Introduction to Economic Instititutions, History, and Principles
Introduction to Economic Instititutions, History, and Principles ECON 1500
Utah State University
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Chapter 1 N L 4 V39 In Zimbabwe the government is country39s severe in ation A decreasing demand for money which is causing the B decreasing supply of C increasing supply of D increasing demand for What are the institutions that help foster the appropriate incentives for economic growth A regulated labor and credit markets and unions B communal property rights and absence of a profitloss system C dependable legal system property rights and competitive and open markets D production and export quotas and supply and demand Recall the chapter opening story about the British sea captains and the convicted felons Instead of paying the sea captains for each prisoner placed on board the ships in Great Britain an economist suggested A paying for each prisoner who walked off the ship in Australia B paying for food and water to reduce costs of caring for prisoners during the transit C doing nothing since the suggested change would not matter D that new regulations be passed to require prisoner safety and health Marginal thinking was simultaneously discovered by three economistsistanley Jevons Carl Menger and Adam Smith You are given a ticket to a Bob Dylan concert The face value of the ticket is 50 You value attending the Bob Dylan concert at 40 You can sell the ticket to a friend for 10 and attend a U2 concert by getting a ticket priced at 60 The opportunity cost of attending the U2 concert is A 10 B 30 C 40 D 50 Page 1 0 gt1 9 0 0 The opportunity cost of attending college includes tuition room and board cost of meals and the lost opportunity to make money at a job Adam Smith s metaphor of the invisible hand refers to the notion that A greed is always good B behavior based on selfinterest can lead to an overall bene t to society C market incentive can lead to negative side effects D markets always align self interest with social interest The opportunity cost of winning a free ticket to the Super Bowl worth 950 and attending the game is A zero since the ticket was free B priceless if the person really loves football C 950 representing the 10st market value of selling the ticket to somebody else D zero if the person would rather go to the game than do anything else Recessions are marked by which of the following phenomena A falling wages B falling national output C rising unemployment D All of the answers are correct Joe runs a landscape business He knows that providing landscaping services costs him 100 per hour on average while the cost of providing such services is 150 per hour a er 5 PM due to overtime pay reduced productivity and the added wear and tear on his equipment A potential client offers Joe 130 per hour to provide services but needs him to provide the services a er 5 PM due to circumstances at the property Joe should take thejob since 130 exceeds his average cost of production Joe should take the job since he is making a 30 pro t per hour Joe should decline the job since he would lose 150 per hour worked on the job Joe should decline the job since he would lose 20 per hour worked B C D Page 2 11 What is a plausible economic explanation as to why Braille dots are commonly found on driveup automatic teller machines N A B V C V D V In ation is always and everywhere a A B C D Chapter 2 Blind people must be able use such machines due to government regulations requiring such dots on the keys under the Americans with Disabilities Act The cost of making two different types of keypads at the margin is substantial and the bene t of providing keypads without the Braille dots is a mere inconvenience to ATM users The opportunity cost of making the keys with the Braille dots is less than making the keys without the Braille dots There is no economic concept that explains why the keypads have Braille dots according to Milton Friedman capitalist problem communist problem monetary phenomenon situation caused by haphazard technological growth 13 New research indicates that running marathons is bad for the heart for instance it increases in ammatory markers which are associated with heart attacks This news will A V B C D B C D cause a change in tastes away from running decreasing the demand for running shoes have no effect on the demand or supply of running shoes increase the supply of running shoes cause a change in tastes away from running increasing the demand for running shoes If Romaine lettuce and Iceberg lettuce are substitute products an increase in the price of Romaine lettuce will the demand for Iceberg lettuce reduce increase not shi either increase or decrease depending on whether lettuce is a normal or inferior good Page 3 gt1 00 O Spaghetti is an inferior good As people s incomes increase and other things remain the same you predict that the demand for spaghetti will decrease and the demand curve shifts to the left demand for spaghetti will decrease and the demand curve shifts to the right demand for spaghetti will rise and the demand curve shi s to the left demand for spaghetti will rise and the demand curve shifts to the right You observe that the price of coffee has increased yet evidence suggests demand for coffee has been stable you surmise a possible explanation is that A there has been no change in the supply of coffee B there has been increased use of subsidies in coffee production C wages of workers in coffee production might have decreased D wages of workers in coffee production might have increased If the university president valued a parking space close to the administration building at 500 and paid 30 for a parking permit he would receive consumer surplus equal to A 30 B 470 C 500 D 530 Which of the following factors causes a decrease in supply A a decrease in demand B a decrease in the price of the product C an increase in the price of the product D new taxes on output The quantity demanded of a good or service is the amount that A consumers are willing and able to buy at a given price B rms are willing to sell during a given time period at a given price C a consumer would like to buy but might not be able to afford D is allocated by a planning authority What does the law of demand state A As incomes increase people consume more of all goods The demand for a good increases with the number of consumers in the market As the price of a good declines consumers purchase more of that good The supply of a good increases in proportion to the demand for it B C D Page 4 21 N N A taX of 4 shi s the supply curve to the right and down by 4 True B False Which of the following are likely to be complements A hotdo gs and hamburgers B books and book lights C coffee and tea D cars and vans Chapter 3 23 Which of the following answer choices contains only factors that would cause a demand curve for a normal good to shi to the right A a rise in population economic growth a fall in the price of a substitute good a rise in preferences for the good economic growth and a rise in the price of a complementary good B C positive expectations for the economy economic growth a fall in the price of a complementary good D a fall in population economic growth a rise in tastes and preferences for the product Lead an input in the production of ammunition has increased in price from 060lb in 2006 to over 150lb in 2007 What happened to the equilibrium price and quantity of ammunition over this period A The equilibrium price increased and the equilibrium quantity decreased B The equilibrium price increased and the equilibrium quantity increased C The equilibrium price decreased and the equilibrium quantity decreased D The equilibrium price decreased and the equilibrium quantity increased At a free market equilibrium A quantity demanded equals quantity supplied B consumer surplus and producer surplus are maximized C there are no uneXploited gains from trade D All of the answers are correct Page 5 26 Immeddately a er a humeane n xslxkely that the quanmy demanded fortree umquot rm m Wm H cuttingremoval sermcest A equa1remamunehanged B belessthannse C Exceedrise D decreasefall 27 In free markets surpluses leadto 39 e 2 B hrgherprrees surpluses D unexploxted gams from trade Usethe followmgto answer quesuor 28 Figure Market Changes P s39 P Sn sr 5 Demand Demand gure A 0 Figure B O p 9 Supply MW 0 Do at Dr ngurv c o Fvgnre u o Fag 5 28 Figure Market Changes Refer mine above gures Ifthe above gures represent the pnee oanute Made orange soft drink a competitorto Faygo7 Figure A A B FigureB C Figurec D FigureD Usethe followingto answer quesuon 29 Figure Demand Supply Shins P 51 o D aunniry mmandnu nun Supp n me inruai sup what will happen A D will sing 10D and equrirbnurn pnee and equilibrium quanmy Win increase B S Wi L m wd L A A an ply eurve is S Iftechnological innovations lowethe costs ofproohcnon 7 deerease C D will sing to D2 and equilibrium pnee and equrirbnurn quanmy will deerease f ty D swiu sin e tn 5 and equilibrium prieewiu decrease but equilibrium quanti 3911 increase Fag 7 30 Whmh ome followmg would eause me eurrem supply ofoods tomcrease7 A personal electromcs B a deerease m the pnee ofsongs on rTurres C the Expectatinn that the futureprice nf iPnds will decrease s D an rrrerease m the wages offeredto manufacturers ofoo 31 a u pnee above equrlrbrrurr pnce A True B False Useme followmgto answer quesuor 32 Figure Gainsfrnm Trade wmrmnt wrrmrd 32 Frgure atthe free market equxlxbnum7 A 1250 B 3375 0 C D 3500 Fag 2 Usethe followmgto answer quesuou 33 Figure Demand Supply Shifts P 51 5 5 D4 D n Gummy Damandud and Supuuuu 33 aw Tde L 4 A and com and soybean crop Slwxll shftto S3 There will be no change m supply or demand m the market 995 Fag 3 Use the following to answer questror 34 Figure Gainsfrnm Trade suppty 25 e Demand 34 Frgure Gams from Trade Refer to the gure above What are theuhexplorted gams from trade at the free market equxlxbnurr A 31250 D 3500 Pagzl Usethe followmgto answer questror 3o Figur Market Changes P Sr P so sn 5 Demand Demand thureA a Figure B o p P Suppw Do Dr name c o more D o 36 Frgure Market Changes Refertothe above gures Ifthe above gures represent the market for woo1 sweaters whreh gure shows the effect of an unseasonably Warm n r7 D Figure D Pagan 37 Suppose that the equilibrium price in the market is 10 If the current market price is the equilibrium price will fall to 750 competition among buyers would increase the current price the current price would fall below 750 because of sellers competing with one another to gain market share There is not enough information provided to answer the question A B C D Chapter 4 38 Which of the following would not result in greater pro ts for a company selling bottled 4 4 gt0 O lemonade during a price ceiling A an increase in the amount of water in the recipe B a decrease in the size ofthe bottle from 12 ounces to 115 ounces C a new marketing campaign and label D elimination of the tollfree telephone number for customer information About what percentage of workers in the United States earn the minimum wage A 25 B 10 C 5 D 3 In practice rent controls are typically set A above the equilibrium rent B below the equilibrium rent C at the equilibrium rent D to encourage the production of rental units When sellers are legally prevented from raising prices they tend to increase quality to attract more buyers Page 12 Use the fouowrng to answer quesuon 42 Figur Gains rum Trade A Gams mm Trade Puue ceuvug x D or on Q2 0 c 39r A the lowesL valued uses ofthxs produew A 335733 B 257335 C 3425 D 317339 Apnee eeurng rs de ned A the hghestpnce peo Wm pay B amoratonum on the e of all goods and servrees me pnce that buyers and sellers agree a limit an the maximum legalyrice as ple Sal C on D Lhatcanhepaid an expectedresul A a snonage ofraw mammals B an increase in prndueer surplus C aredueuon m quality of nal goods D a deerease m the gams from trade Pagal 4 4 ON 4 l 48 49 V39 In 1938 Congress passed the Fair Labor Standards Act What was the purpose of this Act A The Act established the Occupational Safety and Health Administration OSHA B The Act set the rst minimum wage for the United States at 25 cents per hour The Act set the rst price ceilings for the United States The Act unincorporated Puerto Rico from the United States of oil across the from sending a correct signal to Price controls on oil in the 1970s resulted in a country because they prevented entrepreneurs A misallocation the market price B correct allocation the market price C misallocation business pro ts D correct allocation business pro ts Price ceilings and price oors have what in common A They contribute to wasteful changes in quality B They make market competition fairer C They distribute resources in the most equitable method D None of the answers is correct A large increase in the minimum wage will have the same effect on the labor market as a small increase A True B False When price ceilings are put in place in input markets we can expect which of the following to occur A a shortage of the good in the markets that have the price ceilings imposed with no misallocation of resources elsewhere in the economy B a shortage of the good in the markets that have the price ceilings imposed with additional misallocation of resources elsewhere in the economy C no shortage in the input markets but misallocation of resources elsewhere in the economy D a shortage of the good in the markets that have the price ceilings imposed but no predictions on the allocation of resources elsewhere in the economy Page 14 Usethe followmgto answer questron so Flgur Market rnr Trshirts Ruins u gmsgsxzagss u m zu 3a 4a su so 70 30 so l lz ul ls Shinsverday so Flgure Market for Trshms Conslder the Trshm marketrllustratedrnthe gure above If a pnee celllng of 14 ls rmposed what ls the market result othls pollcy7 A a surplus of 30 Trsh rt B a shnrtage nf30 T C a surplus of so Trshms D A shortage of so Trshlrts quanuty oflaborhours employed A True B False 52 When apnee A wlll be e B wlll be less than quanmy demanded C wlll be greater than quanuty demanded D mayhe equaltn less than or greater than quantity demanded celllngls set above the equlllbnum pnee quanuty supplled qual to quanuty demanded Pagels 53 A price ceiling will only affect the price of a good and not the quantity sold A True B False Chapter 5 54 Price ceilings eliminate competition A True B False u gt1 VI 00 u o What does GDP per capita tell us about a nation39s economy What issues does conventional GDP methodology exclude A True B False GDP is calculated by the A Council of Economic Advisors B Federal Reserve Board C Bureau of Labor Statistics D US Treasury When people consume more leisure A the hours in the workweek will increase B the nation39s GDP will decrease C they will consume more services D the leisure hours will contribute to GDP Theoretically why should the expenditure and income approaches to calculating GDP give us the same results A because they have the same components B because every dollar spent is a dollar earned C because of accounting errors D because theoretically consumption equals the sum of all factor incomes A car engine produced by a supplier to Ford Motor Company is an example of A an inferior good B a nal good C a common good D an intermediate good Page 16 60 The sale of sugar will contribute to GDP when A the buyer is Krispy Kreme Doughnuts B the buyer is a mother who is baking cookies C the buyer is a Mexican food restaurant D the buyer is a grocery store chain ON A nation has automobile factories grows illegal marijuana and does not allow its women to work outside the home What will be counted in GDP A the sale of automobiles and the marijuana B the sale of automobiles the marijuana and the value of the women s work C the sale of automobiles minus the environmental effects of pollution emitted by the factories D the sale of the automobiles V Use the following to answer question 62 Table Three Product Economy Product Quantity 2008 Price 2008 Quantity 2009 Price 2009 Computers 30 1000 28 99 Pizzas 100 10 150 15 Burgers 200 200 210 20 62 Table ThreeProduct Economy Suppose an economy produces only the three nal goods listed in the table above What is the growth rate ofreal GDP in 2009 if2009 is the base year A 73 71 B 1 C 7197 D 294 63 GDP can be calculated by adding up the quantities of goods and services produced in a given year A True B False ox 4 Imported goods consumed in the US are counted as part of the US GDP A True B False Page 17 65 For an industrialized country that is experiencing a 3 growth rate in real GDP what is the most likely reason that the average amount of GDP that a person can consume is decreasing A The country39s population is growing faster than the growth of real GDP B The country39s government is hoarding large amounts of the country39s production C The country39s population is growing slower than the growth of nominal GDP D The country39s government spending is growing faster than the private sector39s spending 66 What data are used to calculate GDP A quantities of goods B prices of goods C both quantities and prices of goods D costs of producing goods 67 The growth rate ofGDP is A GDP adjusted for changes in the in ation rate B GDP adjusted changes in the price level C GDP adjusted for changes in population growth D None of the answers is correct Chapter 6 68 Consider the following scenario Arural village in a developing country has an economy based on agriculture Then the government of the country provides the village with newly developed hybrid seeds that increase the agricultural yield per acre by 10 times This story illustrates the growth of per capita GDP in the village through which factors of production A physical capital B human capital C technological knowledge D both human capital and technological knowledge 69 Over one billion of the world s people live on less than per day A 100 B 500 C 1000 D 1200 Page 18 70 The most important factor that contributed to China39s rapid growth at the end of the 1970s and early 1980s was A physical capital B human capital C technology D property rights Use the following to answer question 71 Figure The Distribution of World Income 2000 The Distribution of World Income 2000 GDP per capita real US dollars 2000 3501300 Currently 80 percent of the Luxembourg world39s population lives in a country With an annual 4000quot GDP per capita less than the world average United States 30000 About 8 percent of the world s 20mg population lives in a country with an annual GDP per capita orld less than 1000 10000 9399 5000 Mexico 1000 I I I O 90 100 Cumulative percenta e of wet d population l l l l l r O 1 2 3 4 5 6 Cumulative population in billions 71 Figure The Distribution ofWorld lncome Based on the data in the figure people in the U S are about how many times wealthier than the world average GDP per capita A 50 times B 10 times C 4 times D 30 times Page 19 Use the fouowrng to answer questron 72 Figur cnnnmic Grnwth in Mai nr Wnrld Reginns re t 7375 mu are Ameuzi rm ussn urr4rnm t tun nrr m m nrr HeavenAny 72 Frgure Eeonornre Growth m Major World ea1 GDP per eaprta has been counmes o he world Studyrng the ehart shows I that growth m Afnca has stagnated E E e Equot E Regrons Referto the gure above wheh hangng over urne m different regrons and 1950 111 that Ms expeetaney has nsen tremendously aeross the world regons 73 Enforced property nghts arerrnportantto rnerease whreh othe followmg7 A physrea1 eaprta1 B human eaprta1 C teehno1ogrea1 knowledge D All nrthe factnrslisted are enrreet Pm dwater and ush tor1ets together redlce rnfant rnortahty by appronrrnately A 40 Pugezn 75 If you lived in a country that currently has enforceable property rights a noncorrupt political system high levels of factors of production and a bloody coup every few years you should suspect that economic growth will be because A slow of a lack of a dependable legal system B slow of uncertainty due to an unstable political system C high most of the institutions needed for growth are in place D high once a group comes to power all the institutions needed for growth exist 76 If 10 of the population had an average income of 46000 and the population as a whole had an average income of 10000 what would the average income be for the other 90 of the population A 6000 B 10000 C 9000 D There is not enough information provided to answer the question 77 If a nation doubles its GDP per capita in 20 years what is its annual growth rate 350 o B 42 C 65 D 7 Chapter 7 78 GDP per capita in India is around 3000 This means that all citizens in India live on 7 gt0 approximately 3000 per year If all the countries of the world were underdeveloped with low levels of income except for the United States we would expect that the growth rates of developing countries would be than they are in the world today because is important for longterm economic growth A lower world dominance by the United States B higher market size C lower market size D higher world dominance by the United States Page 21 00 O 00 UI Which of the following would help a country develop from catchup growth to cuttingedge growth a well functioning market system abolishing the system of patents and copyrights limiting domestic savings spillovers from idea production When a country is at its steady state I capital is neither increasing nor decreasing II net investment is 0 III economic growth is 0 A I only B II only C I and II D I II and 111 Why do some economists think that economic growth due to ideas will be faster in the lture A an increasing number of scientists and researchers B globalization that leads to increased market size for rms C increased economic growth in countries like China and India that translate into more scientists and larger markets D All of the answers are correct An increase in investment results in a higher level of steadystate output A True B False As more countries gain wealth private firms will increase RampD to anticipate a larger market A True B False Considering the incentives for the private market to conduct research and development we expect that the amount of research and development conducted by the private sector would be the efficient level because of the 7 property of new knowledge A equal to rivalrous B less than non rivalrous C more than rivalrous D more than nonrivalrous Page 22 00 ON 00 gt1 00 O O O O Which of the following choices can represent the sources of growth identi ed by the Solow growth model Y FA K eL A capital stock knowledge and ideas and labor skilled and unskilled B capital stock technology and skilled labor only C capital stock depreciation and human capital D All of the answers are correct If a developing country wanted to increase its level of investment which of these actions would directly lead to this goal A Strengthen private property laws and enforcement of those laws B Provide a minimum level of food to all people in the country C Do not allow corporations to keep excess pro ts by creating a pro t taX D Nationalize all foreign manufacturing facilities in the country The increase in world population will lead to an increase in ideas for production A True B False Which of the following would decrease national output A a new idea to improve the production process B a natural disaster that destroys some capital C an increase in human capital D an increase in labor Which of the following is not an outcome of the Solow growth model A When a greater proportion of output goes to investment more growth will occur B A country39s growth rate will be faster the further away it is from reaching its steady state value of capital stock C Capital accumulation alone will lead to zero long run economic growth D All of these outcomes are consistent with the Solow growth model All else equal an increase in savings will cause investment to A increase B decrease C remain unchanged D rst increase and then decrease Page 23 92 All other things equal increases in capital will cause output to Chapter 10 B C D increase at an increasing rate increase at a constant rate increase at a decreasing rate remain constant The production lnction expresses a relationship between capital stock and risk output and growth in ation and growth output and the factors of production 94 The development of new and better ideas leads to o gt1 more output more consumption and investment more capital accumulation All of the answers are correct The labor force is made up of institutionalized people the military and employed workers employed and unemployed workers unemployed workers employed workers and students over 16 all adult non institutionalized ciVilians Johnny has been repairing VHS cassettetape players He has lost his job because most his old customers have started using DVD players Johnny is said to be a discouraged worker frictionally unemployed cyclically unemployed structurally unemployed The unemployment rate in the United States has typically been higher than the unemployment rate in Europe Page 24 98 High rates of longterm unemployment correlate with high costs of hiring and ring True B False O O Frictional unemployment is caused by creative destruction B recessions C the transformation of the United States into a service economy D the changing seasons of the year Use the following to answer question 100 Table Unemployment Statistics for Country X Type of Unemployment 1995 2005 Frictional unemployment 15 1 Cyclical unemployment 34 47 Structural unemployment 2 5 19 100 Table Unemployment Statistics for Country X Using the data in the table above for the year 2005 what is the natural unemployment rate A 1 B 47 C 29 D 19 101 If the number of unemployed workers is 95 million and the number of employed workers is 146 million what is the unemployment rate 102 What does the World Ba s rigidity of employment index provide for us A a summary of the average length of unemployment of over a ve year period B a measure of the effects of shrinking manufacturing rms in developed nations C a summary of firms costs for hiring firing and adjusting employment hours D a measure of the available government assistance for workers seeking employment Page 25 103 Unernployrnent eorrelateol wrtln tlne buslness eyele ls ealleol A fncnonal unemployment B suueturalunernployrnent C cycli unernpln ent D seasonalunernployrnent Usetne followmgto answer questron 104 Flgur usinessCyeles ampUnemplnyment 2 LA Iquot N asovteennoenmnm u t mmmmt mm 104 Flgure Buslness Cyeles ampUnemployment Wluen panel m tlne prewous gure shows tlne expeetedrelauonsnrp between real GDP groWLh anol unernployrnent7 PanelA B PanelB cl PanelC D PanelD Pugezo 105 How can people who are laid offfrom work due to arecession eventually turn into structurally unemployed people A by failing to le for unemployment bene ts B by becoming discouraged workers C by staying unemployed so long that their skills become outdated D by receiving food stamps Use the following to answer question 106 Figure Real GDP Real Gross Domestic Product 1 Decimal GDPC1 Pecent 100 change rorn year ago l l l l 50 1970 1975 1980 1985 1990 1995 2000 2005 2010 Shaded areas indicate US recessions Year Source US Department of Commerce Bureau of Economic Analysis 106 Figure Real GDP Refer to the previous gure Given this view ofthe real business cycle for the United States over the time period 1970 to 2008 when would you expect cyclical unemployment to have beenthe highest A 1972 B 1982 C 1985 D 2000 107 The natural unemployment rate is de ned as frictional unemployment plus cyclical unemployment rue B False Page 27 108 The labor force consists of all of the adult noninstitutionalized civilians in a nation True B False 109 Which of the following best describes the effects of a major labor union that maintains a union wage above the market equilibrium wage A The quantity of labor demanded exceeds the quantity of labor supplied and the unemployment rate increases B The quantity of labor demanded exceeds the quantity of labor supplied and the unemployment rate decreases C The quantity of labor supplied exceeds the quantity of labor demanded and the unemployment rate increases D The quantity of labor supplied exceeds the quantity of labor demanded and the unemployment rate decreases Chapter 11 110 What two components of the quantity theory of money are assumed to be stable ll 11 ll N L velocity of money and price level real GDP and price level real GDP and velocity of money money supply and velocity of money When people suffer from money illusion an increase in the money supply A raises real GDP in the short run B lowers real GDP in the short run C has no effect on real GDP in the short run but raises real GDP in the long run D lowers real GDP in the long run De ation can be differentiated from disin ation in that the de ation rate is always negative while the disin ation rate is always positive In a small economy the money supply is 400000 and the velocity of money is 3 The current price level in the economy is 1 What is the level of real GDP in this economy A 12 million B 16 million C 400000 D 133333 Page 28 114 115 116 117 ll 11 0 9 People mistaking changes in nominal prices for changes in real prices is called price illusion in ation illusion money illusion wealth illusion According to the quantity theory of money a nation that increases its money supply by 30 should expect its price level to increase by approximately A 15 B 30 C 45 D 60 Which answer best explains why prices of some popular goods have fallen over time A Consumers have increased their demand for these products over time B Consumers have switched to substitute items C Certain technological advances have offset scarcity D Production costs have increased Which index measures price increases that typical American consumers face when shopping A CPI B PPI C GDP de ator D GDP in ator Which of the following is an example of money illusion assuming that in ation is 5 A You receive a 5 raise on your part time job and start spending extra money on entertainment every weekend B You receive a 5 raise on your parttime job but do not increase or decrease your spending C You do not receive a raise on your parttime job but cut out some expenses as you notice some prices rising D None of the answers is correct According to the quantity theory of money the primary cause of in ation is an increase in real GDP A True B False Page 29 120 In auonrs besr de ned as an rnerease 1n the rea1pnee ofa good or servree B the mate ofone productrelauveto the pnce ofanother product C an pnces 1n an eeonorny D rhe average price level Chapter 12 121 e A actual in atinnrate B expectedm a onrate C longrrunm ahonrate D None ofthe answers 15 correct Usethe followmgto answer quesuon 122 Figure Three Dynamic AD Curves swear 1 m 2 W m so RuzlGDP swana 122 Frgure Three DynarnreAD Curves Referto the gure abovewhat1sthelong run growth rate 1n ths eeonorny a er aposmve money shock7 A 3 B 4 C 6 D 2 PagaZEl rate A True B False 124 Theter m business auemanonsquot refers to A the daffaent es ofaprodud cycle B changes m the pnces ofgoods and semees ova time D the txendmreal GDP over along panod ofume 125 Whmh ofune followmg causes a snug ofune dynanmeAD curve to melem I xncreasedtaxe s 11 increased consumer con dence 1 xncreasedxmpon gowth I and 11 only Usethe followmgto answer quesuon 126 Figure Real Sharks mnnnon 7 v s gmwl curve x w r 7 mm mm 126 mmquot 1 V9 1M1 m at F A W B X C Y D z Paga 127 In the basic real business cycle model shocks to aggregate demand always cause I changes in real GDP II changes in in ation III changes in spending growth A I only B I and III only C 11 only D I II and III 12 9 In the shortrun what happens to the economy when consumer spending decreases in the New Keynesian model A In ation is higher and the real growth rate is higher B In ation is higher and the real growth rate is lower C In ation is lower and the real growth rate is higher D In ation is lower and the real growth rate is lower 129 The Great Depression would have been a lot less severe if monetary policy were better understood and managed at the time A True B False 130 If spending growth is 6 and in ation is also 6 this means that A real GDP did not increase B economic growth was 12 C more money is chasing an increased number of goods D a positive supply shock occurred Chapter 14 131 The Fed loaned money to JP Morgan and AIG because it was concerned about A moral hazard on the part of these banks B systemic risk should these banks fail C the liquidity of these banks D the market demands being placed on these banks Page 32 132 A bank will become illiquid if 13 13 13 13 13 3 4 V39 6 gt1 A it has short term liabilities that exceed its short term assets B it is insolvent C it is solvent and liquid D there is a nancial crisis like the one of 2008 The money multiplier equals A the amount of money supply divided by the amount of reserves B one divided by the difference between the reserve ratio and the required reserve ratio C one divided by the reserve ratio D one divided by the discount rate The Federal Reserve s major tools to control the money supply are I open market operations II discount rate lending and the term auction facility III required reserve ratio and payment of interest on reserves IV federal funds lending A I and II only B III and IV only C I II and III only D I II III and IV The Federal Reserve has direct control over A the monetary base B C M2 D All of the answers are correct Moral hazard occurs when A the failure of one nancial institution can bring down other institutions as well B nancial institutions take on too much risk because they are insured C nancial institutions become insolvent because they issued too many loans D there are more shortterm liabilities than shortterm assets The Federal Reserve acquires its unique power through its ability to issue money A True B False Page 33 13 139 14 O 14 14 N 14 LA 9 When the Fed buys US government bonds to affect the money supply it is conducting A discount rate lending B discount rate borrowing C an open market sale D an open market purchase An increase in money growth will cause the economy39s AD curve to A not shi B shift inward C shift outward D shift outward during expansions and inward during contractions In the United States the amount of cash per capita is about 2500 This gure A shows how much currency each American holds in their checking accounts misrepresents actual cash holdings in the U S dollar because a lot of our currency is outside the borders of the United States B C accurately represents the size of the underground economy in the United States D shows how much the world depends on the US monetary system Inthe United States the largest category of means of payment is A currency B checkable deposits C saVings accounts D All of the answers are correct The Fed has the greatest in uence over 7 interest rates Investment spending depends on interest rates A shortterm shortterm B short term long term C longterm shortterm D longterm longterm Which of the following assets would you classify as being most liquid A demand deposits B smalltime deposits C a home D gold bullion Page 34 Chapter 15 144 Ahegauye shockto AD wlll causethe rh auoh rate to lntrease m A the shortmn ohly l 9 frr Era E e E e thelong ruh D neither the shun ruu nnr the lung ruu Usethe followmgto answer quesuoh 145 Figure Mnnetary Pnlicy and Demand Shneks lunahuu suluw me gmwln cuwe sms Real 9mm 145 Flgure w wvhr V A eurye from ADl to Am The correct monetary pohey respohse ls to A lnwer mnuey supply gram Sn that the AD curve shifts hacktn Am B lowermohey supply growth so that theAD euryererhsuhs atAD C ralse money supply growth at LheAD eurye shl s to AD D ralse money supply growth so that LheAD eurye shl s to Ans Pugezs 146 In a worst case scenario the Federal Reserve is least success ll at counteracting a negative A AD shock B real shock C velocity shock D None of the answers is correct 147 When a negative shock to aggregate demand occurs the in ation rate will A increase B remain the same C decrease D be automatically adjusted by the Fed 14 00 If the Fed wants to raise real GDP growth by raising money supply growth which of the following conditions will make monetary policy more effective in raising real GDP growth A Uncertainty causes people to increase their demand for cash B People lose confidence and reduce investment spending C People believe the Fed will abandon its policy D Prices are perfectly exible Use the following to answer question 149 Table Annual In ation YEAR RATE OF INFLATION 1998 45 1999 71 2000 83 2001 29 2002 13 2003 703 2004 708 2005 71 2006 12 Page 36 149 150 15 152 153 Table Annual In ation This table shows in ation data for an economy During what period did it experience disin ation A 2000 to 2002 B 2003 to 2005 C 2005 to 2006 D 1998 to 2000 Suppose the economy is growing at the Solow growth rate of 3 and the in ation rate is 4 Suppose a positive aggregate demand shock occurs and the Fed responds to the shock by decreasing the money supply If the Fed39s response fails to offset the aggregate demand shock then in the short run A the real grth rate will be 3 and the in ation rate will be 4 B the real growth rate will be lower than 3 and the in ation rate will be lower than 4 C the real growth rate will be higher than 3 and the in ation rate will be lower than 4 D the real growth rate will be higher than 3 and the in ation rate will be higher than 4 Bubbles in asset markets are usually easy to identify When people believe that a central bank will stick with its policy monetary policy is likely to have A high credibility B low credibility C a high bandwagon effect D a low bandwagon effect An economy where the Central Bank overstimulates aggregate demand will suffer from A in ation B unemployment C increases in money supply D de ation Page 37 154 If uncertainty causes people to increase the demand for cash at the same time that the Fed raises money supply growth then the Fed39s action will shi the AD curve further to the right shift the AD curve less to the right shi the AD curve further to the le move theAD back to equilibrium exactly Chapter 16 155 Which of the following is the largest component of US federal government spending l5 l5 l5 l5 0 7 8 O A defense B Social Security C unemployment and welfare D interest on government debt The tax rate on an additional dollar of income is the A average tax rate B total taX rate C marginal tax rate D alternative minimum tax rate The US taX system is A progressive B at C regressive D None of the answers is correct As income rises the marginal tax rate for married couples A decreases smoothly B decreases in steps C increase smoothly D increases in steps Because the alternative minimum taX AMT is not indexed to in ation A more American families have become subject to the AMT over time B fewer American families have become subject to the AMT over time C every American family is subject to the AMT today D no American family is subject to the AMT today Page 38 160 The de ntrs all federal debt he1o1 outside the U 5 government A True B False 161 The Social Seeunty system redsstrrbutes income from A nwrwzge wnrkzrs tn highrwzge wnr rs B peo 1ewrth1onger1r e enpeetaneresto peo woment ple Wth shorter life enpeetaneres o men D None othe answers is eorreet Usethe followingto answer question 162 and C dednsanns a srempanns Lhat need m be applied Trim k ms uunl um all T 0 TR 01 mu mumhum Tinl aiil Huusulmld Tasr d Htiusuhuld TinPainl llmuxw In Dulhrs lncnnn In Doll 5 Iconic In Illm39s o o 5500 35mm 35011 2150 16001 1500 5000 1 mm 39 B750 000 162 Table A ht h nut have a progressive tax system7 A A andB on1y B B andC on1y C B nnly D None othe eountnes has it 163 The federal tax system assists peopie below the poverty me through the A a1tematrye minimum tax B Earned Income Tax Credit C Ismpnrary Assistance rnr Needy Families prugram D tan assistanee to the Working poor Piggy 164 SpinFree The quotstarve the beastquot theory worked with Reagan39s tax cuts True B False 165 According to Behravesh in ation has been subdued but not vanquished A True B False 166 What is Ben Rasmussen39s favorite color A Red B Green C Yellow D Orange Chapter 17 167 Fiscal policy can best be de ned as 16 16 9 0 A the use of government expenditure and taxation to mitigate recessions only B the use of government expenditure government borrowing and taxation to in uence the business cycle C the manipulation of the money supply to in uence the business cycle D the use of international political relations to in uence the business cycle Which federal government policy in uences business cycle uctuations by taking action on taxes spending and borrowing A real business cycle policy B scal policy C monetary policy D growth policy Which of these would help a government ght a recession A raising taxes B cutting taxes C cutting spending D paying down the national debt Page 40 170 Thelargestcomponem ofGDPis A ennsnnnpdnnspenaing B invesenennpendsng C ovemmentspendmg D imports 171 In Working 0 eorree arecession Winn scal policythe government ean A wait orwages dpnces 0 become more exible B rnereaseunernoney supply D raise its expenditures ander inwer taxes In raise zggxegate demand 172 When using fiscal policy 0 gn arecession the governmentwill A decreasetms ander inerease gnvernment Expenditures B increase taxes andor deerease government expenditures C institute eenno1ogrea1 advancement rnune economy decrease government expenditures Usethe followingto answer questions 1737175 Figur Aggxegate Demand and Fiscal Pnlicy In alinn me n shaman agaregaie swva Real GDP growth rain PageAi 17 17 17 17 17 LA 4 UI ON 1 Figure Aggregate Demand and Fiscal Policy In the best case scenario effective shortrun scal policy would take which action to correct an economy in recession at point Z A increase aggregate demand returning the economy to point X B increase the Solow growth curve to a level above 3 C decrease the Solow growth curve to a level below 2 D increase aggregate demand to move the economy to point W Figure Aggregate Demand and Fiscal Policy For an economy in a recession at point Z what will happen in the long run in the absence of any government action to counter the recession Wages will become exible and the economy will return to the long run growth rate Wages will remain sticky and aggregate demand will fall nther Aggregate demand will rise above the longrun Solow growth curve The economy will remain in a recession B C D Figure Aggregate Demand and Fiscal Policy In the best case scenario an economy in a recession at point onuld use scal policy to increase spending growth to A 5 B 7 C 15 D 10 Fiscal policy is A government borrowing to nance the national debt B government taxes and spending that affect the income distribution among people C government taxes spending and borrowing that affect business uctuations D the change of the money supply that affects business uctuations Examples of expansionary scal policy include increases I in government spending II in income taxes III of the money supply A I only B II only C I and II only D I and III only Page 42 78 Frsea1 pohev ean offset aposrtrve shoekto aggregate demand bvrarsrng A the dseount rate B e goWLh rate ofthe money supply C taxe D govemment spendrng Usethe followmgto ansvver questron 179 3 RezlGDP gmwlh rate 179 Four Ifan T F T t TW m w m govemment ean avorda short run rnereasern rnaatron A increasingtaxes Sn thatthe AD curve shifts haektn ADI B rnereasrng taxes sothat the AD eurve shx s further outto C rnereasrng government spendng so that the AD D ADS curve shrth baek to ADr 180 A deerease rn eonsumptron grovvth vvru eause rn atron to fall rn A the short run on1v B n on1 C hath the an he lung nln D nerther the short run nor the long run Fag 43 18 18 18 18 18 1 N L 4 V39 A decrease in consumption growth will cause real growth to fall in A the short run only the long run only both the short run and the long run neither the short run nor the long run B C D Assume that because the government cancels a large infrastructure program construction firms earn less and lay off workers Consequently the region where they live suffers from decreased sales This story illustrates A a reverse multiplier effect B an increase in aggregate demand C a negative technology shock D All of the answers are correct Which of the following is NOT an automatic stabilizer A greater access to credit B defense spending C progressive tax system D welfare program Automatic stabilizers are changes in fiscal policy that affect without the need for explicit action by policy makers A aggregate demand the Solow grth curve shortrun aggregate supply All of the answers are correct 13 C D Examples of automatic stabilizers include I food stamps II unemployment bene ts III implementation lags A I only B II only C I and II only D II and III only Page 44 18 ON 18 18 00 18 190 19 192 gt1 gt0 Which ofthe following is the most effective scal policy to ght a recession if people react to uncertainty by saving all additional money that they earn or receive a taX cut a taX rebate an increase in government spending a donothing strategy that relies on automatic stabilizers EXpansionary scal policy today might mean increased taxes in the future contractionary scal policy in the future increased public borrowing in the future All of the answers are correct B C D Fiscal policy is most desirable if the economy returns to the longrun equilibrium immediately alter a shock occurs The multiplier effect occurs when a change in government spending raises the incomes of people who in turn increase their spending A True B False An effective way to combat real shocks is to change the growth in government spending EXpansionary scal policy is enhanced by the multiplier effect but compromised by the crowding out effect A True B False If an economy is 2 below the longrun Solow growth rate the federal government can offset a recession with a 2 increase in discretionary spending Page 45 193 The lags associated with the Kennedy administration39s taX cuts were extremely long True B False Chapter 18 194 Which of the scenarios below best displays how international trade allows for l9 l9 l9 5 0 specialization A You are better at mowing lawns than your neighbor who is better at gardening B Truck drivers stay awake on long routes by drinking Colombian coffee C The United States and Canada can both produce lumber but the U S buys lumber from Canada because it has a greater yield per acre D Cuba does not have a comparative advantage in producing antibiotics but due to economic sanctions relies on its own supply of medicines The main reason why specialization can raise productivity is that A knowledge in human brains is limited B some persons have more knowledge than others C it is always good to know less than more D it is impossible to learn anything well Knowledge increases and A education increases B productivity increases C perception increases D economies of scale decreases total output r The United States and the European Union are groups of semiindependent states that have come together under an agreement whereby resources can travel freely across borders and a common currency is in use Which of the following statements best explains how this allows for the achievement of economies of scale A Each state or country can now target larger markets and can thus earn more export revenue B States and countries no longer have to worry about borders impeding trade C Each state or country can adopt large scale production techniques that alow lower per unit costs of production D The removal of trade borders and a common currency enhances trade between member states Page 46 198 Why does spenalrzauon beeome more pro table on a larger scale7 1 Large f lrms are more pro table than small rms relatlve to the eost of the maehlnes belng used m A IandHonly B 111 andm C IandHI only D HandDInnly Unron whlch ofthe followlng was most llkely tme7 A Unon B The produeumty of German rms decreased C German rms experienced ecnnnmies nfscalethrnugh incxezsed trade D The European Unon ralsed trade bamers among rts members R in u hlr hl hls house Whlch ofthe followmgls most llkely TRUE7 A h h l mdi rle the high schnnl student w hlgh sehool student w hlgh sehool student w for the hlgn sehool student Use the followmg to answer questrons 201203 Tuhl I IxnllcriPrul Pmduclinll Om il llunc Ono iI luI Canadian label unlts 3 4 1 7 United Slates labor HHS Fag 47 20 20 20 20 20 N E 4 V39 Table iPhone and iPod Production According to the table on iPhone and iPod Production which of the following is TRUE A Canada has an absolute advantage in producing both iPhones and iPods B The United States has an absolute advantage in producing both iPhones and iPods C Canada has an absolute advantage in producing iPhones and the United States has an absolute advantage in producing iPods D The United States has an absolute advantage in producing iPhones and Canada has an absolute advantage in producing iPods Table iPhone and iPod Production According to the table on iPhone and iPod Production the opportunity cost of producing one iPhone is A 43 iPods for Canada and 2 iPods for the United States B 2 iPods for Canada and 4 iPods for the United States C 34 of 1 iPod for Canada and 1 iPod for the United States D 1 iPod for Canada and 34 of one iPod for the United States Table iPhone and iPod Production According to the table on iPhone and iPod Production which of the following is TRUE about Canadian and US comparative advantages A Canada has a comparative advantage in producing both iPhones and iPods The United States has a comparative advantage in producing both iPhones and iPods Canada has a comparative advantage in producing iPhones and the United States has a comparative advantage in producing iPods Canada has a comparative advantage in producing iPods and the United States has a comparative advantage in producing iPhones B C D According to the theory of comparative advantage a country should specialize in producing a good that involves more inputs than those in other countries fewer inputs than those in other countries a higher opportunity cost than that of other countries a lower opportunity cost than that of other countries B C D Comparative advantage is related to which of the following A efficiency B bargaining power C opportunity cost D productivity Page 48 20 ON 20 l 20 00 20 21 211 gt0 0 If labor in China is less productive than labor in the United States in all areas of production then A both the United States and China can bene t from trade B neither nation can bene t from trade C China can bene t from trade but not the United States D the United States can bene t from trade but not China The theory of comparative advantage is A rarely relevant for identifying whether gains from trade can be obtained B always relevant for identifying Whether gains from trade can be obtained C not true for nations though it may be true for individuals D true for nations but is not true for business or individuals Which of the following is TRUE about the economic policy of protectionism A It raises prices of foreign goods in domestic markets B It restricts competitive forces in domestic markets C It can be achieved through quotas and tariffs D All of the answers are correct Imposing a restrictive quota on the import of sugar will likely A increase the price of sugar and decrease the quantity consumed B increase the price of sugar and increase the quantity consumed C leave the price of sugar unchanged and decrease the quantity consumed leave the price of sugar unchanged and increase the quantity consumed Protectionism refers to government policies that restrict imports of foreign products B give foreign producers tax credits in an effort to increase their exports C stimulate trade between countries and increase domestic producers pro t D restrict the output of domestic producers to keep their prices high A tariff is a A taX credit for domestic exports B tax on imports C temporary grant of monopoly rights D renewable subsidy to the energy industry Page 49 21 21 21 21 21 N 3 4 UI 0 A trade quota on imports A bene ts domestic producers and hurts domestic consumers B bene ts domestic consumers and hurts domestic producers C bene ts both domestic producers and domestic consumers D hurts both domestic producers and domestic consumers In most cases trade restrictions will A save jobs without any other costs B save some jobs and destroy some other jobs C bene t both producers and consumers D bene t only the government Why does economic growth require job destruction A Economic growth requires international trade which has been proven to cause shortterm job loss B Economic growth comes from creating and producing goods that use resources more productively causing job loss in industries that use out dated technology C Excessive job creation can destroy economic growth D When economic growth occurs there are not enough resources le over for worker retraining and reeducation programs Suppose a government is facing accusations of allowing domestic jobs to be lost to foreign labor in other countries How can the government address these concerns I Governments can ensure that unemployment insurance and strong education programs exist to help workers retrain for new jobs 11 Governments can stress the importance of j ob creation in those industries that bene t from international trade and encourage job creation in those industries III Governments can set up extensive trade restrictions to limit the impact of foreign rms on domestic production A I only B 11 and 111 only C I and 11 only D I II and 111 Which of the following statements is TRUE A Consumers are harmed while some suppliers bene t when trade barriers are removed B Consumers bene t while some suppliers are harmed when trade barriers are removed C Everyone bene ts when trade barriers are removed D Everyone is harmed when trade barriers are put into place Page 50 21 21 22 gt1 gt0 0 Countries can bene t from trading with one another because trade allows each country to specialize in doing what it does best A True B False US pharmaceutical companies sell drugs to Kenya and Kenyan farmers sell owers to the US This pattern of trade suggests that the US is the lowopportunitycost producer of drugs and Kenya is the lowopportunitycost producer of owers A True B False Protectionism protects domestic industries from the competitive forces exerted by foreign rms A True B False In a demand and supply diagram the effects of a tariff and a quota on the supply and demand curves are identical Page 51 Chapter 11 Questions 1 N E 4 What two components of the quantity theory of money are assumed to be stable velocity of money and price level real GDP and price level real GDP and velocity of money money supply and velocity of money B C D What is the equation for the quantity theory of money What does this theory imply about the cause of in ation in the long run Table Consumer Price Index Refer to the CPI values in the table above for the years 2005 to 2009 In which year was the in ation rate the highest A 2006 B 2007 C 2008 D 2009 When people suffer from money illusion an increase in the money supply A raises real GDP in the short run B lowers real GDP in the short run C has no effect on real GDP in the short run but raises real GDP in the long run D lowers real GDP in the long run Use the following to answer question 5 Table Anticipating In ation Year 2000 2001 2002 2003 2004 Predicted in ation rate Actual in ation rate 3 3 3 2 7 9 5 4 4 7 Page I V39 0 gt1 9 5 0 Table Anticipating In ation Using the in ation data in the table above assume that all loan contracts matured after one year and that they all had xed nominal interest rates of 10 In which year did lenders receive exactly the amount of real interest they expected A 2000 B 2002 C 2003 D 2004 According to the Fisher equation if the expected in ation rate is less than the actual in ation rate then the actual interest rate will be A lower than the equilibrium interest rate B higher than the equilibrium interest rate C the same as the equilibrium interest rate higher or lower than the equilibrium interest rate depending on the degree of money illusion Approximately how many prices of goods and services are measured by the CPI 800000 B 80000 C 800 D 80 When actual in ation is equal to expected in ation A borrowers are harmed and lenders bene t B lenders are harmed and borrowers bene t C taxpayers are harmed and governments bene t None of the answers is correct De ation can be differentiated from disin ation in that the de ation rate is always negative while the disin ation rate is always positive True B False Explain the difference between the price level and the rate of in ation The terms de ation and disin ation have the same meaning A True B False Page 2 LA 0 In a small economy the money supply is 400000 and the velocity of money is 3 The current price level in the economy is 1 What is the level of real GDP in this economy A 12 m lionMV PYr4000003 12 Million B 16 million C 400000 D 133333 Because of the money illusion in ation usually con lses A consumers B workers C rms D All of the answers is correct The concept of money illusion refers to A people who do not understand the purchasing power of money B consumers with in ation indexed wages seeing a rise in prices and believing that their purchasing power has been compromised C consumers paying prices that are higher than normal and not feeling bad about it D an unobserved change in relative prices People mistaking changes in nominal prices for changes in real prices is called price illusion in ation illusion money illusion wealth illusion B C D Lillian lends AJ 10000 Lillian wishes to increase her purchasing power by 200 by making this loan De ation of 2 is expected over the next year What is the nominal interest rate that Lillian should charge A A 0 B 2 C 4 D 25 According to the quantity theory of money a nation that increases its money supply by 30 should expect its price level to increase by approximately A 15 B 30 C 45 D 60 Page 3 00 O O N L The in ation rate is equal to the rate of change of the price level A True B False In ation is best de ned as an increase in A the real price of a good or service B the price of one product relative to the price of another product C all prices in an economy D the average price level Which of the following is an example of money illusion assuming that in ation is 5 A You receive a 5 raise on your part time job and start spending extra money on entertainment every weekend B You receive a 5 raise on your parttime job but do not increase or decrease your spending C You do not receive a raise on your parttime job but cut out some expenses as you notice some prices rising D None of the answers is correct When the price ofa good in Russia increases from 20 rubles to 20 million rubles in a single year the nation is experiencing A de ation falling GDP per capita hyperin ation high disin ation 13 C D The Fisher effect indicates that an increase in the expected in ation rate will cause the nominal rate of interest to A remain relatively constant B increase C decrease D become unpredictable According to the quantity theory of money the primary cause of in ation is an increase in real GDP A True B False Page 4 24 N O N O Hyperin ation causes nancial intermediation to A become more efficient favor longterm lending favor rsttime borrowers break down B C D The common price indexes for measuring in ation include the I consumer price indeX II GDP de ator III commodity price index A I and II only B II and III only C I and III only D I II and III Suppose the average level of prices increased from 100 to 110 between 2007 and 2008 and from 110 to 115 between 2008 and 2009 Between 2008 and 2009 there was A de ation B hyperin ation C disin ation D in ation in the real price of everything What country had the highest in ation rate from 200272007 A Angola B China C Japan D Zimbabwe a What is meant by the term nancial intermediation b What is the ef ect of high in ation on nancial intermediation Use an example to illustrate your answer In ation is an increase in the A prices of some goods B prices of a few important goods C prices of all goods in general price of nancial intermediation Page 5 LA LA LA When the money supply and the demand for goods increase at the same time A producers understand how to react but consumers are confused B consumers act rationally but producers cannot read the market signals C the government is able to clarify how the markets will be affected D both consumers and producers are often confused Suppose a nation39s in ation rate is 58 from Year 1 to Year 2 Ifthe CPI in Year 2 is 200 what was the CPI in Year 1 200QX0058 A 180 B 189 C 190 D 208 Suppose a nation39s CPI is 150 in Year 1 and 180 in Year 2 What is the rate of in ation A 25 Same formula as 31 180150150 30150 15 B 15 C 20 D 25 According to the quantity theory of money the velocity of money equals the amount of money people spend divided by the product of the price level and the quantity of goods and services they purchase Which index measures price increases that typical American consumers face when shopping A CPI B PPI C GDP de ator D GDP in ator Page 6 U gt1 40 Money illusion occurs when people A correctly see changes in nominal prices correctly see changes in real prices see changes in real prices and mistake them for changes in nominal prices see changes in nominal prices and mistake them for changes in real prices B C D High volatility in the in ation rate can result in A improper allocation of resources B sudden changes in prices C volatility in the CPI D de ation Which answer best explains why prices of some popular goods have fallen over time A Consumers have increased their demand for these products over time B Consumers have switched to substitute items C Certain technological advances have offset scarcity D Production costs have increased Suppose the money supply equals 100 million the price level equals 40 and real GDP equals 50 million Given this information the velocity of money equals A 20 B 80 C 100 D 125 Why do we use the real prices of goods to measure how expensive things have become A to nd out what the current prices of goods and services are B to estimate the periods when hyperin ation has occurred C to nd out what the in ation rate has been D to see whether there have been any changes in our purchasing power Chapter 12 Questions 1 The dynamic aggregate demand curve shows a relationship between real GDP growth and the A actual in ation rate B expected in ation rate C longrun in ation rate D None of the answers is correct Page 7 Usethe followmgto answer quesuon 2 Fignr Dynamic Aggz agate Demand Mndel Whhon mar Sa wwgmwmcuwe M 127I n mm m 2 39qur h demandmodel the Solow gowth rate 5 A 12 B 3 C 4 D 8 Usethe followmgto answer quesuon 3 Figure Three Dynamic AD Curves mm ME39 smmv mm curve m 2v 3 s m an mm m Fag 2 9 4 V39 0 gt1 9 Figure Three Dynamic AD Curves Refer to the gure above what is the longrun growth rate in this economy alter a positive money shock A 3 B 4 C 6 D 2 Inthe real business cycle model a positive shock drives up both in ation and the growth rate The term business uctuations refers to A the different stages of a product cycle B changes in the prices of goods and services over time C changes in real GDP around its long term trend D the trend in real GDP over a long period of time Which of the curves listed below is part of the dynamic ADAS framework A the dynamic aggregate demand B the shortrun aggregate supply C the Solow growth curve D All of the answers are correct At all points along the Solow growth curve prices and wages are assumed to be perfectly exible A True B False Which of the following causes a shi of the dynamic AD curve to the le I increased taxes 11 increased consumer con dence III increased import growth A I and 11 only B 11 and 111 only C I and 111 only I II and III Page 9 Usethe followmgto answer questlon 9 Fignr Real Sharks lmlallon s gmwn elm x w z r 7 mm mm 9 Flour 1 Ch kF t d 4 4 4 y A W B X C Y D z 10 Whlch ome followlng curves lsmltpart ofthe real buslness eyele modem A AD B The Solow growth curve C SRAS D None ome answers ls correct ll L Graphlcally Show yourresponse tome followmg shocks m the New Keyneslan Model a growth rate7 growth quot1127 Dy39s Imports temporarin t 1 11 Conn thyme but Exports smy the same what should hapth to the shartrrun gmth mtg7 growth that leads to a dlstmct level of spendmg A True B False Pagzl 13 How mueh dddmvestmem fall between 1929 and 19337 A by pproxlm y 25 B by approxrrhately 40 C proxr te1y 50 D by apprnximately 75 Use the followmg to answer questror 14 Figure Dynamic Aggregate Demand Mla orl ma 2v Mt a cue Smwm me Ft our T represents a rea1 GDP growth rate of 5 B 7 3 D 2 5 honzontal adds the Solow gomh curve 15 A upward slop1n B downward slopmg C a vertical line at the Snlnw grmh rate D ahonzontal hhe at the zerorh atrorrrate Page 16 For any glven exp relauorrslup betwe A e money supply andgrowth rate of output B Marian and gruwllr rate nf nutput cl production factors and wages D m auor and wages emedln auon rate shortrmn aggregate supply eurves showthe en 17 u 1 m 1 1 u 1 aggregate demand7 A ADwnulrlincrease B AD wouldlle on the Solow gomh rate cl AD would stay are same D AD would deerease Usethe followmgto answer questlon18 hree Dynamic Aggxegate Demand Curves 2 m sf 1131312 gmw nuk 18 Flgure Three Dyuarrue AggregateDemand Ouves Uslng thesethree dyuarrue wouldyou move lfspendmg gowth changedto SW A A ms clc DD Pagle 19 Tnc Solow growth rate occurs wncn 1 pnccs are cnblc 11 all real factors ofproductmn are uuhzed n1 therexsmoneyxllusxon A I and 11 nnly B 11 andIH only C land 111 only D I 11 andDI 1 changes m real GDP nch m m auon 111 changes m spendmg growth 3 E Ionly B IandHIonly C nnly D IIandI 21 m auonrate andthereal growthrate mm sv A 5 no a mam gmmn k 22 wncn ofunc fonovnng is a shock that could shx unc Solow growth nunE7 producnmy shock ncganvc supply shock ca1 shock All nfthe answers are current 9955 Pwu N 4 N gt1 An increase in the money supply will increase real growth in the long run in A the real business cycle model B the New Keynesian model C neither the business cycle model nor the New Keynesian model D both the business cycle model and the New Keynesian model All of the following are examples of a positive AD shock except A a faster growth rate of the money supply B an increase in growth rate of government spending C an increase in productivity growth D an increase in export growth Solow growth rates uctuate over time because of real shocks B changes in the rate of in ation C monetary shocks D All of the answers are correct In the New Keynesian model an increase in the rate of expected in ation causes A a shi of the shortrun aggregate supply curve down and to the right B a shift of the short run aggregate supply curve up and t0 the left C an upward movement along the shortrun aggregate supply curve D a downward movement along the shortrun aggregate supply curve In the shortrun what happens to the economy when consumer spending decreases in the New Keynesian model A In ation is higher and the real growth rate is higher B In ation is higher and the real growth rate is lower C In ation is lower and the real growth rate is higher D In ation is lower and the real growth rate is lower The Solow grth curve is A upward sloping B downward sloping C a vertical line D a horizontal line Page 14 29 An increase in spending growth will cause the dynamic aggregate demand curve to A shi inward B shift outward C not shi at all D shi randomly 30 The Solow growth curve is represented by a vertical line at the Solow grth rate because I it does not depend on the rate of in ation II there is an underlying assumption of strong money neutrality III it does not depend on the stock of factors of production A I only B I and II only C II and III only D I and III only 31 If wages are not as exible as prices an increase in money growth will lead to A an increase in in ation and a rise in real longrun GDP growth B an increase in in ation but no rise in real shortrun GDP growth C an increase in in ation and in firms39 pro ts D no change in in ation but a fall in firms39 pro ts U N The Great Depression would have been a lot less severe if monetary policy were better understood and managed at the time A True B False LA LA If spending grth is 6 and in ation is also 6 this means that A real GDP did not increase B economic growth was 12 C more money is chasing an increased number of goods D a positive supply shock occurred 34 What are some of the economic effects of a tariff Wealth is redistributed from wealthy nations to poor nations and taxes fall B Unemployment and in ation rates both fall C Capital and labor are utilized less ef ciently D Trade remains the same in the long run and GDP rises in the nation that enacts the tariff 3 Page 15 V39 0 gt1 0 A recession is de ned as a widespread decline in A real income GDP B in ation C unemployment D mortgage defaults The main reasons for the slope of SRAS is A sticky prices only B sticky wages only C both sticky prices and sticky wages D neither sticky prices nor sticky wages When workers resent haVing their wages cut they are experiencing money illusion B in ationary losses C an endowment effect D a wage paradox In the New Keynesian model an unexpected increase in the growth rate of the money supply A decreases both the in ation and real growth rates in the short run B increases both the in ation and real growth rates in the short run C decreases both the in ation and real growth rates in the long run D increases both the in ation and real growth rates in the long run An increase in the growth rate of the money supply will cause the dynamic aggregate demand curve to A shi inward B shift outward C not shi at all D shi randomly Compare the effects of an unexpected increase in the growth rate of the money supply between the real business cycle model and the New Keynesian model Page 16 C113 2139 14 ms an 1 TheUS money supphesM1andM2rne1ude Use the fouowmg to answer questrons 273 Figure Mnnetary Pnlicy and Aggregate Dem and Smow me mm m mm m a 3 mt an mwm mu 2 Frgure Monetary Pohey and Aggregate Demand Usmg the gure above assume that w oh r would happen m the short run and why7 3 Frgure Monetary Pohey and Aggregate Demand Usmg the gure above assume that w 0 r t u as a t 4 would happen m the short run and why7 Fag 4 V39 0 gt1 9 5 0 Moral hazard occurs when A the failure of one nancial institution can bring down other institutions as well B nancial institutions take on too much risk because they are insured C nancial institutions become insolvent because they issued too many loans D there are more shortterm liabilities than shortterm assets The Fed loaned money to JP Morgan and AIG because it was concerned about A moral hazard on the part of these banks B systemic risk should these banks fail C the liquidity of these banks D the market demands being placed on these banks Checkable deposits are deposits on which the owner may write checks A True B False If banks did not hold reserves ATM machines would not lnction A True B False A bank will become illiquid if A it has short term liabilities that exceed its short term assets it is insolvent it is solvent and liquid there is a nancial crisis like the one of 2008 V B C D When the Fed conducts open market operations to decrease the monetary base real growth decreases only in the short run increases only in the short run decreases in both the short run and the long run increases in both the short run and the long run When the US Treasury borrows the borrowing is managed by the A Treasury itself B Senate Banking Committee C Comptroller of the Currency D Federal Reserve Page 18 Usethe followmgto answer quesuon 11 Also Lhe bank balance sheets must always be balanced Tnhlu39 Mulxiplu Dupesquot pmlsiuu 1M1 mm 1 Bunk Requned may 5 Loans is Requncd mamas Luau Tm 1 m h m I Bank 5308000 Ln Bl LIT Dapusns T01 AL LI BlLl l Deposus 39l OTAL BIL IT Dcposus 1 OTAL 84001000 11 a w Fag 4 gt0 When the Fed buys US government bonds to affect the money supply it is conducting A discount rate lending discount rate borrowing an open market sale an open market purchase B C D If the money multiplier is large then action taken at the bottom of the money pyramid will have a relatively large effect on the entire pyramid A True B False An increase in money growth will cause the economy39s AD curve to A not shi B shi inward C shift outward D shi outward during expansions and inward during contractions The discount rate is the interest rate charged on an A low interest loan from the Federal Reserve to a bank B loan from the Federal Reserve to a bank C longterm loan from one bank to another D overnight loan from one bank to another Ifthe Fed wishes to implement a policy to in uence aggregate demand what are some of the important variables that it monitors and predicts in order to netune its actions Why does so much US currency circulate in other countries A Several countries use the US dollar as their of cial currency B The US dollar is frequently used in drug traf cking C Dollars hold their value in unstable countries All of the answers are correct In what ways is the Federal Reserve System independent of the political process in the United States Page 20 20 N N N L N 4 An increase in the growth rate of the money supply raises both real growth and in ation in the long run The money multiplier equals A the amount of money supply divided by the amount of reserves B one divided by the difference between the reserve ratio and the required reserve ratio C one divided by the reserve ratio D one divided by the discount rate The Federal Reserve s major tools to control the money supply are I open market operations II discount rate lending and the term auction facility III required reserve ratio and payment of interest on reserves IV federal funds lending A I and II only B III and IV only C I II and 111 only D I II III and IV The Federal Reserve has direct control over A the monetary base B Ml C M2 D All of the answers are correct Explain how the Fed is structured and controlled The narrowest measure of the Us money supply is the monetary base B C M2 D M3 Page 21 N l N 00 U 0 LA In the United States the amount of cash per capita is about 2500 This gure A shows how much currency each American holds in their checking accounts misrepresents actual cash holdings in the U S dollar because a lot of our currency is outside the borders of the United States accurately represents the size of the underground economy in the United States shows how much the world depends on the US monetary system B C D The existence of the discount window makes private bank loans work more smoothly even if the discount window isn39t being used A True B False The main difference between M1 and M2 is that A Ml includes some less liquid assets in addition to the assets in M2 B Ml includes more liquid assets in addition to the assets in M2 C M2 includes some less liquid assets in addition to the assets in M1 D M2 includes more liquid assets in addition to the assets in M1 In the United States the largest category of means of payment is A currency B checkable deposits C savings accounts D All of the answers are correct Most of the time a majority of banks borrow from the Federal Reserve A True B False M2 refers to A currency B currency plus total reserves held at the Fed C currency plus checkable deposits D currency checkable deposits savings deposits money market mutual funds and small time deposits Page 22 LA LA U 4 U 0 The Fed has the greatest in uence over 7 interest rates Investment spending depends on interest rates A shortterm shortterm B short term long term longterm shortterm longterm longterm When the Federal Reserve makes an open market purchase the amount of money available for the banking system to loan A increases B decreases C remains constant D becomes dif cult to predict M1 and M2 are the largest components of the money supply A True B False When the Federal Reserve makes an open market purchase the reserves of the banking system will A increase B decrease C remain constant D become dif cult to predict The Federal Reserve can in uence the economy by shi ing A the AD curve B the SRAS curve C the Solow growth curve D All of the answers are correct When the Fed set up a Term Auction Facility in 200772008 its goal was to A inject a certain quantity of reserves into banks set the discount rate to a certain percentage tighten control on legal requirements on banks All of the answers are correct B C D Page 23 38 40 Which of the following assets would you classify as being most liquid A demand deposits B smalltime deposits C a home D gold bullion An increase in money growth will cause in ation to increase in A the short run only B the long run only C both the short run and the long run D neither the short run nor the long run An increase in money growth will cause output growth to increase in A the short run only B the long run only C both the short run and the long run D neither the short run nor the long run Chapter 15 Questions 1 N If the Fed attempts to pop a bubble on a boom such as housing what sector of the economy is it sure of haVing the ability to in uence A residential real estate B residential and commercial real estate C the GDP of the broader economy D consumer spending in general A signi cant reduction in the rate of in ation is called A de ation B disin ation C stag ation D devaluation Page 24 9 4 UI 0 gt1 9 gt0 What is the difference between disin ation and de ation A Disin ation is a smaller positive change in prices whereas de ation is a negative change in prices B De ation is a smaller positive change in prices whereas disin ation is a negative change in prices C The Fed can engineer disin ation but not de ation D There is no difference between disin ation and de ation A negative shock to AD will cause the in ation rate to increase in A the short run only B the long run only C both the short run and the long run D neither the short run nor the long run After September 11 2001 the Fed resisted the temptation to loan billions of dollars to banks and boost shortrun con dence Explain why the Federal Reserve did not reduce the growth rate of the money supply in response to rising oil prices in 2007 and 2008 When it is difficult to know the size and timing of monetary policy effects the central bank should use policy discretion to deal with shocks A True B False Inthe dynamic ADiAS model an increase in money growth will cause the growth rate of real GDP to increase in A the short run only B the long run only C both the short run and the long run D neither the short run nor the long run Explain care llly why monetary policy deals more success llly with aggregate demand shocks than real shocks Page 25 Usethe followmgto answer quesuon 10 Figure Mnnetary Pnlicy and Demand Sharks lunauuu Solnw vale 7 gmle cuNe SRAS 10 Flgure w wmrl 4 4 A eurye from ADl toADo Tne conectmonetary pollcyresponsels to wan Sn thzttheAD curve shifts hacktnADl B lowerrnoney supply growth so that theAD curveremams atAD C ralse rnoney supply growth so that theAD eurye shl s LOAD D ralse rnoney supply growth so that theAD eurye shl s LOADS E a a negauye A AD snoek B real shack C veloclty slnoek D None ofthe answers ls correct 12 Ills easlerfor a eenual bank to stablllze both rnclauon andreal groWLh followlng an aggregate demand shock than followmg a real shock A True B False Pagzl
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