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CHAPTER 5
DIFFICULT CASES FOR THE MARKET AND
THE ROLE OF GOVERNMENT
SAMPLE CHAPTER QUIZ. (ANSWERS AT END OF SECTION)
1.
Which of the following is the most fundamental function of government?
a. protection of individuals and their property
b. imposing progressive taxes to fund income-transfer programs
c. regulating prices and wages
d. provision of postal services and garbage collection
2.
Economic efficiency requires that
a. individuals produce at their maximum level.
b. only long-lasting, high-quality products be produced without regard to cost.
c. income be distributed equally among consumers.
d. all economic activity generating more benefits than costs be undertaken.
3.
When production of a good generates external costs, the
a. demand curve for the good will overstate the true social benefits from consumption of
the good.
b. demand curve for the good will understate the true social benefits from consumption of
the good.
c. supply curve for the good will overstate the true social cost of producing the good.
d. supply curve for the good will understate the true social cost of producing the good.
4.
From the viewpoint of economic efficiency, when competitive forces in an industry are
weak, market allocation will often lead to
a. an output of the product that exceeds the amount consistent with ideal economic
efficiency.
b. an output of the product that is less than the amount consistent with ideal economic
efficiency.
c. an output of the product that equals the amount consistent with ideal economic
efficiency.
d. product prices that are below the cost of production.
5.
Competitive markets generally give consumers and producers correct incentives when
a. externalities are present in the market.
b. property rights are well-defined and enforced.
c. the good being produced and consumed is a pure public good.
d. there is a substantial lack of information on the part of either buyers or sellers.
6.
Which of the following correctly describes the external benefit resulting from an
individual’s purchase of a winter flu shot?
a. The flu shot is cheaper than the cost of treatment when you get the flu.
b. The income of doctors increases when you get the flu shot.
c. The flu shot reduces the likelihood others will catch the flu.
d. The flu shot reduces the likelihood you will miss work as the result of sickness;
therefore, you will earn more income.
7.
Which of the following is the best example of a public good?
a. a government-run health care system
b. the Walt Disney World amusement park
c. national defense
d. long-distance telephone service
8.
Markets may have difficulty providing the proper quantity of a public good because
a. individuals will tend to become free riders, and private firms will have difficulty
generating enough revenue to produce an efficient quantity of the good.
b. the good generally has a very large value to consumers relative to its cost of
production.
c. the good is one that tends to benefit a large number of people.
d. the large profit involved in the production of a public good is generally too much for
private firms to effectively pay out to shareholders.
9.
Suppose paper pulp mills are permitted to emit harmful pollutants, free of charge, into the
air. How will the price and output of paper in a competitive market compare with their
values under conditions of ideal economic efficiency?
a. The price will be too high, and the output will be too large.
b. The price will be too low, and the output will be too large.
c. The price will be too low, and the output will be too small.
d. The price will be too high, and the output will be too small.
10.
Which of the following is a source of information that helps consumers acquire information
about the quality of a good or service?
a. brand names
b. franchising
c. consumer ratings magazines
d. all of the above
ANSWER KEY 1 THROUGH 10
1. (a), 2. (d), 3. (d), 4. (b), 5. (b), 6. (c), 7. (c), 8. (a), 9. (b), 10. (d)
CHAPTER 7
TAKING THE NATION’S ECONOMIC PULSE
SAMPLE CHAPTER QUIZ. (ANSWERS AT END OF SECTION)
1.
Which of the following would be included in this year’s GDP?
a. the value of a used car, at its sale price
b. the value of a new domestic automobile, at its sale price
c. a sale of Microsoft stock from one individual to another
d. the face value of a life insurance policy paid to a woman at the death of her husband
2.
When the expenditure approach is used to measure GDP, the major components of GDP are
a. consumption, investment, indirect business taxes, and depreciation.
b. employee compensation, rents, interest, self-employment income, and corporate
profits.
c. employee compensation, corporate profits, depreciation, and indirect business taxes.
d. consumption, investment, government consumption and gross investment, and net
exports.
3.
If you wanted to measure whether the output of an economy was increasing or decreasing
across time periods, you would use the real GDP data rather than the nominal GDP data
because
a. exports are excluded from real GDP but not nominal.
b. real GDP incorporates the impact of federal budget deficits and surpluses; nominal
GDP does not.
c. real GDP reflects the impact of transfer payments on the economy, but nominal GDP
does not.
d. real GDP adjusts for changes in the general level of prices, but nominal GDP does not.
4.
Which of the following is GDP designed to measure?
a. the total market value of goods and services produced domestically during the year
b. changes in the cost of purchasing the typical consumer market basket of goods from
one year to another
c. the total size of the domestic underground economy
d. the standard of living of the average citizen
5.
The GDP deflator is designed to
a. adjust nominal GDP for changes in the unemployment rate.
b. adjust nominal GDP so as to include the problem of externalities.
c. adjust nominal GDP for changes in the price level.
d. calculate changes in the price of food and other consumer goods.
6.
Which of the following best describes the difference between gross domestic product
(GDP) and gross national product (GNP)?
a. GDP measures output produced domestically, while GNP measures the output of
citizens regardless of where it is generated.
b. GDP measures the output of citizens regardless of where it is generated, while GNP
measures all output produced domestically.
c. GDP measures output at current prices, while GNP measures output using prices from
an earlier base year.
d. GDP measures output using the prices of an earlier base year, while GNP measures
output at current prices.
7.
Suppose that the nominal value of GDP increased by approximately 2 percent during a
given year, but real GDP decreased by 3 percent. Which of the following best explains these
events?
a. The money supply decreased by approximately 5 percent.
b. Prices fell by approximately 5 percent.
c. Prices increased by approximately 5 percent.
d. The real productive capacity of the economy increased by approximately 5 percent.
8.
If national income accountants fail to make an adequate adjustment for increases in the
quality of goods and services over time,
a. real GDP will overstate the growth rate of real output.
b. the GDP deflator will underestimate inflation.
c. the GDP deflator will overestimate inflation.
d. real GDP will overstate the growth of real output, and the GDP deflator will understate
inflation.
9.
The primary value of real GDP is its ability to measure year to year changes in
a. real output.
b. income inequality.
c. real social welfare.
d. the general level of prices.
10.
On September 11, 2001, terrorists crashed two planes into the World Trade Center, killing
3,000 people and causing the towers to collapse. Which of the following most accurately
indicates how GDP was influenced by the damages from the attack and the cleanup that
followed?
a. Both the damage from the attack and the expenditures on the cleanup were subtracted
from GDP.
b. The damage from the attack was subtracted from GDP, while the expenditures on the
cleanup were added.
c. Neither the damages from the attack nor the expenditures on the cleanup affected GDP.
d. No adjustment was made for the damages from the attack, while the expenditures on
the cleanup were added.
ANSWER KEY 1 THROUGH 10
*1. (b), 2. (d), 3. (d), 4. (a), 5. (c), 6. (a), 7. (c), 8. (c), 9. (a), 10. (d)
CHAPTER 8
ECONOMIC FLUCTUATIONS,
UNEMPLOYMENT, AND INFLATION
SAMPLE CHAPTER QUIZ. (ANSWERS AT END OF SECTION)
1.
During this century, the growth rate of real GDP in the United States has averaged
approximately
a. 1 percent.
b. 3 percent.
c. 6 percent.
d. 10 percent.
2.
Economists use the term “business cycle” to refer to
a. the growth of small businesses into major corporations.
b. changes in products that occur from improved technology.
c. fluctuations in the level of real output and employment.
d. periods of increases and decreases in the rate of inflation.
3.
The labor force participation rate of women in the United States has been
a. increasing for several decades.
b. decreasing for the past several decades after increasing dramatically in the early 1900s.
c. approximately constant during the last three decades.
d. decreasing since the early 1900s.
4.
Suppose there was a country with an adult (age 16 and over) population of 1,000, of which
100 were unemployed and 700 were employed. Which of the following is true?
a. The employment population ratio is 87.5 percent.
b. The labor force participation rate is 70 percent.
c. The unemployment rate is 12.5 percent.
d. There are 700 individuals in this country’s labor force.
5.
The type of unemployment caused by changes in the business cycle is
a. cyclical unemployment.
b. natural unemployment.
c. frictional unemployment.
d. structural unemployment.
6.
Frictional unemployment is the result of
a. not enough jobs for everyone to be employed.
b. unemployed workers’ skills not matching those needed for the available jobs.
c. a decline in the demand for labor, such as during a recession.
d. imperfect information and temporary periods of unemployment while workers are
changing jobs.
7.
Suppose an economy is operating at its maximum sustainable output rate. Neither recession
nor economic boom are present. Which of the following would be true?
a. The economy would be considered at full employment.
b. Actual GDP would exceed potential GDP.
c. Actual unemployment will be less than the natural rate of unemployment.
d. One hundred percent of the labor force is employed.
8.
Which of the following individuals would be considered unemployed by the official
government definition?
a. George, a mathematician, who returned to graduate school after failing to find a job the
last four months
b. Gwen, a medical student, who is still in college and is not working
c. Morgan, who is employed part-time but desires a full-time job
d. Ralph, an auto worker vacationing in Florida during a layoff at a General Motors plant
9.
Suppose that the consumer price index at year-end 2004 was 140 and by year-end 2005 had
risen to 150. What was the inflation rate during 2005?
a. 7.1 percent
b. 10 percent
c. 14.2 percent
d. 50 percent
10.
Which of the following is true?
a. Anticipated inflation is an increase in the price level that comes as a surprise, at least to
most individuals.
b. Unanticipated inflation is a change in the price level that is widely expected.
c. Decision makers are generally able to anticipate slow steady rates of inflation with a
fairly high degree of accuracy.
d. Inflation will increase the prices of goods and services that households purchase but
not the wage rates of workers.
ANSWER KEY 1 THROUGH 10
*1. (b), 2. (c), 3. (a), 4. (c), 5. (a), 6. (d), 7. (a), 8. (d), 9. (a), 10. (c)
CHAPTER 9
AN INTRODUCTION TO BASIC
MACROECONOMIC MARKETS
SAMPLE CHAPTER QUIZ. (ANSWERS AT END OF SECTION)
1.
Which of the following is a correct statement?
a. Fiscal policy is the use of tax and spending policies by Congress and the president.
b. Fiscal policy involves the control of the money supply by the Federal Reserve Bank.
c. Monetary policy involves the control of the money supply by Congress and the
president.
d. Monetary policy is the use of tax and spending policies by the Federal Reserve Bank.
2.
The four key markets that coordinate the circular flow of income are
a. goods and services, resources, loanable funds, and foreign exchange.
b. consumption, investment, stock, and government.
c. government, household goods, bond, and business.
d. financial, corporate, stock, and loanable funds.
3.
If the price level in the current period is higher than what buyers and sellers anticipated,
a. profit margins will be unattractive and firms will expand output.
b. profit margins will be unattractive and firms will reduce output.
c. profit margins will be attractive and firms will expand output.
d. profit margins will be attractive and firms will reduce output.
4.
As the general price level in an economy rises, the aggregate quantity demanded of goods
and services falls because
a. the prices of domestic goods have risen relative to foreign goods, causing exports to
fall and imports to rise.
b. higher interest rates caused by an increase in the demand for money balances causes a
reduction in current investment and consumption.
c. the value of money will fall, reducing the real wealth and, thus, the consumption of
persons holding money balances.
d. all of the above are correct.
5.
(I) The short-run aggregate supply curve is upward sloping because the prices firms pay for
many resources are set by long-term contracts. Therefore, unexpected increases in product
prices lead to higher profits, which induce firms to expand output.
(II) The long-run aggregate supply curve is vertical because an economy’s sustainable
productive capacity is determined by its resource base, not by the price level.
a. I is true; II is false.
b. I is false; II is true.
c. Both I and II are true.
d. Both I and II are false.
6.
Long-run equilibrium in the goods and services market requires that
a. aggregate supply equals aggregate demand and that decision makers correctly
anticipate the level of prices.
b. the unemployment rate is zero.
c. prices are neither increasing nor decreasing.
d. aggregate supply be larger than aggregate demand.
7.
The resource market is important from a macroeconomic perspective because
a. it coordinates the allocation of productive resources and determines the costs of
production.
b. it determines the interest rates faced by borrowers and lenders.
c. inflation rates are set in the resource market by the government.
d. resource prices determine the position of the long-run aggregate supply curve.
8.
If the dollar price of the English pound goes from $1.50 to $1.75, the dollar has
a. appreciated, and Americans will find English goods cheaper.
b. appreciated, and Americans will find English goods more expensive.
c. depreciated, and Americans will find English goods cheaper.
d. depreciated, and Americans will find English goods more expensive.
9.
If the real interest rate in the domestic loanable funds market increases,
a. firms will have an added incentive to undertake investment projects.
b. households will save less.
c. the net inflow of foreign capital will tend to increase.
d. it will be cheaper to purchase goods and services now rather than in the future.
10.
When equilibrium is present in the foreign exchange market, which of the following will
tend to be in balance?
a. the value of goods exported and the value of goods imported
b. real and nominal interest rates
c. imports plus capital outflow and exports plus capital inflow
d. tax revenues and government expenditures
ANSWER KEY 1 THROUGH 10
1. (a), 2. (a), 3. (c), 4. (d), 5. (c), 6. (a), 7. (a), 8. (d), 9. (c), 10. (c)