• As a factor of production, oil reserves are counted as land

• In the circular flow model, the factors of production flow in the opposite direction as do the
rents, wages, interest, and profits
• Most of the world's population lives in developing economies
• The world population is approximately ________ people. 6.8 billion
• The largest share of total production in the United States is consumption goods and services
• The personal distribution of income measures which of the following? The distribution of
income among households
• As the circular flow model shows, the factors of production flow from households to firms
through the factor market
• As a percentage of total world production, production in the 29 advanced economies is about
________ percent of total world production and in the 118 developing economies is about
________ percent of total world production. 56; 36
• Dan missed class the day the professor covered the circular flow model. Dan asked his friend
Joan to explain markets to him. Joan correctly stated that a market is any arrangement that
brings buyers and sellers together
• The total value of capital in the United States is around $47 trillion
• Of the following, the largest source of revenue for the federal government is the personal
income tax
• State and local governments obtain most of their revenue from sales taxes and transfers from
the federal government
• Which of the following is true?
i. The advanced economies account for more than half of global production.
ii. Almost four out of every five people in the world live in the developing economies.
iii. In the advanced economies, agriculture accounts for a larger part of total production than in
the developing economies. Only i and ii
• Of the following, the federal government's largest source of revenue is the social security tax
• In the advanced economies, ________ of the factories use advanced capital equipment and in
the developing economies ________ of the factories use advanced capital equipment. virtually
all; some
• An export good is a good produced in the United States and sold in other countries
• Which factor of production is paid "profit"? labor
• The majority of the income earned in the United States is paid in wages.
• Which of the following is a function of the U.S. federal government? providing the legal and
social framework for economic activity
• Of the following, the largest source of revenue for the federal government is personal income
taxes
• A graph shows the average SAT scores for males and females in 2010. The kind of graph used
to show these data would be a cross-section graph
• The horizontal axis in a graph is named the x-axis
• Which of the following statements best describes the study of economics? Economics studies
how we make choices in the face of scarcity.
• As the price of home heating oil rises, families buy less home heating oil. Hence a scatter
diagram with the price of home heating oil on the vertical axis and the quantity purchased on
the horizontal axis reveals a ________ relationship. negative
• As the number of days without rain increases, the amount of wheat grown per acre declines. A
graph showing this relationship shows .None of the above answers is correct
• Canada has nationalized health care, so that everyone, regardless of their ability to pay, has
some access to health care. Based on this observation, Canada has decided that "everyone,
regardless of their ability to pay" is the answer to what microeconomic question?For whom will
health care be produced?
• In a graph, a straight line has a negative slope if the line falls from left to right
• An incentive is an inducement to take a particular action
• As the number of days without rain increases, the amount of wheat grown per acre declines. A
graph showing this relationship shows None of the above answers is correct.
• Which of the following is a topic studied in macroeconomics The effect on economic growth if
the government raises taxes
• If there is a positive relationship between two variables, the graph of the relationship will be
upward sloping.
• Choices that are best for the society as a whole are choices in pursuit of the social interest.
• In making your decision whether to take a trip during Spring Break, you compare all the other
activities you could undertake. As a result, you are making a choice on the margin
• Which of the following statements is true regarding scarcity All citizens in a wealthy economy
experience scarcity
• Which of the following statements is correct A straight line that slopes upward moving to the
right has a positive slope
• Which of the following statements is a positive statement Online shopping increased by 50
percent this Christmas season.
• The cost of a one-unit increase in an activity is called the marginal cost
• Scarcity means that wants are greater than what we can produce with out resources
• The tendency for the values of two variables to move together in a predictable and related way
is correlation
• In a graph, a straight line has a negative slope if the line falls from left to right
• When a home builder decides to computerize all of its production schedule, it directly answers
the ________ question. how
• Which of the following statements is correct A straight line that slopes upward moving to the
right has a positive slope
• If there is a positive relationship between two variables, the graph of the relationship will be
upward sloping
• The production possibilities frontier is a graph showing the maximum combinations of goods
and services that can be produced
• A movement from a point inside the production possibilities frontier to a point on the
production possibilities frontier represents a free lunch.
• For country Gamma the opportunity cost for producing 1 computer is 10 tons of steel. For
country Beta the opportunity cost for producing 1 computer is 6 tons of steel. Which country
has the comparative advantage in the production of steel? Gamma
• As technology advances, the PPF shifts outward.
• The sustained expansion of production possibilities is called economic growth.
• Which of the following statements is correct?
i. As the economy grows, the opportunity costs of economic growth decrease.
ii. Economic growth has no opportunity cost.
iii. The opportunity cost of economic growth is current consumption forgone. iii only
• Having an absolute advantage means being able to produce more of each product than the
trading partner.
• Which of the following statements is correct? A tradeoff is a limit that forces an exchange or a
substitution of one thing for something else.
• In the production possibilities model, the vertical axis measures ________ and the horizontal
axis measures ________. the quantity of a good or service; the quantity of another good or
service
• While moving on the production possibilities frontier, if the opportunity cost of producing one
good is 1/2, the opportunity cost of producing the other good (in the same range) is 2.
• If John can produce 10 chairs or 20 lamps during a week while Mary can produce 12 chairs or
22 lamps in the same time, who has the absolute advantage in producing each good? Mary in
producing both goods
• As an economy increasingly specializes in producing one good, the opportunity cost of that
good increases. The opportunity cost increases because resources are not equally productive in
all activities.
• Moving along a country's PPF, a reason opportunity costs increase is that some resources are
better suited for producing one good rather than the other.
• In order for Ireland to grow more potatoes, wool production must decrease. This situation is an
example of a tradeoff.
• If a nation devotes a larger share of its current production to consumption goods, then its
economic growth will slow down
• The opportunity cost of a good increases as more of it is produced because resources are not
equally productive in all activities.
• A major earthquake occurs in the central part of the United States. What impact would this have
on the nation's production possibilities frontier and why? It would shift inward because some of
the nation's resources, such as capital and labor, would be destroyed.
• The United States produced approximately ________ worth of goods and services in 2007. $14
trillion
• The opportunity cost of producing more of one good on a production possibilities frontier is a
ratio of quantities.
• Moving along a country's PPF, a reason opportunity costs increase is that . some resources are
better suited for producing one good rather than the other.
• The production possibilities frontier is a boundary that separates attainable combinations of
goods and services that can be produced from unattainable ones.
• As an economy increasingly specializes in producing one good, the opportunity cost of that
good increases. The opportunity cost increases because resources are not equally productive in
all activities.
• If the production possibilities frontier between two goods is a straight line, then the resources
are equally productive in both goods.
• When a country's production possibilities frontier shifts outward over time, the country is
experiencing economic growth.
• If a nation devotes a larger share of its current production to consumption goods, then its
economic growth will slow down.
• The opportunity cost of economic growth is the decrease in the current production of
consumption goods.
• Specialization and trade make a country better off because with trade the country can consume
at a point outside its production possibilities frontier.
• An increase in the number of fast-food restaurants increases the supply of fast-food meals.
• An increase in the productivity of producing jeans results in the supply of jeans increasing
• When there is a shortage of parking spaces at your college, the quantity of parking spaces
demanded is greater than the quantity of parking spaces supplied.
• Suppose that people decide riding scooters is no longer fun. The equilibrium price of a scooter
________ and the equilibrium quantity of scooters ________. falls; decreases
• A demand curve is a graph of the relationship between quantity demanded of a good and its
price. has an upward slope.
• Which of the following shifts the supply curve of popcorn leftward? a decrease in the number of
popcorn suppliers
• As a falling price eliminates a surplus in the jersey market, consumers increase the quantity of
jerseys they demand.
• When moving along a demand curve, which of the following changes? the price of the good
• If there is a surplus of a good, the quantity demanded is ________ the quantity supplied and the
price will ________. less than; fall
• If there is a surplus of tacos, then the quantity of tacos demanded is less than the quantity of
tacos supplied
• The quantity supplied of a good, service, or resource is ________ during a specified period and
at a specified price. the amount that people are able and willing to sell
• The downward slope of a demand curve represents the law of demand
• As a falling price eliminates a surplus in the jersey market, consumers increase the quantity of
jerseys they demand.
• Demand curves slope ________ because as the price increases and other things remain the
same, the quantity demanded ________. downward; decreases
• When moving along a demand curve, which of the following changes? the price of the good
• Market demand curves are obtained by summing the quantities every consumer is willing to buy
at each different price
• Suppose that tattoos gained immense popularity with retired people as well as college students.
This gain in popularity best reflects which of the following influences on buying plans?
• preferences
• The technology associated with manufacturing computers has advanced enormously. This
change has led to the price of a computer ________ and the quantity ________. falling;
increasing
• The price of salsa rises. How does the increase in the price of salsa affect the supply of salsa?
There is no change to the supply of salsa but the quantity of salsa supplied increases.
• Suppose that the price of flour used to produce bagels increases. Hence the equilibrium price of
a bagel ________ and the equilibrium quantity ________. rises; decreases
• When there is a surplus of snowboards, the quantity of snowboards supplied is greater than the
quantity of snowboards demanded.
• Consider the market for wheat. If there is an improvement in harvesting technology, the supply
curve for wheat shifts rightward.
• Which of the following increases the demand for a good or service? a rise in the price of a
substitute good or service
• If the demand curve for desktop computers shifts rightward and at the same time the supply
curve shifts leftward, then the equilibrium price definitely rises.
• Suppose that tattoos gained immense popularity with retired people as well as college students.
This gain in popularity best reflects which of the following influences on buying plans?
preferences
• The market demand curve is the horizontal sum of individual demand curves
• Assume a market is in equilibrium. There is an increase in supply, but no change in demand As
a result the equilibrium price is ________, and the equilibrium quantity is ________. falls;
increases
• The technology associated with manufacturing computers has advanced enormously. This
change has led to the price of a computer ________ and the quantity ________. falling;
increasing
• The number of people looking to buy ceiling fan buyers increases, so there is an increase in the
demand for ceiling fans and a rise in the price of a ceiling fan.
• Is the minimum wage fair? No, because workers who lose their jobs are made worse off
• If a rent ceiling is below the equilibrium rent, some allocation scheme must be used. The
allocation methods include all of the following EXCEPT charging the equilibrium rent.
• In a market with a rent ceiling set below the equilibrium rent, the producer and consumer
surplus both decrease but generally not to zero.
• A housing shortage results when a rent ceiling below the equilibrium rent is imposed.
• A black market for housing exists because of a rent ceiling. The rent for housing in the black
market is somewhere between the ceiling rent and the maximum rent a tenant is willing to pay.
• An efficient allocation of labor occurs when the marginal cost to workers is equal to the
marginal benefit to firms.
• A minimum wage law increases the time spent searching by workers who cannot find a job.
• Which of the following decrease the deadweight loss from a rent ceiling set below the
equilibrium rent?
i. lowering the ceiling
ii. dedicating more resources to enforcement of the ceiling
iii. raising the ceiling
• iii only
• A minimum wage increases unemployment by decreasing the quantity of labor demanded.
• Suppose the government imposes a price support that is above the equilibrium price. As a
result,total revenue increases
• Setting a price support in the market for sugar beets above equilibrium price ________ the
quantity produced and ________ the quantity bought by consumers. increases; decreases
• Producers favor a ________ because ________. price support; total revenue increases
• A minimum wage set above the equilibrium wage decreases the workers' surplus because
workers must spend resources looking for jobs.
• Suppose the current equilibrium wage rate for landscapers is $6.65 in Little Rock; $7.50 in St.
Louis and $9.05 in Raleigh. An increase in the minimum wage to $7.50 per hour results in
unemployment of landscapers in only Little Rock.
• If a rent ceiling is below the equilibrium rent, some allocation scheme must be used. The
allocation methods include all of the following EXCEPT charging the equilibrium rent.
• A housing shortage results when a rent ceiling below the equilibrium rent is imposed
• A rent ceiling creates a deadweight loss if it is set below the equilibrium rent.
• A stated goal of a minimum wage is to boost the incomes of low-wage earners.
• A black market for housing exists because of a rent ceiling. The rent for housing in the black
market is somewhere between the ceiling rent and the maximum rent a tenant is willing to pay.
• People who benefit from a rent ceiling include tenants who have a rent-controlled apartment.
• If Sam pays $2,000 in taxes on an income of $20,000 and $2,800 in taxes on an income of
$30,000, the tax rate is regressive.
• If a tax is placed on tires, then
 i. the equilibrium quantity of tires will decrease.
ii. a deadweight loss will be created.
iii. the producer surplus will decrease.
• i, ii, and iii
• Neither the demand nor the supply of automobiles is perfectly elastic or inelastic. If the
government imposes a $1,000 tax on automobiles, then the price of an automobile increases by
less than $1,000.
• Which of the following is an example of a tax following the benefits principle?
i. sales taxes on gasoline are used to fund road maintenance projects
ii. federal income tax used to fund food stamps for poorer households
iii. property taxes used to finance public education i only
• If the supply of automobiles becomes more inelastic, then a tax on automobiles is paid more by
the sellers after the change than before.
• Because the supply of land is perfectly inelastic, when governments tax land, the tax creates no
deadweight loss because the equilibrium quantity is the same as without the tax.
• Using fuel taxes to pay for maintaining public highways is an example of the benefits principle
of fair taxation.
• In the 1980s, the U.S. government forced Japanese automakers to limit their exports to the
United States. The union representing the autoworkers (UAW), argued that otherwise the U.S.
auto industry would have contracted. The UAW's argument is the ________ argument for
protection save domestic jobs
• A sales tax imposed on sellers of a good decreases the supply and shifts the supply curve
leftward.
• A tax on a good that is imposed when it is imported is called a tariff.
• The assertion that Bill Gates and Paris Hilton should pay more taxes than Average Joe best
represents the idea of vertical equity.
• A tax on a good that is imposed when it is imported is called a tariff.
• A country exports the goods that the economy can produce at relatively lowest opportunity cost
• Neither the demand nor the supply of sugar is perfectly elastic or inelastic. If the government
imposes a 5 percent tax on sugar, the price of sugar increases by less then 5 percent.
• Because the supply of capital is highly elastic, taxing the income from capital results in
i. firms that demand capital paying the greater share of the tax.
ii. a decrease in the equilibrium quantity of capital.
iii. a deadweight loss.
• i, ii, and iii
• What is rent seeking with respect to restricting international trade? An attempt to capture the
gains from trade by imposing a tariff.
• Which of the following taxes best illustrate the ability-to-pay principle of tax fairness The WIC
program provides food to low income mothers and is funded through the progressive federal
income tax.
• Ann pays $3,850 in taxes on an income of $38,500. Therefore her average tax rate must be ten
percent.
• Suppose the demand for specialty car license plates is perfectly inelastic and the supply curve
for specialty license plates is upward sloping. A tax is imposed on specialty license plates.
Which of the following is true? Drivers pay all of the tax.
• For a given supply elasticity, the more inelastic the demand for a good, the larger the share of
the tax paid by the buyers.
• Adding wages, interest, rent, and profits yields net domestic product at factor cost.
• Suppose Andy is laid off from the automobile plant because of slow automobile sales. Andy is
looking for a new job. Andy is a job loser
• If real GDP increases over time, the cost of living will More information is needed to determine
how the cost of living changes.
• Across developed and newly industrialized economies, since 1989 the United States has
generally had a higher unemployment rate than Japan and Hong Kong and a lower
unemployment rate than the Eurozone countries.
• In the United States, the decrease in the labor force participation rate by men has been, in part,
the result of earlier retirement.
• In 2009 in the United States, net domestic product at factor cost was $11,091 billion.
Additionally, rent was $2,000 billion, profits were $1,000 billion, and interest was $358 billion.
Hence wages were $7,733 billion.
• To be considered unemployed, a worker must have had no employment during the week before
the survey and be actively looking for a job.
• To be counted as employed by the BLS, in the week before the survey the person must have
worked for pay at least 1 hour
• Which of the following is NOT included in the income approach to calculating GDP? net
exports of goods and services
• Job losers are people who are laid off either permanently or temporarily.
• When gas prices rose sharply, Belle quit her job because it required a long commute. Belle is a
job leaver
• The natural unemployment rate is the unemployment rate that exists when there is no cyclical
unemployment.
• In 2009 in the United States, consumption expenditure was $9,996 billion, investment was
$1,559 billion, government expenditures on goods and services were $2,927 billion, and total
exports were $1,492 billion. GDP equaled some amount, but there is not enough information
given to calculate GDP.
• A main reason for the low unemployment rate from 1995 through most of the 2000s was
because of the rapid development of the Internet industry and other new technologies.
• Which of the following is included in U.S. GDP?
i) the rental value of homes owned by U.S. citizens.
ii) the production of Suburban SUVs by GM in its plant in Mexico.
iii) Tickets sold by U2 for concerts held in the United States
• . i and iii.
• Which of the following is included in the of U.S. GDP for 2011?
i. a 2011 Cadillac Escalade produced and sold as a new car in the United States in 2011
ii. tires produced in the United States, purchased by GM, and installed on a new Cadillac
Escalade sold in 2011
iii. GM cars produced in Canada
• i only
• In the United States, the highest unemployment rates occur among black male teenagers.
• The labor force includes people who
i. are less than 16 years of age.
ii. are in institutions.
iii. are actively seeking a job but do not have a job
• iii only
 • The largest expenditure category in the United States is consumption expenditure.
• The Bureau of Labor Statistics (BLS) compiles information about employment by performing a
monthly survey of 60,000 households.
• Suppose the Bureau of Labor Statistics uses Ballpark Franks as the hot dogs used when
calculating the consumer price index. During 2010, Oscar Mayer aggressively reduces prices.
Consumers respond by purchasing more Oscar Mayer and less Ballpark Franks. The 2010 CPI
is likely to overstate the average prices paid by consumers.
• The nominal wage rate is the average hourly wage rate measured in current dollars
• Suppose that residents of France have seen their real wage rate increase over time. This means
that French workers have increased buying power .
• Your wage this year is $15 per hour and the CPI is 178. Next year you get a raise to $17 and the
CPI rises to 185. What has happened? Your real wage has increased but by a smaller percentage
than your nominal wage.
• If a country had a CPI of 105.0 last year and a CPI of 102.0 this year, then the average prices of
goods and services decreased between last year and this year.
• If you get an 8 percent increase in your nominal income, your real income increases only if the
inflation rate is less than 8 percent.
• An example of the quality change bias, and not a new goods bias, in the calculation of the CPI
is a price increase in a 2011 GPS unit versus a 2008 GPS unit
• When the nominal price of a good increases over time, the real cost of buying the good might
increase, decrease, or stay the same depending on how much the CPI changed.
• The reference base period for the CPI is currently 1982 to 1984
• If we look at real and nominal interest rates in the United States since 1968, we see that the real
interest rate has almost always been less than the nominal interest rate because of inflation.
• The inflation rate measures the percentage change in the CPI from one year to the next year.
• The CPI market basket weights the goods and services according to the budget of an average
urban household.
• Because a third of government outlays are linked directly to the CPI, as time passes the CPI bias
means that the government's outlays are larger than needed to keep pace with the cost of living.
• Your wage this year is $15 per hour and the CPI is 178. Next year you get a raise to $17 and the
CPI rises to 185. What has happened? Your real wage has increased but by a smaller percentage
than your nominal wage.
• If you are earning $20,000 this year and the CPI is 165, your real income in base year prices is
$12,121.21.
• The bias in the CPI affects government outlays because the overstatement of inflation increases
government outlays by more than what is justified.
• The real interest rate equals the nominal interest rate minus the inflation rate.
•
Quantity Quantity
Item (2009) Price (2009) (2010) Price (2010)
Magazines 400 $5.00 450 $4.50
Movie tickets 50 $6.00 200 $8.00
Pizzas 100 $10.00 120 $10.50
• The data in the table above shows the consumption by families in an economy. The year 2009 is
the reference base period.
 Based on the table above, between 2009 and 2010, the inflation rate in this country was -1.5
percent.
• The formula for the CPI is 100 multiplied by (Cost of CPI market basket at current period
prices ÷ Cost of CPI market basket at base period prices).
• Suppose that residents of France have seen their real wage rate increase over time. This means
that French workers have increased buying power
• When a good gets better from one year to the next, the CPI has a what is called quality change
bias.
• For the purpose of measuring the cost of living for consumers, one reason the GDP price index
is NOT a good substitute for the CPI is because the GDP price index includes the prices of
exported goods, which are not consumed in the United States.
• In the United States between 1984 and 2009, the nominal wage rate increased more than the
real wage rate
• Because a third of government outlays are linked directly to the CPI, as time passes the CPI bias
means that the government's outlays are larger than needed to keep pace with the cost of living.
• Suppose the market basket of consumer goods and services costs $180 using the base period
prices, and the same basket of goods and services costs $300 using the current period prices.
The CPI for the current year period equals 166.7.
• If for a given year nominal GDP is $2000 billion and real GDP is $1500 billion, then the GDP
price index is 133
• In 2008, the nominal minimum wage rate was $7.25 an hour and the CPI was 200. The real
minimum wage rate in 2008 was $3.63 an hour
• If the current period has a CPI of 143, then the amount of inflation since the base period is 43
percent.
• If the prices of the goods and services contained in the CPI market basket increase from the
base period to the next year, we know that the next year's CPI will be above 100.
• CHAPTER 23
• Which of the following explain the natural rate of unemployment?
i) job search.
ii) the Okun Gap.
iii) the production function
• i only.
• A country reports that its actual real GDP is greater than its potential GDP. It must be that the
excess by which real GDP exceeds potential GDP is only temporary and eventually real GDP
will decrease to be equal to potential GDP.
• The Monetarist model expands the Keynesian model by proposing that decreases in the quantity
of money lead to higher interest rates.
• When the labor market is in equilibrium, there is full employment, which means that real GDP
 equals potential GDP.
• Diminishing returns, so that each additional hour of labor employed produces successively
smaller additional amounts of real GDP, exist because all other factors are held fixed.
• The real wage rate is the ________ divided by the ________. nominal wage rate; price level
• nominal wage rate; price level job search and job rationing.
• The Lucas Wedge is estimated to to total over $284,000 per person as a result of the slowdown
in the growth rate of real GDP.
• More generous unemployment benefits ________ the opportunity cost of looking for a new job
and therefore ________ the job search process lower; extend
• When the labor market is in equilibrium so that the quantity of labor supplied equals the
quantity demanded, the economy is fully employed.
• Which of the following explain the natural rate of unemployment?
i) job search.
ii) the Okun Gap.
iii) the production function
• i only.
• A surplus in the labor market indicates that the quantity of labor demanded is less than the
quantity of labor supplied
• When the labor market is in equilibrium so that the quantity of labor supplied equals the
quantity demanded, the economy is fully employed.
• A reason a nation faces diminishing returns along a production function is because the quantity
of physical capital is fixed.
• The quantity of labor demanded by a firm depends upon the real wage rate not the nominal
wage rate.
• If the government increases unemployment benefits, then the labor supply curve shifts leftward.
• Efficiency wages, above equilibrium minimum wage rates, and higher union wages are likely to
increase the natural unemployment rate.
• Which of the following will increase the natural unemployment rate?
i) a minimum wage set above the equilibrium wage.
ii) efficiency wages
iii) union-negotiated waged
• i, ii and iii.
• The presence of union wages leads to job rationing because the real wage exceeds the
equilibrium real wage.
• The two fundamental causes of unemployment at full employment are job search and job
rationing.
• More generous unemployment benefits ________ the opportunity cost of looking for a new job
and therefore ________ the job search process lower; extend
• Potential GDP is the level of real GDP that the economy would produce if it was at full
employment.
• The Bubby Gum factory produces bubble gum. Joanne is one of the employees, and she
produces 10 packs of bubble gum per hour. Joanne's money wage rate is $12 per hour. If a
packet of bubble gum sells for $1.00, then Joanne is creating a $2.00 per hour loss for the firm.
• With fixed quantities of capital, land, and entrepreneurship and fixed technology, the amount of
real GDP produced increases when ________ increases.
i. the quantity of labor employed
ii. the inflation rate
iii. the price level
• i only
• An efficiency wage is designed to ________ work effort and to ________ labor turnover.
increase; lower
• Efficiency wages are offered by firms who want to reduce turnover in the labor force.
• If the government raises income taxes, then the labor supply curve shifts leftward.
• Over the business cycle, real GDP fluctuates around potential GDP.
• Firms hire more labor as long as the real wage rate is less than the additional output the labor
produces.
• The real wage rate is the ________ divided by the ________. nominal wage rate; price level
• CHAPTER 24
• The neoclassical growth theory assumes that technological change
i. is determined by economic growth.
ii. is random and the result of chance.
iii. results from people's choices.
• ii only
• Classical growth theory predicts that in the long run there will be zero economic growth.
• The annual growth rate of an economy is 10 percent. The economy's GDP will double in about
________ years. . 7
• The classical theory was developed in the late 18th and early 19th centuries and has proponents
today who fear population growth and overpopulation.
• A key reason why some nations show little or no growth is lack of incentives to undertake
actions toward growth.
• If Kenya institutes policies that support economic freedom and growth, it is likely that Kenya
will slowly reap the benefits of economic growth as the economy grows over time.
• If real income is above the subsistence level then, according to classical growth theory, the
population will increase.
• New growth theory predicts that economic growth can last indefinitely
• A key reason why some countries are growing very slowly is they lack economic freedom.
• Economic growth is a sustained expansion of production possibilities measured as the increase
in ________ over a given period. real GDP
• In India last year, the growth rate of real GDP was 3.5 percent and the population grew from
1,000 million people to 1,100 million. Real GDP per person decreased by 6.5 percent.
• Suppose that in the future, real GDP per person grows 2 percent a year in the United States and
4 percent a year in China. It will take real GDP per person approximately ________ years to
double in the United States and approximately ________ years to double in China. 35; 17.5
• If the U.S. economy grows as proposed by the neoclassical growth model, we would see that
real GDP per person will increase as a result of increases in technology.
• If Kenya institutes policies that support economic freedom and growth, it is likely that Kenya
will slowly reap the benefits of economic growth as the economy grows over time.
• Classical growth theory predicts that economic growth will eventually stop because of
population growth.
• The annual growth rate of an economy is 10 percent. The economy's GDP will double in about
________ years. 7
• Economic freedom means that people are able to make personal choices and their property is
protected.
• New growth theory predicts that economic growth can last indefinitely
• Which theory of economic growth emphasizes that technological innovations result from
people's choices?
i. Classical growth theory
ii. Neoclassical growth theory
iii. New growth theory
• iii only
• Suppose Mexico's real GDP per person in 2008 is $6,000 and the U.S. real GDP per person is
$24,000. Mexico has annual growth in real GDP per person of 5 percent. Approximately how
many years will it take Mexico to equal $24,000 of real GDP per person? 28 years
• Which growth theory predicts that even when technology advances, real GDP per person
always returns to a subsistence level of income? Classical growth theory
• If real GDP in year 1 is $72 million and real GDP in year 2 is $87 million, then the growth rate
of real GDP is 20.8 percent.
• To measure the change in the standard of living, it is best to use the growth rate of real GDP per
person.
• The classical growth theory asserts that population growth will lead to people earning only a
subsistence level of income.
• If real income is above the subsistence level then, according to classical growth theory, the
population will increase.
• The Rule of 70 states that the level of a variable will double in the number of years equal to 70
divided by the variable's annual growth rate.
• Human capital is the accumulated skills and knowledge of workers.
• Classical growth theory predicts that economic growth will eventually stop because of
population growth
• A reason why many of the third world countries are not achieving an increase in their standard
of living is that they don't have social institutions with a strong rule of law and economic
freedom.
• The classical theory was developed in the late 18th and early 19th centuries and has proponents
today who fear population growth and overpopulation.
• CHAPTER 25
• The distinction between physical and financial capital is that financial capital is used to
purchase and operate physical capital.
• What happens to the demand for loanable funds curve when the economy enters a recession?
The demand for loanable funds curve shifts leftward because the expected rate of profit falls.
• Which of the following represents partial ownership of a firm? stocks
• Economists use the term wealth to mean what a person owns
• _______ reflects a use of loanable funds while ________ reflects a supply of loanable funds.
The government budge deficit; private saving.
• China's government runs a budget surplus. As a result, if there is no Ricardo-Barro effect, the
supply of loanable funds curve lies to the right of the private supply of loanable funds curve.
• In a business cycle recession, which of the following occurs? Investment demand decreases and
the demand for loanable funds curve shifts leftward.
• The Ricardo-Barro effect argues that the crowding-out effect will not occur, because the private
saving supply will change to offset any change in the government budget deficit.
• Which of the following decreases the demand for loanable funds and shifts the demand for
loanable funds curve leftward? the economy experiences a recession
• When the real interest rate ________ the equilibrium real interest rate, there is a ________ of
loanable funds and the real interest rate ________. exceeds; surplus ; falls
• Suppose the government has a budget deficit of $2 billion. If there is no Ricardo-Barro effect,
how much crowding out of investment occurs? some crowding out occurs, but less than $2
billion
• Other things remaining the same, the ________ the real interest rate, the ________. lower;
greater the quantity of loanable funds demanded
• As a result of the government's rescue of financial firms and the auto industry in 2008, which of
the following occurred?
i) The government's demand for loanable funds increased the real interest rate.
ii) Investment expenditures were crowded out.
iii) The supply of loanable funds curve shifted leftward.
• i and ii.
• If the real interest rate falls, there is a movement along the supply curve of loanable funds to a
 lower quantity of loanable funds .
• Other things remaining the same, as the real interest rate increases firms will borrow less funds
• During a recession, firms' expected profit from investment ________ so the demand for
loanable funds curve ________. falls; shifts leftward
• The quantity of loanable funds supplied increases if the real interest rate rises, all other things
remaining the same, because the real interest rate is the opportunity cost of consumption.
• In a business cycle recession, which of the following occurs? Investment demand decreases and
the demand for loanable funds curve shifts leftward.
• Bill's Lawn service starts the year with 20 lawn mowers. During the year, 3 mowers break and
are not worth fixing. Bill also expands his business and buys 10 more mowers. Bill's gross
investment is ________ mowers. 10
• When ________ changes, the supply of loanable funds curve shifts. people's expected future
income
• The quantity of loanable funds demanded increases if the real interest rate falls, all other things
remaining the same, because the real interest rate is the opportunity cost of investment.
• China's government runs a budget surplus. As a result, if there is no Ricardo-Barro effect, the
supply of loanable funds curve lies to the right of the private supply of loanable funds curve.
• An example of financial capital is bonds.
• Gross investment equals net investment plus depreciation.
• According to the Ricardo-Barro effect, a government budget deficit increases private saving
supply.
• The opportunity cost of the financial resources used to finance the purchase of capital is the real
interest rate
• Suppose the real interest rate increases from 4 percent to 6 percent. As a result, firms decrease
the quantity demanded of loanable funds.
• If an economy's depreciation is greater than its gross investment, then the economy's capital
stock decreases.
• A decrease in expected future income leads to a rightward shift of the supply of loanable funds
curve.
• Economists use the term wealth to mean what a person owns.
• CHAPTER 26
• Checkable deposits are money because they can be converted into currency on demand and are
used directly as a means of payment.
• When the Fed sells $100 million of securities to a commercial bank the bank's reserves
decrease.
• Which of the following is NOT held as an asset by banks? checkable deposits
• If the currency drain is zero, which of the following situations leads to the greatest total increase
in the quantity of money? an increase in the monetary base of $100,000 when the desired
 reserve ratio is 5 percent
• Comparing the effect on the monetary base between an open market purchase of government
securities from a bank and the same open market operation conducted with the general public,
the monetary base increases by the same amount if the general public sells the securities or if a
bank sells the securities.
• Suppose the desired reserve ratio is 10 percent. If the Commerce Bank has total deposits of
$20,000, total assets of $10,000, and actual reserves of $8000, the amount of excess reserves is
$6,000
• Suppose the desired reserve ratio is 10 percent. If Urban Bank has total deposits of $1000 and
total assets of $10,000, the amount of desired reserves is $100.
• The medium of exchange is defined as an object that is accepted in return for goods and
services.
• What is a problem with barter that makes it so difficult to use? Barter requires a double
coincidence of wants.
• Which of the following items is included in the M1 money supply? coins in a Pepsi vending
machine, waiting to be used as change
• The desired reserve ratio is 10 percent. Joe deposits $1,000 in Bank A. Bank A keeps its
minimum desired reserves and lends the excess to Fred. Fred spends his loan at J.C. Penney.
J.C. Penney deposits the check it receives from Fred in Bank B. Bank B keeps its minimum
desired reserves and lends the excess to Mary. How much can Bank B lend to Mary? $810
• The Fed's policy tools include required reserve ratios, the discount rate, open market operations,
and extraordinary crisis measures.
• Credit cards are a special ID card that is not money
• Open market operations are the purchase or sale of government securities by the Fed.
• The Board of Governors of the Federal Reserve System has seven members serving for 14-year
terms.
• If Federal Reserve notes and coins are $765 billion, and banks' reserves at the Fed are $8
billion, the gold stock is $11 billion, and the Fed owns $725 billion of government securities,
what does the monetary base equal? $773 billion
• Quantitative easing by the Fed refers to the creation of bank reserves by engaging in large-scale
open market operation at very low interest rates.
• Which of the following are considered money?
i) electronic checks
ii) paper checks
iii) the deposit transferred using an e-check
• iii only.
• The desired reserve ratio is 3 percent. Robert deposits $3,000 in Bank America. Bank America
keeps its minimum desired reserves and lends the excess to Fredrica. How much does Bank
America lend to Fredrica? $2,910
• Credit cards, debit cards, and e-checks are not money.
• Checks are not money because they are just instruments to transfer money between banks.
• For anything to be considered money it must be either a commodity or a token, as long as it is
generally accepted as a means of payment.
• Looking at the Fed's actions during the 2008 financial crisis, we can see that the Fed doubled
the monetary base.
• Which of the following are policy tools used by the Federal Reserve?
i. the federal personal income tax
ii. open market operations
iii. changing the required reserve ratio
• ii and iii
• If the currency drain is zero, which of the following situations leads to the greatest total increase
in the quantity of money? an increase in the monetary base of $100,000 when the desired
reserve ratio is 5 percent
• An increase in the currency drain decreases the quantity of money.
• Which of the following describe the "invention" of banking? Goldsmiths in the sixteenth
century issued gold receipts which entitled its owners to reclaim their gold on demand.
• Physical currency is ________ popular than e-cash, ________. more; and both are portable,
untraceable and anonymous
• Keeping $20 in currency to be able to buy gasoline, money is performing which function? Store
of value.
• Which of the following are considered money?
i) electronic checks
ii) paper checks
iii) the deposit transferred using an e-check
• iii only.
• CHAPTERS 27 and 28
• In the long run, if the quantity of money supplied ________ the quantity demanded, the value of
money ________ exceeds; falls as people spend their surplus money
• Oil price hikes decrease aggregate supply.
• Moving along the aggregate supply curve, only the price level changes.
• If the Fed increases the quantity of money, then aggregate demand increases and the AD curve
shifts rightward.
• Barbara is willing to loan $10,000 if she can earn a real interest rate of 6 percent. Everything
else the same, if the inflation rate is 2 percent, she would agree to loan the $10,000 if the
nominal interest rate is 8 percent.
• Because the inflation rate is so high Wanda refuses to carry cash. Even though it is a bother, she
now goes to the ATM twice as often to get the cash she needs. Wanda's actions are an example
of the shoe-leather costs of inflation.
• If real GDP is less than potential GDP, then the ________ and the price level ________.
 aggregate supply curve shifts rightward; falls
• Changes in which of the following do NOT shift the AS curve?
i. the price level
ii. potential GDP
iii. the money wage rate
• i only
• An increase in government expenditure on goods and services ________ aggregate demand,
shifting the aggregate demand curve ________ and potentially bringing the ________ phase of
the business cycle. increases; rightward; expansion
• In its macroeconomic equilibrium, the economy can be producing at
i. below full employment.
ii. full employment.
iii. above full employment.
• i, ii, or iii
• An increase in investment ________ aggregate demand, the aggregate demand curve shifts
________ and the economy is in the ________ phase of the business cycle. increases;
rightward; expansion
• If firms' expectations about the future become pessimistic so that they think future profits will
be lower, then aggregate demand decreases and the AD curve shifts leftward.
• If the quantity of money is $6 billion and nominal GDP is $9 billion, the velocity of circulation
is 1.5.
• In the long run, an increase in the growth rate of the money supply ________ the inflation rate
and ________ the nominal interest rate. raises; raises
• In a period of hyperinflation, the velocity of circulation increases because households and firms
spend money as soon as they receive payment.
• The demand for money is positively related to the price level.
• Which of the following statements is correct? An increase in the quantity of the money shifts
the aggregate demand curve rightward.
• Barbara is willing to loan $10,000 if she can earn a real interest rate of 6 percent. Everything
else the same, if the inflation rate is 2 percent, she would agree to loan the $10,000 if the
nominal interest rate is 8 percent
• If the price level falls and the money wage rate does not change, some firms ________ and
there is ________. shut down; a decrease in the quantity of real GDP supplied
• In the long run, the price level adjusts to achieve money market equilibrium.
• Suppose a country has a real interest rate of 4 percent and an inflation rate of 3 percent. If the
income tax rate is 20 percent, then the after-tax real interest rate is 2.6 percent.
• You have a $500 saving bond. The nominal interest rate is 10 percent, and the inflation rate is 4
percent. After a year, in real terms you have earned $30.
• GDP is an imperfect measure of the standard of living.
• Starting from a situation of full employment, a decrease in aggregate demand ________ the
price level, leading to ________. lowers; a recessionary gap
• If there is an increase in expected future income, then the aggregate demand curve shifts
rightward.
• If the quantity of money supplied is greater than the quantity of money demanded, then the
nominal interest rate falls
• Changes in which of the following do NOT shift the AS curve?
i. the price level
ii. potential GDP
iii. the money wage rate
• i only
• Suppose that the equilibrium nominal interest rate is 4 percent and the equilibrium quantity of
money is $1 trillion. At any interest rate above 4 percent, less than $1 trillion will be demanded
and bond prices will increase.
• The demand for money schedule shows the ________ relationship between money demand and
the nominal interest rate which means that as the ________. negative; nominal interest rate
increases, the opportunity cost of holding money increases.
• The aggregate supply curve slopes ________ because a ________ in the price level brings a
________ in the real wage rate. upward; rise; fall
• CHAPTER 31
• Automatic stabilizers are defined as policy that stabilizes without the need for action by the
government
• The balanced budget multiplier is based on the point that the ________ multiplier is larger than
the ________ multiplier so that an equal increase in government expenditure and taxes
________ aggregate demand. expenditure; tax; increases
• Fiscal policies that move the economy toward potential GDP without a change in policy are
called automatic stabilizers.
• The national debt can only be reduced if the federal budget is in surplus.
• Suppose the economy is in an equilibrium in which real GDP is less than potential GDP. To
increase real GDP, the government can use a fiscal stimulus of decreasing taxes and/or
increasing government expenditure.
• A cut in the income tax rate ________ the tax wedge and ________ employment, saving, and
investment. decreases; increases
• Which of the following is an example of a discretionary fiscal policy action? a decrease in the
tax rate resulting from an effort to increase aggregate demand to combat a recession
• If the government reduces expenditure on goods and services by $30 billion, then aggregate
demand decreases by more than $30 billion and real GDP decreases.
• If fiscal stimulus creates a large budget ________, then in the long run economic growth
________. deficit; decreases
• The government collects tax revenue of $100 million and has $105 million in outlays. The
budget balance is a deficit of $5 million.
• An example of fiscal stimulus policy is cutting taxes
• Automatic stabilizers decrease the impact of a recession on the level of economic activity
because they mean disposable income does not change by as much as real GDP.
• If government expenditure on goods and services increase by $100 billion, then aggregate
demand increases by more than $100 billion.
• Increasing the income tax rate ________ the before-tax real wage rate and ________ the after-
tax real wage rate. raises; lowers
• When tax revenue ________ outlays is negative, then the government has a budget ________.
minus; surplus
• The national debt is the amount of debt outstanding that arises from past budget deficits
• When an economy faces an inflationary gap, an appropriate fiscal policy is to decrease
government expenditure.
• If a tax cut increases people's labor supply, then tax cuts increase potential GDP.
• Ignoring any supply-side effects, if government expenditure on goods and services increase by
$10 billion and taxes increase by $10 billion, then real GDP ________ and the price level
________. increases; rises
• During a recession, unemployment compensation payments increase without the need for any
government action. This increase is an example of automatic fiscal policy
• Looking at the supply-side effects on aggregate supply shows that a tax hike on labor income
Both answers A and B are correct.
• Need-based spending ________ during an expansion and ________ during a recession, which
leads to larger budget deficits during the ________ phase of the business cycle. decreases;
increases; recession
• Mainstream economists believe that Keynesian economist overstate the effect of the multiplier
effect. Which of the following statements would a mainstream economists NOT consider to be
accurate. a fiscal stimulus is a vital tool to fight recession and depression due to the multiplier
effect
• Which of the following is an example of a discretionary fiscal policy action? a decrease in the
tax rate resulting from an effort to increase aggregate demand to combat a recession
• Automatic stabilizers decrease the magnitude of the government expenditure multiplier.
• An example of automatic fiscal policy is expenditure for unemployment compensation
increasing as economic growth slows.
• If a tax cut increases people's labor supply, then tax cuts increase potential GDP
• When an economy faces an inflationary gap, an appropriate fiscal policy is to decrease
government expenditure.
• Increasing the income tax rate ________ the before-tax real wage rate and ________ the after-
tax real wage rate. raises; lowers
• Needs-tested spending increases as unemployment increases.
• CHAPTER 32
• If real GDP exceeds potential GDP, to move the economy to potential GDP the Fed raises the
federal funds rate to decrease real GDP but not potential GDP.
• As firms expect future profits to increase, they increase their investment. As a result, real GDP
rises above potential GDP. If the Fed followed Friedman's k-percent rule, the Fed would
continue allowing the quantity of money to grow at "k" percent.
• When the Fed sells government securities, banks' reserves ________, the quantity of money
________, and the federal funds rate ________. decrease; decreases; rises
• Which of the following are policy instruments available to the Fed as it tries to achieve its
macroeconomic goals?
i. government expenditure on goods and services and taxes
ii. the government budget deficit or surplus
iii. changes in the federal funds rate
• iii only
• The monetary policy instrument the Federal Reserve choose to use is the federal funds rate.
• The monetary policy instrument the Federal Reserve chooses to use is the federal funds rate
• If the Fed sells U.S. government securities, the federal funds rate rises.
• If the Fed lowers the federal funds rate, eventually the AD curve shifts rightward, increasing
real GDP and raising the price level.
• In the short run, lowering the federal funds rate shifts the aggregate demand curve ________ so
that real GDP ________ and the price level ________. rightward; increases; rises
• When the Fed sells government securities, banks' reserves ________, the quantity of money
________, and the federal funds rate ________. decrease; decreases; rises
• When the Fed buys government securities, banks' reserves ________, the quantity of money
________, and the federal funds rate ________. increase; increases; falls
• The k-percent rule, an example of a money targeting rule, relies on a relatively stable demand
for money
• A change in the federal funds rate ________ the supply of loanable funds, ________ the long-
term real interest rate, and ________ investment. affects; affects; affects
• If the Fed lowers the interest rate, then net exports will increase.
• If the Federal Reserve uses open market operations to offset a recession, the Fed ________
government securities in order to ________ the federal funds rate. buys; lower
• Which of the following are policy instruments available to the Fed as it tries to achieve its
macroeconomic goals?
i. government expenditure on goods and services and taxes
ii. the government budget deficit or surplus
iii. changes in the federal funds rate
• iii only
• If the Fed bases its monetary policy on judgments of its policymakers about the current needs of
the economy, it is following a discretionary policy.
• The monetary policy instrument the Federal Reserve choose to use is the federal funds rate.
• Discretionary monetary policy is monetary policy that is based on the judgment of the monetary
policymakers about the current needs of the economy.
• In the market for bank reserves, if the federal funds rate target is higher than the federal funds
rate, the Fed will take action to ________ reserves. decrease the supply of
• The k-percent rule, an example of a money targeting rule, relies on a relatively stable demand
for money.
• If the Fed sells U.S. government securities, the federal funds rate rises.
• If the Fed fears inflation, it ________ by ________ government securities. decreases aggregate
demand; selling
• The Federal Reserve fears that the United States economy is growing too slowly and is stuck in
a recession. To move the economy back to its potential GDP, the most likely policy action for
the Fed is to ________ the federal funds and thus ________. lower; increase aggregate demand
• As firms expect future profits to increase, they increase their investment. As a result, real GDP
rises above potential GDP. If the Fed followed Friedman's k-percent rule, the Fed would
continue allowing the quantity of money to grow at "k" percent.
• Which of the following is NOT an effect from a change in the federal funds rate? change in
government expenditures
• Inflation targeting requires that the central bank publicize its targeted inflation rate.
• When the Fed lowers the federal funds rate, the quantity of money ________ and the supply of
loanable funds ________. increases; increases
• When the Fed fears inflation, the Fed ________ government securities, so that the federal funds
rate ________ and the quantity of money ________. sells; rises; decreases
• What would be an example of capital good? Antonio, the manager of the local Taco Hut,
purchases a new deep fryer.
• Goods produced in the United States and sold in other countries are called exports.
• The income paid for the use of land is called rent.
• The largest share of total production in the United States is consumption goods and services.
• In the circular flow model, both firms and households buy or sell in different markets.
• Property taxes are a major source of revenue for state and local governments.
• Among the United States, Canada, Russia, India, and the United Kingdom, the country with the
highest average income per person is the United States
• As a percentage of total world production, production in the 29 advanced economies is about
________ percent of total world production and in the 118 developing economies is about
________ percent of total world production. 56; 36
• U.S. exports of goods and services flow to households and firms in ________ and U.S. financial
 inflows of capital flow to households and firms in ________. the rest of the world; the United
States
• Capital is best defined as produced goods used by businesses.
• If the minimum wage is above the equilibrium wage rate, then an increase in the minimum
wage ________ employment and ________ unemployment. decreases; increases
• Which of the following decrease the deadweight loss from a rent ceiling set below the
equilibrium rent?
i. lowering the ceiling
ii. dedicating more resources to enforcement of the ceiling
iii. raising the ceiling
• iii only
• The deadweight loss from a rent ceiling below the equilibrium rent is smallest when the supply
of housing is perfectly inelastic.
• Who loses and who gains from the minimum wage? Losers are all firms and some workers,
while gainers are other workers.
• If a rent ceiling is below the equilibrium rent, some allocation scheme must be used. The
allocation methods include all of the following EXCEPT charging the equilibrium rent.
• Which of the following is true?
i. A price ceiling is inefficient but fair.
ii. A price floor is inefficient and unfair.
iii. A price support increases the quantity produced.
• Only ii
• A minimum wage law increases the time spent searching by workers who cannot find a job.
• A price floor is a price below which a seller cannot legally sell.
• A minimum wage increases unemployment by decreasing the quantity of labor demanded.
• Which of the following is true?
i. A price ceiling set below the equilibrium price decreases search activity.
ii. A minimum wage is an example of a price ceiling.
iii. A price support decreases the quantity consumed.
• Only iii
• The proposition that people should pay taxes equal to the benefits they receive from public
services is known as the benefits principle.
• A tax on a good that is imposed when it is imported is called a tariff
• A quota ________ a deadweight loss and a tariff ________ a deadweight loss creates; creates
• When a nation exports a good or service, the nation's consumer surplus ________, its producer
surplus ________, and its total surplus ________. decreases; increases; increases
• What happens to the acceptable wage rate at each level of employment once an income tax is
levied on workers? It increases by the amount of the tax that must be paid.
• While high-paid American workers fear competition with low-paid foreign workers, low-paid
foreign workers fear competition with high-paid American workers. Why? Because high wages
reflect high worker productivity and the low-paid foreign workers are not as productive.
• The percentage of an additional dollar of income that is paid in tax is the marginal tax rate.
• What is the dumping argument for protection from international trade? Foreign producers
selling below cost to drive domestic firms bankrupt must be stopped
• The incidence of a tax refers to the division of the burden of a tax between buyers and sellers.
• The difference between a tariff and a quota is that the tariff revenue goes to the domestic
government.
• The natural unemployment rate is not known with certainty.
• If nominal GDP increases this year, then real GDP could increase, decrease, or not change.
• When the unemployment rate is less than the natural unemployment rate, real GDP is ________
potential GDP. greater than
• When measuring GDP, the expenditure on goods and services by all levels of government are
included.
• Which type of unemployment is the consequence of downturns in the business cycle? cyclical
• Net exports of goods and services are defined as the value of exports minus the value of
imports.
• If the number of people in the labor force ________, then ________. increases; the labor force
participation rate increases
• Excluding household and underground production leads to underestimation of both real GDP
and nominal GDP.
• When Jamie purchases a classic 1968 Plymouth Cuda convertible from Shane, GDP does not
change, because the car was not produced this year.
• During a recession the unemployment rate generally ________ and during an expansion the
unemployment rate generally ________. rises; falls
•