A nation that protects its workers from unemployment by limiting the use (by employers) of technological improvements will
grow less rapidly because technological change is an important factor contributing to the growth of output.
What is the opportunity cost of an action?
The value of the best opportunity that must be sacrificed in order to take the action.
A local restaurant offers an “all you can eat” Sunday brunch for $12. Susan eats four servings but leaves half of a fifth helping uneaten. Why?
Her marginal value of food has fallen to zero.
What will people do because information is costly to acquire?
They will rationally choose not to become fully informed when making decisions.
The value of a good
depends on many factors, including who uses it and under what circumstances.
When economists say the quantity supplied of a product has decreased, they mean the
price of the product has fallen, and consequently, suppliers are producing less of it.
Which of the following would decrease the supply of sugar?
The tariff (tax) on imported sugar increases
The difference between positive economic statements and normative economic statements is that
positive statements are based on fact while normative statements are based on opinion
Which of the following is true of private ownership?
Private ownership links responsibility with the right of control.
If Georgia experiences a late frost that damages the peach crop, we should expect the
supply curve for peaches to shift to the left and the price of peaches to rise.
Which of the following occurs when a shortage occurs in the market for a good?
Quantity demanded exceeds quantity supplied and the market mechanism pushes the price up, which in turn encourages more production and less consumption.
What will happen if the demand for bicycles increases?
Quantity supplied will increase.
Which of the following would reduce the price of DVD players and increase the quantity sold?
an increase in the supply of DVD players
The term market always refers to
a group of buyers and sellers of a particular good or service.
In a competitive market economy, a resource in short supply will be allocated
to those firms that can make the most profitable use of it.
Which of the following statements about trade is true?
The value of a good generally depends on who uses it and circumstances such as when and where it is used.
Rebecca decides to buy a dress that Hillary has for sale; they agree on a price of $20. Which of the following best describes who gains and who loses from the transaction?
Both parties expect to gain from this transaction.
The law of demand refers to the
inverse relationship between the price of a good and the willingness of consumers to buy it.
A decrease in the expected future price of a good will cause the current demand for the good to
decrease, which is a shift to the left of the demand curve.
When economists say the quantity demanded of a product has increased, they mean the
price of the product has fallen, and consequently, consumers are buying more of it.
What does Adam Smith’s invisible hand principle stress?
The tendency of the competitive market process to direct self-interested individuals into activities that enhance the economic welfare of society.
Which of the following is a major implication of the invisible hand concept?
When directed by competitive market prices, the actions of self-interested individuals will tend to promote overall economic prosperity.
Which of the following is true when collective decision making is utilized to resolve economic questions regarding the allocation of resources?
Central planning and political bargaining will replace market forces.
Which one of the following statements about pitfalls to avoid is correct?
Government programs can be implemented with good intentions but can lead to undesirable outcomes because of unintended consequences.
Suppose demand decreases and supply increases. Which of the following will happen?
Equilibrium quantity will rise, fall, or stay the same while equilibrium price will decrease.
f there is both an increase in the supply of a good and a decrease in demand for a good, which of the following will definitely occur?
The price of the good will decrease.
If Shawn can produce more donuts in one day than Sue can produce in one day, then
Shawn has an absolute advantage in the production of donuts.
Economic analysis suggests that gains from specialization and exchange
will be realized if individuals are allowed to pursue goals that are in their own self-interest.
Land used to grow alfalfa could also be used to grow hay. Which of the following is true when the farmer plants hay and the market price of alfalfa rises?
The opportunity cost of producing hay increases.
Which of the following is the best description of the scientific method in economics?
The unbiased development and testing of theories about how the world works.
In computing GDP, why are market prices used to value final goods and services?
Market prices reflect the values of goods and services to the buyer.
U.S. exports are
included in U.S. GDP because they are produced domestically
U.S. imports are
not added to U.S. GDP because they are produced abroad
If Europe and Japan experience rapid growth in their incomes, other things constant, this will cause
an increase in the exports of the United States.
If the nominal interest rate was 12 percent and the inflation rate was 10 percent in 1980, while the nominal interest rate was 7 percent and the inflation rate was 2 percent in 2009, then
real rates were higher in 2009.
Which of the following adjustments will most likely occur when output exceeds the economy’s long-run capacity?
Higher resource prices and costs will reduce short-run aggregate supply until output falls to the economy’s long-run capacity.
If an unanticipated reduction in aggregate demand throws a market economy into a recession,
lower real resource prices and interest rates will act as a stabilizing force and direct the economy back to its full employment potential.
Steven puts money into an account. One year later he sees that he has 6 percent more dollars and that his money will buy 2 percent more goods.
The nominal interest rate was 6 percent and the inflation rate was 4 percent.
Which of the following explains why higher prices in the goods and services market will lead to an upward sloping short-run aggregate supply curve?
The higher prices will temporarily improve profit margins because many of the cost components of firms will be fixed in the short run.
Over time, people have come to rely more on market-produced goods and less on goods that they produce for themselves. For example, busy people with high incomes, rather than cleaning their own houses, hire people to clean their houses. By itself, this change has
caused GDP to rise.
When the economy is operating at an output rate less than full-employment capacity,
weak demand for investment will place downward pressure on real interest rates.
Which of the following will most likely occur in the United States as the result of an unexpected rapid growth in real income in Canada and Mexico?
An increase in aggregate demand and output in the short run
If an unanticipated increase in aggregate demand results in an output beyond the economy’s long-run capacity, long-run equilibrium will eventually be restored by
higher resource prices and a decrease in SRAS.
Which of the following will most likely accompany an unanticipated increase in short-run aggregate supply?
An increase in real GDP.
if Sam Jackson voluntarily quits one job, possesses marketable skills, and expects to find a new job in a few weeks, then Mr. Jackson is considered
Which of the following is true if the actual price level is lower than the expected price level reflected in long-term contracts?
The actual rate of unemployment will exceed the natural rate of unemployment.
When prices in the goods and services market are below the level anticipated,
output will temporarily fall short of the economy’s long-run potential.
When an economy is in long run equilibrium,
the actual and natural rates of unemployment will be equal.
Which of the following is true when an economy is operating at its full employment rate of output?
The actual rate of unemployment will equal the natural rate
When full employment is present,
the actual rate of unemployment will equal the natural rate.
During a recession, the actual rate of unemployment will be
greater than the natural rate of unemployment
Anna has just finished high school and started looking for her first job, but has not yet found one. As a result, the unemployment rate
increases, and the labor-force participation rate increases.
Sally is on a temporary layoff from her factory job. If Sally participates in the BLS survey, she will be classified as
unemployed and in the labor force.
If this year the CPI is 110 and last year it was 100, then
the price level as measured by the CPI has increased by 10 percent.
Your boss gives you an increase in the number of dollars you earn per hour. This increase in pay makes
your nominal wage increase. If your nominal wage rose by a greater percentage than the price level, then your real wage also increased.
Which of the following statements about real GDP per person is true?
Real GDP per person provides more meaningful comparisons across time and countries than real GDP.
If you go to the bank and notice that a dollar buys more Mexican pesos than it used to, then the dollar has
appreciated relative to the peso. Other things the same, the appreciation would make you more likely to travel to Mexico.
If net exports are negative, then
there will be net capital inflow, so American assets bought by foreigners are greater than foreign assets bought by Americans.
f the quantity supplied of euro were greater than the quantity demanded, which of the following would occur?
The price of the euro would fall.
A large grain crop resulting from favorable weather conditions would shift which of the following curves?
Only short-run aggregate supply.
In the aggregate demand-aggregate supply model, the short-run effects of an unanticipated increase in the money supply will be
lower real interest rates and an increase in aggregate demand.
If the Fed unexpectedly decreases the money supply, real GDP
decreases because the resulting increase in the interest rate leads to a decrease in investment.
When the Fed buys bonds and injects additional reserves into the banking system, this action will
place downward pressure on short-term interest rates.
An unexpected increase in the supply of money will
reduce the real rate of interest and, thereby, trigger an increase in current spending by households and businesses
Which one of the following is a major difference between market and collective action through government?
in the market sector, there is generally a one-to-one link between payment and consumption; this link is often absent in the government sector.
Which of the following is true regarding the methodology of public choice analysis?
It develops a logically consistent theory based on how individual actors (such as voters, politicians, and bureaucrats) respond to incentives.
An analysis of countries experiencing rapid inflation indicates that inflation is generally
caused by rapid growth in the money supply.
A shift to a more expansionary monetary policy will
Stimulate output and employment, but only after a time lag that is generally long and variable.
Within the framework of the Keynesian model,
changes in output rather than changes in prices direct the economy to equilibrium.
Within the Keynesian model, the multiplier effect tends to
magnify small changes in spending into much larger changes in output and employment.
The expenditure multiplier indicates that
changes in investment, government, or consumption spending can trigger much larger changes in output.
If uncertainty causes commercial banks to increase their holdings of excess reserves, other things constant, this will
reduce the size of the deposit expansion multiplier.
Why does a tax change affect aggregate demand?
A tax change alters disposable income and consumption spending.
According to the Keynesian view, if policy makers thought the economy was about to fall into a recession, which of the following would be most appropriate?
A planned increase in the budget deficit.
According to the Keynesian view, the proper response to a severe recession would be
an increase in government spending financed by borrowing.
Which of the following is the strongest evidence of a shift toward a more expansionary fiscal policy?
An increase in government spending as a share of the economy and an expansion in the size of the budget deficit
When the Federal Reserve System wants to increase the money supply, what does it typically do?
It purchases U.S. government securities.
Which of the following would be most appropriate if the Federal Reserve wanted to increase the money supply in order to stimulate the economy?
It would buy U.S. securities.
f the Fed wants to shift toward a more expansionary policy, it often announces that it is going to change the federal funds interest rate. The Fed controls the federal funds interest rate
through its policy of open market operations.
Which of the following indicates the primary mechanism by which the money supply expands?
The Fed purchases additional bonds, which increases the reserves available to the banking system
Raising taxes as an element of discretionary fiscal policy is intended to reduce aggregate demand, but it can also reduce aggregate supply if
the higher taxes cause workers to work less.
Which of the following attributes of fiscal policy will most likely be stressed by a supporter of supply-side economics?
the impact of marginal tax rates on the supply and productivity of resources
Which of the following tends to make the size of a shift in aggregate demand resulting from a tax change smaller than would otherwise be the case?
The crowding-out effect
In a world where capital moves rapidly across national boundaries, if a larger budget deficit leads to higher real interest rates, which of the following is likely to occur?
There will be a net inflow of capital, which will cause the dollar to appreciate and net exports to decline.
It will be difficult to institute fiscal policy in a stabilizing manner because politicians will find
budget deficits attractive during a recession, but they will be reluctant to run budget surpluses during an expansion.
Which of the following is a primary action of modern banks?
They hold only a fraction of their assets in the form of required reserves relative to their deposits.
If new regulations make it illegal to sell older model electrical appliances, then
producers of new models that meet the regulations will see demand for their output rise.
Other things constant, if both the benefits and costs of a public-sector activity are widespread among voters, the political process will generally result in the
acceptance of productive activities and rejection of unproductive activities
In which one of the following situations is the political process most likely to result in both the acceptance of efficient (productive) programs and the rejection of inefficient (counterproductive) political activities?
The people who benefit from a government program pay the costs of the program roughly in proportion to the benefits that each receives.
Which of the following is the most likely explanation for the imposition of a price floor in the market for corn?
Sellers of corn, recognizing that the price floor is good for them, have pressured policy makers into enacting the price floor.
If price falls, what happens to the demand for a product?
It does not change.
According to Adam Smith’s invisible hand principle, productive actions that promote the general welfare of society will be undertaken when
competitive markets direct the actions of self-interested individuals.
An increase in demand will cause
an increase in quantity supplied.
Which of the following best expresses the law of demand?
The inverse relationship between the price of a good and the quantity demanded.
What important role do profits and losses play in a market economy?
They allocate scarce resources in a manner that maximizes the value created to society.
Which of the following would most likely cause the supply of wheat to increase?
a technological advance that lowers the cost of producing wheat
If price rises, what happens to quantity supplied of a product?
An increase in supply will cause
an increase in quantity demanded.
An increase in the price of a good would
decrease the quantity demanded for the good.
An increase in the demand for tattoos will lead to a
higher price and a larger quantity sold.
f price rises, what happens to the quantity demanded for a product?
Other things constant, a decrease in consumer income will do which of the following?
Decrease the demand for large-screen television sets
If nominal GDP rises from one year to the next, then
either output, or the general level of prices, or both must be rising.
Which of the following transactions would be included in this year’s GDP?
d. Johnson rents a five-year-old house from Smith.
a. Johnson purchases an antique at Smith’s garage sale.
b. Johnson purchases 100 shares of AT&T stock from Smith.
c. Johnson purchases a five-year-old house from Smith.
d. Johnson rents a five-year-old house from Smith.
When economists speak of changes in GDP measured in constant dollars, they mean that
a price index has been used to adjust money GDP for the effects of inflation.
Suppose a country had $2.4 billion of net exports and bought $4.8 billion of goods and services from foreign countries. This country would have
$7.2 billion of exports and $4.8 billion of imports.
Which of the following about inventory changes and GDP is true?
Inventory investment adds to GDP because it represents goods produced during the current period.
Which of the following expenditures are not included in the consumption component of GDP?
d. purchase of a new home
a. tax preparation service
b. maid service
c. a new videocassette recorder
d. purchase of a new home
e. a restaurant meal
Which one of the following transactions would be included in GDP?
b. Ms. Bartolini pays $500 to fix the front end of her car damaged in a recent accident.
a. Ms. Smith pays $5,000 to purchase 100 shares of Microsoft stock.
b. Ms. Bartolini pays $500 to fix the front end of her car damaged in a recent accident.
c. Ms. Kim pays $50 for a used picture frame at a neighborhood garage sale.
d. Mr. Doe donates $500 to his town’s junior college scholarship fund.
Suppose a country had net exports of $8.3 billion and sold $52.4 billion of goods and services abroad. This country had
$52.4 billion of exports and $44.1 billion of imports.
Which one of the following would count as investment in the national income accounts?
d. a freight-hauling firm buying a new domestically produced truck
a. buying an existing house
b. buying 100 shares of Wal-Mart stock
c. buying a U.S. government bond
d. a freight-hauling firm buying a new domestically produced truck
If you wanted to compare the quantity of output of a country across time periods, which of the following would you use?
Which of the following is one of the widely-acknowledged problems with the consumer price index (CPI) as a measure of the cost of living?
It fails to account for the introduction of new goods.
Until recently, George lived in a home that was newly constructed in 2005. In 2005, he paid $200,000 for the brand new house. He sold the house in 2006 for $225,000. Which of the following statements is correct regarding the sale of the house?
The 2006 sale affected neither 2005 GDP nor 2006 GDP.
Anna, a U.S. citizen, works only in Germany. Where is the value she adds to production in Germany included?
In German GDP, but it is not included in U.S. GDP.
A business produced $10 million of goods in 2007 but sold only $9 million. Is the $1 million increase in inventory counted as part of the 2007 gross domestic product?
Yes, because these inventories are part of the output of the economy in 2007.
If inventory investment during a year was negative $6 billion, producers must have
sold $6 billion more goods and services during the year than they produced.
Which of the following best describes the distinguishing characteristics of business cycles?
Periods of growth in real output followed by periods of decline.
Which of the following would be officially classified as unemployed?
A laid-off construction worker waiting to return to a previous job.
Sharon was being treated unfairly by her boss, so she stormed off the job and two days later found another position. For two days, Sharon experienced
Matt loses his job and decides to sit on the beach rather than looking for work the next few months. Other things the same, what happens to the unemployment rate and labor-force participation rate?
The unemployment rate increases, and the labor-force participation rate decreases.
What causes the natural rate of unemployment to exist?
Normal dynamic changes given the institutional arrangements of the economy
Which of the following will most likely occur during the contractionary phase of a business cycle?
The sales of most businesses decline, and the unemployment rate rises.
When the rate of cyclical unemployment is zero, which of the following results?
The economy is considered to be at full employment.
Full employment means which of the following is zero?
Suppose the official unemployment rate is 10 percent. Which of the following is a definite conclusion to draw?
One of every ten people in the labor force is currently unemployed
A decrease in aggregate demand and the subsequent cutbacks in production lead to
Which one of the following persons would be classified as unemployed by the Bureau of Labor Statistics?
Joe, who is on layoff waiting for better weather so he can return to his construction job
When full employment is present in the United States, which of the following is true?
Approximately 95 percent of the labor force will be employed.
What happens during periods when the inflation rate fluctuates widely?
Uncertainty about changes in relative prices causes a decrease in economic efficiency.
Which of the following will most likely occur during the expansionary phase of a business cycle?
Real GDP rises, and unemployment falls.
If borrowers and lenders expect a higher rate of inflation, what happens to interest rates?
Nominal interest rates will tend to rise.
Suppose people expect inflation to be 3 percent during the next several years. When the real interest rate is 5 percent, what will be the nominal (money) interest rate?
Which of the following will always be true when an economy is in long-run equilibrium?
The output of the economy will correspond with the full-employment output.
If the dollar depreciates relative to the Peso, it can be said that
the Peso appreciates relative to the dollar.
Other things constant, an increase in resource prices will do which of the following?
Increase the cost of producing goods and services, which will lead to a higher price level.
f equilibrium is present in the foreign exchange market and a nation is experiencing a trade surplus,
the nation must be experiencing a net capital outflow.
Which of the following best characterizes the circular flow of income?
Businesses buy resources from households, and households use their income to buy goods and services from businesses.
Other things the same, when the interest rate rises
people would want to lend more, making the quantity of loanable funds supplied increase.
Other things constant, a decrease in resource prices will lead to
increased profits and an increase in short-run aggregate supply.
Which of the following will occur once decision makers fully adjust to an increase in prices?
Competitive forces will restore the usual relationship between product prices and costs.
Which of the following would generate a dollar demand for the euro?
American demand for European real estate.
A decrease in the dollar price of the English pound will make
U.S. exports to England decrease
When the exchange rate is determined by market forces and an economy is experiencing a net inflow of capital, the economy will tend to
run a trade deficit.
Which of the following is true in the aggregate demand and aggregate supply model?
The upward-sloping short-run aggregate supply curve intersects the downward-sloping aggregate demand curve to determine the economy’s price level and GDP.
Which of the following is true if there is a surplus of loanable funds?
The quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and the interest rate is above equilibrium.
Which of the following represents why private production tends to be more efficient then government production?
all the above
As both the budget and regulatory powers of government grow, public choice analysis indicates that individuals and groups will find it in their interest to do which of the following?
Spend more time rent seeking
Restrictions that limit sugar imports, subsidies for the construction of sports stadiums, and federal spending on programs like the construction of an indoor rain forest in Iowa all provide examples of government programs
that reflect the political attractiveness of special-interest issues.
An analysis of market failure and government failure indicates
both the market and the government may fail to meet conditions of economic efficiency; in each individual case, the choice of market or public-sector action requires careful evaluation.
The rational-ignorance effect refers to which of the following scenarios?
The lack of incentive voters have to become well-informed about candidates and issues because their vote is unlikely to affect the outcome of an election.
Public choice analysis suggests that the primary motivating factor for politicians will be finding the policies that are most likely to
get them reelected
Special-interest legislation is characterized by which of the following?
Concentrated benefits and widespread costs.
Which of the following explains why elected representatives will find borrowing to be an attractive method of financing current government programs?
the short sightedness effect
Which of the following is a distinguishing characteristic of a user charge?
Persons pay roughly in proportion to the extent that they use the good or service.
When is crony capitalism most likely to be present?
When businesses either implicitly or explicitly provide political decision-makers with contributions and other forms of political support in “exchange” for government favors that will improve their profitability.
For activities in which the benefits are concentrated and the costs widespread, governments are likely to undertake
too much of these activities relative to what would be efficient
Which of the following explains why pork-barrel spending is often approved, even when the spending is inefficient?
All of the above are correct.
What is logrolling?
Vote trading among legislators.
According to the shortsightedness effect, politicians tend to favor projects with which of the following characteristics?
Short-run benefits and long-run costs.
Which of the following is accurate regarding government expenditures in the United States?
The federal government spends considerably more than state and local governments combined.
The larger the marginal propensity to consume,
the larger the multiplier
Why do long lags make discretionary policy less effective?
By the time the impact of a policy is felt, the problem may have been corrected by market forces.
Keynes rejected the view that lower wages would direct a recessionary economy back to full employment because
powerful trade unions and large corporations made wages highly inflexible.
The multiplier effect refers to the fact that a change in spending (aggregate demand) will
cause nominal output to rise by some multiple of the initial increase in spending.
Why is the multiplier principle important?
It shows why small shifts in investment have a powerful influence on national income
Which of the following provides the best information about the direction of the government’s fiscal policy?
changes in the size of the federal government’s budget deficit or surplus
Within the framework of the Keynesian model, which of the following will occur if spending is abnormally low?
Equilibrium output will be less than the full-employment rate of output.
According to the Keynesian view, which of the following would most likely stimulate real output if an economy were in a recession?
a decrease in tax rates
If the government owes $10.0 trillion and then borrows $700 billion more this year, this leads to
a debt of $10.7 trillion and a deficit of $700 billion.
Which of the following best describes the economic conditions of the 1930s?
Depressed economic conditions and prolonged high rates of unemployment.
Keynesian economists believed that the prolonged unemployment of the 1930s was the result of
insufficient aggregate demand and the failure of market forces to direct the economy back to full employment.
Discretionary fiscal policy involves which of the following?
An intentional change in taxation or government spending.
Changes in government spending and/or taxes as the result of legislation, is called
discretionary fiscal policy.
As the marginal propensity to consume (MPC) increases, what happens to the spending multiplier?
Fiscal policy designed to increase aggregate demand during economic downturns and decrease aggregate demand during economic booms is called
countercyclical fiscal policy.
Which of the following best describes the crowding-out effect?
An increase in borrowing by the government will push interest rates upward, which will lead to a reduction in private spending.
Which of the following is most likely true when household debt as a share of income is abnormally high?
The growth of consumption is likely to remain sluggish even as the economy begins to recover
According to the crowding-out effect, expansionary fiscal policy will lead to
higher interest rates, an appreciated dollar, and reduced net exports.
Fiscal stimulus is most likely to direct resources into productive projects when spending decisions are left in the hands of
Measured as a share of GDP, what happened to the net federal debt between 1990 and 2011?
It fell during most of the 1990s, but rose sharply during 2001-2011.
Which one of the following is an area of continued disagreement among modern macroeconomists with regard to the use of fiscal policy?
Budget deficits are a highly effective tool with which to combat a severe recession.
Both Keynesians and non-Keynesians now recognize
the difficulties involved in timing discretionary changes in fiscal policy in a stabilizing manner.
Which of the following does the crowding-out effect stress?
Additional government borrowing to finance a larger deficit will increase the demand for loanable funds, causing real interest rates to rise.
Which one of the following is an area of agreement among modern macroeconomists with regard to the use of fiscal policy?
It is difficult to time changes in discretionary fiscal policy in a manner that will promote stability.
Since the mid-1980s, what has happened to the debt-to-income ratio of American households?
It has rapidly increased.
If heavy federal borrowing pushes up real interest rates in the United States, which of the following will most likely result?
an inflow of capital and an appreciation in the foreign exchange value of the dollar
Which of the following is true about fiscal policy?
Proper timing of changes in discretionary fiscal policy is both crucially important and difficult to achieve.
Which is more likely to stimulate aggregate demand in a timely manner?
a tax cut, because disbursement can take place quickly while spending increases are generally spread out over several years
Critics of the Keynesian view argue that increases in government spending financed by borrowing will hamper the recovery from a recession and slow long term growth because
all of the above are true
What is mostly likely to happen if decreased government borrowing drives down real interest rates in the United States?
The dollar will depreciate leading to an increase in net exports.
What is the effect when a customer deposits $100 into a checking account?
Both the bank’s liabilities and its assets will increase.
Which of the following is true regarding the foreign holdings of U.S. dollars?
They indicate that foreigners have confidence in the monetary policy and economy of the United States.
The Fed acquired the authority to do which of the following during the economic crisis of 2008?
Pay interest to commercial banks on their reserves.
An individual bank can lend out at most its
When the actual reserves held by a bank exceed the legal requirement, the bank
has excess reserves, which can be used to extend additional loans.
When the Fed lowers the discount rate, it makes it
cheaper for banks to obtain additional reserves by borrowing from the Fed.
Compared to a barter economy, using money increases efficiency by reducing
Which of the following is the primary tool the Fed uses to control the supply of money?
open market operations
In order to increase the money supply, the banking system must have which of the following?
Suppose you withdraw $1,000 from your checking account. If the reserve requirement is 20 percent, how does this transaction affect the supply of money and the excess reserves of your bank?
There is no change in the supply of money; your bank’s excess reserves are reduced by $800.
What is the primary benefit of a monetary system of exchange compared to a barter system?
Better efficiency in arranging transactions.
If you have a checking account at a local bank, your bank account there is
a liability of the bank and an asset to you.
What is meant by the expression, “There is too much money chasing too few goods”?
An expansion in the supply of money relative to the availability of goods and services is causing an increase in the general level of prices.
If the prices of goods and services fall, what happens to the value of money (its purchasing power)?
Banks are considered a safer place to deposit money now than they were prior to 1933 because
the creation of the FDIC reduced the likelihood of bank runs.
If the Fed unexpectedly shifts to a more expansionary monetary policy, which of the following will most likely occur in the short run?
a decrease in the real interest rate
An unanticipated shift to a more restrictive monetary policy by the Fed will result in which of the following?
An increase in interest rates and, thereby, reduced investment, current consumption, and aggregate demand.
if expansionary monetary policy reduces real interest rates in the United States, which of the following is most likely to occur?
Net foreign investment will decline, causing the dollar to depreciate and net exports to increase.
Which of the following will be the most likely impact of an unanticipated increase in the money supply?
A decrease in the real interest rate, which in turn stimulates investment and GDP.
In the short run, which of the following is the most likely effect of an unanticipated move to a more expansionary monetary policy?
an increase in employment
In the aggregate demand-aggregate supply model, the short-run effects of an unanticipated decrease in the money supply will be
higher real interest rates and a reduction in aggregate demand.
If the Federal Reserve unexpectedly decides to sell bonds, which of the following will most likely happen in the short run?
The supply of loanable funds will decrease, which will exert upward pressure on the interest rate.
Which of the following will increase interest rates in the short run?
the sale of bonds by the Federal Reserve in the open market
Which of the following contributed to the financial crisis of 2008?
all of the above
Given the strict quantity theory of money, if the quantity of money were decreased by 50 percent, prices would
fall by 50 percent.
Why will it difficult for the Fed to use monetary policy to direct the economy back to full employment and price stability from the recession of 2008-2009?
The time lags between changes in monetary policy and when the changes exert an impact on output and prices are long and variable.
When the Fed decreases the money supply, what will happen to nominal interest rates?
they will rise
An unanticipated increase in the money supply will lead to
a decline in interest rates, an increase in investment, and an increase in aggregate demand.
If there is a “long and variable time lag” between when a change in monetary policy is instituted and when it impacts aggregate demand and output, this will
make it more difficult for the Fed to properly time changes in monetary policy.
Which of the following is true?
Growth of output is necessary for the growth of income.
Which of the following will discourage investment?
Which of the following is most likely to help the residents of a nation produce more goods and services and achieve higher income levels?
a higher rate of investment
Why do political instability and insecure property rights retard economic growth?
all the above
Which of the following would be most likely to cause the per capita income of less-developed countries to rise?
investment expenditures that enhance the human capital of labor force participants
In a market economy, what determines whether an entrepreneur will continue in business or terminate the production of a new product?
the profit or loss of the business
How does an open capital market affect a nation’s economic growth?
all the above
Economic growth will have which of the following effects?
Expand the production possibilities of an economy.
The recent growth records of Japan and Hong Kong during the last fifty years indicate that a nation can grow rapidly without which of the following?
Abundant domestic natural resources.
Which of the following statements concerning economic growth is true?
Economic growth is primarily the result of gains from trade, discovery of better ways of doing things, and capital investment.
Which of the following policies would be most likely to reduce the efficiency of a country’s economic organization?
imposition of tariffs and other barriers limiting international trade
Which of the following statements about economic growth is true?
Countries with low marginal tax rates have generally had higher rates of economic growth than those with high tax rates.
Monetary and price instability will
generate uncertainty, and encourage investors and businesses to move their activities to countries with a more stable monetary environment.
If a nation is going to achieve and sustain a high rate of economic growth, it must
have a mechanism capable of attracting savings and channeling them into wealth-creating projects.
Which of the following is important if a country is going to achieve and sustain high rates of economic growth?
all the above
According to data on GDP growth between 1980 and 2009, which of the following statements is true?
Many poor nations grew more rapidly than wealthy nations, while others continued to stagnate.
Democracy tends to best promote freedom when there is
constitutional protection of private property rights.
Nations will attract investment and its citizens will engage in productive activities when the institutions and policies of that country do which of the following?
all the above
According to the Economic Freedom of the World measure, the United States was
the third freest economy in the world, behind only Hong Kong and Singapore during 1980-2000.
Which of the following provides the fuel for growth and achievement of high income levels?
all of the above
Which of the following is true for the developing countries that moved most rapidly toward economic freedom during 1980-2005 period?
They experienced both more rapid rates of economic growth and larger reductions in poverty rates than countries that were less free.
In order to achieve a high economic freedom rating, a country must
all of the above
According to the Economic Freedom of the World measure, between 2000 and 2009 what happened to the economic freedom of the United States?
It declined and its rank fell from third to tenth during this period.
The GDP figures fail to count labor services and other household production. Once this omission is taken into account,
the income differences between the high and low income countries are still huge
One-third of the world’s population live in China and India. How did the growth rate of these two countries compare with the growth of high income industrial countries during 1980-2009?
Per capita GDP increased more rapidly in China and India than in the high income industrial countries.
Which of the following is true of modern technology?
all of the above
Compared to those in low-income countries, the residents of countries with high per person incomes nearly always
all the above- live longer, lower mortality rates, lower birth rates
Countries with more economic freedom during 1980-2009 tended to do which of the following
Achieve both more rapid growth and higher income levels than those that were less free.
Compared to those with less economic freedom, countries with more economic freedom generally have ____ per capita GDP levels and ____ growth rates.
higher; more rapid
Other things constant, countries that invest more will grow
Which of the following arguments in support of trade restrictions limiting U.S. dependence on foreign suppliers of petroleum and aircraft is most valid when applied to the United States?
the national defense argument
Which of the following is a basic problem with the infant-industry argument?
Political pressure will likely prevent the withdrawal of the tariff when the industry matures
The theory of comparative advantage suggests that nations should produce a good if they
have the lowest opportunity cost.
International trade does all the following except
reduce world output.
If a country allows trade and, for a certain good, the domestic price without trade is higher than the world price, which of the following conclusions can be made?
The country will be an importer of the good.
What would opening trade between two nations do?
Trade would leave the production possibilities unchanged and increase their consumption possibilities.
Which of the following would be expected if the tariff on foreign-produced automobiles were increased?
The supply of foreign automobiles to the domestic market would decline, causing auto prices to rise.
If a country allows trade and, for a certain good, the domestic price without trade is lower than the world price, which of the following conclusions can be made?
The country will be an exporter of the good.
Compared to the no-trade situation, when a country imports a good, which of the following will occur?
Domestic consumers gain, domestic producers lose, and the gains outweigh the losses.
Who would most likely be helped by an increase in the tariff on foreign-produced automobiles?
The domestic producers of automobiles.
Countries that impose high tariffs, exchange rate controls, and other barriers that restrict international trade have, on average,
low rates of economic growth.
Why do opportunity costs primarily differ among nations?
Nations have different endowments of land, labor skills, capital, and technology.
Economically speaking, tariffs are
obstacles that limit voluntary exchange.
The primary source of purchasing power used to buy imported goods is
the exports of a nation.
Which of the following about trade is true?
Specialization and trade leads to mutual gains for countries.
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