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What 1. do economists mean when they state that a good is scarce? a. There is a shortage or insufficient supply of the good at the existing price. b. It is impossible to expand the availability of the good. c. People will want to buy more of the good regardless of price. d. The amount of the good that people would like to have exceeds the supply that is freely available from nature. 2. Economic choice and competitive behavior are the result of a. basic human greed. b. poverty. c. private ownership of resources. d. scarcity. 3. Rationing is a. the allocation of a limited supply of a good or resource among users who would like to have more of it. b. a function that can only be performed by market prices. c. a function that is unnecessary except in cases where markets are used to allocate goods and resources. d. essential only when the price of a product is set above market equilibrium. 4. The expression, "There's no such thing as a free lunch" implies that a. everyone has to pay for his own lunch. b. the person consuming a good must always pay for it. c. costs are incurred when resources are used to produce goods and services. d. no one has time for a good lunch anymore. 5. Which one of the following states a central element of the economic way of thinking? a. Scarce goods are priceless. b. Incentives matter--if the personal cost of a choice increases, individuals will be less likely to choose it. c. The realism of the assumptions is the best test of an economic theory. d. When deciding how to allocate time, the concept of opportunity cost is meaningless. 6. Which of the following is most clearly consistent with the basic postulate of economics with regard to human decision making? a. People will never choose work over leisure. b. People will buy less gas if the gasoline tax decreases 20 cents per gallon. c. People will buy more orange juice at $2 per gallon than at $1 per gallon. d. People will consume less beef if the price increases from $1 to $2 per pound. 7. Which one of the following is a positive economic statement? a. An increase in the price of butter causes consumers to buy less butter. b. Social conscience demands that we increase the minimum wage. c. Taxes should be raised to halt inflation. d. The sales tax on food should be repealed. 8. The basic difference between macroeconomics and microeconomics is that a. macroeconomics looks at the forest (aggregate markets), while microeconomics is concerned with the individual trees (subcomponents). b. macroeconomics is concerned with policy decisions, while microeconomics applies only to theory. c. microeconomics is concerned with the forest (aggregate markets), while macroeconomics is concerned with the trees (components). d. opportunity cost is applicable to macroeconomics, and the fallacy of composition relates to microeconomics. 9. Economic analysis assumes that a. for the most part, individuals act out of selfish motives, and it is realistic to assume this is always true. b. although individuals are at times selfish and at times altruistic, only their selfish actions may be predicted. c. people are basically humanitarian and their actions are therefore difficult to predict. d. changes in the personal benefits and costs associated with an activity will exert a predictable influence on human behavior. 10. Adam Smith believed that if people were free to pursue their own interests, then a. greed and cheating would prevail in the market. b. less would be produced than if altruism were our guiding principle. c. they would generally be encouraged to produce goods and services that others valued highly (relative to their costs). d. the public interest would be best served, but the interests of employers would be hurt. 11. Which of the following sayings best reflects the concept of opportunity cost? a. "You can't teach an old dog new tricks." b. "Time is money." c. "I have a baker's dozen." d. "There's no business like show business." 12. If an economy is operating at a point inside the production possibilities curve, a. its resources are being wasted. b. the curve will begin to shift inward. c. the curve will begin to shift outward. d. This is a trick question because an economy cannot produce at a point inside the curve. 13. The primary benefit that results when a nation employs its resources in accordance with the principle of comparative advantage is a. an expansion in capital investment resulting from a reallocation of resources away from consumption. b. a larger output resulting from a more efficient use of resources. c. greater equality of income resulting from an increase in the number of workers. d. an increase in the profitability of business enterprises resulting from an increase in capital formation. 14. The price of an airline ticket from Denver to Washington, D.C., is $600. A bus ticket is $150. Traveling by plane takes six hours, compared with 36 hours by bus. Other things constant, an individual would gain by choosing air travel if, and only if, his time were valued at more than a. $6 per hour. b. $8 per hour. c. $10 per hour. d. $15 per hour. 15. Does voluntary exchange create wealth (value)? a. No, exchange does not expand output. b. No, if one person gains, the other party must lose an equal amount. c. Uncertain, it does when it results in the creation of additional goods and services; otherwise it does not. d. Yes, trade generally permits the trading partners to gain more of what they value; this is why they agree to the terms of the exchange. 16. "Now that Blake paints the broad surfaces and I do the trim work, we can paint a house in three-fourths the time that it took for each of us to do both." This statement most clearly reflects a. the importance of secondary effects. b. the fallacy of composition. c. the law of comparative advantage. d. behavior inconsistent with economizing. 17. Which of the following will most likely occur under a system of clearly defined and enforced private property rights? a. Resource owners will fail to conserve vital resources, even if they expect their scarcity to increase. b. Resource owners will ignore the wishes of others, including others who would like to use the resource that is privately owned. c. Resource owners will fail to consider the wishes of potential future buyers when they decide how to employ privately owned resources. d. Resource owners will gain by discovering and employing their resources in ways that are highly valued by others. 18. Three basic decisions must be made by all economies. What are they? a. how much will be produced; when it will be produced; how much it will cost b. what the price of each good will be; who will produce each good; who will consume each good c. what will be produced; how goods will be produced; for whom goods will be produced d. how the opportunity cost principle will be applied; if and how the law of comparative advantage will be utilized; whether the production possibilities constraint will apply 19. If a firm or a nation desires to maximize its output, each productive assignment should be carried out by those persons who a. have the highest opportunity cost. b. have a comparative advantage in the productive activity. c. can complete the productive activity most rapidly. d. least enjoy performing the productive activity. 20. "The economic wealth of this country is primarily the result of the profit made by some individuals at the expense of others." The person who made this statement a. has failed to comprehend that mutual gains result from specialization and exchange. b. has failed to comprehend the fallacy of composition. c. has failed to understand the significance of the production possibilities constraint. d. has utilized the economic way of thinking; the statement is essentially correct. 21. Which of the following would most likely increase the demand for peanut butter? a. a decrease in the price of bread, a good that is often used with peanut butter b. a discovery that the average daily consumption of peanut butter decreases one's life span by 15 years c. crop failures that raise the price of peanuts d. a decrease in the price of all substitute protein products 22. Economic profit is best defined as a. a company's net income as indicated by its accounting statement. b. the difference between the price of a product and the monetary cost of the raw materials used to produce it. c. the difference between the revenue from the sale of a product and the opportunity cost of the resources used to produce it. d. income paid by a business to its owners. 23. The long run is a time period of sufficient length to enable a. producers to alter their use of fixed capital (the size of their plant and equipment). b. producers to alter their output by utilizing labor and raw materials more intensively. c. decision makers to adjust fully to a change in market conditions. d. Both a and c are correct. 24. The number of persons wanting tickets to Super Bowl games is invariably greater than the number of tickets (and seats) available. This is evidence that the price of the tickets is a. higher than the competitive equilibrium price. b. equal to the competitive equilibrium price since the number of tickets bought equals the number sold. c. lower than the competitive equilibrium price. d. higher than the competitive equilibrium price when the demand is inelastic but lower when the demand is elastic. 25. "A reduction in gasoline prices caused the demand to increase. The lower prices led to an increase in demand for large cars, causing their prices to rise." These statements a. are essentially correct. b. contain one error; the lower gasoline prices would cause a reduction in demand for large cars, not an increase. c. contain one error; the lower gasoline prices would increase the quantity of gasoline demanded by consumers, not the demand for large cars. d. contain two errors; the lower gasoline prices would cause the quantity of gasoline demanded (rather than demand for large cars) to increase, and the lower gasoline price would reduce (rather than increase) the demand for large cars. 26. A cold spell in Florida extensively reduced the orange crop, and, as a result, California oranges commanded a higher price. Which of the following statements best explains the situation? a. The supply of Florida oranges fell, causing the supply of California oranges to increase as well as their price. b. The supply of Florida oranges fell, causing the supply of California oranges to decrease and their price to increase. c. The supply of Florida oranges fell, causing their price to increase and the demand for California oranges to increase. d. The demand for Florida oranges was reduced by the freeze, causing an increase in the price of California oranges and a greater demand for them. 27. When a price floor is above the equilibrium price, a. quantity demanded will exceed quantity supplied. b. quantity supplied will exceed quantity demanded. c. the market will be in equilibrium. d. This is a trick question because price floors generally exist below the equilibrium price. 28. If the market price of a good is less than the opportunity cost of producing it, a. the market price of the product will fall in the long run. b. producers will increase supply in the long run. c. resources will flow away from production of the good, causing supply to decline with the passage of time. d. the situation will remain unchanged as long as supply and demand remain in balance. 29. The price of chicken increases as the result of higher beef prices. This indicates that a. chicken and beef are substitutes. b. chicken and beef are complements. c. the market demand for beef is inelastic. d. the market demand for chicken is elastic. 30. The invisible hand principle indicates that competitive markets can help promote the efficient use of resources a. only if buyers and sellers really care, personally, about economic efficiency. b. even when each market participant cares only about getting a "bigger slice of the pie" rather than about the overall efficiency of resource use. c. even if business firms fail to produce goods efficiently. d. if, and only if, businesses recognize their social obligation to keep costs low and use resources wisely. 31. "A reduction in gasoline prices caused the demand to increase. The lower prices led to an increase in demand for large cars, causing their price to rise." This statement a. is essentially correct. b. contains one error the lower gasoline prices would cause a reduction in demand for large cars, not an increase. c. contains one error the lower gasoline prices would increase the quantity demanded by consumers, not the demand. d. contains two errors the lower gasoline prices would cause the quantity demanded (rather than demand) to increase, and the lower gasoline price would reduce (rather than increase) the demand for large cars. 32. "If gasoline sales were taxed, the price of gasoline would rise. Consequently, the quantity demanded of gasoline would decline. As a result of the higher gasoline prices, the demand for fuel-efficient automobiles would increase." This statement is a. essentially correct. b. incorrect; the high gasoline prices would cause the demand for gasoline, not the quantity demanded, to fall. c. incorrect; the statement confuses a change in demand with a shift in supply. d. incorrect; demand and quantity demanded are confused for both gasoline and fuelefficient cars. 33. "As the price of gasoline rose, consumers decreased their quantity demanded. In addition, the demand for compact cars increased, causing their price to rise." This statement a. is essentially correct. b. contains one error the quantity demanded, not the demand for compact cars, increased. c. contains two errors demand and quantity demanded are confused twice. d. contains one error demand, not quantity demanded, for gasoline decreased. 34. "If gasoline sales were taxed, the price of gasoline would rise. Consequently, the demand for gasoline would decline. As a result of the higher gasoline prices, the demand for fuel-efficient automobiles would increase." This statement is a. essentially correct. b. incorrect; the high gasoline prices would cause the quantity demanded of gasoline, not the demand, to fall. c. incorrect; the statement confuses a change in demand with a shift in supply. d. incorrect; demand is confused with quantity demanded for both gasoline and fuelefficient cars. 35. If the supply of apples decreases, which of the following will generally occur in a market setting? a. Demand for apples will decrease. b. The quantity demanded will increase. c. The costs of apple producers will decrease. d. The price of apples will increase. 36. If the supply of a good decreases, which of the following will generally occur in a market setting? a. The price of the good will decrease. b. Demand will decrease. c. The quantity demanded will increase. d. The quantity demanded will decrease. 37. "Lower fuel oil prices in 1986 led to a reduction in demand and lower prices of solar heating units. At the lower price, producers of solar heating units reduced the quantity supplied." This statement is a. false; lower fuel oil prices would increase the demand for and price of solar heating units. b. false; producers of solar units would expand production rather than reduce output if the price of the units fell. c. false; if the demand for solar units fell, the supply of the units would decrease but not the quantity supplied. d. essentially correct. 38. If the demand for a good increases, which of the following will generally occur in a market setting? a. The price of the good will decrease. b. The supply of the good will increase. c. The quantity supplied will increase. d. Producer profits will fall. 39. If the demand for a good decreases, which of the following will generally occur in a market setting? a. The price of the good will increase. b. The supply of the good will decrease. c. The quantity supplied will decrease. d. Producer profits will rise. 40. In a market economy, an increase in demand will generally cause the equilibrium a. price to fall. b. quantity supplied to increase. c. quantity demanded to fall. d. number of firms in the market to decline. 41. Which of the following is legally permitted to use coercive force to modify the actions of adults? a. banks b. corporations c. governments d. all of the above 42. As methods of economic organization, the market and the public sector are similar in which of the following ways? a. Income is distributed equally in and by both sectors. b. In both sectors, economic activity is undertaken only when it will result in social gain. c. In both sectors, economic exchange is completely voluntary. d. Someone must cover the cost associated with the provision of scarce goods in both sectors. 43. Which one of the following is a major difference between market and collective economic organization? a. Individuals are motivated by their personal interests when they make market decisions, but they will be motivated primarily by the public interests when they make collective choices. b. Individuals have a strong incentive to acquire information when making private consumption decisions, but voters have little incentive to invest in acquiring information when making political choices. c. Competitive behavior is present when decisions are made in the marketplace, but competition is absent when choices are made collectively. d. For market choices, there will be a one-to-one link between individual consumption and individual payment for a good; this link is also present when choices are made collectively. 44. The cost of government activities equals a. the income transferred to the government in the form of taxation. b. the income that could have been earned by government employees if they had worked in the private sector. c. the difference between government expenditures and tax revenues. d. the sum of the opportunity cost of resources used by the government plus the cost of tax compliance and the excess burden of taxation. 45. Economic efficiency requires a. individuals produce at their maximum level. b. only long-lasting, high-quality products be produced. c. income be distributed equally among consumer units. d. all economic activity generating more benefits than costs to individuals in the economy be undertaken. 46. Which of the following correctly describes an external benefit resulting from an individual's purchase of a winter flu shot? a. The flu shot is cheaper than the cost of treatment when you get the flu. b. The income of doctors increases when you get the flu shot. c. The flu shot reduces the likelihood of others catching the flu. d. The flu shot reduces the likelihood you will miss work as the result of sickness; therefore, you will earn more income. 47. Which of the following is the best example of a public good? a. a national system of health care b. the Disney World amusement park c. a flood control project d. telephone service 48. From the viewpoint of economic efficiency, when competitive forces in an industry are weak, market allocation will often a. lead to an excessive supply of the product by firms in the industry. b. lead to product prices that exceed the opportunity cost of production. c. lead to product prices that are too low. d. cause private firms to use inefficient production methods. 49. Which of the following is the best example of an action that imposes an external cost? a. wear and tear on one's car as the result of speeding b. an increase in one's water bill as the result of watering the yard c. deterioration in the environmental quality of a campground as a result of garbage left behind by careless campers d. a rose garden on your property that improves the view available to your neighbors 50. Producers will be most likely to help consumers acquire accurate information at a low cost when a. advertising expenses are considered a fixed cost for tax purposes. b. the producers incur external costs by providing such information to consumers. c. the good produced is a repeat-buy item and sales depend on the satisfaction of customers. d. the product sold is a near public good. 51. Public choice theory indicates the behavior of people in government a. differs from the behavior of people in the market sector because the latter are motivated by self-interest, whereas, the former are motivated by the public interest. b. differs from the behavior of people in the market because public sector decision roles do not allow people to pursue their own self-interests. c. is the same as people in the market sector only if decisions are made by majority vote. d. is best understood by applying the same principles we use to predict the behavior of people in the market sector. 52. The rational ignorance effect is a result of a. externalities that lead to an excess supply of information. b. the limited incentive of the news media to cover political campaigns. c. the cost of information and the expectation of individual voters that their vote will not be decisive. d. The lack of a college education on the part of most voters in the United States. 53. A labor lawyer who lobbies for legislation requiring lengthy contracts between employers and employees (that require both parties to hire lawyers) is engaging in a. an activity necessarily promoting the public good. b. rent seeking. c. internalization of an externality. d. an illegal act. 54. Which of the following provides the best summary of the basic idea of public choice analysis? a. Public choice analysis applies the principles of economics to political science topics. b. Public choice analysis takes the principles of political science and applies them to the traditional topics of economics. c. Public choice analysis uses the principle of majority rule to determine the efficiency of an action. d. Public choice analysis indicates there is a sharp distinction between economic and political topics. 55. According to the special-interest effect, which of the following groups is least likely to have a significant influence on the political process? a. the American Federation of Labor b. the National Association of Manufacturers c. nonunion employees d. the American Medical Association 56. Legislators have a strong incentive to: a. work with special-interest groups that may make campaign contributions. b. conceal the true costs of favored projects from voters c. exaggerate the benefits of favored projects to voters. d. do all of the above. 57. Most voters will likely be concerned with a. most issues since most issues have some impact, however slight, on each citizen. b. only a few special issues (those that exert the most impact on the voters' personal welfare). c. most issues since information on most issues can be obtained at a low cost. d. the views of a particular political candidate on all issues. 58. Public choice theory suggests political entrepreneurs will be most likely to favor redistribution of income from a. the rich to the poor. b. unorganized taxpayers to well-organized interest groups. c. middle-income taxpayers to both the rich and the poor. d. well-organized businesses and labor groups to consumers. 59. Garbage removal is provided by different kinds of organizations. If a newly developed truck has just come on the market, and managers in all garbage-removal organizations are analyzing the net benefits of buying it, which of the following groups will most likely undertake the most serious, painstaking examination and adopt the new truck quickly if it effectively reduces costs? a. managers of city-owned garbage agencies b. elected officials in cities where government provides the garbage removal services c. owner/managers of private garbage removal companies operating in a competitive environment d. the mayors of large cities 60. Which of the following factors weakens the case for public-sector provision of goods and services? a. the shortsightedness effect b. externalities c. the special-interest effect d. both a and c 61. Which of the following would increase GDP? a. Ford Motor Company begins to produce and sell cars in Japan. b. Mercedes-Benz begins to produce and sell cars in Alabama. c. An American investor buys 100 shares of Ford stock. d. An American investor purchases 100 shares of Mercedes-Benz stock. 62. When the expenditure approach is used to measure GDP, the major components of GDP are a. consumption, investment, indirect business taxes, and depreciation. b. employee compensation, rents, interest, self-employment income, and corporate profits. c. employee compensation, corporate profits, depreciation, and indirect business taxes. d. consumption, investment, government consumption and gross investment, and net exports. 63. Assume that between 1990 and 1998 nominal GDP increased from $5 trillion to $8.3 trillion and that the price index rose from 100 to 140. Which of the following expresses GDP for 1990 in terms of 1998 prices? a. $5.93 trillion b. $7 trillion c. $8.3 trillion d. $11.63 trillion 64. Which of the following would not be counted as part of this year's GDP? a. the paint you buy to paint your house b. the government bond you receive as a birthday present c. the purchase of an IBM computer (produced during the year) by the U.S. government d. the purchase of wheat (produced during the year by a Kansas farmer) by the Russian government 65. The GDP deflator is designed to a. adjust nominal GDP for changes in the unemployment rate. b. adjust nominal GDP so as to include the problem of externalities. c. adjust nominal GDP for changes in the price level. d. calculate changes in the price of food and other consumer goods. 66. Which of the following best describes the difference between gross domestic product (GDP) and gross national product (GNP)? a. GDP measures output produced within domestic borders, while GNP measures output produced by domestic citizens. b. GDP measures output produced by domestic citizens within domestic borders, while GNP measures all output produced within domestic borders. c. GDP measures output produced by domestic citizens, while GNP measures output produced within domestic borders. d. GDP measures all output produced within domestic borders, while GNP measures output produced by domestic citizens within domestic borders. 67. Suppose that, in dollar terms, GDP increased by approximately 8 percent during a given year, but real GDP increased 5 percent. Which of the following best explains these events? a. The money supply decreased by approximately 8 percent. b. Prices fell by approximately 3 percent. c. Prices increased by approximately 3 percent. d. The real capacity of the economy decreased more rapidly than money output. 68. If waitresses and taxi drivers do not report all of their income to the government, GDP will be understated. This is because the unreported income a. involves the introduction of new goods. b. is part of the underground economy. c. is an example of nonmarket production. d. represents an increase in leisure time. 69. The primary value of GDP is a. its ability to reflect the output rate of a nation. b. as a measure of well-being, income inequality, and unemployment in an economy. c. to provide observers with a reasonably good index of social progress. d. limited to capitalist economies and highly developed countries. 70. National income is a. after-tax household income available for either consumption expenditures or saving during a period. b. gross national product minus depreciation. c. the total income payments to the owners of human (labor) and physical capital during a period. d. gross national product minus government expenditures. 71. During this century, the growth rate of real GDP in the United States has averaged approximately a. 1 percent. b. 3 percent. c. 6 percent. d. 10 percent. 72. Economists use the term "business cycle" to refer to a. the growth of small businesses into major corporations. b. changes in products that occur from improved technology. c. fluctuations in economic activity, measured by GDP or unemployment. d. periods of increases and decreases in the rate of inflation. 73. The labor force participation rate of women in the United States has been a. increasing for several decades. b. decreasing for the past several decades after increasing dramatically in the early 1900s. c. approximately constant during the last three decades. d. decreasing since the early 1900s. 74. Suppose there was a country with a population of 1000, of which 200 were unemployed and 500 were employed. Which of the following is true? a. The numbers have been calculated incorrectly as there are 300 people who are neither employed nor unemployed. b. The labor force participation rate is 50 percent. c. The unemployment rate is 20 percent. d. There are 700 individuals in this country's labor force. 75. The type of unemployment caused by changes in the business cycle is a. structural unemployment. b. natural unemployment. c. frictional unemployment. d. cyclical unemployment. 76. An individual should continue to spend time searching for a job as long as a. all salary offers are below what the person expected. b. the marginal gain from additional search exceeds the marginal cost. c. job openings are available in the individual's field. d. information is available that the individual has not yet collected. 77. Suppose an economy is operating at its maximum sustainable output rate. It is not in a recession, but neither is it experiencing a boom. Which of the following would be true? a. The economy would be considered at full employment. b. Actual GDP would equal potential GDP. c. Actual unemployment would equal the natural rate of unemployment. d. All of the above are true. 78. Which of the following persons would be considered unemployed by the official government definition? a. George, a mathematician who returned to graduate school after failing to find a job the last four months b. Gwen, a medical student, who is still in college and is not working c. Morgan, who is employed part-time but desires a full-time job d. Ralph, an auto worker vacationing in Florida during a layoff at a General Motors plant due to an annual change-over in models 79. During a recession, which of the following will be true? a. The actual rate of unemployment will be lower than the natural rate. b. Actual GDP will be lower than potential GDP. c. Actual employment will exceed what is considered full employment. d. Actual inflation will be higher was than anticipated. 80. Which of the following is not a harmful effect of inflation? a. Unanticipated inflation increases the risk associated with long-term contracts. b. Inflation distorts the information delivered by market prices. c. Individuals will waste productive resources protecting themselves from the effects of inflation. d. Inflation increases the purchasing power of the dollar. 81. Which of the following is a correct statement? a. Fiscal policy is the use of tax and spending policies by the Congress and the president. b. Fiscal policy involves the control of the money supply by the Federal Reserve Bank. c. Monetary policy involves the control of the money supply by the Congress and the president. d. Monetary policy is the use of tax and spending policies by the Federal Reserve Bank. 82. The four basic markets that characterize the economy (as in the circular flow diagram) are the a. goods market, services market, stock market, and bond market. b. resource market, labor market, goods market, and loanable funds market. c. goods and services market, resource market, foreign exchange market, and loanable funds market. d. savings market, stock market, bond market, and investment market. 83. (I) The three reasons why the aggregate demand curve slopes downward are the international substitution effect, the real balance effect, and the interest rate effect. (II) The aggregate demand curve shows the relationship between the aggregate quantity of goods and services demanded and the general price level in an economy. a. I is true; II is false. b. I is false; II is true. c. Both I and II are true. d. Both I and II are false. 84. As the general price level in an economy rises, the aggregate quantity demanded of goods and services falls because a. the prices of domestic goods have risen relative to foreign goods, causing exports to fall and imports to rise. b. higher interest rates caused by an increase in the demand for money balances causes a reduction in current investment and consumption. c. the value of money will fall, reducing the real wealth and thus the consumption of persons holding money balances. d. all of the above are correct. 85. (I) The short-run aggregate supply curve is upward sloping because the prices firms pay for major resources is set by long-term contracts, thus unexpected increases in product prices lead to higher profits inducing firms to expand output. (II) The long-run aggregate supply curve is vertical because an economy's productive ability is determined in the long run by its resources, not by the price level. Additionally, in the long run, decision makers will adjust long-term contracts to take price changes into account. a. I is true; II is false. b. I is false; II is true. c. Both I and II are true. d. Both I and II are false. 86. (I) If long-run equilibrium is present in the goods and services market, the actual price level will equal the price level anticipated when buyers and sellers agreed to long-term contracts. (II) When an economy is in long-run equilibrium, the output level will be less than the full employment or potential level. a. Both I and II are true. b. Both I and II are false. c. I is true; II is false. d. I is false; II is true. 87. The resource market is important from a macroeconomic perspective because a. it coordinates the allocation of productive resources and determines the costs of production. b. it determines the interest rates faced by borrowers and lenders. c. inflation rates are set in the resource market by the government. d. resource prices determine the position of the long-run aggregate supply curve. 88. The actions of borrowers and lenders are coordinated in a. the loanable funds market by the real interest rate. b. the goods and services market by the general price level. c. the resource market by wage rates. d. the loanable funds market by the inflation rate. 89. If the money or nominal interest rate is 3 percent and the inflation premium is 8 percent, the real interest rate is a. -5 percent. b. 3 percent. c. 5 percent. d. 11 percent. 90. The macroeconomy is said to be in long-run equilibrium only if a. the resource, loanable funds, foreign exchange, and goods and services markets are all in equilibrium. b. prices were incorrectly estimated by decision makers. c. the output of the economy exceeds the full-employment level of output. d. the economy is operating along its short-run aggregate supply curve. 91. (I) A tornado strikes Michigan, destroying most of the automobile manufacturing plants, and reducing the supply of automobiles. (II) For the fourth year in a row, the inflation rate is 3 percent. a. I is most likely an unanticipated change; II is most likely an anticipated change. b. I is most likely an anticipated change; II is most likely an unanticipated change. c. Both I and II are most likely unanticipated changes. d. Both I and II are most likely anticipated changes. 92. Which of the following will most likely accompany an unanticipated increase in aggregate demand? a. an increase in prices b. an increase in unemployment c. a decrease in real GDP d. a decrease in the demand for resources 93. In the aggregate demand/aggregate supply model, when the output of an economy is less than its long-run potential, the economy will experience a. falling real wages and resource prices that will stimulate employment and real output. b. rising interest rates that will stimulate aggregate demand and restore full employment. c. a budget surplus that will stimulate demand and, thereby, help restore full employment. d. rising resource prices that will restore equilibrium at a higher price level. 94. Which of the following will most likely result from an unanticipated decrease in aggregate supply due to unfavorable weather conditions in agricultural areas? a. a decrease in inflation b. a decrease in unemployment c. an increase in prices d. an increase in the natural rate of unemployment 95. Which of the following will most likely increase aggregate supply in the long run? a. unfavorable weather conditions in agricultural areas b. an increase in the expected inflation rate c. higher real interest rates d. a high rate of capital investment, which expands the future supply of productive resources 96. Within the AD/AS model, an unanticipated increase in short-run aggregate supply will cause real output to a. increase and prices to decrease. b. decrease and prices to increase. c. increase and prices to increase. d. decrease and prices to decrease. 97. An increase in the long-run aggregate supply curve indicates that a. potential real GDP has increased. b. unemployment has increased. c. employment has increased. d. the natural rate of unemployment has increased. 98. Which of the following will most likely accompany an unanticipated decrease in aggregate demand? a. an increase in the general price level or inflation b. a decrease in resource prices c. an increase in real GDP d. a decrease in unemployment 99. Which of the following statements is most consistent with the view that the economy has a self-corrective mechanism? a. When the economy is in a recession, it will remain there until the government steps in to bring the economy out of the recession. b. When the economy is in a recession, falling resource prices will eventually increase short-run aggregate supply, bringing the economy back to full employment. c. During economic booms, interest rates will fall, causing the economy to fall into a recession. d. In a market economy, resource prices, such as wages, can only increase; they can never decrease. 100. A decline in the real interest rate in the loanable funds market will cause the a. aggregate demand curve to shift to the right. b. aggregate demand curve to shift to the left. c. long-run aggregate supply curve to shift to the left. d. natural rate of unemployment to fall. 101. In a single year, a $5 billion tax reduction was accompanied by a $9 billion increase in consumer spending. From a Keynesian view, the most probable explanation for the increase in consumer spending by more than the amount of the tax cut is that a. lower taxes caused government spending to fall, which led to the increase in consumer spending. b. increased consumption spending by those with higher disposable incomes led to higher incomes and still more consumption spending by others. c. the tax cut caused interest rates to fall, thus increasing consumer spending. d. the lower taxes prompted the Federal Reserve to sell U.S. securities, causing both the money supply and consumer spending to increase. 102. Although the economy was in the Great Depression, the Hoover administration followed a fiscal policy of balancing the budget. A Keynesian would have found this policy a. inappropriate because it probably would have depressed economic activity and led to further increases in unemployment. b. appropriate because it probably would have led to a significant increase in the money supply and thereby increased employment. c. inappropriate because it probably would have impaired the ability of monetary policy to end the Depression. d. appropriate because it probably would have stimulated economic activity and helped end the Depression. 103. Suppose U.S. policy makers decide that to stimulate GDP growth, investment must be increased. What is needed, they conclude, is a reallocation of resources away from producing consumer goods and toward producing capital goods. Which of the following policy alternatives would most likely accomplish this objective? a. a reduction in personal income taxes b. a reduction in state sales taxes c. a tax credit allowance for business investment in capital equipment d. restrictive monetary policy 104. According to the Keynesian view, which of the following would most likely decrease aggregate demand? a. a decrease in tax rates b. a decrease in government expenditures c. an increase in transfer payments d. an increase in the budget deficit 105. Which of the following is an example of an automatic stabilizer? a. Congress legislates lower tax rates to increase consumption and investment. b. Tax rates are increased during a recession to maintain a balanced budget. c. A regressive income tax system reduces tax revenues (as a share of income) as income expands. d. Revenues from the corporate income tax increase sharply during a business boom but decline substantially during a recession, even though no new tax legislation is enacted. 106. Keynesian analysis implies that a planned budget deficit is a. always necessary to ensure full employment. b. proper during slack economic conditions but highly inappropriate if the economy is already operating at capacity. c. of little consequence unless there is a corresponding change in the money supply. d. an effective method of dealing with inflation. 107. The crowding-out effect suggests that a. expansionary fiscal policy causes inflation. b. restrictive fiscal policy is an effective weapon against inflation. c. reduction in private spending resulting from the higher interest rates caused by a budget deficit will largely offset the expansionary impact of a pure fiscal action. d. a budget surplus will cause the private demand for loanable funds, the interest rate, and aggregate demand to fall. 108. Other things constant, an increase in marginal tax rates will: a. decrease the supply of labor and reduce its productive efficiency. b. decrease the supply of capital and reduce its productive efficiency. c. encourage individuals to substitute less desired, tax-deductible goods for more desired, non-deductible goods. d. cause all of the above. 109. The new classical model implies that substitution of debt for tax financing a. increases aggregate demand and exerts a multiplier effect leading to an expansion in real output. b. is highly effective against inflation. c. reduces consumption because it increases both the current and future tax liability of households. d. leaves wealth and therefore aggregate demand unchanged since the debt implies higher future taxes. 110. A balanced budget is present when a. the economy is at full employment. b. the actual level of aggregate spending equals the planned level of spending. c. public sector spending equals private sector spending. d. government revenues equal expenditures. 111. If the required reserve ratio is 10 percent, a bank with a new deposit of $1,000 a. must keep $100 on reserve and can make up to $900 in new loans. b. must keep $200 on reserve and can make up to $800 in new loans. c. must keep $900 on reserve and can make up to $100 in new loans. d. must keep $1,000 on reserve and can make no additional loans. 112. Which one of the following is incorrect regarding money? a. Money is a medium of exchange. b. Money is a store of value. c. Money serves as a unit of account. d. The value of money is dependent on the quantity of gold held by the Federal Reserve. 113. Which of the following are changes altering the nature of money and the usefulness of the money supply figures? a. the widespread holding of U.S. currency outside the country by foreigners b. the increasing availability of stock and bond mutual funds c. the use of debit cards and electronic money d. all of the above 114. Which of the following is primarily responsible for controlling the money supply in the United States? a. the U.S. Congress b. the Council of Economic Advisors c. the U.S. Treasury d. the Board of Governors of the Federal Reserve System 115. If the Fed wanted to use all three of its major monetary control tools to decrease the money supply, it would a. buy bonds, reduce the discount rate, and reduce reserve requirements. b. sell bonds, reduce the discount rate, and reduce reserve requirements. c. sell bonds, reduce the discount rate, and increase reserve requirements. d. sell bonds, increase the discount rate, and increase reserve requirements. 116. If a decrease in the money supply were desired to slow inflation, the Federal Reserve might a. increase the reserve requirements. b. sell U.S. securities on the open market. c. raise the discount rate. d. buy U.S. securities directly from the Treasury. 117. The Federal Reserve's most frequently used monetary tool is a. the discount rate. b. the reserve requirements. c. moral persuasion. d. open market operations. 118. Suppose the Fed purchases $100 million of U.S. securities from the public. The reserve requirement is 20 percent and all banks have zero excess reserves. The total impact of this action on the money supply will be a a. $100 million decrease in the money supply. b. $100 million increase in the money supply. c. $200 million increase in the money supply. d. $500 million increase in the money supply. 119. A reserve requirement of 20 percent implies a potential money deposit multiplier of a. 4. b. 5. c. 20. d. 25. 120. A bank receives a demand deposit of $1,000. The bank loans out $600 of this deposit and increases its excess reserves by $300. What is the legal reserve requirement? a. 10 percent b. 20 percent c. 60 percent d. 70 percent 121. The velocity of money is a. the rate at which the price index for consumer goods rises. b. the multiple by which an increase in government expenditures will cause output to rise. c. set by the Board of Governors of the Federal Reserve System. d. the average number of times one dollar buys final goods and services during a year. 122. A decrease in the nominal interest rate would a. encourage people to hold larger money balances. b. encourage people to hold smaller money balances. c. force the Fed to increase the money supply. d. cause households to decrease consumption. 123. The demand curve for money a. shows the amount of money balances that individuals and businesses wish to hold at various interest rates. b. reflects the open market operations policy of the Federal Reserve. c. shows the amount of money individuals and businesses wish to hold at various price levels. d. reflects the discount rate policy of the Federal Reserve. 124. If unemployment were 12 percent and prices were rising 2 percent annually, which of the following would be the most appropriate policy? a. a decrease in planned government expenditures b. a decrease in the Fed's reserve requirements c. the sale of U.S. securities by the Federal Reserve d. an increase in the discount rate 125. "Monetary instability has been the major cause of economic instability in this country. Expansion in the money supply has been the source of every major inflation. Every major recession has been either caused or perpetuated by monetary contraction." Who among the following would most likely adhere to this view? a. monetarists b. Keynesians c. supply-side economists d. early proponents of the quantity theory of money 126. Suppose the Fed has reduced the money supply in an effort to decelerate inflation. If decision makers anticipate that the Fed will soon shift back to a more expansionary monetary policy, the decline in the money supply will a. be more effective as an anti-inflationary weapon. b. be less effective as an anti-inflationary weapon. c. reduce aggregate demand by a larger amount than if decision makers expect the restrictive policy to continue. d. leave aggregate demand unchanged because expectations do not influence the effectiveness of macropolicy. 127. If monetary authorities persistently expand the money supply more rapidly than real output, the probable result will be a. inflation. b. lower money interest rates. c. rapid growth of real output. d. an increase in real private investment. 128. Which of the following accurately summarizes the transmission of restrictive monetary policy to the goods and services market? a. Higher real interest rates will lead to a reduction in both business investment and consumer purchases of durable items, causing a reduction in aggregate demand. b. The exchange rate value of the dollar will rise, causing U.S. exports to fall and imports to rise. With lower net exports, aggregate demand will fall. c. Bank reserves will fall and loans will become less available to small- and mediumsized businesses. The investment undertaken by these businesses will fall, leading to a reduction in aggregate demand. d. All of the above are true. 129. Suppose the U.S. Treasury finances a budget deficit by selling securities to the public. The money supply will a. increase because the demand deposits of the Treasury will increase. b. decrease because the demand deposits of the public will decrease. c. decrease because the money in the hands of the Fed will increase. d. remain unchanged as long as the government spends what is borrowed. 130. Starting from a position of macroeconomic equilibrium at the fullemployment level of real GDP, in the short run an unanticipated increase in the money supply will a. raise real interest rates, lower prices, and reduce real GDP. b. raise real interest rates, lower prices, and leave real GDP unchanged. c. raise nominal interest rates, lower prices, and leave real GDP unchanged. d. lower real interest rates, raise prices, and increase real GDP. 131. Suppose Congress raises taxes and the monetary authorities slow the annual money supply growth from 10 percent to 5 percent. If decision makers accurately anticipate the impact of these policy changes on prices, a. unemployment will rise. b. unemployment will fall. c. there will be no effect on unemployment. d. unemployment will fall if the change in monetary policy dominates, but unemployment will rise if the change in fiscal policy dominates. 132. Which one of the following accurately states the view of activists who favor discretionary stabilization policy? a. The index of leading indicators and other forecasting tools provide policy makers with valuable information that permits them to institute stabilizing changes in macroeconomic policy. b. Since we have only limited ability to forecast the economy, the best policy is to do nothing. c. In recent years, our ability to forecast the economy has improved to the extent that discretionary macroeconomic policy is capable of fine-tuning if policy makers would follow the advice of leading economists. d. The index of leading indicators is unreliable at revealing when an economy is about to enter a recession. 133. Which of the following is an argument against a monetary rule (money supply growth at a constant rate such as 4 percent)? a. Since the lag between when a monetary policy is instituted and when it takes effect is unpredictable, changes in monetary policy are difficult to time. b. The inability to forecast the economy makes it difficult to time monetary policy. c. A monetary rule would prevent the monetary authorities from taking action to offset abrupt changes in the money velocity. d. Since the index of leading indicators has sometimes provided conflicting information on the economy, it would be difficult to institute a monetary rule. 134. The activists' view that the best policy is one of discretionary intervention into the macroeconomy is most consistent with which of the following views? a. The self-correcting properties of a market economy would work well if they were not disrupted by errors in macropolicy. b. A market economy is unstable because politicians force incorrect policies on the people. c. A market economy is inherently stable. d. The self-correcting properties of a market economy work very slowly. 135. Compared to discretionary monetary policy, which of the following strengthen(s) the case for a monetary rule, such as the expansion of the money supply at a constant rate (perhaps 4 percent)? a. Since the lag between when a monetary policy is instituted and when it exerts its major effect is unpredictable, changes in monetary policy are difficult to time. b. The inability to forecast the economy makes it difficult to time discretionary monetary policy. c. A monetary rule would reduce the likelihood that monetary planners could stimulate an economic boom just prior to a major election. d. All of the above are correct. 136. (I) Since forecasting is an imprecise science, policy makers should not respond to minor economic ups and downs, which may be misleading indicators. Precise fine-tuning is beyond our knowledge and capabilities. (II) Demand stimulus can reduce the rate of unemployment below the natural level for a long time. a. Most economists would agree with I; most economists would agree with II. b. Most economists would disagree with I; most economists would agree with II. c. Most economists would agree with I; most economists would disagree with II. d. Most economists would disagree with I; most economists would disagree with II. 137. Which of the following is a good example of an activist stabilization policy designed to head off a recession? a. Congress cuts government expenditures to reduce the budget deficit. b. The Fed reduces money supply growth to increase the value of the dollar in the foreign exchange market. c. Congress reduces tax rates as the result of the index of leading indicators declining for four months in a row. d. All of the above are correct. 138. If restrictive macroeconomic policy will reduce inflation emanating from excess demand, ideally the policy should be undertaken a. when inflation is at its highest. b. when inflation begins to increase. c. before inflation begins to increase. d. about six months after inflation peaks. 139. The index of leading indicators is a(n) a. alphabetical listing of the most popular indicators in the economy for a given month. b. composite index of indicators that provides information on the future direction of the economy. c. measure of the level of aggregate output. d. composite index designed to measure inflation. 140. Under the rational expectations hypothesis, which of the following is the most likely short-run effect of a move to expansionary monetary policy? a. higher prices and no change in real output b. higher prices and real output c. no change in prices and lower real output d. no change in prices or real output 141. Suppose Congress raises taxes and the monetary authorities slow the annual money supply growth from 10 percent to 5 percent. If decision makers accurately anticipate the impact of these policy changes on prices, a. unemployment will rise. b. unemployment will fall. c. there will be no effect on unemployment. d. unemployment will fall if the change in monetary policy dominates, but unemployment will rise if the change in fiscal policy dominates. 142. Which one of the following accurately states the view of activists who favor discretionary stabilization policy? a. The index of leading indicators and other forecasting tools provide policy makers with valuable information that permits them to institute stabilizing changes in macroeconomic policy. b. Since we have only limited ability to forecast the economy, the best policy is to do nothing. c. In recent years, our ability to forecast the economy has improved to the extent that discretionary macroeconomic policy is capable of fine-tuning if policy makers would follow the advice of leading economists. d. The index of leading indicators is unreliable at revealing when an economy is about to enter a recession. 143. Which of the following is an argument against a monetary rule (money supply growth at a constant rate such as 4 percent)? a. Since the lag between when a monetary policy is instituted and when it takes effect is unpredictable, changes in monetary policy are difficult to time. b. The inability to forecast the economy makes it difficult to time monetary policy. c. A monetary rule would prevent the monetary authorities from taking action to offset abrupt changes in the money velocity. d. Since the index of leading indicators has sometimes provided conflicting information on the economy, it would be difficult to institute a monetary rule. 144. The activists' view that the best policy is one of discretionary intervention into the macroeconomy is most consistent with which of the following views? a. The self-correcting properties of a market economy would work well if they were not disrupted by errors in macropolicy. b. A market economy is unstable because politicians force incorrect policies on the people. c. A market economy is inherently stable. d. The self-correcting properties of a market economy work very slowly. 145. Compared to discretionary monetary policy, which of the following strengthen(s) the case for a monetary rule, such as the expansion of the money supply at a constant rate (perhaps 4 percent)? a. Since the lag between when a monetary policy is instituted and when it exerts its major effect is unpredictable, changes in monetary policy are difficult to time. b. The inability to forecast the economy makes it difficult to time discretionary monetary policy. c. A monetary rule would reduce the likelihood that monetary planners could stimulate an economic boom just prior to a major election. d. All of the above are correct. 146. (I) Since forecasting is an imprecise science, policy makers should not respond to minor economic ups and downs, which may be misleading indicators. Precise fine-tuning is beyond our knowledge and capabilities. (II) Demand stimulus can reduce the rate of unemployment below the natural level for a long time. a. Most economists would agree with I; most economists would agree with II. b. Most economists would disagree with I; most economists would agree with II. c. Most economists would agree with I; most economists would disagree with II. d. Most economists would disagree with I; most economists would disagree with II. 147. Which of the following is a good example of an activist stabilization policy designed to head off a recession? a. Congress cuts government expenditures to reduce the budget deficit. b. The Fed reduces money supply growth to increase the value of the dollar in the foreign exchange market. c. Congress reduces tax rates as the result of the index of leading indicators declining for four months in a row. d. All of the above are correct. 148. If restrictive macroeconomic policy will reduce inflation emanating from excess demand, ideally the policy should be undertaken a. when inflation is at its highest. b. when inflation begins to increase. c. before inflation begins to increase. d. about six months after inflation peaks. 149. The index of leading indicators is a(n) a. alphabetical listing of the most popular indicators in the economy for a given month. b. composite index of indicators that provides information on the future direction of the economy. c. measure of the level of aggregate output. d. composite index designed to measure inflation. 150. Under the rational expectations hypothesis, which of the following is the most likely short-run effect of a move to expansionary monetary policy? a. higher prices and no change in real output b. higher prices and real output c. no change in prices and lower real output d. no change in prices or real output 151. A decrease in demand will a. reduce supply. b. increase the quantity traded in the market. c. cause higher prices, although quantity traded in the market will decline. d. lead to a reduction in the quantity supplied. 152. When a price floor is above the equilibrium price, a. quantity demanded will exceed quantity supplied. b. quantity supplied will exceed quantity demanded. c. the market will be in equilibrium. d. This is a trick question because price floors generally exist below the equilibrium price. 153. Rent control applies to about two-thirds of the private rental housing in New York City. Economic theory suggests that the below-equilibrium prices established by rent controls would a. redistribute income from tenants to landlords. b. promote a rapid increase in the future supply of housing. c. result in poor service and quality deterioration of many rental units. d. lead to a reduction in housing discrimination against minorities. 154. Which of the following is the most likely result of an increase in the minimum wage? a. an increase in the employment of unskilled workers b. a decrease in the unemployment rate of unskilled workers c. an increase in the demand for unskilled workers d. a decrease in the employment of unskilled workers 155. If the United Auto Workers union can obtain a substantial wage increase for auto workers, the price of automobiles will rise. The rise can be attributed to a. a shift to the right in the supply curve for automobiles. b. a shift to the left in the supply curve for automobiles. c. a shift to the right in the demand curve for automobiles. d. a shift to the left in the demand curve for automobiles. ... View Full Document

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