Introduction to Microeconomics
Final Test Solutions
Course Introduction
Introduction to Microeconomics provides students with a foundational understanding of how individual consumers, firms, and markets operate within the broader economy. The course explores core concepts such as supply and demand, market equilibrium, consumer and producer behavior, price elasticity, and the role of government in regulating markets. Through real-world examples and analytical tools, students learn to assess how economic agents make choices under scarcity and how these choices shape outcomes in various market structures, including perfect competition, monopoly, and oligopoly. The course lays the groundwork for further study in economics and helps students develop critical thinking skills applicable to everyday life and policy discussions.
Recommended Textbook Principles of Economics 5th Edition by Joshua Gans
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Chapter 1: Ten Lessons From Economics
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Sample Questions
Q1) Lee accepts a contract to photograph a wedding on Saturday for $1000. She cancels plans to go to the zoo with her friends instead. Her opportunity cost of photographing the wedding is:
A) the $1000 she earns
B) the enjoyment of spending the day with her friends at the zoo
C) the $1000 less the enjoyment she would have received from being at the zoo with her friends
D) nothing, as she wasn't going to earn any money at the zoo
Answer: B
Q2) A biscuit shop in a shopping centre is open from 9 a.m. to 5 p.m., Monday to Friday. The cost of making and selling biscuits averages $0.50 per biscuit. At 5 p.m. on Friday evening, the owner still has several dozen unsold biscuits. The biscuits will not be saleable on Monday. What is the best price strategy for the biscuit shop to take? Justify your answer.
Answer: The owner should continually reduce the price of the biscuits so that all the biscuits are sold by closing time, even if the price falls below $0.50.
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Chapter 2: Thinking Like an Economist
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Sample Questions
Q1) An economy is being efficient if it is impossible to produce more of one good without producing less of another.
A)True
B)False
Answer: True
Q2) Why do economists use graphs?
Answer: Graphs serve two purposes. You've heard the old saying 'A picture is worth a thousand words'. Graphs offer a way to express ideas visually that might be less clear if described with equations or words. Also, graphs provide a way of finding how variables are in fact related in the world. Graphs provide one way of expressing the relationship among variables.
Q3) Refer to Graph 2-2. In the circular-flow diagram shown, which arrow shows the flow of spending by households?
A) A
B) B
C) C
D) D
Answer: A
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Chapter 3: Interdependence and the Gains From Trade
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Sample Questions
Q1) Refer to Graph 3-1. For Friday, the opportunity cost of 1 kg of coconuts is:
A) 2/3 kg of fish
B) 3 kg of fish
C) 1 kg of fish
D) 2 kg of fish
Answer: A
Q2) Refer to Table 3-3. The opportunity cost of one aeroplane for the US is:
A) four cars
B) three cars
C) 1/3 car
D) 1/4 car
Answer: A
Q3) Trade can make everybody better off because it:
A) leads to interdependence
B) increases labour costs
C) reduces absolute costs of production
D) allows people to specialise according to comparative advantage
Answer: D
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Chapter 4: The Market Forces of Supply and Demand
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Sample Questions
Q1) At the equilibrium price:
A) everyone in the market has been satisfied
B) it is possible for there to be a shortage
C) firms have an incentive to increase production
D) buyers have an incentive to buy more
Q2) A table showing how the quantity supplied of a product varies with its price, other things being equal, is a supply schedule and the graph of the supply schedule is called a supply curve.
A)True
B)False
Q3) Why would Qantas be interested in the price of its competitors in the trans-Tasman air route?
Q4) Refer to the Graph 4-6. If price were $25, quantity demanded would be:
A) 400
B) 500
C) 600
D) 800
Q5) Tastes and expectations are not determinants of individual demand.
A)True
B)False
6
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Chapter 5: Elasticity and Its Application
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Sample Questions
Q1) Suppose there is a change in the price of electricity. The demand for electricity will respond to this change less over the next month than over the next two years.
A)True
B)False
Q2) Consider the following pairs of goods. Which would you expect to have the more elastic demand? Why?
a. water or diamonds
b. insulin or nasal decongestant spray
c. food in general or breakfast cereal
d. gasoline over the course of a week or gasoline over the course of a year
e. personal computers or IBM personal computers
Q3) If an increase in the price of a good results in an increase in total revenue for the firm, then:
A) the supply of the good must be unit elastic
B) the supply of the good must be inelastic
C) the supply of the good must be elastic
D) nothing can be said about price elasticity of supply from the information given
Q4) What is elasticity and why do economists use the concept?
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Chapter 6: Supply, Demand and Government Policies
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Sample Questions
Q1) The minimum wage creates the most benefits for teenage workers as their wages are typically much lower than adult workers.
A)True
B)False
Q2) Refer to Graph 6-9. In which market will the majority of a tax be paid by the seller?
A) market a
B) market b
C) market c
D) all of the above
Q3) According to Graph 6-7, the equilibrium price in the market before the tax is imposed is:
A) $8.00
B) $6.00
C) $5.00
D) $3.50
Q4) What is the goal of rent control and what do economists think of rent control as a mechanism for achieving the goal?
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) Economists tend to see ticket scalping as:
A) a way for a few to profit while producing nothing of value
B) an inequitable interference in the orderly process of ticket distribution
C) a way of increasing the efficiency of ticket distribution
D) an unproductive activity which should be made illegal everywhere
Q2) If some buyers and sellers are prevented from trading, the efficient allocation will not occur.
A)True
B)False
Q3) Suppose there is a price decrease. Assuming that nothing else changes, explain what happens to producer surplus and illustrate your answer using a supply curve.
Q4) Which of the following would be true of the seller's cost?
A) the seller would be eager to sell her services at a price higher than her cost
B) the seller would refuse to sell her services at a price lower than her cost
C) the seller would be indifferent about selling her services at a price equal to her cost
D) all of the above are true
Q5) What is the relationship between the demand curve and the willingness to pay?
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Chapter 8: Application: The Costs of Taxation
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Sample Questions
Q1) One result of a tax on a good is that the equilibrium quantity sold tends to rise.
A)True
B)False
Q2) A major political problem with collecting taxes to finance government spending is that:
A) taxes make taxpayers worse off since government spending benefits no one
B) taxes make taxpayers worse off since government spending benefits only those on welfare
C) the people who pay the taxes are often not the same people who benefit from the government spending of tax funds
D) taxes reduce economic welfare more than the expenditure of tax funds benefits society
Q3) Which economic tool that can predict whether reducing a tax in a market will increase or decrease tax revenue?
Q4) What factors must be taken into account in order to fully understand the effect of taxes on economic wellbeing?
Q5) According to the Laffer curve, what will happen to tax revenue if tax rates are reduced?
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Chapter 9: Application: International Trade
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Sample Questions
Q1) Which of the following is NOT an argument for restricting trade?
A) the jobs argument
B) the national security argument
C) the infant industry argument
D) the efficiency argument
Q2) It is not necessary for a young industry to be protected in order to grow and succeed in international markets.
A)True
B)False
Q3) New Zealand is a large exporter of dairy products. This means that NZ dairy exporters are better off as a result of this trade but domestic customers are worse off.
A)True
B)False
Q4) Which of the following is not a benefit of trade?
A) an increased variety of goods
B) an ability to control domestic and world prices
C) lower costs through economies of scale
D) increased competition
Q5) As an economist, do any arguments justify trade restrictions? Explain.
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Chapter 10: Externalities
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Sample Questions
Q1) The height of the demand curve for aluminum for any given quantity, shows the:
A) willingness to pay of the marginal supplier
B) willingness to pay of the marginal buyer
C) the gains from trade
D) opportunity cost
Q2) Which of the following statements about a market that is affected by a positive production externality is correct?
A) the optimum level of output is less than the free market level of output and the optimum price is greater than the free market price
B) the optimum level of output is greater than the free market level of output and the optimum price is less than the free market price
C) the optimum level of output is greater than the free market level of output and the optimum price is greater than the free market price
D) the optimum level of output is less than the free market level of output and the optimum price is less than the free market price
Q3) Using a supply-demand diagram, demonstrate how a positive consumption externality leads to market inefficiency.
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Chapter 11: Public Goods and Common Resources
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Sample Questions
Q1) An ice-cream cone is an example of a public good.
A)True
B)False
Q2) The American alligator is no longer endangered and is farmed in several Southern US states. The Chinese alligator is highly endangered. Which species is a common resource and which species is more like a private good?
Q3) What combination of policies has the Singapore Government used to reduce road congestion and pollution? Why wouldn't this reduction in road congestion occur without government intervention?
Q4) When a good is excludable but not rival, it is an example of a:
A) natural monopoly
B) private good
C) public good
D) common resource
Q5) Sheep-grazing on a common land and wireless internet share a common problem. Explain what this is and what are its causes.
Q6) When human lives are at stake, should the government approve all projects that would increase safety to human beings?
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Chapter 12: The Design of the Tax System
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Sample Questions
Q1) When the government levies a tax on a company:
A) all the burden of the tax ultimately falls on owners
B) it is meeting all of the requirements for vertical equity
C) the company is more like a tax collector than a taxpayer
D) there are very few distortions to individual incentives
Q2) The extra tax that is paid by a taxpayer on their next additional dollar of income is called:
A) a deadweight loss
B) the marginal tax rate
C) a consumption tax
D) the average tax rate
Q3) State and local governments:
A) are funded entirely by their own tax base
B) receive the majority of their tax revenues from company income tax
C) are generally not responsible for collecting sales tax
D) receive some of their funds from the federal government
Q4) The most important taxes for state and local governments in Australia are individual and company income taxes.
A)True
B)False
14
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Chapter 13: The Costs of Production
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Q1) The average total cost curve reflects the shape of both the average fixed cost and average variable cost curves.
A)True
B)False
Q2) A firm's profit is equivalent to:
A) its total sales
B) average revenue minus average total cost
C) marginal revenue minus marginal cost
D) total revenue minus total cost
Q3) Implicit costs are costs that do not require an outlay of cash by the firm.
A)True
B)False
Q4) Economists class the short run as the time period:
A) up to three years
B) up to six months
C) up to three months
D) it takes for a firm to adjust its production facilities
Q5) Cost of capital can also be seen as implicit costs.
A)True
B)False
Page 15
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Chapter 14: Firms in Competitive Markets
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Sample Questions
Q1) The costs of investigating new factories can be regarded as a sunk cost
A)True
B)False
Q2) Refer to Graph 14-9. Assume that the market starts in equilibrium at point A in panel (b). An increase in demand from Demand<sub>0</sub> to Demand<sub>1</sub> will result in:
A) a new market equilibrium at point D
B) rising prices and falling profits for existing firms in the market
C) falling prices and falling profits for existing firms in the market
D) an eventual increase in the number of firms in the market and a new long-run equilibrium at point C
Q3) Refer to Graph 14-6. When market price is P<sub>1</sub>, a profit-maximising firm's total profit or loss can be represented by which area?
A) (P<sub>3</sub> - P<sub>1</sub>) * Q<sub>2</sub>; loss
B) P<sub>1</sub> * Q<sub>3</sub>; profit
C) (\(\Delta\)P<sub>2</sub> - P<sub>1</sub>) * Q<sub>1</sub>; loss
D) we can't determine it because we don't know the fixed costs
Q4) Discuss the process that induces firms to operate at efficient scale in the long run in a competitive market with free entry and exit.
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Chapter 15: Monopoly
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Sample Questions
Q1) A monopoly generates inefficiency because:
A) the high prices cause some people to choose to go without the good
B) the monopoly owner earns an abnormally large profit
C) the monopoly pays its workers very low wages
D) of all of the above
Q2) When an industry is a natural monopoly:
A) an increase in the number of firms may lead to a lower average cost
B) an increase in the number of firms will lead to a higher average cost
C) the firm has control over a natural resource
D) it is characterised by diseconomies of scale
Q3) When a monopolist is able to sell its product at different prices, it is engaging in:
A) exploitation of consumers
B) predatory pricing
C) price discrimination
D) price differentiation
Q4) When a firm operates under conditions of a monopoly, its price is unconstrained.
A)True
B)False
Q5) Is a publisher of a hugely popular book able to exercise monopoly power?
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Chapter 16: Business Strategy
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Sample Questions
Q1) Refer to Table 16-3. Since Robert and John operate as a profit-maximising monopoly in the market for water, what price will they charge to sell 80 litres of water?
A) $4
B) $9
C) $12
D) none of the above; the price is arbitrary when dealing with a monopoly market
Q2) Refer to Table 16-1. Assume that there are two profit-maximising ecotourist companies operating in this market. Further assume that they are not able to collude on the price and quantity of tickets they sell. What price will the tickets be sold at when this market reaches a Nash equilibrium?
A) $12
B) $18
C) $24
D) from the information given in the table, we can't determine price in a Nash equilibrium
Q3) Total profit for an oligopolist is more than that of a perfectly competitive firm.
A)True
B)False
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Chapter 17: Competition Policy
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Sample Questions
Q1) Resale price maintenance prevents retailers from competing on price.
A)True
B)False
Q2) Explain the practice of resale price maintenance and discuss why it is controversial.
Q3) 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.
Q4) Private ownership of a monopoly cannot benefit society.
A)True
B)False
Q5) What is resale price maintenance, predatory pricing and tying?
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Chapter 18: Monopolistic Competition
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Q1) In some countries, brand name fast-food restaurants are not allowed to operate. Such restrictions are likely to:
A) enhance the choice set of consumers among local restaurants
B) reduce barriers to entry in imperfect markets
C) reduce the competitive nature of local fast-food markets
D) enhance the social wellbeing of society
Q2) If a firm in a monopolistically competitive market uses advertising to decrease elasticity of demand for its product:
A) it will be able to increase its mark-up over marginal cost
B) the firm will eventually have to lower its price to remain competitive
C) it will increase the wellbeing of society
D) it will reduce average total cost
Q3) When McDonald's opens a store in Dhaka, Bangladesh, it has a strong incentive to enforce product quality consistent with that in stores in the US.
A)True
B)False
Q4) Summarise the main differences between monopolistic competition and perfect competition.
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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Q1) When a petrol station sells petrol, which of the following would qualify as capital? (i) the service attendants' time (ii) the physical space on which the station exists (iii) the petrol tanks and pumps
A) (i) only
B) (iii) only
C) (i) and (iii)
D) (ii) and (iii)
Q2) If hiring more workers causes each additional worker to contribute less to the total output:
A) diminishing profitability is present
B) diminishing marginal product is present
C) increasing marginal product is present
D) diminishing marginal cost is present
Q3) Capital income does not include income paid to households for the use of their capital.
A)True
B)False
Q4) Define the terms diminishing marginal product and the value of marginal product.
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Chapter 20: Earnings, Unions and Discrimination
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Q1) When economists study wages, they relate a worker's wage to those variables that are most subject to measurement. Which of the following are most likely to be omitted variables?
A) years of schooling, age and years of experience
B) ability, effort and chance
C) job characteristics, gender and race
D) gender, race and geographic location
Q2) Differences in human capital among groups of workers is possibly a reflection of discrimination.
A)True
B)False
Q3) Advocates of comparable worth claim that:
A) men are typically paid less than women for identical work
B) the existence of a gender gap in wage rates is evidence of discrimination
C) occupations are not gender specific
D) all of the above are true
Q4) What is the signalling theory of education?
Q5) Explain the role of job experience in explaining the difference between the average wages of men and women.
Page 22
Q6) Why can Roger Federer command a high sponsorship bonus?
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Chapter 21: Income Inequity and Poverty
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Q1) Discuss the life cycle hypothesis of income distribution.
Q2) The maximin criterion holds that public policies should aim to minimise the well-being of the most-fortunate person in society.
A)True
B)False
Q3) Using demand-supply analysis, show why some economists argue that an effective minimum wage will result in higher unemployment among those groups of workers affected by the minimum wage.
Q4) Economists who support minimum wage legislation are likely to believe that the: (i) demand for unskilled labour is relatively inelastic
(ii) demand for unskilled labour is relatively elastic (iii) supply of unskilled labour is relatively elastic
A) (i) only
B) (i) and (ii)
C) (i) and (iii)
D) (ii) and (iii)
Q5) What is meant by a perfectly equal distribution of income? Use a graph to depict such a situation.
Q6) Explain what information is contained in the poverty rate statistic.
Page 23
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Chapter 22: The Theory of Consumer Choice
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Q1) The combination of two goods a consumer chooses depends on his:
A) demand and his supply
B) preferences and his demand
C) budget constraint and his preferences
D) budget constraint and his supply
Q2) Which of the following is a property of indifference curves?
A) indifference curves have positive slopes
B) indifference curves that cross are helpful in explaining differences in consumption choices
C) indifference curves are bowed in toward the origin
D) indifference curves are always linear and downward-sloping
Q3) Explain the relationship between the budget constraint and an indifference curve at consumer optimum.
Q4) Because indifference curves are linear for each type of good, the marginal rate of substitution is the same at all points on a given indifference curve.
A)True
B)False
Q5) Which measure of elasticity can be weakly linked to Giffen goods?
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Chapter 23: Frontiers of Microeconomics
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Q1) Given asymmetric information, car insurance companies might encourage risky drivers to identify themselves by offering a high-premium policy without a deductible.
A)True
B)False
Q2) Gift-giving can be explained through:
A)screening
B)moral hazard
C)asymmetric information and signalling
D)none of the above
Q3) A difference in access to relevant knowledge is called:
A)an information symmetry
B)an information asymmetry
C)signalling
D)screening
Q4) In the case where landlords require tenants to pay security deposits:
A)the landlord is the agent and the tenant is the principal
B)the landlord is the principal and the tenant is the agent
C)both the landlord and the tenant are agents
D)both the landlord and the tenant are principals
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Chapter 24: Measuring a Nations Income
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Q1) The government reports that GDP increased at an annual rate of four per cent for the third quarter of 1999. This means that GDP was 4 per cent higher at the end of the third quarter than at the beginning of the quarter.
A)True
B)False
Q2) For each of the following events, ceteris paribus, state the effect on GDP (does it increase/decrease/remain unchanged?) and why.
A. A few small boat builders decide to move from the production of simple boats for leisure use to the production of yachts for the America's Cup.
B. You are short of cash and you need more exercise so you sell your car for $1000.
C. The Australian Tax Office gets tough on illegal unrecorded activity (the underground economy )
D. A major oil spill occurs off the coastline of an area with high unemployment levels. Many of the local unemployed are employed to help with the clean-up.
Q3) Define GDP and explain why some products are excluded.
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Chapter 25: Measuring the Cost of Living
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Q1) Indexation is only used in the payment of transfers.
A)True
B)False
Q2) The price index in 2011 is 120, and in 2012 the price index is 126. What is the inflation rate?
A) 5 per cent
B) 6 per cent
C) 26 per cent
D) The inflation rate is impossible to determine without knowing the base year
Q3) The substitution bias in the CPI results from the index not taking into account:
A) the substitution of new goods for old goods in the purchases of consumers
B) that consumers substitute towards goods that have become relatively less expensive
C) the substitution of new prices for old prices in the basket of goods from one year to the next
D) the substitution of quality for quantity in consumer purchases over time
Q4) The GDP deflator is the ratio of nominal GDP to real GDP.
A)True
B)False
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Chapter 26: Production and Growth
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Q1) An externality:
A) can only be positive
B) is the effect of one person's actions on the wellbeing of a bystander
C) is the external forces that increase the growth of GDP in a country
D) none of the above
Q2) In some East Asian countries, such as Hong Kong, Singapore and Taiwan, average income has risen about ____ per cent per year in recent decades.
A) -4 per cent
B) 7 per cent
C) -7 per cent
D) 18 per cent
Q3) The rule of 70 refers to the compulsory retirement age of employees, as they are no longer as productive as they once were.
A)True
B)False
Q4) Consumer spending encourages firms to produce more, and increases economic growth.
A)True
B)False
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Chapter 27: Saving, Investment and the Financial System
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Q1) If the real interest rate and the nominal interest rate was 3 per cent in 2005, then the inflation rate in 2005 would be:
A) 6 per cent
B) 3 per cent
C) 0 per cent
D) -3 per cent
Q2) The supply of loanable funds is upward-sloping because:
A) as the interest rate falls, the supply of loanable funds increases
B) as the interest rate falls, the supply of loanable funds falls
C) as the interest rate rises, the quantity of loanable funds supplied falls
D) as the interest rate rises, the quantity of loanable funds supplied rises
Q3) When setting up a business, you might need to purchase a building, computer, filing cabinets and furniture. This type of purchase would be called ____ by an economist.
A) capital investment
B) business consumption expenditures
C) investment in human capital
D) none of the above
Q4) Discuss whether the Rudd stimulus package to shield the economy was successful.
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Chapter 28: The Natural Rate of Unemployment
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Q1) A union is:
A) the decision of one firm to merge with another
B) an employee bargaining association limited to professional sports
C) a group of employers who band together for the purpose of bargaining with employees
D) a worker association that bargains with employers over wages and working conditions
Q2) What is the theory of efficiency wages?
Q3) Most spells of unemployment are:
A) short , and most unemployment observed at any given time is long-term
B) long , and most unemployment observed at any given time is long-term
C) short, and most unemployment observed at any given time is short-term
D) long , and most unemployment observed at any given time is short-term
Q4) An economy's natural rate of unemployment refers to the lowest rate of unemployment the economy experiences over the business cycle.
A)True
B)False
Q5) Suppose that a firm is faced with an excess supply of workers. What would the firm do? Explain with standard economic theory and with efficiency wage theory.
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Chapter 29: The Monetary System
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Q1) If a bank uses $80 of reserves to make a new loan when the reserve ratio is 25 per cent, then:
A) the money supply initially increases by $20
B) the money supply initially decreases by $80
C) the level of wealth in the economy will not have changed
D) the money supply will eventually increase by more than $20 but less than $80
Q2) Bank runs:
A) occur when the discount rate rises
B) occur when large numbers of depositors all try to withdraw their deposits at the same time
C) are only a problem in a 100 per cent reserve banking system
D) none of the above
Q3) Credit cards are:
A) equivalent to debit cards like the VISA debit
B) part of the M3 money supply
C) a method of deferring payment
D) used as a method of payment
Q4) The gold standard is used as the basis for a nation's money supply.
A)True
B)False
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Chapter 30: Inflation: Its Causes and Costs
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Q1) Inflation is the increase in the overall level of prices.
A)True
B)False
Q2) If between when you purchase an asset and sell it, the general price level and the price of the asset both double, then you have realised a:
A) capital gain
B) real gain
C) capital loss
D) real loss
Q3) What is the real interest rate under each of the following scenarios?
a. The nominal interest rate is 4 per cent and the inflation rate is 3 per cent
b. The nominal interest rate is 6 per cent and the inflation rate is -1 per cent
c. The nominal interest rate is 5 per cent and the inflation rate is 7 per cent
Q4) The classical dichotomy is:
A) the separation of money and goods markets
B) the theoretical separation of nominal and real variables
C) the separation of the monetary system and production system
D) the separation of goods and services produced today and goods and services produced tomorrow
Q5) What is the classical dichotomy, and to whom do we attribute it?
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Chapter 31: Open-Economy Macroeconomics: Basic Concepts
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Q1) General price levels in any country change to:
A) balance demand for goods and supply of goods
B) balance demand for services and supply of services
C) balance demand for money and supply of money
D) balance demand for goods and services, and supply of goods and services
Q2) The trade balance is:
A) domestically produced goods and services that are sold abroad
B) foreign-produced goods that are sold domestically
C) net exports
D) all goods and services available inside the country
Q3) Ceteris paribus, an increase in the level of imports desired by a nation's households leads to a decrease in GDP.
A)True
B)False
Q4) Which of the following statements is correct? In an open economy:
A) the country engages in trade but always has balanced trade
B) the country does not import at all and therefore always has a trade surplus
C) the country may have a deficit, surplus or zero balance in its trade balance
D) none of the above
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 an open economy, a government budget deficit:
A) lowers net foreign investment and pushes the trade balance towards deficit
B) raises net foreign investment and pushes the trade balance towards surplus
C) raises net foreign investment and pushes the trade balance towards deficit
D) lowers net foreign investment and pushes the trade balance towards surplus
Q2) In the macroeconomic model of the open economy developed in the text, if the central bank increases the money supply, the price level will:
A) rise, the real interest rate will rise, the nominal interest rate will rise, the real exchange rate will rise and the nominal exchange rate will rise
B) rise, the real interest rate will be unaffected, the nominal interest rate will rise, the real exchange rate will be unaffected and the nominal exchange rate will rise
C) rise, the real interest rate will be unaffected, the nominal interest rate will be unaffected, the real exchange rate will be unaffected and the nominal exchange rate will be unaffected
D) rise, the real interest rate will be unaffected, the nominal interest rate will rise, the real exchange rate will be unaffected and the nominal exchange rate will fall
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Chapter 33: Aggregate Demand and Aggregate Supply
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Q1) Most economists believe that in the short run:
A) real and nominal variables are highly interrelated
B) only real variables are highly interrelated
C) only nominal variables are highly interrelated
D) none of the above
Q2) The aggregate-demand curve is downward-sloping because of Pigou's wealth effect, Keynes's interest-rate effect, Mundell-Fleming's exchange-rate effect and Veblen's envy effect.
A)True
B)False
Q3) The long-run aggregate supply is called:
A) potential output
B) full-employment output
C) natural rate of output
D) all of the above
Q4) A decrease in the price of imported raw materials owing to appreciation of the $A would shift the AS-curve to the right.
A)True
B)False
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Chapter 34: The Influence of Monetary and Fiscal Policy on Aggregate Demand
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Q1) If an increase in interest rates reduces investment spending by $25m:
A) real GDP will decrease by $25 million
B) GDP will decrease by $25 million
C) GDP will decrease by more than $25 million
D) GDP will decrease by less than $25 million
Q2) The multipler > 1 represents a less than proportionate change on economic activity as a result of government spending.
A)True
B)False
Q3) An increase in the price level would:
A) shift the money demand to the left
B) shift the money demand to the right
C) shift the money supply to the right
D) shift the money supply to the left
Q4) Keynes's theory that the interest rate adjusts to bring money supply and money demand into balance is called:
A) the theory of sticky wages
B) the theory of sticky prices
C) the classical dichotomy theory
D) the theory of liquidity preference
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Chapter 35: The Short-Run Trade-Off Between Inflation and Unemployment
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Q1) The Phillips curve implies that the economy faces a:
A) long-run trade-off between price inflation and the level of real wages
B) long-run trade-off between inflation and unemployment
C) short-run trade-off between the actual unemployment rate and the natural rate of unemployment
D) short-run trade-off between inflation and unemployment
Q2) The natural rate of unemployment is often called the non-acceleration inflation rate of unemployment.
A)True
B)False
Q3) Most economists believe that:
Most economists believe that:
A) there is no short-run trade-off between inflation and unemployment
B) there is a temporary trade-off between inflation and unemployment
C) there is no long-run trade-off between inflation and unemployment
D) both A and B
E) both B and C
Q4) Explain how policymakers could use monetary and fiscal policies to move the economy along the Phillips curve in the direction of higher inflation and lower unemployment.
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Chapter 36: Five Debates Over Macroeconomic Policy
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Q1) Discretion in the conduct of monetary policy does not limit incompetence and abuse of power.
A)True
B)False
Q2) Proponents of the tax reform targeted at increasing the saving rate believe that:
A) consumption-based taxes are the only way to do so
B) the current taxation rates on savings are a disincentive for saving
C) discouraging savings through tax on savings creates more transfer-dependency
D) all of the above are correct
Q3) Fiscal policy works with a lag because of the long political process that governs changes in spending and tax
A)True
B)False
Q4) Advocates of governments' balanced budgets, believe that failure to do this will:
A) shift the burden of debt repayment to future generations
B) create possibly unsustainable levels of debt
C) potentially lower the standard of living in the future
D) all of the above
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