Macroeconomics Final
Test Solutions
Course Introduction
Macroeconomics is a branch of economics that examines the behavior, structure, and performance of an entire economy rather than individual markets. This course explores key concepts such as national income, gross domestic product (GDP), inflation, unemployment, fiscal and monetary policy, economic growth, and international trade. Students will develop an understanding of how government policies and global events impact economic activity on a national and international scale, using theoretical models and real-world data to analyze macroeconomic issues and trends.
Recommended Textbook Essentials of Economics 4th Edition by R. Glenn Hubbard
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Page 2
Chapter 1: Economics: Foundations and Models
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Sample Questions
Q1) Which of the following is motivated by an equity concern?
A)Some U.S.colleges have cut back on merit scholarships since these programs siphon money from need-based programs, thus harming lower-income students with greater financial need.
B)Following the removal of subsidies in urban water use, household demand for water decreased quite significantly in Bogor, Indonesia.
C)In November 2003, the Federal Communications Commission implemented the "local number portability" rule which gives cell phone customers the option of keeping their number when they switch carriers within the same geographic region.
D)The United States protects intellectual property rights, allowing inventors to prevent others from using their inventions without payment.
Answer: A
Q2) In economics,the term "equity" means
A)everyone has an equal standard of living.
B)the hardest working individuals consume all they want.
C)only elected officials have high standards of living.
D)economic benefits are distributed fairly.
Answer: D
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Chapter
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Sample Questions
Q1) Refer to Figure 2-8.What is the opportunity cost of 80 dozen orchids?
A)0 roses
B)2.5 dozen roses
C)40 dozen roses
D)200 dozen roses
Answer: D
Q2) Refer to Figure 2-1.________ is (are)inefficient in that not all resources are being used.
A)Point A
B)Point B
C)Point C
D)Points A and C
Answer: A
Q3) A decrease in population shifts the production possibility frontier outwards over time.
A)True
B)False
Answer: False
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Chapter 3: Where Prices Come From: the Interaction of
Demand and Supply
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Sample Questions
Q1) Refer to Figure 3-8.The graph in this figure illustrates an initial competitive equilibrium in the market for apples at the intersection of D and S (point A) If there is a shortage of apples how will the equilibrium point change?
A)The equilibrium point will move from A to B.
B)The equilibrium point will move from A to C.
C)There will be no change in the equilibrium point.
D)The equilibrium point will move from A to E.
Answer: C
Q2) In most countries in South America,the legal driving age is 18.If the legal driving age in the United States was raised from 16 to 18,how would this affect the market for new and used automobiles? What would happen to the equilibrium price and quantity of new and used automobiles?
Answer: The demand for new and used automobiles wold decrease,which would decrease the equilibrium price and quantity.
Q3) Explain the difference between a normal good and an inferior good.
Answer: A normal good is something for which the demand increases when income rises and the demand decreases when income falls.An inferior good is something for which the demand decreases when income rises and the demand increases when income falls.
Page 5
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Chapter 4: Market Efficiency and Market Failure
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Sample Questions
Q1) A negative externality exists if
A)there are price controls in a market.
B)there are quantity controls in a market.
C)the marginal social cost of producing a good or service exceeds the private cost.
D)the marginal private cost of producing a good or service exceeds the social cost.
Q2) Refer to Figure 4-6.What area represents producer surplus at the equilibrium price of P ?
A)A + B + D
B)D + E
C)D + E + G + H
D)A + B + C + D + E
Q3) What is a private benefit from consumption? What is a social benefit from consumption? When is the private benefit from consumption equal to the social benefit from consumption?
Q4) An external benefit is created when you pursue a college education. A)True B)False
Q5) What area on a supply and demand graph represents producer surplus?
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Chapter 5: The Economics of Health Care
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Sample Questions
Q1) What is health insurance?
Q2) Refer to Figure 5-5.If consumers paid the full price of medical services,the equilibrium quantity would be
A)400.
B)800.
C)1,200.
D)>1,200.
Q3) Of the following high-income countries,which has the lowest number of MRI units per 1 million population?
A)Canada
B)Japan
C)the United Kingdom
D)the United States
Q4) A doctor pursuing his own interests rather than the interests of his patients is an example of the principal-agent problem.
A)True
B)False
Q5) How can improvements in health increase a country's total income?
Q6) Why might a young,healthy person choose not to buy health insurance?
Page 7
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Chapter 6: Firms, the Stock Market, and Corporate Governance
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Sample Questions
Q1) Mortgages issued to borrowers whose credit histories include failures to make payments on bills are known as ________ mortgages.
A)catastrophic
B)variable rate
C)subprime
D)Alt-A
Q2) If a corporate bond with a face value of $2,000 pays yearly coupon payments of $50,what is the coupon rate?
A)2.5%
B)4%
C)25%
D)40%
Q3) If the personal assets of the owners cannot be claimed if the business is bankrupt,the owners are said to have
A)unlimited liability.
B)a proprietorship type of business.
C)limited liability.
D)a partnership type of business.
Q4) Define a sole proprietorship.
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Chapter 7: Consumer Choice and Elasticity
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Sample Questions
Q1) All of the following products are most likely to have significant network externalities except
A)cat food.
B)cell phones.
C)popular board games.
D)fax machines.
Q2) For which of the following products is social influence likely to have the greatest impact?
A)toothpaste
B)restaurants
C)high-blood pressure medication
D)school textbook
Q3) If the demand for a life-saving drug was perfectly inelastic and the price doubled,the quantity demanded would A)also double.
B)decrease by 50%.
C)be cut in half.
D)remain constant.
Q4) What is marginal utility and what is the law of diminishing marginal utility?
Q5) Briefly explain the economic concept of elasticity.
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Chapter 8: Technology, production, and Costs
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Sample Questions
Q1) The long-run average cost curve shows
A)the lowest average cost of producing every level of output in the long run.
B)where the most profitable level of output occurs.
C)the average cost of producing where diminishing returns are not present.
D)the plant size or scale that the firm should build.
Q2) The basic activity of a firm is
A)to set the prices of its products as high as possible.
B)to compete with other firms that produce similar products.
C)to provide jobs for its employees.
D)to use inputs to produce outputs of goods and services.
Q3) Which of the following are implicit costs for a typical firm?
A)the cost of labor
B)the opportunity cost of capital owned and used by the firm
C)the cost of energy used in production
D)a business licensing fee
Q4) As output increases,the distance between average total cost and average variable cost increases.
A)True
B)False
Q5) In economics,what is the difference between the short run and the long run?
Page 10
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Chapter 9: Firms in Perfectly Competitive Markets
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Sample Questions
Q1) Refer to Figure 9-5.If the firm's fixed cost increases by $1,000 due to a new environmental regulation,what happens in the diagram above?
A)All the cost curves shift upward.
B)Only the average variable cost and average total cost curves shift upward; marginal cost is not affected.
C)Only the average total cost curve shifts upward; the marginal cost and average variable cost curves are not affected.
D)None of the curves shifts; only the fixed cost curve, which is not shown here, is affected.
Q2) The minimum point on the average variable cost curve is called the loss-minimizing point.
A)True
B)False
Q3) Refer to Figure 9-5.What is the minimum price the firm requires to produce output?
A)$20
B)$14
C)$5
D)It cannot be determined
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Chapter 10: Monopoly and Antitrust Policy
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Sample Questions
Q1) Some economists believe that the economy benefits from firms having market power.Which of the following is an argument that has been made to support this position?
A)Large firms are better able than small firms to spend funds on research and development required to develop new products.
B)Competition is very rare in the U.S.economy and few new products are produced by smaller, competitive firms.
C)Research has shown that the deadweight loss from monopolies is a small percentage of the value of production in the United States.
D)Large firms can afford to lobby the U.S.government in order to impose restrictions on imports and reduce the outsourcing of jobs to other countries.
Q2) Refer to Figure 10-15.Erickson Power is a natural monopoly because
A)it is a power company and all power companies are natural monopolies.
B)average total cost is still declining when it intersects demand.
C)of its continually declining marginal revenue curve as output rises.
D)its marginal cost lies entirely below its long-run average cost.
Q3) Explain why the monopolist has no supply curve?
Q4) Identify two ways by which the government controls monopolies?
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Page 12
Chapter 11: Monopolistic Competition and Oligopoly
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Sample Questions
Q1) Refer to Figure 11-15 to answer the following questions.
a.What is the profit-maximizing output level?
b.What is the profit-maximizing price?
c.What is the average total cost at the profit-maximizing output level?
d.What area represents the firm's profit?
e.At which output level are economies of scale exhausted?
f.Does this graph most likely represent the long run or the short run? Why?
Q2) Refer to Figure 11-4.What is the area that represents the total variable cost of production?
A)0P aQ
B)0P bQ
C)P abP
D)P bdP
Q3) Refer to Figure 11-10.to answer the following questions.
a.What is the profit-maximizing output level?
b.What is the profit-maximizing price?
c.At the profit-maximizing output level,how much profit will be realized?
d.Does this graph most likely represent the long run or the short run? Why?
Q4) How does the demand curve for an oligopoly firm differ from the demand curves for firms in competitive market structures?
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Chapter 12: Gdp: Measuring Total Production and Income
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Sample Questions
Q1) Refer to Table 12-25.Given the following information,calculate the rate of increase in the price level from 2012 to 2013.Use the percent change in the GDP deflator.
Q2) Refer to Table 12-22.Consider the data above for a simple economy: Using 2009 as the base year,calculate nominal GDP,real GDP,and the GDP deflator for 2013.Show your work.
Q3) Refer to Table 12-16.Given the information above,what can we say has happened in the economy from 2012 to 2013?
A)The price level has fallen.
B)The price level has risen.
C)The price level has remained constant.
D)Not enough information is available to determine what has happened to prices.
Q4) The "underground economy" is also referred to as
A)the informal sector.
B)the formal sector.
C)the halfway economy.
D)the net domestic product economy.
Q5) Why does inflation make nominal GDP a poor measure of the increase in total production from one year to the next?
Q6) Give two reasons why GDP does not reflect total production in an economy.
Page 14
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Chapter 13: Unemployment and Inflation
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Sample Questions
Q1) Why might firms pay wages that are above the equilibrium wage in a market?
A)to increase the productivity of their workers
B)to reduce the unemployment rate
C)to encourage workers to form labor unions
D)to reduce profit
Q2) Refer to Table 13-6.Consider the following values of the consumer price index for 1996,1997,and 1998: The inflation rate for 1997 was equal to
A)1.2 percent.
B)2.0 percent.
C)2.5 percent.
D)4.0 percent.
Q3) Refer to Table 13-23.The table above lists the actual minimum wage and CPI in 1974 and in 2012.Using the above table,calculate the real minimum wage for 1974 and 2012.Calculate the rate of growth of the real minimum wage from 1974 to 2012.Are workers better off in terms of the purchasing power of a dollar in 1974 or 2012? Explain why.
Q4) Explain what economists mean by full employment and why this rate of unemployment is not zero.
Q5) Describe how inflation can be costly even if it is anticipated.
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Chapter 14: Economic Growth, the Financial System, and Business Cycles
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Sample Questions
Q1) The lengths of the recession and expansion phases and which sectors of the economy are most affected will rarely be the same in any two business cycles.
A)True
B)False
Q2) Under which of the following circumstances would the government be running a deficit?
A)G = $5 trillion T = $5 trillion
TR = $1 trillion
B)G = $5 trillion T = $7 trillion
TR = $1 trillion
C)G = $7 trillion T = $7 trillion
TR = $0
D)G = $7 trillion T = $10 trillion
TR = $3 trillion
Q3) Public saving in the economy can be increased by A)lowering taxes.
B)raising government spending.
C)raising taxes.
D)raising transfer payments.
Q4) Carefully define the two categories of saving in the economy.
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Chapter 15: Aggregate Demand and Aggregate Supply Analysis
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Sample Questions
Q1) Explain the three reasons the aggregate demand curve slopes downward.
Q2) Changes in the price level
A)increase the level of aggregate supply in the long run.
B)decrease the level of aggregate supply in the long run.
C)do not affect the level of aggregate supply in the long run.
D)increase the level of aggregate supply in the long run only at very high levels of output.
Q3) The impact of Hurricane Katrina on consumers in the economy was to make them very pessimistic about their future incomes.How does this increased pessimism affect the aggregate demand curve?
A)This will move the economy up along a stationary aggregate demand curve.
B)This will move the economy down along a stationary aggregate demand curve.
C)This will shift the aggregate demand curve to the left.
D)This will shift the aggregate demand curve to the right.
Q4) A decrease in investment causes the price level to ________ in the short run and ________ in the long run.
A)increase; increase further
B)increase; decrease
C)decrease; decrease further D)decrease; increase
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Chapter 16: Money, banks, and the Federal Reserve System
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Q1) Which of the following is not a major function of the Federal Reserve System?
A)lender of last resort
B)clearing checks between banks
C)setting income tax rates
D)controlling the money supply
Q2) Among potential stores of value,money
A)offers the highest rate of return.
B)increases in value during periods of inflation.
C)has the advantage of being the most liquid asset.
D)provides more services than the other assets.
Q3) In an economy with ________,there are more prices than in an economy with ________.
A)barter; money
B)money; barter
C)fiat money; commodity money
D)fiat money; barter
Q4) Money cannot serve as a medium of exchange unless it also serves as a store of value.Is this statement true or false? Explain.
Q5) How do open market operations work?
Q6) What is the principle monetary policy tool used by the Fed.Why?
Page 18
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Chapter 17: Monetary Policy
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Q1) Suppose that the economy is producing below potential GDP and the Fed implements the correct change in monetary policy,but not until after the economy has passed the trough of the recession.Then
A)the Fed's contractionary policy will result in too large of a decrease in GDP.
B)the Fed's contractionary policy will result in too small of a decrease in GDP.
C)the Fed's expansionary policy will result in too small of a decrease in GDP.
D)the Fed's expansionary policy will result in too large of an increase in GDP.
Q2) If the amount you owe on your house is less than the price of the house,you have A)positive equity in your house.
B)an adjustable-rate mortgage on your house.
C)negative equity in your house.
D)a reverse mortgage on your house.
Q3) Changes in interest rates affect all four components of aggregate demand.
A)True
B)False
Q4) When Congress established the Federal Reserve in 1913,what was its main responsibility? When did Congress broaden the Fed's responsibilities?
Q5) Use the money demand and money supply model to show graphically and briefly explain the effect on the interest rate if real GDP increases.
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Chapter 18: Fiscal Policy
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Q1) Which of the following is an appropriate discretionary fiscal policy if equilibrium real GDP falls below potential real GDP?
A)an increase in government purchases
B)an increase in the supply of money
C)an increase in individual income taxes
D)a decrease in transfer payments
Q2) The problem typically during a recession is not that there is too little money,but too little spending.If the problem was too little money,what would be its cause? If the problem was too little spending,what could be its cause?
Q3) Part of the spending on the Caldecott Tunnel project in northern California came from the American Reinvestment and Recovery Act,which is an example of discretionary fiscal policy aimed at increasing
A)real GDP and employment.
B)tax revenues and the federal budget surplus.
C)disposable income and interest rates.
D)the money supply and money demand.
Q4) Why would a higher tax rate lower the government purchases multiplier? What does the tax rate have to do with the government purchases multiplier?
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Chapter 19: Comparative Advantage, international Trade, and Exchange Rates
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Q1) If a country has a fixed exchange rate
A)the equilibrium exchange rate in that market does not respond to changes in supply and demand for currency.
B)central banks have more control over real GDP in the economy.
C)central banks must buy and sell their holdings of currencies to maintain a given exchange rate.
D)the exchange rate is allowed to fluctuate in response to changes in the supply and demand for currency.
Q2) Economists believe the most persuasive argument for protectionism is to A)save jobs.
B)protect high wages.
C)protect national security.
D)protect infant industries.
Q3) Distinguish between a voluntary export restraint and a quota.
Q4) In 2013,________ of Goodyear's sales were outside North America.
A)only 11 percent
B)more than 60 percent
C)less than half
D)95 percent
Q5) What is dumping? Who benefits and who loses from dumping?
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