demand for borrowed funds has the characteristic negative slope of any demand curve.
A)True
B)False
Q4) Economic rent is a payment for a factor of production that elicits an increase in the quantity supplied.
A)True
B)False
Q5) Profit is the return to entrepreneurship.
A)True
B)False
21
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Chapter 20: Labor and Entrepreneurship: The Human Inputs
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Sample Questions
Q1) The percentage of work time lost due to strikes is greater than the percentage of work time lost due to coffee breaks.
A)True
B)False
Q2) Which of the following were invented centuries ago in China?
A) gunpowder
B) the wheelbarrow
C) printing with movable type
D) all of the above
Q3) Labor markets are generally perfectly competitive markets.
A)True
B)False
Q4) One implication of human capital theory is that college graduates should earn substantially less than high school graduates.
A)True
B)False
Q5) Cannon Mills used to be virtually the only employer in Kannapolis, North Carolina.What is the name for a single hirer of labor, and how do wages and the number of jobs available compare to a competitive labor market?
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Chapter 21: Poverty, Inequality, and Discrimination
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Sample Questions
Q1) Explain why greater equality is inevitably gained at the expense of efficiency.
Q2) If income redistribution policy is based on the relative concept of poverty, the war on poverty
A) will be won quite soon.
B) is, by definition, unwinnable.
C) has not helped at all.
D) has already been won.
Q3) The essence of the trade-off between equality and efficiency is that
A) taxes and transfers reduce incentives to earn income, thus reducing GNP.
B) people are ideologically opposed to socialistic income redistribution.
C) redistribution violates the "work ethic."
D) people are prejudiced against blacks and women.
Q4) The existence of differences between the average earnings of men and women
A) proves the existence of economic discrimination.
B) may be partially due to factors other than economic discrimination.
C) proves that men on average invest more in their human capital than women do.
D) indicates that men are on average smarter than women.
Q5) Compared to a negative income tax, the federal personal income tax is thought of as a way to promote greater equality.Why?
Page 23
Q6) Is wage discrimination more likely in competitive or monopolistic markets?
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Chapter 22: An Introduction to Macroeconomics
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Sample Questions
Q1) You can generally distinguish an aggregate supply-caused recession from an aggregate demand-caused recession because
A) real GDP will rise in an aggregate supply recession.
B) the price level will fall in an aggregate supply recession.
C) the price level will fall in an aggregate demand recession.
D) real GDP will rise in an aggregate demand recession.
Q2) One major effect of the Great Depression was
A) it reaffirmed everyone's faith that capitalism was a self-correcting system.
B) it encouraged voters to limit the role of government.
C) the creation of the rational expectations school of economic theory.
D) a decreased faith in the ability of economies to automatically correct major problems.
Q3) In 2001, the first year of the Bush administration, Americans learned that recessions were a thing of the past.
A)True
B)False
Q4) What are intermediate goods? Why do economists exclude the value of intermediate goods while calculating national income?
Q5) What are the two basic principles of aggregation?
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Chapter 23: The Goals of Macroeconomic Policy
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Q1) Unemployment insurance has an important macroeconomic effect because it
A) props up aggregate supply.
B) props up aggregate demand.
C) props up aggregate exports.
D) helps balance the federal budget.
Q2) Older Americans living on a pension and therefore on a fixed income, tend to be made
A) better off when prices rise.
B) better off when inflation rates rise.
C) worse off when prices rise.
D) worse off when prices fall.
Q3) Someone who is out of work because they are between jobs is experiencing
A) frictional unemployment.
B) structural unemployment.
C) seasonal unemployment.
D) cyclical unemployment.
Q4) Frictional unemployment will typically be a short-term problem for someone between jobs.
A)True
B)False
Page 25
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Chapter 24: Economic Growth: Theory and Policy
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Q1) Because it is a market economy, in the United States all research and development is done by private business firms.
A)True
B)False
Q2) The U.S.government attempts to spur research and development activities through A) monetary policy.
B) interest rate policy.
C) export subsidy policy.
D) tax policy.
Q3) Foreign direct investment generally leads to technological advancements in poorer countries.
A)True
B)False
Q4) In general, countries with lower rates of growth of labor productivity have A) lower levels of productivity.
B) higher levels of productivity.
C) lower levels of educational attainment.
D) higher levels of natural resource endowments.
Q5) What is the price of investment? How are they related? What has to be done to increase investment?
26
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Chapter 25: Aggregate Demand and the Powerful Consumer
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Q1) Define the following terms and explain their importance in the study of macroeconomics:
a.consumer expenditures
b.investment spending
c.national income
d.transfer payments
Q2) In Figure 8-2, which of the following moves can be explained by a decrease in the price level?
A) A to B
B) A to C
C) A to D
D) A to E
Q3) Which of the following would be counted as investment in the national income accounts?
A) the purchase of a newly issued stock
B) the purchase of a newly built apartment house
C) the purchase of a newly minted coin
D) the payment of tuition at a private college
Q4) What is the marginal propensity to consume (MPC) and why is it important in predicting consumer behavior?
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Chapter 26: Demand-Side Equilibrium: Unemployment or Inflation?
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Sample Questions
Q1) If total spending is greater than the value of output, firms will A) cut prices.
B) decrease production levels.
C) tend to raise prices.
D) see inventories rise.
Q2) When demand for goods and services is high, firms are more likely to hire more workers.
A)True
B)False
Q3) In the basic 45-degree line model, what is the effect of an increase in the price level?
A) There will be movement to the left on the expenditure line.
B) There will be movement to the right on the expenditure line.
C) The expenditure line will shift downward.
D) The expenditure line will shift upward.
Q4) Inventory reductions are a signal indicating that
A) the economy is close to disaster.
B) the Dow Jones Industrial Average will fall.
C) manufacturers need to increase production.
D) All of the above are true.
28
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Chapter 27: Bringing in the Supply Side: Unemployment and Inflation?
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Q1) A recession can be expected to reduce inflation in the economy if the recession is caused by a(n)
A) increase in aggregate demand.
B) increase in aggregate supply.
C) decrease in aggregate demand.
D) decrease in aggregate supply.
Q2) Figure 10-9 illustrates a period of
A) economic growth and high inflation.
B) economic growth and low inflation.
C) economic recession and high inflation.
D) economic recession and low inflation.
Q3) For a given growth rate in aggregate supply, slower growth in aggregate demand will lead to lower inflation.
A)True
B)False
Q4) If wages or prices of other inputs change, the aggregate supply curve will shift to another position.
A)True
B)False
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Chapter 28: Managing Aggregate Demand: Fiscal Policy
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Sample Questions
Q1) Discuss some of the general conclusions arrived at about supply-side tax initiatives.
Q2) Explain why a change in income tax rates causes the consumption schedule to change slope.
Q3) Personal income taxes and corporate income taxes are examples of ____ taxes.
A) variable
B) sales
C) fixed
D) disposable
Q4) Assume that the federal government wishes to counteract inflation with a policy that has the smallest impact on the federal budget.Which of the following would you recommend?
A) Increase transfer payments.
B) Increase government purchases.
C) Decrease government purchases.
D) Decrease transfer payments.
E) Increase personal income taxes.
Q5) The addition of imports reduces the value of the multiplier.
A)True
B)False
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Chapter 29: Money and the Banking System
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Questions
Q1) Are funds available on a credit card included in a definition of the money supply?
A) Yes, because these funds can be used to pay for goods and services.
B) Yes, because these funds are included in M2.
C) No, because these funds are hard to measure total credit card spending.
D) No, because these funds are not a store of value.
Q2) Which of the following observations is not true?
A) Money is divisible.
B) The value of money never remains the same.
C) Money has an intrinsic value.
D) Money is the most liquid form of asset.
Q3) Which of the following definitions of the money supply is the least liquid?
A) M
B) M2
C) M3
D) L
Q4) What may limit the size of the money supply expansion to an amount less than indicated by the oversimplified deposit creation formula?
Q5) Explain the "too big to fail" doctrine.
Q6) What is the criticism leveled against deposit insurance by the FDIC?
Page 31
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Chapter 30: Monetary Policy: Conventional and
Unconventional
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Q1) We should expect to see home construction activity decrease when interest rates increase.
A)True
B)False
Q2) In its original role as "lender of last resort" the Fed was supposed to
A) lend money to people in regions without banks.
B) lend money to developing nations.
C) keep the money supply from drying up during financial panics.
D) provide mortgage lending to returning soldiers.
Q3) If the Fed sells a T-bill to an individual rather than to a commercial bank, how will this affect the money supply?
A) It will increase the money supply.
B) It will increase the checking account balance of the individual.
C) It will have no effect on the money supply.
D) It will decrease the money supply.
Q4) The Federal Open Market Committee consists of
A) the president and the Board of Governors.
B) Congresspeople, Senators, and the Board of Governors.
C) the Secretary of the Treasury and the Board of Governors.
D) the Board of Governors and five district bank presidents.
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Chapter 31: The Financial Crisis and the Great Recession
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Q1) The 2009 fiscal stimulus bill represented approximately
A) 5.5% of GDP and was designed to close the expansionary gap.
B) 5.5% of GDP and was designed to close the recessionary gap.
C) 7.8% of GDP and was designed to close the expansionary gap.
D) 7.8% of GDP and was designed to close the recessionary gap.
Q2) During the 2000 to 2006 time period, housing prices increased but only to a limited degree.
A)True
B)False
Q3) The Fed's loan that effectively nationalized AIG was approved by Congress. A)True
B)False
Q4) As a result of the Great Recession, job growth did not resume until A) September 2008
B) March 2009
C) September 2009
D) March 2010
Q5) Borrowed funds are used in financing every component of GDP.
A)True
B)False
33
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Chapter 32: The Debate over Monetary and Fiscal Policy
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Q1) Many economists maintain that
A) the aggregate supply curve is nearly horizontal at low levels of real GDP.
B) the aggregate supply curve is nearly vertical at very high levels of real GDP.
C) any change in aggregate demand will have most of its effect on output when economic activity is low but on prices when the economy is near full employment.
D) All of the above are correct.
Q2) The most common estimate of the value of transactions used to estimate velocity is A) real GDP.
B) total sales.
C) nominal GDP.
D) cash balances.
Q3) Which of the following policies would a Keynesian expect to produce the largest decrease in income?
A) a reduction in government spending of $100 billion
B) a decrease in transfer payments of $100 billion
C) an increase in government spending of $100 billion
D) a tax increase of $100 billion
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34
Chapter 33: Budget Deficits in the Short and Long Run
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Q1) Assume that a contractionary monetary policy has shifted the aggregate demand curve in Figure 16-2 from D D to D D .Fiscal authorities who wish to restore real GDP to the full-employment level will
A) run a budget surplus by increasing taxes or cutting government spending.
B) run a balanced budget to prevent the interest rate from rising and cutting off investment.
C) run a budget deficit by cutting taxes or increasing government spending.
D) ignore the change in monetary policy since it has no effect on fiscal policy.
Q2) The actual deficit is a poor measure of the government fiscal policy because it changes independently of intentional government policies.
A)True
B)False
Q3) The budget deficits of the 1980s and early 1990s differ from others in the post-World War II era in that they were
A) a result of the Fed rather than a change in fiscal policy.
B) temporary rather than structural, and pose no threat to the economy.
C) not contracted to fight a war or end a recession.
D) contracted as part of a program to plan the economy.
Q4) Give some arguments for and against a balanced budget requirement.
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Chapter 34: The Trade-Off between Inflation and Unemployment
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Q1) If the income tax system were indexed, a person whose nominal income went up from $30,000 to $33,000 in a year when the price index rose by 10 percent would pay
A) no increases in nominal income taxes.
B) no increases in real income taxes.
C) lower taxes in both real and nominal terms.
D) higher taxes in both real and nominal terms.
Q2) A movement from an upper point to a lower point on the Phillips curve shows
A) decrease in the inflation and decrease in the unemployment.
B) increase in the inflation and decrease in the employment.
C) increase in the inflation and increase in the employment.
D) decrease in the inflation and increase in the unemployment.
Q3) A vocal minority of economists, believers in the theory of rational expectations, insist that
A) the Phillips curve is downward sloping even in the short run.
B) the Phillips curve is vertical even in the short run.
C) a trade-off exists between inflation and unemployment even in the long run.
D) expansionary fiscal and monetary policy can reduce unemployment without creating inflation.
Q4) What is the effect of supply-side inflation on the short-run Phillips curve?
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Chapter 35: International Trade and Comparative Advantage
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Q1) From the graph in Figure 18-5 (curves show output per unit of labor input), one can infer that
A) Japan has an absolute advantage in TVs and computers, but a comparative advantage only in TVs.
B) Japan has only a comparative advantage in TVs.
C) Japan has an absolute advantage in both TVs and computers, but a comparative advantage only in computers.
D) China has a comparative advantage in computers.
Q2) Compare and contrast the effects of a quota and a tariff on imports.Be sure to include both short-run and long-run effects in your answer.
Q3) The United States is known worldwide as being a low tariff nation.
A)True
B)False
Q4) Suppose that a tariff is imposed on imports of minivans.Show graphically what the effect is in terms of price and quantity of imports.Be sure that your graph is completely and correctly labeled.What determines how much of the tariff is paid by the buyers of the minivans?
Q5) Why is comparative advantage rather than absolute advantage the basis for trade?
Q6) What is mercantilism? What are the draw backs of this doctrine?
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Chapter 36: The International Monetary System: Order or Disorder?
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Q1) International trade under a floating exchange rate system
A) has been trouble-free owing to the stabilizing role of speculators in the currency markets.
B) has suffered from so many problems that the volume of trade has declined significantly.
C) exposes businesses to unavoidable risks when exchange rates change.
D) has been subject to wild runs on currencies that were on the verge of devaluation.
Q2) Domestic monetary policy is essentially useless under
A) a floating exchange rate system.
B) a fixed exchange rate system.
C) the gold standard.
D) conditions of balance of payments surpluses.
Q3) The advantage of a system of fixed exchange rates over one where exchange rates are flexible is that
A) the government gains more control over the economy.
B) floating exchange rates impose risks on importers and exporters from unpredictable exchange rates.
C) exchange controls become unnecessary.
D) fiscal and monetary policy can focus more on domestic conditions.
Page 38
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Chapter 37: Exchange Rates and the Macroeconomy
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Q1) In the mid-1990s, real interest rates fell in the United States.This was the result of budget deficit
A) increases and tighter monetary policy.
B) increases and looser monetary policy.
C) reductions and looser monetary policy.
D) reductions and tighter monetary policy.
Q2) Which of the following is correct?
A) IM + X = G - T
B) I + G + T = S + X - M
C) I + G + X = S + T + IM
D) I + T + G = S - X - IM
Q3) An appreciation of the Japanese yen relative to the U.S.dollar will
A) increase aggregate demand in the United States.
B) increase aggregate supply in the United States.
C) increase aggregate demand in Japan.
D) decrease aggregate supply in Japan.
Q4) An exchange rate depreciation appears to consumers as a markdown on foreign products.
A)True
B)False
Page 39
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