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Updated: Sept 19, 2015
Macroeconomics
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1 Employ the economic way of thinking to make the
choices involved in a world of scarcity
Short Title: Introduction to Economics and Scarcity
1 Define what economics is and why it is important
Short Title: Introduction to Economics
Select the statements that best help define economics.
1. Social science that examines how people choose among alternatives.*
1. Scarcity, choice, and opportunity cost are important factors.*
1. It is a science because it involves people.
1. an alternative science that examines how people choose among the alternatives available to them.
The definition of economics is:
1. a social science that examines how people choose among the alternatives available to them.*
1. a physical science that examines how people choose among the alternatives available to them.
1. an alternative science that examines how people choose among the alternatives available to them.
Selection among alternatives involves which three ideas central to economics?
1. scarcity, choice, and opportunity cost*
1. scarcity, resources, and opportunity cost
1. abundance, choice, and resources
1. resources, costs, choice
1. opportunity cost, resources, choice
1a Define scarcity
Short Title: Scarcity
The economic term “scarcity” is best defined as which of the following?
1. Human wants exceed the available supply.*
1. Inadequate factors of production.
Updated: Sept 19, 2015
1. Low productivity of the workforce
1. The land will not produce enough food for consumption.
7. Why is there scarcity?
A. Because the opportunity set determines this.
B. Because theory dictates it.
C. Because our unlimited wants exceed our limited resources*
D. Because human wants are limited.
9. Scarcity implies that:
A. consumers would be willing to purchase the same quantity of a good at a higher price.
B. it is impossible to completely fulfill the unlimited human desire for goods and services with the limited
resources available.*
C. at the current market price, consumers are willing to purchase more of a good than suppliers are willing
to produce.
D. consumers are too poor to afford the goods and services available.
The economic term “scarcity” is best defined as which of the following?
the land will not produce enough food for consumption
inadequate factors of production
Poor productivity of the labor force
limited resources *
2 Recognize the concept of opportunity cost, and differentiate it from
monetary cost
Short Title: Opportunity Cost
One of the most important concepts in all of economics is Opportunity Cost. Identify the statements that
help define this concept.
1. Opportunity cost is the value of the best alternative forgone in making a choice.*
1. Opportunity cost is the price of something. It is the same thing as purchase price.
1. Opportunity cost is the consumer’s perception of value for something. It is the amount you believe
something is worth and are willing to pay.
The real economic cost of a good or service produced when measured by the value of the sacrificed
alternative is the what?
1. opportunity cost*
1. real cost
1. money cost
1. sunk cost
The opportunity cost of any choice is
1. the value of the best alternative that had to be forgone in making that choice*
1. the cost of another item that you could have purchased
1. a measure of how scarce an item is
1. the sum of all the alternatives forgone in making a particular decision
Every choice always has ________
1. an opportunity cost*
1. an estimated value
1. negative consequences
Updated: Sept 19, 2015
2.a Calculate the opportunity costs of an action
Short Title: Calculating Opportunity Cost
Gomer decides to spend an hour playing basketball rather than studying. His opportunity cost is:
A. nothing, because he enjoys playing basketball more than studying.
B. the increase in skill he obtains from playing basketball for that hour.
C. the benefit to his grades from studying for an hour*
D. nothing, because he had a free pass into the sports complex to play basketball.
11. “If I didn’t have class tonight, I would save the $4 campus parking fee and spend four hours at work
where I earn $10 per hour.” The opportunity cost of attending class this evening is:
A. $0
B. $4
C. $40
D. $44*
A student has only a few hours to prepare for two different exams this afternoon. The table below shows
alternative possible exam scores with three alternative uses of the student’s time. The opportunity cost of
scoring a 94 on the economics exam rather than a 77 is:
Possibility A
Economics
History
I
94
76
II
87
84
III
77
91
A. 8 points on the history exam.
B. 15 points on the history exam.*
C. 14 points on the history exam.
D. 17 points on the history exam.
A student has only a few hours to prepare for two different exams tomorrow morning. The above table
shows alternative possible exam outcomes with three alternative uses of the student’s time. The opportunity
cost of scoring an 84 on the history exam rather than 76 is:
Possibility A
Economics
History
I
94
76
II
87
84
III
77
91
A. 10 points on the economics exam
B. 8 points on the history exam
C. 7 points on the economics exam*
D. 12 points on the economics exam
Updated: Sept 19, 2015
2b Represent basic economic models using graphing tools
Short Title: Graphs in Economics
The change in the vertical axis divided by the change in the horizontal axis is known as the
1. slope*
1. y-intercept
1. run
1. ratio
A ________ is something whose value can change.
1. variable*
1. constant
1. hypothesis
1. slippery slope
1. shift
A slope on a standard graph between two variables always measures ________.
1. the relationship between the two variables*
1. scientific cause and effect
1. a constant correlation between the variables
1. the differences between two variables
3 Define society’s tradeoffs through the use of the production possibilities
frontier (or curve)
Short Title: The Production Possibilities Frontier
The maximum combinations of two outputs that could be produced with available resources is represented
on a graph by which of the following?
1. production possibility frontier*
1. maximization of resources
1. opportunity cost
1. Gross Domestic Product
1. Production efficiency curve
A Production Possibility Curve demonstrates the ________.
1. efficiency of production, the law of diminishing returns and the existence of scarcity*
1. existence of scarcity only
1. the production possibilities based on environmental restraints
1. efficiency of labor, investment in capital, and the reduction of scarcity.
1. the production possibility based upon labor and capital constraints.
1. The production possibilities between two countries.
When one country is able to produce the same good as another country but at a lower opportunity cost, the
first country is said to have ________ in that good.
1. a comparative advantage*
1. a technological superiority
1. an absolute advantage
1. comparative monopoly
A Production Possibility Curve shows a society’s greatest ________.
1. potential for producing two different goods*
Updated: Sept 19, 2015
1. level of employment
1. most efficient use of the factors of production
1. possible level of production without technological restraints
An economy will have a comparative advantage if its ________.
1. opportunity cost is lower than that of another country*
1. production is higher in the economy
1. costs are the least expensive
1. technology is efficient
1. The production possibilities curve represents
A. the maximum combination of future products which can be produced with maximum growth in
resources
B. the maximum combination of products which can be produced with fixed technology and resources*
C. the maximum combination of products which can be produced if prices decline
3a Construct a production possibilities frontier given a dataset of
production alternatives
Short Title: Constructing a Production Possibilities Frontier
The production possibilities schedule below shows the hypothetical relationship between the production of
industrial robots and food. Refer to the table below. The marginal opportunity cost of the 2nd unit of
industrial robots is:
Products
A
B
C
D
E
Industrial Robots
0
1
2
3
4
Food
100
90
70
40
0
A. 20 units of food*
B. 70 units of food
C. 35 units of food
The production possibilities schedule below shows the hypothetical relationship between the production of
industrial robots and food. In moving from production alternative D to C,
Products
A
B
C
D
E
Industrial Robots
0
1
2
3
4
Food
100
90
70
40
0
A. 2 units of industrial robots are given up to get 70 units of food
B. 1 unit of industrial robots are given up to get 30 units of food*
C. 30 units of food are given up to get 1 unit of industrial robots
Updated: Sept 19, 2015
The production possibilities schedule below shows the hypothetical relationship between the production of
industrial robots and food. If an economy produces 2 units of industrial robots and 60 units of food, the
economy is experiencing
Products
A
B
C
D
E
Industrial Robots
0
1
2
3
4
Food
100
90
70
40
0
A. an increase in the opportunity cost of food
B. a reduction in the amount of capital stock
C. unemployment of one or more of its resources*
3b Explain verbally and demonstrate graphically why opportunity costs
increase (The Law of Increasing Opportunity Cost)
Short Title: Law of Increasing Opportunity Cost
Identify the explanation that best describe the Law of Increasing Opportunity Cost.
1. As an economy moves along its production possibilities curve in the direction of producing more of a
particular good, the opportunity cost of additional units of that good will increase.*
1. Assume you have a company that makes cups and then starts to make plates also. At first the opportunity
cost of plates will be relatively low, but as the company makes more plates the opportunity cost per plate
will increase.*
1. Opportunity cost increases as a result of inflation. As inflation rises, the opportunity cost rises
proportionally. For example, in a factory that produces just one type of product, opportunity cost rises in
step with direct costs.
Why do opportunity costs increase more as the production of a good increases?
1. It is because there is less and less efficiency in producing*
1. It is because of environmental restraints and limitations.
1. It is because the price of alternative goods rises.
The steeper the slope on the production possibilities curve, the ________.
1. greater the opportunity cost*
1. smaller the opportunity cost
1. cheaper the price
Opportunity cost is best defined as:
All of the possible alternatives given up.
The value of the next best alternative that is given up in making a choice.*
The amount of money spent in consuming something.
The amount of time and money spent in consuming something.
Suppose you make the decision to volunteer for an event in school for an hour this week. This means that
you would have to take an hour off from your summer job, for which you earn $10 per hour. You spend $3
in bus fare in order to get to school and $5 for lunch. If you went to work, you would have been able to
walk to your job, and lunch would have been provided to you by the office. The opportunity cost of
volunteering is:
$8
$2
Updated: Sept 19, 2015
$18*
$10
Which of the following best defines and values opportunity cost?
Opportunity cost is the value of the next best alternative that is given up in making a choice; it is the same
for each person.
Opportunity cost is the value of the next best alternative that is given up in making a choice; it can be
different for each person.*
Opportunity cost is the explicit dollar value of the next best alternative that is given up in making a choice;
it is the same for each person.
Opportunity cost is the explicit dollar value of the next best alternative that is given up in making a choice;
it can be different for each person.
Refer to the diagram below. The production possibilities curve is bowed outward from the origin because:
A. the labor force is increasing
B. of the law of diminishing marginal returns
C. opportunity costs are increasing*
If a production possibilities curve bows outward from the origin and is not a straight line
A. the two products do not have the same value to the economy
B. resources are not equally suited to producing alternative products*
C. more of one product cannot be produced without producing less of another
The Law of Increasing Opportunity Costs is demonstrated by
A. a production possibilities curve which is bowed out from the origin*
B. a rightward shift of the production possibilities curve
C. any inefficient point of production
Updated: Sept 19, 2015
3c Identify the consequences of underutilization of society’s resources
Short Title: Underutilization of Society’s Resources
Suppose an economy produces either bread or butter. Which of the following factors might cause the
economy to operate at a point inside its production possibilities curve?
1. The butter factory employs 40 people, when it could easily employ 45.*
1. The government designates 100 available land acres as parkland, which could have been used as
farmland for growing more wheat.*
1. The economy has achieved full employment.
1. There is a high unemployment*
An economy operating INSIDE its production possibilities curve:
1. implies the economy is operating inefficiently*
1. implies that the economy is operating at full capacity
1. explains that an economy is producing more than it can use
Specialization among many workers is preferred over each worker producing the entire good alone because
________.
1. it results in greater production and lower costs*
1. it results in more people employed
1. it results in greater job satisfaction
1. it results in empowered employees
A consultant works for $200 per hour. She likes to eat vegetables, but is not very good growing them. Why
does it make more economic sense for her to spend her time at the consulting job and shop for her
vegetables instead of growing them herself?
1. She maximizes her income by spending more time consulting, which allows her to consume more
vegetables than if she grew them herself.*
1. She maximizes her income by shopping for vegetables at cheaper prices than she could grow them
herself.
1. She maximizes her income by consulting part-time and growing some vegetables part-time, and shops
for the other vegetables.
Refer to the diagram below. A point on the production possibilities curve is
Updated: Sept 19, 2015
A. attainable and the economy is efficient*
B. attainable with increased capital investment
C. unattainable without an increase in technology
3d Identify the necessary conditions for expansion of society’s production
possibilities and the resulting consequences of that expansion
Short Title: Expansion of Society’s Production Possibilities
7. A rightward shift of the production possibilities curve represents
A. increasing opportunity costs
B. economic growth*
C. diminishing opportunity costs
8. Technological improvement results in a
A. increase in opportunity costs
B. shift outward of the production possibilities curve*
C. increase in the slope of a production possibilities curve
9. If an economy devotes more resources to capital goods and fewer resources to consumer goods, the
economy will
A. attain full employment but not full production
B. attain full production but not full employment
C. achieve greater economic growth*
4 Explain how economic models are used by economists
Updated: Sept 19, 2015
Short Title: Economic Models
Visual models are based on observations and economic reasoning.The relationship between energy
production and air purity have a (an) ________ rather than a (an) ________ relationship.
1. inverse; direct*
1. direct; inverse
1. there is no relationship
Which of the following best characterizes the circular flow of income?
1. Businesses buy resources from households, and households use their income from the sale of resources
to buy goods and services from businesses.*
1. Businesses buy resources from the government, and households buy goods and services from businesses.
1. Households buy factors of production from businesses, and businesses buy goods and services from
households.
A hypothesis that has not been rejected (proven false) after widespread testing and that wins general
acceptance is commonly called a:
1. theory*
1. framework
1. variable
An economic model offers which of the following?
a perfect representative of an economy.
a best estimate of the future.*
a complete and accurate description.
5 Describe the concept of marginality; calculate marginal changes
Short Title: Marginality
John is saving for a new car. He is offered a chance to work an extra 10 hour shift on President’s day,
making $15 per hour. What will be the marginal change in his gross pay if he takes the shift?
1. $150*
1. $15
1. 10 hours
Marginal thinking is best demonstrated by:
1. choosing to spend one more hour studying economics because you think the improvement in your score
on the next quiz will be worth the sacrifice of time.*
1. deciding to never purchase a coat made with animal skins or furs
1. measuring all of the costs of a meal against all of the benefits
Most choices involve ________, which involves comparing the benefits and costs of choosing a little more
or a little less of a good.
1. marginal analysis*
1. utility
1. the budget constraint
Marginal Cost is the:
Cost of a small increase in an activity.*
Cost of an activity minus the benefits.
Cost of a foregone alternative.
Total cost of an activity.
Updated: Sept 19, 2015
The marginal benefit of a slice of pizza is the:
A. total amount that a consumer is willing to pay for a whole pizza, divided by the number of slices
B. difference between the value of the slice to the consumer and the price of the slice
C. maximum amount that a consumer is willing to pay for the slice*
D. price of the slice of pizza
Suppose you work forty hours every week and earn $15 per hour. If you wish to work beyond forty hours,
your employer agrees to pay you $17 for every extra hour that you work. Your Marginal Benefit from
working each extra hour of overtime is:
$2
$15
$17*
$32
Tom owns a bakery and decides to bake a few extra loaves of bread each morning. If he is making a
decision “at the margin,” it implies that he is comparing:
The total revenue to the total cost of producing the bread.
The total revenue before and after producing the extra loaves.
The total revenue to the average cost of producing the bread.
The additional revenue earned to the additional cost of producing the extra loaves of bread.*
When making a decision “at the margin”; you will consider undertaking more of an activity if the Marginal
Benefit from it is __________ the Marginal Cost.
Greater than
Less than
Less than or at least equal to
Greater than or at least equal to*
Complete the following sentence. Tom owns a bakery and decides to bake a few extra loaves of bread each
morning. If he is making a decision “at the margin,” it implies that he is comparing\:
the total revenue to the total cost of producing the bread.
the total revenue before and after producing the extra loaves.
the total revenue to the average cost of producing the bread.
the additional revenue earned to the additional cost of producing the extra loaves of bread.*
6 Explain the assumption of rationality by individuals and firms
Short Title: Rationality
What is the rationality assumption in economics?
1. Companies and individuals make choices based on an effort to gain benefit and avoid cost.*
1. Individuals are essentially emotional beings and make choices based on response to emotional stimulus.
1. Companies will tend to be more rational than individual consumers and make decisions based on cost
and benefit.
Which of the following is NOT based on the assumption of rationality?
1. Texans like spicy food more than New Englanders do.*
1. Consumers want to maximize utility.
1. Businesses choose to minimize costs.
When economists say that a consumer maximizes her satisfaction, it implies that she
is pursuing her self-interest*
is behaving selfishly
is acting irrationally
Updated: Sept 19, 2015
7 Differentiate between positive and normative statements
Short Title: Positive and Normative Statements
Which of the following are NORMATIVE statements?
1. The federal government does not spend enough on children.*
1. Access to healthcare should not be limited by income.*
1. Efforts to improve the environment tend to reduce production and employment.
In economics, positive statements are ________.
1. factual statements of what is*
1. opinions of what should be
1. statements of the benefits of a decision rather than its costs
In economics, normative statements are ________.
1. opinions about what should be*
1. statement about what average people believe
1. factual statements of what is
“Low income people receive less education than high-income people,” is ________.
1. a positive statement*
1. a factual opinion
1. a normative statement
“Low income people should receive more financial assistance for education,” is ________.
1. a normative statement*
1. a positive statement
1. a factual opinion
Which type of statement can never be definitively proven?
1. normative*
1. hypothesis
1. statement of fact
Which of the following are POSITIVE statements?
1. A requirement that aluminum used in cars be made from recycled materials will raise the price of
automobiles.*
1. An increase in police resources provided to the inner city will lower the crime rate.*
1. Japanese firms should hire additional workers when production rises and lay off workers when
production falls
2 Analyze how buyers and sellers interact in a free and
competitive market to determine prices and quantities
of goods
Short Title: Supply and Demand
1 Define a free market and a competitive market
Updated: Sept 19, 2015
Short Title: The Free Market
Which of the following statements describe(s) a competitive market?
1. There are a large number of buyers and sellers.*
1. Government does not intervene in any way.
1. The number of sellers is limited to a select few.
Which of the following statements describe(s) a free market?
1. Government does not intervene in any way.*
1. There are price controls.
1. The number of sellers is limited to a select few.
Which of the following statements describe(s) a free market?
1. The government does not intervene in any way.*
1. Inputs are free to sellers.
1. The price of outputs is controlled by the government.
2 Explain the determinants of demand
Short Title: Demand
Economists refer to the relationship that a higher price leads to a lower quantity demanded as the
a) market equilibrium
b) law of demand *
c) price and demand model
The term “ceteris paribus” means
a) Everything is variable
b) All variables except those specified are constant*
c) No one knows which variables will change and which will remain constant
Which of the following are determinants of demand, i.e. factors which influence the quantity people are
willing and able to consume?
1. Price of the good or service and income*
1. Consumer preferences and population size*
1. Quality of transportation and efficiency of production
The Law of Demand states that, other things remaining the same,
As the price of bread increases, the quantity of bread demanded will increase.
As the price of bread increases, the quantity of bread demanded will decrease.*
As the demand for bread increases, the price of bread will also increase.
Complete the following sentence. If people expect the price of electronics to increase in the near future, it
will result in:
an increase in the supply of electronics today.
an increase in the demand for electronics today.*
a decrease in the price of electronics today.
If the drop in price of MP3 players shifts the demand curve of CD players leftwards, what does this
signify?
MP3 players and CD players are inferior goods.
MP3 players and CD players are substitutes.*
MP3 players and CD players are normal goods.
Updated: Sept 19, 2015
2a Graphically illustrate a demand curve
Short Title: Graphing the Demand Curve
A demand curve shows the graphical relationship between price and ______
a) quantity demanded*
b) quantity produced
c) costs
The law of demand states that as the price of a good increases:
a) more of it is produced
b) suppliers wish to sell less of it
c) buyers desire to purchase less of it*
The downward slope of a demand curve illustrates the pattern that as _______ rises, ______ decreases.
a) quantity demanded, price
b) quantity supplied, quantity demanded
c) price, quantity demanded*
2b Describe the differences between changes in demand and changes in the
quantity demanded
Short Title: Demand vs. Quantity Demanded
When quantity demanded decreases in response to a change in price:
A. the demand curve shifts to the right.
B. the demand curve shifts to the left.
C. there is a movement up along the demand curve. *
After widespread press reports about the dangers of contracting “mad cow disease” by consuming beef
from Canada, the likely economic effect on the U.S. demand curve for beef from Canada is:
A. a shift to the left. *
B. a movement down along the demand curve to the right.
C. a shift to the right.
The difference between a change in demand and a change in the quantity demanded is the following:
A change in demand is shown by a shift in the demand curve.
A change in quantity demanded is shown by a movement along a given demand curve. *
A change in quantity demanded is shown by a shift in the supply curve. *
3 Explain the determinants of supply
Short Title: Supply
All of the following will shift the supply curve to the right except:
a change in consumer tastes and preferences*
a decrease in the price of inputs to production
government deregulation of production
A change in technology that reduces the costs of production will:
increased consumer demand
Updated: Sept 19, 2015
decrease consumer demand
shift the supply curve to the right.*
An increase in the number of producers will:
reduce competition
shift the supply curve to the right*
cause an increase in the quantity consumed
All of the following will cause the supply curve to shift to the right EXCEPT:
1. Higher product taxes*
1. Improved technology
1. A fall in input prices
3a Graphically illustrate a supply curve
Short Title: Graphing the Supply Curve
A supply curve is a graphical illustration of the relationship between price, shown on the vertical axis, and
____________, shown on the horizontal axis.
A. demand
B. quantity supplied *
C. quantity demanded
When economists talk about supply, they are referring to a relationship between the price a supplier is
willing and able to supply a unit of a good for and the _________________.
A. market price
B. quantity supplied *
C. demand curve
Nearly all supply curves share a basic similarity: they slope _______________.
A. down from left to right
B. up from left to right*
C. up from right to left
3b Describe the differences between changes in supply and changes in
quantity supplied
Short Title: Supply vs. Quantity Supplied
A change in quantity supplied results from a change in ________, and leads to ________.
1. price; a movement along the supply curve*
1. a supply shifter; a shift of the supply curve to the right or left
1. quantity demanded; a shift of the supply curve to the right or left
When __________________, a firm will supply a higher quantity at any given price for its output, and the
supply curve will shift to the right.
A. prices rise
B. costs of production fall *
C. there is a population increase
Which of the following would cause the supply curve to shift to the right?
an increase in the price of the product
Updated: Sept 19, 2015
an improvement in technology *
a decrease in production costs *
A severe freeze has once again damaged the Florida orange crop. The impact on the market for orange juice
will be a leftward shift of:
A. the supply curve. *
B. the demand curve
C. both the supply and demand curves.
A drought decreases the supply of agricultural products, which means that at any given price a lower
quantity will be supplied; conversely, especially good weather would shift the __________________ .
A. demand curve to the right
B. supply curve to the left
C. supply curve to the right *
4 Define and graphically illustrate equilibrium price and quantity
Short Title: Equilibrium
If the price is below the equilibrium level, then the quantity demanded will exceed the quantity supplied.
This condition is known as ________
1. excess demand*
1. excess supply
1. a price ceiling
The ____________ is where quantity demanded and quantity supplied are equal at a certain price.
A. quantity demanded
B. equilibrium *
C. supply schedule
Refer to the figure below. The equilibrium is
Updated: Sept 19, 2015
Q= 30, P =$14*
Q = 2, P = $16
Q = 16, P = $13
The conditions of demand and supply are given in the table below. What are the equilibrium price and
quantity?
Price
Qd
Qs
$1.60
9,000
5,000
$2.00
8,500
5,500
Updated: Sept 19, 2015
$2.40
8,000
6,400
$2.80
7,500
7,500
$3.20
7,000
9,000
$3.60
6,500
11,000
$4.00
6,000
15,000
1. $2.80*
1. $2.40
1. $3.20
// Updated Sept 18, 2015 choices edited and answer identified
4a Explain how markets eliminate shortages and surpluses
Short Title: Surpluses and Shortages
When there is an excess supply of a good,
suppliers lower prices, which encourages demanders to demand more*
demanders demand more, causing the price to increase
the market increases its costs of production.
When there is an excess demand for a good,
demanders demand less, causing the price to increase
suppliers increase prices, causing demanders to demand less*
the market decreases its costs of production
In a market with an upward sloping supply curve and a downward sloping demand curve, when there is an
excess supply in the market,
The price is higher than the equilibrium price*
The quantity transacted is lower than the equilibrium quantity*
The equilibrium is the same as the price
In a market with an upward sloping supply curve and a downward sloping demand curve, when there is an
excess demand in the market,
the price is lower than the equilibrium price*
the quantity transacted is lower than the equilibrium quantity*
the equilibrium is the same as the price
5 Apply the theories of supply & demand to explain how disturbances to
markets affect equilibrium prices and quantities.
Short Title: Changes in Equilibrium
Suppose that a new advertising campaign extolling the virtues of apple juice is successful and a major
freeze destroys half of the country’s apple crop. What happens to the price and quantity of apple juice?
The equilibrium price of apple juice might rise or fall and the equilibrium quantity of apple juice falls.
The equilibrium price of apple juice rises and the equilibrium quantity of apple juice might rise or fall.*
The equilibrium price of apple juice might rise or fall and the equilibrium quantity of apple juice rises.
Updated: Sept 19, 2015
Imagine that new research is released indicating that potato chips contribute to halitosis. At the same
moment, an insect infestation destroys ¼ of the nation’s potato crop. What happens in the market for
potatoes?
The equilibrium price increases and the equilibrium quantity falls
The equilibrium price falls and the equilibrium quantity might rise or fall.
The equilibrium price might rise or fall, and the equilibrium quantity falls*.
Potato chips and corn chips are substitute goods. Imagine that an insect infestation destroys ¼ of the
nation’s potato crop. What happens?
The price of potato chips falls and the price of corn chips increases.
The price of potato chips rises and the quantity of corn chips bought and sold increases.*
The price of potato chips stays the same, and the price of corn chips falls..
5a Apply the theories of supply & demand to explain how a change in one
of the determinants of demand: tastes & preferences, the number of
buyers, consumer expectations on future prices, income, the price of
substitutes or the price of complements affects equilibrium price and
equilibrium quantity
Short Title: Impact of Changes in Demand
If Pepsi goes on sale, what will happen to the demand for Coca-Cola?
1. demand for Coca-Cola will decrease*
1. demand for Coca-Cola will increase
1. demand for Coca-Cola will stay the same
Suppose that a new study is released stating that consumption of orange juice (a substitute for apple juice)
reduces the risk of cancer, and a major freeze destroys half of the country’s apple crop. What happens to
the price and quantity of apple juice?
The price of apple juice might rise or fall and the quantity of apple juice falls.*
The price of apple juice might rise or fall and the quantity of apple juice rises.
The quantity of apple juice might rise or fall, and the price of apple juice rises.
Government subsidies for corn production have just been eliminated. This can be expected to:
Increase the demand for products made from corn oil.
Decrease the demand for corn oil substitutes.
Increase the demand for corn oil substitutes.*
If demand increases and supply remains constant, what happens to the market equilibrium?
1. Quantity and price both rise.*
1. Quantity rises and price falls.
1. Quantity and price both fall.
5b Apply the theories of supply & demand to explain how a change in one
of the determinants of supply: cost of production, or a change in
technology affects equilibrium price and equilibrium quantity, taxes and
subsidies, and producer expectations on future prices
Short Title: Impact of Changes in Supply
Updated: Sept 19, 2015
A severe freeze has once again damaged the Florida orange crop. The impact on the market for orange juice
will be a leftward shift of:
1. the supply curve, as fewer oranges are available to produce orange juice*
1. the demand curve, as consumers try to economize because of the shortage
1.both the supply and demand curves, resulting in a higher equilibrium price
If supply falls and demand remains constant, what happens to the market equilibrium?
1. Quantity falls and price rises.*
1. Quantity rises and price falls.
1. Quantity and price both fall.
The city of Portland aims to increase tourism. A recent study showing the high popularity of doughnuts
causes the city to subsidize its doughnut shops. What happens in the market for doughnuts in Portland?
Quantity increases and price increases
Quantity increases and price falls
Quantity increases, and the price may increase or decrease*
3 Measure how changes in price, income, or things
affect the behavior of buyers and sellers –
Short Title: Elasticity
1 Define the concept of elasticity
Short Title: Defining Elasticity
Which of these questions is the best example of elasticity?
1. How much will a change in price or quantity impact consumer and producer behavior?*
1. What is the least amount of goods a supplier can produce without upsetting the customers?
1. How will a change in consumer behavior affect the overall consumer experience
Elasticity refers to
1. how responsive one variable is to changes in another*
2. how frequently a demand curve or supply curve changes slope
3. how long it takes a market to reach equilibrium
Elasticity is relevant when trying to understand
1. how a change in price affects quantity supplied*
2. how a change in price affects quantity demanded*
3. how raising a tax on a good affects the revenue from the tax*
2 Explain the price elasticity of demand and be able to compute it using
the midpoint analysis
Short Title: Price Elasticity of Demand
1. The price elasticity of demand measures the:
A. responsiveness of quantity demanded to a change in quantity supplied.
Updated: Sept 19, 2015
B. responsiveness of price to a change in quantity demanded.
C. responsiveness of quantity demanded to a change in price.*
6. The elasticity of demand is defined as the percentage change in quantity demanded divided by the
percentage change in __________.
A. quantity supplied
B. the slope of the demand curve
C. price*
The size of the change in the quantity demanded of a good or service due to change in its price is measured
by the elasticity of demand. When the percentage of change in the quality demanded is less than the
percentage of the price change, the good is ________.
1. inelastic*
1. elastic
1. unitarian
The price elasticity of demand measures the ________.
1. responsiveness of quantity demanded to a change in price*
1. responsiveness of price to a change in quantity demanded
1. responsiveness of quantity demanded to a change in quantity supplied
The slope of a demand curve represents how much demand will respond to a change in price. The flatter
the slope, the _______ the response will be.
greater*
less
does not apply
When the demand for a good or service does NOT vary when there is a change in price, the good is
_______?
perfectly elastic
perfectly inelastic*
unitarian
A 10% decrease in the price of one product that you buy causes an 8% increase in quantity demanded of
that product. How would another 10% drop in price affect the quantity demanded?
1. The second 10% decrease in price would likely lead to a more than 8% increase in quantity demanded
because demand elasticity increases as prices drop and quantities increase.
1. The second 10% decrease in price would likely lead to about the same increase in quantity demanded
(around 8%) because the increase in quantity holds steady with an identical change in price.
1. The second 10% decrease in price would likely lead to a less than 8% increase in quantity demanded
because demand elasticity decreases as prices drop and quantities increase.*
The elasticity of demand is defined as the change in the quantity demanded of a good or service due to
change in its price. When the percentage of change in the quantity demanded is less than the percentage
change in the price, the good is ________.
1. inelastic*
1. elastic
1. unitary
The size of the change in the quantity demanded of a good or service due to change in its price is measured
by the elasticity of demand. When the percentage change in the quantity demanded is greater than the
percentage change of the price, the good is ________.
1. elastic*
Updated: Sept 19, 2015
1. inelastic
1. unitarian
Demand “D” represents a demand curve that is?
1. perfectly inelastic*
1. relatively inelastic
1. perfectly elastic
Updated: Sept 19, 2015
Demand “C” represents a demand curve that is?
1. relatively inelastic*
1. perfectly inelastic
1. perfectly elastic
Updated: Sept 19, 2015
Demand “B” represents a demand curve that is?
1. relatively elastic*
1. perfectly inelastic
1. perfectly elastic
3 Explain the income elasticity of demand and the cross-price elasticity of
demand and be able to compute it using the midpoint analysis
Short Title: Income and Cross-Price Elasticity
When income increases and the demand for a good increases, the good is considered a
1. normal good*
2. inferior good
3. complementary good
When income increases and demand for a good falls, the good is considered a
1. normal good
2. inferior good*
3. complementary good
When a 5% increase change in income elicits a 3% drop in quantity demanded of a good,
1. the income elasticity is .6 and the good is an inferior good*
Updated: Sept 19, 2015
2. The cross-price elasticity is .6 and the good is an inferior good
3. The income elasticity is 1.67 and the good is a normal good.
A 10 percent decrease in the price of potato chips leads to a 30 percent increase in the quantity of soda
demanded. It appears that:
A. elasticity of demand for potato chips is 3.
B. cross-price elasticity of demand for soda is -3.*
C. elasticity of demand for soda 3.
If consumers find cola and iced tea good substitutes, then it is likely that:
A. the goods’ cross price elasticities are greater than zero.*
B. the goods’ price elasticities of demand are less than one.
C. the goods’ income elasticities are less than zero.
Negative Cross Price Elasticity of Demand between two goods indicates that the two goods are ________.
Substitutes
Inferior goods
Compliments*
4 Explain the price elasticity of supply and be able to compute it using the
midpoint analysis
Short Title: Price Elasticity of Supply
The elasticity of supply is defined as the ________ change in quantity supplied divided by the _______
change in price.
A. total; percentage
B. marginal; percentage
C. percentage; percentage*
Supply is said to be ____________ when the quantity supplied is very responsive to changes in price.
A. inelastic
B. unit elastic
C. elastic*
27. If the supply curve for a product is vertical, then the elasticity of supply is:
A. equal to zero.*
B. equal to 1.
C. equal to infinity.
28. If the supply curve for a product is horizontal, then the elasticity of supply is:
A. equal to infinity.*
B. equal to 1.
C. equal to zero.
29. A perfectly elastic supply curve is:
A. upward sloping to the right.
B. horizontal.*
C. vertical.
5 Explain the relationship between a firm’s price elasticity of demand and
total revenue
Updated: Sept 19, 2015
Short Title: Price Elasticity and Total Revenue
You are the manager of the public transit system. You are informed that the system faces a deficit, but you
cannot cut service, which means you cannot cut costs. Your only hope is to increase revenue by increasing
fares. You are advised that the estimated price elasticity of demand for the first few months after a price
change is about −0.3, but that after several years, it will be about −1.5. Select the statements that describe
the results of raising the fare.
1. Total revenue rises immediately after the fare increase, since demand over the immediate period is price
inelastic.*
1. Total revenue falls after a few years, since demand changes and becomes price elastic.*
1. Total revenue will rise incrementally as the demand fluctuates and price moves back and forth between
being elastic and inelastic.
Suppose you are in charge of sales at a pharmaceutical company, and your firm has a new drug that causes
bald men to grow hair. Assume that the company wants to earn as much revenue as possible from this drug.
If the elasticity of demand for your company’s product at the current price is 1.4, what would you advise
the company to do?
1. lower the price*
1. raise the price
1. keep the price the same
35. If the supply curve for aspirin is perfectly elastic, then a reduction in demand will cause the equilibrium
price to:
A. stay the same and the equilibrium quantity to fall.*
B. fall and the equilibrium quantity to fall.
C. rise and the equilibrium quantity to stay the same.
Complete the following sentence. Given that total revenue = price x quantity, a reduction in price will lead
to an increase in total revenue when demand is:
elastic.*
inelastic.
unit elastic.
4 Evaluate the consequences of government policies in
markets.
Short Title: Government Action
1 Analyze the consequences of the government setting a binding price
ceiling
Short Title: Price Ceilings
Price ceilings typically result in ________.
1. shortages*
1. excess supply
1. price equilibrium
Updated: Sept 19, 2015
Price ceilings attempt to make consumer prices ________.
1. lower*
1. higher
1. at equilibrium
Refer to the figure below. If the government set a price ceiling of $8, there would be a:
shortage of 4 units*
surplus of 4 units
shortage of 8 units
Refer to the figure below. If the government set a price ceiling of $6,
Updated: Sept 19, 2015
consumers would demand 14 units*
there would be a shortage of 14 units
there would be a surplus of 6 units
Refer to the figure below. If the government set a price ceiling at $10, there would be a:
Updated: Sept 19, 2015
shortage of 24 units*
surplus of 32 units
surplus of 80 units
1a Identify the market’s equilibrium price and quantity under a price
ceiling
Short Title: Equilibrium Under Price Ceilings
A low-income country decides to set a price ceiling on bread so they can make sure that bread is affordable
to the poor. The conditions of demand and supply are given in the table below. What is the equilibrium
price before the price ceiling? What will the surplus or the shortage be if the price ceiling is set at $2.40?
Updated: Sept 19, 2015
Price
Qd
Qs
$1.60
9,000
5,000
$2.00
8,500
5,500
$2.40
8,000
6,400
$2.80
7,500
7,500
$3.20
7,000
9,000
$3.60
6,500
11,000
$4.00
6,000
15,000
1. $2.80; 1,600 shortage*
1. $2.40; 1,600 shortage
1. $2.80; 1,600 surplus
A low-income country decides to set a price ceiling on bread so they can make sure that bread is affordable
to the poor. The conditions of demand and supply are given in the table below. What will the surplus or the
shortage be if the price ceiling is set at $2.00?
Price
Qd
Qs
$1.60
9,000
5,000
$2.00
8,500
5,500
$2.40
8,000
6,400
$2.80
7,500
7,500
$3.20
7,000
9,000
$3.60
6,500
11,000
$4.00
6,000
15,000
3,000 surplus
3,000 shortage*
8,500 shortage
A low-income country decides to set a price ceiling on bread of $2.40 so they can make sure that bread is
affordable to the poor. The conditions of demand and supply are given in the table below. What will be the
price and quantity of bread purchased?
Price
Qd
Qs
Updated: Sept 19, 2015
$1.60
9,000
5,000
$2.00
8,500
5,500
$2.40
8,000
6,400
$2.80
7,500
7,500
$3.20
7,000
9,000
$3.60
6,500
11,000
$4.00
6,000
15,000
1. $2.40; 8,000
1. $2.40; 6,400*
1. $2.00; 7,000
1b Compute the market shortage resulting from a price ceiling and show
graphically
Short Title: Market Shortages from Price Ceilings
Suppose the local government is concerned about the health of local school children, and for that reason
imposes a price ceiling of $3 on yogurt. Based on the graph below, which of the following is true?
Updated: Sept 19, 2015
The quantity demanded will be 5 yogurts. *
The quantity supplied will be 3 yogurts. *
There will be a shortage of 2 yogurts. *
Suppose, in the graph below, there is a price ceiling of $3. Then there is a shortage of:
Updated: Sept 19, 2015
3 units.
6 units. *
0 units.
Suppose, in the graph below, there is a price ceiling of $6. Then there is a shortage of
Updated: Sept 19, 2015
3 units.
6 units.
0 units. *
2 Analyze the consequences of the government setting a binding price floor
Short Title: Price Floors
The local government is concerned about poverty so it institutes a minimum wage of $9 per hour. If the
demand and supply for labor are given in the graph above, there will be
Updated: Sept 19, 2015
a surplus of 3 workers.
a surplus of 6 workers.*
a shortage of 6 workers.
A price floor attempts to keep prices ________.
1. high*
1. low
1. at equilibrium
________ are enacted when discontented sellers, feeling that prices are too low, appeal to legislators to
keep prices from falling.
1. price floors*
1. price ceilings
1. rent controls
Price floors typically result in ________.
1. excess supply*.
1. excess demand.
1. quantity supplied equals quantity demanded.
2a Identify the market’s equilibrium price and quantity for a price floor
Updated: Sept 19, 2015
Short Title: Equilibrium for Price Floors
Supply and demand for bushels of wheat (millions) are shown in the following table. A $10.00 government
mandated price floor would result in:
Price
Qd
Qs
$5.00
26
16
$6.00
24
18
$7.00
22
20
$8.00
21
21
$9.00
20
22
$10.00
19
23
$11.00
18
24
a price of $10.00 and a quantity of 19 million bushels of wheat sold*
a price of $8.00 and a quantity of 19 million bushels of wheat sold
a price of $8.00 and a quantity of 23 million bushels of wheat sold
Refer to the figure below. If the government set a price floor of $80, the amount bought and sold will be:
Updated: Sept 19, 2015
12*
80
28
Refer to the figure below. If the government set a price floor of $80, there would be:
Updated: Sept 19, 2015
12 units sold*
28 units sold
16 units sold
2b Compute the market surplus resulting from a price floor and show
graphically
Short Title: Market Surpluses from Price Floors
If the government sets prices for wheat or corn that guarantee farmers a specific price for that product, the
most probable result would be what?
over production.*
Updated: Sept 19, 2015
more buyers would leave the market.*
the market would suffer shortages.
Refer to the figure below. If the government set a price floor of $80, there would be a:
surplus of 16 units*
surplus of 12 units
shortage of 28 units
Supply and demand for bushels of wheat (millions) are shown in the following table. A $9.00 government
mandated price floor would result in:
Updated: Sept 19, 2015
Price
Qd
Qs
$5.00
26
16
$6.00
24
18
$7.00
22
20
$8.00
21
21
$9.00
20
22
$10.00
19
23
$11.00
18
24
a surplus of 2 million bushels of wheat*
a shortage of 2 million bushels of wheat
sales of 22 million bushels of wheat
2c Explain the outcome of a binding price ceiling or price floor on the price
and quantity of a product sold
Short Title: Impact of Binding Price Ceilings or Price Floors
3. A price ceiling creates _____ when it is set _____ the equilibrium price.
A. excess demand — below*
B. excess demand — above
C. excess supply — below
4. A price floor creates _____ when it is set ______ the equilibrium price.
A. excess demand — below
B. excess supply — below
C. excess supply — above*
How does a price floor set above the equilibrium level affect quantity demanded and quantity supplied?
1. It results in a greater quantity supplied than the quantity demanded, otherwise known as a surplus.*
1. It results in a greater quantity supplied than the quantity demanded, otherwise known as a shortage.
1. It results in a smaller quantity supplied than the quantity demanded, otherwise known as a shortage.
3 Explain how the price elasticities of demand and supply affect the
incidence of a sales tax
Short Title: Tax Incidence
When supply is inelastic and demand is elastic, the tax incidence falls on ________.
1. the producer*
1. the consumer
1. government
Updated: Sept 19, 2015
When supply is elastic and demand is inelastic, the tax incidence falls on the ________.
1. the consumer*
1. the producer
1. government
The demand for cigarettes is highly inelastic. This suggests that the incidence of a higher tax on cigarettes
will fall primarily on:
Cigarette consumers.*
Cigarette sellers.
Government.
4 Define progressive, proportional, and regressive taxes
Short Title: Taxation
Which of the following example(s) describe a progressive tax?
1. Income tax with a 10% tax rate on low income households and 20-30% tax rates on higher income
households*
1. Social Security tax rate of 6.2% on earned income below $117,000 and 0% on income earned above
$117,000
1. Medicare payroll tax of 2.9% of income for everyone, regardless of how much they earn
Which of the following example(s) describe a regressive tax?
1. Social Security tax rate of 6.2% on earned income below $117,000 and 0% on income earned above
$117,000*
1. Income tax with a 10% tax rate on low income households and 20-30% tax rates on higher income
households
1. Medicare payroll tax of 2.9% of income for everyone, regardless of how much they earn
Which of the following example(s) describe a proportional tax?
1. Medicare payroll tax of 2.9% of income for everyone, regardless of how much they earn*
1. Social Security tax rate of 6.2% on earned income below $117,000 and 0% on income earned above
$117,000
1. Income tax with a 10% tax rate on low income households and 20-30% tax rates on higher income
households
5 Use the concept of producer, consumer surplus, and
total surplus to explain the outcomes of markets for
individuals, firms, and society
Short Title: Surplus
1 Define and calculate consumer surplus; Graphically illustrate consumer
surplus
Short Title: Consumer Surplus
Updated: Sept 19, 2015
Which of the following best defines consumer surplus?
1. The social surplus minus producer surplus*
1. The difference between an item’s production cost and the amount paid by consumers
1. The amount a seller is paid for a good minus the seller’s actual cost
Consumer surplus is best described as the extra benefit consumers receive when they ________.
1. pay less than they would have been willing to pay*
1. pay more than they would have been willing to pay
1. pay exactly what they would have been willing to pay
Which of the following represents consumer surplus?
1. A*
1. B
1. B+A
Refer to the figure below. Consumer surplus is:
Updated: Sept 19, 2015
$30*
$60
$420
1a Define and calculate producer surplus; graphically illustrate producer
surplus
Short Title: Producer Surplus
In the following figure, which area represents producer surplus?
Updated: Sept 19, 2015
Area A
Area B
Area C*
// Sept 18, 2015 graph corrected and replaced; question replaced
Which of the following represents producer surplus? (image: https://s3-us-west2.amazonaws.com/textimgs/Econ+assessment+images/surplus+graph.png)
1. B*
1. A
1. B+A
Refer to the figure below. Producer surplus is:
Updated: Sept 19, 2015
$180*
$420
$60
1b Define and calculate total surplus; graphically illustrate total surplus
Short Title: Total Surplus
Social surplus is ________.
1. the sum of consumer surplus and producer surplus*
1. consumer surplus minus producer surplus
1. producer surplus minus consumer surplus
Updated: Sept 19, 2015
If the total surplus in a market with no government intervention is $500 and consumer surplus is $200,
producer surplus is
1. $300*
2. $700
3. $2.5
If the consumer surplus is $1000 and the producer surplus is $300, social surplus is
1. $700
2. 1300*
3. -$700
Refer to the figure below. Total surplus is:
$210*
Updated: Sept 19, 2015
$105
$420
2 Use the concepts of consumer, producer and total surplus to explain why
markets typically lead to efficient outcomes
Short Title: Surplus and Inefficiency
In a market with an upward sloping supply curve and a downward sloping demand curve, a price floor
________.
1. creates deadweight loss*
1. transfers some producer surplus to the consumer
1. transfers some consumer surplus to the producer*
// Updated Sept 18, 2015 Answer fixed
What is the relationship between total surplus and economic efficiency?
1. An economically efficient market will have the maximum possible total surplus given the supply and
demand curves.*
1. An economically efficient market will have no total surplus given the supply and demand curves.
1. An economically efficient market will have a larger consumer surplus than producer surplus.
Compare a market operating at a quantity lower than equilibrium with the same market operating at the
equilibrium quantity. Which of the following statements are true?
The consumer surplus is greater at the equilibrium quantity. *
The producer surplus is greater at the equilibrium quantity. *
The economic surplus is greater at the equilibrium quantity. *
6 Evaluate macroeconomic performance using
indicators that include output measures,
unemployment, and inflation
Short Title: Macroeconomic Measures of Performance
1 Define the term “economic indicator”
Short Title: Economic Indicators
Economic indicators:
1. Are data or statistics used to judge the current or future health of the economy*
1. Are largely collected and released by government or non-profit groups*
1. Enable analysis of economic performance*
1. Permit determination of business cycles*
The three types of economic indicators are:
1. Leading, coincident, lagging indicators*
1. Future, current, past indicators
1. Forecast, performance, resultant indicators
Updated: Sept 19, 2015
Economic indicators that measure aspects of the aggregate economy include:
a. GDP*
b. Inflation*
c. Dow Jones industrial average
1a Identify the major economic indicators used to assess the state of the
macroeconomy
Short Title: Major Macroeconomic Indicators
In the US, information about employment or unemployment is collected and published by
Bureau of Employment
U.S. Department of Labor / Bureau of Labor Statistics*
US. Commerce Department
Which economic indicators are tracked/published by the U.S. Department of Commerce:
Personal Income*
Gross Domestic Product*
Home Sales*
Home Construction*
Inventories*
Business Sales*
Rental Vacancy Rates*
Home Ownership*
Unemployment Rates
Employment Rates
Tax Rates
Tariff Rates
Which economic indicators are tracked/published by the US. Department of Labor
Consumer Price Index*
Producer Price Index*
Consumer Expenditures*
Unemployment*
Employment*
National Compensation*
Wages*
Productivity*
Home Ownership
Personal Income
Rental Vacancy Rates
2 Explain GDP, including what it measures and what it excludes
Short Title: Components of GDP
Which of the following captures all the components of GDP?
1. C + I + G
2. C + I + G + M
3. C + I + G + (X – M)*
Which of the following is most likely to contribute to economic growth as measured by GDP per capita?
A. the imposition of tariffs and quotas on imported goods
Updated: Sept 19, 2015
B. increased capital formation*
C. rapid population growth*
D. an increase in marginal tax rates
Final goods or services used to compute GDP refer to:
A. the sum of all wages paid to laborers.
B. the factors of production used to produce output.
C. goods and services purchased by the ultimate users.*
D. the value of outstanding shares of stock of manufacturing firms.
12. Which of the following is part of GDP?
A. the purchase of 100 shares of AT&T stock by your grandfather.
B. the purchase of a snow plough by the city of Minneapolis.*
C. the unsold additions to inventory at an appliances store.*
D. the purchase of a loaf of bread by a consumer*
Two major components of the GDP in terms of value in the US are consumer goods and ____?
1. agricultural goods
2. durable goods
3. investment expenditures*
What is investment used for?
1. buying stocks
2. building bridges*
3. military spending
Which of the following is included in GDP?
A. the payments for a chiropractor’s services*
B. cash paid to a babysitter that is not reported to the tax authorities
C. your friend changes your brake pads for free
D. the fees for legal services rendered by your lawyer*
Which of the following is included in GDP calculations?
1. cash received from a yard sale
1. E-Bay’s commission for selling your used iPhone*
1. the university tuition paid to enroll in a course*
20. Which of the following is included in GDP?
A. revenue from the sale of a three-year old car
B. the fees charged for a stock broker’s services*
C. the receipts from a sale of land
21. GDP does NOT directly include:
A. the value of goods produced domestically and sold abroad.
B. the value of intermediate goods sold during a period.*
C. the value of services rendered during a period.
D. the value of final goods and services produced, but not sold, during a period.
23. Investment (I) includes:
A. the amount spent on new factories and machinery.*
B. the amount spent on stocks and bonds.
C. the amount spent on consumer goods that last more than one year.
D. the amount spent on purchases of art.
Updated: Sept 19, 2015
Fill in the blanks. GDP is a _____ measure of societal well-being, because it ________.
good; takes into account employment, production, and income levels
good; omits the cost of keeping the environment clean
bad; omits the cost of keeping the environment clean*
bad; takes into account employment, production, and income levels
Fill in the blanks. The expenditure approach to measuring GDP is the sum of ____ and the income
approach captures ____ .
1. consumption, investment, government, and net exports; personal disposable income, rent, interest, and
profit
1. wages, rent, interest, and profit; consumption, investment, government, and net exports
1. consumption, investment, government, and net exports; wages, rent, interest, and profit*
A business cycle reflects changes in economic activity, particularly real GDP. The stages of a business
cycle – in sequential order – are:
A. trough, peak, expansion, recession
B. contraction, recession, expansion, boom
C. expansion, peak, recession, trough*
2a Explain the expenditure approach to calculating GDP
Short Title: Expenditure Approach to Calculating GDP
When calculating the GDP using the expenditure approach, what must happen to exports of a nation?
They must be ignored, because they are not bought in the domestic market.
They must be added to the other components of GDP.*
They must be subtracted, because they are included in the consumption of a foreign country.
They must be subtracted if foreign firms buy the exports for investment purposes.
Which of the following would be included in the computation of GDP in a particular year?
1. Government expenditure on public schools*
1. Social security payments to retirees
1. An increase in inventories*
GDP measured from the expenditure side includes
Investment demand*
Tax spending
Trade balance.*
Which of the following components of GDP has the largest immediate impact on GDP. Changes in
1. government spending
1. consumption spending*
1. business investment
1. services provision
2b Explain the national income approach to calculating GDP
Short Title: National Income Approach to Calculating GDP
_________ are now the largest single component of the supply side of GDP, representing over half of GDP.
1. Durable goods
1. Services*
Updated: Sept 19, 2015
1. Nondurable goods
1. Structures
// The labor component of the national income approach to calculating GDP includes:
// Salaries*
// Wages*
// Health benefits*
// Retirement benefits*
// Unemployment Insurance*
// Hours worked
// Productivity
// Per capital labor data
// Updated: Sept 18, 2015 removed
Proponents of supply side approaches to economic growth will likely make the following statements?
Tax reductions for consumers allow them to spend and save more, thereby increasing business investment.
Favorable taxes for innovations by business owners decrease worker productivity and elevate citizen
reliance on government support.
Tax breaks to businesses increase employment and the production of more goods and services. Newly hired
workers earn high incomes, and increase spending thereby benefitting other workers.*
Government spending translates into higher levels of employment, production, incomes, and spending.
3 Describe the relationships among GDP, net domestic product, national
income, personal income, and disposable income
Short Title: GDP and Income
Which of the following best describes economic growth?
1. An increase in real personal income*
1. A reduction in real personal income
1. A decrease in real GDP over time
1. An increase in nominal GDP over time
Disposable Income refers to a households’
Consumption and savings*
Income minus net taxes*
Entertainment, spending, and consumption
Credit card debt service and housing
If depreciation equals $36 billion, GDP equals $240 billion, and national income is $225 billion, then what
is the Net National Product?
$204 billion*
$189 billion
$276 billion
$361 billion
4 Explain how the unemployment rate is calculated
Short Title: The Unemployment Rate
Calculate the unemployment rate based on the following data for a country: Population: 200, Employed
workers: 140, Labor Force: 160, Discouraged workers: 10.
10 %
Updated: Sept 19, 2015
12.5 %*
18.75 %
7.15 %
If out of 125 people, the number of employed workers is 100 and number of unemployed workers is 25,
then the unemployment rate is
1. 20%*
1. 10%
1. 30%
What is the formula with which to calculate the official unemployment rate?
The number in the labor force divided by the population
The number of unemployed workers divided by the sum of employed and unemployed workers*
The number of discouraged workers divided by the number of civilian workers
The number of people seeking work divided by the number quitting their jobs
Reginald looked for work for six months but could not find a job to his liking. He now spends his time at
the beach. For purposes of employment he is considered:
A. out of the labor force.*
B. unemployed.
C. employed in the underground economy.
D. underemployed.
If the number of employed persons in a country equals 24 million, the number of unemployed persons
equals 8 million, and the number of persons over age 16 in the population equals 40 million, the
unemployment rate equals:
A. 32%
B. 25%*
C. 20%
D. 8%
Calculation of the unemployment rate requires data on
1. Percent of the adult population in the labor force who are unemployed.*
1. Percent of the adult population who are unemployed.
1. Percent of the adult population not in the labor force.
4a Critique the unemployment rate as a measure of the unemployment
problem
Short Title: Critiquing the Unemployment Rate
If the unemployment rate is 8 percent, then this means:
1. 8 percent of the population is unemployed.
1. 8 percent of the labor force is unemployed.*
1. the number of unemployed persons equals 8 percent of the employed persons.
Which of the following could cause unemployment?
1. a depression*
2. a prolonged war
3. competition*
Complete the following sentence. Calculations of the official unemployment rate exclude:
labor force
Updated: Sept 19, 2015
employed
discouraged workers*
unemployed, but seeking work
5 Identify and differentiate between the different types of unemployment
Short Title: Types of Unemployment
Bill is a construction worker who was laid off because the market for new homes has been adversely
affected in the recession. Bill’s unemployment experience is referred to
Cyclical unemployment*
Seasonal unemployment
Frictional unemployment
Structural unemployment
Fill in the blank. If the print media is taken over by the electronic media, thereby causing employees in the
print media industry to be permanently laid off, ________________ unemployment would increase.
Cyclical
Seasonal
Frictional
Structural*
A contraction in the business cycle is likely to result in which form of unemployment?
Frictional
Cyclical*
Seasonal
Structural
Which form of unemployment suggests workers need to seek education and training and to update their
skill sets?
Functional
Cyclical
Structural*
Seasonal
Employment generally ________ during recessions and ________ during expansions.
1. falls; rises.*
1. rises; falls.
1. rises; rises.
When prices do not respond quickly to bring forces of supply and forces of demand to equilibrium point,
they are called
1. sticky prices.*
1. market prices.
1. market structure prices.
Which types of unemployment exist at all times, and determine the natural rate of unemployment? I.
frictional unemployment II. structural unemployment III. cyclical unemployment
1. I & II*
1. II & III
1. I & III
Updated: Sept 19, 2015
Frictional unemployment occurs because it takes ________ for people to find jobs.
1. time*
1. money
1. resources
The idea that firms will pay wages higher than than the equilibrium wage is called
1. efficiency-wage theory*
1. optimal-wage theory
1. equilibrium-wage theory
8. A welder who quits his job and moves from Pittsburgh to Madison to try to get a better welding job is
said to be:
A. frictionally unemployed*
B. underemployed
C. cyclically unemployed
D. structurally unemployed
10. If a nation’s labor force receives a significant influx of young workers:
A. the natural rate of unemployment is likely to increase.*
B. the natural rate of unemployment is likely to decrease.
C. the natural rate of unemployment is unlikely to change
D. frictional unemployment will likely decrease to zero.
11. Workers hired during the US holiday season lower:
A. cyclical unemployment *
B. the natural rate of unemployment
C. seasonal unemployment*
D. frictional unemployment
Tom graduated from college in June but was still looking for work in August. This is an example of,
1. Structural unemployment
1. Frictional unemployment*
1. Cyclical unemployment.
6 Explain the concept of a price index and explain how price indices are
derived
Short Title: Price Indexes
5. When Anders took out his first two-year membership with Maxima Gym in 2004, the fee was $540.00.
He renewed his membership three times; in 2006 for $580.00, in 2008, for $600.00, and again in 2010, for
$630.00. What is the overall rate of inflation for Anders’ gym membership?
A. 8.6%
B. 5.4%
C. 7.87%
D. 16.66%*
Inflation can be calculated in terms of how the overall cost of ___________________ changes over time.
A. all goods
B. the basket of goods *
C. all goods and services
D. all services
Updated: Sept 19, 2015
Two factors that complicate the calculation of the inflation rate are:
A. substitution and quality/new product bias*
B. preferential bias
C. complementary product bias
D. consumer behavior bias
If you have $100 cash and the price level rises two percent, then which of the following statements is true?
The value of $100 is more in terms of what it can purchase.
The value of $100 is less in terms of what it can purchase.*
The value of $100 is the same in terms of what it can purchase.
6a Define the consumer price index and the producer price index
Short Title: Consumer Price Index vs. Producer Price Index
The percentage change in the price level from one time period to the next, will be the _____________.
A. inflation rate*
B. price index rate
C. consumer price index
D. producer price Index
Which is the largest expenditure category in the US CPI?
A. apparel
B. entertainment
C. Housing*
D. transportation
The Producer Price Index is based on prices paid for supplies and inputs by:
A. consumers
B. producers of goods and services*
C. government
D. the small business sector
Which of the following is the name used to describe the price index that consists of intermediate goods and
finished goods?
A. Producer Price Index *
B. Consumer Price Index
C. Employment Cost Index
D. Processing Price Index
6b Calculate a price index number given a basket of goods & services and
the nominal price of each in a base year and at some later time
Short Title: Calculating Price Indexes
7. If the price index moves from 107 to 110, the rate of inflation is:
A. 3%
B. 30%
C. 28%
D. 2.8%*
Updated: Sept 19, 2015
An analyst needs to adjust the nominal GDP for the years 2000 and 2010 into real terms. The nominal GDP
in 2000 was $672 billion and $1,690 billion for 2010; the real interest rate was 6.79% in 2000 and 3.71% in
2010; the 2000 deflator was 24 and 51 in 2010. What is the real gain?
A. 18.34%*
B. 38.58%
C. 151.48%
D. 70.61%
In Fairwind Country, there are only 4 goods: tourism, popcorn, carrots, and berries. The following chart
shows the prices and quantities of these 4 categories in 1985, 2005, and 2015. The average family
purchased the following “market basket”: 2 units tourism, 25 units popcorn, 10 units carrots, and 15 units
berries. Use 1985 as the base year.
Calculate the market basket values for 1985, 2005, and 2015.
1985
2005
2015
P
Q
P
Q
P
Q
Tourism
$125.00
500
$150.00
550
$200.00
600
Popcorn
$4.00
750
$5.00
700
$7.00
600
Carrots
$0.75
1000
$2.25
1250
$3.50
2000
Berries
$1.50
1000
$2.50
1500
$4.00
2000
1987: $67,750, 2005: $92563, 2015: $139,200
1987: $106,641, 2005: $159,750, 2015: $278,850
1987: $380, 2005: $485, 2015: $670*
1987: 1235, 2005: 1576, 2015: 2178
1987: $130, 2005: $185, 2015: $270
Using the data in the following table, please calculate the CPI values for 2005 and 2015, using 1987 as a
base year. (Please round to the nearest whole number).
1985
2005
2015
P
Q
P
Q
P
Q
Tourism
$125.00
500
$150.00
550
$200.00
600
Popcorn
$4.00
750
$5.00
700
$7.00
600
Carrots
$0.75
1000
$2.25
1250
$3.50
2000
Berries
$1.50
1000
$2.50
1500
$4.00
2000
2005: 137, 2015: 138
2005:137, 2015: 176
2005: 128, 2015: 176 *
2005: 128, 2015: 138
Updated: Sept 19, 2015
2005: 142, 2015: 208
2005: 142, 2015: 146
7 Define the rate of inflation; Explain how the rate of inflation is calculated
Short Title: Rate of Inflation
If the Consumer Price Index was 186.5 at the end of last year and 179.8 at the end of this year, the country
experienced which of the following?
An inflation rate of 3.59 percent
An inflation rate of 3.72 percent
A deflation rate of 3.59 percent*
A deflation rate of 3.72 percent
If the Consumer Price Index was 120 at the end of last year and 125 at the end of this year, the country
experienced which of the following?
Inflation*
Deflation
A decrease in price
Inflation is a
1. increase in the price level of a given basket of goods.*
1. increase in the overall price level.*
1. increase in the price of beer.
8 Identify the consequences of price instability (i.e., inflation)
Short Title: Consequences of Price Instability
During the 1970s when inflation accelerated, middle class Americans benefited primarily because.
Nominal wages fell.
The value of their mortgages decreased in real terms.*
Inflation always benefits the middle class.
Inflation makes
financial assets worth less.*
real assets worth more.*
the value of money diminish.*
The redistribution of purchasing power due to unexpected inflation benefits
a. Elderly persons on pensions with cost-of-living adjustments*
b. Home buyers with adjustable rate mortgages
c. Students with fixed-rate educational loans.*
Inflation increases transaction costs to consumers because
sellers raise the prices of their products
consumers must put more effort into shopping to find the best price. *
consumers must research big ticket items more before purchasing. *
9 Use a price index to translate between real and nominal data
Short Title: Price Indexes and Real Data
Updated: Sept 19, 2015
David’s pay last year was $100,000. His pay this year increased to $115,000. The consumer price index
increased from 100 to 115 over the same time period. What has happened to David’s real income from last
year to this year?
David’s real income is unchanged. *
David’s real income increased.
David’s real income decreased.
Kim’s nominal income is $75,000. If the consumer price index is 75, Kim’s real income is
$100,000 *
$ 56,250
$ 75,075
Julie received a 10% pay raise, while the inflation rate for consumer prices was 3%. How much did Julie’s
income increase in real terms?
10%
7%*
13%
10 Define the GDP price index (also known as the GDP deflator or the
Implicit Price Deflator)
Short Title: Defining the GDP Price Index
If the nominal GDP is $3 trillion and the GDP deflator is 120, then what is the real GDP?
$2.5 trillion*
$0.25 trillion
$4 trillion
$400 trillion
An economics professor is discussing a measure of inflation over time based on a basket of goods
comprised of all the components of GDP. Which measure is it?
A. Consumer Price Index
B. GDP Price Index
C. Consumer GDP
D. GDP Deflator*
The GDP deflator is a price index that includes the following components of GDP:
A. Consumption
B. Consumption plus Investment but not Exports
C. Consumption, Investment plus Exports minus Imports
D. Consumption, Investment, Government plus Exports minus Imports*
26. Alex wants to measure the nominal 1998 GDP of $993 billion in 2008 dollars. From the data he
gathered, he knows the deflator for 1998 is 30 and for 2008, it is 74, and that real interest in those years was
6.23% and 3.21% respectively. If he avoids making a misleading calculation, what will the value be?
A. $430 billion
B. $835 billion
C. $2,063 billion
D. $2,449 billion*
11 Differentiate between nominal GDP and real GDP
Short Title: Nominal and Real GDP
Updated: Sept 19, 2015
Which of the following best defines real GDP?
Real GDP is defined as the total dollar value of final goods and services produced within a country in one
year before adjustment for inflation.
Real GDP is defined as the current total dollar value of final goods and services produced within a country.
Real GDP is defined as the total dollar value of final goods and services produced within a country in one
year after adjustment for inflation.*
The distinction between real GDP and nominal GDP is important to determine which of the following?
The change in economic welfare
The growth in the government sector
The change in the price levels
The change in real production*
The difference between nominal GDP and real GDP is:
A. nominal GDP measures actual productivity
B. nominal GDP adjusts for inflation
C. real GDP adjusts for inflation*
D. real GDP excludes imports and exports
The following table shows the production of a country’s economy in two consecutive years. What was the
real GDP for year 1997(Assume 1997 is the base year)?
Year
Item
Quantity Produced
Price Per Unit
1997
Oranges
1000 pounds
$1.00
1997
Haircuts
2000 haircuts
$5.00
1998
Oranges
1500 pounds
$1.50
1998
Haircuts
3000 pounds
$7.00
1. $11,000*
1. $12,500
1. $16,500
The following table shows the production of a country’s economy in two consecutive years. What was the
real GDP for year 1998 Assume 1997 is the base year)?
Year
Item
Quantity Produced
Price Per Unit
1997
Oranges
1000 pounds
$1.00
1997
Haircuts
2000 haircuts
$5.00
1998
Oranges
1500 pounds
$1.50
1998
Haircuts
3000 pounds
$7.00
1. $16,500*
1. $15,000
1. $12,500
Updated: Sept 19, 2015
11a Use the GDP price index to compute real GDP from nominal GDP
Short Title: Converting Nominal to Real GDP
If Nominal GDP = $4,500 trillion and the GDP deflator is 150, then real GDP is equal to
$3,000 trillion *
$4,350 trillion
$6,000 trillion
Suppose the European Union has a Real GDP of 12.2 trillion Euros, and their GDP deflator is 125. What is
the European Union’s nominal GDP?
1525 trillion Euros *
9.76 trillion Euros
137.5 trillion Euros
// updated Sept 19, 2015: Decimal removed from correct answer.
If Nominal GDP is $17,000 billion and the GDP deflator is 0.75, then Real GDP is:
$22.67 billion *
$12.75 billion
$16.50 billion
12 Measure the distribution of income using the Lorenz curve
Short Title: The Lorenz Curve
What is the the image below?
income curve
inequality curve
Lorenz Curve*
The image below shows what?
Updated: Sept 19, 2015
the inequality of the American capitalist system
distribution of income among groups of people*
the impact on unions on wage earners
A Lorenz curve refers to a graphic illustration of the share of population on the ________ and the
cumulative percentage of total income received on the ________.
1. horizontal axis; vertical axis*
1. left quintile; right quintile
1. vertical axis; horizontal axis
Incomes rise for low-income and high-income workers, but rise more for the high-income earners. How
will this change affect income inequality?
1. poverty falls, inequality rises*
1. poverty rises, inequality falls
1. no change
A Lorenz curve shows:
what percentage of a population has incomes below the poverty line
how a population’s total income is distributed among its members *
how the distribution of income in a population has changed over time
7 Modeling the macro economy over the short and long
terms
Short Title: Macro Workings
1 Describe the business cycle and its primary phases
Short Title: The Business Cycle
Updated: Sept 19, 2015
The business cycle refers to the
1. periodic but irregular up-and-down movement in production.*
1. increases and decreases trends in the price level.
1. periodic but regular up-and-down movement in production.
Which of the following is the alternating periods of expansion and contraction in the economy?
1. business cycles*
2. depressions
3. economic crises
The periods of time in which an economic cycle transitions from boom to bust or bust to boom is a:
1. cyclic point.
2. turning point.*
3. peak.
Which of the following are economic disturbances that originate outside an economy?
1. cycles
2. external shocks*
3. droughts
Concerning the four phases in the economic cycle above A shows an economic what?
1. boom*
2. recovery
3. depression
Updated: Sept 19, 2015
Concerning the four phases in the economic cycle above, B shows an economic what?
1. recovery
2. peak*
3. recession
Updated: Sept 19, 2015
Concerning the four phases in the economic cycle above, C shows an economic what?
1. peak
2. boom
3. bust*
Updated: Sept 19, 2015
Concerning the four phases in the economic cycle above, D shows an economic what?
1. boom
2. recession
3. trough*
Macroeconomic fluctuations are called ___________?
1. business cycles.*
2. depressions.
3. recessions.
The point of a fluctuation at which economy turns from growth to a slowdown is called a:
1. depression
2. peak*
3. reconversion
The point of a fluctuation at which economy turns from a slowdown to growth is called a _________.
1. depression.
2. disinflation.
3. trough.*
The top or bottom of a fluctuation where the economy transitions is called a _________.
1. recovery.
2. turning point.*
3. contraction.
Updated: Sept 19, 2015
Which of the following best describes a business cycle?
The cyclical movement in interest rates
Regular growth rate of consumer spending
Periods of increasing and decreasing real GDP*
Irregular fluctuations of prices
A drop in the GDP for two successive quarters defines a what? (Outcome
1) (DOK1)
Short Title: 1. recession*
2. depression
3. contraction
25. A business cycle reflects changes in economic activity, particularly real GDP. The stages of a business
cycle are:
A. trough, expansion, recession, peak
B. contraction, recession, expansion, boom
C. expansion, trough, recession, peak
D. expansion, peak, recession, trough*
26. Which of the following is true?
A. A depression is a recession that is mild and relatively brief.
B. The expansions and contractions of real world business cycles last varying lengths of time and often
differ in magnitude.*
C. The timing of business fluctuations is regular and therefore easily predictable.
D. During the contractionary phase of the business cycle, the rate of unemployment is generally quite low.
2 Define economic growth
Short Title: Defining Economic Growth
Economic growth is
1. the annual percentage change of real GDP.*
1. the nominal GDP.
1. the quantity of goods produced within four months period.
8. A nation can achieve higher economic growth if:
A. it devotes more resources to research and development.*
B. the productivity of labor declines
C. taxes are imposed on investment in capital.
D. more resources are allocated to consumption goods.
36. _______________, which can be approximated by the growth of gross domestic product, ultimately
determines the prevailing standard of living in a country.
A. Trade balance
B. Inflation
C. Education
D. Economic growth*
Since the late 1950s, economists have performed “growth accounting” studies in the United States. These
have determined that ________________ is typically the most important contributor to U.S. economic
Updated: Sept 19, 2015
growth.
A. human capital
B. physical capital
C. technology*
D. a market orientation
Which of the following factors contribute to economic growth?
A. a decrease in the quantity of labor due to emigration
B. a decrease in the productivity of labor
C. the discovery of new oil reserves*
D. a decline in the stock of physical capital
2a Identify the sources of economic growth
Short Title: Sources of Economic Growth
11. When discussing economic growth, it is often useful to focus on ____________, to avoid studying
changes in the size of GDP that represent only having more people in the economy, and focus on those
increases in GDP which represent an actual rise in the standard of living on a per person basis.
A. economic growth
B. GDP per capita*
C. living standards
D. consumption and expenditures
14. Investment in human capital:
A. is of minor importance to economic growth.
B. can be acquired through on-the-job training.*
C. is an important source of economic growth.*
D. is characterized by both b) and c).*
Economists typically measure economic growth by tracking:
A. the employment rate.
B. the unemployment rate.
C. averaged GDP growth
D. real GDP per capita.*
16. Which of the following is most likely to contribute to economic growth as measured by GDP per
capita?
A. the imposition of tariffs and quotas on imported goods
B. increased capital formation*
C. rapid population growth
D. an increase in marginal tax rates
Increased investment alone will guarantee economic growth.
A. This is a true statement, because growth occurs only with savings.
B. This is a true statement, because money is the only resource needed for growth.
C. This is a false statement, because an economy must rely on capital injections from abroad.
D. This is a false statement, because economic growth hinges on the quality and type of investment as well
as the human capital and improvements in technology.*
A nation can achieve higher economic growth if:
A. more resources are allocated to consumption goods.
B. taxes are imposed on investment in capital.
Updated: Sept 19, 2015
C. the productivity of labor declines.
D. it devotes more resources to research and development.*
Which of the following is unlikely to affect the rate of economic growth?
A. the quality of available resources
B. the quantity of available resources
C. the level of government spending*
D. technological change
Which of the following did not result in economic growth?
A. Installing a network of irrigation ditches and pumping stations in order to grow fruits and vegetables in
parts of southern California.
B. The invention of a threshing machine for harvesting grains.
C. Increased government funding of post-secondary education.
D. Many citizens emigrating from Zimbabwe when a politically repressive regime took office.*
Which of the following factors contribute to economic growth?
A. an increase in the average wage rate paid to workers
B. an increase in the standard of living
C. a decrease in the productivity of labor
D. an increase in the proportion of the population that is college educated*
2b Explain productivity and relate productivity growth to improvements
in the standard of living
Short Title: Productivity
An economy’s rate of productivity growth is closely linked to the growth rate of its ______________,
although the two aren’t identical.
A. GNP
B. output
C. GDP per capita*
D. technology
9. _________ is output per hour in the business sector.
A. Net exports
B. Productivity*
C. Investment
D. GDP per capita
To achieve a high standard of living, a nation should:
A. increase welfare payments to the poor.
B. use less capital and more labor in the production process.
C. promote economic growth.*
D. increase the tax deduction for child dependents.
In the long run, the most important source of increase in a nation’s standard of living is a:
A. zero rate of population growth.
B. high rate of economic growth.*
C. high rate of consumption.
D. high rate of labor force growth.
Updated: Sept 19, 2015
Over the long run, ____________ per hour is the most important determinant of the average
wage level in any economy.
A. demand
B. dollars
C. productivity*
D. supply
4. In the long run, the most important source of increase in a nation’s standard of living is a:
A. zero rate of population growth
B. high rate of economic growth.*
C. high rate of consumption.
D. high rate of labor force growth.
The value of what is produced per worker, or per hour worked, is called ____________.
A. economic growth
B. human capital
C. productivity*
D. GDP per capita
3. To achieve a high standard of living, a nation should:
A. increase the tax deduction for child dependents.
B. promote economic growth.*
C. use less capital and more labor in the production process.
D. increase welfare payments to the poor.
3 Use the AD-AS model to explain the equilibrium levels of real GDP and
price level
Short Title: The AD-AS Model and Equilibrium
In an AD/AS model:
A. the GDP deflator always slopes upwards.
B. the potential GDP always slopes downwards.
C. the CPI is shown on the vertical axis.
D. real GDP is shown on the horizontal axis.*
What term is used to describe the maximum quantity that an economy can produce, in the context of its
existing inputs, market and legal institutions?
A. GDP deflator
B. AS curve
C. potential GDP*
D. aggregate supply
Why is productivity growth considered to be the most important factor in the AD/AS model?
A. it shifts the AD curve in the long-term
B. it shifts the AD curve in the short-term
C. it shifts the AS curve in the short-term
D. it shifts the AS curve in the long-term*
34. As the aggregate price level in an economy rises, ____________________.
A. interest rates increase*
B. consumer demand increases
Updated: Sept 19, 2015
C. exports decrease
D. investment increases
3a Define aggregate demand (AD) and explain the factors that cause it to
change
Short Title: Aggregate Demand (AD)
Aggregate demand curves slope downwards for each of the following reasons EXCEPT:
A. The wealth effect: As the price level falls, the buying power of people’s savings increases and induces
them to spend more.
B. The substitution effect: As the price level falls, people buy more of the cheaper goods and less of other
goods.*
C. The interest rate effect: As prices for outputs rise, it costs more to make the same purchases, driving up
the demand for money, raising interest rates and reducing investment spending.
D. The foreign price effect: As the price level falls, U.S. become more attractive to foreigners and domestic
residents, increasing net export spending.
In macroeconomics, _____________________ denotes the relationship between the total quantity of goods
and services and the price level for output.
A. macroeconomic equilibrium
B. aggregate supply (AS)
C. aggregate demand (AD)*
D. potential GDP
32. Changes in the price level of the different components of aggregate demand are reflected in the
AD/ASAD/AS macroeconomic model by a ________________________.
A. flatter top portion of AD curve
B. longer distance to equilibrium point
C. downward sloping AD curve*
D. shorter distance to equilibrium point
Aggregate Demand (AD) = C + I + G + (X-M). C = ________.
1. cost
2. consumers*
3. customers
Aggregate Demand (AD) = C + I + G + (X-M). I = ________.
1. interest rates
2. industry
3. investments*
Aggregate Demand (AD) = C + I + G + (X-M). G = ________.
1. government investment*
2. guest workers
3. gross investment
Aggregate Demand (AD) = C + I + G + (X-M). X = ________.
1. X factor
2. exports*
3. exchange
Updated: Sept 19, 2015
Aggregate Demand (AD) = C + I + G + (X-M). M = ________.
1. investments
2. imports*
3. income
Aggregate Demand (AD) = C + I + G + (X-M). The Aggregate demand is the demand for _____ of a
country.
1. Gross National Product
2. Output
3. Gross Domestic Product*
The Aggregate demand is the demand for _____.
1. a nation’s output of goods and services
2. a nation’s total budget
3. the total of goods and services available*
The Aggregate demand is also _____.
1. a nation’s output of goods and services.
2. a nation’s total budget.
3. the effective demand *
Some define the Aggregate demand as a measure of -which of the following?
1. a nation’s total budget
2. ability to spend*
3. output of goods and services
Aggregate Demand (AD) = C + I + G + (X-M). There are other determinants to the AD. One is ____ which
affects the cost of borrowing and impacts consumption and investment.
1. consumption rate
2. unemployment rate
3. interest rate*
Aggregate Demand (AD) = C + I + G + (X-M). There are other determinants to the AD. One is the
________ which is made up of government purchases.
1. consumption rate
2. federal deficit*
3. interest rate
Which of the following items can directly cause an increase / decrease in the aggregate demand?
1. consumption rate
2. federal deficit
3. exchange rate*
The largest component of Aggregate demand is ______?
1. federal deficient
2. exports
3. consumer spending*
Exports will add to the AD only if which of the following occurs?
1. The exchange rates are equal.
2. Value of exports exceeds value of imports.*
3. They are not taxed.
Updated: Sept 19, 2015
Imports will reduce the AD if which of the following occurs?
1. they exceed the value of imports.*
2. they are taxed too high.
3. exchange rates are not equal.
In the 1970s, the price of oil was extremely high. In the long run this caused what economically?
1. A shift to the left in the aggregate supply curve.
2. A shift to the right in the aggregate demand curve.
3. A shift to the left in the aggregate demand curve.*
During the winter of 2014 / 2015 oil prices dropped by a large percentage compared to the summer of
2014. By March 2015, what changed?
1. A shift to the left in the aggregate supply curve.
2. A shift to the right in the aggregate demand curve.*
3. A shift to the left in the aggregate demand curve.
There is a positive to falling aggregate demand. What could be considered positive in these situations?
1. Illegal immigrants go back to where they came from.
2. Unions lose clout.
3. Inflation slows*
There is a negative to rising aggregate demand. What could be considered a negative impact in these
situations?
1. The flow of illegal immigrants increases.
2. Foreign investment rises.
3. The inflation rate gets larger.*
A sudden unexpected event that causes a large change in the aggregate demand is called what?
1. a demand shock*
1. a recession
2. a rampant inflation
3b Define aggregate supply (AS) and explain the factors that cause it to
change
Short Title: Aggregate Supply (AS)
During the winter of 2014 / 2015, oil prices dropped by a large percentage compared to the summer of
2014. By March 2015, what changed?
1. A shift to the left in the aggregate supply curve.*
2. A shift to the right in the aggregate demand curve.
3. A shift to the left in the aggregate demand curve.
In the chart below concerning the shifts in Aggregate Supply, Arrow A represents an economy that is
moving toward __________.
Updated: Sept 19, 2015
4. deflationary growth
5. stagflation*
6. depression
In the chart below concerning the shifts in Aggregate Supply. Arrow B represents an economy that is
moving toward __________.
1. deflationary growth*
2. stagflation
3. depression
Updated: Sept 19, 2015
40. When an economy’s output increases and the price level decreases, the _________ curve has shifted to
the ____________.
A. AS; left
B. AD; left
C. AD; right
D. AS; right*
37. Aggregate supply curves are ________________________ for low levels of output, and
____________________________ for high levels of output.
A. relatively flat; remain flat
B. relatively steep; remain steep
C. relatively flat; relatively steep *
D. relatively steep; relatively flat
27. Which of the following must be present in order for the aggregate supply curve to form an upward
slope?
A. the lure of higher profits to induce continued production
B. fixed cost of inputs combined with rising prices for outputs *
C. rise in aggregate quantity of supplied goods and services
D. constant price level for intermediate goods and services
2. Aggregate supply (AS) denotes the relationship between the __________________ that firms choose to
produce and sell and the _________________, holding the price of inputs fixed.
A. total quantity; price level for output*
B. type of goods; input price of raw materials
C. price of goods; number of employees
D. total inputs; types of goods
4. The term “full employment GDP” is synonymous with which of the following?
A. aggregate GDP
B. Keynesian zone
C. macroeconomic equilibrium
D. potential GDP*
3. The maximum quantity that an economy can produce, given its existing levels of labor, physical capital,
technology, and institutions, is called:
A. real GDP.
B. potential GDP.*
C. aggregate supply.
D. aggregate demand.
39. The change in inventories, a component of aggregate supply, comprises roughly __________ of GDP.
A. 20%
B. 10%
C. 1%
D. 0.5%*
3c Use the AD-AS model to explain periods of recession, and expansion,
demand-pull inflation and cost-push inflation
Short Title: The AD-AS Model and Recession, Expansion and Inflation
Updated: Sept 19, 2015
41. Whether the economy is in a recession is illustrated in the AD/AS model by how close the
_____________________ is to the potential GDP line.
A. AS curve
B. AD curve
C. equilibrium*
D. AS and AD curve
38. In an AD/ASAD/AS diagram, __________________________ could explain a rise in cyclical
unemployment?
A. a shift to the left in either AS or AD*
B. a shift in AS to the left
C. a shift in AS to the right
D. a shift in AD to the left
39. In an AD/AS diagram, an increase in structural unemployment will:
A. shift AS to the right.
B. have no effect on AS or AD.*
C. shift AS to the left.
D. shift AD to the left.
When prices of outputs in an economy become sufciently high causing production to exceed potential
GDP, the resulting:
A. hyper-intense production will be unsustainable in the long run.*
B. higher wages will encourage workers to produce more at high prices.
C. lower prices will lead to a lower quantity of demand.
D. downward slope in aggregate supply curve will be short run.
29. Due to inflationary pressures, the national income of households has been spread across a higher overall
price base for goods and services. How will this effect be shown in an AD/AS model?
A. nearly vertical AS slope at the far right
B. nearly horizontal AD curve at the far left
C. a downward sloping AD curve*
D. a downward sloping AS curve
25. In an AD/AS model, the point where the economy has excess capacity is called the:
A. Keynesian zone of the AS curve*
B. intermediate zone of the AS curve
C. neoclassical zone of the AS curve
D. crossing point of the potential GDP line
3d Use the AD-AS model to explain periods of economic growth
Short Title: The AD-AS Model and Economic Growth
In macroeconomics, the connection from inputs to outputs for the entire economy is called
_______________.
A. a production function
B. an aggregate production function*
C. human capital
D. physical capital
_______________________ happens when the economy is producing at its potential and unemployment is
at the natural rate of unemployment.
A. The foreign price effect
Updated: Sept 19, 2015
B. Stagflation
C. Full employment GDP*
D. The interest rate effect
Aggregate supplies and aggregate demands adjust naturally to offset pressures for long-term unemployment
or substantial economic inefficiency. This is a definition of ___?
1. a market economy
2. communism
3. classical economics*
8 Identify, compare, and apply key features of
Neoclassical and Keynesian economic models
Short Title: Keynesian and Neoclassical Economics
1 Understand the tenets of Neoclassical Economics
Short Title: The Neoclassical Perspective
Which of the following is a building block of neoclassical economics?
A. the size of the economy is determined by real GDP
B. sticky wages and prices
C. aggregate demand model
D. wages and prices will adjust in a flexible manner *
The neoclassical perspective on macroeconomics emphasizes that in the long run, the economy seems to
rebound back to its _____________ and its ____________________.
A. long term growth; cyclical unemployment
B. potential GDP; natural rate of unemployment *
C. natural level of output; cyclical unemployment rate
D. real GDP; natural rate of unemployment
From a neoclassical viewpoint, government should focus less on:
A. long-term growth.
B. controlling inflation.
C. aggregate supply.
D. cyclical unemployment. *
If a neoclassical model shows increasing wages in the economy over the long run, what else will likely
occur?
A. change in government policy to decrease in aggregate demand
B. substantial short-term off-setting decrease in output
C. inflationary increase in price level*
D. short-run decrease in cyclical unemployment
In the neoclassical view, the economy has a ___________________________ to move back to potential
GDP.
A. rational tendency
B. tendency to be unable
C. self-correcting tendency *
Updated: Sept 19, 2015
________________ economists place an emphasis on __________ run economic performance.
A. Phillips; short
B. Keynesian; long
C. Neoclassical; long*
D. Says; short
From a neoclassical view, which of the following is less important?
A. fighting unemployment *
B. encouraging long-term growth
C. fighting inflation
D. level of potential GDP
From a neoclassical perspective, which of the following would most likely be viewed as an element that
underpins long-run productivity growth in the economy?
A. flexible price levels
B. flexible market forces
C. investments in human capital *
D. higher unemployment
Which of the following schools of thought believe that the economy is self regulating and always at full
employment?
Keynesian
Supply-side*
Classical*
The ___________________ argument tends to view inflation as a cost that offers no offsetting gains in
terms of lower unemployment?
A. market forces
B. Keynesian
C. neoclassical*
D. flexible wage and price
2 Understand the tenets of Keynesian Economics
Short Title: The Keynesian Perspective
Keynes believed that the government should________ to get the economy out of recession
1. decrease taxes and/or increase government spending.*
1. increase taxes and reduce government spending.
1. increase taxes and/or increase spending.
Which of the following represents a Keynesian point of view of macroeconomics?
A. focus on long-term growth in the economy
B. aggregate supply is the primary determinate of economic output
C. creating increases in aggregate demand to reduce unemployment *
D. vertical aggregate supply
Which one of the following statements is akin to the Keynesian Perspective?
1. Build it and they will come.
1. We should build things.
1. People’s desires determines what is built.*
Updated: Sept 19, 2015
According to the Huffington Post in February 2015, Canada ranked second to Greece in the amount of debt
households had. How might this affect consumption in Canada if one were to use the Keynesian
perspective?
1. Canadian consumption would not be affected
1. Canadian households would consume more.*
1. Canadian household would consume less.*
What factors increase aggregate demand in the United States (AD shifts right)?
1. U.S. Households start to worry about the future and so start to consume less.
1. U.S. Firms decide to produce more in anticipation of the holiday season.*
1. President Obama puts an embargo on US Cars to Canada.*
Consumption, investment, government spending, exports, and imports are:
A. all complementary elements of a market-orientated economy.
B. some of the opposing elements found in a market-orientated economy.
C. all components of aggregate demand.*
D. some of the building blocks of Keynesian analysis.
Keynesian economics focuses on explaining why recessions and depressions occur, as well as offering a
______________________ for minimizing their effects.
A. pricing strategy
B. macroeconomic model
C. policy prescription*
D. set of menu costs
The Keynesian view of economics assumes that:
A. the Keynesian Phillips curve is vertical.
B. wages are sticky.*
C. the economy must focus is on long-term growth.
D. economic output is primarily determined by aggregate supply.
Which of the following is most strongly supported by the Keynesian perspective of macroeconomics?
A. inflation is a price that might have to be paid to achieve lower unemployment *
B. inflation offers no offsetting gains in terms of higher unemployment
C. more emphasis on economic growth and how labor markets work
D. shifts in unemployment primary determine changes in the price level
Referring to a Keynesian Phillips curve, a reduction in inflation is likely to cause:
A. at least a slight increase in aggregate demand.
B. a vertical Phillips curve because aggregate supply remains fixed.
C. at least a slight increase in unemployment.*
D. unemployment to remain constant in the long run.
The Keynesian economic framework is based on an assumption that:
A. an increase in government spending will cause the aggregate demand curve to shift to the left.
B. prices and wages are sticky and do not adjust rapidly. *
C. an increase in government spending will cause the aggregate demand curve to shift to the left.
D. people can afford a high level of government services.
Which of the following is consistent with Keynesian theory?
A typical firm changes its prices frequently to adjust to changes in aggregate demand.
A typical firm does not change its prices immediately when aggregate demand fluctuates.*
The economy is always at full employment.
Updated: Sept 19, 2015
Which of the following statements about economic models is false?
In the neoclassical model, the real wage adjusts to move the economy to full employment.
In the simple Keynesian model, the real wage adjusts to move the economy to full employment.*
In the simple Keynesian model, equilibrium is achieved by adjustments in aggregate demand, which equals
aggregate income.
In the simple Keynesian model, equilibrium may be achieved at less than full employment level.
Fill in the blanks. According to the Keynesian perspective, the government _____ a role in managing the
macroeconomy ______.
has; especially when actions by consumers, firms, and trading partners are weak or fall short of
expectations*
does not have; anytime
does not have; when there is unemployment and inflation
has; especially in the long run
According to macroeconomic theory, evidence that high unemployment may be accompanied by low
inflation, and low unemployment may be accompanied by high inflation is supported by the:
A. neoclassical expenditure-output model.
B. Keynesian cross diagram.
C. Keynesian Phillips curve tradeoff. *
D. Keynesian Inflation trade-of model.
The ________ suggests a negative relationship between inflation and unemployment.
1. short run Phillips curve*
1. aggregate demand curve
1. long run Phillips curve
3 Apply the tenets through the aggregate supply and demand model
Short Title: Applying the AS/AD Model
Moving along the aggregate demand curve, a decrease in real GDP demanded is associated with which of
the following?
An increase in the price level*
A decrease in the price level
An increase in income
A decrease in wealth
In the neoclassical version of the AD/AS model, which of the following should you use to represent the AS
curve?
A. the AS curve shifting as productivity increases
B. an upward sloping curve with a vertical top
C. a vertical line drawn at the level of potential GDP *
D. the AS curve shifting as potential GDP expands
In the Keynesian version of the AD/AS model, which of the following should you use to represent the AS
curve?
A. the AS curve shifting as productivity increases
B. an upward sloping curve with a vertical top
C. a horizontal line drawn at the existing aggregate price level *
D. the AS curve shifting as potential GDP expands
Aggregate demand is more likely to _________________ than aggregate supply in the short run.
A. shift substantially *
Updated: Sept 19, 2015
B. remain unchanged
C. decrease substantially
D. increase slightly
If aggregate supply is vertical, then which of the following statements must be true?
A. Aggregate demand does not affect the quantity of output. *
B. Aggregate demand does not cause inflationary changes in price level.
C. Inflation will accompany any rise in output.
D. Inflation creates greater social benefits.
In the neoclassical model, economic growth over time shifts potential GDP and the ______________
gradually to the right.
A. vertical AS curve *
B. vertical AD curve
C. vertical Phillips curve
In the neoclassical model, the AS curve shifts to the right over time as_______________________ and
potential GDP expands.
A. the macroeconomy adjusts back to real GDP
B. productivity increases *
C. the level of real output drops
D. aggregate demand increases
Over the long run, a surge in aggregate demand from a neoclassical perspective will most likely result in:
A. a rise in level of output.
B. an increase in price level. *
C. downward pressure on the price level.
D. pressure for a lower level of inflation.
Suppose that a rise in business confidence has led to more investment in the economy and higher levels of
output. In the short-run Keynesian analysis, the rise in aggregate demand will:
A. lower unemployment.*
B. cause government to lower taxes.
C. cause consumption expenditure to increase.*
D. exports will drop.
Which of the following factors would lead to a shift in the aggregate demand curve?
A cut in personal income tax *
High consumer confidence *
Increased defense spending *
The shape of the ______________ involves a tradeoff between unemployment and inflation.
A. aggregate demand curve
B. aggregate supply curve
C. Phillips curve*
D. Keynesian demand curve
3a Identify the Keynesian portion of the AS curve and explain the logic for
it
Short Title: The Keynesian Portion of the AS Curve
Updated: Sept 19, 2015
1. What is the best explanation for the slope of the Keynesian part of the aggregate supply curve?
a. an increase in aggregate demand when the economy is operating below potential output is causes real
output to grow, with no effect on the price level.*
b. an increase in aggregate demand causes real output to grow and the price level to increase.
c. an increase in aggregate demand when the economy is operating at potential output causes the price level
to rise, with no effect on real output.
In the Keynesian version of the AD/AS model, which of the following should you use to represent the AS
curve?
A. the AS curve shifting as productivity increases
B. an upward sloping curve with a vertical top
C. a horizontal line drawn at the existing aggregate price level *
D. the AS curve shifting as potential GDP expands
A horizontal AS curve means that changes in GDP will be caused by:
A. cyclical unemployment
B. changes in potential output.
C. changes in aggregate demand. *
A typical Keynesian aggregate supply (AS) curve _______________ and a typical Keynesian Phillips
curve _____________.
A. is horizontal; slopes downward *
B. slopes downward; slopes downward
C. is vertical; slopes upward
3b Use the Income-Expenditure model to explain periods of recession and
expansion
Short Title: The Expenditure Output Model
In a Keynesian cross diagram, what name is given to the distance between an output level that is below
potential GDP and the level of potential GDP?
A. expenditure-output
B. inflationary gap
C. recessionary gap *
D. national income
Fill in the blanks. As disposable income increases, consumption expenditures ________ and autonomous
consumption will _______.
increase; remain the same*
increase; increase
decrease; remain the same
decrease; increase
When the economy is in a recession, the government will want to increase output. If the multiplier equals
2.5 and the government increases spending by 200, how much will output increase by?
A. 100
B. 300
C. 500 *
D. 900
The economy is in a recession and the government wants to increase output. If the multiplier equals 3 and
the government increases spending by 250, how much will output increase by?
Updated: Sept 19, 2015
A. 50
B. 100
C. 200
D. 750 *
If John’s consumption expenditure increases from $2500 to $3500 when his disposable income increases
from $4000 to $6000, then which of the following is true?
John is dissaving.
John’s consumption function has a slope of 0.2.
John’s consumption function has a slope of 0.5.*
John’s consumption function has shifted.
If the slope of the Aggregate Expenditure curve is 0.4, what would the value of the multiplier be?
1.67*
0.4
0.6
2.5
Why does the multiplier effect exist?
Because a change in autonomous expenditure leads to changes in income, which generates further
spending*
Because a change in autonomous expenditure induces households to save
Because a change in autonomous expenditure induces the country to export
Because a change in autonomous expenditure is part of the government’s stabilization policy
3c Find the GDP Gap (negative or positive)
Short Title: The GDP Gap
When real GDP is less than potential real GDP, the economy is experiencing
a GDP gap *
inflation
unemployment *
The GDP gap shrinks
as the economy recovers from recession. *
as the Fed contracts the economy.
as the government uses discretionary fiscal policy to reduce the budget deficit.
Over the long run, the GDP gap
tends to be zero. *
tends to be positive.
tends to be negative.
3d Identify the Neoclassical portion of the AS curve and explain the logic
for it
Short Title: The Neoclassical Portion of the AS Curve
A vertical AS curve means that the level of aggregate supply (or potential GDP) will determine the real
GDP of the economy, regardless of the level of:
A. cyclical unemployment.
Updated: Sept 19, 2015
B. real unemployment.
C. aggregate demand.*
Neoclassical economists argue that:
the long run aggregate supply curve is vertical*
the long run aggregate supply curve is fixed at the level of potential GDP*
the long run aggregate supply curve moves gradually to the left as potential GDP grows
What is the best explanation for the slope of the Neoclassical part of the aggregate supply curve?
a. an increase in aggregate demand when the economy is operating below potential output is causes real
output to grow, with no effect on the price level.
b. an increase in aggregate demand causes real output to grow and the price level to increase.
c. an increase in aggregate demand when the economy is operating at potential output causes the price level
to rise, with no effect on real output.*
3e Differentiate between the long run and short run aggregate supply
curves
Short Title: Long Run and Short Run AS Curves
Why do neoclassical economists tend to put relatively more emphasis on long-term growth than on fighting
recession?
A. price and wage stickiness is reasonable in the short run
B. government focuses more on recession and cyclical unemployment
C. standard of living is ultimately determined by long-term growth *
D. upward trend of potential GDP determines the rate of inflation
An accurate interpretation of the long-run aggregate supply curve acknowledges both that real GDP does
not vary with the price level and:
the amount of cyclical unemployment is zero.*
the amount of structural unemployment is zero.
the amount of frictional unemployment is zero
the total amount of unemployment is zero.
Which of the following accurately contrasts short-run and long-run equilibrium?
In short-run equilibrium, the aggregate demand curve intersects the short-run aggregate supply curve; in the
long-run equilibrium, the aggregate demand curve intersects the long-run aggregate supply curve. *
In short-run equilibrium, the aggregate demand curve intersects the short-run aggregate supply curve; in the
long-run equilibrium, the aggregate demand curve intersects the long-run aggregate expenditures curve.
In short-run equilibrium, the aggregate demand curve intersects the short-run aggregate supply curve; in
long-run equilibrium, the aggregate demand curve intersects the short-run aggregate supply curves.*
4 Compare and contrast the circumstances under which it makes sense to
apply the Keynesian and Neoclassical perspectives
Short Title: Apply the Keynesian and Neoclassical Perspectives
If markets throughout the global economy all have flexible and continually adjusting prices, then:
A. all market-oriented economies will implement coordinated wage reductions.
B. each economy will always head for its natural rate of unemployment. *
C. each economy must shift in aggregate demand and create additional employment.
D. all changes in prices and wages will create additional employment.
Updated: Sept 19, 2015
If an economy experiences a decrease in aggregate demand due to a decline in consumer confidence and
output falls below potential GDP, which of the following is likely to occur?
A. less consumption and more saving*
B. adjustment back to potential GDP
C. increase in price inflation
D. a rise in unemployment *
The Keynesian model focuses more on ______ and the neo-classical model focuses more on _____.
Short term fluctuations caused by business cycles, long-run determinants of output and employment.*
Long-run determinants of output and employment, short term fluctuations caused by business cycles.
Short term fluctuations caused by technological change and labor force growth, long-run determinants of
output and employment.
9 Understand What Government Budgets Consist Of,
and How Fiscal Policy Affects the Economy
Short Title: Fiscal Policy
1 Identify the major spending categories and major revenue sources in the
U.S. Federal budget
Short Title: The Federal Budget
Assuming that income tax is the only source of revenue for the government, with a tax rate of 10%, an
aggregate income of $500 billion, and government outlays of $70 billion, which of the following is true of
the government’s budget?
The government has a budget surplus of $430 billion.
The government has a budget deficit of $20 billion.*
The government has a budget surplus of $20 billion.
None of the above; more information is needed to calculate the budget’s surplus or deficit.
When does a balanced budget occur?
when government spending equals government tax revenues*
when government spending exceeds government tax revenues
when the rate of increase in government spending equals the rate of increase in government tax revenue
collections
When does a budget surplus occur?
When government spending exceeds government tax collections*
When government tax collections exceed government spending
When government spending equals government tax collections
When the increase in the rate of government spending is smaller than the rate for government tax
collections
Which of the following is a major component of US government spending?
Net export expenditures
Medicare and social security expenditures*
Payments to secure gold in order to back money supply
Updated: Sept 19, 2015
Which of the following statements about an entitlement is true?
An entitlement is an item that is included automatically in the government’s budget.*
An entitlement is an item that sends money to the owners of a property.
An entitlement is an item that the wealthy receive from the government.
An entitlement is an item that accounts for changes in new housing starts.
Which of the following statements accurately differentiates a budget deficit and national debt?
A budget deficit occurs every year; the national debt occurs every five years.
A budget deficit occurs in one year when the government spends less than it receives; national debt is an
accumulation of budget deficits over time.
A budget deficit occurs in one year when the government spends more than it receives; national debt is an
accumulation of budget deficits over time.*
A budget deficit is the result of Democratic control of Congress; national debt is something we can pay off
next year.
A government annually collects $210 billion in tax revenue and allocates $70 billion to military spending.
What percentage of this government’s budget is spent on its military?
A. 27%
B. 36%
C. 30% *
D. 41%
24. A government annually collects $320 billion in tax revenue and allocates $80 billion to education
spending. What percentage of this government’s budget is spent on education?
A. 25%*
B. 12%
C. 30%
D. 1%
By June, 2010, the U.S. government owed $13.6 trillion dollars ________________ that, over time, has
remained unpaid.
A. from decreases in excise tax
B. from decreases in income tax
C. in accumulated government debt *
D. from decreases in corporate tax
4. A ______________________ is created each time the federal government spends more than it collects in
taxes in a given year.
A. budget deficit*
B. budget surplus
C. corporate tax
D. regressive tax
19. Which of the following terms is used to describe the set of policies that relate to government spending,
taxation, and borrowing?
A. financial policies
B. monetary policies
C. fiscal policies*
D. economic policies
5. A ______________________ means that government spending and taxes are equal.
A. fiscal budget
B. balanced budget*
C. contractionary fiscal policy D. discretionary fiscal policy
Updated: Sept 19, 2015
6. A __________________________ policy will cause a greater share of income to be collected from those
with high incomes than from those with lower incomes.
A. proportional tax
B. regressive tax
C. progressive tax *
D. excise tax
13. If government tax policy requires Jane to pay $25,000 in taxes on annual income of $200,000 and Mary
to pay $10,000 in tax on annual income of $100,000, then the tax policy is:
A. regressive.
B. progressive. *
C. proportional.
D. optional.
12. If government tax policy requires Peter to pay $15,000 in tax on annual income of $200,000 and Paul to
pay $10,000 in tax on annual income of $100,000, then the tax policy is:
A. optional.
B. progressive.
C. proportional.
D. regressive.*
6. A __________________________ policy will cause a greater share of income to be collected from those
with high incomes than from those with lower incomes.
A. proportional tax
B. regressive tax
C. progressive tax *
D. excise tax
10. What do goods like gasoline, tobacco, and alcohol typically share in common?
A. A progressive tax is imposed on each of them.
B. A regressive tax is imposed on each of them.
C. They are all subject to government excise taxes. *
D. They are all subject to government fiscal taxes.
9. In 2010, Microsoft will pay corporate income tax to the federal government based on the company’s
__________________.
A. proportional tax rate
B. corporate profits*
C. optional tax rate
D. excise profits
25. A government annually collects $200 billion in tax revenue and allocates $20 billion to its universal
healthcare spending. What percentage of this government’s budget is spent on healthcare?
A. 12%
B. 10% *
C. 16%
D. 21%
26. A government collects $600 billion annually in tax revenue. Each year it allocates $35 billion to
healthcare and $25 billion for education. What percentage of annual tax revenue is allocated to these two
categories of government spending?
A. 10%*
B. 14%
Updated: Sept 19, 2015
C. 17%
D. 26%
27. A government collects $700 billion annually in tax revenue. Each year it allocates $140 billion to
interest payments that it must pay on its accumulated debt. What percentage of annual tax revenue is
allocated to make these interest payments?
A. 17%
B. 28%
C. 20% *
D. 27%
2 Identify the major spending categories and major revenue sources in
U.S. state and local budgets
Short Title: State and Local Budgets
2. If the state of Washington’s government collects $75 billion in tax revenues in 2013 and total spending
in the same year is $74.8 billion, the result will be a:
A. budget deficit.
B. budget surplus.*
C. decrease in payroll tax.
D. decrease in proportional taxes.
3. If the government for the state of Washington collects $65.8 billion in tax revenues in 2013 and total
spending in the same year is $74.8 billion, the result will be:
A. an increase in payroll tax.
B. an increase in excise tax.
C. a budget surplus.
D. a budget deficit.*
1. If South Dakota’s governor reports a budget surplus in 2011, that state government likely:
A. received more in taxes than it spent in that year. *
B. increased the proportional tax level.
C. equalized spending and taxes in that year.
D. increased the corporate income tax rate.
3 Define fiscal policy and identify the roles of tax rates and government
spending
Short Title: Fiscal Policy and Tax Rates
19. Which of the following terms is used to describe the set of policies that relate to government spending,
taxation, and borrowing?
A. financial policies
B. monetary policies
C. fiscal policies*
D. economic policies
16. The government can use _____________ in the form of ____________________ to increase the level
of aggregate demand in the economy.
A. an expansionary fiscal policy; an increase in government spending*
B. a contractionary fiscal policy; a reduction in taxes
Updated: Sept 19, 2015
C. a contractionary fiscal policy; an increase in taxes
D. an expansionary fiscal policy; an increase in corporate taxes
When the government increases its spending, it is conducting
1. fiscal policy*
1. monetary policy
1. supply-side policy
4 Differentiate between discretionary and automatic fiscal policy
Short Title: Discretionary and Automatic Fiscal Policy
4a Define Automatic Stabilization Tools
Short Title: Automatic Fiscal Policy
Which of the following is an example of an automatic fiscal policy stabilizer?
Decrease in tax revenues as real GDP decreases*
A law passed by Congress to raise taxes
The government decides to cut its spending
Personal tax rates are changed
_____________________ are a form of tax and spending rules that can affect aggregate demand in the
economy without any additional change in legislation.
A. Standardized employment budgets
B. Discretionary fiscal policies
C. Automatic stabilizers*
D. Budget expenditures
40. If an economy moves into a recession, causing that country to produce less than potential GDP, then:
A. automatic stabilizers will cause tax revenue to decrease and government spending to increase.*
B. automatic stabilizers will cause tax revenue to increase and government spending to decrease.
C. tax revenue and government spending will be higher because of automatic stabilizers.
D. tax revenue and government spending will be lower because of automatic stabilizers.
41. If Canada’s economy moves into an expansion while its economy is producing more than potential
GDP, then:
A. government spending and tax revenue will increase because of automatic stabilizers.
B. government spending and tax revenue will decrease because of automatic stabilizers.
C. automatic stabilizers will increase government spending and decrease tax revenue.
D. automatic stabilizers will decrease government spending and increase tax revenue.*
29. _____________________ are a form of tax and spending rules that can affect aggregate demand in the
economy without any additional change in legislation.
A. Standardized employment budgets
B. Discretionary fiscal policies
C. Automatic stabilizers*
D. Budget expenditures
37. During a recession, if a government uses an expansionary fiscal policy to increase GDP, the:
A. aggregate supply curve will shift to the right.
B. aggregate supply curve will shift to the left.
Updated: Sept 19, 2015
C. aggregate demand curve will shift to the left.
D. aggregate demand curve will shift to the right. *
4b Define discretionary fiscal policy
Short Title: Discretionary Fiscal Policy
38. When inflation begins to climb to unacceptable levels in the economy, the government should:
A. use contractionary fiscal policy to shift aggregate demand to the right.
B. use contractionary fiscal policy to shift aggregate demand to the left. *
C. use expansionary fiscal policy to shift aggregate demand to the right.
D. use expansionary fiscal policy to shift aggregate demand to the left.
16. The government can use _____________ in the form of ____________________ to increase the level
of aggregate demand in the economy.
A. an expansionary fiscal policy; an increase in government spending *
B. a contractionary fiscal policy; a reduction in taxes
C. a contractionary fiscal policy; an increase in taxes
D. an expansionary fiscal policy; an increase in corporate taxes
17. If a government reduces taxes in order to increase the level of aggregate demand, what type of fiscal
policy is being used?
A. discretionary
B. contractionary
C. standardized
D. expansionary*
18. A typical ____________________________ fiscal policy allows government to decrease the level of
aggregate demand, through increases in taxes.
A. expansionary
B. contractionary *
C. discretionary
D. standardized
28. When the government passes a new law that explicitly changes overall tax or spending levels, it is
enacting:
A. discretionary fiscal policy.*
B. progressive fiscal policy.
C. regressive fiscal policy.
D. monetary policy.
Which of the following is an example of an expansionary fiscal policy?
Increase in defense spending to promote national security*
Increase in interest rates
Decrease in interest rates
Change taxes and/or government expenditure to reduce the current account deficit
4c Differentiate between structural and cyclical budget balance
Short Title: Standardized vs. Actual Budget Figures
43. If the economy is producing less than its potential GDP, _____________________ will show a smaller
deficit than the actual deficit.
Updated: Sept 19, 2015
A. discretionary fiscal policy
B. the automatic stabilizers
C. the standardized employment deficit *
D. expansionary fiscal policy
44. When a country’s economy is producing at a level that exceeds its potential GDP, the standardized
employment deficit will show a __________________ than the actual deficit..
A. smaller surplus
B. smaller deficit
C. larger deficit *
D. surplus
A standardized deficit differs from an actual budget deficit because it:
eliminates the impacts of automatic stabilizers on the government deficit.*
includes the impacts of automatic stabilizers on the government deficit.
includes the impacts of discretionary countercylical spending on the deficit.
5 Compare and contrast expansionary and contractionary fiscal policies
Short Title: Expansionary and Contractionary Fiscal Policies
A decrease in government expenditure shifts the AD curve to the ________________ and a decrease in
taxes shifts the AD curve to the _______________.
Right, left
Right, right
Left, right*
Left, left
45. Assume that laws have been passed that require the federal government to run a balanced budget.
During a recession, the government will want to implement _____________________, but may be unable
to do so because such a policy would ____________________________.
A. contractionary fiscal policy; lead to a budget deficit
B. discretionary fiscal policy; lead to a budget surplus
C. contractionary fiscal policy; lead to a budget surplus
D. expansionary fiscal policy; lead to a budget deficit *
A decrease in aggregate demand as a consequence of government decisions to alter its levels of expenditure
and revenues involves which of the following?
Increases in tax rates and collections and decreases in spending*
Decreases in tax rates, collections, and spending
Decreases in spending
Increases in spending and decreases in tax rates and collections
An increase in aggregate demand as a consequence of government decisions to alter its levels of
expenditure and revenues involves which of the following?
Increases in tax rates and collections and decreases in spending
Decreases in tax rates, collections, and spending
Decreases in spending
Increases in spending and decreases in tax rates and collections*
6 Compare and contrast the way tax changes and government spending
changes work
Updated: Sept 19, 2015
Short Title: Changes in Tax and Spending
In an attempt to boost the economy, the government’s expansionary fiscal policy would include which of
the following?
Increased taxation
Cutting government expenditure
Cutting tax rates*
Control the money supply
If an economy’s potential GDP is at $ 300 billion, but it has a real GDP of $ 350 billion, what should the
government do in order to move the economy to the level of potential GDP?
Increase taxes and increase government expenditure.
Increase taxes and decrease government expenditure.*
Decrease taxes and increase government expenditure.
Decrease taxes and decrease government expenditure.
Which of the following can the government use as a tool of fiscal policy if it wants to increase the level of
real GDP in the economy?
A cut in taxes*
A decrease in government expenditure
An increase in government expenditure*
Which of the following can the government use as a tool of fiscal policy if it wants to decrease the level of
real GDP in the economy?
A cut in taxes
A decrease in government expenditure*
An increase in government expenditure
10 Explain the role of money, banking and monetary
policy in an economy
Short Title: Monetary Policy
1 Define money, explain the functions of money, and define liquidity
Short Title: Defining Money
Which of the following are functions of money?
1. medium of exchange, store of value, unit of account, standard of deferred payment*
1. price level, measurement of wealth, unit of scale
1. Store of value*
What serves as a medium of exchange, and is widely accepted as a means of payment?
1. money*
1. frequent flyer points*
1. credit
________ is defined as when goods are exchanged directly for other goods.
1. barter*
Updated: Sept 19, 2015
1. currency
1. trade
Money that some authority, generally a government, has ordered to be accepted as a medium of exchange is
1. fiat money*
1. commodity money
1. intrinsic value money
Complete the following sentence. Fiat money is backed by:
precious metals such as gold.
the public’s trust in a government and an overarching economic system.*
bartering arrangements.
Complete the following sentence. Money helps us to avoid bartering, primarily because it functions as a:
store of value.
unit of account.
medium of exchange.*
Which of the following qualify as “money”?
checks
credit cards
coins*
The ease by which deposits are turned into money is referred to as what?
convenience
rapidity
liquidity*
Economies that lack money do what?
sign IOUs
barter*
create debt
Goats, coins, and checks can all be used as payments. In economic terms these things are all what?
a medium of exchange*
money
terms of trade
Around the world oil is priced in United States dollars. In economic terms this is referred to as what?
store of value
units of measure*
flexible values.
Demand deposits are the largest part of the money supply and include checks and which of the following?.
accounts receivable
savings accounts*
bank reserve accounts
2 Define credit (or debt)
Short Title: Defining Credit
Updated: Sept 19, 2015
Which of the following are types of debt?
credit cards*
mortgage*
business loans*
student loans*
rental agreement
leases
insurance payments
Making a purchase with credit means
You will increase your debt. *
You will need to pay back the lender, usually with interest *
You would be better off waiting until you had the money.
Which of the following are types of business debt?
Revolving line of credit*
Bonds*
Mezzanine debt*
Credit cards*
Home equity loans
Leases
3 Explain what a bank does
Short Title: Banks
Banks are financial intermediaries because they:
Accept deposits from businesses, individuals, and government entities*
Analyze potential applicants and make loans*
Aid the economy in the exchange goods and services for money or other financial assets*
Print money as needed for borrowers whether business, individual, or government entities.
Hold all the money in the economic system in currency form
Banks facilitate macroeconomic activity basically by doing which of the following?
Converting household savings into business investments in which savings appear as a liability on the
bank’s balance sheet*
Converting household savings into business investments in which savings appear as an asset on the bank’s
balance sheet
Converting business investments into household savings in which loans appear as a liability on the bank’s
balance sheet
Converting business investments into household savings in which loans appear as an income item on the
bank’s balance sheet
Savings banks and credit unions are both an example of which of these?
part of the Federal Reserve
part of the treasury
depository institutions*
4 Understand how money is created by lending
Short Title: Lending and Money Creation
Updated: Sept 19, 2015
Which is true about banks’ deposits?
1. Banks lend out most of the deposits they have collected*
1. Banks must keep a large amount of deposits on hand, due to depositors often requesting the entire
amount at once
1. Banks keep the majority of their deposits as cash with the Federal Reserve
When banks receive new deposits, they can make new loans, and thus create money
1. only up to the amount of their excess reserves*
1. for the full amount of the deposit
1. up to the amount of their checkable deposits
Which of the following statements is most precise in describing the money creation process?
Money is created through bank deposit lending in direct relation to the federal funds rate.
Money is created through bank deposit lending in direct relation to the reserve requirement ratio.*
Money is created through bank lending contraction in direct relation to the government’s printing of new
dollar bills.
Money is created through bank lending contraction in direct relation to the government’s shredding of old
dollar bills.
Which of the following offers banks the ability to create money?
printing it
writing a check
borrowing from a bank*
The Federal Reserve requirement is extremely important to money creation. This requirement is defined as
which of the following?
the reserve over & above the required minimum on deposit with the fed
the maximum a bank can loan
a bank’s required percentage of cash it must keep against its demand deposits*
4a Calculate the lending capacity of a bank given its deposits and a
required reserve ratio
Short Title: Calculating a Bank’s Lending Capacity
The required reserve ratio for Jack’s bank is 10%. If Jack deposits $2000 cash in his checking out, what is
the amount of new money the bank would create?
$200
$1800*
$1000
$500
Money creation in the United States results from which of the following?
The rise in the value of gold
The process of multiple banks’ lending of their deposits*
The actions of a single commercial bank
The purchases of government securities
If Giant Bank has $500MM dollars in deposits and has a 12% reserve ratio, how much can Giant Bank
lend?
$440 MM*
$70 MM
Updated: Sept 19, 2015
$500 MM
$120 MM
5 Explain the structure, functions and responsibilities of the Federal
Reserve System
Short Title: The Federal Reserve
The Fed’s seven member ruling board of directors are:
1. appointed by the president, confirmed by Congress, and serve 14-year terms*
1. appointed by the president, confirmed by Congress, and serve 4-year terms
1. elected, following congressional confirmation, and serve 14-year terms
The Federal Reserve consists of:
12 Regional Federal Reserve Districts*
50 State Federal Reserve Districts
Board of Governors*
Federal Open Market Committee*
Board of Chairmen
Board of District Banks
Federal Marketing Committee
The Federal Reserve:
Helps keep economy stable *
Monitors the health of banks *
Makes loans to businesses
Makes loans to consumers
Regulates the supply of currency in the country
One of the key institutions that impact the economy*
Makes monetary policy decisions*
Affects interest rates*
Influences inflation rates*
Utilize policies to support maximum employment*
Oversee financial system*
Supervision and regulation of banks*
5a Define the money multiplier, explain how to calculate it, and
demonstrate its relevance
Short Title: The Money Multiplier
The money multiplier describes:
the amount of money that the banking system can create*
the amount of consumer demand following an increase in government spending
the amount of money that a bank can create.
The money multiplier is calculated as:
1. reserve requirement multiplied by the change in excess reserves following a change in the money
supply.*
1. reserve requirement multiplied by the change in deposits following a change in government expenditure.
1. reserve requirement multiplied by the change in total reserves following a change in the money supply.
Updated: Sept 19, 2015
If the reserve requirement is 10% and a monetary expansion increases excess reserves by $5 million, the
total change in the money supply after all rounds of lending are completed is:
50 million*
100 million
5 million
The money supply may expand by less than the amount predicted by the money multiplier if:
people do not deposit the money that they receive in the bank*
banks do not loan out all of their excess reserves*
banks loan out all of their excess reserves
6 Differentiate between M1 and M2 (measures of the supply of money)
Short Title: M1 and M2
Which source of money is most available to consumers?
M1*
M2
Certificates of deposit
The M2 money supply consists of savings deposits and which of the following?
certificates of deposit.*
long term debt.
personal checks.
The ease with which an asset can be converted into currency is the asset’s
1. liquidity*
1. exchange rate
1. money supply
M1, the narrowest of the Fed’s money supply definitions includes
1. savings deposits
1. currency in circulation*
1. checkable deposits*
Complete the following sentence. The M2 measure of the money supply is defined as currency:
plus checkable deposits, savings accounts and other timed deposits, and is smaller in sum than M1.
plus checkable deposits, savings accounts and other timed deposits and is larger in sum than M1.*
minus checkable deposits, savings accounts and other timed deposits and is larger in sum than M1.
minus checkable deposits, savings accounts and other timed deposits and is smaller in sum than M1.
7 Define monetary policy and differentiate it from fiscal policy
Short Title: Defining Monetary Policy
Monetary policy involves which of the following?
Adjustments in the supply of money*
Modifications to levels in government spending and taxing activities by Congress
Sales and purchases of government-issued items such as bonds and treasury bills*
Monetary policy describes _________ and fiscal policy describes ________.
management of the money supply, government taxes and expenditures.*
Updated: Sept 19, 2015
government taxes and expenditures, management of the money supply.
government tax policies and government spending programs.
A decision by the federal reserve to change reserve requirements for banks is an example of”
monetary policy*
fiscal policy
federal budget policy
Monetary policies include:
Bank reserve requirements*
Federal funds rate
Tax rates
Fiscal policies determine _____ and monetary policies address ________:
tax rates, bank reserve requirements.*
discount rate, government expenditure.
bank reserve requirements, open market operations.
7a Identify the tools of monetary policy
Short Title: Tools of Monetary Policy
The interest rate charged by the Fed when it lends reserves to banks is called the
1. discount rate*
1. federal interest rate
1. federal funds rate
Typically banks rely on other banks to lend reserves to one another. Which interest rate do they charge for
these loans?
1. federal funds rate*
1. federal interest rate
1. discount rate
Which of the following is a tool of monetary policy?
Federal funds rate
Discount rate*
Required reserves ratio*
Which of the following is a part of the Federal Reserve System’s monetary policy tool?
The required reserve ratio*
The income tax rate
Open market operations*
The Federal Reserve does all the following with the exception of what?
printing money*
setting reserve requirements
varying the discount rates
The amount money over the Federal Reserve requirement are/is?
deposit liabilities
reserve requirement ratio
excess reserves*
Updated: Sept 19, 2015
8 Define interest rates
Short Title: Interests Rates
An interest rate is the:
price of borrowing money*
reward for lending money*
annual stock dividend.
Interest rates measure the returns to investments in:
corporate bonds*
U.S. Treasury securities*
stock mutual funds
Interest rates measure:
returns on certificates of deposit*
gains in stock asset values
borrowing costs of mortgages*
8a Differentiate between the Federal Funds rate, the Prime rate and the
Discount rate
Short Title: Federal Funds, Prime and Discount Interest Rates
The federal funds rate is:
the interest on overnight inter-bank loans.*
interest rate that banks charge their very best customers.
interest rate charged by the Federal Reserve for discount loans.
The prime rate is:
the interest on overnight inter-bank loans.
interest rate that banks charge their very best customers.*
interest rate charged by the Federal Reserve for discount loans.
The discount rate is:
the interest on overnight inter-bank loans.
interest rate that banks charge their very best customers.
interest rate charged by the Federal Reserve for discount loans.*
9 Explain how the equilibrium interest rate is determined in the market
for money
Short Title: The Equilibrium Rate
The market for money can be described as:
demand for and supply of loanable funds in financial markets*
people’s demand for cash versus other assets*
supply and demand for currency
Agents in the financial market for money include:
a household that deposits its savings in its local bank*
Updated: Sept 19, 2015
a tech startup that needs a loan*
a neighborhood watch service that charges by the day
The supply and demand for financial capital can be shown on a graph with:
the interest rate on the vertical axis and quantity of of money that is loaned or borrowed on the horizontal
axis*
the interest rate on the horizontal axis and the supply of money on the vertical axis.
curves to describe the supply of loanable funds and the demand for loanable funds.*
When the demand for loanable funds exceeds the supply of loanable funds:
the interest rate will rise*
the interest rate will fall
the interest rate is unchanged.
When the supply of loanable funds exceeds demand for loanable funds:
the interest rate will rise
the interest rate will fall*
the interest rate is unchanged.
If an increase in consumer confidence leads to increased charged on consumers’ credit cards:
the demand for loanable funds will increase and cause interest rates to rise.*
the supply of loanable funds will increase and cause interest rates to rise.
the supply of loanable funds will decline and cause interest rates to rise.
The law of demand in the loanable funds market predicts:
a fall in consumer credit card use if the interest rate rises.*
a fall in consumer credit card use if the interest rate falls.
an increase in credit card issuance if the interest rate rises.*
9a Describe what economists mean by the demand for money
Short Title: Demand for Money
Complete the following sentence. In drawing an accurate money demand curve, one would:
place interest rate on the vertical axis, place quantity of money on the horizontal axis, and fix the line to
show a negative relationship.*
place interest rate on the vertical axis, place quantity of money on the horizontal axis, and fix the line to
show a positive relationship.
place interest rate on the horizontal axis, place quantity of money on the vertical axis, and fix the line to
show a positive relationship.
place interest rate on the horizontal axis, place quantity of money on the vertical axis, and fix the line to
show a negative relationship.
If the quantity of money demanded is greater than the money supplied, people will _______________
bonds and the interest rate would ______________.
Sell, fall
Buy, rise
Buy, fall
Sell, rise*
The economic term “transactions demand for money” implies which of the following?
a run on the bank
Updated: Sept 19, 2015
cashing in checks
people anticipate spending it*
Holding money to meet unexpected requirements is which of the following?
a savings account
a demand account
a precautionary demand*
When we hold investments or assume bonds, we forgo __________ in exchange for interest.
liquidity*
purchasing power
tax payments
Which of the following statements about the quantity of money demanded is true?
The quantity of money demanded varies inversely with the interest rate.*
The quantity of money demanded increases even if real GDP falls
The quantity of money demanded decreases as the price level decreases
The quantity of money demanded varies inversely with the income level
10 Explain the mechanism by which open market operations affect the
money supply and interest rates
Short Title: Open Market Operations
If the Federal Reserve adopts an expansionary policy, the FOMC will direct the trading desk to:
buy securities*
sell securities
make loans.
Monetary policy affects economy-wide interest rates by:
setting the federal funds rate*
conducting open market operations*
changing bank reserve requirements*
Ceteris paribus, a reduction in the federal funds affects car loan rates in the following manner:
Car loan rates will decrease.*
Car loan rates will increase.
Car loan rates will stay the same.
12 Explain how monetary policy affects GDP and the price level
Short Title: Monetary Policy and GDP
An expansionary monetary policy affects aggregate demand:
indirectly, by lowering interest rates, the available quantity of loans, and spending.*
directly, by increasing government expenditure.
indirectly, by increasing interest rates, the available quantity of loans, and spending.
An expansionary monetary policy increases investment and consumption spending, which:
shifts the AD curve to the right and increases equilibrium GDP.*
shifts the AD curve to the left and decreases equilibrium GDP.
shifts the AS supply curve to the right and increases equilibrium GDP.
Updated: Sept 19, 2015
A contractionary monetary policy reduces GDP by:
raising interest rates and discouraging investment and consumption spending.*
lowering interest rates and encouraging investment and consumption spending.
raising interest rates and encouraging investment and consumption spending.
If an economy is producing at a level of output above its potential GDP, a countercyclical monetary policy
would:
conduct open market operations that sell securities*
increase the federal funds rate*
lower the bank reserve requirement.
11 Use an understanding of the strengths and weakness
of fiscal and monetary policy to determine an
appropriate stabilization policy for a given
macroeconomic situation (moderate slowdown, severe
slowdown, overheating, etc).
Short Title: Policy Application
1 Understand the Keynesian View on Changes in Government Spending
and Taxation
Short Title: Keynesian Policy Prescriptions
1a >> Explain the implications of a Liquidity Trap
Short Title: Liquidity Trap
A liquidity trap exists when a change in money supply:
1. is able to increase the interest rate.
1. is able to lower the interest rate.
1. is unable to affect the interest rate.*
Which of the following could be potential solutions to the liquidity trap?
1. increase money supply*
1. sell government bonds
1. quantitive easing*
Which of the following statements is NOT true when considering the liquidity trap and consumers?
1. they are risk aversive
1. they hold on to their money
1. they believe the price of nonmonetary assets will rise*
1b Explain the significance of the Expenditure Multiplier
Short Title: The Expenditure Multiplier
Updated: Sept 19, 2015
Why is the effect of a government expenditure multiplier transmitted throughout the economy?
1.Because government spending changes the interest rate
1. Because there is no change in taxes
1. Because government spending generates a change in consumption spending which in turn affects the
equilibrium income*
If consumption spending decreased by $10 million, aggregate demand would decrease by,
1. $10 million
1. Less than $10 million
1. More than $10 million*
If GDP was $100 million below potential GDP, what should the government do to bring it back to
equilibrium?
1. Raise government spending by $100 million.
1. Raise government spending by less than $100 million.*
1. Do nothing.
1c Explain how Crowding Out weakens the effectiveness of fiscal policy
Short Title: Crowding Out
Complete the following sentence. Holding all else constant while government is borrowing to cover budget
deficits, the crowding out concept suggests:
interest rates rise and investment expenditures rise.
interest rates rise and investment expenditures fall.*
interest rates fall and investment expenditures fall.
interest rates fall and investment expenditures rise.
A country’s economic data indicates that there has been a substantial reduction in the financial capital
available to private sector firms. Which of the following most likely had the greatest influence on this
economy?
A. especially large and sustained household saving
B. increased borrowing by private firms
C. reduction in influx of funds for foreign financial investors
D. especially large and sustained government borrowing *
From a macroeconomic point of view, which of the following is a source of demand for financial capital?
A. savings by households and firms
B. foreign financial investment
C. domestic household private savings
D. government borrowing*
An increase in government borrowing can:
A. crowd out private investment in physical capital.*
B. increase the incentive to invest in technology.
C. cause a substantial decrease in interest rates.
A reduction in government borrowing can:
A. decrease the incentive to invest.
B. increase the interest rate.
C. crowd out private investment in human capital.
D. give private investment an opportunity to expand.*
Updated: Sept 19, 2015
Expansionary fiscal policy may result in which of the following?
Crowding out of private investment*
Crowding in additional investment
Reducing the deficit
Reduces government borrowing
2 Understand the effects of tax and spending policy from a neoclassical
perspective
Short Title: Neoclassical Policy Prescriptions
2a Explain the features of Supply-Side Economics
Short Title: Supply-Side Economics
Former President Ronald Reagan was an animate supply side economist. This meant what?
1. increasing taxes would decrease supply
2. reducing taxes would increase supply*
3. reducing taxes would increase supply
One of the arguments in favor of supply side approaches to economic growth calls for:
reductions in taxes paid by business operating in specific market, as they will bring about higher
unemployment rates in the macroeconomy.
reductions in taxes paid by business operating in specific market, as they will bring about lower
unemployment rates in the macroeconomy.*
increases in taxes paid by business operating in specific markets, as they will bring about lower
unemployment rates in the macroeconomy.
increases in taxes paid by business operating in specific market, as they will bring about higher inflation
rates in the macroeconomy.
A supply side economist would advocate:
reducing tax rates to encourage people to work more hours*
reducing tax rates to encourage businesses to increase investment spending*
reducing tax rates to encourage consumers to spend less
2b Explain how policy lags weaken the practice of activist fiscal and
monetary policies.
Short Title: Policy Lags
____________________________ will often cause monetary policy to be considered counterproductive
because it makes it hard for the central bank to know when the policy will take effect?
A. Altering the discount rate
B. Reserve requirements
C. Long and variable time lags *
D. Quantitative easing
Why does the implementation lag influence fiscal policy effectiveness?
Because it takes time to collect data on the current state of the economy
Because it takes time to agree on a resolution*
Because it takes time to evaluate differences between states of the economy
Because it takes time for interest rates and bond prices to change
Updated: Sept 19, 2015
Why does the recognition lag influence fiscal policy effectiveness?
Because it takes time to collect data on the current state of the economy*
Because it takes time to agree on a resolution
Because it takes time to evaluate differences between states of the economy
Because it takes time for interest rates and bond prices to change
Why does the impact lag influence monetary policy effectiveness?
Because it takes time to collect data on the current state of the economy
Because it takes time to agree on a resolution
Because it takes time to evaluate differences between states of the economy
Because it takes time for interest rates and bond prices to change*
2c Explain why the Neoclassical economists believe there is no Phillips
Curve tradeoff
Short Title: No Phillips Curve Tradeoff
In the long run, the Phillips curve will be ________ at the natural rate of unemployment.
1. a vertical line*
1. a horizontal line
1. upward sloping
The neoclassical perspective believes there is no Phillips Curve tradeoff because:
1. Prices are flexible.*
1. The natural rate of unemployment is determined by labor market conditions separate from the
mechanism that determines prices.*
1. Changes in aggregate demand affect prices.
In a neoclassical economists world, an increase in taxes will
1. Raise the price level.
1. Increase the natural rate of unemployment.
1. Lower the price level. *
2d Explain the features of New Classical economics and the theory of
Rational Expectations
Short Title: New Classical Economics and Rational Expectations
The theory of _____________________ holds that people will use all information available to them to
form the most accurate possible expectations about the future.
A. adaptive expectations
B. rational expectations *
C. Keynesian economics
D. Neoclassical economics
At a macroeconomic level, the theory of rational expectations points out that if the
______________________ is vertical over time, then people should rationally expect this pattern.
A. GDP
B. Phillips curve *
C. aggregate demand curve
D. aggregate supply curve *
Updated: Sept 19, 2015
24. When a shift in ________________ occurs, rational expectations hold that its impact on output and
employment will only be minimal.
A. aggregate demand *
B. aggregate supply
C. wage levels
D. price levels
1. The theory of rational expectations implies what about the Phillips Curve?
a. Inflation and unemployment are inversely (or negatively) related. When one goes up, the other goes
down.
b. Inflation and unemployment are directly (or positively) related. When one goes up, the other goes up.
c. Inflation and unemployment have no relationship. When inflation goes up, unemployment stays the
same. *
2. Neoclassical economists believe which of the following statements about the Phillips Curve?
a. There is a trade-off between inflation and unemployment.
b. There is a trade-off between inflation and unemployment in the short run, but there is no trade-off in the
long run. *
c. There is no trade-off between inflation and unemployment. *
After reports of the subprime mortgage crisis began to appear in the media, which of the following most
likely caused housing prices to fall?
A. neoclassical theory
B. cyclical expectations
C. rational expectations *
D. Keynesian theory
1. Keynesian economists believe which of the following statements about the Phillips Curve?
a. There is a trade-off between inflation and unemployment. *
b. There is a trade-off between inflation and unemployment in the short run, but there is no trade-off in the
long run.
c. There is no trade-off between inflation and unemployment.
Which of the following is a valid criticism of the rational expectations theory?
A. prices do not wait on events
B. most people lack the information necessary to form rational expectations. *
C. people form the most accurate possible expectations
D. adjustment of wages and prices might be quite rapid
2e Explain how the theory of Ricardian Equivalence weakens the
effectiveness of activist fiscal policy
Short Title: Ricardian Equivalence
If Ricardian Equivalence theory holds completely true, then any change in budget deficits or budget
surpluses would be completely offset by which of the following?
A. a change in currency exchange rates
B. a sustained pattern of trade imbalances
C. a corresponding change in private saving *
D. a dependence on inflows of capital
Ricardian equivalence means that:
A. changes in private savings offset any changes in the government deficit. *
Updated: Sept 19, 2015
B. changes in exports offset any changes in the government deficit.
C. changes in imports offset any changes in the government deficit.
D. changes in investment offset any changes in the government deficit.
Suppose you are analyzing data for an economy in which Ricardian neutrality holds true. If the budget
deficit increases by 50, then:
A. investment will increase by 50
B. investment will decrease by 50
C. private savings will decrease by 50
D. private savings will increase by 50 *
2f Compare and contrast Keynesian and Neoclassical approaches to
addressing inflation, recession, and unemployment
Short Title: Policy Implications: Inflation, Recession, and Unemployment
To decrease inflation, a Keynesian would propose the following policies:
1. Decrease Aggregate demand.*
1. Increase government spending.
1. Decrease money supply.*
In a recession, periods of low economic output, a Neoclassical economist would:
1. Pursue investments in human capital.*
1. Believe the economy will eventually rebound.*
1. Propose increases in government spending.
To decrease short-run unemployment, a Keynesian (respectively Neoclassical) economist would propose
the following policies:
1. Both would suggest an increase in aggregate demand by decreasing taxes.*
1. Keynesian would suggest an increase government spending and a neoclassical will suggest doing nothing
because the labor market will correct itself .*
1. A Keynesian would suggest increasing government spending, Neoclassical will suggest tax rebates that
stimulate productivity growth.*
3 Identify appropriate macro policy options in response to the state of the
economy.
Short Title: Real World Macro Policy Options
1. Which policy choice would both Keynesians and Neoclassicals agree would boost GDP and
employment?
a. a tax cut *
b. an increase in government spending
c. an increase in the money supply (or expansionary monetary policy).
2. Which policy choice would both Keynesians and Neoclassicals agree would reduce GDP and
employment?
a. a tax increase *
b. an decrease in government spending
c. a decrease in the money supply (or contractionary monetary policy).
Updated: Sept 19, 2015
Suppose the economy experiences a surge in exports. What is the likely impact on the aggregate price level
(P) and the level of real GDP (Q)?
a. P will rise and Q will fall.
b. P will fall and Q will rise.
c. P will rise and Q will rise.*
1. Suppose the economy experiences a surge in exports. What is the likely impact on interest rates and
investment expenditure?
a. Interest rates will rise and investment will fall. *
b. Interest rates will rise and investment will rise.
c. Interest rates will fall and investment will fall.
1. Suppose the economy experiences a surge in exports. What is the likely to occur?
a. The level of real GDP (Q) will rise. *
b. Interest rates will rise. *
c. Investment expenditure (I) will fall. *
2. Suppose the economy experiences a surge in imports. What is the likely impact on the aggregate price
level (P) and the level of real GDP (Q)?
a. P will rise and Q will fall.
b. P will fall and Q will rise.
c. P will fall and Q will fall. *
3. Suppose the economy experiences a surge in imports. What is likely to occur?
a. The level of real GDP (Q) will fall. *
b. The aggregate price level (P) will fall. *
c. Interest rates will fall. *
4. Suppose the economy experiences a surge in imports. What is likely to occur?
a. The level of real GDP (Q) will fall. *
b. Interest rates will rise.
c. Investment expenditure (I) will rise.
3a Identify the lessons macroeconomists learned from the 1970s
Short Title: Lessons from the 1970s
The experience of the 1970s taught economists that
changes in aggregate supply can affect the economy in the short run. *
changes in aggregate demand can affect the economy in the long run.
changes in aggregate demand are less important than changes in aggregate supply in understanding changes
in the economy in the short run.
Keynesian economists concluded from the experience of the 1970s that
fiscal “fine-tuning” of the economy is difficult to accomplish effectively. *
stabilization policy is never effective using monetary tools.
inflation makes stabilization policy easier to accomplish.
Keynesian economists came to understand that monetary policy
was more effective than previously believed. *
was less effective than previously believed.
was rarely effective.
Updated: Sept 19, 2015
3b Explain how public investment can avoid crowding out.
Short Title: Crowding Out Revisited
Deficit spending may not cause a crowding out problem, if:
The deficit is caused by government investment in infrastructure. *
The deficit is caused by tax cuts on private investment. *
The deficit is caused by government spending on national defense.
Crowding out can be minimized, if at the same time that the government increases spending, the Federal
Reserve:
Conducts an open market purchase. *
Raises the discount rate.
Increases the required reserve ratio.
The crowding out argument ignores the possibility of:
Public investment. *
Government spending on research & development. *
Interest rates falling.
3c Identify practical problems with discretionary fiscal policy
Short Title: Practical problems with discretionary fiscal policy
Tax cuts that are explicitly temporary have less impact than permanent ones because:
individuals and businesses do not change their behavior very much, since they do not expect the tax cuts to
last. *
temporary tax cuts are usually smaller than permanent ones.
temporary tax cuts have less effect on the budget deficit than permanent ones do.
Structural change refers to:
long run changes in the way the economy works. *
short run changes in the way the economy works.
the fact that after recovery from recession, the economy does not return exactly where it would have been
without the recession occurring. *
A prolonged period of budget deficits may lead to ___________________.
A. outflows of financial capital abroad
B. lower inflation
C. lower economic growth *
D. increasing exchange rates
Which of the following events would cause interest rates to increase?
A. lower tax rates *
B. a higher discount rate*
C. lower reserve requirements
D. an open market purchase of bonds
When the interest rate in an economy increases, it is likely the result of either:
A. an increase in its budget deficit. *
B. a decrease in the budget deficit.
C. an open market sale of securities by the Fed. *
D. an open market purchase of securities by the Fed.
Updated: Sept 19, 2015
Suppose that a rise in business confidence has led to more investment in the economy and higher levels of
output. In the short-run, the rise in aggregate demand will:
A. lower unemployment. *
B. cause government to lower taxes.
C. cause government to increase spending.
D. exports will drop.
If the Fed initiates an expansionary monetary policy at the same time that the government budget deficit
decreases, then the interest rate will ______________________.
A. increase
B. decrease *
C. remain unchanged.
If a government’s budget deficits are increasing aggregate demand when the economy is already producing
near potential GDP, causing a threat of an inflationary increase in price levels, then the central bank may
react with:
A. a contractionary monetary policy. *
B. an expansionary monetary policy.
C. a loose monetary policy.
If the U.S. economy is producing at a level that is substantially less than potential GDP and the
government’s budget deficits are increasing aggregate demand, then ____________________________ is
not much of a danger.
A. a tight monetary policy
B. an increase in the aggregate price level *
C. international financial investment
D. the central bank’s contractionary monetary policy
If the government’s budget deficit increases while the economy is producing substantially less then
potential GDP and expansionary monetary policy is implemented, then any ________________ from
government borrowing would be _____________________________ from that monetary policy.
A. higher interest rates; largely offset by the lower interest rates *
B. lower interest rates; largely offset by the higher interest rates
C. increase in interest rates; reduced by private sector investment
D. inflationary increase in price level; crowding out private investment
6a Understand the effectiveness and limitations of fiscal and/or monetary
policy for a given state of the economy. (e.g., politics, lag time, etc.)
Short Title: Practical Problems with Discretionary Fiscal Policy
A limitation of a countercyclical fiscal policy is that:
increased fiscal spending can be politically difficult to achieve during a recession*
higher taxes and lower spending can be politically difficult to achieve during economic booms*
there is a long time lag between its implementation and its effect on aggregate demand.
A limitation of a countercyclical fiscal policy is that:
the policy can be implemented quickly.
the post-cyclical structure often changes and this process takes time.*
it can be difficult to garner political support for increased fiscal spending during a recession.*
A limitation of countercyclical fiscal policies is that:
given uncertainty, it can be difficult to target specific economic objectives.*
Updated: Sept 19, 2015
automatic stabilizers must be enacted by Congress to go into effect.
they are typically less effective than countercyclical monetary policy.
6b Choose an appropriate fiscal and monetary policy for a given state of
the economy
Short Title: Putting It Together: Policy Application
If the economy is in a recession, appropriate policies to pursue may include:
an expansionary monetary policy that shifts the AD curve to the right*
automatic stabilizers that shift the AD curve to the right.*
an expansionary fiscal policy that shifts the AD curve to the left.
If the economy is in a boom period, appropriate policies to pursue may include:
an expansionary monetary policy that shifts the AD curve to the right
automatic stabilizers that shift the AD curve to the left.*
an expansionary fiscal policy that shifts the AD curve to the left.
If the economy is in a recession, appropriate policies to pursue may include:
an expansionary monetary policy that shifts the AS curve to the right
automatic stabilizers that shift the AD curve to the right.*
an expansionary fiscal policy that shifts the AD curve to the right.*
12 Analyze the Benefits and Costs of International
Trade
Short Title: Globalization, Trade and Finance
1 Define and calculate comparative and absolute advantage
Short Title: Comparative and Absolute Advantage
When one nation can produce a product at lower cost relative to another nation, it is said to have a(n)
__________________ in producing that product.
1. relative advantage
1. absolute advantage*
1. economy of scale
1. production efficiency
The idea behind comparative advantage reflects the possibility that one party:
1. may be able to produce everything relatively more efficiently than another party.
1. may be able to produce something at a lower dollar cost than another party.
1. is good at producing everything.
1. may be able to produce something at a lower opportunity cost than another party.*
Colombia produces coffee with less labor and land than any other country; it therefore necessarily has:
1. a comparative advantage in coffee production.
Updated: Sept 19, 2015
1. an absolute advantage in coffee production*
1. both a comparative and absolute advantage in coffee production.
Here are alternate outputs from one day’s labor input: USA: 12 bushels of wheat OR 3 yards of textiles.
India: 3 bushels of wheat OR 12 yards of textiles. The opportunity cost of one bushel of wheat in India is:
1. 1 yard of textiles.
1. 3 yards of textiles.
1. 4 yards of textiles.*
1. 12 yards of textiles.
Here are alternate outputs from one day’s labor input: USA: 12 bushels of wheat or 3 yards of textiles.
India: 3 bushels of wheat or 12 yards of textiles. From the data, the USA:
1. has an absolute advantage over India in the production of textiles.
1. has an absolute advantage over India in the production of wheat*
1. has a comparative advantage in the production of textiles.
1. should export textiles to India.
Brazil can produce 100 pounds of beef or 10 autos; in contrast the United States can produce 40 pounds of
beef or 30 autos. Which country has the absolute advantage in producing beef?
1. Brazil*
1. United States
1. Neither
Brazil can produce 100 pounds of beef or 10 autos; in contrast the United States can produce 40 pounds of
beef or 30 autos. Which country has the absolute advantage in producing autos?
1. United States*
1. Brazil
1. Neither
Assuming that Brazil can produce 100 pounds of beef or 10 autos and the United States can produce 40
pounds of beef or 30 autos, what is the opportunity cost of producing one pound of beef in Brazil?
1. 1/10 of an auto*
1. 3/4 of an auto
1. 1/5 of an auto
Say that Aliceland can produce 32 units of food per person per year or 16 units of clothing per person per
year, but Georgeland can produce 16 units of food per year or 8 units of clothing. Which of the following is
true?
A. Georgeland has a comparative advantage, but not an absolute advantage, in producing clothing.
B. Georgeland has both a comparative and absolute advantage in producing clothing.
C. Aliceland has a comparative advantage, but not an absolute advantage, in producing food.
D. Aliceland has an absolute advantage, but not comparative advantage, in producing food.*
2 Explain how a nation’s workers and consumers are affected by impact of
international trade
Short Title: Impact of International Trade
What are the opportunity costs of protecting textile jobs?
1. Lower prices for textiles, more jobs for other workers.
1. Higher prices for textiles, fewer jobs for non-textile workers.*
1. More jobs for textile workers, lower prices of textiles
Updated: Sept 19, 2015
Free trade agreements in the US have most likely lowered the wage of which type of worker?
1. A maid in the hotel industry.
1. A production line worker in car manufacturing.*
1. A computer programmer.*
Which of the following statements is false?
Imports reduce business profits. *
Exports enhance business profits.
Balanced trade maximizes business profits.
3 Understand the way government regulations (e.g., tariffs, quotas and
non-tariff barriers) affect business, consumers and workers in the
economy
Short Title: Impact of Government Regulations
Assume that US produce mangoes in California and also imports them from India. India produce mangoes
at a lower cost. A tariff imposed by the US government on mangoes from India will:
1. Lower the price of mangos in the US, and lower the quantity of mangoes sold in the US.
1. Increase the price of mangoes in the US, and lower the quantity of mangoes sold in the US.*
1. Keep the price of mangoes the same in the US, and increase the quantity of mangoes.
What are the economic reasons why a government may seek to protect an industry?
1. The government wants to snub a foreign power.
1. The government want to protect overall jobs.
1. An industry is afraid of low prices and competition from abroad.*
Which of the following barriers to international trade harms domestic consumers?
tariffs *
quotas *
non-tariff barriers *
What area in the graph below illustrates the gain to domestic producers as a result of a government placing
a tariff to protect the shoe industry.
Updated: Sept 19, 2015
1. B+C
1. C*
1. C+F
Updated: Sept 19, 2015
Use the graph below to identify the loss to consumers from the tariff.
1. F+G
1. C+F+D+E+G*
1. F+D+E+G
Updated: Sept 19, 2015
Use the graph below to identify the government revenue from the tariff.
1. D
1. D+E*
1. F+D+E+G
4 Differentiate between alternative international trade regimes and how
they impact global trade
Short Title: Trade Policy and Agreements
The slow pace of international trade negotiations is understandable given that
1. separate rules were set up for different nations*
2. negotiations are easy but politicians make it hard
3. there were many nations involved*
4. nations gain and lose differently with tariff reductions*
An example of a regional trade agreements is
1. NAFTA*
2. WTO
3. GATT
An economic union is
1. a common market and coordinated fiscal policy
Updated: Sept 19, 2015
2. a common market, currency union and coordinated fiscal and monetary policy*
3. a free trade union
Why are some economists concerned about the proliferation of regional trade agreements?
1. Regional trade agreements dilute economic power
2. Regional trade agreements can conflict with the WTO*
3. Regional trade agreements may limit trade from outside the regions that agree to free trade*
Trade agreements and free trade negotiations
1. have stimulated protests*
2. have reduced non-tariff barriers*
3. have reduced tariff barriers to less than 2% by 2000*
Trade legislation like the Smoot-Hawley Act of 1930 led to
a surge in US agricultural exports to Canada
an international trade war*
a more severe Great Depression*
The WTO is an organization that is used
1. to resolve trade disputes between nations*
2. to challenge national authority
3. to resolve criminal cases between nations
If the US wanted to ensure that its cars could be exported to Cuba without tariffs, not give any other
concessions to Cuba or anger Canada with its agreement, it should negotiate a
1. preferential trade area with Cuba*
2. free Trade area
3. fForm a customs union with Cuba
Refer to the video on the US-South Korea free trade agreement. When Free Trade Agreements are
negotiated, firms,
1. will lower the price of tariffed products.
2. may keep prices high and unchanged despite lower tariffs*
3. may increase the variety of goods that they offer to domestic consumers.
5 Define currency exchange rates and explain how they influence trade
balances
Short Title: Exchange Rates and International Finance
If the value of the Euro falls compared to the Dollar, what is logical outcome for US exports to the EU?
1. nothing
1. the amount of exports to the EU falls*
1. the amount of exports to the EU rises
If the value of the Euro appreciates compared to the Dollar, what is logical outcome for US exports to the
EU?
1. nothing
1. the amount of exports to the EU falls
1. the amount of exports to the EU rises.*
If the value of the Dollar rises compared to the Euro what is logical outcome for EU exports to the US?
1. nothing
Updated: Sept 19, 2015
1. the amount of exports to the US falls
1. the amount of exports to the US rises*
If the value of the Dollar depreciates compared to the Euro what may happen to the net exports from the
EU to the US.
1. nothing
1. EU’s trade deficit with the US will decrease
1. EU’s trade deficit with the US will rise*
6 Explain how the balance of trade (surplus or deficit) affects the domestic
economy, and how the domestic economy affects the balance of trade
Short Title: The Balance of Trade
Generally speaking, when the US economy is doing well its trade deficit will:
1. increase*
1. decrease
1. doesn’t change – deficit is tied to the exchange rates
An increase in the trade surplus:
stimulates aggregate demand. *
reduces aggregate demand.
stimulates aggregate supply.
A larger trade deficit causes:
higher unemployment. *
higher inflation.
lower real GDP. *
7 Connect globalization, international trade and international finance
Short Title: Globalization
Free Trade
1. has income distribution effects*
2. results in gains from trade*
3. may impoverish a nation
Protectionist policies like tariffs and quotas
1. has income distribution effects*
2. results in gains from trade
3. may impoverish a nation*
A British trade deficit results in
1. lending by Britain to China
2. certain long term harm to the British economy
3. British indebtedness*