Principles of Economics
Pre-Test Questions
Course Introduction
Principles of Economics provides an introduction to the fundamental concepts and theories that underpin the study of economics. This course explores how individuals, firms, and governments make choices about allocating scarce resources to satisfy unlimited wants, examining both microeconomic and macroeconomic perspectives. Key topics include supply and demand, market structures, consumer behavior, production, costs, market equilibrium, economic efficiency, and the role of government intervention. The course also introduces students to broad economic indicators, fiscal and monetary policy, and international trade, equipping them with the analytical tools needed to understand current economic issues and policy debates.
Recommended Textbook
Principles of Economics Arab World Edition 2nd Edition by Gregory Mankiw
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Chapter 1: Ten Principles of Economics
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Q1) Which is the most accurate statement about trade?
A)Trade can make every nation better off.
B)Trade makes some nations better off and others worse off.
C)Trading for a good can make a nation better off only if the nation cannot produce that good itself.
D)Trade helps rich nations and hurts poor nations.
Answer: A
Q2) Explain how an attempt by the government to lower inflation could cause unemployment to increase in the short-run.
Answer: To lower inflation,the government may choose to reduce the money supply in the economy.When the money supply is reduced,prices don't adjust immediately.Lower spending,combined with prices that are too high,reduces sales and causes workers to be laid off.Hence,the lower price level is associated with higher unemployment.
Q3) For markets to work well,there must be
A)market power.
B)a central planner.
C)property rights.
D)abundant,not scarce,resources.
Answer: C
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Chapter 2: Thinking Like an Economist
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Q1) Home is a country that produces two goods,pears and cellular phones.Last year,Home produced 450 bushels of pears and 1050 cellular phones.This year it produced 450 bushels of pears and 2000 cellular phones.Given no other information,which of the following events could explain this change?
A)Home experienced increased unemployment.
B)Home experienced a decline in pear-producing technology.
C)Home experienced an improvement in cellular phone-making technology.
D)Home experienced a reduction in resources.
Answer: C
Q2) Refer to Table 2-3.What is the opportunity cost of increasing the production of cookies from 200 dozen to 400 dozen?
A)100 pounds of coffee
B)200 pounds of coffee
C)300 pounds of coffee
D)400 pounds of coffee
Answer: B
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Chapter 3: Interdependence and the Gains From Trade
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Q1) If he devotes all of his available resources to cantaloupe production,a farmer can produce 120 cantaloupes.If he sacrifices 1.5 watermelons for each cantaloupe that he produces,it follows that
A)if he devotes all of his available resources to watermelon production,then he can produce 80 watermelons.
B)he cannot have a comparative advantage over other farmers in producing cantaloupes.
C)his opportunity cost of one watermelon is 2/3 of a cantaloupe.
D)his production possibilities frontier is bowed-out.
Answer: C
Q2) The production possibilities frontier shows the trade-offs that the producer faces but does not identify the choice the producer will make.
A)True
B)False
Answer: True
Q3) Trade allows a country to consume outside its production possibilities frontier. A)True
B)False
Answer: True
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Chapter 4: The Market Forces of Supply and Demand
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Q1) The quantity supplied of a good is the amount that A)buyers are willing and able to purchase.
B)sellers are able to produce.
C)buyers and sellers agree will be brought to market.
D)sellers are willing and able to sell.
Q2) In a perfectly competitive market,buyers and sellers are price setters.
A)True
B)False
Q3) Refer to Figure 4-1.The movement from point A to point B on the graph shows A)a decrease in demand.
B)an increase in demand.
C)a decrease in quantity demanded.
D)an increase in quantity demanded.
Q4) Refer to Figure 4-2.All else equal,an increase in the price of the pulp used in the paper production process would cause a move from A)x to y.
B)y to x.
C)S<sub>A</sub> to S<sub>B</sub>.
D)S<sub>B</sub> to S<sub>A</sub>.
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Chapter 5: Elasticity and Its Application
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Q1) In the market for oil in the short run,demand
A)and supply are both elastic.
B)and supply are both inelastic.
C)is elastic and supply is inelastic.
D)is inelastic and supply is elastic.
Q2) If the price elasticity of demand for a good is 6,then a 3 percent decrease in price results in
A)a 20 percent increase in the quantity demanded.
B)an 18 percent increase in the quantity demanded.
C)a 2 percent increase in the quantity demanded.
D)a 1.8 percent increase in the quantity demanded.
Q3) Which of the following statements is valid when supply is perfectly elastic at a price of $4?
A)The elasticity of supply approaches infinity.
B)The supply curve is vertical.
C)At a price below $4,quantity supplied is infinite.
D)At a price above $4,quantity supplied is zero.
Q4) If the price elasticity of demand is equal to 0,then demand is unit elastic.
A)True
B)False
Page 7
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Chapter 6: Supply,demand,and Government Policies
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Q1) Refer to Figure 6-12.When the price ceiling applies in this market,and the supply curve for gasoline shifts from S<sub>1</sub> to S<sub>2</sub>,
A)the market price will increase to P<sub>3</sub>.
B)a surplus will occur at the new market price of P<sub>2</sub>.
C)the market price will stay at P<sub>1</sub>.
D)a shortage will occur at the new market price of P<sub>2</sub>.
Q2) A price ceiling set above the equilibrium price is not binding.
A)True
B)False
Q3) Unlike minimum wage laws,wage subsidies
A)discourage firms from hiring the working poor.
B)cause unemployment.
C)help only wealthy workers.
D)raise the living standards of the working poor without creating unemployment.
Q4) If a binding price floor is imposed on the video game market,then
A)the quantity of video games demanded will decrease.
B)the quantity of video games supplied will increase.
C)a surplus of video games will develop.
D)All of the above are correct.
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Chapter 7: Consumers, producers, and the Efficiency of Markets
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Q1) Answer each of the following questions about demand and consumer surplus.
a.What is consumer surplus,and how is it measured?
b.What is the relationship between the demand curve and the willingness to pay?
c.Other things equal,what happens to consumer surplus if the price of a good falls? Why? Illustrate using a demand curve.
d.In what way does the demand curve represent the benefit consumers receive from participating in a market? In addition to the demand curve,what else must be considered to determine consumer surplus?
Q2) Suppose the demand for peaches decreases.What will happen to producer surplus in the market for peaches?
A)It increases.
B)It decreases.
C)It remains unchanged.
D)It may increase,decrease,or remain unchanged.
Q3) A seller's opportunity cost measures the A)value of everything he must give up to produce a good. B)amount he is paid for a good minus his cost of providing it.
C)consumer surplus.
D)out of pocket expenses to produce a good but not the value of his time.
Page 9
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Chapter 8: Application: The Costs of Taxation
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Q1) Refer to Figure 8-3.The per-unit burden of the tax on sellers is
A)P3 - P1.
B)P3 - P2.
C)P2 - P1.
D)P4 - P3.
Q2) A decrease in the size of a tax is most likely to increase tax revenue in a market with
A)elastic demand and elastic supply.
B)elastic demand and inelastic supply.
C)inelastic demand and elastic supply.
D)inelastic demand and inelastic supply.
Q3) The benefit to buyers of participating in a market is measured by A)the price elasticity of demand.
B)consumer surplus.
C)the maximum amount that buyers are willing to pay for the good.
D)the equilibrium price.
Q4) When a tax is imposed on sellers,consumer surplus and producer surplus both decrease.
A)True
B)False
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Chapter 9: Application: International Trade
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Q1) Refer to Figure 9-15.A result of the tariff is that,relative to the free-trade situation,the quantity of saddles imported decreases by
A)Q<sub>2</sub> - Q<sub>1</sub>.
B)Q<sub>3</sub> - Q<sub>2</sub>.
C)Q<sub>4</sub> - Q<sub>3</sub>.
D)Q<sub>4</sub> - Q<sub>3</sub> + Q<sub>2</sub> - Q<sub>1</sub>.
Q2) Refer to Figure 9-15.With the tariff,the quantity of saddles imported is
A)Q<sub>3</sub> - Q<sub>1</sub>.
B)Q<sub>3</sub> - Q<sub>2</sub>.
C)Q<sub>4</sub> - Q<sub>1</sub>.
D)Q<sub>4</sub> - Q<sub>2</sub>.
Q3) A tariff is a
A)limit on how much of a good can be exported.
B)limit on how much of a good can be imported.
C)tax on an exported good.
D)tax on an imported good.
Q4) How does an import quota differ from an equivalent tariff?
Q5) Characterize the two different approaches a nation can take to achieve free trade.Does one approach have an advantage over the other?
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Chapter 10: Externalities
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Q1) Suppose that elementary education creates a positive externality.If the government subsidizes education by an amount equal to the per-unit externality it creates,then
A)the equilibrium quantity of education will equal the socially optimal quantity of education.
B)the equilibrium quantity of education will be greater than the socially optimal quantity of education.
C)the equilibrium quantity of education will be less than the socially optimal quantity of education.
D)There is not enough information to answer the question.
Q2) When market activity generates a negative externality,the level of output in the market equilibrium is lower than the socially optimal level.
A)True
B)False
Q3) Refer to Figure 10-15.Which graph illustrates a pollution permit program?
A)the left graph
B)the right graph
C)both graphs
D)neither graph
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Chapter 11: Public Goods and Common Resources
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Q1) For private goods allocated in markets,
A)prices guide the decisions of buyers and sellers and these decisions lead to an efficient allocation of resources.
B)prices guide the decisions of buyers and sellers and these decisions lead to an inefficient allocation of resources.
C)the government guides the decisions of buyers and sellers and these decisions lead to an efficient allocation of resources.
D)the government guides the decisions of buyers and sellers and these decisions lead to an inefficient allocation of resources.
Q2) Advocates of antipoverty programs claim that fighting poverty
A)is best accomplished by charities.
B)is a public good.
C)is more efficiently accomplished by the market.
D)should not be attempted with tax dollars.
Q3) The creation of knowledge is a public good.Because knowledge is a public good,profit-seeking firms tend to free-ride on the knowledge created by others and,as a result,devote too few resources to the creation of knowledge.How does the U.S.government correct for this apparent market failure?
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Chapter 12: The Design of the Tax System
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Q1) An efficient tax system is one that imposes small
A)deadweight losses and administrative burdens.
B)marginal rates and deadweight losses.
C)administrative burdens and transfers of money.
D)marginal rates and transfers of money.
Q2) Economists play an important role in the complex debates over tax policy by
A)identifying efficiency as the most important goal of tax policy.
B)identifying equity as the most important goal of tax policy.
C)shedding light on the tradeoff between efficiency and equity in tax policy.
D)None of the above is correct.
Q3) Corporate income taxes are based on the amount of revenue a corporation earns.
A)True
B)False
Q4) A recent increase in federal gasoline taxes was estimated to cause a $150 million reduction in the total surplus (consumer plus producer surplus)in the gasoline market.If tax revenues increased by $100 million,what is the deadweight loss associated with the tax?
As a result of the tax,10,000 people sold their cars and started riding their bicycles to work.How much of the burden of the deadweight loss is incurred by the bicycle riders?
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Chapter 13: The Costs of Production
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Q1) The marginal product of an input in the production process is the increase in A)total revenue obtained from an additional unit of that input.
B)profit obtained from an additional unit of that input.
C)total revenue obtained from an additional unit of that input
D)quantity of output obtained from an additional unit of that input.
Q2) Refer to Table 13-13.What is the total fixed cost for this firm?
A)20
B)30
C)40
D)50
Q3) Refer to Table 13-8.What is the average fixed cost of producing 5 units of output?
A)4
B)5
C)40
D)44
Q4) The economic field of industrial organization examines how firms' decisions about prices and quantities depend on the market conditions they face.
A)True
B)False
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Chapter 14: Firms in Competitive Markets
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Q1) For a firm operating in a perfectly competitive industry,total revenue,marginal revenue,and average revenue are all equal.
A)True
B)False
Q2) All competitive firms earn zero economic profit in both the short run and the long run.
A)True B)False
Q3) Which of the following statements is correct regarding a firm's decision-making?
A)The decision to shut down and the decision to exit are both short-run decisions.
B)The decision to shut down and the decision to exit are both long-run decisions.
C)The decision to shut down is a short-run decision,whereas the decision to exit is a long-run decision.
D)The decision to exit is a short-run decision,whereas the decision to shut down is a long-run decision.
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Chapter 15: Monopoly
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Q1) For a monopoly,the socially efficient level of output occurs where
A)marginal revenue equals marginal cost.
B)average revenue equals marginal cost.
C)marginal revenue equals average total cost.
D)average revenue equals average total cost.
Q2) A patent gives a single person or firm the exclusive right to sell some good or service forever.
A)True
B)False
Q3) Which of the following statements is correct? Monopolies are socially inefficient because they (i)charge a price above marginal cost.
(ii)produce too little output.
(iii)earn profits at the expense of consumers.
(iv)maximize the market's total surplus.
A)(iii)only
B)(iii)and (iv)only
C)(i)and (ii)only
D)(i),(ii),(iii),and (iv)
Q4) Give some examples of the benefits and costs of antitrust laws.
Page 17
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Chapter 16: Monopolistic Competition
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Q1) In the short run,a firm in a monopolistically competitive market operates much like a A)firm in a perfectly competitive market.
B)firm in an oligopoly.
C)monopolist.
D)monopsonist.
Q2) Which of the following statements is correct?
A)Cigarettes are likely to be produced in a monopolistically competitive industry.
B)Novels are likely to be produced in a monopoly industry.
C)Movies are likely to be produced in a monopolistically competitive industry.
D)Milk is likely to be produced in an oligopoly industry.
Q3) For the economy as a whole,spending on advertising comprises about what percent of total firm revenue?
A)0.5
B)2
C)10
D)20
Q4) Why does a typical monopolistically competitive firm face a downward-sloping demand curve?
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18
Chapter 17: Oligopoly
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Q1) Refer to Table 17-14.Which of the following statements about this game is true?
A)Up is a dominant strategy for A and Right is a dominant strategy for B.
B)Up is a dominant strategy for A and Left is a dominant strategy for B.
C)Down is a dominant strategy for A and Right is a dominant strategy for B.
D)Down is a dominant strategy for A and Left is a dominant strategy for B.
Q2) Much of the research on game theory in recent decades was driven by attempts to analyze actions of players during
A)the Great Depression of the 1930s.
B)World War II.
C)the Cold War between the United States and the Soviet Union.
D)the ascendancy of the conservative movement in the United States in the 1970s and 1980s.
Q3) Describe the source of tension between cooperation and self-interest in a market characterized by oligopoly.Use an example of an actual cartel arrangement to demonstrate why this tension creates instability in cartels.
Q4) Resale price maintenance prevents retailers from competing on price.
A)True
B)False
Q5) Explain the practice of tying and discuss why it is controversial.
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Chapter 18: The Market for the Factors of Production
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Q1) Refer to Figure 18-1.The figure illustrates the A)demand for labor.
B)supply of labor.
C)production function.
D)wage function.
Q2) Refer to Scenario 18-2.Based on the given information,it is likely that Gertrude's firm has
A)some influence over the wages paid to crew members but no influence over the price of salmon.
B)some influence over the price of salmon but no influence over the wages paid to crew members.
C)some influence over both the price of salmon and the wages paid to crew members. D)no influence over either the price of salmon or the wages paid to crew members.
Q3) Describe the difference between the purchase price of capital and the rental price of capital.If you know the value of marginal product from the flow of capital services,how would you determine the market price for the capital stock?
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Chapter 19: Earnings and Discrimination
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Q1) Explain the theory that education acts as a signaling device.How does this contrast with the theory of education as an investment in human capital?
Q2) Consumers are often a primary source of discrimination in labor markets.
A)True B)False
Q3) Which of the following sets of circumstances is likely to provide the best evidence in support of the theory of efficiency wages?
A)Workers in the market are unskilled and not represented by a union,and their wage exceeds both the equilibrium wage and the minimum wage.
B)Workers in the market are highly skilled and not represented by a union,and their wage exceeds the minimum wage.
C)Workers in the market are highly skilled and represented by a union,and their wage exceeds the equilibrium wage.
D)Employers in the market are known for reducing the workers' wage whenever they get an opportunity to do so.
Q4) Explain the role that consumers play in perpetuating discrimination in labor markets.
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Chapter 20: Income Inequality and Poverty
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Q1) Suppose that a family saves and borrows to buffer itself against changes in income.These actions relate to which problem in measuring inequality?
A)in-kind transfers
B)negative income tax
C)transitory versus permanent income
D)economic mobility
Q2) A goal of libertarians is to provide citizens with equal opportunities rather than to ensure equal outcomes.
A)True
B)False
Q3) The maximin criterion is the idea that the government should aim to maximize the well-being of the worst-off person in society.
A)True
B)False
Q4) People have their highest saving rates when they are A)retired.
B)middle-aged.
C)married with young children.
D)young and single.
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Chapter 21: The Theory of Consumer Choice
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Q1) Draw a budget constraint that is consistent with the following prices and income. Income = 200
P<sub>Y</sub> = 50
P<sub>X</sub> = 25
a.Demonstrate how your original budget constraint would change if income increases to 500.
b.Demonstrate how your original budget constraint would change if P<sub>Y</sub> decreases to 20.
c.Demonstrate how your original budget constraint would change if P<sub>X</sub> increases to 40.
Q2) Evaluate the following statement,"Warren Buffet is the second richest person in the world.He doesn't face any constraint on his ability to purchase commodities he wants."
Q3) When indifference curves are bowed inward,the marginal rate of substitution is A)the same at all points along an indifference curve.
B)increasing as the consumer moves to the right along an indifference curve.
C)decreasing as the consumer moves to the right along an indifference curve. D)constant.
Q4) List and briefly explain each of the four properties of indifference curves.
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Chapter 22: Frontiers of Microeconomics
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Q1) "Signaling" refers to actions by an informed party for the sole purpose of A)telling another party that the signaler has information to reveal,without actually revealing that information.
B)conveying false information.
C)confusing another party.
D)credibly revealing private information.
Q2) The results of the ultimatum game illustrate the fact that
A)people's behavior is often driven by an innate sense of fairness. B)homo economicus is a good description of people's behavior.
C)self-interest brings out the most efficient economic outcome.
D)Both b and c are correct.
Q3) If preferences exhibit the property of transitivity,then
A)the preferences are irrational.
B)individuals prefer more government involvement in private markets than do people whose preferences are not transitive.
C)preferences change over time more quickly than when preferences are not transitive. D)preferences satisfy one of the properties assumed to be desirable by Kenneth Arrow in Social Choice and Individual Values.
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Chapter 23: Measuring a Nations Income
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Q1) Sally purchases a classic 1964 car she saw for sale on someone's lawn.She then purchases some new parts and spends 120 hours refurbishing the car which she keeps.Which of the following is included in GDP?
A)the amount she paid to buy the car
B)the amount she paid to buy new parts
C)the value of her time repairing the car
D)All of the above are included.
Q2) Which of the following statements about GDP is correct?
A)GDP measures two things at once: the total income of everyone in the economy and the total expenditure on the economy's output of goods and services.
B)Money continuously flows from households to firms and then back to households,and GDP measures this flow of money.
C)GDP is generally regarded as the best single measure of a society's economic well-being.
D)All of the above are correct.
Q3) The GDP deflator can be used to take inflation out of nominal GDP.
A)True
B)False
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Chapter 24: Measuring the Cost of Living
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Q1) The CPI is a measure of the overall cost of the goods and services bought by A)a typical consumer,and the CPI is computed and reported by the Department of the Treasury.
B)typical consumers and typical business firms,and the CPI is computed and reported by the Department of the Treasury.
C)a typical consumer,and the CPI is computed and reported by the Bureau of Labor Statistics.
D)typical consumers and typical business firms,and the CPI is computed and reported by the Bureau of Labor Statistics.
Q2) Why does the GDP deflator give a different rate of inflation than the CPI?
Q3) The nominal interest rate tells you
A)how fast the number of dollars in your bank account rises over time.
B)how fast the purchasing power of your bank account rises over time.
C)the number of dollars in your bank account today.
D)the purchasing power of your bank account today.
Q4) The inflation rate is the absolute change in the price level from the previous period.
A)True
B)False
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Chapter 25: Production and Growth
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Q1) Strike Out Bowling Balls produces 800 bowling balls per day using 2 workers who each work 8 hours per day.What is Strike Out's productivity?
A)800 bowling balls
B)100 bowling balls per hour
C)50 bowling balls per hour
D)None of the above is correct.
Q2) The slope of the production function with capital per worker on the horizontal axis and output per worker on the vertical axis
A)is positive and gets steeper as capital per worker rises.
B)is positive and gets flatter as capital per worker rises.
C)is negative and gets steeper as capital per worker rises.
D)is negative and gets flatter as capital per worker rises.
Q3) When a country removes trade barriers and imports appliances and exports engineering services,
A)its growth slows.
B)its productivity decreases.
C)it is essentially transforming engineering services into appliances.
D)its economic well-being decreases while that of the country that sells appliances increases.
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Chapter 26: Saving,investment,and the Financial System
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Q1) A stock index is
A)an average of a group of stock prices.
B)an average of a group of stock yields.
C)a measure of the risk relative to the profitability of corporations.
D)a report in a newspaper or other media outlet on the price of the stock and earnings of the corporation that issued the stock.
Q2) Banks and mutual funds are examples of financial markets.
A)True
B)False
Q3) Which of the following is correct?
A)Lenders sell bonds and borrowers buy them.
B)Long-term bonds usually pay a lower interest rate than do short-term bonds because long-term bonds are riskier.
C)The term junk bonds refers to bonds that have been resold many times.
D)None of the above is correct.
Q4) Draw and label a graph showing equilibrium in the market for loanable funds.
Q5) In the national income accounting identity showing the equality between national saving and investment,what are the algebraic expressions for private saving and public saving?
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Chapter 27: The Basic Tools of Finance
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Q1) Refer to Figure 27-3.From the appearance of Rob's utility function,we know that
A)if Rob owns a house,then he definitely would buy fire insurance provided the cost of the insurance were reasonable.
B)Rob would voluntarily exchange a portfolio of stocks with a high average return and a high level of risk for a portfolio with a low average return and a low level of risk.
C)Rob is risk averse.
D)Rob is not risk averse.
Q2) What's the difference between firm-specific risk and market risk? Will diversification eliminate one or both? Explain.
Q3) Which of the following concepts is most helpful in explaining why investment increases when the interest rate falls?
A)deadweight loss
B)present value
C)economic growth
D)financial intermediation
Q4) Give an example of adverse selection and an example of moral hazard using homeowners insurance.
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Chapter 28: Islamic Finance
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Q1) During the 2008 financial crisis Islamic banks were more resilient in avoiding direct financial losses.Why do you think this might have been?
Explain your reasoning.
Q2) Uncertainty in a transaction is known as:
A)Gharar.
B)Haram.
C)Riba.
D)Takaful.
Q3) Which of the following describes a feature that applies to a Musharakah contract?
A)There is no guarantee of the capital.
B)The capital providers are involved in business decision making
C)The profit shared is limited to an agreed ratio.
D)For the capital provider the losses are unlimited.
Q4) A partnership between an Islamic bank and other partners,in which all partners contribute to the capital of the project,is called a Mudarabah contract.
A)True
B)False
Q5) Explain in your own words the three key principles of Islamic finance.
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Chapter 29: Unemployment
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Q1) Consumers decide to ride bikes more and drive cars less.Bicycle companies expand production while automobile companies fire workers.This is an example of
A)frictional unemployment created by sectoral shifts.
B)frictional unemployment created by efficiency wages.
C)structural unemployment created by efficiency wages.
D)structural unemployment created by sectoral shifts.
Q2) Refer to Table 29-3.What is the adult male labor force in Meditor?
A)50 million
B)85 million
C)90 million
D)130 million
Q3) What is the theory of efficiency wages?
Provide four reasons that employers might pay efficiency wages.
Q4) Refer to Table 29-3.What is the adult male population in Meditor?
A)50 million
B)90 million
C)130 million
D)135 million
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Chapter 30: The Monetary System
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Q1) When the Fed buys government bonds,
A)the money supply increases and the federal funds rate increases.
B)the money supply increases and the federal funds rate decreases.
C)the money supply decreases and the federal funds rate increases.
D)the money supply decreases and the federal funds rate decreases.
Q2) Suppose banks decide to hold more excess reserves relative to deposits.Other things the same,this action will cause the A)money supply to fall.To reduce the impact of this the Fed could lower the discount rate.
B)money supply to fall.To reduce the impact of this the Fed could raise the discount rate. C)money supply to rise.To reduce the impact of this the Fed could lower the discount rate.
D)money supply to rise.To reduce the impact of this the Fed could raise the discount rate.
Q3) In order for currency to be widely used as a medium of exchange,it is sufficient for the government to designate it as legal tender.
A)True
B)False
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Chapter 31: Money Growth and Inflation
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Q1) Which of the following is correct?
A)If the Fed purchases bonds in the open market,then the money supply curve shifts right.A change in the price level does not shift the money supply curve.
B)If the Fed sells bonds in the open market,then the money supply curve shifts right.A change in the price level does not shift the money supply curve.
C)If the Fed purchases bonds,then the money supply curve shifts right.An increase in the price level shifts the money supply curve right.
D)If the Fed sells bonds,then the money supply curve shifts right.A decrease in the price level shifts the money supply curve right.
Q2) The inflation rate is measured as the percentage change in a price index.
A)True
B)False
Q3) As the price level rises,the value of money
A)increases,so people want to hold more of it.
B)increases,so people want to hold less of it.
C)decreases,so people want to hold more of it.
D)decreases,so people want to hold less of it.
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Chapter 32: Open-Economy Macroeconomic Models
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Q1) During a hyperinflation the real domestic value of a country's currency
A)falls and its nominal exchange rate depreciates.
B)falls and its nominal exchange rate appreciates.
C)rises and its nominal exchange rate depreciates.
D)rises and its nominal exchange rate appreciates.
Q2) Which of the following does purchasing-power parity conclude should equal 1?
A)both the nominal and the real exchange rate.
B)the nominal exchange rate but not the real exchange rate
C)the real exchange rate but not the nominal exchange rate
D)neither the nominal exchange rate nor the real exchange rate
Q3) If a country sells more goods and services abroad than it purchases abroad,it has positive net exports and a trade surplus.
A)True
B)False
Q4) If a country's net exports fall,then its net capital outflow falls by the same amount. A)True B)False
Q5) How do the nominal exchange rate and the real exchange rate differ?
Q6) Why are net exports and net capital outflow always equal?
Page 34
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Chapter 33: A Macroeconomic Theory of the Open Economy
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Q1) In the open economy macroeconomic model,the price that balances supply and demand in the market for foreign-currency exchange model is the
A)nominal exchange rate.
B)nominal interest rate.
C)real exchange rate.
D)real interest rate.
Q2) In an open economy,the demand for loanable funds comes from both domestic investment and net capital outflow.
A)True
B)False
Q3) Refer to Figure 33-6.If the economy were initially in equilibrium at r<sub>2 </sub>and E<sub>3</sub> and the government removed import quotas,the exchange rate would
A)appreciate to E<sub>4</sub>.
B)appreciate to E<sub>2</sub>.
C)depreciate to E<sub>1</sub>.
D)depreciate to E<sub>2</sub>.
Q4) How are the identities S = NCO + I and NCO = NX related to the foreign currency exchange market and the loanable funds market?
Page 35
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Chapter 34: Aggregate Demand and Aggregate Supply
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Q1) From 2001 to 2005 there was a dramatic rise in the price of houses.If this rise made people feel wealthier,then it would have shifted
A)aggregate demand right.
B)aggregate demand left.
C)aggregate supply right.
D)aggregate supply left.
Q2) Refer to Figure 34-2.The appearance of the long-run aggregate-supply (LRAS)curve
A)is inconsistent with the concept of monetary neutrality.
B)is consistent with the idea that point A represents a long-run equilibrium but not a short-run equilibrium when the relevant short-run aggregate-supply curve is AS<sub>1</sub>.
C)indicates that Y<sub>1</sub> is the natural rate of output.
D)All of the above are correct.
Q3) Other things the same,if the price level rises,then domestic interest rates
A)rise,so domestic residents will want to hold more foreign bonds.
B)rise,so domestic residents will want to hold fewer foreign bonds.
C)fall,so domestic residents will want to hold more foreign bonds.
D)fall,so domestic residents will want to hold fewer foreign bonds.
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Chapter 35: The Influence of Monetary and Fiscal Policy on Aggregate Demand
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Q1) A tax cut shifts the aggregate demand curve the farthest if
A)the MPC is large and if the tax cut is permanent.
B)the MPC is large and if the tax cut is temporary.
C)the MPC is small and if the tax cut is permanent.
D)the MPC is small and if the tax cut is temporary.
Q2) The primary argument against active monetary and fiscal policy is that
A)attempts to stabilize the economy do not constitute a proper role for government in a democratic society.
B)these policies affect the economy with a long lag.
C)these policies affect the economy too quickly and with too much impact.
D)history demonstrates that interest rates respond unpredictably to active policies,leading to unpredictable effects on income.
Q3) The exchange-rate effect is based,in part,on the idea that
A)a decrease in the price level reduces the interest rate.
B)an increase in the price level causes investors to move some of their funds overseas.
C)an increase in the price level causes domestic goods to become less expensive relative to foreign goods.
D)a decrease in the price level reduces spending on net exports.
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Chapter 36: The Short-Run Trade-Off Between Inflation and Unemployment
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Q1) Suppose that the Prime Minister and Parliament of Veridian are disappointed with the high inflation rates under the current system where the Veridian Ministry of Finance is in charge of the money supply.They make reforms to lower inflation from its current rate of 8%.Suppose further that the public is confident that with the reforms in place that inflation will fall to 2%.Also suppose that those in control of the money supply actually conduct monetary policy so that the actual inflation rate is 4%.Using long-run and short-run Phillips curves and assuming the natural rate of unemployment is 6%,show the initial long run equilibrium of Veridian and label it "A".Assuming that the government had actually set inflation at 2% and that the public believed this,label the long-run equilibrium "B".Now,suppose that inflation expectations fell to 2% and that the government unexpectedly created inflation of 4%.Show the short-run equilibrium and label it "C".If the money supply continues to grow at a rate consistent with 4% inflation,show where the economy ends up and label that point "D".
Q2) If people anticipate higher inflation,but inflation remains the same then
A)the short-run Phillips curve would shift right and unemployment would rise. B)the short-run Phillips curve would shift right and unemployment would fall. C)the short-run Phillips curve would shift left and unemployment would rise. D)the short-run Phillips curve would shift left and unemployment would fall.
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Chapter 37: Six Debates Over Macroeconomic Policy
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Q1) Policymakers following a "lean against the wind" policy would
A)increase government expenditures when output is low and decrease them when output is high.
B)increase government expenditures when output is low and do nothing when output is high.
C)decrease government expenditures when output is low and increase them when output is high.
D)decrease government expenditures when output is high and do nothing when output is low.
Q2) Proponents of tax-law changes to encourage saving would
A)argue that corporate tax rates should be decreased.
B)increase the number of government benefits which are means-tested.
C)argue that state sales tax should be replaced with state income tax.
D)favor none of the above programs.
Q3) If the unemployment rate rises,which policies would be appropriate to reduce it?
A)increase the money supply,increase taxes
B)increase the money supply,cut taxes
C)decrease the money supply,increase taxes
D)decrease the money supply,cut taxes
Q4) Explain the main arguments in favor of economic stabilization.
Page 39
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