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Macroeconomics Part Two

Services make up about what percentage of the U.S. economy?
85 percent.
If the price elasticity of demand is highly elastic, then an increase in the price of the good will lead to:
a decrease in total revenue for the firm.
If cross elasticity of demand is greater than 0, then the goods are
Carrie is a shoe shopping addict, thus her demand for trendy shoes is inelastic. However, because she cannot afford all the shoes she likes, she finds a better paying job. What is true about Carrie”s demand for shoes?
Her demand curve is very steep and will shift to the right after her increase in income.
Which of the following can be determined by cross elasticity of demand analysis:
Whether a good is a normal or inferior good.
If the price elasticity of demand is highly elastic, then an increase in the price of the good will lead to:
a decrease in total revenue for the firm.
A negative income elasticity of demand is representative of
inferior goods.
What is not a determinant of price elasticity of demand?
number of producers.
An example of externalities is:
a polluted river.
A good for which the consumption by one individual excludes completely the consumption of that very same unit of good is called:
a pure private good.
Complete the following sentence: The “Utility of Poverty” argument predicts that as wage levels increase
the supply of labor will eventually decrease as wages rise.
Externalities are
benefits or costs not included in price.
Consumption of what in a crowded room is most likely to give rise to a negative externality?
a Cuban cigar.
Liberal economists such as John Kenneth Galbraith, tend to believe that, in the U.S.
There are too many private goods and not enough public goods.
Libertarians would align most closely with which of the following thoughts?
Human beings are self-interested beings, and private property and free markets are needed to provide protection and incentives to these individuals
Which of the following is not an example of an externality?
An increase in apartment rent rates forcing people to find housing elsewhere.
Franklin works as a part-time legal assistant. She consumes 8 hamburgers and 1 steak every month. After 2 years, she gets promoted to a full-time salaried position. Her hamburger consumption falls to 4 per month and her steak consumption increases to 5 per month. Here, the hamburger is an example of:
An inferior good
Which of these economic thinkers was NOT a Utopian?
(Robert Owen, Saint-Simon, David Ricardo, Charles Fourier, Pierre-Joseph Proudhon)
David Ricardo.
Mercantilists maintained that above certain income level, people would no longer respond to the incentive of a higher wage. This can be demonstrated by:
Backward bending supply curve.
Suppose that the price of tea has currently increased from $1 to $2. As this change is taking place, the neighborhood Starbucks store noticed that the demand for their coffee has increased from 800 cups a day to 1000 cups a day. What is the cross price elasticity of demand for coffee in response to a rise in the price of tea?
According to Max Weber in The Protestant Ethic and Spirit of Capitalism, why did Protestant countries achieve more economic dynamism than Catholic Countries?
Unlike the Catholic Church, Protestants did not look down upon money making, The protestant religion had fewer Saints’ Days throughout the year, which translated into more work days, Protestants lived by the motto: “work hard and live simply.”, Protestant ethic promoted savings and a frugal lifestyle.
If you have a price inelastic demand for notebooks and the notebook industry decides to jack up the price, the total revenue for the notebook producers will:
The oil crisis of the 1970s, where OPEC increased prices of petroleum from $1.80 a barrel in 1970 to $34 a barrel in 1978, is an example of:
Cost-push inflation and When demand is inelastic in the short run and elastic in the long run.
Economists Henry Saffer of Kean University, Frank J. Chaloupka of the University of Illinois at Chicago, and Dhaval Dave of Bentley College estimated that the government must spend $4,170 on drug control to deter one person from using drugs and the cost that one drug user imposes on society is $897. Based on this information alone, should the government spend the money on drug control?
No, since the marginal cost of drug control exceeds the marginal benefit, government should not spend $4,170 to deter one person from using drugs.
If a 40% fall in price leads to a 10% increase in quantity demanded:
Elasticity of demand is equal to -0.25
Suppose that this week there were 200 Angry Birds dolls sold at the price of $10 each. Next week, the price of these dolls is expected to rise to $11. The Price elasticity of demand was calculated to be -0.8. How many Angry Birds will be sold next week?
Suzy Q works as a waitress part-time (18 hours per week) while attending college. Her generous manager just announced that he will raise her hourly wage from $5.50 to 5.85. With her newfound higher income, Suzy spends more at the iTunes store every week. Previously, she purchased 9 songs per week; now, she buys 13 songs per week. The iTunes store charges $1 per song. What is her income elasticity of demand for iTunes and does it represent a normal or luxury good?
6.98 : Luxury.
Arseni has a higher standard of living. His income rose by 12%, this year, and his purchases of potatoes decreased by 3%. What is Arseni’s income elasticity of demand for potatoes and does this represent a normal or inferior good?
-0.75 : Inferior.
Given the following supply table:
Production of Widgets
Price ($) Quantity Supplied
15 50
20 55
25 60
30 65
35 70
40 75
Calculate the elasticity of supply as Price changes from $30 to $35.
Which of the following would most likely generate a positive externality? (Roller coaster rides, Pollution, Alcoholic beverages, Education)
Which of the following is the best example of a demerit good? (Cigarettes, Whole-wheat bread, Bicycles, Education)
Behavioral economists have found that:
people’s decisions are affected by how the choice is presented.
Assuming government’s goal is to benefit society as much as possible:
actions with negative externalities should be restricted and actions with positive externalities should be encouraged.
A public good is a good that:
when consumed by one individual, can still be consumed by others.
If the price for apples increases from $1 to $1.50 per pound and the demand for pears increases from 500,000 to 1,000,000 pounds per year, the cross price elasticity between the two goods is:
0.5 and the two goods are substitutes.
If the price of bread decreases from $5 to $4 per loaf and the demand for butter increases from 400 to 600 sticks of butter, the cross price elasticity between the two goods is:
-2.5 and the two goods are complements
If Clyde’s income falls from $ 540 to $460 per week, and the quantity of bread demanded by him increases from 15 to 25 loaves per week, then the income elasticity of demand is
The price elasticity of demand for tickets to a popular theater event is 3. If the price of a ticket
increases by 10 percent, the quantity of tickets demanded will:
decrease by 30 percent.
What do all economists have in common?
They believe that models must capture the importance of incentives.
Models that require knowledge of the relevant history to reach a conclusion are referred to as
path-dependent models.
The statistical analysis of economic data is referred to as:
A model that statistically discovers a pattern in the data is called a(n) ___ model.
empirical model
___ ____ management policies are based on the work of John Maynard Keynes.
Active demand
In the AS/AD model, as the price level falls, the holders of money become richer and buy more. This is one reason why the aggregate demand curve is downward sloping. What is this called?
The money wealth effect
Keynesian economists believe:
government can implement policy proposals that can positively impact the economy.
Laissez-faire economists believe:
most government policies would probably make things worse.
Between 2007 and 2009, the U.S. unemployment rate rose from under 5 percent to over 8 percent. A Keynesian economist would most likely blame this increase in unemployment on:
a decline in the level of aggregate demand.
Before the Great Depression the popular view of government was:
laissez-faire, and after the Depression, the popular view of government was activist.
The laissez-faire policy prescription to eliminate unemployment was to:
eliminate labor unions and government policies that hold real wages too high.
The Classical economists argued that if unemployment occurs:
it will cure itself because wages and prices will fall.
Aggregate demand management policies are designed most directly to:
control the aggregate level of spending in the economy.
Potential income is that level of income that:
an economy is capable of producing without generating higher inflation.
The paradox of thrift occurs when:
an increase in saving reduces output.
By the 1950s, the views of the Classical economists among American economists:
had been largely eclipsed by Keynesian views.
The shapes of the curves in the AS/AD model are based:
on the relationship between the price level and total output.
The reason why the AS/AD model does not depend upon the concepts of substitution and opportunity cost is that:
the AS/AD model considers total output. There are no goods to substitute.
As prices fall, people become richer and buy more. This occurs as a result of:
the money wealth effect
A fall in the U.S. price level will cause foreigners to:
substitute U.S. goods for their own domestically-produced goods.
The multiplier effect makes the aggregate demand curve:
When aggregate demand is declining and the price level needs to fall to bring about equilibrium, pressure for the price level to fall brings expectations of falling aggregate demand, lower asset prices, and financial panics triggered by the decline in the value of financial assets. If these forces are strong enough, these dynamic effects can create a:
rightward shift in the aggregate demand curve.
A fall in a foreign country’s income will most likely cause:
a reduction in U.S. exports, so the U.S. aggregate demand curve shifts left.
Suppose prices in the U.S. are expected to decline in the future. The effect today is likely to:
shift the AD curve to the left.
Which of the following would shift the aggregate demand curve to the right?
(an increase in foreign income, an appreciation of the value of a country’s currency, a lower future expected price level, an increase in imports)
an increase in foreign income
A fall in the value of the dollar relative to other currencies will:
increase demand for U.S. goods, shifting the U.S. aggregate demand curve to the right.
A change in the distribution of income affects the AD curve because:
workers are more likely than stockholders to spend the income they receive.
The new government of Pakistan transfers money from the rich to the poor. This will likely:
shift the Pakistani AD curve to the right.
In the early 1930s, U.S. government expenditures increased as part of the New Deal without any change in taxes. This:
shifted the AD curve to the right.
To combat inflation in 1955 and 1956, the Fed reduced the money supply. In terms of the AS-AD model, this change should have:
shifted the AD curve to the left.
The AD curve will shift by ___ than initial shift factor when the multiplier is greater than one.
If the multiplier effect is 4, a $15 billion increase in government expenditures will shift the AD curve:
to the right by $60 billion.
The short-run aggregate supply curve specifies how shifts in aggregate demand affect:
real output and the price level in the short run.
An increase in production costs is most likely to shift the:
short-run aggregate supply curve up (to the left).
In the late 1990s in the United States, those making policy at the Federal Reserve argued about whether productivity was increasing faster than it had in the past. If productivity was growing faster than anticipated, they would expect the:
short-run aggregate supply curve to be shifting down (to the right).
The long-run aggregate supply curve shows the output level that an economy can produce when:
both capital and labor are fully employed.
At points on the short-run aggregate supply curve, but to the right of the long-run aggregate supply curve, resources are:
over-utilized, making it more likely that the short-run aggregate supply curve will shift up (to the left).
Which of the following factors will not shift the long-run aggregate supply curve?
(An increase in capital accumulation, An increase in available resources, An increase in the price level, An improvement in production technology)
An increase in the price level
At the intersection of the short-run aggregate supply curve, the aggregate demand curve, and the long-run aggregate supply curve, the economy is in:
both a short-run and long-run equilibrium.
A policy that raises taxes or reduces government spending is called:
a contractionary fiscal policy.
Contractionary fiscal policies are most appropriate when the economy is in:
An inflationary gap
When is a budget surplus most likely to occur?
When fiscal policy is contractionary and the economy is expanding.
During the Great Depression, output fell very sharply and the government’s budget went into deficit (that is tax revenues fell beneath government outlays.) In response, the Roosevelt administration passed a tax increase designed to reduce the budget deficit. This is an example of:
procyclical fiscal policy.

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