Introduction to Macroeconomics Practice Exam
Course Introduction
Introduction to Macroeconomics provides students with a foundational understanding of the economy as a whole, exploring key concepts such as gross domestic product (GDP), inflation, unemployment, economic growth, and fiscal and monetary policy. The course examines how different sectors interact within national and global economies, analyzing the roles of government, central banks, and international trade. Emphasis is placed on understanding economic indicators, policy-making processes, and their effects on aggregate demand and supply, equipping students to interpret current economic events and trends.
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) All economic transactions involve only buyers and sellers; no third parties are involved.
A)True
B)False
Answer: False
Q2) Suppose that a curve has a slope equal to zero at some point A.To the right of A, the curve may
A) have a positive slope.
B) have a negative slope.
C) be a straight line.
D) All of the above are correct.
Answer: D
Q3) Graphs are useful because of the way they
A) facilitate interpretation and analysis of data.
B) clarify interpretation and analysis of ideas.
C) permit a person to easily see relationships.
D) convey an idea that might otherwise take many words.
E) All of the above are correct.
Answer: E
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Chapter 2: The Economy: Myth and Reality
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Sample Questions
Q1) Annual incomes of James, Jack, and Stanley are $30,000, $50,000, and $80,000 and their tax rates are 10%, 20%, and 30% respectively.Which tax structure is this an example of?
A) Proportional tax
B) Progressive tax
C) Regressive tax
D) Digressive tax
Answer: B
Q2) A mixed economy is one that combines public and private ownership of property.
A)True
B)False
Answer: True
Q3) How does the United States compare to other advanced, industrialized economies on the issue of openness?
A) It is completely closed.
B) It is one of the less open of them.
C) It is about average in openness.
D) It is one of the more open of them.
E) It is the most open of them.
Answer: B
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Chapter 3: The Fundamental Economic Problem: Scarcity and
Choice
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Sample Questions
Q1) In the 1960s, the lyrics of a rock song asked, "Did you ever have to make up your mind to say yes to one and leave the others behind?" What economic principle was demonstrated in the song? Explain.
Answer: The principle is that of opportunity cost.Selecting one person to date and marry means saying no to all others-at least in societies that prohibit polygamy.
Q2) According to Baumol and Blinder, recognition of the usefulness of markets
A) labels a person as an apologist (defender) of capital.
B) extends to some socialist countries, for example, China.
C) should make totally free markets good for any society.
D) makes one a radical.
Answer: B
Q3) Adam Smith's book, one of the first systematic treatments of economics, was entitled
A) The Plan of the Ages.
B) The General Theory of Money, Taxes, and Income.
C) The Wealth of Nations.
D) Principles of Economics.
E) Concepts in Moral Philosophy.
Answer: C
Page 5
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Chapter 4: Supply and Demand: An Initial Look
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Sample Questions
Q1) If oranges and grapefruit are close substitutes, an increase in the price of oranges will shift the demand curve of
A) both products to the right.
B) both products to the left.
C) grapefruit to the right.
D) oranges to the left.
Q2) The law of increasing relative costs, depicted by the concavity of the production opportunities frontier, is most closely related to the
A) downward slope of the demand curve.
B) upward slope of the demand curve.
C) downward slope of the supply curve.
D) upward slope of the supply curve.
Q3) Refer to Exhibit 4-1.According to the data given, the equilibrium price of a weezil is A) $3.
B) $5.
C) $11.
D) $14.
Q4) Distinguish the terms price ceiling and price floor.
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Chapter 5: Consumer Choice: Individual and Market Demand
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Sample Questions
Q1) In Figure 5-4, the rightward shift in budget lines from the one containing point A to the one containing point B
A) resulted from equal price reductions in beer and wine.
B) resulted from an increase in the consumer's income.
C) could have been caused by income or price changes.
D) All of the answers above are correct possibilities.
E) None of the above is correct.
Q2) In Figure 5-2, consumer surplus is measured by the area
A) ABC.
B) OBCD.
C) OACD.
D) DCE.
Q3) In Figure 5-16, Adam is
A) better off at C than at D and able to afford either C or D.
B) better off at D than at C but only able to afford C.
C) equally well off at C and D and able to afford either C or D.
D) equally well off at C and D but only able to afford C.
Q4) If a good has "snob appeal," consumers may purchases less when the price falls.
A)True
B)False
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Chapter 6: Demand and Elasticity
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Sample Questions
Q1) A price increase will always cause a firm's revenue to fall, because they will sell less of the good.
A)True
B)False
Q2) Two goods with a low cross elasticity of demand are competing in the same market.
A)True
B)False
Q3) A unit-elastic demand curve will be concave toward the origin.
A)True
B)False
Q4) To avoid an increase in the local property tax, Sullivan County, New York, proposed a 2 percent hotel tax, which presumably would be passed on to tourists.The hotel industry argued that the tax would hurt hotel business.They are really arguing that
A) tourist and convention demand is inelastic, so hotel bookings will decline.
B) tourist and convention demand is very elastic, so hotel bookings will decline.
C) they would prefer a property tax increase instead.
D) it is unfair to tax people who do not live in the area.
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Chapter 7: Production, Inputs, and Cost: Building Blocks for Supply Analysis
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Sample Questions
Q1) In the short run the firm has at least one fixed input.
A)True
B)False
Q2) Total physical product is maximized if marginal physical product is zero.
A)True
B)False
Q3) In Table 7-3, diminishing returns set in with picker
A) 3.
B) 4.
C) 5.
D) 6.
E) 9.
Q4) The average cost curve shows the total cost divided by quantity produced for various levels of output.
A)True
B)False
Q5) Fixed cost increases when output rises.
A)True
B)False
Q6) Explain why the long-run average cost is typically U-shaped. Page 9
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Chapter 8: Output, Price, and Profit: The Importance of Marginal Analysis
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Sample Questions
Q1) Profit is maximized at the output at which marginal revenue exceeds marginal cost by the greatest margin.
A)True B)False
Q2) Firms need to know the shape of a demand curve to use marginal analysis.
A)True B)False
Q3) If marginal cost of an additional unit of output is greater than average cost, then average cost will rise.
A)True
B)False
Q4) A firm should keep producing output as long as the marginal profit is greater than zero, no matter how small it is.
A)True B)False
Q5) Marginal, average, and total figures are bound together.If any two are known, the third can be calculated.
A)True B)False
Page 11
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Chapter
The Tail that Wags the Dog?
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Sample Questions
Q1) A portfolio of stocks, bonds, and other investments helps reduce the risk of investment.
A)True
B)False
Q2) For a corporation, issuing bonds is riskier than issuing stock.
A)True
B)False
Q3) Stock markets deal
A) almost exclusively in newly issued stocks.
B) in previously issued stocks.
C) in both newly issued and previously issued stocks, but they do not deal in bonds.
D) in large amounts of both newly issued and previously issued stocks and bonds.
Q4) Suppose that many corporations begin issuing new bonds.Everything else being equal, what is most likely to happen to the interest rate?
A) It will increase.
B) It will decrease.
C) It will not change.
D) It will vary according to a random walk.
Q5) What is the stock market's role in achieving efficient use of resources?
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Chapter 10: The Firm and the Industry under Perfect Competition
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Sample Questions
Q1) The short-run supply curve of the perfectly competitive industry is found by summing the
A) AC curves of the individual firms in the industry.
B) AVC curves of the individual firms in the industry.
C) MC curves above AVC of the individual firms in the industry.
D) There is no short-run supply curve in a competitive industry.
Q2) In perfect competition, marginal revenue always equals
A) total revenue.
B) price.
C) average cost.
D) marginal fixed cost.
Q3) The perfectly competitive firm's short-run shutdown rule is to shut down immediately if
A) TR < TC.
B) TR < SRFC.
C) TR < SRVC.
D) TR < MC > Q.
Q4) What is the relationship between the long-run industry supply curve and the short-run supply curve in a perfectly competitive market?
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) A monopolist can earn a positive economic profit, even in the long run.
A)True
B)False
Q2) A monopolist sets price at $10 and sells 100 units.The corresponding marginal revenue is $5 and marginal cost $3.What recommendation regarding price and quantity would you give this monopolist? Use a graph if you wish.
Q3) What is true for monopoly that is not true for perfect competition?
A) The industry demand curve is downward sloping.
B) Profit is maximized where MR = MC.
C) The firm and the industry are exactly the same entity.
D) Positive economic profits may be earned in the short run.
Q4) Graphically show why one electric company can operate more cheaply than two.
Q5) How does the monopolist calculate profit per unit, and total profit?
Q6) There exist only two causes of monopoly: barriers to entry and government restrictions.
A)True
B)False
Q7) The software industry has traits in common with monopoly markets.
A)True
B)False
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Chapter 12: Between Competition and Monopoly
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Sample
Questions
Q1) In the past, the Department of Transportation allowed airline mergers that gave the merged airlines market shares of 79 and 82 percent, respectively, in their hub cities.The concept the DOT used to allow mergers where there was obvious concentration was most likely
A) the good trust principle.
B) contestability.
C) the efficient market principle.
D) the monopolistic competition principle.
Q2) Monopolistic competition is a market structure characterized by many small firms selling a homogeneous product.
A)True
B)False
Q3) Average cost is higher with a monopolistically competitive firm than with a perfectly competitive firm.
A)True
B)False
Q4) Explain the prisoner's dilemma case in game theory and its relevance to the maximin criterion.
Q5) Which oligopoly model leads to price rigidity? Graphically show why.
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Chapter 13: Limiting Market Power: Regulation and Antitrust
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Sample Questions
Q1) The antitrust laws are enforced by government agencies such as the Federal Trade Commission and the Department of Justice.
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) In many regulated industries, marginal cost will be
A) below average cost.
B) above total cost.
C) above marginal fixed cost.
D) below incremental cost.
Q4) Cross-subsidization implies that a loss from one product's sales will be made up by the profit from another product's sales.
A)True
B)False
Q5) Briefly review the history of antitrust legislation in the United States.
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Chapter 14: The Case for Free Markets I: The Price System
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Sample Questions
Q1) Laissez-faire refers to a situation in which there is ____ with the workings of the market system.
A) zero consumer involvement
B) zero government interference
C) minimal government interference
D) complete government interference
Q2) In order for the price system to have satisfied the exacting requirements for efficiency,
A) MU must equal MC for each and every commodity.
B) the average cost of producing each good must be equal to its MU.
C) the maximum possible of total economic profit must be produced.
D) every consumer's MU will be equal to marginal physical product
Q3) Keeping landing fees low at airports during the "peak" hours
A) perpetuates congestion during those hours.
B) is politically unpopular.
C) contributes to efficient allocation of airport facilities.
D) would lessen the problem of delayed flight landings.
Q4) Economics tells us which resource allocations are preferable.
A)True
B)False
Page 17
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Chapter 15: The Shortcomings of Free Markets
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Sample Questions
Q1) The principle of "comparable worth" asserts that people with comparable, if not identical, skills and responsibilities should receive the same pay.If this principle were to become law, it would tend to
A) reduce the problem of the "cost disease of services."
B) exacerbate the problem of the "cost disease" of the service sector.
C) be irrelevant to the "cost disease" problem.
D) eliminate the problem of externalities.
Q2) Part of the reason why barely used cars sell for much less than new cars is that
A) buyers and sellers have symmetric information about cars and both have less information about used cars than about new cars.
B) buyers and sellers have symmetric information about cars and both have more information about used cars than about new cars.
C) buyers have more information about used cars than sellers do.
D) sellers have more information about used cars than buyers do.
Q3) Which of the following observations is true?
A) A market produced with allocative efficiency if a monopoly exists.
B) A market can provide "public goods."
C) A market makes public and personal services inexpensive.
D) A market distributes income equally.
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Chapter 16: The Market's Prime Achievement: Innovation and Growth
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Sample Questions
Q1) If the marginal revenue from R&D is greater than the marginal cost, a profit maximizing firm will spend less on R&D.
A)True
B)False
Q2) Given the severe externality problems associated with basic research, governments rather than private firms tend to finance such research.
A)True
B)False
Q3) Provide examples of efforts undertaken by large businesses to contain the risks inherent in the innovation process.
Q4) Who is credited as the originator of modern microtheory of innovation?
A) Mountifort Longfield
B) Adam Smith
C) Wassily Leontief
D) Joseph Schumpeter
Q5) The presence of barriers to entry in innovation will ensure that profits from innovation are driven to zero.
A)True
B)False
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Chapter 17: Externalities, the Environment, and Natural Resources
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Sample Questions
Q1) The use of pollution charges to reduce pollution confronts the problem of
A) free riders who avoid revealing benefits from abatement.
B) determining specific individual damages and appropriate charges associated with pollutants.
C) necessarily lowering the price of the products.
D) requiring no agency to administer the tax.
Q2) Which of the following has also been called the command and control approach?
A) Direct controls
B) Voluntary compliance
C) Tradable emissions permits
D) Taxes on pollution
Q3) Voluntarism includes methods for dealing with pollution that A) carry no legal authority.
B) call the problems of pollution to the public's attention.
C) involve trying to persuade polluters to reduce or eliminate pollution voluntarily.
D) include all of the above.
Q4) In the last three decades, air quality in American cities has improved.
A)True
B)False
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Chapter 18: Taxation and Resource Allocation
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Sample Questions
Q1) What is personal income tax? On which principle does the federal government levy this tax?
Q2) The major objective of the 1986 tax reform was to: (i) enhance efficiency by lowering marginal tax rates; (ii) enhance equity by closing "loopholes."
A) i and ii
B) i but not ii
C) ii but not i
D) neither i nor ii
Q3) What is the controversy surrounding property taxes as a source for school funding?
Q4) Tax deductions were significantly ____ under the Tax Reform Act of 1986.
A) increased
B) decreased
C) expanded
D) left unchanged for individual taxpayers
Q5) State and local governments receive money from sales taxes, property taxes, and the federal government.
A)True
B)False
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Chapter 19: Pricing the Factors of Production
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Sample Questions
Q1) On January 1, 2006, a consumer borrowed $10,000 for a term of one year at an interest rate of 12 percent.How much principal and interest will the consumer pay back on January 1, 2007?
A) $10,000
B) $1,200
C) $8,929
D) $11,200
Q2) What is the distinction between innovation and invention?
Q3) The marginal productivity principle has relevance only in a capitalist economy, and not in a socialist system.
A)True
B)False
Q4) In a free market for rental housing, the average rental rate
A) includes a large amount of economic rent.
B) includes zero economic rent.
C) is entirely economic rent, since rental housing is fixed in supply.
D) is about 10 percent economic rent.
Q5) Explain how to derive the demand for an input.
Q6) Explain the distinction between investment and capital.
Q7) How does the market mechanism distribute income?
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Chapter 20: Labor and Entrepreneurship: The Human Inputs
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Sample Questions
Q1) In the collective bargaining process
A) supply and demand analysis is used to determine the wage.
B) the contract can legally cover only the wage or salary determined.
C) there is often heated discussion with threats of strikes and counterthreats of lockout.
D) the negotiation period is limited to thirty days.
Q2) What are the alternative views to the human capital theory with respect to the role of education?
Q3) Increased productivity of workers in manufacturing has A) increased employment in manufacturing.
B) increased employment in agriculture.
C) decreased employment in agriculture.
D) decreased employment in services.
E) increased employment in services.
Q4) The demand for labor is a derived demand.Employers hire workers until the A) wage rate equals the average product of labor.
B) wage rate equals the marginal revenue product of labor.
C) last worker hired adds nothing to total output.
D) average product of labor is zero.
Q5) Explain how the demand for labor is determined.
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Chapter 21: Poverty, Inequality, and Discrimination
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Sample Questions
Q1) The relative concept of poverty means that poverty will never be eliminated.
A)True
B)False
Q2) Many economists believe that
A) once a negative income tax system was in place, the United States could increase economic equality indefinitely without reducing economic efficiency.
B) a negative income tax would be less efficient than the current welfare system.
C) replacing the current welfare system with a negative income tax would increase both economic efficiency and economic equality.
D) None of the above is correct.
Q3) Define discrimination.Why does discrimination occur and what evidence exists that it does occur?
Q4) In 2009, the poverty line for a family of four was about $22,000.
A)True
B)False
Q5) Actual experiments show that negative income taxes destroy work incentives.
A)True
B)False
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Chapter 22: An Introduction to Macroeconomics
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Q1) During the Great Depression of the 1930s, how much did output fall between 1929 and 1933?
A) 5 percent
B) 10 percent
C) 20 percent
D) 30 percent
E) 50 percent
Q2) Growth in GDP systematically understates the growth in national well being because
A) ecological costs are netted out of GDP.
B) "bads" as well as "goods" get included in GDP.
C) investment is not included in GDP.
D) as a country gets richer, leisure time increases.
Q3) An example of an abstraction used in macroeconomics is
A) the price level.
B) total costs.
C) the tax rate.
D) the treasury bill rate.
E) proprietor's income.
Q4) What are the two basic principles of aggregation?
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Chapter 23: The Goals of Macroeconomic Policy
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Sample Questions
Q1) Which of the following groups would have the lowest unemployment rates?
A) high-school dropouts
B) married men
C) nonwhite teenagers
D) nonwhite women
Q2) Are there key differences between an increase in the capital stock and an improvement in the level of technology?
Q3) The amount of goods and services the economy could produce if the labor force is fully employed is called
A) nominal GDP.
B) real GDP.
C) actual GDP.
D) potential GDP.
Q4) Real GDP is the product of the
A) total hours of work times the labor force.
B) labor force times the output per hour.
C) nation's capital stock times the output per hour.
D) total hours of work times the output per hour.
Q5) High unemployment is socially wasteful.Why?
Q6) Distinguish between real rate of interest and nominal rate of interest.
26
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Chapter 24: Economic Growth: Theory and Policy
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Q1) An increase in the number of hours worked would
A) shift the production function upward.
B) shift the production function downward.
C) shift the production function outward.
D) not shift the production function.
Q2) Falling energy prices could explain rising labor productivity in the 1990s
A) and the 1980s.
B) and the 1970s.
C) but not the 1980s.
D) but not the 1970s.
Q3) The financing of investment spending is often made possible by A) consumer spending.
B) money supply creation.
C) borrowing.
D) tax reductions.
Q4) The fastest growing productivity increases in the United States have occurred in the personal services sector.
A)True
B)False
Q5) Describe the three pillars of productivity growth.
Page 27
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Chapter 25: Aggregate Demand and the Powerful Consumer
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Q1) Which of the following is not part of the investment component of GDP?
A) residential construction
B) plant, equipment, and software
C) net imports
D) business structures
Q2) Given the scatter diagram in Figure 8-1, how much will consumption decrease if the price level rises by 5 percent?
A) $50 billion
B) $100 billion
C) $200 billion
D) cannot be determined
Q3) Assume that consumption in the United States is $9,000 billion in 2009.If the MPC is 0.8 and disposable income increases by $1,000 billion in 2010, then the level of consumption in 2010 will be
A) $10,000 billion.
B) $9,800 billion.
C) $9,000 billion.
D) $7,200 billion.
Q4) What is disposable income? How is it calculated?
Page 28
Q5) Explain why national income and domestic product must be equal.
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Chapter 26: Demand-Side Equilibrium: Unemployment or Inflation?
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Sample Questions
Q1) If saving exceeds investment, then the level of GDP will A) increase.
B) remain constant.
C) decrease.
D) rise above potential GDP.
Q2) The aggregate demand curve
A) slopes upward.
B) slopes downward.
C) is perfectly vertical.
D) is perfectly horizontal.
Q3) If retail managers are ordering extra merchandise from their wholesale distributors, then it is probably true that A) total output is greater than total spending.
B) price levels are decreasing.
C) inventory levels are increasing.
D) inventory levels are decreasing.
Q4) High unemployment and high rates of inflation are examples of coordination successes.
A)True B)False
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Chapter 27: Bringing in the Supply Side: Unemployment and Inflation?
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Q1) Wage increases are resisted by firms because they decrease profits.
A)True
B)False
Q2) Decreasing profit margins indicate a need to increase production in an economy.
A)True
B)False
Q3) Distinguish between a movement along the aggregate supply curve and a shift of the entire aggregate supply curve.What factors cause each to occur?
Q4) In Figure 10-3, both graphs (a) and (b) indicate that the economy is experiencing a(n)
A) recessionary gap of RE.
B) recessionary gap of RG.
C) inflationary gap of RG.
D) inflationary gap of RE.
Q5) If the price level decreases, what will happen to the level of real GDP supplied?
A) It will usually decrease.
B) It will usually increase.
C) Nothing.
D) It will decrease at first and then increase.
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Chapter 28: Managing Aggregate Demand: Fiscal Policy
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Q1) An increase in income taxes was part of President George W.Bush's plan in 2001 and 2008 to increase aggregate demand.
A)True
B)False
Q2) If a "liberal" wanted to increase aggregate demand, which of the following would she tend to favor?
A) An increase in government spending, because it will increase the size of the public sector.
B) A decrease in transfer payments, because it keeps the public sector small.
C) An increase in transfer payments, because it has a larger multiplier than tax changes.
D) A decrease in taxes, because it makes the public sector smaller.
Q3) Which of the following is one of the main features of our modern economy that helps ensure against a repeat performance of the Great Depression?
A) transfer payments
B) outsourcing
C) multiplier
D) personal income tax
Q4) How do transfer payments function as negative taxes?
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Chapter 29: Money and the Banking System
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Q1) One principle that nearly all economists agree on when defining money is that it should be
A) spendable.
B) liquid.
C) accepted as payment.
D) easily transferable.
E) All of the above are correct.
Q2) Which of the following are included in the M2 definition of the money supply?
A) cash and currency
B) checkable deposits
C) money market deposit accounts
D) money market mutual funds
E) All of the above are included.
Q3) Which of the following was a result of the Dodd-Frank Act?
A) restricted bank activities
B) established a new consumer protection agency
C) tougher regulations for banks
D) All of the above
Q4) What is fiat money? Why is fiat money important in the United States today?
Q5) What is a barter system? What are the drawbacks of this system?
Page 32
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Chapter 30: Monetary Policy: Conventional and
Unconventional
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Q1) The Fed's purchase and sale of government securities is known as
A) margin operations.
B) open market operations.
C) bank reserve operations.
D) cash management operations.
Q2) ____ is the rate that applies when banks borrow and lend reserves to one another.
A) The repo rate
B) The discount rate
C) The coupon rate
D) The federal fund rate
Q3) Which of the following will increase interest rates in the short run?
A) an decrease in reserve requirements
B) open market sales by the Fed
C) a decrease in real GDP
D) an decrease in the price level
Q4) Personal consumption spending is the most sensitive component of aggregate demand to monetary policy.
A)True
B)False
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Chapter 31: The Financial Crisis and the Great Recession
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Q1) Assume that Sharon purchases $5,000 worth of a stock.To do so she uses $1,000 of her own money and borrows the remaining $4,000 at a 7.0% interest rate.If the stock's value decreases by 10% in one year and she has to sell the stock at that time, what is her rate of return?
A) -10%
B) -50%
C) -78%
D) -156%
Q2) An increase in the price of a particular bond implies an increase in the interest rate for that bond.
A)True
B)False
Q3) Mortgage-backed securities became a significant issue because I.Housing prices fell across all regions.
II.These securities were not as widely distributed as previously thought.
A) I above only
B) II above only
C) both I and II above
D) neither I nor II above
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Chapter 32: The Debate over Monetary and Fiscal Policy
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Q1) List the reasons why the actual multiplier, which is estimated to be less than 2 for the U.S.economy, is much less than what the oversimplified formula suggests.
Q2) If financial news broadcasts reported that inflation was likely to rise significantly next year, what would most likely happen to the velocity of circulation?
A) It will decrease.
B) It will increase.
C) It will remain constant.
D) Velocity is unrelated to inflation.
Q3) Which is likely to be larger, the velocity of M or M2?
A) M , because M2 is a larger number.
B) M2, because M is a larger number.
C) The velocities of both are approximately equal.
D) The numbers of velocity switch in relative size.
Q4) The principal factor determining velocity is the
A) level of income.
B) frequency with which paychecks are distributed.
C) frequency with which taxes are paid.
D) growth rate of real output.
Q5) What are the important factors which determine the velocity of money?
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Chapter 33: Budget Deficits in the Short and Long Run
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Q1) The United States need never pay off the national debt; it can simply refinance the debt when it comes due.The flaw in thinking that the government must pay it off is based on the fallacy of
A) benefit-cost ratio.
B) post hoc, ergo propter hoc.
C) composition.
D) a priori expectations.
Q2) Because the personal income tax is an automatic stabilizer, A) inflationary gaps are impossible.
B) the budget deficit grows during a recession.
C) the deficit needed to cure a recessionary gap increases.
D) the structural deficit grows during a recession.
E) All of the above are correct.
Q3) How sensitive is the structural deficit to the state of the economy?
A) It is insensitive to the state of the economy.
B) The structural deficit changes cyclically with the economy.
C) Changes in the structural deficit trigger opposite swings in the economy.
D) The structural deficit changes countercyclically with the economy.
Q4) Why do economists view structural budget deficit as a good measure of the direction of the fiscal policy?
Page 36
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Chapter 34: The Trade-Off between Inflation and Unemployment
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Q1) If an economy's resources are fully employed, A) a great deal of unemployment will be needed to achieve even a small reduction in inflation.
B) the aggregate supply curve (and thus the Phillips curve) will be flat.
C) the aggregate supply curve (and thus the Phillips curve) will be steep.
D) Both a and c are correct.
Q2) If workers underestimate inflation, the aggregate supply curve will tend to be
A) upward sloping.
B) downward sloping.
C) vertical.
D) horizontal.
Q3) Given the situation in graph (1) in Figure 17-3, what movement would be expected in graph (2) from the economy's self-correcting mechanism?
A) A to B
B) A to D
C) C to E
D) D to C
Q4) Who gains if inflation turns out to be higher than expected: the lender or borrower? What happens if inflation turns out to be lower than expected?
Page 37
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Chapter 35: International Trade and Comparative Advantage
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Q1) Tariffs are different from quotas because they
A) increase government revenue.
B) increase profits.
C) increase the quantity traded.
D) place all the burden on foreigners.
Q2) A country's comparative advantage can be illustrated by the graph of the production possibilities frontier.
A)True
B)False
Q3) Nothing raises the standard of living more than a greater
A) abundance of goods.
B) effort of production.
C) population.
D) number of import tariffs.
E) All of the above are true.
Q4) Absolute advantage states that a country has an advantage over another if it can produce a good with fewer resources.
A)True
B)False
Page 38
Q5) How can tariffs lead to a situation in which all parties to a trade lose?
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Chapter 36: The International Monetary System: Order or Disorder?
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Q1) The purchasing power parity theory of exchange rate determination states that A) in the short run, rates will adjust to parity.
B) in the long run, the rate reflects differences in price levels between the two countries.
C) in the long run, a government agency sets the rate at parity.
D) in the short run, the cost of labor really sets the exchange rate.
Q2) Suppose that a nation has adopted a fixed exchange rate with another country, and has a persistent trade deficit.What is most likely to happen?
A) a gradual increase in the value of its currency
B) a gradual decrease in the value of its currency
C) a "run" on its currency and a sudden appreciation
D) a "run" on its currency and a sudden devaluation
Q3) If the quantity of euro demanded were greater than the quantity supplied, then the price of the
A) euro would rise.
B) euro would fall.
C) dollar would rise.
D) euro would be in equilibrium.
Q4) Explain three factors that would cause the dollar to appreciate.
Page 39
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Chapter 37: Exchange Rates and the Macroeconomy
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Q1) If European economies experience a strong economic recovery, U.S.net exports will A) increase and AD will shift outward.
B) increase and AD will shift inward.
C) decrease and AD will shift inward.
D) decrease and AD will shift outward.
Q2) A main reason why the U.S.trade deficit grew so large from 1997 to 2000 was that
A) Congress removed all tariffs and trade restrictions on imports.
B) NAFTA was introduced and Mexican exports flooded the United States.
C) the international value of the dollar fell during the 1990s, which encouraged U.S.exports.
D) the international value of the dollar rose in the last half of the 1990s, which encouraged U.S.imports and damaged U.S.exports.
Q3) In the spring of 2002, the United States imposed tariffs on imported steel to protect the jobs of American steel workers and protect the production of the American steel industry.Why might this policy not work to increase overall employment in the United States?
Q4) Explain how exchange rate changes affect aggregate demand.
Q5) Discuss the opposing points of view on U.S.trade deficit.
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