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Final study guide
Multiple Choice
Identify the choice that best completes the statement or answers the question.
1. What you give up to obtain an item is called your
a. opportunity cost.
b. explicit cost.
c. monetary cost.
d. direct cost.
2. Bill is restoring a car and has already spent $4000 on the restoration. He expects to be able to sell the car for
$6200. Bill discovers that he needs to do an additional $2400 of work to make the car worth $6200 to
potential buyers. He could also sell the car now, without completing the additional work, for $3800. What
should he do?
a. He should sell the car now for $3800.
b. He should keep the car since it wouldn’t be rational to spend $6400 restoring a car and
then sell it for only $6200.
c. He should complete the additional work and sell the car for $6200.
d. It does not matter if Bill sells the car now or completes the work and then sells it at the
higher price because the outcome will be the same either way.
3. Rick buys a 1966 Mustang for $3,000, planning to restore and sell the car. He goes on to spend $9,000
restoring the car. At this point he can sell the car for $10,000. As an alternative, he can spend an additional
$3,000 replacing the engine. With a new engine the car would sell for $13,000. Rick should
a. complete the repairs and sell the car for $13,000.
b. sell the car now for $10,000.
c. never try such an expensive project again.
d. be indifferent between (i) selling the car now and (ii) replacing the engine and then
selling it.
4. You have eaten two bowls of ice cream at Sundae School Ice Cream store. You consider eating a third. As a
rational consumer you should make your choice by comparing
a. the benefits from eating all three bowls of ice cream to how much three bowls of ice
cream costs.
b. the benefits from eating all three bowls of ice cream to how much one more bowl of ice
cream costs.
c. the benefits from eating one more bowl of ice cream to how much three bowls of ice
cream costs.
d. the benefits from eating one more bowl of ice cream to how much one more bowl of ice
cream costs.
5. People are likely to respond to a policy change
a. only if they think the policy is a good one.
b. only if the policy change changes the costs of their behavior.
c. only if the policy change changes the benefits of their behavior.
d. if the policy changes either the costs or benefits of their behavior.
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Name: ________________________
ID: A
6. Trade between the United States and India
a. benefits both the United States and India.
b. is a losing proposition for the United States because India has cheaper labor.
c. is a losing proposition for India because capital is much more abundant in the U.S. than
in India.
d. is a losing proposition for India because U.S. workers are more productive.
7. In communism, central planners decide which of the following?
a. what goods and services will be produced
b. how much will be produced
c. who produced and consumed the goods and services
d. All of the above are correct.
8. A friend of yours asks you why market prices are better than government-determined prices. Because you
understand economic principles, you say that market-determined prices are better because they generally
reflect
a. the value of a good to society, but not the cost of making it.
b. the cost of making a good to society, but not its value.
c. both the value of a good to society and the cost of making it.
d. neither the value of a good to society nor the cost of making it.
9. The primary determinant of a country's standard of living is
a. the country’s ability to prevail over foreign competition.
b. the country’s ability to produce goods and services.
c. the total supply of money in the economy.
d. the average age of the country's labor force.
10. A worker in Equador can earn $3 per day making cotton cloth on a hand loom. A worker in the United States
can earn $70 per day making cotton cloth with a mechanical loom. What accounts for the difference in
wages?
a. U.S. textile workers belong to a union.
b. There is little demand for cotton cloth in Equador and great demand in the U.S.
c. Labor is more productive making cotton cloth with a mechanical loom than with a hand
loom.
d. Equador has a low-wage policy to make its textile industry more competitive in world
markets.
11. In which of the following decades was there both high inflation and rapid money supply growth in the US?
a. the 1970’s and the 1990’s
b. the 1970’s but not the 1990’s
c. the 1990’s but not the 1970’s
d. neither the 1970’s nor the 1990’s
12. Which of the following would a permanent increase in the growth rate of the money supply change
permanently?
a. inflation
b. unemployment
c. both inflation and unemployment
d. neither inflation nor unemployment
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Name: ________________________
ID: A
13. In the short run, an increase in the money supply is likely to lead to
a. lower unemployment and lower inflation.
b. lower unemployment and higher inflation.
c. higher unemployment and lower inflation.
d. higher unemployment and higher inflation.
14. Sir Isaac Newton's development of the theory of gravity after observing an apple fall from a tree is an
example of
a. a controlled experiment that lead to the formulation of a scientific theory.
b. being in the right place at the right time.
c. an idea whose time had come.
d. the interplay between observation and theory in science.
15. For economists, substitutes for laboratory experiments often come in the form of
a. natural experiments offered by history.
b. untested theories.
c. “rules of thumb” and other such conveniences.
d. reliance upon the wisdom of elders in the economics profession.
16. Which types of models are built with assumptions?
a. economic models, but not models in other disciplines such as physics and biology
b. economic models as well as models in other disciplines such as physics and biology
c. models that are built for teaching purposes but not for research purposes
d. bad models
17. In the circular-flow diagram, which of the following items flows from households to firms through the
markets for goods and services?
a. goods and services
b. dollars paid to land, labor, and capital
c. dollars spent on goods and services
d. wages, rent, and profit
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Name: ________________________
ID: A
Figure 2-1
18. Refer to Figure 2-1. Which arrow represents the flow of spending by households?
a. A
b. B
c. C
d. D
Figure 2-3
19. Refer to Figure 2-3. Unemployment could cause this economy to produce at which point(s)?
a. J, L
b. J, L, M
c. K, N
d. M
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Name: ________________________
ID: A
Figure 2-4
20. Refer to Figure 2-4. Suppose this economy is producing at point W. Which of the following statements
would best explain this situation?
a. The economy lacks the resources to produce at a more desirable point.
b. The economy’s available technology prevents it from producing at a more desirable
point.
c. There is widespread unemployment in the economy.
d. Any of the above statements would be a legitimate explanation for this situation.
Figure 2-5
21. Refer to Figure 2-5. The opportunity cost of this economy moving from point D to point B is
a. zero.
b. 50 soccer balls.
c. 60 sweaters.
d. 50 soccer balls and 60 sweaters.
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Name: ________________________
ID: A
Figure 2-6
22. Refer to Figure 2-6. Efficient production is represented by which point(s)?
a. A, B
b. A, B, C, F, G
c. C, F, G
d. D
Figure 2-11
23. Refer to Figure 2-11. The shift of the production possibilities frontier from A to B can best be described as
a. a downturn in the economy.
b. economic growth.
c. an enhancement of equality.
d. an improvement in the allocation of resources.
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Name: ________________________
ID: A
Table 2-5
Cookies (in dozens)
1000
800
600
400
200
0
Coffee (in pounds)
0
350
650
800
1000
1150
24. Refer to Table 2-5. Table 2-5 shows one set of production possibilities. Which of the following statements is
correct?
a. The opportunity cost of a dozen cookies does not depend on how many pounds of coffee
are being produced.
b. The opportunity cost of a dozen cookies increases as more cookies are produced.
c. The opportunity cost of a dozen cookies decreases as more cookies are produced.
d. The opportunity cost of a pound of coffee decreases as more coffee is produced.
25. Normative statements are not
a. descriptive.
b. prescriptive.
c. claims about how the world should be.
d. made by economists speaking as policy advisers.
26. John Maynard Keynes observed that during rare times of deep financial and economic crisis, when the
“invisible hand” has temporarily ceased to function,
a. there is a more urgent need for government to play an active role in restoring markets to
their healthy function.
b. government should avoid intervening in the market and wait patiently for proper market
function to return.
c. economists need to re-evaluate all of their basic principles.
d. the economy can rely on entrepreneurs to take creative actions to end the crisis.
27. Which of the following statements is correct about the extent of disagreement among economists?
a. There is a great deal of agreement among economists on virtually every economic issue.
b. There is a great deal of agreement among economists on many important economic
issues.
c. All disagreements among economists are attributable to differences in their values.
d. All disagreements among economists are attributable to the fact that different economists
have different degrees of faith in the validity of alternative economic theories.
28. Almost all economists agree that local and state governments should
a. eliminate subsidies to professional sports franchises.
b. increase subsidies to professional sports franchises.
c. copy economic policy from Washington, D.C.
d. prevent companies from outsourcing work.
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Name: ________________________
ID: A
29. If Erin’s income decreases and, as a result, she chooses to buy fewer milkshakes per month at each price, then
her demand curve will
a. shift to the right.
b. shift to the left.
c. not shift; instead, Erin will move along her demand curve downward and to the right.
d. not shift; instead, Erin will move along her demand curve upward and to the left.
30. The slope of a line that passes through the points (15, 10) and (7, 30) is
a. -5/2.
b. -2/5.
c. 2/5.
d. 5/2.
31. An economy’s production possibilities frontier is also its consumption possibilities frontier
a. under all circumstances.
b. under no circumstances.
c. when the economy is self-sufficient.
d. when the rate of tradeoff between the two goods being produced is constant.
Figure 3-4
Perry’s Production Possibilities Frontier
Jordan’s Production Possibilities Frontier
32. Refer to Figure 3-4. If Perry and Jordan each divides their time equally between writing novels and writing
poems, then total production is
a. 2 novels and 6 poems.
b. 3 novels and 12 poems.
c. 4 novels and 12 poems.
d. 6 novels and 24 poems.
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Name: ________________________
ID: A
33. Refer to Figure 3-4. Suppose Perry is willing to trade 4 poems to Jordan for each novel that Jordan writes
and sends to Perry. Which of the following combinations of novels and poems could Jordan then consume,
assuming Jordan specializes in novel production and Perry specializes in poem production?
a. 1 novel and 14 poems
b. 2 novels and 8 poems
c. 3 novels and 6 poems
d. 4 novels and 2 poems
34. Refer to Figure 3-4. Perry has an absolute advantage in the production of
a. novels and Jordan has an absolute advantage in the production of poems.
b. poems and Jordan has an absolute advantage in the production of novels.
c. novels and Jordan has an absolute advantage in the production of neither good.
d. neither good and Jordan has an absolute advantage in the production of novels.
Figure 3-6
Maxine’s Production Possibilities Frontier
Daisy’s Production Possibilities Frontier
35. Refer to Figure 3-6. If Maxine and Daisy each divides her time equally between making pies and making
tarts, then total production is
a. 6 pies and 10 tarts.
b. 7.5 pies and 3 tarts.
c. 7.5 pies and 10 tarts.
d. 13.5 pies and 13 tarts.
36. Refer to Figure 3-6. If the production possibilities frontiers shown are each for one day of work, then which
of the following combinations of pies and tarts could Maxine and Daisy together not make in a given day?
a. 2 pies and 25 tarts
b. 10 pies and 22 tarts
c. 12 pies and 15 tarts
d. 15 pies and 16 tarts
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Name: ________________________
ID: A
Figure 3-10
Alice and Betty’s Production Possibilities in one 8-hour day.
Alice’s Production Possibilities Frontier
Betty’s Production Possibilities Frontier
37. Refer to Figure 3-10. If Alice produces only lemonade, she can produce
a. 200 pitchers per day.
b. 300 pitchers per day.
c. 400 pitchers per day.
d. 450 pitchers per day.
38. Refer to Figure 3-10. Which of the following statements is correct regarding comparative advantage?
a. Alice has a comparative advantage in the production of both lemonade and pizzas.
b. Betty has a comparative advantage in the production of both lemonade and pizzas.
c. Alice has a comparative advantage in the production of pizzas while Betty has a
comparative advantage in the production of lemonade.
d. Alice has a comparative advantage in the production of lemonade while Betty has a
comparative advantage in the production of pizzas.
39. 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.
40. Which of the following statements is not correct?
a. Trade allows for specialization.
b. Trade has the potential to benefit all nations.
c. Trade allows nations to consume outside of their production possibilities curves.
d. Absolute advantage is the driving force of specialization.
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Name: ________________________
ID: A
Table 3-4
Assume that the farmer and the rancher can switch between producing meat and producing potatoes at a
constant rate.
Farmer
Rancher
Labor Hours Needed
to Make 1 Pound of
Meat
Potatoes
8
2
3
6
Pounds Produced
in 24 Hours
Meat
Potatoes
3
12
8
4
41. Refer to Table 3-4. The opportunity cost of 1 pound of potatoes for the farmer is
a. 1/4 pound of meat.
b. 2 hours of labor.
c. 4 pounds of meat.
d. 8 hours of labor.
Table 3-8
Assume that Huang and Min can switch between producing parasols and producing porcelain plates at a
constant rate.
Huang
Min
Labor Hours Needed
to Make 1
Parasol
Plate
2
6
2
4
Quantity Produced
in 36 Hours
Parasol
Plate
18
6
18
9
42. Refer to Table 3-8. The opportunity cost of 1 parasol for Huang is
a. 1/3 plate.
b. 1/2 plate.
c. 3 plates.
d. 6 plates.
Table 3-11
Assume that Falda and Varick can switch between producing wheat and producing cloth at a constant rate.
Falda
Varick
Quantity Produced in 1 Hour
Bushels of Wheat Yards of Cloth
8
12
6
15
43. Refer to Table 3-11. Falda has an absolute advantage in the production of
a. wheat.
b. cloth.
c. both goods.
d. neither good.
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Name: ________________________
ID: A
44. Refer to Table 3-11. Falda has a comparative advantage in the production of
a. wheat.
b. cloth.
c. both goods.
d. neither good.
Figure 3-2
Peru’s Production Possibilities Frontier
45. Refer to Figure 3-2. Suppose Peru decides to increase its production of emeralds by 2. What is the
opportunity cost of this decision?
a. 30 rubies
b. 40 rubies
c. 60 rubies
d. 120 rubies
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Name: ________________________
ID: A
Figure 3-3
Arturo’s Production Possibilities Frontier
Dina’s Production Possibilities Frontier
46. Refer to Figure 3-3. If Arturo and Dina switch from each person dividing their time equally between the
production of tacos and burritos to each person spending all of their time producing the good in which they
have a comparative advantage, then total production of burritos will increase by
a. 50.
b. 100.
c. 150.
d. 300.
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Name: ________________________
ID: A
Figure 3-5
Hosne’s Production Possibilities Frontier
Merve’s Production Possibilities Frontier
47. Refer to Figure 3-5. Hosne has a comparative advantage in the production of
a. purses and Merve has a comparative advantage in the production of wallets.
b. wallets and Merve has a comparative advantage in the production of purses.
c. both goods and Merve has a comparative advantage in the production of neither good.
d. neither good and Merve has a comparative advantage in the production of both goods.
48. Refer to Figure 3-5. At which of the following prices would both Hosne and Merve gain from trade with
each other?
a. 5 wallets for 1.25 purses
b. 5 wallets for 2.5 purses
c. 5 wallets for 3.75 purses
d. Hosne and Merve could not both gain from trade with each other at any price.
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Name: ________________________
ID: A
Figure 3-9
Uzbekistan’s Production Possibilities Frontier
Azerbaijan’s Production Possibilities Frontier
49. Refer to Figure 3-9. Azerbaijan’s opportunity cost of one bolt is
a. 1/4 nail and Uzbekistan’s opportunity cost of one bolt is 1/2 nail.
b. 1/4 nail and Uzbekistan’s opportunity cost of one bolt is 2 nails.
c. 4 nails and Uzbekistan’s opportunity cost of one bolt is 1/2 nail.
d. 4 nails and Uzbekistan’s opportunity cost of one bolt is 2 nails.
50. Refer to Figure 3-9. Azerbaijan has an absolute advantage in the production of
a. bolts and a comparative advantage in the production of bolts.
b. bolts and a comparative advantage in the production of nails.
c. nails and a comparative advantage in the production of bolts.
d. nails and a comparative advantage in the production of nails.
51. The quantity demanded of a good is the amount that buyers are
a. willing to purchase.
b. willing and able to purchase.
c. willing, able, and need to purchase.
d. able to purchase.
52. The line that relates the price of a good and the quantity demanded of that good is called the demand
a. schedule, and it usually slopes upward.
b. schedule, and it usually slopes downward.
c. curve, and it usually slopes upward.
d. curve, and it usually slopes downward.
53. When quantity demanded decreases at every possible price, the demand curve has
a. shifted to the left.
b. shifted to the right.
c. not shifted; rather, we have moved along the demand curve to a new point on the same
curve.
d. not shifted; rather, the demand curve has become flatter.
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Name: ________________________
ID: A
54. A market demand curve shows
a. the relationship between price and the number of buyers in a market.
b. how quantity demanded changes when the number of sellers changes.
c. the sum of all prices that individual buyers are willing and able to pay for each possible
quantity of the good.
d. how much of a good all buyers are willing and able to buy at each possible price.
Table 4-1
Price
$5
$4
$3
$2
$1
$0
Quantity Demanded
by Michelle
5
6
7
8
9
10
Quantity Demanded
by Laura
4
6
8
10
12
14
Quantity Demanded
by Hillary
11
13
15
17
19
21
55. Refer to Table 4-1. If the market consists of Michelle and Hillary only and the price falls by $1, the quantity
demanded in the market increases by
a. 2 units.
b. 3 units.
c. 4 units.
d. 5 units.
Figure 4-4
56. Refer to Figure 4-4. Which of the following would cause the demand curve to shift from Demand C to
Demand A in the market for tennis balls in the United States?
a. an increase in the price of tennis balls
b. a decrease in the price of tennis racquets
c. an expectation by buyers that their incomes will increase in the very near future
d. a decrease in the number of people in the United States under age 70
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Name: ________________________
ID: A
Figure 4-6
57. Refer to Figure 4-6. The shift from D to D’ is called
a. an increase in demand.
b. a decrease in demand.
c. a decrease in quantity demanded.
d. an increase in quantity demanded.
58. A decrease in demand is represented by a
a. movement downward and to the right along a demand curve.
b. movement upward and to the left along a demand curve.
c. rightward shift of a demand curve.
d. leftward shift of a demand curve.
59. A rightward shift of a demand curve is called a(n)
a. increase in demand.
b. decrease in demand.
c. decrease in quantity demanded.
d. increase in quantity demanded.
60. Which of the following would shift the demand curve for gasoline to the right?
a. a decrease in the price of gasoline
b. an increase in consumer income, assuming gasoline is a normal good
c. an increase in the price of cars, a complement for gasoline
d. a decrease in the expected future price of gasoline
61. Suppose that Amanda receives a pay increase. We would expect
a. to observe Amanda moving down and to the right along her given demand curve.
b. Amanda's demand for inferior goods to decrease.
c. Amanda's demand for each of two goods that are complements to increase.
d. Amanda's demand for normal goods to decrease.
62. When quantity demanded has increased at every price, it might be because
a. the number of buyers in the market has decreased.
b. income has increased, and the good is an inferior good.
c. the costs incurred by sellers producing the good have decreased.
d. the price of a complementary good has decreased.
17
Name: ________________________
ID: A
63. You love peanut butter. You hear on the news that 50 percent of the peanut crop in the South has been wiped
out by drought and that this will cause the price of peanuts to double by the end of the year. As a result, your
demand for peanut butter
a. will increase but not until the end of the year.
b. increases today.
c. decreases as you look for a substitute good.
d. shifts left today.
64. Most studies indicate that tobacco and marijuana tend to be
a. substitutes.
b. complements.
c. unrelated because one good is legal while the other one is illegal.
d. inferior goods.
65. When we move along a given supply curve,
a. only price is held constant.
b. technology and price are held constant.
c. all nonprice determinants of supply are held constant.
d. all determinants of quantity supplied are held constant.
66. An increase in supply is represented by a
a. movement downward and to the left along a supply curve.
b. movement upward and to the right along a supply curve.
c. rightward shift of a supply curve.
d. leftward shift of a supply curve.
67. The supply curve for milk
a. shifts when the price of milk changes because the price of milk is measured on the
vertical axis of the graph.
b. shifts when the price of milk changes because the quantity supplied of milk is measured
on the horizontal axis of the graph.
c. does not shift when the price of milk changes because the price of milk is measured on
the vertical axis of the graph.
d. does not shift when the price of milk changes because the price of milk is measured on
the horizontal axis of the graph.
68. Workers at a bicycle assembly plant currently earn the mandatory minimum wage. If the federal government
increases the minimum wage by $1.00 per hour, then it is likely that the
a. demand for bicycle assembly workers will increase.
b. supply of bicycles will shift to the right.
c. supply of bicycles will shift to the left.
d. firm must increase output to maintain profit levels.
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Name: ________________________
ID: A
69. Equilibrium price must increase when demand
a. increases and supply does not change, when demand does not change and supply
decreases, and when demand decreases and supply increases simultaneously.
b. increases and supply does not change, when demand does not change and supply
decreases, and when demand increases and supply decreases simultaneously.
c. decreases and supply does not change, when demand does not change and supply
increases, and when demand decreases and supply increases simultaneously.
d. decreases and supply does not change, when demand does not change and supply
increases, and when demand increases and supply decreases simultaneously.
Table 4-6
An Increase in Demand
A Decrease in Demand
An Increase in Supply
A
C
A Decrease in Supply
B
D
70. Refer to Table 4-6. Which combination would produce a decrease in equilibrium quantity and an
indeterminate change in equilibrium price?
a. A
b. B
c. C
d. D
71. When a shortage exists in a market, sellers
a. raise price, which increases quantity demanded and decreases quantity supplied until the
shortage is eliminated.
b. raise price, which decreases quantity demanded and increases quantity supplied until the
shortage is eliminated.
c. lower price, which increases quantity demanded and decreases quantity supplied until the
shortage is eliminated.
d. lower price, which decreases quantity demanded and increases quantity supplied until the
shortage is eliminated.
Table 4-7
Price
$10
$8
$6
$4
$2
Quantity
Demanded
10
20
30
40
50
Quantity
Supplied
60
45
30
15
0
72. Refer to Table 4-7. The equilibrium price and quantity, respectively, are
a. $2 and 50 units.
b. $6 and 30 units.
c. $6 and 60 units.
d. $12 and 30 units.
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Name: ________________________
ID: A
Figure 4-15
73. Refer to Figure 4-15. At a price of $15, there would be a
a. surplus of 400 units.
b. shortage of 200 units.
c. shortage of 400 units.
d. shortage of 600 units.
Figure 4-17
74. Refer to Figure 4-17. At a price of $15,
a. quantity demanded exceeds quantity supplied.
b. there is a shortage.
c. there is an excess demand.
d. All of the above are correct.
20
Name: ________________________
ID: A
75. Suppose buyers of computers and printers regard the two goods as complements. Then an increase in the
price of computers will cause a(n)
a. decrease in the demand for printers and a decrease in the quantity supplied of printers.
b. decrease in the supply of printers and a decrease in the quantity demanded of printers.
c. decrease in the equilibrium price of printers and an increase in the equilibrium quantity of
printers.
d. increase in the equilibrium price of printers and a decrease in the equilibrium quantity of
printers.
76. If consumers often purchase muffins to eat while they drink their lattés at local coffee shops, what would
happen to the equilibrium price and quantity of lattés if the price of muffins rises?
a. Both the equilibrium price and quantity would increase.
b. Both the equilibrium price and quantity would decrease.
c. The equilibrium price would increase, and the equilibrium quantity would decrease.
d. The equilibrium price would decrease, and the equilibrium quantity would increase.
Figure 4-21
77. Refer to Figure 4-21. Which of the following movements would illustrate the effect in the market for orange
juice of an announcement by the American Dental Association that orange juice erodes tooth enamel?
a. Point A to Point B
b. Point C to Point B
c. Point C to Point D
d. Point A to Point D
78. Refer to Figure 4-21. Which of the following movements would illustrate the effect in the market for
ballroom dancing lessons resulting from the introduction of a popular new television show called “Dancing
with the Stars”?
a. Point A to Point B
b. Point C to Point B
c. Point C to Point D
d. Point A to Point D
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Name: ________________________
ID: A
Figure 4-22
Panel (a)
Panel (b)
Panel (c)
Panel (d)
79. Refer to Figure 4-22. Which of the four panels illustrates an increase in quantity demanded?
a. Panel (a)
b. Panel (b)
c. Panel (c)
d. Panel (d)
80. Which of the following questions is more likely to be studied by a microeconomist than a macroeconomist?
a. Why do prices in general rise by more in some countries than in others?
b. Why do wages differ across industries?
c. Why do national production and income increase in some periods and not in others?
d. How rapidly is GDP currently increasing?
22
Name: ________________________
ID: A
81. According to the circular-flow diagram GDP
a. can be computed as the total income paid by firms or as expenditures on final goods and
services.
b. can be computed as the total income paid by firms, but not as expenditures on final goods
and services.
c. can be computed as expenditures on final goods and services, but not as the total income
paid by firms.
d. cannot be computed as either total income paid by firms or expenditures on final goods
and services.
82. GDP excludes most items that are produced and sold illegally and most items that are produced and consumed
at home because
a. the quality of these items is not high enough to contribute value to GDP.
b. measuring them is so difficult.
c. the government wants to discourage the production and consumption of these items.
d. these items are not reported on income tax forms.
83. Estimates of the values of which of the following non-market goods or services are included in GDP?
a. the value of unpaid housework
b. the value of services provided by major household appliances purchased in a previous
period
c. the estimated rental value of owner-occupied homes
d. All of the above are included in GDP.
84. Over time, people have come to rely more on market-produced goods and services and less on goods and
services 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
a. caused measured GDP to fall.
b. not caused any change in measured GDP.
c. caused measured GDP to rise.
d. probably changed measured GDP, but in an uncertain direction; the direction of the
change depends on the difference in the quality of the cleaning that has resulted.
85. Ralph pays someone to mow his lawn, while Mike mows his own lawn. Regarding these two practices, which
of the following statements is correct?
a. Only Ralph’s payments are included in GDP.
b. Ralph’s payments as well as the estimated value of Mike’s mowing services are included
in GDP.
c. Neither Ralph’s payments nor the estimated value of Mike's mowing services is included
in GDP.
d. Ralph’s payments are included in GDP, while the estimated value of Mike’s mowing
services is included in GDP only if Mike voluntarily provides his estimate of that value to
the government.
86. One bag of oranges is sold for $6.00 to a company that turns them into juice which is sold to consumers for
$12.00. Another bag of oranges is purchased by a grocery store for $6.00 who then sells it to a consumer for
$7. Taking these four transactions into account, how much is added to GDP?
a. $31
b. $25
c. $19
d. None of the above is correct.
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Name: ________________________
ID: A
87. Which of the following domestically produced items is not included in GDP?
a. a bottle of shampoo
b. a hairdryer
c. a haircut
d. All of the above are included in GDP.
88. Which of the following items is included in U.S. GDP?
a. final goods and services that are purchased by the U.S. federal government
b. intermediate goods that are produced in the U.S. but that are unsold at the end of the GDP
accounting period
c. goods and services produced by foreign citizens working in the U.S.
d. All of the above are included in U.S. GDP.
89. The residents of country A earn $500 million of income from abroad. Residents of other countries earn $200
million in country A. These earnings are accounted for in country A’s
a. country A’s net factor payments from abroad are positive, and its GDP is larger than its
GNP.
b. country A’s net factor payments from abroad are positive, and its GNP is larger than its
GDP.
c. country A’s net factor payments from abroad are negative, and its GDP is larger than its
GNP.
d. country A’s net factor payments from abroad are negative, and its GNP is larger than its
GDP.
90. GA wind farm in Iowa buys a large turbine generator from a Swedish-owned factory located in Connecticut
that uses workers who live in Connecticut. As a result,
a. U.S. investment, GDP, and GNP all increase by the same amount.
b. U.S. investment increases, but GDP and GNP are unaffected by the purchase.
c. U.S. investment and GDP increase by the same amount, but U.S. GNP increases by a
smaller amount.
d. U.S. investment and GNP increase by the same amount, but U.S. GDP increases by a
smaller amount.
91. During the current quarter, a firm produces consumer goods and adds some of those goods to its inventory
rather than selling them. The value of the goods added to inventory is
a. not included in the current quarter GDP.
b. included in the current quarter GDP as investment.
c. included in the current quarter GDP as consumption.
d. included in the current quarter GDP as a statistical discrepancy.
92. Transfer payments
a. are payments that flow from government to households.
b. are not made in exchange for currently produced goods or services.
c. alter household income, but they do not reflect the economy’s production.
d. All of the above are correct.
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Name: ________________________
ID: A
93. In the economy of Ukzten in 2010, consumption was $800, GDP was $2000, government purchases were
$400, and investment was $600. What were Ukzten’s net exports in 2010?
a. -$200
b. $200
c. $1800
d. Net exports cannot be calculated from the information given.
94. Changes in real GDP reflect
a. only changes in prices.
b. only changes in the amounts being produced.
c. both changes in prices and changes in the amounts being produced.
d. neither changes in prices nor changes in the amounts being produced.
95. If real GDP is 5,100 and nominal GDP is 4,900, then the GDP deflator is
a. 104.1 so prices are higher than in the base year.
b. 104.1 so prices are lower than in the base year.
c. 96.1 so prices are higher than in the base year.
d. 96.1 so prices are lower than in the base year.
96. Countries with low GDP per person tend to have
a. lower rates of child malnutrition.
b. fewer infants with low birth weight.
c. higher rates of infant mortality.
d. more access to safe drinking water.
97. Rank the countries from highest to lowest based on underground economic activity as a percentage of GDP.
a. Bolivia, Thailand, United States, Sweden.
b. Thailand, United States, Sweden, Bolivia.
c. United States, Bolivia, Sweden, Thailand.
d. Bolivia, Thailand, Sweden, United States.
98. In computing the consumer price index, a base year is chosen. Which of the following statements about the
base year is correct?
a. The base year is always the first year among the years for which computations are being
made.
b. It is necessary to designate a base year only in the simplest case of two goods; in more
realistic cases, it is not necessary to designate a base year.
c. The value of the consumer price index is always 100 in the base year.
d. The base year is always the year in which the cost of the basket was highest among the
years for which computations are being made.
99. In an imaginary economy, consumers buy only sandwiches and magazines. The fixed basket consists of 20
sandwiches and 30 magazines. In 2006, a sandwich cost $4 and a magazine cost $2. In 2007, a sandwich
cost $5. The base year is 2006. If the inflation rate in 2007 was 16 percent, then how much did a magazine
cost in 2007?
a. $1.87
b. $2.08
c. $2.32
d. $3.00
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Name: ________________________
ID: A
100. Assume an economy experienced a positive rate of inflation between 2003 and 2004 and again between 2004
and 2005. However, the inflation rate was higher between 2004 and 2005 than it was between 2003 and
2004. Which of the following scenarios is consistent with this assumption?
a. The CPI was 100 in 2003, 110 in 2004, and 105 in 2005.
b. The CPI was 100 in 2003, 120 in 2004, and 135 in 2005.
c. The CPI was 100 in 2003, 105 in 2004, and 130 in 2005.
d. The CPI was 100 in 2003, 90 in 2004, and 88 in 2005.
101. Suppose a basket of goods and services has been selected to calculate the consumer price index. In 2005, the
basket of goods cost $108.00; in 2006, it cost $135.00; and in 2007, it cost $168.75. Which of the following
statements is correct?
a. Using 2005 as the base year, the economy’s inflation rate was higher in 2007 than it was
in 2006.
b. If 2007 is the base year, then the CPI is 33.75 in 2006.
c. If the CPI is 156.25 in 2007, then 2005 is the base year.
d. Using 2005 as the base year, the economy’s inflation rate for 2006 was 27 percent.
Table 24-1
The table below pertains to Pieway, an economy in which the typical consumer’s basket consists of 10
bushels of peaches and 15 bushels of pecans.
Year
2005
2006
Price of
Peaches
$11 per bushel
$9 per bushel
Price of
Pecans
$6 per bushel
$10 per bushel
102. Refer to Table 24-1. If 2005 is the base year, then the inflation rate in 2006 was
a. 16.7 percent.
b. 20 percent.
c. 40 percent.
d. 44.1 percent.
103. The second largest category, by relative importance, in the CPI calculation is
a. housing.
b. apparel.
c. transportation.
d. medical care.
104. Which of the following statements regarding the consumer price index and the GDP deflator is correct?
a. The two price measures are always equal.
b. Divergence between the two price measures is the rule, not the exception.
c. Divergence between the two price measures is the exception, not the rule.
d. None of the above is correct.
26
Name: ________________________
ID: A
105. Ethel purchased a bag of groceries in 1970 for $8. She purchased the same bag of groceries in 2006 for $25.
If the price index was 38.8 in 1970 and the price index was 180 in 2006, then what is the price of the 1970
bag of groceries in 2006 dollars?
a. $5.39
b. $25.00
c. $29.11
d. $37.11
Scenario 24-2
The price tag on a golf ball in 1975 read $0.20, and the price tag on a golf ball in 2005 read $2.00. The CPI
in 1975 was 52.3, and the CPI in 2005 was 191.3.
106. Refer to Scenario 24-2. The price of a 1975 golf ball in 2005 dollars is
a. $0.05.
b. $0.53.
c. $0.73.
d. $2.00.
107. Arlo is offered a job in Des Moines, where the CPI is 60, and a job in New York, where the CPI is 125.
Arlo's job offer in Des Moines is for $48,000. How much does the New York job have to pay in order for the
two salaries to represent the same purchasing power?
a. $23,040
b. $52,000
c. $79,200
d. $100,000
108. In 1970, Professor Plum earned $12,000; in 1980, he earned $24,000; and in 1990, he earned $36,000. If the
CPI was 40 in 1970, 60 in 1980, and 100 in 1990, then in real terms, Professor Plum's salary was highest in
a. 1980 and lowest in 1970.
b. 1980 and lowest in 1990.
c. 1990 and lowest in 1970.
d. 1990 and lowest in 1980.
109. Institutions that help to match one person's saving with another person's investment are collectively called the
a. Federal Reserve system.
b. banking system.
c. monetary system.
d. financial system.
110. Given that Monika's income exceeds her expenditures, Monika is best described as a
a. saver or as a supplier of funds.
b. saver or as a demander of funds.
c. borrower or as a supplier of funds.
d. borrower or as a demander of funds.
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Name: ________________________
ID: A
111. Norberto is opening a bicycle shop, and his monthly expenditures to get the shop up and running exceed his
monthly income. Norberto is best described as a
a. saver or as a supplier of funds.
b. saver or as a demander of funds.
c. borrower or as a supplier of funds.
d. borrower or as a demander of funds.
112. A bond buyer is a
a. saver. Bond buyers must hold their bonds until maturity.
b. saver. Bond buyers may sell their bonds prior to maturity.
c. borrower. Bond buyers must hold their bonds until maturity.
d. borrower. Bond buyers may sell their bonds prior to maturity.
113. Suppose the issuer of a bond fails to pay some of the interest or principal that was promised to the
bondholders. This failure is referred to as a
a. breach.
b. default.
c. risk.
d. term failure.
114. Suppose the government finds a major defect in one of a company's products and demands that the product be
taken off the market. We would expect that the
a. supply of existing shares of the stock and the price will both rise.
b. supply of existing shares of the stock and the price will both fall.
c. demand for existing shares of the stock and the price will both rise.
d. demand for existing shares of the stock and the price will both fall.
115. A high demand for a company’s stock is an indication that
a. the company is in need of funds.
b. the company has recently sold a large quantity of bonds.
c. people are optimistic about the company’s future.
d. people are pessimistic about the company’s future.
116. A stock’s dividend yield is the
a. dividend as a percentage of the price per share.
b. stock price as a percentage of the dividend.
c. dividend as a percentage of the retained earnings per share.
d. retained earnings per share as the percentage of the dividend.
117. Which of the following is correct?
a. Joan takes some of her income and buys mutual fund shares. Joan’s purchase will be
included in the investment category of GDP.
b. If a share of stock in Virtual Pizza Corporation sells for $77, the earnings per share are
$5, and the dividend per share is $2, then the P/E ratio is 11.
c. In order to use equity finance, a firm must sell about equal values of stocks and bonds.
d. None of the above is correct.
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Name: ________________________
ID: A
118. Borrowers can (and sometimes do) default on their loans when
a. the dividend yield on their shares of stock reaches zero.
b. they convert their bonds into perpetuities.
c. they declare bankruptcy.
d. they cannot find enough buyers of their bonds to sell all the bonds they wish to sell.
119. Which of the following statements is correct?
a. NASDAQ is an important stock exchange in the United States.
b. The Standard & Poor’s 500 Index and the New York Stock Exchange are two examples
of stock indexes.
c. The most significant influence on the demand for a corporation’s stock is the number of
shares of the stock that the corporation has issued.
d. All of the above are correct.
120. Who accepts all of the risk associated with a mutual fund’s portfolio of stocks and/or bonds?
a. the fund’s managers
b. the fund’s shareholders
c. the federal government
d. the corporations that originally issued the stocks and/or bonds held by the fund
121. The first three elements of a financial crisis are correctly represented as taking place in the following order:
a. large decline in some asset prices insolvencies at financial institutions decline in
confidence in financial institutions
b. insolvencies at financial institutions decline in confidence in financial institutions
large decline in some asset prices
c. insolvencies at financial institutions economic downturn credit crunch
d. insolvencies at financial institutions credit crunch economic downturn
122. Consider the expressions T - G and Y - T - C. Which of the following statements is correct?
a. Each one of these is equal to national saving.
b. Each one of these is equal to public saving.
c. The first of these is private saving; the second one is public saving.
d. The first of these is public saving; the second one is private saving.
123. Consider three different closed economies with the following national income statistics. Country A has taxes
of $40 billion, transfers of $20 billion, and government expenditures on goods and services of $30 billion.
County B has private savings of $60 billion, and investment expenditures of $50 billion. Country C has GDP
of $300 billion, investment of $70, consumption of $180 billion, taxes of $60 billion and transfers of $20
billion. From this information we know that there is a $10 billion government budget deficit for
a. only country A.
b. only country B.
c. only country C.
d. all three countries.
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Name: ________________________
ID: A
Scenario 26-2. Assume the following information for an imaginary, closed economy.
GDP = $200,000; consumption = $120,000;
government purchases = $35,000; and taxes = $25,000.
124. Refer to Scenario 26-2. For this economy, investment amounts to
a. $25,000.
b. $30,000.
c. $35,000.
d. $45,000.
125. Which of the following restrictions implies that saving and investment are equal for a closed economy?
a. Private saving is equal to zero.
b. Public saving is equal to zero.
c. The economy’s government is running neither a surplus nor a deficit.
d. No restriction is necessary; saving and investment are equal for all closed economies.
126. If the supply of loanable funds shifts to the right, then the equilibrium interest rate
a. and quantity of loanable funds rise.
b. and quantity of loanable funds fall.
c. rises and the quantity of loanable funds falls.
d. falls and the quantity of loanable funds rises.
127. Which of the following would necessarily create a surplus at the original equilibrium interest rate in the
loanable funds market?
a. an increase in the supply of or a decrease in the demand for loanable funds
b. an increase in the supply of or an increase in the demand for loanable funds
c. a decrease in the supply of or a decrease in the demand for loanable funds
d. a decrease in the supply of or an increase in the demand for loanable funds
128. What would happen in the market for loanable funds if the government were to decrease the tax rate on
interest income?
a. There would be an increase in the amount of loanable funds borrowed.
b. There would be a reduction in the amount of loanable funds borrowed.
c. There would be no change in the amount of loanable funds borrowed.
d. The change in loanable funds is uncertain.
129. Suppose a government that taxed all interest income changed its tax law so that the first $5,000 of a
taxpayer’s interest income was tax free. This would shift the
a. supply of loanable funds to the right, causing interest rates to fall.
b. supply of loanable funds to the left, causing interest rates to rise.
c. demand for loanable funds to the right, causing interest rates to rise.
d. demand for loanable funds to the left, causing interest rates to fall.
130. Which of the following events could explain an increase in interest rates together with a decrease in
investment?
a. The government budget went from surplus to deficit.
b. The government instituted an investment tax credit.
c. The government reduced the tax rate on savings.
d. None of the above is correct.
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Name: ________________________
ID: A
131. For an imaginary economy, when the real interest rate is 5 percent, the quantity of loanable funds demanded
is $1,000 and the quantity of loanable funds supplied is $1,000. Currently, the nominal interest rate is 9
percent and the inflation rate is 2 percent. Currently,
a. the market for loanable funds is in equilibrium.
b. the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded,
and as a result the real interest rate will rise.
c. the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded,
and as a result the real interest rate will fall.
d. the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied,
and as a result the real interest rate will rise.
132. Discounting refers directly to
a. finding the present value of a future sum of money.
b. finding the future value of a present sum of money.
c. calculations that ignore the phenomenon of compounding for the sake of ease and
simplicity.
d. decreases in interest rates over time, while compounding refers to increases in interest
rates over time.
133. What is the future value of $750 one year from today if the interest rate is 2.5 percent?
a. $766.50
b. $768.75
c. $770.23
d. None of the above are correct to the nearest cent.
134. What is the future value of $800 one year from today if the interest rate is 7 percent?
a. $747.66
b. $756.00
c. $856.00
d. None of the above are correct to the nearest cent.
135. If you presently have $50,000 saved and earn 15 percent interest per year, about how many years will it take
for your investment to triple?
a. 6
b. 8
c. 10
d. 12
136. Veronica deposited $1,000 into an account two years ago. The first year she earned 7 percent interest; the
second year she earned 5 percent. How much money does Veronica have in her account today?
a. $1,133.31
b. $1,120.00
c. $1,123.50
d. None of the above are correct to the nearest cent.
137. Which of the following changes would decrease the present value of a future payment?
a. a decrease in the size of the payment
b. an increase in the time until the payment is made
c. an increase in the interest rate
d. All of the above are correct.
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Name: ________________________
ID: A
138. Lucky Hardware Store considered building a store in a new location. The owners and their accountants
decided that this was not the profitable thing to do. However, soon after they made this decision, both the
interest rate and the cost of building the store changed. In which case do these changes both make it more
likely that they will now build the store?
a. Interest rates rise and the cost of building the store rises.
b. Interest rates rise and the cost of building the store falls.
c. Interest rates fall and the cost of building the store rises.
d. Interest rates fall and the cost of building the store falls.
139. Hardwood Furniture Store considered building a store in a new location. The owners and their accountants
decided that this was the profitable thing to do. However, soon after they made this decision, both the interest
rate and the cost of building the store changed. In which case do these changes both make it less likely that
they will now build the store?
a. Interest rates rise and the cost of building the store rises.
b. Interest rates rise and the cost of building the store falls.
c. Interest rates fall and the cost of building the store rises.
d. Interest rates fall and the cost of building the store falls.
140. Allen Steel Company is considering whether to build a new mill. If the interest rate rises,
a. the present value of the returns from the mill will fall, so Allen will be less likely to build
the mill.
b. the present value of the returns from the mill will fall, so Allen will be more likely to
build the mill.
c. the present value of the returns from the mill will rise, so Allen will be less likely to build
the mill.
d. the present value of the returns from the mill will rise, so Allen will be more likely to
build the mill.
141. If the interest rate is r percent, then the rule of 70 says that your savings will double about every
a. 70/(1 - r) years.
b. 70/(1 + r) years.
c. 70/r years.
d. 70(1 + r)/r years.
142. Suppose you win a small lottery and you are given the following choice: You can receive (1) an immediate
payment of $10,000 or (2) two annual payments, each in the amount of $5,200, with the first payment coming
one year from now, and the second payment coming two years from now. You would choose to take the
immediate payment of $10,000 if the interest rate is
a. 2 percent, but not if the interest rate is 1 percent.
b. 3 percent, but not if the interest rate is 2 percent.
c. 4 percent, but not if the interest rate is 3 percent.
d. 5 percent, but not if the interest rate is 4 percent.
143. Suppose you will receive $800 in two years. If the interest rate is 5 percent, then the present value of this
future payment is
a. $725.62. It would be higher if the interest rate were higher.
b. $727.28. It would be higher if the interest rate were higher.
c. $725.62. It would be lower if the interest rate were higher.
d. $727.28. It would be lower if the interest rate were higher.
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Name: ________________________
ID: A
Figure 27-1. The figure shows a utility function.
144. Refer to Figure 27-1. The utility function that is shown exhibits the property of diminishing
a. wealth.
b. utility.
c. marginal wealth.
d. marginal utility.
145. Suppose that Thom experiences a greater loss in utility if he loses $50 than he would gain in utility if he wins
$50. This implies that Thom’s
a. marginal utility diminishes as wealth rises, so he must be risk averse.
b. marginal utility diminishes as wealth rises, but we can’t tell from this if he is risk averse.
c. marginal utility increases as wealth rises, so he must be risk averse.
d. marginal utility increases as wealth rises, but we can’t tell from this if he is risk averse.
146. Other things the same, as the stocks of a greater number of corporations are held in a portfolio,
a. risk increases at an increasing rate.
b. risk increases at a decreasing rate.
c. risk decreases at an increasing rate.
d. risk decreases at a decreasing rate.
147. Which of the following is not correct?
a. A risk averse person might be willing to hold stocks.
b. Other things the same, a portfolio with the stocks of a large number of companies has less
risk.
c. Other things the same, the larger a portion of savings a person invests in stocks, the
greater his expected return.
d. Diversification can eliminate market risk but not firm-specific risk.
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Name: ________________________
ID: A
148. People who hold well-diversified portfolios of stocks have greatly reduced or eliminated
a. firm-specific risk, and so they do not need to worry about their wealth decreasing as a
result of recessions.
b. market risk, and so they do not need to worry about their wealth decreasing as a result of
recessions.
c. firm-specific risk, but still they have reason to worry about their wealth decreasing as a
result of recessions.
d. market risk, but still they have reason to worry about their wealth decreasing as a result
of recessions.
149. Samantha holds stocks in four companies. If she adds stocks of several more companies she will decrease
a. firm specific risk and market risk.
b. firm specific risk but not market risk.
c. market risk but not firm specific risk.
d. neither firm specific nor market risk.
150. If stock prices follow a random walk, then stock investors can make large profits by
a. buying stocks whose prices have been falling for several days.
b. buying stocks whose prices have been rising for several days.
c. performing fundamental analysis of stocks using data contained in annual reports.
d. using inside information.
151. The possibility of speculative bubbles in the stock market arises in part because
a. stock prices may not depend at all on psychological factors.
b. fundamental analysis may be the correct way to evaluate the value of stocks.
c. future streams of dividend payments are very hard to estimate.
d. the value of shares of stock depends not only on the future stream of dividend payments
but also on the price at which the stock will be sold.
152. If asset markets are driven by the “animal spirits” of investors, then
a. those markets reflect rational behavior.
b. those markets reflect irrational behavior.
c. the efficient markets hypothesis is correct.
d. the stock market exhibits informational efficiency.
153. The efficient markets hypothesis implies
a. that all stocks are fairly valued all the time and that no stock is a better buy than any
other.
b. that all stocks are fairly valued all the time, but that some stocks may be better buys than
other.
c. that some stocks may be better buys than others and stock experts can determine which
ones.
d. that no stock is efficiently valued.
34
Name: ________________________
ID: A
154. President Bigego is running for re-election against Senator Pander. Bigego proclaims that more people are
working now than when he took office. Pander says that the unemployment rate is higher now than when
Bigego took office. You conclude that
a. one of them must be lying.
b. both of them could be telling the truth if the labor force and employment grew at the
exact same rate.
c. both of them could be telling the truth if the labor force grew slower than employment.
d. both of them could be telling the truth if the labor force grew faster than employment.
Table 28-1
Labor Data for Aridia
Year
Adult population
Number of employed
Number of unemployed
2010
2000
1400
200
2011
3000
1300
600
2012
3200
1600
200
155. Refer to Table 28-1. The labor force of Aridia in 2010 was
a. 1400.
b. 1600.
c. 1800.
d. 2000.
156. Refer to Table 28-1. The number of adults not in the labor force of Aridia in 2010 was
a. 200.
b. 400.
c. 600.
d. 1800.
157. Most spells of unemployment are
a. long, and most unemployment observed at any given time is long term.
b. long, but most unemployment observed at any given time is short term.
c. short, but most unemployment observed at any given time is long term.
d. short, and most unemployment observed at any given time is short term.
158. Which of the following is not correct?
a. Most people who become unemployed will soon find jobs.
b. In an ideal labor market, wages would adjust to ensure that all workers are always fully
employed.
c. The unemployment rate occasionally falls to zero.
d. There are always some workers without jobs, even when the overall economy is doing
well.
159. Which of the following was not among the four industries with the largest employment in the United States a
century ago?
a. cotton goods
b. men’s clothing
c. meat packing
d. lumber
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Name: ________________________
ID: A
160. In the 1990’s Ireland made unemployment benefits less generous. This change would likely have
a. reduced structural unemployment and the natural rate of unemployment
b. reduced structural unemployment but not the natural rate of unemployment
c. reduced frictional unemployment and the natural rate of unemployment
d. reduced frictional unemployment but not the natural rate of unemployment
161. Minimum-wage laws can keep wages
a. above equilibrium and cause a surplus of labor.
b. above equilibrium and cause a shortage of labor.
c. below equilibrium and cause a surplus of labor.
d. below equilibrium and cause a shortage of labor.
Labor Market Data
Below is some hypothetical data on the labor market.
wage
$7
$6
$5
quantity demanded
9,000
12,000
15,000
quantity supplied
14,000
12,000
10,000
162. Refer to Labor Market Data. If the government imposed a minimum wage of $5, what would
unemployment be?
a. 0
b. 2,000
c. 3,000
d. 5,000
163. Which of the following both make a firm more likely to pay efficiency wages?
a. it is easy to judge the quality of applicants and after workers have worked for the firm a
while they tend not to look for other jobs
b. it is easy to judge the quality of applicants and after workers have worked for the firm a
while they tend to look for other jobs
c. it is difficult to judge the quality of applicants and after workers have worked for the
firm a while they tend not to look for other jobs
d. it is difficult to judge the quality of applicants and after workers have worked for the
firm a while they tend to look for other jobs
164. You receive money as payment for babysitting your neighbors' children. This best illustrates which function
of money?
a. medium of exchange
b. unit of account
c. store of value
d. liquidity
165. Which of the following is a store of value?
a. currency
b. U.S. government bonds
c. fine art
d. All of the above are correct.
36
Name: ________________________
ID: A
166. Treasury Bonds are
a. both a store of value and a medium of exchange.
b. a store of value, but not a medium of exchange
c. a medium of exchange, but not a store of value.
d. neither a store of value nor a medium of exchange.
167. The set of items that serve as media of exchange clearly includes
a. demand deposits.
b. short-term bonds.
c. credit cards.
d. All of the above are correct.
168. Which of the following is included in both M1 and M2?
a. currency
b. demand deposits
c. other checkable deposits
d. All of the above are correct.
169. Which of the following statements regarding the Federal Open Market Committee is correct?
a. Only the five voting regional Fed presidents attend the meetings.
b. All regional Fed presidents attend and vote at the meetings.
c. All regional Fed presidents attend the meetings, but only five get to vote.
d. Regional Fed presidents may neither attend nor vote the meetings.
170. When conducting an open-market purchase, the Fed
a. buys government bonds, and in so doing increases the money supply.
b. buys government bonds, and in so doing decreases the money supply.
c. sells government bonds, and in so doing increases the money supply.
d. sells government bonds, and in so doing decreases the money supply.
171. A bank has $10,000 in deposits and $8,000 in loans. It has loaned out all it can given the reserve requirement.
It follows that the reserve requirement is
a. 2 percent.
b. 12.5 percent.
c. 20 percent.
d. 80 percent.
172. As the reserve ratio increases, the money multiplier
a. increases.
b. does not change.
c. decreases.
d. could do any of the above.
173. If the reserve ratio is 4 percent, then the money multiplier is
a. 25.
b. 20.
c. 4.
d. 2.
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Name: ________________________
ID: A
174. If the reserve ratio is 20 percent, the money multiplier is
a. 2.
b. 4.
c. 5.
d. 8.
Table 29-3.
The First Bank of Fairfield
Assets
Reserves
Loans
$2,000
8,000
Liabilities
Deposits
$10,000
175. Refer to Table 29-3. If $1,000 is deposited into the First Bank of Fairfield, and the bank takes no other
actions, its
a. reserves will increase by $200.
b. liabilities will decrease by $1,000.
c. assets will increase by $1,000.
d. reserves will increase by $800.
Table 29-4.
The First Bank of Roswell
Assets
Reserves
Loans
$25,000
125,000
Liabilities
Deposits
$150,000
176. Refer to Table 29-4. If the bank faces a reserve requirement of 10 percent, then the bank
a. is in a position to make a new loan of $15,000.
b. has fewer reserves than are required.
c. has excess reserves of $10,000.
d. None of the above is correct.
177. Refer to Table 29-4. Suppose the bank faces a reserve requirement of 10 percent. Starting from the situation
as depicted by the T-account, a customer deposits an additional $50,000 into his account at the bank. If the
bank takes no other action it will
a. have $65,000 in excess reserves.
b. have $55,000 in excess reserves.
c. need to raise an additional $5,000 of reserves to meet the reserve requirement ratio
d. None of the above is correct.
178. Refer to Table 29-4. If the bank is holding $4,000 in excess reserves, then the reserve requirement with
which it must comply is
a. 4 percent.
b. 6 percent.
c. 12 percent.
d. 14 percent.
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Name: ________________________
ID: A
179. The manager of the bank where you work tells you that the bank has $300 million in deposits and $255
million dollars in loans. If the reserve requirement is 10 percent, how much is the bank holding in excess
reserves?
a. $15 million
b. $19.5 million
c. $25.5 million
d. $30 million
180. The Fed increases the reserve requirement, but it wants to offset the effects on the money supply. Which of
the following should it do?
a. sell bonds to increase reserves
b. sell bonds to decrease reserves
c. buy bonds to increase reserves
d. buy bonds to decrease reserves
Scenario 29-1.
The monetary policy of Namdian is determined by the Namdian Central Bank. The local currency is the dia.
Namdian banks collectively hold 100 million dias of required reserves, 25 million dias of excess reserves, 250
million dias of Namdian Treasury Bonds, and their customers hold 1,000 million dias of deposits. Namdians
prefer to use only demand deposits and so the money supply consists of demand deposits.
181. Refer to Scenario 29-1. Suppose the Central Bank of Namdia loaned the banks of Namdia 5 million dias.
Suppose also that both the reserve requirement and the percentage of deposits held as excess reserves stay the
same. By how much would the money supply of Namdia change?
a. 60 million dias
b. 50 million dias
c. 40 million dias
d. None of the above is correct.
182. If the price level increased from 120 to 150, then what was the inflation rate?
a. 30 percent
b. 25 percent
c. 20 percent
d. None of the above is correct.
183. In the last part of the 1800’s
a. deflation made it harder for farmers to pay off their debt.
b. deflation made it easier for farmers to pay off their debt.
c. inflation made it harder for farmers to pay off their debt.
d. inflation made it easier for farmers to pay off their debt.
184. The classical theory of inflation
a. is also known as the quantity theory of money.
b. was developed by some of the earliest economic thinkers.
c. is used by most modern economists to explain the long-run determinants of the inflation
rate.
d. All of the above are correct.
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Name: ________________________
ID: A
185. Money demand depends on
a. the price level and the interest rate.
b. the price level but not the interest rate.
c. the interest rate but not the price level.
d. neither the price level nor the interest rate.
186. When the money market is drawn with the value of money on the vertical axis, an increase in the money
supply causes the equilibrium value of money
a. and equilibrium quantity of money to increase.
b. and equilibrium quantity of money to decrease.
c. to increase, while the equilibrium quantity of money decreases.
d. to decrease, while the equilibrium quantity of money increases.
Figure 30-2. On the graph, MS represents the money supply and MD represents money demand. The usual
quantities are measured along the axes.
187. Refer to Figure 30-2. Suppose the relevant money-demand curve is the one labeled MD 1; also suppose the
economy’s real GDP is 30,000 for the year. If the money market is in equilibrium, then how many times per
year is the typical dollar bill used to pay for a newly produced good or service?
a. 4
b. 6
c. 8
d. 12
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Name: ________________________
ID: A
Figure 30-3. On the graph, MS represents the money supply and MD represents money demand. The usual
quantities are measured along the axes.
188. Refer to Figure 30-3. What quantity is measured along the vertical axis?
a. the price level
b. the velocity of money
c. the value of money
d. the quantity of money
189. The payments you make on your automobile loan are given in terms of dollars. As prices rise you notice you
give up fewer goods to make your payments.
a. The dollar amount you pay is a nominal value. The number of goods you give up is a
real value.
b. The dollar amount you pay is a real value. The number of goods you give up is a
nominal value.
c. Both the dollar amount you pay and the goods you give up are nominal values.
d. Both the dollar amount you pay and the goods you give up are real values.
190. According to the classical dichotomy, which of the following is influenced by monetary factors?
a. real GDP
b. unemployment
c. nominal interest rates
d. All of the above are correct.
191. If real output in an economy is 1,000 goods per year, the money supply is $300, and each dollar is spent an
average of 3 times per year, then according to the quantity equation, the average price level is
a. $0.90.
b. $1.00.
c. $1.11.
d. $1.33.
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Name: ________________________
ID: A
192. Other things the same, a decrease in velocity means that
a. the rate at which money changes hands falls, so the price level rises.
b. the rate at which money changes hands falls, so the price level falls.
c. the rate at which money changes hands rises, so the price level rises.
d. the rate at which money changes hands rises, so the price level falls.
193. Evidence concerning hyperinflation indicates a clear link between the money supply and the price level for
a. Austria in the 1920’s.
b. Hungary in the 1920’s.
c. Poland in the 1920’s.
d. All of the above are correct.
194. Based on past experience, if a country is experiencing hyperinflation, then which of the following would be a
reasonable guess?
a. The country has high money supply growth.
b. Inflation is acting like a tax on everyone who holds money.
c. The government is printing money to finance its expenditures.
d. All of the above are correct.
195. The claim that increases in the growth rate of the money supply increase nominal interest rates but not real
interest rates is known as the
a. Friedman Effect.
b. Hume Effect.
c. Fisher Effect.
d. None of the above is correct.
196. The nominal interest rate is 4.5 percent and the inflation rate is 0.9 percent. What is the real interest rate?
a. 5.4 percent
b. 5 percent
c. 4.1 percent
d. 3.6 percent
197. Suppose that monetary neutrality and the Fisher effect both hold. An increase in the money supply growth
rate increases
a. the inflation rate and real interest rates.
b. the inflation rate, but not real interest rates.
c. real interest rates, but not the inflation rate.
d. neither the inflation rate nor real interest rates.
198. U.S. tax laws allow taxpayers, in computing the amount of tax they owe, to use the real value, as opposed to
the nominal value, of
a. both interest income and capital gains.
b. interest income but not capital gains.
c. capital gains but not interest income.
d. neither interest income nor capital gains.
199. For a given real interest rate, a decrease in the inflation rate would
a. decrease the after-tax real interest rate and so decrease saving.
b. decrease the after-tax real interest rate and so increase saving.
c. increase the after-tax real interest rate and so decrease saving.
d. increase the after-tax real interest rate and so increase saving.
42
Name: ________________________
ID: A
200. You bought some shares of stock and, over the next year, the price per share increased by 5 percent and the
price level increased by 8 percent. Before taxes, you experienced
a. both a nominal gain and a real gain, and you paid taxes on the nominal gain.
b. both a nominal gain and a real gain, and you paid taxes only on the real gain.
c. a nominal gain and a real loss, and you paid taxes on the nominal gain.
d. a nominal gain and a real loss, and you paid no taxes on the transaction.
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