Managerial Economics Exam Questions
Course Introduction
Managerial Economics is a course that bridges economic theory and business practice, equipping students with the analytical tools necessary to make informed managerial decisions. Through an exploration of microeconomic concepts such as demand, production, cost analysis, and market structures, the course emphasizes how these principles apply to real-world business scenarios. Students learn to evaluate business choices, optimize resource allocation, conduct marginal analysis, and assess the impacts of government policies and market competition. By integrating quantitative techniques and case studies, the course prepares students to tackle complex economic challenges and drive effective strategy within organizations.
Recommended Textbook
Economics 5th 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 a problem inherent in centrally planned economies?
A) There are no problems and everyone, including consumers, is satisfied.
B) There is too much production of low-cost, high-quality goods and services.
C) Production managers are more concerned with satisfying government's orders than with satisfying consumer wants.
D) Unemployment is too high.
Answer: C
Q2) Positive analysis is concerned with "what ought to be," while normative analysis is concerned with "what is."
A)True
B)False
Answer: False
Q3) What are the five steps by which economists arrive at a useful economic model?
Answer: 1. Decide on the assumptions to use in developing the model.
2. Formulate a testable hypothesis.
3. Use economic data to test the hypothesis.
4. Revise the model if it fails to explain the economic data well.
5. Retain the revised model to help answer similar economic questions in the future.
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Chapter 2: Trade-Offs, Comparative Advantage, and the Market System
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Sample Questions
Q1) The resource income earned by those who supply ________ is called wages. A) labor
B) capital
C) natural resources
D) entrepreneurship
Answer: A
Q2) Refer to Table 2-14. Scotland has a comparative advantage in the production of A) both products.
B) guitars.
C) motorcycles.
D) neither product.
Answer: C
Q3) If property rights are not well enforced, all of the following are likely to occur except A) fewer goods and services will be produced.
B) economic efficiency will be reduced.
C) an economy will produce inside its production possibilities frontier.
D) a significant number of people will be willing to risk their funds by investing them in local businesses.
Answer: D
Page 4
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Chapter 3: Where Prices Come From: the Interaction of
Demand and Supply
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Sample Questions
Q1) Suppose that when the price of hamburgers decreases, the Ruiz family increases their purchases of ketchup. To the Ruiz family,
A) hamburgers and ketchup are complements.
B) hamburgers and ketchup and substitutes.
C) hamburgers and ketchup are normal goods.
D) hamburgers are normal goods and hot dogs are inferior goods.
Answer: A
Q2) If in the market for peaches, the supply curve has shifted to the left,
A) the supply of peaches has increased.
B) the supply of peaches has decreased.
C) the quantity of peaches supplied has increased.
D) the quantity of peaches supplied has decreased.
Answer: B
Q3) Scarcity is defined as the situation that exists when the quantity demanded for a good is greater than the quantity supplied.
A)True
B)False
Answer: False
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Chapter 4: Economic Efficiency, Government Price Setting, and Taxes
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Sample Questions
Q1) If the price of chewing gum is represented by equation P = 25 - 0.5 QD, then the corresponding quantity of chewing gum demanded is represented by the equation
A) QD = 2P - 0.5.
B) QD = 0.5P + 25.
C) QD = 50 - 2P.
D) QD = -5 + 10P.
Q2) Refer to Figure 4-5. The figure above represents the market for pecans. Assume that this is a competitive market. At a price of $9,
A) the marginal cost of pecans is greater than the marginal benefit; therefore, output is inefficiently low.
B) producers should lower the price to $3 in order to sell the quantity demanded of 4,000.
C) the marginal benefit of pecans is greater than the marginal cost; therefore, output is inefficiently high.
D) the marginal benefit of pecans is greater than the marginal cost; therefore, output is inefficiently low.
Q3) What do economists mean by an efficient tax?
Q4) What is "tax incidence"? What determines tax incidence in a competitive market?
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Chapter 5: Externalities, Environmental Policy, and Public Goods
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Sample Questions
Q1) Economic incentives are designed to make individual self-interest coincide with social interest. According to economists, which of the following methods of pollution control best uses economic incentives to reduce pollution?
A) rewarding environmental groups for monitoring the activities of private firms that produce products which generate pollution
B) imposing quantitative limits on the amount of pollution and imposing a penalty for non-compliance with these limits
C) requiring the installation of specific pollution control devices
D) instituting a system of tradable emissions allowances
Q2) Who was the economist who first proposed that governments use taxes and subsidies to correct for externalities?
A) Ronald Coase
B) A. C. Pigou
C) Adam Smith
D) David Hume
Q3) "When it comes to public goods, individuals do not reveal their true preferences because it is not in their self-interest to do so." Evaluate this statement.
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Chapter 6: Elasticity: the Responsiveness of Demand and Supply
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Q1) If the percentage increase in price is 15 percent and the value of the price elasticity of demand is -3, then quantity demanded
A) will increase by 45 percent.
B) will increase by 5 percent.
C) will decrease by 45 percent.
D) will decrease by 5 percent.
Q2) Assume that the market for barley is in equilibrium and the demand for barley is inelastic. Predict what happens to the revenue of barley farmers if a prolonged drought reduces the supply of barley. The drought will cause farm revenue to
A) rise because there will be a shortage of barley.
B) rise because the percentage decrease in quantity sold is less than the percentage increase in price.
C) rise because the percentage increase in quantity sold is greater than the percentage increase in price.
D) fall because of the decrease in the quantity of barley sold.
Q3) What does price elasticity of demand measure? When is demand elastic? Inelastic? Unit elastic?
Q4) Briefly explain the economic concept of elasticity.
Page 8
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Chapter 7: The Economics of Health Care
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Sample Questions
Q1) Refer to Figure 7-5. If consumers paid the full price of medical services, the equilibrium quantity would be
A) 400.
B) 800.
C) 1,200.
D) >1,200.
Q2) If a fire insurance company requires firms buying fire insurance to install automatic sprinkler systems, the insurance company is trying to reduce
A) the problem of adverse selection.
B) the moral hazard problem.
C) sunk costs.
D) asymmetric information.
Q3) Because of the positive externality of vaccinations, economic efficiency would be improved
A) if fewer people were vaccinated.
B) if more people were vaccinated.
C) only if all people were vaccinated.
D) only if no people were vaccinated.
Q4) What is adverse selection?
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Chapter 8: Firms, the Stock Market, and Corporate Governance
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Sample Questions
Q1) Which of the following does not take place in the direct finance market?
A) Ownership in corporations is sold in the form of common stock.
B) Deposits from savers are accumulated and loans made to borrowers.
C) Ownership in corporations is sold in the form of preferred stock.
D) Corporate bonds are sold to savers.
Q2) Anything of value owned by a person or a firm is
A) an asset.
B) a liability.
C) wealth.
D) owner's yield.
Q3) Define a corporation.
Q4) One of the most widely followed stock indexes in the United States is the Dow Jones Industrial Average. This index represents
A) the stock prices of 500 large U.S. firms.
B) an over-the-counter market.
C) the stock prices of more than 4,000 U.S. firms.
D) the stock prices of 30 large U.S. corporations.
Q5) How can a corporation's board of directors and its managers try to reduce the principal-agent problem?
Page 10
Q6) How do unlimited and limited liability differ?
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Chapter 9: Comparative Advantage and the Gains From International Trade
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Sample
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Q1) An agreement negotiated by two countries that places a numerical limit on the quantity of a good that can be imported by one country from another country is called
A) a non-tariff trade barrier.
B) an export quota.
C) an import quota.
D) a voluntary export restraint.
Q2) Jobs lost to foreign trade are generally easy to identify, but jobs created by foreign trade are generally less easy to identify.
A)True
B)False
Q3) What is a tariff?
Q4) Refer to Table 9-11. All of the following are terms of trade that could possibly benefit both countries except
A) 1/5 of a hat : 1 clock
B) 1/3 of a hat : 1 clock
C) 1/2 of a hat : 1 clock
D) 3/4 of a hat : 1 clock
Q5) What is dumping? Who benefits and who loses from dumping?
Page 12
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Chapter 10: Consumer Choice and Behavioral Economics
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Sample Questions
Q1) Refer to Figure 10-7. Suppose the price of Pilates sessions rise to $30 while income and the price of Yoga sessions remain unchanged. The substitution effect of this price change is represented by the movement from
A) A to B.
B) A to C.
C) A to D.
D) D to B.
Q2) What is an indifference curve?
A) It is a curve that shows the total utility and the marginal utility derived from consuming a bundle of goods.
B) It is a curve that shows the combinations of consumption bundles that gives the consumer the same utility.
C) It is a curve that shows ranks a consumer's preference for various consumption bundles.
D) It is a curve that shows the tradeoff a consumer faces among different combinations of consumption bundles.
Q3) Explain the endowment effect.
Q4) Describe the demand curve for a Giffen good.
Q5) What is an indifference curve? Why can indifference curves never cross?
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Chapter 11: Technology, Production, and Costs
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Sample Questions
Q1) Suppose the total cost of producing 40,000 flash drives is $120,000, and the fixed cost is $30,000.
a. What is the variable cost?
b. When output is 40,000, what are the average variable cost and the average fixed cost?
c. Assuming the cost curves have the usual shape, is the dollar difference between the average total cost and the average variable cost greater when the output is 40,000 flash drives or when the output is 60,000 flash drives? Explain.
Q2) Marginal cost is the
A) change in average cost when an additional unit of output is produced.
B) the additional output when total cost is increased by one dollar.
C) additional cost of producing an additional unit of output.
D) change in the price of inputs if a firm buys more inputs to produce an additional unit of output.
Q3) Which of the following are implicit costs for a typical firm?
A) opportunity costs of capital owned and used by the firm
B) the cost of labor hired by the firm
C) utilities cost
D) a business licensing fee
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Chapter 12: Firms in Perfectly Competitive Markets
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Sample Questions
Q1) An industry's long-run supply curve shows
A) the relationship in the long run between market price and quantity supplied.
B) how the government determines the price of the product.
C) how average productivity is changing.
D) greater than normal profit.
Q2) Which of the following is the best example of a perfectly competitive industry?
A) wheat production
B) steel production
C) electricity production
D) airplane production
Q3) The marginal revenue curve for a perfectly competitive firm
A) is downward sloping.
B) is the same as its demand curve.
C) is perfectly inelastic.
D) is the same as its marginal cost curve.
Q4) Refer to Figure 12-9. At price P2, the firm would produce
A) Q2 units.
B) Q3 units.
C) Q4 units.
D) zero units.
Page 15
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Chapter 13: Monopolistic Competition: the Competitive
Model in a More Realistic Setting
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Sample Questions
Q1) Firms such as Caribou Coffee and Diedrich Coffee operate hundreds of coffeehouses nationwide while firms such as Dunn Brothers Coffee operate only in four states. How would you characterize these stores?
A) Caribou Coffee and Diedrich Coffee are oligopolists while Dunn Brothers is a monopolistic competitor.
B) Caribou Coffee and Diedrich Coffee are duopolists while Dunn Brothers is a monopolistic competitor.
C) Caribou Coffee and Diedrich Coffee are duopolists while Dunn Brothers is an oligopolist
D) They are all monopolistic competitors.
Q2) If a monopolistically competitive firm is producing 50 units of output where marginal cost equals marginal revenue, total cost is $1,674 and total revenue is $2,000, its average profit is
A) $326.
B) $40.
C) $6.52.
D) impossible to determine without additional information.
Q3) Discuss the role of product differentiation and advertising in monopolistic competition.
Page 16
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Chapter 14: Oligopoly: Firms in Less Competitive Markets
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Sample Questions
Q1) A member of a cartel like OPEC has an incentive to A) argue for larger production quotas for each member of the cartel.
B) agree to a low cartel production level and then produce more than its quota.
C) abide by its individual production quota.
D) support equal production quotas for each member.
Q2) A consequence of the quota that has been imposed on the importation of sugar into the United States is
A) consumers are protected from eating unsafe products made from cheap imported sugar.
B) competition in the U.S. sugar market is reduced.
C) the cost of producing cereal, chocolate and candy products in the United States is reduced.
D) the market for sugar in the United States has become monopolistically competitive rather than oligopolistic.
Q3) Firms in an oligopoly are said to be interdependent. What does this mean?
Q4) The approach economists use to analyze competition among oligopolists is called A) marginal analysis.
B) game theory.
C) oligopoly theory.
D) competition among the few.
Page 17
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Chapter 15: Monopoly and Antitrust Policy
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Sample Questions
Q1) Refer to Figure 15-1. Which of the following statements about the firm depicted in the diagram is true?
A) The fact that this firm is a natural monopoly is shown by the continually declining long-run average total cost as output rises.
B) The fact that this firm is a natural monopoly is shown by the continually declining market demand curve as output rises.
C) The fact that this firm is a natural monopoly is shown by the continually declining marginal revenue curve as output rises.
D) The fact that this firm is a natural monopoly is shown by the fact that marginal cost lies below the long-run average total cost where the firm maximizes its profits.
Q2) Refer to Figure 15-11. Following the entry of Verizon, the subscription price falls from PM to PC. What is the increase in consumer surplus as a result of this change?
A) the area A + B + C
B) the area B + C
C) the area D + F
D) the area B + C + D
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Chapter 16: Pricing Strategy
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Sample Questions
Q1) Though large firms have the knowledge and resources to utilize a better pricing strategy, many choose to use cost-plus pricing. One reason for this is that
A) large firms do not have to maximize their profits because they face little competition from other firms.
B) there is less risk of violating antitrust laws if a cost-plus pricing strategy is used rather than a profit-maximizing pricing strategy.
C) the additional revenue that would result from a profit-maximizing pricing strategy is an insignificant fraction of the firms' revenues.
D) firms often adjust the markup they charge to reflect current demand.
Q2) Buying at a low price in one market and reselling at a higher price in another market will
A) not generate any profit because of transportation costs.
B) not generate any profit because of transactions costs.
C) eventually eliminate all of the price differences.
D) eventually eliminate most, but not necessarily all, of the price differences.
Q3) Are sellers who practice arbitrage taking advantage of buyers?
Q4) What three conditions must hold for a firm to successfully price discriminate?
Q5) Are restaurant coupons a form of price discrimination? Why or why not?
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Chapter 17: The Markets for Labor and Other Factors of Production
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Q1) Which of the following is a reason why some firms do not use commission pay?
A) It gives workers incentive to produce more.
B) It increases firm profits.
C) It is difficult to measure the output and attribute output to a particular worker.
D) The best workers stay and less productive workers leave.
Q2) An increase in the demand for orthodontic services leads to
A) an increase in the supply of orthodontists.
B) lower prices for orthodontic care.
C) an increase in the demand for orthodontists.
D) a rise in the rates of dental insurance.
Q3) The market price of a factor of production that is in fixed supply is determined only by demand.
A)True
B)False
Q4) All else equal, a decrease in the supply of labor will shift the labor supply curve to the left and decrease the equilibrium wage.
A)True
B)False
Q5) What is the marginal productivity theory of income distribution?
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Chapter 18: Public Choice, Taxes, and the Distribution of Income
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Sample Questions
Q1) The largest source of tax revenue for state and local governments in the United States in 2012 was
A) sales taxes.
B) the corporate income tax.
C) the property tax.
D) the individual income tax.
Q2) What is logrolling?
A) a situation where a policymaker votes to approve a bill in exchange for favorable votes from his colleagues on other bills
B) a situation where policymakers transfer resources from those voters who are unlikely to have a huge impact on the political outcome to those who contribute to political campaigns
C) a situation where a policymaker accepts bribes to prevent proposed legislation from coming to a vote
D) a situation where a policymaker gets the government to fund a non-essential project benefiting her family members
Q3) What is a Lorenz curve and what is a Gini coefficient?
Q4) Describe the main factors economists believe cause inequality of income.
Q5) What is the difference between the poverty line and the poverty rate?
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Chapter 19: GDP: Measuring Total Production and Income
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Q1) The informal sector can be a significant drag on the economies of developing countries because the firms in the informal sector
A) produce goods and services no one wants.
B) sell their goods and services to citizens in other countries.
C) do not pay taxes to the government.
D) employ illegal immigrants from other countries.
Q2) The GDP deflator is the
A) difference between real GDP and nominal GDP multiplied by 100.
B) difference between nominal GDP and real GDP divided by 100.
C) ratio of real GDP to nominal GDP multiplied by 100.
D) ratio of nominal GDP to real GDP multiplied by 100.
Q3) The "underground economy" refers to
A) the buying and selling of goods that is concealed from the government.
B) the production of goods and services used by the government for covert spy operations.
C) the sector of the economy that earns profits that are higher than average.
D) the formal sector of the economy in developing countries.
Q4) Explain the difference between Gross Domestic Product and Gross National Product. Give an example of each.
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Chapter 20: Unemployment and Inflation
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Q1) Your grandfather tells you that he earned $7,000/year in his first job in 1961. You earn $35,000/year in your first job in 2013. You know that average prices have risen steadily since 1961. You earn
A) 5 times as much as your grandfather in terms of real income.
B) more than 5 times as much as your grandfather in terms of real income.
C) less than 5 times as much as your grandfather in terms of real income.
D) less than 5 times as much as your grandfather in terms of nominal income.
Q2) When an economy is at its natural rate of unemployment, which of the following will be true?
A) The unemployment rate will be 0%.
B) The labor force participation rate will be 100%.
C) The unemployment rate will be greater than 0%.
D) Only structural unemployment as a result of technological change will exist in the economy.
Q3) Why would a firm pay efficiency wages?
Q4) If inflation increases unexpectedly, then
A) borrowers pay a higher real interest rate than they expected.
B) lenders receive a lower real interest rate than they expected.
C) lenders gain and borrowers gain.
D) neither borrowers nor lenders lose.
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Chapter 21: Economic Growth, the Financial System, and Business Cycles
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Q1) Retained earnings are sufficient to finance a firm's rapid expansion in a high-growth economy.
A)True
B)False
Q2) Explain how unemployment changes over the business cycle. Why do these changes occur?
Q3) An increase in government purchases, ceteris paribus, will
A) increase public saving.
B) increase the supply of loanable funds.
C) reduce investment.
D) reduce real GDP.
Q4) If government saving is negative, then
A) T > TR.
B) G > T.
C) T - TR < G.
D) Y + TR < C - T.
Q5) What factors increase potential GDP? Include a definition of potential GDP in your answer.
Q7) Carefully define the two categories of saving in the economy. Page 24
Q6) Explain why the demand curve for loanable funds has a negative slope.
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Chapter 22: Long-Run Economic Growth: Sources and Policies
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Q1) Robert Lucas argues that there are ________ returns to human capital, and these productivity increases are not completely captured by individuals as they decide how much education to purchase. As a result, the market produces ________ education and training.
A) increasing; too much
B) decreasing; too much
C) increasing; too little
D) decreasing; too little
Q2) Because of the productivity slowdown in the United States from the mid-1970s through the mid-1990s,
A) real GDP per capita grew more rapidly.
B) real GDP per capita grew more slowly.
C) the standard of living did not change.
D) the standard of living increased in the United States.
Q3) One reason why many low-income countries experience low rates of growth is because of poor public education and health.
A)True
B)False
Q4) Is knowledge capital subject to the law of diminishing returns? Explain.
Page 26
Q5) Explain three reasons why the productivity slowdown of 1974-1995 occurred.
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Chapter 23: Aggregate Expenditure and Output in the Short Run
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Q1) Given Table 23-9 below, fill in the values of the marginal propensity to save (MPS) and the marginal propensity to consume (MPC). Show that MPC + MPS = 1.
Q2) Which of the following will cause a direct increase in consumption spending?
A) an increase in planned investment
B) an increase in government spending
C) an increase in disposable income
D) a decrease in net export spending
Q3) If the marginal propensity to save is 0.35, the multiplier is 2.86.
A)True
B)False
Q4) Consumption spending refers to ________ spending on goods and services.
A) household
B) business
C) government
D) foreign
Q5) Consumption spending will ________ when disposable income ________.
A) increase; increases
B) increase; decreases
C) decrease; increases
D) change unpredictably; decreases
27
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Chapter 24: Aggregate Demand and Aggregate Supply Analysis
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Q1) If the short-run aggregate supply increases by less than the long-run aggregate supply, then, at the short-run equilibrium,
A) GDP will be below potential GDP.
B) aggregate demand will increase.
C) GDP will be above potential GDP.
D) GDP will be equal to potential GDP.
Q2) Beginning with long-run equilibrium, use the aggregate demand and aggregate supply model to illustrate what happens in the short run when the economy suffers a negative supply shock.
Q3) A decrease in aggregate demand in the economy will have what effect on macroeconomic equilibrium in the long run?
A) The price level will fall, and the level of GDP will be unaffected.
B) The price level will fall, and the level of GDP will fall.
C) The price level will rise, and the level of GDP will fall.
D) The price level will rise, and the level of GDP will be unaffected.
Q4) At a long-run macroeconomic equilibrium, real GDP is always equal to potential GDP.
A)True
B)False
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Chapter 25: Money, Banks, and the Federal Reserve System
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Q1) If whole tomatoes were money, which of the following functions of money would be the hardest for tomatoes to satisfy?
A) unit of account
B) store of value
C) certificate of gold
D) medium of exchange
Q2) In an attempt to bring lenders and borrowers together following the financial crisis of 2008, the Federal Reserve made a large amount of new funds available to financial markets. The Fed expected this to increase in the money supply and the total amount of lending because of the multiplier effect, in which a given amount of new reserves results in a multiple increase in
A) stockholders' equity.
B) bank deposits.
C) long-term debt.
D) required reserves.
Q3) Why does the holding of excess reserves by banks and the holding of currency by households and firms cause the real-world deposit multiplier to be less than the simple deposit multiplier?
Q4) What is the principle monetary policy tool used by the Fed. Why?
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Chapter 26: Monetary Policy
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Questions
Q1) Suppose the equilibrium real federal funds rate is 2 percent, the target rate of inflation is 2 percent, the current inflation rate is 4 percent, and real GDP is 2 percent above potential real GDP. If the weights for the inflation gap and the output gap are both 1/2, then according to the Taylor rule the federal funds target rate equals
A) 4 percent.
B) 6 percent.
C) 8 percent.
D) 10 percent.
Q2) Which of the following are goals of monetary policy?
A) maximizing the value of the dollar relative to other currencies, economic growth, and high employment
B) price stability, maximizing the value of the dollar relative to other currencies, and high employment
C) price stability, economic growth, and high employment
D) price stability, economic growth, and maximizing the value of the dollar relative to other currencies
Q3) What is a mortgage? What were the important developments in the mortgage market during the years after 1970?
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Chapter 27: Fiscal Policy
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Sample Questions
Q1) An increase in government spending lowers interest rates and increases the rate of investment in new capital.
A)True
B)False
Q2) Refer to Figure 27-5. In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, Congress and the president would most likely
A) decrease government spending.
B) increase government spending.
C) increase oil prices.
D) increase taxes.
E) lower interest rates.
Q3) Explain why the tax multiplier is different from the government purchases multiplier, in both sign and relative magnitude.
Q4) The level of crowding out associated with a tax cut will be smaller if the tax change has a supply-side effect than it will be if it only has a demand-side effect.
A)True
B)False
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Chapter 28: Inflation, Unemployment, and Federal Reserve Policy
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Sample Questions
Q1) Why is the credibility of the Fed's policy announcements particularly important?
Q2) Does the short-run Phillips curve have a positive or negative slope? Explain how this slope is derived.
Q3) The curve showing the short-run relationship between the ________ and the ________ is called the Phillips curve.
A) nominal interest rate; real interest rate
B) unemployment rate; inflation rate
C) price level; real GDP
D) exchange rate; real interest rate
Q4) Lucas and Sargent argue that the short-run trade-off between unemployment and inflation is caused by
A) workers and firms using Fed policy to predict inflation.
B) workers and firms using all the information available to predict inflation.
C) workers and firms rapidly adjusting wages and prices in response to changes in expectations.
D) workers and firms being fooled by unexpected changes in monetary policy.
Q5) What does it mean to say that workers and firms have rational expectations?
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Q6) Explain why expansionary monetary policy would not result in reduced unemployment rates if workers and firms have rational expectations.
Chapter 29: Macroeconomics in an Open Economy
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Sample Questions
Q1) How does a decrease in value of a country's currency relative to other currencies affect its balance of trade?
A) A decrease in value of a country's currency relative to other currencies raises imports, reduces exports, and reduces the balance of trade.
B) A decrease in value of a country's currency relative to other currencies reduces imports, raises exports, and reduces the balance of trade.
C) A decrease in value of a country's currency relative to other currencies reduces imports, raises exports, and increases the balance of trade.
D) A decrease in value of a country's currency relative to other currencies raises imports, reduces exports, and increases the balance of trade.
Q2) What are the three main sets of factors that cause the supply and demand curves in the foreign exchange market to shift?
Q3) The saving and investment equation holds only when the federal budget is balanced.
A)True
B)False
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Chapter 30: The International Financial System
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Sample Questions
Q1) A Big Mac costs $4.00 in the United States and 9.00 reals in Brazil. If the exchange rate is 2 reals per dollar, purchasing power parity predicts that
A) the dollar is undervalued.
B) the dollar is overvalued.
C) the real is undervalued.
D) both B and C are correct.
Q2) If two countries adhere to a gold standard, the exchange rate for their currencies is fixed.
A)True
B)False
Q3) If the GDP deflator in the United States is 114, and the GDP deflator in Ukraine is 142, which of the following exchange rates would the theory of purchasing power parity predict in the long run? (The Ukrainian currency is the hryvnia.)
A) 0.80 hryvnias per dollar
B) 1.25 hryvnias per dollar
C) 2.80 hryvnias per dollar
D) 28 hryvnias per dollar
Q4) Why do countries peg their currencies, and what problems can result from pegging?
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