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In economics, scarcity means that:
Society’s desires exceed the want-satisfying capability of the resources available to satisfy those desires.
Given that resources are scarce:
Opportunity costs are experienced whenever choices are made.
Opportunity cost may be defined as the:
Goods or services that are forgone in order to obtain something else.
The market mechanism may best be defined as:
The use of market prices and sales to signal desired output.
When the invisible hand does not produce optimal outcomes for the economy, there is evidence of:
Market failure.
Macroeconomics focuses on the performance of:
The overall economy.
Scarcity results when available resources cannot satisfy all desired uses of those resources.
Which of the following statements is true about the United States economy?
The U.S. produces approximately one-fifth of the world’s production.
The government establishes the rules of the game for economic transactions in order to:
Legitimatize and enforce contracts.
The term externalities refer to:
The costs and benefits of a market activity borne by a third party.
The goal of the consumer in a market economy is to use his/her limited income to buy:
The set of goods and services that maximizes their utility.
Which of the following is purchased in a factor market?
The labor of a state university professor
Individual consumers supply ____ and purchase ____.
Factors of production; final goods and services
According to the law of demand, during a given period of time, the quantity of a good demanded:
Increases as its price falls, ceteris paribus.
According to the law of demand, a demand curve:
Has a negative slope.
Ceteris paribus, if buyers expect the price of airline tickets to fall in the future, then right now there should be:
A decrease in the demand for airline tickets.
Assume that pencils and pens are substitutes. If the price of pencils rises, then we will see:
An increase in the demand for pens.
Which of the following is a determinant of supply?
Available technology
Which of the following events would cause a rightward shift in the market supply curve for automobiles?
A technological improvement which reduces the cost of production
Assume that steel is used to produce monkey wrenches. Ceteris paribus, if the price of steel rises, then:
The supply curve for monkey wrenches will shift to the left.
If there is a surplus at a given price, then:
That price is greater than the equilibrium price.
Market failure implies that the market mechanism:
Leads the economy to the wrong mix of output.
When external costs result from the production of a good:
Both producers and consumers have an incentive to produce and consume too much.
The market will overproduce goods that have external costs because:
Producers experience lower costs than society.
Antitrust activity addresses:
Market power.
Which of the following is a source of government failure but is not typically an example of market failure?
According to cost-benefit analysis, a government project should be undertaken as long as the:
Benefits exceed the opportunity costs.
The GDP per capita is the most practical way to:
Make international comparisons of the standard of living.
If GDP grows more rapidly than population for a particular country over a period of time, then we can determine that:
GDP per capita has increased.
Suppose a friend claims he is helping the economy by throwing trash on the street rather than in trash cans because the extra expenditures necessary to clean up the streets will increase GDP. Your friend is:
Right. GDP will increase, ceteris paribus.
When an individual makes repairs to her own home instead of hiring a company to make the repairs, the activity is:
Productive but excluded from GDP because it is a nonmarket activity.
A furniture factory produces dining room sets. The lumber they purchase from the lumberyard is a/an:
Intermediate good.
Value added is the:
Increase in market value of a product that takes place at each stage of the production process.
The sum of value added:
Is one way to compute the GDP.
The value of final output produced in a given period, measured in current prices is:
Nominal GDP.
Real GDP is more accurate than nominal GDP in making comparisons of output over time because:
Nominal GDP can increase simply because of price increases over time.
In calculating GDP imports are:
Subtracted from exports because they are part of another country’s GDP.
The value of total output must equal the value of total income in an economy for all of the following reasons except:
Government expenditures must equal government revenues.
The value of final output produced in a given period, measured in current prices is:
Nominal GDP.
Real GDP is more accurate than nominal GDP in making comparisons of output over time because:
Nominal GDP can increase simply because of price increases over time.
If real GDP falls from one period to another and the price level stays the same we can conclude that:
Nominal GDP decreased.
Investment is the:
Expenditure on new plant, equipment, and structures plus changes in business inventories.
An increase in business inventories during a time period, ceteris paribus, will:
Increase GDP during that period.
Net exports are:
The value of exports minus the value of imports.
In calculating GDP imports are:
Subtracted from exports because they are part of another country’s GDP.
The components of GDP are:
C + I + G + (X – M).
The labor-force participation rate is the number:
In the labor force divided by the working-age population.
The type of unemployment that economists generally associate with normal growth of the labor force and expanding job opportunities in a dynamic economy is:
Frictional unemployment.
When there is a mismatch between the skills required for a job and the skills of job seekers, the unemployment that results is an example of:
Structural unemployment.
Tom worked at NASA for thirteen years. In the fourteenth year, his job was automated, resulting in him losing his job. He looked for a new job for eighteen months before finding a job that paid less. During his eighteen month job search, Tom was considered to be:
Structurally unemployed.
During an economic downturn, consumers spend considerably less on goods and services. This results in layoffs, and the laid off workers are classified as:
Cyclically unemployed.
Inflation is:
An increase in the average level of prices of goods and services.
Inflation means:
Average prices are rising, but it is not certain what is happening to relative prices.
Relative price is:
The price of one good in comparison with the price of other goods.
Changes in relative prices may occur in a period of:
Stable prices, inflation or deflation.
Which of the following explains why redistribution occurs during inflation?
People buy different combinations of goods and services and own different combinations of wealth
The term “nominal income” refers to:
Money income measured in current dollars.
Your real income is:
The purchasing power of the money you receive.
The Consumer Price Index is:
A measure of changes in the average price of consumer goods and services.
A sudden increase in inflation, ceteris paribus:
Raises the CPI and reduces real income.
Alternating periods of economic growth and contraction in real GDP define:
The business cycle.
According to classical theory:
Flexible wages and prices allow a laissez-faire economy to adjust to shifts in aggregate demand.
According to classical economists, market-driven economies:
Are typically self-adjusting.
Say’s Law states that:
Supply creates its own demand.
Unlike the Classical economists, Keynes asserted that:
The economy was inherently unstable.
A decline in total output for two or more consecutive quarters is referred to as:
A recession.
Determinants of macro performance work on macro outcomes through:
Aggregate supply and demand.
Which of the following is illustrated by the aggregate demand curve?
How total quantity of output demanded varies with the average price level
The aggregate demand curve is downward-sloping because, other things being equal:
People buy more goods and services at lower average prices.
The real-balances effect says that an increase in the price level:
Reduces the value of savings, which reduces the purchase of goods and services.
Ceteris paribus, if average prices in the U.S. economy fall, then the:
Foreign-trade effect will lead to a higher quantity of output demanded.
Ceteris paribus, if average prices in the U.S. economy fall, then the:
Interest-rate effect will lead to a higher quantity of output demanded.
Macro equilibrium always occurs when:
Aggregate demand equals aggregate supply at the average price level of the economy.
The unique situation in which the behavior of buyers and sellers is compatible is referred to as:
Macro equilibrium.
Alternating periods of economic growth and contraction are:
The result of recurrent shifts of aggregate demand and aggregate supply.
If full employment is associated with an output that is greater than the current macro equilibrium, which of the following best describes the impact of a rightward shift of the aggregate supply curve, ceteris paribus?
A lower price level and a higher level of output
Which combination of shifts of aggregate demand and supply would definitely cause an increase in real GDP?
Demand shifts to the right and supply shifts to the right
Which of the following economic perspectives focuses on the need for government to shift aggregate supply to correct problems of unemployment and inflation?
A vertical aggregate supply curve:
Implies that aggregate demand shifts have no impact on output.
The only policy lever that is effective against unemployment when the AS curve is vertical is:
Supply-side policy.
Aggregate demand is the total quantity of output:
Demanded at alternative price levels in a given time period.
The components of aggregate demand are:
Consumption, government spending, net exports, and investment.
Which of the following is not true about the marginal propensity to consume?
It is always equal to or greater than 1
The MPC indicates the portion of:
An additional dollar of income that will be spent.
The MPC + MPS must always equal:
Which of the following statements is not true about the consumption function?
It indicates that consumption is inversely related to disposable income
The line described by the consumption function C = a + bYD will change its slope when:
The MPC changes.
An increase in the income-dependent portion of the consumption function would correspond to a:
Movement along the consumption function to the right.
Investment spending includes expenditures on all of the following except:
Stocks and bonds.
Which of the following is not considered to be an important determinant of investment?
Current disposable income
Which of the following causes a movement along the investment demand curve?
A change in the rate of interest
Which of the following will cause the aggregate-demand curve to shift to the left?
A decrease in consumer and business confidence because of a terrorist attack
Which of the following is eliminated when output equals full-employment GDP?
Cyclical unemployment
Keynes was concerned that at macroeconomic equilibrium the economy would experience:
Neither full employment nor price stability.
A recessionary gap:
Is the amount by which total spending exceeds GDP.
Which of the following occurs when the spending on final goods and services exceeds full-employment GDP?
Inflationary gap
When the economy is at equilibrium:
Leakages equal injections.
An addition of spending to the circular flow of income is:
An injection.
Injections include:
If an economy is at full employment and investment spending decreases while all other levels of spending remaining constant then:
A GDP gap emerges.
If an economy is at full employment and consumption spending decreases while all other levels of spending remaining constant then:
Increased unemployment results.
When unwanted inventories pile up in retail stores, retail managers will take actions that lead to greater:
The multiplier process can occur when a decrease in investment spending:
Reduces household incomes causing consumers to buy fewer goods and services.
The marginal propensity to consume is:
The fraction of each additional dollar of disposable income spent on consumption.
An initial (autonomous) decrease in aggregate demand will likely be:
Much smaller than the eventual decline in spending.
Assuming an upward-sloping aggregate supply curve, when aggregate demand decreases, unemployment:
Increases and the price level decreases.
A decrease in a recessionary GDP gap will most likely be associated with a decrease in:
Cyclical unemployment.
Suppose an economy has an upward-sloping AS curve and an inflationary gap equal to $10 billion. If AD shifts to the left by $10 billion:
Real output will fall by less then $10 billion.
Fiscal policy works primarily through:
Shifts of the AD curve.
Which of the following fiscal policies would cause a decrease in aggregate expenditures?
An increase in taxes and a decrease in government spending
From a Keynesian perspective, the way out of recession is to:
Get consumers to spend more on goods and services.
A tax cut intended to increase aggregate demand is an example of:
Fiscal stimulus.
In a diagram of aggregate demand and supply curves, the GDP gap is measured as the:
Horizontal distance between the equilibrium output and the full-employment output.
The AD shortfall is the amount of additional aggregate demand needed to achieve full employment after allowing for:
Price-level changes.
Fiscal policy works primarily through:
Shifts of the AD curve.
A tax cut intended to increase aggregate demand is an example of:
Fiscal stimulus.
If aggregate demand increases by the amount of the recessionary GDP gap and aggregate supply is upward sloping:
A recessionary GDP gap will still exist.
The AD shortfall is the amount of additional aggregate demand needed to achieve full employment after allowing for:
Price-level changes.
Given an economy that is experiencing high unemployment, the amount of additional aggregate demand needed to achieve full employment after allowing for price-level changes is:
The AD excess.
Ceteris paribus, if the AD shortfall equals $600 billion, then the federal government can close it by increasing:
Government spending by less than $600 billion.
Which of the following is true when the government attempts to move the economy to full employment by increasing spending?
The total change in spending includes both the new government spending and the subsequent increases in consumer spending.
Which of the following explains why the government should not increase spending by the entire amount of the AD shortfall to move the economy to full employment?
The multiplier process will contribute to an additional increase in aggregate demand which will cause an inflationary gap.
The desired tax cut to close a GDP gap is given by:
Desired fiscal stimulus ÷ MPC.
A tax cut:
Contains less fiscal stimulus than an increase in government spending of the same size.
Which of the following would cause the level of income to change by the greatest amount, ceteris paribus?
An increase in defense spending of $10 billion
When the macro equilibrium is above full employment, fiscal policy should be used to shift aggregate demand by the amount of:
The AD excess.
The desired fiscal restraint is equal to:
Excess AD divided by the multiplier.
Deficit spending results whenever the government:
Finances expenditures that exceed tax revenues.
Which of the following policies will reduce the budget deficit while achieving greater fiscal restraint?
Less government expenditure and higher taxes
If full-employment output exceeds equilibrium output, greater deficit spending will result in a:
Smaller recessionary gap.
A budget surplus is:
An excess of government revenues over government expenditures in a given time period.
When there is excess aggregate demand, the appropriate policy would be for the government to:
Make budget surpluses larger.
The elements of the federal budget not determined by past legislative or executive commitments are:
Discretionary fiscal spending.
Much of each year’s federal budget is considered “uncontrollable” because:
Most of the current revenues and expenditures are the result of decisions made in prior years.
Which of the following is not an automatic stabilizer?
Defense spending
Automatic stabilizers:
Help to moderate the extremes of the business cycle.
Which of the following is most likely to increase a federal budget surplus?
A higher inflation rate and a lower unemployment rate
For the convenience of analyzing the part of the deficit that is sensitive to fiscal policy, the actual deficit is divided into which of the following components?
Structural and cyclical deficits
In contrast to the structural deficit, the cyclical deficit reflects:
Fluctuations in economic activity.
The major reason why budget deficits were reduced during the 1990s and why there was a budget surplus in 1998-2000 is because of:
The growth of the U.S. economy.
A decrease in private-sector borrowing and spending caused by increased government borrowing is:
Crowding out.
The opportunity cost of the debt is:
Less of an issue if the economy is below full employment since crowding out is less likely to occur.
The national debt is:
The accumulation of annual deficit flows.
Policies designed to pay off the national debt will result in:
A smaller level of AD.
Interest payments on the national debt:
Are a redistribution of income from taxpayers to bondholders.
The “real burden” of the debt is directly related to:
The idea of opportunity cost.
When money serves as a mechanism for transforming current income into future purchases it is functioning as a:
Store of value.
Which of the following is not included in the narrowest definition of the money supply?
Credit card balances
The different components of the money supply reflect:
Variations in liquidity and accessibility of assets.
Deposit creation occurs when:
A bank lends money.
One of the essential functions a bank performs is that of:
Transferring money from savers to spenders.
When cash or coins are initially deposited into a bank:
The composition of the money supply changes, but the size of the money supply does not change.
The ratio of a bank’s reserves to its total transactions deposits is known as the:
Reserve ratio.
The minimum amount of reserves a bank is required to hold is known as:
Required reserves.
Which of the following sets the legal minimum reserve ratio?
The Federal Reserve
Excess reserves are:
Total reserves less required reserves.
The government uses ____________ to regulate the amount of money banks lend.
Monetary policy
The Federal Reserve System was created by:
The Federal Reserve Act in 1913.
Which of the following services is performed by the regional Federal Reserve banks?
Providing currency to private banks
The Board of Governors consists of:
7 members, appointed for 14 year terms.
The Federal Open Market Committee includes:
All 7 governors and 5 of the regional Reserve bank presidents.
The current chairman of the Federal Reserve is:
Ben Bernanke.
All of the following are tools available to the Fed for controlling the money supply except:
The federal funds rate is the interest rate charged when:
One bank lends to another bank.
The rate of interest charged by Federal Reserve banks for lending reserves to member banks is the:
Discount rate.
By raising and lowering the discount rate, the Fed changes the:
Incentive for banks to borrow reserves.
Which of the following is the principal mechanism used by the Federal Reserve to directly alter the reserves of the banking system?
Open market operations
Open market operations involve the Fed:
Buying or selling bonds.
Stagflation is the result of
A decrease in aggregate supply.
Which of the following characterizes stagflation?
An increase in both unemployment and inflation.
The Phillips curve shows
A historical (inverse) relationship between the rate of unemployment and the rate of inflation.
A movement along the Phillips curve shows that the unemployment rate and inflation rate are
Inversely related to each other.
Demand-side policies alone result in which of the following?
A movement along the Phillips curve.
According to supply-side theory, which of the following would cause a leftward shift in the aggregate supply curve?
Increasing government regulations.
Supply-side policies are designed to achieve a
Lower inflation rate and a lower unemployment rate.
Which of the following is NOT an example of positive supply-side policy?
Higher marginal tax rates.
According to supply-side theorists, taxes
Alter disposable income and affect the incentives to work and produce.
Supply-side economists favor tax incentives that
Encourage investment.
Read also what do think classical economists

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