S1

1. The downward slope of the demand curve again illustrates the pattern
that as ________ rises, ________ decreases.
A. quantity demanded, price
B. quantity supplied, quantity demanded
C. price, quantity demanded
D. price, quantity supplied

2. The nature of demand indicates that as the price of a good increases:

A. suppliers wish to sell less of it.
B. more of it is produced.
C. more of it is desired.
D. buyers desire to purchase less of it.

3. Any given demand or supply curve is based on the ceteris paribus

assumption that ________.
A. everything is variable.
B. all else is held equal
C. no one knows which variables will change and which will remain constant.
D. what is true for the individual is not necessarily true for the whole.

4. The term "ceteris paribus" means that

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.
D. what is true for the individual is not necessarily true for the whole.

5. 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
C. quantity supplied
D. quantity demanded

6. Economists refer to the relationship that a higher price leads to a lower

quantity demanded as the ________.
A. income gap
B. market equilibrium
C. law of demand
D. price model

7. A demand curve shows the relationship between price and _____ on a

graph.
A. quantity demanded
B. quantity produced
C. economies of scale
D. costs

8. ____ refers to the total number of units that are purchased at that price.
A. quantity
B. quantity demanded
C. supply
D. market quantity

9. In economics, the demand for a good refers to the amount of the good
that people
A. would like to have if the good were free.
B. will buy at various prices.
C. need to achieve a minimum standard of living.
D. will buy at alternative income levels.

10. The demand curve for a typical good has a(n)

A. negative slope because some consumers switch to other goods as the price
rises.
B. negative slope because consumer incomes fall as the price of the good rises.
C. negative slope because the good has less "snob appeal" as its price falls.
D. inverse slope because as the price goes up, the good has more profitability.

11. When economists talk about supply, they are referring to a relationship
between price received for each unit sold and the ________.
A. demand schedule
B. market price
C. quantity supplied
D. demand curve

12. But 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
D. down from right to left

13. The demand schedule for a good

A. indicates the quantity that people will buy at the prevailing price.
B. indicates the quantities that suppliers will sell at various market prices.
C. is determined primarily by the cost of producing the good.
D. indicates the quantities that will be purchased at alternative market prices.
14. 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 down along the demand curve.
D. there is a movement up along the demand curve.

15. The _________ is the only price where quantity demanded is equal to
quantity supplied.
A. equilibrium price
B. horizontal axis intercept
C. vertical axis intercept
D. market price

16. 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. no change; only the supply curve for beef is likely to be affected.
B. a shift of the demand curve for beef to the left.
C. a movement down along the demand curve for beef to the right.
D. a shift of the demand curve for beef to the right.

17. Refer to Figure 3-1

Using the graph above and beginning on D1, a shift to D2 would indicate a(n)
A. increase in quantity demanded.
B. decrease in quantity demanded.
C. increase in demand.
D. decrease in demand.

18. Refer to Figure 3-2

A change from Point A to Point B represents a(n)

A. increase in demand.
B. decrease in demand.
C. decrease in quantity demanded.
D. increase in quantity demanded.

19. If new manufacturers enter the computer industry, then (ceteris

paribus)
A. the supply curve shifts to the left.
B. the supply curve shifts to the right.
C. the demand curve shifts to the left.
D. some established manufacturers must exit the industry.

20. If a firm faces ________, while the prices for the output the firm
produces remain unchanged, a firm’s profits will increase.
A. higher demand
B. lower costs of production
C. equilibrium
D. a shift in demand

21. 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. equilibrium is achieved
C. costs of production fall
D. there is a population increase

22. 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, as consumers try to economize because of the shortage.
C. both the supply and demand curves.
D. the supply curve and a rightward shift of the demand curve, resulting in a
higher equilibrium price.

Figure 3-3

23. Refer to figure 3-3, a change from Point A to Point E represents a(n)
A. increase in supply.
B. decrease in supply.
C. increase in quantity supplied.
D. decrease in quantity supplied.

24. Refer to figure 3-3, a change from Point A to Point D represents a(n)
A. decrease in quantity supplied.
B. increase in quantity supplied.
C. decrease in supply.
D. increase in supply.

25. Refer to figure 3-3, a change from Point A to Point B represents a(n)
A. increase in supply.
B. decrease in supply.
C. increase in quantity supplied.
D. decrease in quantity supplied.

26. 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
D. demand curve to the left

27. A change in price of a good or service typically causes __________ for

that specific good or service.
A. a new equilibrium price
B. a change along the supply curve
C. the supply curve to shift
D. a decreased demand

28. According to the law of supply

A. there is a direct relationship between price and the quantity supplied.
B. there is an inverse relationship between price and the quantity supplied.
C. there is a direct relationship between price and quantity demanded.
D. there is an inverse relationship between price and quantity demanded.

29. Which of the following would reduce the supply of microcomputers?

A. a technological improvement that lowers the cost of producing the computers
B. higher wage rates for the workers that assemble the computers
C. a reduction in the price of computer chips used to produce the computers
D. a reduction in the price of computers.

30. Interpret the following statement: "An increase in the price of wheat
will encourage farmers to increase the quantity of wheat supplied to the
market."
A. The statement is correct.
B. The statement would be correct if "quantity of wheat demanded" were
substituted for "quantity of wheat supplied."
C. The statement is incorrect because it confuses a change in quantity supplied
with a change in supply.
D. The statement would be correct if it read that a "decrease in the price of
wheat will encourage farmers to increase the quantity of wheat supplied to the
market."

31. ________ are enacted when discontented sellers, feeling that prices are
too low, appeal to legislators to keep prices from falling.
A. Rent controls
B. Price ceilings
C. Price floors
D. Subsidies

32. Andy views beer and pizza as complements to one another. If the price
of pizza decreases, economists would expect
A. Andy's demand for pizza to increase.
B. Andy's demand for pizza to decrease.
C. Andy's quantity of pizza demanded to decrease.
D. Andy's demand for beer to increase.

33. If an increase in the price of Good X causes a decrease in the demand

for Good Y, we can conclude that
A. the price of Good Y will increase.
B. Goods X and Y are normal goods.
C. Goods X and Y are substitute goods.
D. Goods X and Y are complement goods.

34. If the price is below the equilibrium level, then the quantity demanded
will exceed the quantity supplied. This is known as _________.
A. excess supply
B. excess demand
C. ceteris paribus
D. a price ceiling

35. The ________ is the quantity where quantity demanded and quantity
supplied are equal at a certain price.
A. quantity demanded
B. equilibrium quantity
C. demand schedule
D. supply schedule
 S2
1. GDP is
A. the sum of all currency and coins in circulation.
B. the value of all final goods and services produced by a government.
C. the value of all final good and services produced anywhere in the world by a
nation's firms.
D. the value of all final goods and services produced domestically.

2. Consumption is the purchase of goods and services by

A. households.
B. government.
C. business firms.
D. foreign buyers.

3. Which of the following are most likely classified by economists as

consumer durable goods?
A. food, clothing
B. drugs, toys, magazines, books
C. automobiles, furniture
D. stocks, bonds

4. Gross Domestic Product equals $1.2 trillion. If consumption equals $690

billion, investment equals $200 billion, and government spending equals
$260 billion, then
A. exports exceed imports by $50 billion.
B. imports exceed exports by $50 billion.
C. imports exceed exports by $150 billion.
D. exports exceed imports by $150 billion.
5. In order to avoid double counting, statisticians just count the _________.
A. final inventories
B. final goods and services
C. intermediate goods and services
D. durable goods and nondurable goods

6. Which of the following is included in the calculated Gross Domestic

Product?
A. Farmer Freddie sells his second tractor to his son.
B. Suzanne buys a love seat and chair for $85 at the yard sale on the corner.
C. A local ice cream store sells $17,000 worth of cones and sundaes on July 1.
D. Mr. Farkle buys a used lawn mower from his neighbor, Mr. Sparkle.

7. Which of the following is not counted as a 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

8. Which of the following is not included in GDP?

A. the payments for a chiropractor's services
B. cash income paid to a day laborer that is not reported to the tax authorities
C. the replacement of brake pads on your six-year-old vehicle
D. the fees for legal services rendered by your lawyer

9. To compare the GDP of two different countries with different currencies,

it is necessary to use ________________.
A. an exchange rate
B. foreign currency
10. ___________ is about two-thirds of the demand side of GDP, but it
moves relatively little over time.
A. Government
B. Consumption
C. Investment
D. Services

11. _________ is calculated by taking _________ and then subtracting the

value of how much physical capital is worn out, or reduced in value because
of aging, over the course of a year.
A. GNP; NNP
B. NNP; GNP
C. GDP; NNP
D. NNP; GDP

12. Which of the following is included in GDP calculations?

A. sales revenue received from a yard sale
B. cash income received by a self-employed landscaper that is not reported to
the IRS
C. a crisp $50 bill received on your birthday
D. the university tuition paid to enroll in a course

13. 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
D. the value of lawn care service provided by a sixteen-year-old as part of his
weekly chores
14. 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.

15. 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.

16. 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

17. 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.

18. For most high-income countries of the world, GDP _______ over time.
A. has proven to be stable
B. has risen gradually
C. has declined slightly
D. has sharply risen

19. If imports exceed exports, as in recent years, then __________ exists.

A. a trade surplus
B. a trade deficit
C. a trade imbalance
D. trade disequilibrium

20. On the demand side of GDP, consumption by _______ is the largest

component of GDP, accounting for about 2/3 of the GDP in any year.
A. services
B. businesses
C. households
D. government

21. The Czech Republic has a GDP of 2,000 billion koruny. The exchange
rate is 20 koruny per U.S. dollar. The Czech population is 20 million.
Calculate the per capita GDP of the Czech Republic in U.S. dollars.
A. $5
B. $100,000
C. $500
D. $5000

22. The gap between exports and imports in a nation's economy is called the
___________.
A. trade surplus
B. trade balance
C. trade deficit
D. trade inventory

23. _______________, 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

24. The change in inventories, a component of aggregate supply, comprises

roughly __________ of GDP.
A. 20%
B. 10%
C. 1%
D. 0.5%

25. Which of the following statements is true?

A. GDP includes spending on recreation and travel, but it does not cover leisure
time.
B. GDP does not include production that is exchanged in the market, but it does
cover production that is not exchanged in the market.
C. GDP does not include newly produced goods and services, but counts the
buying and selling of previously existing assets
D. GDP includes production that is not exchanged in the market

26. 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

27. The nominal value of any economic statistic refers to the number that is
actually announced at that time, while the ________________ refers to the
statistic after it has been adjusted for inflation.
A. empirical value
B. adjusted value
C. real value
D. net value
 S3
1. During the last two centuries, the average rate of growth of GDP per
capita in the leading industrialized countries has averaged about ________
per year.
A. 2%
B. 12%
C. 22%
D. 32%

2. ___ is a term which refers to the widespread use of power-driven

machinery and the economic and social changes that resulted in the first
half of the 1800s.
A. GDP per capita
B. The Industrial Revolution
C. The living standard
D. Investment and inventions

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.

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.
5. 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

6. When society has a higher level of capital per person, it is called

________.
A. physical capital
B. human capital
C. capital deepening
D. technological gains

7. 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.

8. Assuming a country's economy maintains an 8% rate of growth, young

adults starting at age 20 would see the average standard of living in their
country more than double by the time they had reached age ________.
A. 30
B. 40
C. 50
D. 60
9. 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

10. Economists typically measure economic growth by tracking

A. the employment rate.
B. the unemployment rate.
C. averaged GDP growth
D. real GDP per capita.

11. 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

12. Country Alpha and Country Beta initially have the same real GDP per
capita. Country Alpha experiences no economic growth, while Country
Beta grows at a sustained rate of 5 percent. In 14 years, Country Alpha's
GDP will be approximately _______ that of Country Beta.
A. one-fourth
B. one-half
C. double
D. triple

13. 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

14. 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.

15. Which of the following best describes the relationship between economic
growth and literacy?
A. As the economy grows, literacy declines because it becomes less and less
useful in a developed economy.
B. Increased literacy initially stimulates economic growth by raising labor
productivity, but as the economy grows and the opportunity cost of education
rises, literacy declines.
C. Increased literacy stimulates economic growth by raising labor productivity,
and as the economy grows, people consume more education.
D. There is no correlation between economic growth and literacy.
16. 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.

17. A country will roughly double its GDP in twenty years if its annual
growth rate is
A. 12 percent.
B. 7.5 percent.
C. 3.5 percent.
D. 2.5 percent.

18. 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

19. 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 growth.
A. human capital
B. physical capital
C. technology
D. a market orientation
 S4
1. The unemployment rate measures
A. the number of people unemployed divided by the number of people
employed.
B. unemployed workers as a percentage of the labor force.
C. unemployed workers as a percentage of the population age over-sixteen.
D. unemployed workers as a percentage of the population.

2. Reginald looked for work for 6 months but couldn’t 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.

3. If the unemployment rate is 8 percent, then this means

A. 8 percent of the population is unemployed.
B. 8 percent of the population age over sixteen is unemployed.
C. 8 percent of the labor force is unemployed.
D. the number of unemployed persons equals 8 percent of the employed persons.

4. During the deep recessions of the early 1980s and of 2007-2009,

unemployment reached roughly __________.
A. 10%
B. 20%
C. 30%
D. 40%
5. Frictional unemployment is
A. unemployment that is due to the friction of competing ideological systems.
B. unemployment caused by lack of training and education.
C. unemployment caused by automation in the workplace.
D. unemployment that is due to normal turnover in the labor market.

6. The type of unemployment that occurs because of a recession is called

A. cyclical unemployment.
B. the natural rate of unemployment.
C. seasonal unemployment.
D. frictional unemployment.

7. If the unemployment rate is 6 percent and the number of persons

unemployed is 6 million, then the number of people employed is equal to
A. 100 million.
B. 94 million.
C. 106 million.
D. 6 million.

8. Gomer loses his job as a road construction worker and cannot find
another position with equivalent pay and benefits. As a result, he is still
checking the want ads and reporting to the unemployment office on a
weekly basis. He is considered to be
A. laid off.
B. underemployed.
C. out of the labor force.
D. unemployed.

9. Which of the following statements is incorrect?

A. Employment insurance compensation encourages longer job searches, which
may lead to a better match between jobs and employees.
B. Employment insurance compensation increases the opportunity cost of being
unemployed.
C. The typical employment insurance compensation is roughly one third of one's
latest salary for up to 26 weeks.
D. Demand and supply curves for labor are constantly shifting.

10. Through good economic years and bad, many European economies had
unemployment rates hovering near ______ since the 1970s.
A. 1%
B. 5%
C. 10%
D. 20%

11. Craigburg has a working age population of 20 million. Of those, 11

million are employed and 1 million are unemployed. The unemployment
rate is ________ and the participation rate is __________.
A. 5%; 55%.
B. 8.3%; 60%.
C. 8.3%; 55%.
D. 5%; 60%.

12. A forestry worker who is out of work because of the temporarily low
demand for wood products associated with a recession is defined as
A. cyclically unemployed.
B. underemployed.
C. frictionally unemployed.
D. naturally unemployed.
13. The development of a nationwide computerized job bank listing of all
job openings would be most likely to reduce
A. natural unemployment.
B. frictional unemployment.
C. seasonal unemployment.
D. cyclical unemployment.

14. The unemployment rate may overestimate the true extent of

unemployment if
A. many part-time employees would like to work fulltime, but are unable to get
the additional work.
B. many people who claim to be unemployed actually work in the underground
economy.
C. people falsely claim that they are actively seeking work in order to receive
unemployment benefits.
D. either B) or C) occurs.

15. In so far as government public policy is concerned, the best way to

battle unemployment would be ________.
A. to minimize recessions
B. to maximize unemployment payments
C. to maximize unemployment insurance duration
D. to minimize labor unions

16. The labor force consists of

A. discouraged workers, employed workers, plus those actively seeking work.
B. all adults who are working or actively seeking work.
C. all adults who are able to work.
D. all adults who are working, plus those not working.

17. The unemployment rate may underestimate the true extent of

unemployment if
A. many part-time employees would like to work fulltime, but are unable to get
the additional work.
B. employees increase the number of hours they work overtime.
C. there are a large number of people working in the underground economy.
D. people are pretending to look for work so that they can continue receiving
unemployment benefits.

18. The unemployment rate may underestimate the true extent of

unemployment if
A. many people have a part time as well as a full time job.
B. there are a large number of people working in the underground economy.
C. many people become discouraged and cease looking for work.
D. employees increase the number of hours they work overtime.

19. A university student who is enrolled in school fulltime and not seeking
employment is considered
A. out of the labor force.
B. unemployable, and not counted in official statistics.
C. employed in leisure.
D. underemployed.

20. The extent of ______ will depend on how easy it is for workers to learn
about alternative jobs, which may reflect the ease of communications about
job prospects in the economy.
A. frictional unemployment
B. cyclical unemployment
C. seasonal unemployment
D. cyclical employment
 S5
1. ________ implies that pressure for price increases reaches across
________ markets, not just one.
A. inflation; all
B. deflation; most
C. inflation; most
D. deflation; all

2. The effects of inflation are seen in

A. goods and services only
B. wages and income levels only
C. services and wages only
D. goods, services, wages and income levels

3. Inflation implies that the level of all prices _________.

A. decrease
B. stay the same
C. increase
D. none of the above

4. If the price index moves from 107 to 110, the rate of inflation is
A. 3%
B. 30%
C. 28%
D. 2.8%

5. The most commonly cited measure of inflation in the United States is

A. the Consumer Price Index (CPI)
B. the Deflationary Price Index (DPI)
C. the Cumulative Price Index (CPI)
D. the Inflationary Price Index (IPI)

6. One of the reasons that a rise in the price of a fixed basket of goods over
time tends to overstate the rise in a consumer’s true cost of living, is
A. substitution bias
B. attribution bias
C. complimentary bias
D. preference bias

7. The percentage change in the price level from one time period to the next,
whether the price level is measured in terms of money or as a price index,
will be the _______.
A. inflation rate
B. price index rate
C. consumer price index
D. producer price Index

8. Two factors that complicate the calculation of the inflation rate are
A. substitution and quality/new product bias
B. preferential bias
C. complimentary product bias
D. consumer behavior bias

9. When we want to measure wage inflation in the labor market, we use the
A. Consumer Price Index
B. Product Price Index
C. Employment Cost Index
D. Employment Price Index
10. 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

11. The ________ is based on the prices of merchandise that are exported or
imported.
A. International Product Index
B. Producer Price Index
C. Foreign Price Index
D. International Price Index

12. Another term used to describe negative inflation is

A. counter inflation
B. deflation
C. hyperinflation
D. GDP deflator

13. In the early 1990’s extremely high inflation rates of 2500% were
common in Russia. During that time, we can say that as a result of those
inflation rates, Russia was experiencing _______.
A. perpetual inflation
B. ultra inflation
C. hypo inflation
D. hyperinflation
14. Which of the following is an example of one of the major categories in
the overall CPI?
A. apparel and accessories
B. entertainment
C. recreation
D. transportation and insurance

15. The situation where the buying power of money in terms of goods and
services increases is called
A. deflation.
B. inflation.
C. stationary pricing.
D. hyperinflation.

16. 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

17. An analyst needs to adjust the nominal GDP for the years 2000 and
2010 into real terms to conclude his comparison analysis. 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%

18. What distinguishes the real value of a statistic from the nominal value of
a statistic?
A. timing of announcement
B. adjusting for inflation
C. adjusting for GDP deflator
D. real interest rate

19. Nancy's union has negotiated a three-year wage contract that provides
for a 2.4% increase indexed to inflation. The rates of inflation are forecast
to be 1.62%, 1.93% and 2.21% respectively. How will Nancy's wage
increase be expressed in the new contract?
A. COLA plus 1.6%
B. COLA plus 1.9%
C. COLA plus 2.4%
D. COLA plus 2.2%

20. When a price, wage, or interest rate is adjusted automatically with

inflation, it is said to be __________.
A. indexed
B. colaed
C. nominally adjusted
D. semi-indexed

21. In the 1970s and 1980s, labor unions commonly negotiated wage
contracts that had ____ which guaranteed that their wages would keep up
with inflation.
A. cost of living adjustments
B. inflation protection plans
C. inflation ceiling guarantees
D. wage protection clauses

22. The effect of substitution bias is that the rise in the price of a fixed
basket of goods over time tends to _________ the rise in a consumer’s true
cost of living, because it doesn’t take into account that the person can
substitute between goods according to changes in their relative prices.
A. stabilize
B. understate
C. overstate
D. reduce

23. The ________ is the nominal interest rate minus the rate of inflation.
A. real GDP
B. real interest rate
C. nominally adjusted
D. annualized interest rate
 S6
1. In macroeconomics, __________ describes a situation in which two
people each want to exchange some good or service that the other can
provide.
A. a medium of exchange
B. a double coincidence of wants
C. interrelated banking
D. the usefulness of money

2. Which of the following is omitted in a barter transaction?

A. trade
B. medium of exchange
C. store of value
D. money

3. In uncertain economic times, ___________ serves as a way of preserving

economic value that can be spent or consumed in the future.
A. buying a new car
B. owning gold
C. refinancing your home mortgage
D. obtaining a credit card

7. In modern economies, credit cards are a ___________ because of their

wide acceptance as a method of payment for both goods and services.
A. unit of exchange
B. store of value
C. unit of account
D. medium of exchange
8. __________ serves society in three functions: medium of exchange, unit
of account, and store of value.
A. Money
B. Currency
C. Barter
D. A double coincidence of wants

9. Which of the following would function as a store of value, and also

provide a medium of exchange, and unit of account?
A. a new car
B. an iPod
C. an estate
D. gym membership

10. If mollusk shells were accepted as a method of payment in modern-day

markets, what economic role would they play in the financial system?
A. capital exchange
B. currency exchange
C. unit of exchange
D. medium of exchange

11. Which of the following is a valid criticism of the use of money as a store
of value in modern economies?
A. annual inflationary loss of buying power
B. money supply is too narrowly defined
C. storing money is wasteful
D. imperfect as a unit of account
12. Which of the following would be classified in the M1 category of the
money supply?
A. savings deposits
B. money market deposit
C. demand deposits
D. certificates of deposit

13. With respect to measuring the money supply, which of the following
terms describes a checking account?
A. demand certificates
B. currency deposits
C. cash certificates
D. demand deposits

14. _________ are included in the aggregate amount of MI money currently

in circulation.
A. Savings deposits
B. Traveler's checks
C. Short-term bonds
D. Foreign currency deposits

15. Which category of the money supply would you be contributing to if you
invest in money market funds?
A. M2
B. M1
C. time deposits
D. savings deposits
16. Which of the following terms is considered to be a narrow definition of
the money supply that includes, among other things, currency?
A. savings
B. money
C. M2
D. M1

17. Antonio tries to limit his risk of overexposure to debt by using a

_______ to store a certain amount of value that he then uses to make
purchases.
A. debit card
B. credit card
C. smart card
D. chip card

18. If Brent uses his credit card to purchase a new television, then the
money to pay the retailer is taken from
A. his M1 funds.
B. his M2 funds.
C. the credit card company's M1 funds.
D. the credit card company's M2 funds.

19. Stealth bank holds deposits of $600 million. It holds reserves of $30
million and government bonds worth $80 million. The current market value
of the bank's loans is $400 million. What is the value of the bank’s total
liabilities?
A. $600 million
B. $110 million
C. $200 million
D. $90 million

20. Stealth bank has deposits of $700 million. It holds reserves of $20
million and has purchased government bonds worth $350 million. The
bank's loans, if sold at current market value, would be worth $600 million.
What does Stealth bank’s net worth equal?
A. $120 million
B. $270 million
C. $1.02 billion
D. $970 million

21. Stealth bank has deposits of $700 million. It holds reserves of $20
million and has purchased government bonds worth $350 million. The
banks loans, if sold at current market value, would be worth $600 million.
What is the total value of Stealth bank’s assets?
A. $1.3 billion
B. $1.7 billion
C. $970 million
D. $470 million

22. Stealth bank holds deposits of $200 million. It holds reserves of $15
million. It has purchased government bonds worth $75 million. The current
value of its loans, if sold at market value, is $130 million. What is the value
of the Stealth bank’s liabilities?
A. $20 million
B. $200 million
C. $5 million
D. $330 million
23. Stealth bank has deposits of $350 million. It holds reserves of $30
million and government bonds worth $70 million. If the bank sells its loans
at market value of $400 million, what will its total assets equal?
A. $500 million
B. $750 million
C. $450 million
D. $380 million

24. Stealth bank has deposits of $300 million. It holds reserves of $20
million and has purchased government bonds worth $300 million. The
bank's loans, if sold at current market value, would be worth $600 million.
What does Stealth bank’s net worth equal?
A. $20 million
B. $620 million
C. $1.22 billion
D. $920 million

25. Why do banks use a T-account?

A. if a bank has become bankrupt, net worth will be shown as a zero on the
balance sheet
B. the T-account separates the liabilities on the left from assets on the right
C. the T-account separates assets on the left from liabilities on the right
D. the T-account ensures the final entry made under the assets column is bank
reserves

26. In modern economies, ________ receive money from savers and provide
funds to borrowers.
A. governments
B. credit unions
C. banks
D. financial intermediaries

27. ___________are funds that the bank keeps on hand that are not loaned
out or invested in bonds.
A. Certificates of deposit
B. Reserves
C. Time deposits
D. Demand deposits

28. In macroeconomics, _________ describes a situation where a bank’s

liabilities can be withdrawn in the short-term while its assets are being
repaid in the long-term.
A. diversification
B. reserve ratio
C. an asset-liability time mismatch
D. a negative net worth

29. Banks can protect themselves against an unexpectedly high rate of loan
defaults and against the risk of _____ by adopting a strategy that will
_____.
A. rising interest rates; diversify its loans
B. rising interest rates; provide loans to a variety of customers
C. an increased reserve requirement; provide loans to a variety of customers
D. an asset-liability time mismatch; diversify its loans

30. The money multiplier is equal to the _____ in the economy divided by
the original ______.
A. total money; quantity of money
B. original quantity of reserves; reserve ratio
C. quantity of money; total money
D. reserve ratio; original quantity of reserves

31. The quantity of money in an economy and the _______ are inextricably
intertwined.
A. value of assets for loans
B. quantity of credit for loans
C. financial stress in the banking system
D. extraordinary gains that can be made with money

32. The process of banks making loans in financial capital markets is

intimately tied to the
A. redistribution of wealth.
B. financial stress levels of banks.
C. creation of money.
D. home construction industry.

33. Banks typically come under financial stress because of

A. the money multiplier effect.

B. a widespread decline in the value of their assets.
C. diversification of loan assets.
D. risks associated with extraordinary economic gains.

34. If loans become far less available, then sectors of the economy that
______ like business investment, home construction, and car manufacturing
can be dealt a crushing blow.
A. depend on borrowed money
B. typically generate extraordinary gains
C. make loans to financial capital markets
D. failed to diversify risk

35. If the central bank increases the amount of reserves banks are required
to hold to 20%, then
A. the money multiplier will increase and the supply of money in the economy
will decrease.
B. both the money multiplier and the supply of money in the economy will
increase.
C. the money multiplier will decrease and the supply of money in the economy
will increase.
D. both the money multiplier and supply of money in the economy will
decrease.

36. If the central bank decreases the amount of reserves banks are required
to hold from 20% to 10%, then

A. the money multiplier will increase and the supply of money in the economy
will decrease.
B. both the money multiplier and the supply of money in the economy will
decrease.
C. both the money multiplier and the supply of money in the economy will
increase.
D. the money multiplier will decrease and the supply of money in the economy
will increase.

37. ________ are a form of deposits held in banks that are available by
making a cash withdrawal or writing a check.
A. Direct deposits
B. Savings deposits
C. Time deposits
D. Demand deposits

38. _______ pool the deposits of many investors together and invest them in
a safe way like short-term government bonds.
A. Money market funds
B. Savings deposits
C. Time deposits
D. Certificates of deposit

39. _______ that require the depositor to commit to leaving their funds in
the bank for a certain period of time, in exchange for a higher rate of
interest are also called _______.
A. Demand deposits; certificates of deposit
B. Certificates of deposit; time deposits
C. Money market funds; time deposits
D. Bonds; term deposits

40. The term _______ describes the proportion of deposits that the bank
must hold in the form of reserves that are not loaned out or invested in
bonds.
A. reserve ratio
B. reserve funds
C. term deposits
D. bond reserves
41. _____ are a form of financial instrument through which corporations
and governments borrow money from financial investors and promise to
repay with interest.
A. Certificates of deposit
B. Bonds
C. Money market funds
D. Time deposits

42. In an economy with ______, money loses some buying power each year,
but it remains money.
A. inflation
B. currency
C. deflation
D. a market orientation
43. The people in an economy have $10 million in money. There is only one
bank that all the people deposit their money in and it holds 5% of the
deposits as reserves. What is the money multiplier in this economy?
A. 5
B. 1
C. 20
D. 10

44. The people in an economy have $10 million in money. There is only one
bank that all the people deposit their money in and it holds 10% of the
deposits as reserves. What is the money multiplier in this economy?
A. 5
B. 10
C. 20
D. 1
45. The market where loans are made to borrowers is called the
A. secondary loan market.
B. money market.
C. loan market.
D. primary loan market.

46. The market in which loans are bought and sold is called the
A. loan market.
B. money market.
C. secondary loan market.
D. primary loan market.
 S7
1. Which of the following institutions determines the quantity of money in
the economy as its most important task?
A. U.S. Department of the Treasury
B. Federal Open Market Committee
C. Central Bank
D. Federal Reserve Board of Governors

2. Which of the following is a traditional tool used by the Fed during

recessions?
A. quantitative easing
B. higher interest rates
C. open market operations
D. coins and paper currency

3. Which of the following terms is used to describe the proportion of

deposits that banks are legally required to deposit with the central bank?
A. discount requirements
B. deposit requirements
C. reserve requirements
D. monetary requirements

4. What term is used to describe the interest rate charged by the central
bank when it makes loans to commercial banks?
A. discount rate
B. reserve requirement
C. Fed rate
D. open market rate
5. Which of the following is considered to be a relatively weak tool of
monetary policy?
A. quantitative easing
B. altering the discount rate
C. reserve requirements
D. reducing the money supply

6. A central bank that wants to increase the quantity of money in the

economy will
A. raise the discount rate.
B. sell bonds in open market operations.
C. reverse quantitative easing.
D. buy bonds in open market operations.

7. A central bank that desires to reduce the quantity of money in the

economy can
A. raise the reserve requirement.
B. buy bonds in open market operations.
C. lower the discount rate.
D. engages in quantitative easing.

8. The quantitative easing policies adopted by the Federal Reserve are

usually thought of as
A. short term loans to fill out reserves.
B. temporary emergency measures.
C. traditional monetary policies.
D. a relatively weak tool.
9. Which of the following is described as an innovative and nontraditional
method used by the Federal Reserve to expand the quantity of money and
credit during the recent U.S. recession?
A. increased discount rate
B. increased reserves requirements
C. open market operations
D. quantitative easing

10. Central Bank policy requires Northern Bank to hold 10% of its deposits
as reserves. Northern Bank policy prevents it from holding excess reserves.
If the central bank purchases $30 million in bonds from Northern Bank
what will be the result?
A. Northern's loan assets increase by $30 million
B. Northern's bond assets increase by $30 million
C. Northern’s net worth changes by $30 million
D. the money supply in the economy decreases

11. The central bank requires Southern to hold 10% of deposits as reserves.
Southern Bank's policy prohibits it from holding excess reserves. If the
central bank sells $25 million in bonds to Southern Bank which of the
following will result?
A. the money supply in the economy decreases
B. Southern's net worth increases by $25 million
C. decrease in Southern's bond assets by $25 million
D. increase in Southern's loan assets of $25 million

12. Atlantic Bank is required to hold 10% of deposits as reserves. If the

central bank increases the discount rate, how would Atlantic Bank
respond?
A. by noting a decrease in net worth
B. by increasing its reserves
C. its balance sheet will be unchanged
D. it can make more loans with increased loan assets

13. The Central Bank has raised its reserve requirements from 10% to
12%. If Southern Bank finds that it is not holding enough in reserves to
meet the higher requirements, then it will likely
A. keep track of whether money is flowing in or out of the bank.
B. buy bonds to increase the size of its reserve assets.
C. reduce the quantity of money and loans on the balance sheet.
D. borrow for the short term from the central bank.

14. 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 operation to buy bonds

15. How are the specific interest rates for the lending and borrowing
markets determined?

A. U.S. Treasury Department Board policy

B. by the forces of supply and demand
C. through open market operations
D. by altering the discount rate

16. When the Central Bank acts in a way that causes the money supply to
increase while aggregate demand remains unchanged, it is
A. following a contractionary monetary policy.
B. following quantitative easing policy.
C. following a tight monetary policy.
D. following an expansionary monetary policy.

17. If a Central Bank decides it needs to decrease both the aggregate

demand and the money supply, then it will
A. follow expansionary monetary policy.
B. follow loose monetary policy.
C. follow tight monetary policy.
D. follow quantitative easing policy.

18. When a Central Bank takes action to decrease the money supply and
increase the interest rate, it is following
A. a loose monetary policy.
B. a contractionary monetary policy.
C. a expansionary monetary policy.
D. a quantitative easing policy.

19. When a Central Bank makes a decision that will cause an increase in
both the money supply and aggregate demand, it is
A. following a loose monetary policy.
B. following a tight monetary policy.
C. following a contractionary monetary policy.
D. reversing quantitative easing.

20. __________ 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

21. When banks hold excess reserves because they don’t see good lending
opportunities
A. it negatively affects contractionary monetary policy.
B. it negatively affects expansionary monetary policy.
C. expansionary monetary policy is unaffected.
D. contractionary monetary policy is unaffected.

22. If the economy is in recession with high unemployment and output

below potential GDP, then _________ would cause the economy to return to
its potential GDP?
A. a tight monetary policy
B. fewer loanable funds
C. a loose monetary policy
D. higher interest rates

23. The central bank uses a _________ monetary policy to offset business
related economic contractions and expansions?
A. laissez faire
B. loose
C. contractionary
D. countercyclical

24. Regardless of the outcome in the long run, _________ always has the
effect of stimulating the economy in the short run.
A. expansionary monetary policy
B. contractionary monetary policy
C. reverse quantitative easing policy
D. tight monetary policy

25. What is the name given to the macroeconomic equation MV = PQ?

A. basic velocity of money equation
B. basic quantity equation of output
C. basic quantity equation of money
D. basic velocity of price equation

26. According to the quantity theory, if constant growth in the money

supply is combined with fluctuating velocity, which of the following is most
likely to result?
A. unpredictable rises and falls in nominal GDP
B. monetary policy will become inevitably imprecise
C. quantity of credit rises above where it otherwise be
D. innovations relating to banking and finance

27. According to the basic quantity equation of money, if price and output
fall while velocity increases, then
A. the quantity of money will rise.
B. the quantity of money will fall.
C. the quantity of money will rise before it falls.
D. the quantity of money will rise slowly.

28. If nominal GDP is 1800 and the money supply is 450, then what is
velocity?
A. 25
B. 4.5
C. 4
D. 22

29. If GDP is 3600 and the money supply is 300, what is the velocity?
A. 18
B. 8
C. 4.57
D. 12

30. In good economic times, a surge in lending exaggerates the episode of

economic growth. Which of the following adaptations of monetary policy
can moderate these exaggerated effects?
A. price stability to reinforce effect of deposit insurance
B. monitoring asset prices and leverage
C. quantitative easing when banks are under stress
D. inflation-targeting lender of last resort policies

31. If you were to survey central bankers from around the world and ask
them what they believe the primary task of monetary policy should be,
what would the most popular answer likely be?
A. leverage cycle
B. bank runs
C. fighting inflation
D. bank supervision

32. If the economy is at equilibrium as shown in the diagram above, then a

contractionary monetary policy will
A. increase unemployment, but have little effect on inflation.
B. increase unemployment and decrease inflation.
C. increase output and increase inflation.
D. have no effect on output, but increase inflation.

33. If the economy is at equilibrium as shown in the diagram above, then an

expansionary monetary policy will
A. have no effect on both unemployment and inflation.
B. reduce unemployment but increase inflation.
C. reduce both unemployment and inflation.
D. reduce unemployment but have little effect on inflation.
34. The diagram above refers to a private closed economy. In this instance,
the equilibrium GDP is
A. $60 billion.
B. $180 billion.
C. between $60 and $180 billion.
D. $60 billion at all levels of GDP.

S8
1. People or firms use one currency to purchase another currency at the
____.
A. international currency exchange
B. foreign exchange market
C. foreign currency exchange
D. international parity market

2. The ________ is an example of a large-scale common currency.

A. euro
B. dollar
C. pound
D. franc

3. What do the economies of Greece, Ireland and Germany all share?

A. they pegged their various currencies
B. they unpegged their various currencies
C. a common currency
D. floating rate currencies

4. Foreign direct investment is the term used to describe purchases of firms

in another country that involve _____________.
A. internationally traded goods across countries
B. using another currency.
C. taking a management responsibility
D. the exchange rate market

5. If the Canadian dollar is strengthening, then

A. it has been unpegged from other currencies.
B. Canada has adopted a hard peg policy.
C. Canada has purchasing power parity.
D. it has appreciated in terms of other currencies.

6. A depreciating U.S. dollar is _________ because it is worth _________ in

terms of other currencies.
A. strengthening; more
B. weakening; less
C. a problem for exporters; less
D. beneficial to importers; more

7. ______ equalizes the prices of internationally traded goods across

countries.
A. The foreign exchange rate
B. A floating exchange rate
C. Purchasing power parity
D. An international parity rate

8. If government policy allows a country's currency to be determined in the

exchange rate market, then that currency will be subject to
A. a hard peg policy.
B. purchasing power parity.
C. depreciation.
D. a floating exchange rate.

9. When a government uses a ________ exchange rate policy, it usually

allows the exchange rate to be set by the market.
A. PPP
B. soft peg
C. hard peg
D. currency

10. For firms engaged in international lending and borrowing, ________

can have an enormous effect on profits.
A. swings in exchange rates
B. trade-offs and risks
C. foreign portfolio investment
D. foreign direct investment

11. Exchange rates are an effective way to analyze the price of one currency
in terms of another currency with _________.
A. distinctive trade-offs and risks
B. exchange rate policy
C. monetary policy
D. the tools of demand and supply

12. The ________ is the largest market in the world economy.

A. international exchange market
B. foreign exchange market
C. foreign currency market
D. international currency market

13. One of the following groups is not participating in the foreign exchange
markets. Which one?
A. Boston business firms trading goods and services with firms in France
B. international investors buying bonds issued by a German car manufacturing
firm
C. an Iowa travel firm that arranges vacation tours for local seniors to Hawaii
D. international investors buying part-ownership of a mining operation in
Afghanistan

14. The most commonly traded currency in foreign exchange markets is the
A. euro.
B. U.S. dollar.
C. Chinese yuan.
D. British pound.

15. Which of the following is no longer one of the most commonly traded
currencies in foreign exchange markets?
A. U.S. dollar
B. British pound
C. Japanese yen
D. French franc

16. If 112 Japanese yen purchased $1.00 U.S. in 2008 and 83 Japanese yen
purchased $1.00 U.S. in 2009, then
A. the dollar depreciated against the yen.
B. the dollar appreciated against the yen.
C. the yen depreciated against the dollar.
D. the yen weakened against the dollar.

17. In 2010, 1 Swiss franc cost .56 British pounds and in 2012 it cost .51
British pounds. How much would 1 British pound purchase in Swiss francs
in 2010 and 2012?
A. 2010: 1.79 francs, 2012: 1.96 francs
B. 2010: 1.78 francs, 2012: 1.98 francs
C. 2010: 1.71 francs, 2012: 2.00 francs
D. 2010: 1.73 francs, 2012: 1.97 francs

18. Which of the following is an example of a pegged currency?

A. U.S. dollar
B. British pound
C. Euro
D. Chinese yuan

19. Portfolio investments are often made based on beliefs about how
________ are likely to move in the near future.
A. interest rates
B. foreign investment tax rates
C. exchange rates or rates of return
D. bond rates and interest rates

20. If American Airlines were to purchase Malaysian Airlines, it would

likely have ___________ in mind.
A. beliefs about how exchange rates will move in the near future
B. a longer-term horizon
C. beliefs about how rates of return will move in the near future
D. a shorter-term horizon

21. Which of the following denotes a common misunderstanding about

exchange rates?
A. an appreciating currency must be better than a stronger currency
B. a depreciating currency must be better than an appreciating currency
C. a weaker currency must be better than a stronger currency
D. an appreciating currency must be better than a depreciating currency
22. Movements in exchange rates can have a powerful effect on incentives to
export and import, and thus on _______ in the economy as a whole.
A. aggregate supply
B. aggregate demand
C. direct investments
D. portfolio investments

23. From a macroeconomic point of view, increases in ______ are an

addition to aggregate demand, while increases in ______ are a subtraction
from aggregate demand.
A. rates of return; exchange rates
B. exchange rates; rates of return
C. exports; imports
D. imports; exports

24. Expansionary monetary policy lowers _________, and increases demand

for investment and consumer borrowing, which shifts aggregate demand to
the _________.
A. interest rates; right
B. rates of return; left
C. rates of return; right
D. exchange rates; left

25. A _______ monetary policy can be used to decrease aggregate demand

because it _______ exports and ______ imports.
A. tight; stimulates; reduces
B. loose; stimulates; reduces
C. expansionary; reduces; stimulates
D. contractionary; reduces; stimulates
26. If the U.S. government uses an expansionary monetary policy to reduce
interest rates, then it will
A. lead to higher imports and lower exports.
B. cause the exchange rate for U.S. currency to depreciate.
C. lower levels of consumption and investment.
D. cause the exchange rate for U.S. currency to appreciate.

27. Referring to the diagram above, which of the following statements is

true?
A. Monetary policy that increases the money supply also increases the level of
potential GDP.
B. Tight monetary policy expands the economy by increasing the level of
potential GDP.
C. This contractionary monetary policy shift will also affect exchange rates for
both imports and exports.
D. This expansionary monetary policy shift also includes the effect of exchange
rates on exports and imports.
28. Suppose the diagram above refers to a situation where investors in the
US are looking to Japan as a place where they should invest for a future
high rate of return, while Japanese investors are looking to lower their
investments in the US. The combined effect will
A. shift the demand curve out, the supply curve shifts in and the value of the
dollar decreases.
B. shift the supply curve out, the demand curve shifts in and the value of the
dollar increases.
C. shift the demand curve out, the supply curve shifts in and the value of the
dollar increases.
D. shift the supply curve out; the demand curve shifts in and the value of the
dollar decreases.

29. A central bank must be concerned about whether a large and

unexpected ___________ will drive most of the country’s existing banks into
bankruptcy.
A. exchange rate appreciation
B. interest rate increase
C. exchange rate depreciation
D. increase in foreign investments
30. If a central bank focuses on preventing either high inflation or deep
recession by using low and reasonably steady interest rate policy, then
A. foreign investment will increase significantly.
B. exchange rates will have less reason to vary.
C. domestic investments in foreign businesses will decrease.
D. government will intervene to peg the nation's currency.

31. A soft peg policy typically allows the exchange rate to move up and
down by relatively small amounts in _________, but seeks to avoid extreme
short-term fluctuations.
A. the market exchange
B. the medium run
C. the long run
D. the short run

32. If a government uses monetary policy to alter the exchange rate, then it
cannot at the same time use monetary policy to address issues of
__________.
A. inflation or recession
B. purchases or sales of foreign currencies
C. how currency speculators react to rumors
D. extreme short-term fluctuations

33. Why would an expansionary monetary policy no longer be available to

combat recession for a country that has pegged its exchange rate?
A. inflation or recession must be ignored in order to focus on its soft peg
B. it would appreciate the country's currency and break its hard peg
C. it would depreciate the country's exchange rate and break its hard peg
D. it will use up all its reserves of international currency to buy its own currency
34. A ____________ policy in which the government almost never acts to
intervene in the exchange rate market will look a great deal like a floating
exchange rate.
A. pegged exchange rate
B. loose exchange rate
C. hard peg exchange rate
D. soft peg exchange rate

35. Governments that attempt to intervene in exchange rate markets

through soft pegs or hard peg
A. risk causing even greater fluctuations in foreign exchange markets.
B. will save an economy that consistently fails at achieving the main economic
goals.
C. gain the power to use monetary policy to focus on domestic inflations.
D. gain the power to use monetary policy to focus on domestic recessions.

36. Short run speculation in currencies can create _______, at least for a
time, where an expected appreciation leads to a stronger currency and vice
versa.
A. low inflation rates
B. high inflation rates
C. a self-fulfilling prophecy
D. a decrease in the supply side

37. A soft peg exchange rate may create additional __________ as exchange
rate markets try to anticipate when and how the government will intervene.
A. volatility
B. trade-offs
C. demand side effects
D. exchange rate zones

38. If a nation merges its currency with another nation to create a single
currency, what must it give up?
A. the ability to purchase currency in foreign exchange markets
B. the ability to determine its own nationally-oriented monetary policy
C. the ability to fight recessions and control inflations
D. the ability to sell currency in foreign exchange markets

39. The Canadian dollar will most likely strengthen against the U.S. dollar
if
A. U.S. interest rates rise due to exchange rate policies.
B. interest rates in Canada fall due to exchange rate policies.
C. the Canadian inflation rate becomes extremely low.
D. the Canadian dollar is below the PPP exchange rate.

40. A stronger euro is less favorable for

A. German tourists traveling abroad.
B. American tourists traveling in France.
C. Canadian firms selling in Germany.
D. Canadian investors with money investments in Germany.

41. A stronger British pound is beneficial for

A. U.S. exchange students studying in Britain with a U.S. scholarship.
B. British firms selling goods and services in Canada.
C. British investors who have invested money in Australia.
D. exchange students with a British scholarship studying in Canada.
42. If the U.S. dollar weakens, which of the following parties will benefit?
A. countries exporting to the U.S.
B. Australian firms selling in the U.S.
C. U.S firms selling in Europe
D. Japanese investors who have money in the U.S.

43. If Australia's exchange rate is stronger than the PPP rate for several
years, which of the following will likely result?
A. its imports will increase
B. its exports will increase
C. aggregate demand will increase
D. trade deficit will decrease
 S9
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.

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.

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

5. A _________ means that government spending and taxes are equal.

A. fiscal budget
B. balanced budget
C. contractionary fiscal policy
D. discretionary fiscal policy

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

7. A ________ is calculated as a flat percentage of income earned,

regardless of level of income.
A. progressive tax
B. regressive tax
C. proportional tax
D. estate and gift tax

8. When the share of individual income tax collected by the government

from people with higher incomes is smaller than the share of tax collected
from people with lower incomes, then the tax is _________.
A. optional
B. proportional
C. progressive
D. regressive

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

10. If government tax policy requires Bill to pay $20,000 in taxes 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. regressive.
B. progressive.
C. proportional.
D. optional.

11. 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

12. 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

13. 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

14. 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

15. 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. A government collects $70 billion quarterly in tax revenue. Each year it
allocates $15 billion to the justice system and $29 billion for the
administrative costs. What percentage of its total annual tax revenue is left
for allocation to the remaining categories of government spending?
A. 84.29%
B. 15.71%
C. 62.85%
D. 37.15%

17. A government annually allocates $5 billion of its total tax revenue to

weather related disaster relief, $21 billion to healthcare and $11 billion to
education. If the government's quarterly tax revenue is $33 billion, what
percentage of its budget is allocated annually to healthcare?
A. 17.50%
B. 63.63%
C. 25.00%
D. 15.90%

18. A government collects $700 billion annually in tax revenue. Each year it
allocates $70 billion to the justice system and $130 billion for its own
administrative costs. What percentage of annual tax revenue is allocated to
these two categories of government spending?
A. 37.15%
B. 28.57%
C. 17.51%
D. 27.58%

19. A government annually collects $230 billion in tax revenue and allocates
$70 billion to military spending. What percentage of this government's
budget is spent on its military?
A. 27.50%
B. 36.63%
C. 30.43%
D. 41.90%
20. A government annually collects $320 billion in tax revenue and allocates
$42 billion to education spending. What percentage of this government's
budget is spent on education?
A. 24.50%
B. 12.31%
C. 30.13%
D. 13.12%

21. A government annually collects $230 billion in tax revenue and allocates
$29 billion to its universal healthcare spending. What percentage of this
government's budget is spent on healthcare?
A. 12.60%
B. 26.63%
C. 16.43%
D. 21.90%

22. A government collects $600 billion annually in tax revenue. Each year it
allocates $35 billion to healthcare and $50 billion for education. What
percentage of annual tax revenue is allocated to these two categories of
government spending?
A. 21.37%
B. 14.16%
C. 17.51%
D. 26.41%

23. A government collects $700 billion annually in tax revenue. Each year it
allocates $130 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. 17.15%
B. 28.75%
C. 18.57%
D. 27.58%

24. Which of the following is the percentage of annual US government

spending allocated to foreign aid?
A. 21%
B. 10%
C. 1%
D. 17%

25. At the beginning of 2009, a government had a total debt of $540 billion
dollars. It ended 2009 with a $6 billion dollar budget surplus. In 2010, its
budget surplus reached $8 billion dollars. What is the total debt of the
government equal to at the end of 2010?
A. $554 billion
B. $540 billion
C. $0
D. $14 billion

26. At the beginning 2010, the government of Norway had no debt and held
$180 billion dollars in its sovereign fund. To stimulate its economy during
2011, Norway's government plans to spend $35 billion more than it will
collect in tax revenue and in 2012, its spending will exceed tax revenues by
$25 billion. What will the total government debt equal at the end of 2012?
A. $60 billion
B. $0
C. $120 billion
D. $180 billion

27. If a country’s GDP increases, but its debt also increases during that
year, then the country’s debt to GDP ratio for the year will _______ in
proportion to the magnitude of the changes.
A. decrease because GDP increased
B. increase because its debt increased
C. increase
D. increase or decrease

28. If a country’s GDP increases, but its debt decreases during that year,
then the country’s debt to GDP ratio for the year will _________ in
proportion to the magnitude of the changes.
A. increase or decrease
B. decrease because its debt decreased
C. increase because GDP increased
D. decrease

29. If a country’s GDP decreases, but its debt increases during that year,
then the country’s debt to GDP ratio for the year will _________ in
proportion to the magnitude of the changes.
A. decrease
B. increase or decrease
C. increase
D. decrease because GDP decreased

30. When increasing oil prices cause aggregate supply to shift to the left,
then
A. unemployment and inflation decrease.
B. unemployment decreases and inflation increases.
C. unemployment and inflation increase.
D. unemployment increases and inflation decreases.

31. 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.

32. 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.

33. If individual income tax accounts for more total revenue than the
payroll tax in the U.S., why would over half the households in the country
pay more in payroll taxes than in income taxes?
A. income tax is a proportional tax
B. income tax is a progressive tax
C. payroll tax is a regressive tax
D. payroll tax is a progressive tax

34. If the economy is producing less than its potential GDP, ________ will
show a larger deficit than the actual budget.
A. discretionary fiscal policy
B. the automatic stabilizers
C. the standardized employment budget
D. expansionary fiscal policy

35. When a country's economy is producing at a level that exceeds its

potential GDP, the standardized employment budget will show a _________
than the actual budget.
A. smaller surplus
B. smaller deficit
C. larger deficit
D. surplus

36. 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
37. The time lag for monetary policy is typically _________ the time lag for
fiscal policy.
A. longer than
B. shorter than
C. about the same as
D. the same as

38. Currently, the US government accumulated debt to GDP ratio

A. is lower than its historical high point.
B. is higher than it has ever been.
C. is lower than it has ever been.
D. has remained relatively steady for the past decade.

39. The current level of US government accumulated debt, when measured

in nominal dollars
A. has reached higher levels in the past.
B. is higher than it has ever been.
C. is lower than it has ever been.
D. has remained steady for the past decade.

40. A consensus estimate based on a number of studies suggests that if there

is an increase in budget deficits (or a fall in budget surplus) by 1% of GDP,
it will most likely cause which of the following?
A. an increase of 0.5–1.0% in the long-term interest rate
B. long and variable time lags in enacting the fiscal policy
C. smaller impact due to temporary fiscal policy
D. output above the potential GDP output level
 S10
1. When governments are borrowers in financial capital markets, which of
the following is least likely to be a possible source of the funds from a
macroeconomic point of view?
A. central bank prints more money
B. increase in household savings
C. decrease in borrowing by private firms
D. foreign financial investors

2. 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

3. If a country's economic data shows private savings of $300 million,

government spending of $350 million, tax revenue of $400 million, and a
trade surplus of $75 million, then what does investment equal?
A. $775 million
B. $475 million
C. $275 million
D. $700 million

4. If a country's economic data shows that private savings equal $300

million, government spending equals $400 million, taxes equal $300, and the
trade surplus equals $100 million, then what does investment equal?
A. $150 million
B. $175 million
C. $200 million
D. $100 million

5. If a country's economic data shows that private savings equal $350

million, government spending equals $375 million, taxes equal $300, and the
trade surplus equals $125 million, then what does investment equal?
A. $50 million
B. $150 million
C. $425 million
D. $600 million

6. In the national savings and investment identity framework, an inflow of

savings from abroad is, by definition, equal to
A. private sector investment.
B. the trade surplus.
C. the trade deficit.
D. domestic household savings.

7. 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

8. The U.S. economy has two main sources for financial capital; ____ and
____.
A. private savings from U.S. households and firms; inflows of foreign financial
investment.
B. private sector investment; government borrowing
C. private savings from U.S. households and firms; government borrowing
D. private sector investment; inflows of foreign financial investment from
abroad

9. Which of the following is least likely to be the result of economic

disruptive patterns caused by a prolonged period of government budget
deficits?
A. high inflation
B. substantial inflows of foreign financial capital
C. increasing exchange rates
D. strains on a country's financial system

10. An increase in government borrowing can

A. allow private investment to expand.
B. crowd out private investment in physical capital.
C. increase the incentive to invest in technology.
D. cause a substantial decrease in interest rates.

11. 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.

12. When the interest rate in an economy increases, it is likely the result of
either
A. a decrease in the government's budget surplus or an increase in its budget
deficit.
B. a decrease in the government budget surplus or its budget deficit.
C. an increase in the government budget surplus or a decrease in its budget
deficit.
D. an increase in the government budget surplus or its budget deficit.

13. When the interest rate in an economy decreases, it’s most likely as a
result of
A. an increase in the government budget surplus or its budget deficit.
B. a decrease in the government budget surplus or its budget deficit.
C. an increase in the government budget surplus or a decrease in its budget
deficit.
D. a decrease in the government budget surplus or an increase in its budget
deficit.

14. An increase in the government’s budget surplus will cause the interest
rate to
A. either increase or decrease.
B. remain the same.
C. increase.
D. decrease.

15. If a government decides to finance an investment in _____ with higher

taxes or _____ in other areas, it need not worry that it is crowding out
private investment.
A. roads and bridges; increased borrowing
B. water supply and sewers; by raising capital spending
C. public physical capital; lower government spending
D. hydroelectric dams and windmills; government R&D

16. In most developed countries, the government plays a large role in

society’s investment in human capital through ___________.
A. direct spending
B. the education system
C. tax incentives
D. private sector R&D

17. In a market-oriented economy, private firms will undertake most of the

________, and ________ should seek to avoid a long series of large budget
deficits that might crowd out such investment.
A. economic growth activities; monetary policy
B. economic growth activities; fiscal policy
C. investment in human capital; monetary policy
D. investment in physical capital; fiscal policy

18. When a business firm makes an investment in physical capital, what is

that investment subject to?
A. state and local government incentives
B. economic output and productivity
C. political orientated incentives
D. the discipline of the market

19. Because of the difference between the discipline imposed by market

competition and the discipline imposed by political decisions, which of the
following is most likely?

A. reduced government borrowing to avoid crowding out private investment

B. difficulty managing public investment so it’s done in a cost effective way
C. government budgets will exactly shadow the rate of private investment
D. tax budgets increase without a corresponding drop in private investment

20. An additional investment in human capital, especially for the low-

income nations of the world, will likely directly increase which of the
following?
A. productivity and economic growth
B. increased levels of R&D spending
C. consumer orientated spin-offs
D. highly qualified teachers

21. A government will likely ________ to encourage investment in

technology R&D by private firms?
A. reduce R&D grants to nonprofit organizations
B. reduce R&D grants to universities
C. spend more on R&D in government laboratories
D. implement fiscal policy establishing tax incentives

22. Which of the following is least likely to benefit the civilian economy?
A. R&D carried out in government laboratories
B. R&D aimed at producing new weapons
C. direct private sector R&D spending
D. tax policy promoting civilian R&D spending

23. If David Ricardo's 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

24. Ricardian equivalence means that

A. changes in private savings offset any changes in the government deficit.
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.

25. 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

26. Suppose you are analyzing data for an economy in which Ricardian
neutrality holds true. If the budget surplus increases by 100, then
A. private savings will increase by 100.
B. private savings will decrease by 100.
C. investment will increase by 100.
D. investment will decrease by 100.

27. If an economy has a budget surplus of 1,500, private savings of 3,000,

and investment of 5,000, what will the balance of trade in this economy
equal?

A. deficit of 500
B. surplus of 500
C. surplus of 1,500
D. deficit of 1,500

28. If an economy has a budget deficit of 600, private savings of 2,000, and
investment of 800. What is the balance of trade in this economy?
A. deficit of 600
B. deficit of 2000
C. surplus of 2000
D. surplus of 600

29. When government policy moves from a budget surplus to a budget

deficit and the trade deficit remains constant
A. savings will decrease no matter what happens to investment.
B. savings will decrease if investment remains constant.
C. investment will increase if savings also remains constant.
D. investment will decrease if savings also remains constant.

30. A government began 2013 with a budget deficit and a trade deficit.
During the year, the government changed its policy and is now running a
budget surplus. If all other factors hold constant, this change in policy will
cause
A. the exchange rate to decrease and the trade deficit to increase.
B. the exchange rate to increase and the trade deficit to decrease.
C. the exchange rate and the trade deficit to decrease.
D. the exchange rate and the trade deficit to increase.

31. A government began 2013 with a budget surplus and a trade deficit.
Due to the onset of recession, the government changed its policy and is now
running a budget deficit. If all other factors hold constant, this change in
policy will cause
A. the exchange rate and the trade deficit to increase.
B. the exchange rate and the trade deficit to decrease.
C. the exchange rate to decrease and the trade deficit to increase.
D. the exchange rate to increase and the trade deficit to decrease.

32. Which of the following is not a consequence of an increase in the

government's budget deficit?
A. private savings increases while holding everything else constant
B. exports increase while imports and all other variables are held constant
C. imports increase while exports and all other variables are held constant
D. investment falls while holding everything else constant

33. If a government experiences an increase in its budget surplus, which of

the following possible outcomes will likely result?
A. investment falls while everything else holds constant
B. exports decrease while imports and all other variables are held constant
C. imports increase while exports and all other variables are held constant
D. private savings decrease while everything else holds constant

34. A moderate increase in a budget deficit that leads to a ____________ is

not necessarily a cause for concern.
A. combination of less foreign capital and banks that are bankrupt
B. moderate increase in a trade deficit and a moderate appreciation of the
exchange rate
C. a series of large budget deficits
D. shift in aggregate demand so far to the right that it causes high inflation
35. In the U.S. economy, the offsetting effects of private saving compared to
government borrowing are typically noted as being represented by which of
the following ratios?
A. much less than one-to-one
B. slightly less than one-to-one
C. slightly more than two-to-one
D. much more than two-to-one

36. __________ can set the stage for international financial investors first to
send their funds to a country and cause an appreciation of its exchange rate
and then to pull their funds out and cause a depreciation of the exchange
rate and a financial crisis as well.
A. Trade balance
B. Twin deficits
C. Trade deficits
D. Crowding out
 S11
1. The slope of the production possibility frontier is determined by the
_________ of expanding production of one good, measured by how much of
the other good would be lost.
A. absolute advantage
B. opportunity cost
C. relative advantage
D. specialization

2. In India one person can produce 330 pounds of rice or 110 shirts in one
year. In China one person can produce 400 pounds of rice or 200 shirts in
one year. Which of the following statements is true?
A. India has a comparative advantage in the production of rice.
B. China has a comparative advantage in the production of rice.
C. China has both an absolute and comparative advantage in the production of
rice.
D. India has an absolute advantage in the production of rice.

3. Alpha can produce either 18 oranges or 9 apples an hour, while Beta can
produce either 16 oranges or 4 apples an hour. The opportunity cost of
producing 1 orange for Alpha and Beta, respectively, are
A. 0.25 apples; 0.5 apples.
B. 9 apples; 4 apples.
C. 0.5 apples; 0.25 apples.
D. 2 apples; 4 apples

4. Which of the following is true?

A. A nation can have a comparative advantage in the production of a good only
if it also has an absolute advantage.
B. A nation can have a comparative advantage in the production of every good,
but not an absolute advantage.
C. A nation cannot have an absolute advantage in the production of every good.
D. A nation cannot have a comparative advantage in the production of every
good.

5. Suppose that Canada can produce 100,000 hockey sticks or 10,000

gallons of maple syrup in a typical workweek, while Germany can produce
90,000 hockey sticks or 10,000 gallons of maple syrup in a typical
workweek. From these numbers, we can conclude
A. Canada has a comparative advantage in the production of hockey sticks.
B. Germany has a comparative advantage in the production of hockey sticks.
C. Canada has an absolute advantage in the production of maple syrup.
D. Germany has an absolute advantage in the production of maple syrup.

6. The underlying reason why trade benefits both sides of a trading

arrangement is rooted in the concept of
A. opportunity cost
B. specialization
C. absolute advantage
D. maximum production

7. If the USA could produce 1 ton of potatoes or 0.5 tons of wheat per
worker per year, while Ireland could produce 3 tons of potatoes or 2 tons of
wheat per worker per year, there can be mutual gains from trade if
A. The USA specializes in potatoes because of its comparative advantage in
producing potatoes.
B. The USA specializes in wheat because of its absolute advantage in producing
wheat.
C. The USA specializes in wheat because of its comparative advantage in
producing wheat.
D. There can be no mutual gains from trade.

8. According to international trade theory, a country should

A. import goods in which it has an absolute advantage.
B. import goods in which it has a comparative disadvantage.
C. export goods in which it has an absolute advantage.
D. import goods in which it has an absolute disadvantage.

9. _________ identifies the area where a producer’s absolute advantage is

relatively greatest, or where the producer’s absolute disadvantage in
productivity is relatively least.
A. relative advantage
B. opportunity cost
C. productivity advantage
D. comparative advantage

10. Jethro has a(n) ____________ in all aspects of camping: he is faster at

carrying a backpack, gathering firewood, paddling a canoe, setting up tents,
making a meal, and washing up.
A. relative advantage
B. opportunity cost
C. absolute advantage
D. comparative advantage
11. Say that Alland 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. Alland has a comparative advantage, but not an absolute advantage, in
producing food.
D. Alland has an absolute advantage, but not comparative advantage, in
producing food.

12. The idea behind comparative advantage reflects the possibility that one
party
A. may be able to produce everything relatively more efficiently than another
party.
B. may be able to produce something at a lower opportunity cost than another
party.
C. may be able to produce something at a lower dollar cost than another party.
D. with an absolute advantage in producing two different may export goods both
of those goods to the other party.

13. The concept of ___________ means that as the measure of output goes
up, average costs of production decline—at least up to a point.
A. relative advantage
B. economies of scale
C. absolute advantage
D. comparative advantage
14. Intra-industry trade between similar trading partners allows the gains
from __________ that arise when firms and workers specialize in the
production of a certain product.
A. comparative advantage
B. learning and innovation
C. creating the value chain
D. relative advantage

15. As measured in 2008, about _______of U.S. trade and _______of

European trade is intra-industry trade.
A. 10%; 10%
B. 30%; 30%
C. 60%; 60%
D. 90%; 90%

16. Say that Alland can produce 32 units of food per person per year or 16
units of clothing per person per year, but Georgeland can produce 24 units
of food per year or 12 units of clothing. Which of the following is true?
A. Alland has an absolute advantage in producing food but will not trade with
Georgeland.
B. Alland has a comparative advantage, but not an absolute advantage, in
producing food.
C. Georgeland has both a comparative and absolute advantage in producing
clothing.
D. Georgeland has a comparative advantage, but not an absolute advantage, in
producing clothing.
17. Say that Alland can produce 32 units of food per person per year or 16
units of clothing per person per year, but Georgeland can produce 24 units
of food per year or 12 units of clothing. Which of the following is true?
A. Alland has both a comparative and absolute advantage in producing food.
B. Alland has comparative advantage, but not an absolute advantage, in
producing food.
C. Georgeland has both a comparative and absolute disadvantage in producing
clothing.
D. Georgeland has an absolute disadvantage, but not a comparative
disadvantage, in producing clothing.

18. Say that Alland can produce 32 units of food per person per year or 16
units of clothing per person per year, but Georgeland can produce 36 units
of food per year or 18 units of clothing. Which of the following is true?
A. Georgeland has an absolute but not a comparative advantage in producing
clothing.
B. Georgeland has both an absolute and a comparative advantage in producing
clothing.
C. Alland has an absolute but not a comparative advantage in producing food.
D. Alland has both an absolute and a comparative advantage in producing food.

19. Alpha can produce either 18 oranges or 9 apples an hour, while Beta
can produce either 16 oranges or 4 apples an hour. Which of the following
statements is true?
A. Alpha should export to Beta, but Beta should not export to Alpha.
B. Since Alpha has an absolute advantage in both goods, no mutual gains from
trade are possible.
C. If Alpha specializes in growing oranges and Beta specializes in growing
apples, they could both gain by specialization and trade.
D. If Alpha specializes in growing apples and Beta specializes in growing
oranges, they could both gain by specialization and trade.

20. Alpha can produce either 18 oranges or 9 apples an hour, while Beta
can produce either 16 oranges or 4 apples an hour. Which of the following
terms of trade between apples and oranges would allow both Alpha and
Beta to gain by specialization and exchange?
A. 1 orange for 0.2 apples
B. 2 apples for 3 oranges
C. 3 apples for 3 oranges
D. 1 apple for 3 oranges

21. Alpha can produce either 18 oranges or 9 apples an hour, while Beta
can produce either 16 oranges or 4 apples an hour. If the terms of trade are
established as 1 apple for 2 oranges, then
A. there are no incentives for Alpha to specialize and trade with Beta.
B. it is in the interest of both countries to specialize and trade with one another.
C. it is in the interest of Beta to grow oranges and trade for apples.
D. there are no incentives for Beta to engage in international specialization and
trade of apples and oranges.

22. Alpha can produce either 18 oranges or 9 apples an hour, while Beta
can produce either 16 oranges or 4 apples an hour. If the terms of trade are
established as 1 apple for 4 oranges, then
A. there are no incentives for Beta to engage in international specialization and
trade with Alpha.
B. it is in the interest of Beta to grow oranges and trade for apples.
C. it is in the interest of both countries to specialize and trade with one another.
D. there are no incentives for Alpha or Beta to specialize and trade with one
another.

23. Suppose that the USA can make 15,000,000 cars or 20,000,000 bottles of
wine with one year's worth of labor. France can make 10,000,000 cars or
18,000,000 bottles of wine with one year's worth of labor. From these
numbers, we can conclude
A. The USA has a comparative advantage in the production of wine.
B. France has a comparative advantage in the production of cars.
C. The USA has an absolute advantage in the production of cars.
D. France has an absolute advantage in the production of wine.

24. Assume that one day's labor in Argentina can produce either 20 units of
cloth or 2 units of wine, while in Chile one day's labor can produce either 24
units of cloth or 12 units of wine. If Argentina transfers 2 units of labor
from wine to cloth and Chile transfers 1 unit of labor from cloth to wine,
the increase in combined output by those two workers will be
A. 16 wine; 8 cloths
B. 16 wine; 16 cloths
C. 12 wine; 12 cloths
D. 8 wine; 16 cloths

25. The opportunity cost of producing a pair of pants in the USA is 5

bushels of wheat, while in China, it is 2 bushels of wheat. As a result
A. there can be mutual gains from trade to the two countries if the USA exports
wheat to China in exchange for pants.
B. The USA has a comparative advantage over China in the production of pants.
C. China has a comparative advantage over the USA in the production of wheat.
D. there can be mutual gains from trade to the two countries if the USA exports
pants to China in exchange for wheat.

26. If a nation has a comparative disadvantage in the production of some

commodity
A. it cannot gain from international trade unless it has an absolute advantage in
every other commodity.
B. it cannot gain from international trade in the commodity.
C. it can still gain from international trade in that commodity, by getting it at a
lower opportunity cost than if it produced it domestically.
D. it can gain from international trade in that commodity only if it has an
absolute advantage in that commodity.

27. Some nations that seek to produce all of their own needs face the
problem that
A. some industries are too small to be efficient if restricted to their domestic
markets alone.
B. they can deplete their natural resources as a result.
C. the opportunity cost of producing some of their own goods is lower than that
of trading with others for them.
D. they will not be able to satisfy the wants of all of their citizens.
 I
If GDP exceeds GNP, receipts of factor income from the rest of the world
exceed payments of factor income to the rest of the world

In 2010, output per capita in the U.S. was approximately equal to $47,300
In 2010, the unemployment in the U.S. was 9.6%
In 2010, the U.S. budget deficit as a percentage of U.S. output was
approximately equal to 9%.
In 2010, Spain had the lowest level of output per capita
In 2010, output per capita in China was approximately equal to $4,300
In the period 2000-2010, the annual rate of output growth in China was
approximately equal to 10%

Inflation represents an increase in the aggregate price level

N
Net national product (NNP) is equal to GNP minus consumption of fixed capital

C
Changes in business inventories will be positive when production exceeds sales
Changes in business inventories will be negative when production is less than
sales

Changes in GDP in the short run are caused primarily by demand factors
Changes in GDP in the medium run are determined primarily by supply factors

Example
Suppose exports are greater than imports → a trade surplus exists

Suppose exports are less than imports → a trade deficit exists

Suppose nominal GDP increased in a given year. Based on this information, we

know with certainty that either real output or the price level (GDP deflator) have
increased

Suppose you are provided with the following data for your country for a
particular month: 200 million people are working, 20 million are not working
but are looking for work, and 40 million are not working and have given up
looking for work. The official unemployment rate for that month is 9.1%

Suppose a country using the United States' system of calculating official

unemployment statistics has 100 million people, of whom 50 million are
working age. Of these 50 million, 20 million have jobs. Of the remainder: 10
million are actively searching for jobs; 10 million would like jobs but are not
searching; and 10 million do not want jobs at all.
Refer to the information above. The labor force is 60 million.
Refer to the information above. The labor force participation rate is 6
Refer to the information above. The official unemployment rate is 33

Assume that 1980 is the base year. Given macroeconomic conditions in the
United States over the past three decades, we know that real GDP and nominal
GDP were equal in 1980.

If nominal GDP rises from $100 trillion to $120 trillion, while the GDP deflator
rises from 2.0 to 2.2, the percentage change in real GDP is approximately equal
to 9.1%
In a given year, suppose a company spends $100 million on intermediate goods
and $200 million on wages, with no other expenses. Also assume that its total
sales are $800 million. The value added by this company equals $700 million

Which prices will be used when calculating the rate of growth of real GDP
between the year's 2005 and 2006 using the chain method? The average of
prices in 2005 and 2006

O
"Ordinary least squares" is a technique that can be used to obtain a line
describing consumption behavior in the real world.

W
When we use ordinary least squares to determine the relationship between
changes in consumption and changes in both current and lagged income, we find
that current income has a greater impact on consumption than income lagged
one quarter.

When estimating a regression line, a high R2‚ tells us we have a good fit

When using the income approach to measure GDP, the largest share of GDP
generally consists of labor income

A
A large "T-statistic" tell us that we can be confident that our estimated
coefficient is not zero
A key step in using instrument variable methods is to find one or more
exogenous variables that influence your dependent variable

At January 1 2002, the Euro be used as currency

An individual is said to be a discouraged worker if he or she wants to work but

has given up searching for a job

A transition from central planning to a market economy explains the relatively

high growth rate of output in China since 1980

According to convention, a recession is referred to if an economy goes through

at least two consecutive quarters of negative growth

A firm's value-added equals its revenue minus its cost of intermediate goods

T
The most recent financial crisis started in housing market

The standard of living typically refers to output per capita

The labor force in the United States is defined as the sum of the total number of
individuals who are employed and the officially unemployed

The GDP deflator provides a measure of the ratio of nominal GDP to real GDP

The prices for goods bought by households are included in both the GDP
deflator and the consumer price index
The Okun's law shows the relationship between output growth and
unemployment

The Phillips curve describes the relationship between inflation and

unemployment

E
Economists have suggested that the relatively higher unemployment in Europe
has been caused by relatively high unemployment benefits, relatively high level
of worker protection, inadequate macroeconomic policies, increased labor costs

Expressions represents nominal GDP: PtYt

Expressions represents real GDP: Yt

H
How many countries are in the European Union? 27
How many countries are in the Euro area? 17

Hedonic pricing is the process of pricing individual characteristics of a good or

service

M
Most economists believe that the source of European high unemployment in the
past two decades is labor market institutions
Macroeconomists are concerned about changes in the unemployment rate
because changes in the unemployment rate provide information about the state
of the economy and the welfare of those who are unemployed

G
GDP is the value of all final goods and services produced in a given period

GDP in constant dollars represents real GDP

L
Labor income's share in an advanced country is likely to be 70%

P
Pure inflation occurs when all prices and nominal wages rise by the same
percentage

Prices for firms' purchases of new equipment are included in the GDP deflator,
but not included in the Consumer Price Index

D
Deflation generally occurs when the consumer price index decreases

During the mid-1980s, we observed a significant reduction in oil prices. In the

United States, we would expect that this reduction in oil prices would cause a
larger reduction in the CPI compared to the GDP deflator
During the late 1990s, Japan experienced reductions in the GDP deflator. Given
this information, we know with certainty that the overall price level in Japan
decreased during these periods.