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1. award: 10.00 points The production possibilities curve illustrates which two of the following essential principles? Factors of production and price signals. → Scarce resources and opportunity cost. Market mechanisms and laissez faire. Economic growth and market failure. The production possibilities curve illustrates scarce resources and opportunity cost as essential principles. Multiple Choice Difficulty: 2 Medium Learning Objective: 0102 What the productionpossibilities curve represents. 2. award: 10.00 points At which point is society producing some of each type of structure but still producing inefficiently? (See Figure 1.1.) A. B. → C. D. More could be produced by moving to a point on the production possibilities curve. Multiple Choice Difficulty: 2 Medium Learning Objective: 0102 What the productionpossibilities curve represents. 3. award: 10.00 points Refer to Figure 1.8. If the university decides to lower grading standards, then This curve will shift rightward. → This curve will pivot up and to the left. The curve will begin to bend downward at an earlier point. We will slide up the curve from point B to point C. We would expect grades to be higher with less study time required, all else equal. Multiple Choice Difficulty: 2 Medium Learning Objective: 0101 How scarcity creates opportunity costs. 4. award: 10.00 points The slope of a curve at any point is given by this formula: → The change in y coordinates between two points divided by the change in their x coordinates. The change in x coordinates between two points divided by the change in their y coordinates. The percentage change in y coordinates between two points divided by the percentage change in their x coordinates. The percentage change in x coordinates between two points divided by the percentage change in their y coordinates. This is the equivalent of rise over run, where the change in y is the rise and the change in x is the run. Multiple Choice 5. Difficulty: 2 Medium Learning Objective: 0101 How scarcity creates opportunity costs. award: 10.00 points When the relationship between two variables changes, There is movement from one point on the curve to another point on the curve. The curve becomes linear. → The entire curve shifts. All of the choices are correct. This would be caused by a change in a variable that is not on either axis. Multiple Choice 6. Difficulty: 2 Medium Learning Objective: 0101 How scarcity creates opportunity costs. award: 10.00 points If an economy is producing inside the production possibilities curve, then There is full employment of resources. It is operating efficiently. → It can produce more of one good without giving up some of another good. There are not enough resources available to produce more output. No goods must be given up to move from an inefficient to an efficient level of production. Hence, there is no sacrifice or opportunity cost. Multiple Choice Difficulty: 2 Medium Learning Objective: 0102 What the productionpossibilities curve represents. 7. award: 10.00 points Which of the following correctly characterizes the shape of a constant opportunity cost production possibilities curve? A straight line indicating that the law of increasing opportunity costs applies. → A straight line when there is constant opportunity costs. A line that curves outward when resources are perfectly adaptable in the production of different goods. A line that curves inward when resources are perfectly adaptable in the production of different goods. A straightline production possibilities curve means resources are equally adaptable to producing either good. Multiple Choice 8. Difficulty: 2 Medium Learning Objective: 0102 What the productionpossibilities curve represents. award: 10.00 points The fact that there are too few resources to satisfy all our wants is attributed to → Scarcity. Greed. Shortages. Lack of money. There is always an imbalance in what is desired and what is possible. Multiple Choice 9. Difficulty: 2 Medium Learning Objective: 0101 How scarcity creates opportunity costs. award: 10.00 points Which of the following has occurred when government directives do not produce better economic outcomes? → Government failure. Market failure. Macroeconomic failure. Scarcity. Government failure occurs when government action ends up making the market outcomes worse, not better. Multiple Choice Difficulty: 2 Medium Learning Objective: 0104 How market and government approaches to economic problems differ. 10. award: 10.00 points Which of the following contains the two sectors whose percentage contribution to the real GDP has declined since 1900? → Farming and manufacturing. Manufacturing and exports. Farming and services. Services and exports. Farming and manufacturing are less important in the overall economy today compared to the service sector. Multiple Choice 11. Difficulty: 2 Medium Learning Objective: 0202 How the U.S. output mix has changed over time. award: 10.00 points Those who are interested in assessing the relative standard of living of different countries over a given time period are most likely to look at GDP. Percentage change in GDP. Population. → Per capita GDP. Comparing living standards between countries allows us to see which countries are more or less prosperous per person. Multiple Choice 12. Difficulty: 2 Medium Learning Objective: 0201 The relative size of the U.S. economy. award: 10.00 points As a country's literacy rate and human capital capacity increase, the relative number of Laborintensive production processes increases. → Capitalintensive production processes increases. Sector service jobs decreases. None of the choices are correct. Ceteris paribus, as the labor force accrues more human capital, they are supplied with more physical capital. Multiple Choice Difficulty: 2 Medium Learning Objective: 0203 How the U.S. is able to produce so much output. 13. award: 10.00 points Income inequality is greatest in → Poorest countries. Middleincome countries. Richest countries. None of the choices are correct. Poor countries have low GDPs relative to population size and are not necessarily controlled by democratic governments. Multiple Choice 14. Difficulty: 2 Medium Learning Objective: 0204 How incomes are distributed in the United States and elsewhere. award: 10.00 points The result of government intervention in the market is that Society is always better off. The production possibilities curve always shifts outward. → Society may be worse off. Society is always worse off. Government intervention in the market does not always cause the best outcome for society at large. Multiple Choice 15. Difficulty: 2 Medium Learning Objective: 0203 How the U.S. is able to produce so much output. award: 10.00 points The government regulates food additives To keep food producers from dominating their markets. To restrain the market power of food producers. To assess their safety. → To prevent externalities. Governments should intervene to reduce or eliminate external costs. Multiple Choice Difficulty: 2 Medium Learning Objective: 0203 How the U.S. is able to produce so much output. 16. award: 10.00 points Which of the following is likely to be most capitalintensive? Farming in developing countries. Production of apparel by the Chinese. → Oil refining in the United States. None of the choices are correct. Capitalintensive means there is a high ratio of capital to labor used in production. Multiple Choice 17. Difficulty: 2 Medium Learning Objective: 0203 How the U.S. is able to produce so much output. award: 10.00 points In terms of an economy's production possibilities curve, a decrease in the level of human capital, ceteris paribus, will cause → An inward shift of the curve. A movement from the curve to a point inside the curve. A movement along the curve. An expansion of the curve. A decrease in any resource, including human capital, will decrease a nation's production possibilities curve. Multiple Choice 18. Difficulty: 2 Medium Learning Objective: 0203 How the U.S. is able to produce so much output. award: 10.00 points Market demand is determined by all of the following except → The number of potential sellers. Income. Tastes. Expectations about future income. Market demand is determined by the number of potential buyers and their respective tastes, incomes, prices of other goods, and expectations. Multiple Choice Difficulty: 2 Medium Learning Objective: 0301 The nature and determinants of market demand. 19. award: 10.00 points Ceteris paribus, which of the following is most likely to cause an increase in the quantity supplied of perfume? An improvement in perfumemaking technology. An increase in the salaries paid to perfume makers. → An increase in the price of perfume. An increase in the number of sellers of perfume. If the price of a product is the only variable changing, then we can track changes in quantity supplied along the supply curve. Multiple Choice 20. Difficulty: 2 Medium Learning Objective: 0302 The nature and determinants of market supply. award: 10.00 points Which of the following would not cause the market supply of cell phones to change? Telecommunications are deregulated, and anyone who wants to can produce and sell cell phones. A cheaper technology for producing plastics used in producing cell phones is developed. → A reduction in the demand for cell phones causes the price to fall. Taxes levied on cell phone production are reduced. A change in the price of cell phones will cause a movement along the supply curve or a change in the quantity supplied. Multiple Choice 21. Difficulty: 2 Medium Learning Objective: 0302 The nature and determinants of market supply. award: 10.00 points A rightward shift of the market demand curve for MP3 players, ceteris paribus, causes equilibrium Price to increase and equilibrium quantity to decrease. Price to decrease and equilibrium quantity to decrease. → Price to increase and equilibrium quantity to increase. Price to decrease and equilibrium quantity to increase. An increase in demand causes equilibrium price and equilibrium quantity to increase. Multiple Choice Difficulty: 2 Medium Learning Objective: 0304 What causes market prices to change. 22. award: 10.00 points When the demand for coffee increases, ceteris paribus, the equilibrium price will also increase because → A shortage exists at the old equilibrium price. There must be a surplus of the good. The market supply and demand curves do not intersect. Market demand must be upwardsloping. When demand increases, if the equilibrium price doesn't change, quantity demanded will be greater than quantity supplied, causing a shortage. Multiple Choice 23. Difficulty: 2 Medium Learning Objective: 0304 What causes market prices to change. award: 10.00 points If the government places a binding or effective price ceiling on cancertreating drugs, then Fewer people will die from cancer. → More people will die from cancer. There will be no change in the number of people who die from cancer. The supply of cancertreating drugs will increase. Price ceilings increase the quantity demanded, decrease the quantity supplied, and create market shortages. Multiple Choice 24. Difficulty: 2 Medium Learning Objective: 0305 How government price controls affect market outcomes. award: 10.00 points Choose the letter of the diagram in Figure 3.1 that best describes the type of shift that would occur in each situation for the market listed on the left, ceteris paribus. Figure 3.1 Shifts of Supply and Demand Candy bars: People become more healthconscious and prefer power bars instead of candy bars. A. B. → C. D. A change in tastes and preferences away from candy bars causes demand to decrease. Multiple Choice Difficulty: 2 Medium Learning Objective: 0304 What causes market prices to change. 25. award: 10.00 points Which panel of Figure 3.3 represents the changes in the market for cigarettes when the government increases subsidies for the production of tobacco and at the same time bans smoking in public buildings? Figure 3.3 Shifts of Supply and Demand A. → B. C. D. A subsidy will encourage more production, causing supply to increase, and the ban on smoking will cause a decrease in demand. Multiple Choice Difficulty: 2 Medium Learning Objective: 0304 What causes market prices to change. 26. award: 10.00 points Which of the following statements about markets is not true? → Markets necessarily have a physical location. Markets have both a demand side and a supply side. The two types of markets include the factor and product markets. Every market transaction involves an exchange of money for goods or resources or a direct exchange of goods or resources without money called barter. Markets exist wherever and whenever an exchange takes place, even in cyberspace. Multiple Choice 27. Difficulty: 2 Medium Learning Objective: 0303 How market prices and quantities are established. award: 10.00 points The optimal mix of output may not be produced by an economy because of the existence of Inequity. Internalities. → Public goods. Production possibilities. Public goods are a type of market failure that may prevent the market from achieving the optimal mix of output. Multiple Choice 28. Difficulty: 2 Medium Learning Objective: 0401 The nature and causes of market failure. award: 10.00 points Government intervention may be appropriate to correct market outcomes because of → Externalities. Private goods. Production possibilities. None of the choices are correct. Externalities cause market failure, which establishes a basis for government intervention. Multiple Choice Difficulty: 2 Medium Learning Objective: 0401 The nature and causes of market failure. 29. award: 10.00 points Which of the following explains why flood control is a public good? There are external benefits associated with its consumption. The private sector usually produces flood control projects. → It is not divisible and therefore cannot be kept from people who do not pay. Flood control is paid for by taxpayers. A public good is a good or service whose consumption by one person does not exclude consumption by others. One person cannot prevent others from benefiting from flood control. Multiple Choice 30. Difficulty: 2 Medium Learning Objective: 0401 The nature and causes of market failure. award: 10.00 points Governments usually build highways because it is difficult to exclude individuals who don't pay for the highways from using them. What type of market failure is involved? Inequity. → Public goods. Externalities. Market power. A public good is a good or service whose consumption by one person does not exclude consumption by others. Multiple Choice 31. Difficulty: 2 Medium Learning Objective: 0401 The nature and causes of market failure. award: 10.00 points Which of the following is a merit good? Cigarettes. → Food. Local telephone service. A computer operating system. A merit good is a good or service that society deems everyone is entitled to some minimal quantity of, such as food. Multiple Choice Difficulty: 2 Medium Learning Objective: 0401 The nature and causes of market failure. 32. award: 10.00 points When there is a decrease in the unemployment rate, → The economy moves closer to the production possibilities curve. The production possibilities curve shifts outward. The production possibilities curve shifts inward. There is a movement along the production possibilities curve. An output level on the production possibilities curve is consistent with full employment. Multiple Choice 33. Difficulty: 2 Medium Learning Objective: 0401 The nature and causes of market failure. award: 10.00 points Which of the following is possible when the market fails? → The mix of goods and services is on the production possibilities curve. It is impossible for government intervention to improve the mix of goods and services. The mix of goods and services is at the correct point on the production possibilities curve. The mix of goods and services is the optimal mix. Market failure implies that market forces have not led us to the best point on the production possibilities curve. Multiple Choice 34. Difficulty: 2 Medium Learning Objective: 0401 The nature and causes of market failure. award: 10.00 points The market will overproduce goods that have external costs because → Producers experience lower costs than society. Producers experience higher costs than society. The government is not able to produce these goods. Producers cannot keep these goods from consumers who do not pay, so they have to produce greater amounts. If a product yields external costs, the social demand is less than the market demand. Multiple Choice Difficulty: 2 Medium Learning Objective: 0401 The nature and causes of market failure. 35. award: 10.00 points If Good X has social demand that is less than market demand, then Good X must be a Public good. → Good with an external cost. Good with an external benefit. Good suffering from the freerider problem. The market responds to consumer demands, not externalities. External costs imply that the social demand is less than (below) market demand. Multiple Choice 36. Difficulty: 2 Medium Learning Objective: 0401 The nature and causes of market failure. award: 10.00 points Which of the following would be included in U.S. GNP but not in U.S. GDP? The tips received by a waiter in New Jersey. Auto parts produced by a Japaneseowned firm operating in North Carolina. Sales of used cars in the United States. → Chipsets produced by U.S.owned firms operating in China. To count in U.S. GDP, something must be produced within the borders of the United States. Multiple Choice 37. Difficulty: 2 Medium Learning Objective: 0501 What GDP measuresand what it doesn t. award: 10.00 points The increase in the market value of a good at a particular stage of production is known as Profit. → Value added. Cost based accounting. The input price. The value added is equal to the sales price minus the cost of intermediate goods. Multiple Choice Difficulty: 2 Medium Learning Objective: 0501 What GDP measuresand what it doesn t. 38. award: 10.00 points Which of the following would not be included in the calculation of GDP? Income earned by an attorney. Income earned by a CPA. Contract work performed by an electrician. → Tips earned by a bartender who does not report them to the IRS. Any income that is not reported from legal or illegal sources does not officially count in GDP. Multiple Choice 39. Difficulty: 2 Medium Learning Objective: 0501 What GDP measuresand what it doesn t. award: 10.00 points If the price level is 100 for 2005 and the price level is 106.5 in 2007, a nominal GDP in 2007 of $15,600 billion would mean that real GDP in 2007 (in 2005 prices) would be closest to → $14,647.9 billion. $15,600.0 billion. $14,751.3 billion. $13,971.2 billion. Real GDP takes into account changes in the price level so that we are looking only at changes in actual production. Real GDP is equal to nominal GDP divided by the price index and multiplied by 100: ($15,600/106.5) × 100. Multiple Choice 40. Difficulty: 2 Medium Learning Objective: 0502 The difference between real and nominal GDP. award: 10.00 points Which of the following is investment, according to an economist? The purchase of U.S. savings bonds. A collection of rare coins. → An increase in business inventories. The purchase of a new family car. Purchases of consumer durables and the allocation of one's personal wealth are not considered investment, according to an economist. Multiple Choice Difficulty: 2 Medium Learning Objective: 0504 The major submeasures of output and income. 41. award: 10.00 points The base year for the calculation of real GDP for the hypothetical economy in Figure 5.2 is closest to 1960. → 1980. 1990. 2000. In the base year, nominal GDP equals real GDP since both are expressed using the sameyear dollars. Multiple Choice Difficulty: 2 Medium Learning Objective: 0502 The difference between real and nominal GDP. 42. award: 10.00 points (Assume the figures above represent the workingage population). What was the unemployment rate in Nationland in 1999? rev: 08_09_2012 7.6 percent. → 7.1 percent. 5.0 percent. 65.0 percent. The unemployment rate is simply the number of people who are unemployed divided by the labor force: 5/(65 + 5). Multiple Choice 43. Difficulty: 2 Medium Learning Objective: 0601 How unemployment is measured. award: 10.00 points When the labor force participation rate is declining, the Unemployment rate is rising faster than the total population rate. Percentage of the workingage population that is outside the labor force is declining. → Percentage of the workingage population that is willing and able to work is declining. Percentage of the total population that is employed is rising. A lower labor force participation rate means a smaller fraction of the population is employed or unemployed. Multiple Choice Difficulty: 2 Medium Learning Objective: 0601 How unemployment is measured. 44. award: 10.00 points In the early weeks of a recession, what type of unemployment gets larger? Frictional. Structural. → Cyclical. Seasonal. As demand falls off, the economy enters the downward portion of the business cycle that is characterized by cyclical unemployment. Multiple Choice 45. Difficulty: 2 Medium Learning Objective: 0603 The major types of unemployment. award: 10.00 points In terms of the musical chairs analogy in the text, which of the following is a description of structural unemployment? There are too few chairs. There are too many chairs. → There are enough chairs, but some are not the right size. There are enough chairs, but it takes time to find one. Structural unemployment does not go away; many times the worker will need to be retrained for a new job. Multiple Choice 46. Difficulty: 2 Medium Learning Objective: 0603 The major types of unemployment. award: 10.00 points Suppose there are 6 million unemployed workers actively seeking a job. After a period of time, 1,500,000 of these workers become discouraged and no longer look for employment. If everything else remains constant, the unemployment rate will → Decrease. Increase. Remain unchanged until the unemployed find a job. Increase initially but decrease when the phantom unemployed receive unemployment benefits. The official unemployment rate can mask actual unemployment. Multiple Choice Difficulty: 2 Medium Learning Objective: 0601 How unemployment is measured. 47. award: 10.00 points When unemployed people stop looking for jobs, the Unemployment rate increases and the labor force increases. → Unemployment rate decreases and the labor force decreases. Unemployment rate increases and the labor force decreases. Unemployment rate decreases and the labor force increases. When people stop looking for work, the "looking for work" portions of both the numerator and denominator get smaller. Example: 4/(4 + 6) = 40%; 3/(3 + 6) = 33.3%. Multiple Choice 48. Difficulty: 2 Medium Learning Objective: 0601 How unemployment is measured. award: 10.00 points If more teenagers stay in school longer rather than dropping out and entering the labor force, The production possibilities curve shifts outward. → The production possibilities curve shifts inward. The production possibilities curve remains unchanged. The unemployment rate goes up. Reducing resources such as labor due to more schooling will decrease the production possibilities curve. Multiple Choice 49. Difficulty: 2 Medium Learning Objective: 0601 How unemployment is measured. award: 10.00 points After a fruitless twoyear search for a job, a former executive gives up and decides to live off the land in the Rocky Mountains. This former executive is considered → A discouraged worker. Structurally unemployed. One of the phantom unemployed. Underemployed. Discouraged workers are not actively seeking employment. Multiple Choice Difficulty: 2 Medium Learning Objective: 0601 How unemployment is measured. 50. award: 10.00 points All of the following are true about outsourcing of jobs except that it Occurs because labor is cheaper in other countries. Increases specialization. Reduces costs and increases profits for companies. → Ultimately leaves the United States worse off. The United States benefits through outsourcing by paying lower prices for foreign factors of production, and job losses are minimal as a fraction of the overall labor force. Multiple Choice 51. Difficulty: 2 Medium Learning Objective: 0603 The major types of unemployment. award: 10.00 points Ceteris paribus, if structural unemployment increases, the economy is Outside the production possibilities curve. Inside the production possibilities curve. On the fixed production possibilities curve. → On the production possibilities curve that shifts inward. At the natural rate of unemployment (frictional + structural), the economy is on the production possibilities curve. If any part of the natural rate of unemployment increases, the production possibilities curve shifts inward. Multiple Choice Difficulty: 2 Medium Learning Objective: 0604 The meaning of full employment. 52. award: 10.00 points During the time period represented in Figure 7.1, Country A Experienced periods of both inflation and deflation. Never achieved the inflation goal set by the Full Employment and Balanced Growth Act of 1978. → Had no need for COLAs. Experienced only inflation. Since the CPI remained constant, the cost of living also remained constant; therefore there was no need for COLAs. Multiple Choice Difficulty: 2 Medium Learning Objective: 0701 How inflation is measured. 53. award: 10.00 points If you were interested in charting prices of resources used by producers of energy, which of the following would you use? → The Producer Price Index (PPI). The Consumer Price Index (CPI). The GDP deflator. The Cost of Living Adjustment (COLA). Firms are better served by tracking the price level with the PPI, which looks more at things they are paying for. Multiple Choice Difficulty: 2 Medium Learning Objective: 0701 How inflation is measured. 54. award: 10.00 points According to Figure 7.1 in Country A, → Relative prices may have been changing, but average prices were constant. Relative prices were definitely constant. Average prices and relative prices were definitely changing. Average prices were constant, and unemployment was increasing. As the textbook will later explain in great detail, many forces in both the private sector and public sector affect the price level. In this case, the forces were balanced, and the price level was stable. Multiple Choice Difficulty: 2 Medium Learning Objective: 0701 How inflation is measured. 55. award: 10.00 points Based on Table 7.1, the rate of inflation between 2003 and 2004, using the GDP deflator, was 2.4 percent. → 2.9 percent. 6.2 percent. 4.1 percent. The inflation rate is equal to the difference in the price index divided by the GDP deflator in 2003. Multiple Choice 56. Difficulty: 2 Medium Learning Objective: 0701 How inflation is measured. award: 10.00 points All of the following statements about inflation in the United States are correct except Since the Great Depression, average prices have risen almost every year. The inflation rate was 13.5 percent in 1980. Prior to World War II, the United States experienced periods of both deflation and inflation. → Inflation was at its worst during the Great Depression. During the Great Depression, deflation was actually a significant concern. Multiple Choice Difficulty: 2 Medium Learning Objective: 0704 The broad causes of inflation. 57. award: 10.00 points The Producer Price Index (PPI) is the best index to measure average price changes faced by Consumers. → Producers. Importers. Labor unions negotiating COLAs. The PPI measures changes to the prices of things purchased by businesses. Multiple Choice 58. Difficulty: 2 Medium Learning Objective: 0701 How inflation is measured. award: 10.00 points According to the text, which group of assets increased the most in percentage terms from 1991 to 2001? Housing. Gold. → Stocks. Bonds. Inflation does not affect everyone equally; the way wealth is held has a big effect on whether one wins or loses from inflation. Multiple Choice 59. Difficulty: 2 Medium Learning Objective: 0702 Why inflation is a socioeconomic problem. award: 10.00 points A friend tells you that his income has risen every year by 5 percent. At the same time, prices, on average, have risen by 5 percent. Your friend claims he is better off. Your friend → Is experiencing money illusion. Really is better off as he suggests. Has experienced an increase in nominal and real income. Has experienced an increase in real income only. Since your friend is using only nominal income to determine if he's better off and his real income is remaining constant, he is experiencing money illusion. Multiple Choice Difficulty: 2 Medium Learning Objective: 0702 Why inflation is a socioeconomic problem. 60. award: 10.00 points All of the following are true of the real interest rate except it Is equal to the nominal interest rate minus the anticipated rate of inflation. Is stabilized by ARMs. Is the inflationadjusted rate of interest. → Equals the foreign exchange rate minus the inflation rate. The real interest rate equals the nominal interest rate minus the rate of inflation. Multiple Choice 61. Difficulty: 2 Medium Learning Objective: 0704 The broad causes of inflation. award: 10.00 points Which of the following is not true for the GDP deflator? → It is based on a fixed basket of goods and services. It refers to all goods and services produced in GDP. It typically reveals a lower inflation rate than the CPI. It reflects both price changes and market responses. The GDP deflator changes as the production of goods and services changes; in this respect it is very up to date. Multiple Choice 62. Difficulty: 2 Medium Learning Objective: 0701 How inflation is measured. award: 10.00 points The aggregate demand curve is downwardsloping because, other things being equal, People buy fewer goods and services at lower average incomes. → People buy more goods and services at lower average prices. A higher average price level will induce producers to offer more output than otherwise. People buy more goods and services at higher average prices. As the price level falls, buyers are willing and able to purchase more goods and services. Multiple Choice Difficulty: 2 Medium Learning Objective: 0803 The nature of aggregate demand (AD) and aggregate supply (AS). 63. award: 10.00 points Using Figure 8.1, a decrease in the quantity of aggregate demand resulting from the interest rate effect would be depicted as a movement from point B to point A. A to point C. B to point C. → C to point A. When the interest rate rises because prices have risen, some spending is reduced since borrowing costs are higher. This is known as the interest rate effect, which explains why the aggregate demand is downward sloping. Multiple Choice Difficulty: 2 Medium Learning Objective: 0804 How changes in AD and AS affect macro outcomes. 64. award: 10.00 points In Figure 8.1, an increase in government spending, ceteris paribus, is best represented as a movement from point → A to point B. C to point A. B to point C. A to point C. An increase in government spending actually increases aggregate demand, thereby causing the curve to shift to the right. Multiple Choice Difficulty: 2 Medium Learning Objective: 0804 How changes in AD and AS affect macro outcomes. 65. award: 10.00 points Controversies between Keynesian, monetarist, and supplyside theories focus on the → Shape and sensitivity of aggregate demand and aggregate supply curves. Existence or nonexistence of the aggregate supply curve. Importance of international balances to the economy. Usefulness of aggregate demand and supply to analyze adjustment of the macro equilibrium. Any desired equilibrium can be attained, but how it happens depends on the shape of the aggregate demand and aggregate supply curves and what causes them to shift; that is where the controversy comes in. Multiple Choice 66. Difficulty: 2 Medium Learning Objective: 0802 Why the debate over macro stability is important. award: 10.00 points If wages and prices are flexible, then a recession is best eliminated when prices And wages both rise. → And wages both fall. Rise and wages drop. Drop and wages rise. After the price and wage adjustment, quantity demanded increases and production increases again, and the economy returns to its potential. Multiple Choice 67. Difficulty: 2 Medium Learning Objective: 0801 The major macro outcomes and their determinants. award: 10.00 points The determinants of macro outcomes include all of the following except Internal market forces. External shocks. → Prices. Policy levers. Macro outcomes such as output, jobs, prices, growth, and international balances are determined by internal market forces, external shocks, and policy levers. Multiple Choice Difficulty: 2 Medium Learning Objective: 0801 The major macro outcomes and their determinants. 68. award: 10.00 points A vertical aggregate supply curve Implies that supplyside policies will have no effect on the macro equilibrium. → Implies that aggregate demand shifts have no impact on output. Is likely in the short run. Reflects the inflexibility of prices and wages. If aggregate demand shifts along a vertical aggregate supply curve, the price level may rise or fall, but the level of output will remain constant. Multiple Choice 69. Difficulty: 2 Medium Learning Objective: 0804 How changes in AD and AS affect macro outcomes. award: 10.00 points In which of the following situations is the percentage change in real GDP always positive? Depression. Inflation. Recession. → Growth recession. A growth recession means very little growth, but some positive growth nonetheless. Multiple Choice 70. Difficulty: 2 Medium Learning Objective: 0801 The major macro outcomes and their determinants. award: 10.00 points If aggregate demand decreases and aggregate supply decreases, the level of real output will Decrease, and the price level will definitely decrease. Decrease, and the price level will definitely increase. Either increase or decrease, but the price level will stay the same. → Decrease, but the price level is indeterminate. Since both the aggregate demand and aggregate supply curves shift to the left, the output, which is on the horizontal axis, must be lower; but the price level could rise, fall, or stay the same depending on the relative changes in aggregate demand and aggregate supply. Multiple Choice Difficulty: 2 Medium Learning Objective: 0804 How changes in AD and AS affect macro outcomes. 71. award: 10.00 points Which combination of shifts of aggregate demand and supply would definitely cause an increase in real GDP? Demand shifts to the left and supply shifts to the right. Demand shifts to the left and supply shifts to the left. → Demand shifts to the right and supply shifts to the right. Demand shifts to the right and supply shifts to the left. When both curves shift to the right, output must rise because output is the variable on the horizontal axis. Multiple Choice Difficulty: 2 Medium Learning Objective: 0804 How changes in AD and AS affect macro outcomes. 72. award: 10.00 points In Figure 9.6, if full employment occurs at QA, then aggregate demand is Just right, causing no cyclical unemployment. → Too great, causing an inflationary gap. Too small, causing an inflationary gap. Too great, causing a recessionary gap. Since macro equilibrium falls to the right of the fullemployment level of output, there will be an inflationary gap. Multiple Choice Difficulty: 2 Medium Learning Objective: 0905 How and when macro failure occurs. 73. award: 10.00 points Which of the following will cause a decrease in U.S. gross exports? An increase in foreign consumer income. → A decrease in foreign business purchases of U.S. output. An increase in foreign wealth. None of the choices are correct. If foreign investment in U.S. capital goods falls, the demand for U.S. capital goods will decline. Multiple Choice 74. Difficulty: 2 Medium Learning Objective: 0901 What the major components of aggregate demand are. award: 10.00 points Which of the following will cause the aggregate demand curve to shift to the left? → A decrease in consumer and business confidence because of a terrorist attack. A decrease in the interest rate. A decrease in business taxes. An improvement in technology. Anything that causes one or more categories of GDP (consumption, investment, government expenditure, and net exports) to decrease will lead to a decrease in the AD curve. Multiple Choice 75. Difficulty: 2 Medium Learning Objective: 0903 The determinants of investment spending. award: 10.00 points According to Keynesian theory, which of the following is not true at each shortterm macro equilibrium? The economy may or may not be at full employment. The aggregate demand curve intersects the aggregate supply curve. → All macroeconomic goals are achieved. Producers are selling everything they currently produce. Some macroeconomics goals may not be achieved since the equilibrium could be below or above the full employment level of output. Multiple Choice Difficulty: 2 Medium Learning Objective: 0901 What the major components of aggregate demand are. 76. award: 10.00 points In Figure 9.6, if full employment occurs at QB, then aggregate demand is Too great, causing cyclical unemployment. Too great, causing demandpull inflation. Too small, causing cyclical unemployment. → Just right, causing no cyclical unemployment. At QB macro equilibrium corresponds to the fullemployment level of output. Multiple Choice Difficulty: 2 Medium Learning Objective: 0905 How and when macro failure occurs. 77. award: 10.00 points Given that autonomous consumption equals $1,000, disposable income equals $20,000, and the MPC equals 0.80, the level of Saving equals $4,000. Saving equals $19,000. → Consumption equals $17,000. Consumption equals $16,000. This corresponds to $16,000 of spending out of the $20,000 in income, plus the $1,000 in autonomous consumption. Multiple Choice 78. Difficulty: 2 Medium Learning Objective: 0902 What the consumption function tells us. award: 10.00 points Which of the following is not considered to be a private depository institution? → The Federal Reserve. Mutual savings banks. Savings and loan associations. Commercial banks. The Federal Reserve is the central bank and does not hold deposits for the general public. Multiple Choice 79. Difficulty: 2 Medium Learning Objective: 1302 How banks create money. award: 10.00 points Suppose a bank has $200,000 in deposits, a required reserve ratio of 10 percent, and bank reserves of $45,000. Then this bank can make new loans in the amount of $2,500. $10,000. $20,000. → $25,000. The bank is required to hold $20,000. So its excess reserves of $25,000 can be converted into new loans. Multiple Choice Difficulty: 2 Medium Learning Objective: 1302 How banks create money. 80. award: 10.00 points Students Bank and Trust has zero excess reserves. Ceteris paribus, if the required reserve ratio decreases. Required reserves will increase. Bank assets will decrease. → The bank will be able to make additional loans. The money multiplier will decrease. A decrease in the required reserve ratio will instantly create excess reserves, thereby allowing for more loans. Multiple Choice 81. Difficulty: 2 Medium Learning Objective: 1302 How banks create money. award: 10.00 points If people never withdraw cash from banks and there are no required reserves, how much money can the banking system potentially create for a given amount of new deposits? None. The same amount as the new deposits. The amount of new deposits multiplied by the reserve ratio. → An infinite amount of money. An infinite amount of money can be created because all deposits may lent out over and over again as new loans become new deposits and so forth. Basically, with a reserve ratio of zero, the money multiplier is (1 ÷ required reserve ratio) or infinity. Multiple Choice 82. Difficulty: 2 Medium Learning Objective: 1303 How the money multiplier works. award: 10.00 points Which of the following explains why banks try to keep their holdings of excess reserves low? → To maximize profits. To keep the money multiplier low. To escape Fed penalties. To please bank examiners. By holding reserves, banks forgo the opportunity to earn profit from loans. Multiple Choice Difficulty: 2 Medium Learning Objective: 1302 How banks create money. 83. award: 10.00 points Suppose a bank has $1 million in deposits, a required reserve ratio of 25 percent, and total reserves of $600,000. Then it has excess reserves of $250,000. $600,000. → $350,000. $1,000,000. The bank is required to hold $250,000. So the extra $350,000 counts as excess reserves. Multiple Choice 84. Difficulty: 2 Medium Learning Objective: 1302 How banks create money. award: 10.00 points The different components of the money supply reflect → Variations in liquidity and accessibility of assets. Whether deposits are domestic or international. How often depositors use their accounts. Whether the deposits are earned or inherited. The most basic forms of money are the most liquid, with additional forms being less liquid. Multiple Choice 85. Difficulty: 2 Medium Learning Objective: 1301 What money is. award: 10.00 points Shoffner buys a bond in the amount of $1,000 with a promised interest rate of 18 percent. If the market interest rate decreases to 3 percent, Shoffner can sell his bond for up to $5,000. → $6,000. $3,000. $2,000. The market interest rate will be the yield or return that the purchaser of the bond can expect to earn. Using the yield formula and solving for the current price, one can determine the highest price an investor would be willing to pay for this existing bond. Since the buyer will earn a 3 percent return or yield and the annual interest payment will be $180, the bond will sell for up to $6,000 ($180/0.03). There is also a simpler way to do this. Interest rates and bond prices have an inversely related correlation factor of 1. To get the new principal, divide the old interest rate by the new interest rate and multiply the quotient by the old principal. In this case, (18/3 × $1,000 = $6,000). Multiple Choice Difficulty: 2 Medium Learning Objective: 1403 How open market operations work. 86. award: 10.00 points Which of the following is not true for members of the Federal Reserve Board of Governors? They are appointed to 14year terms by the president of the United States. They are relatively immune to shortterm political pressures. They may not be reappointed after serving a full term. → They usually serve two or three terms. Members of the Board of Governors are restricted to just one 14year term. Multiple Choice 87. Difficulty: 2 Medium Learning Objective: 1401 How the Federal Reserve is organized. award: 10.00 points When the Fed raises the discount rate, all of the following result except The cost of borrowing reserves for member banks increases. It sends a signal that it is moving toward a slower growth rate for the money supply. It sends a signal that it is reluctant to lend reserves. → It expands the lending capacity of the banking system. A higher discount rate discourages borrowing from the Fed, thereby slowing the growth in the money supply. Multiple Choice 88. Difficulty: 2 Medium Learning Objective: 1402 The Fed s major policy tools. award: 10.00 points Members of the Federal Reserve Board of Governors are appointed for one 14year term so that they Have time to learn how the Fed operates. Are more likely to make politically acceptable decisions. → Make their decisions based on economic, rather than political, considerations. Have enough time to travel to all 12 regional banks. An independent Fed requires insulation from the political process so that what is best for the economy is pursued, rather than what is good for an election year. Multiple Choice Difficulty: 2 Medium Learning Objective: 1401 How the Federal Reserve is organized. 89. award: 10.00 points Which of the following represents the lending capacity of an individual (nonmonopoly) bank? Required reserve ratio × total deposits. → Total reserves required reserves. (Total reserves required reserves) × multiplier. 1 ÷ (required reserve ratio). An individual bank can lend all its reserves except for a minimum percentage of its deposits that the bank is required to maintain as established by the Fed. Multiple Choice 90. Difficulty: 2 Medium Learning Objective: 1402 The Fed s major policy tools. award: 10.00 points Which of the following services is performed by the regional Federal Reserve banks? Holding deposits for individuals. Providing loans to individuals. → Providing currency to private banks. Check cashing for large nonbank corporations. Whenever a bank runs low on physical currency, the Fed can ship more to it, drawing it from the balance the bank has on deposit with the Fed. Multiple Choice 91. Difficulty: 2 Medium Learning Objective: 1401 How the Federal Reserve is organized. award: 10.00 points If the Fed wishes to reduce the money supply, it can do all of the following except Raise the discount rate. Raise the minimum reserve ratio. Sell securities on the open market. → Buy shares of common stock in a large bank. The traditional tools of the Fed include changing the discount rate, the reserve requirement, and open market operations, with the last being the most popular. Multiple Choice Difficulty: 2 Medium Learning Objective: 1403 How open market operations work. 92. award: 10.00 points Changing the reserve requirement is → A powerful tool that can cause abrupt changes in the money supply. The most oftenused tool on the part of the Fed. A tool that has little impact on the money supply. Effective in changing excess reserves but not the money supply. Changing the required reserve ratio changes the excess reserves immediately and can result in banks quickly trying to achieve the new required level of reserves, which will impact the overall economy. Multiple Choice 93. Difficulty: 2 Medium Learning Objective: 1402 The Fed s major policy tools. award: 10.00 points The success of Fed intervention depends on how well Congress performs when manipulating the money supply. Individuals respond to the Fed's direct requests of the public. The Treasury follows the Fed's directions for releasing money. → Changes in longterm interest rates closely follow changes in shortterm interest rates. Monetary policy will be less effective if the longterm rates diverge too far from shortterm rates. Multiple Choice 94. Difficulty: 2 Medium Learning Objective: 1502 How monetary policy affects macro outcomes. award: 10.00 points According to Bernanke's policy guide, a half percentage point increase in longterm interest rates will Increase AD by $50 billion. → Decrease AD by $100 billion. Increase AS by $50 billion. Decrease AS by $100 billion. The rule used at present by the Fed suggests that we get a $50 billion boost from lowering the longterm rates by 1/4 of a point. Therefore, if interest rates rise by 1/2 of a percentage point, aggregate demand decreases by $100 billion. Multiple Choice Difficulty: 2 Medium Learning Objective: 1502 How monetary policy affects macro outcomes. 95. award: 10.00 points In Figure 15.2, the equilibrium rate of interest Is 3 percent. → Is 6 percent. Is 9 percent. Cannot be determined from this figure. The equilibrium interest rate corresponds to the interest rate that prevails when the money supply and money demand curves intersect. Multiple Choice Difficulty: 2 Medium Learning Objective: 1501 How interest rates are set in the money market. 96. award: 10.00 points The Fed could sell bonds in the open market in an effort to keep interest rates constant when The discount rate increases. Money demand increases. The reserve requirement increases. → Money demand decreases. The Fed would try to equally match the drop in money demand with a drop in money supply, thereby stabilizing interest rates. Multiple Choice 97. Difficulty: 2 Medium Learning Objective: 1501 How interest rates are set in the money market. award: 10.00 points The money supply curve is determined by all of the following except Federal Reserve policy. The lending behavior of private banks. The willingness of individuals to borrow money. → The demand for money. The money supply curve is determined by the Fed and is magnified by the money multiplier throughout the banking system. Multiple Choice 98. Difficulty: 2 Medium Learning Objective: 1501 How interest rates are set in the money market. award: 10.00 points According to extreme monetarists, monetary policy affects The velocity of money and level of employment. Real output, investment, and the money supply. → Aggregate demand, prices, and nominal interest rates only. Aggregate demand, real output, and real interest rates, with possible effects on prices and nominal interest rates. Monetary policy affects aggregate demand, prices, and nominal interest rates because V and Q are stable. Multiple Choice Difficulty: 2 Medium Learning Objective: 1504 The differences between Keynesian and monetarist monetary theories. 99. award: 10.00 points The speculative, transactions, and precautionary demands for money added together give the → Market demand curve for money. Monetarist demandformoney curve. Keynesian liquidity trap. Market supply curve for money. Individuals hold money for everyday transactions and unexpected emergencies, and in case they need it to invest in different assets. Multiple Choice Difficulty: 2 Medium Learning Objective: 1501 How interest rates are set in the money market. award: 100. 10.00 points The effectiveness of monetary policy is influenced by → The time it takes for lower interest rates to make investment spending more profitable. The willingness of Congress to implement it. How responsive the money supply is to changes in taxes. Reports by the Congressional Budget Office. Since there is a time lag between implementation of policy and the results, the economy may have changed significantly, causing the policy to be destabilizing. Multiple Choice Difficulty: 2 Medium Learning Objective: 1502 How monetary policy affects macro outcomes.