Chapter 21

True/False
Indicate whether the statement is true or false.

____ 1. When the price of a good rises, consumers are willing to pay for fewer units, so there is a decrease in demand.

____ 2. The slope of a budget constraint is equal to the relative prices of the two goods.

____ 3. An increase in income changes the slope of the budget constraint towards the cheaper good.

____ 4. A consumer who chooses to consume at a point inside her budget constraint will have to borrow money to
pay for her consumption.

____ 5. The slope of an indifference curve reflects the consumer’s willingness to exchange one commodity for
another.

____ 6. When goods are not easy to substitute for each other, the indifference curves are less bowed, and when goods
are easy to substitute, the indifference curves are very bowed.

____ 7. The point at which the indifference curve is tangent to the budget constraint is called an optimum.

____ 8. The optimal level of consumption occurs where the marginal rate of substitution is greater than the sum of the
relative price and the consumer has spent all his or hers income.

____ 9. The income effect is the change in consumption that results when a price change moves the consumer to a
higher or lower indifference curve.

____ 10. The substitution effect and income effect always reinforce each other.

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. The indifference curves of perfect substitutes are:

A. straight lines
B. at right angles
C. bowed inwards
D. bowed outwards

Graph 22-3
____ 2. Refer to Graph 22-3. Using the figure in panel (a), if income is equal to $160, the price of good Y is:
A. $1.20
B. $3.20
C. $2.66
D. $8.00
____ 3. The indifference curves of perfect compliments are:
A. straight lines
B. at right angles
C. bowed inwards
D. bowed outwards

Graph 22-4

____ 4. Refer to Graph 22-4. A person who chooses to consume bundle C rather than bundle A is likely to:
 A. place a higher relative value on croissants than on coffee
B. place a higher relative value on coffee than on croissants
C. gain more satisfaction from bundle C than bundle A
D. gain more satisfaction from bundle B than bundle A
____ 5. Suppose at the current consumption bundle, the marginal rate of substitution of pizza for pepsi is 4 litres of
pepsi for every one pizza. If we took four litres of pepsi away from our consumer and gave them one extra
pizza, which of the following statements would be correct?
A. the consumer would be on a higher indifference curve
B. the consumer would be on a lower indifference curve
C. the consumer’s marginal rate of substitution of pepsi for pizza would rise
D. the consumer’s marginal rate of substitution of pepsi for pizza would fall
____ 6. As long as a consumer is on the same indifference curve:
A. her preferences will not affect the marginal rate of substitution
B. she is unable to decide which bundle of goods to choose
C. she is indifferent among the points on that indifference curve
D. she is indifferent to all points which lie on any other indifference curves
____ 7. A consumer’s set of indifference curves provides a:
A. complete ranking of all possible consumption bundles
B. ranking of the set of bundles that happen to fall on indifference curves
C. framework for evaluating market equilibriums
D. relative ranking of bundles that provide more of all goods
____ 8. Which of the following statements is correct? If the indifference curves are at right angles to each other, then
the consumer will:
(i) be indifferent to trading one good for the other
(ii) always consume the good in constant proportions
(iii) will always consume a bundle on the “point” of the indifference curve (where the indifference curves
meet at 90-degrees)
A. (i) and (iii) only
B. (ii) and (iii) only
C. (i) only
D. (ii) only
____ 9. The optimum represents the:
A. centre point on the highest indifference curve possible for the consumer
B. best combination of two goods that is attainable by the consumer
C. point at which an indifference curve crosses the consumer’s budget constraint
D. intersection of the consumer’s demand curve and the market supply curve
____ 10. If demand for a good falls as income rises, this is known as a:
A. normal good
B. inferior good
C. Giffen good
D. the law of demand

Graph 22-6
____ 11. Refer to Graph 22-6. It will be possible for the consumer to reach I2 if:
A. the price of Y decreases
B. the price of X decreases
C. income increases
D. all of the above are correct

Graph 22-7

____ 12. Refer to Graph 22-7. Assume that the consumer depicted in the graph faces prices and income such that she
optimises at point A. According to the graph, what change allows the consumer to move to point B?
A. a decrease in the price of M&Ms
B. an increase in the price of M&Ms
C. an increase in the price of Skittles
 D. a decrease in the price of Skittles
____ 13. Amy purchases only coffee and croissants. The substitution effect associated with a decrease in the price of a
croissant will result in:
A. a decrease in the consumption of croissants and an increase in the consumption of coffee
B. an increase in the consumption of croissants and a decrease in the consumption of coffee
C. only a decrease in the consumption of coffee
D. only an increase in the consumption of coffee
____ 14. Amy purchases only coffee and croissants. If coffee is an inferior good and croissants are normal goods, the
income effect associated with an increase in the price of croissants will result in a(n):
A. increase in the consumption of croissants and an increase in the consumption of coffee
B. increase in the consumption of croissants and a decrease in the consumption of coffee
C. decrease in the consumption of croissants and a decrease in the consumption of coffee
D. decrease in the consumption of croissants and an increase in the consumption of coffee
____ 15. When the price of a good decreases, ceteris paribus, the lower price:
A. generally encourages the consumption of inferior goods
B. leads to a parallel shift of the linear budget constraint
C. will necessarily lead to a decrease in the consumption of goods whose price did not change
D. expands the consumer’s set of buying opportunities
Chapter 21
Answer Section

TRUE/FALSE

1. ANS: F PTS: 1 DIF: Easy TOP: Income and substitution effects

2. ANS: T PTS: 1 DIF: Easy
TOP: The budget constraint: What the consumer can afford
3. ANS: F PTS: 1 DIF: Easy TOP: Income and substitution effects
4. ANS: F PTS: 1 DIF: Moderate
TOP: The budget constraint: What the consumer can afford
5. ANS: T PTS: 1 DIF: Easy
TOP: Representing preferences with indifference curves
6. ANS: F PTS: 1 DIF: Moderate
TOP: Four properties of indifference curves
7. ANS: T PTS: 1 DIF: Easy TOP: The consumer’s optimum choices
8. ANS: F PTS: 1 DIF: Easy TOP: The consumer’s optimum choices
9. ANS: T PTS: 1 DIF: Easy TOP: Income and substitution effects
10. ANS: F PTS: 1 DIF: Easy TOP: Income and substitution effects

MULTIPLE CHOICE
1. ANS: A PTS: 1 DIF: Moderate
TOP: Two examples of indifference curves
2. ANS: B PTS: 1 DIF: Moderate
TOP: The budget constraint: What the consumer can afford
3. ANS: D PTS: 1 DIF: Moderate
TOP: Two extreme examples of indifference curves
4. ANS: A PTS: 1 DIF: Difficult
TOP: Representing preferences with indifference curves
5. ANS: D PTS: 1 DIF: Difficult
TOP: Representing preferences with indifference curves
6. ANS: C PTS: 1 DIF: Moderate
TOP: Representing preferences with indifference curves
7. ANS: A PTS: 1 DIF: Easy
TOP: Representing preferences with indifference curves
8. ANS: B PTS: 1 DIF: Moderate TOP: Perfect substitutes
9. ANS: B PTS: 1 DIF: Easy TOP: The consumer’s optimum choices
10. ANS: B PTS: 1 DIF: Easy
TOP: How changes in income affect a consumer’s choices
11. ANS: D PTS: 1 DIF: Difficult
TOP: Optimisation: What the consumer chooses
12. ANS: A PTS: 1 DIF: Difficult
TOP: How changes in prices affect a consumer’s choices
13. ANS: B PTS: 1 DIF: Difficult TOP: Income and substitution effects
14. ANS: D PTS: 1 DIF: Difficult TOP: Income and substitution effects
15. ANS: D PTS: 1 DIF: Moderate
TOP: How changes in prices affect a consumer’s choices
Chapter 23

True/False
Indicate whether the statement is true or false.

____ 1. Nominal GDP always grows faster than real GDP.

____ 2. If Canada’s GDP is $1000 billion and Poland’s GDP is $100 billion, the average Canadian citizen must be ten
times as well-off as the average Polish citizen.

____ 3. For the year 2005, nominal GDP is $10 billion and real GDP is $11 billion, so the GDP deflator is 110.

____ 4. GDP can be measured by counting final sales at each level of production.

____ 5. Capital income (profits, rental payments and interest payments) is the largest component of income.

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. Macroeconomics is:

a. the study of economics at the level of the industry
b. the study of the economy as a whole
c. the study of individual households and firms and their interactions in markets
d. the study of money and financial markets
____ 2. The difference between the values of final production and value of the inputs is called:
a. the surplus of the final goods and services
b. the profit of the final goods and services
c. the value added of the final goods and services
d. the gross product of the final goods and services
____ 3. Value added is
a. used to measure GDP under the spending approach
b. the final sales value of a firm’s output
c. the value of a firm’s output plus the value of intermediate goods used in production
d. the value of a firm’s output minus the value of intermediate goods used in production
____ 4. The value of the housing service provided to individuals who live in housing they own themselves is included
in GDP by:
a. estimating the rental value of the housing
b. using the monthly mortgage payment
c. using the purchase price of the house
d. none of the above. Because the value cannot be measured directly, it is excluded.
____ 5. GDP includes the value of final goods, and not intermediate goods, because:
a. the value of intermediate goods is already included in the value of final goods
b. the value of intermediate goods is too difficult to measure
c. the value of intermediate goods is measured by GNP
d. the value of intermediate goods depends on the number of separate production processes
____ 6. If the GDP deflator is 200 and real GDP is $40 billion, then nominal GDP is:
a. $8000 billion
b. $20 billion
c. $80 billion
d. $2000 billion
____ 7. Which of the following is not a component of the income approach?
a. labour income
b. capital and mixed income
c. transfer payments
d. indirect business taxes
____ 8. Transfer payments are included under
a. consumption
b. investment
c. government purchases
d. none of the options given
____ 9. If the GDP deflator is $98 billion and the nominal GDP is $1960 billion, then the real GDP is:
a. $2000 billion
b. $20 billion
c. $5 billion
d. $192 080 billion
____ 10. Since black market and non-market measures are excluded from measures of GDP, the GDP measure tends
to:
a. overestimate the total production of an economy
b. underestimate the total production in an economy
c. not make a significant difference in determining the total production of an economy
d. lead one to the conclusion that GDP measures are not very useful to anyone but market
economists
Chapter 23
Answer Section

TRUE/FALSE

1. ANS: F PTS: 1 DIF: Difficult TOP: Real versus nominal GDP

2. ANS: F PTS: 1 DIF: Difficult TOP: Real versus nominal GDP
3. ANS: F PTS: 1 DIF: Difficult TOP: The GDP deflator
4. ANS: F PTS: 1 DIF: Easy TOP: FYI: Three measures of income
5. ANS: F PTS: 2 DIF: Difficult TOP: FYI: Three measures of income

MULTIPLE CHOICE

1. ANS: B PTS: 1 DIF: Easy TOP: Introduction

2. ANS: C PTS: 1 DIF: Easy
TOP: The economy’s income and expenditure
3. ANS: D PTS: 1 DIF: Easy TOP: Three measures of income
4. ANS: A PTS: 1 DIF: Difficult TOP: FYI: Three measures of income
5. ANS: A PTS: 1 DIF: Easy
TOP: The measurement of gross domestic product
6. ANS: C PTS: 1 DIF: Difficult TOP: Real versus nominal GDP
7. ANS: C PTS: 1 DIF: Easy TOP: Three measures of income
8. ANS: D PTS: 1 DIF: Difficult TOP: The components of GDP
9. ANS: A PTS: 1 DIF: Difficult TOP: Real versus nominal GDP
10. ANS: B PTS: 1 DIF: Easy
TOP: The measurement of gross domestic product
Chapter 24

True/False
Indicate whether the statement is true or false.

____ 1. The CPI is a perfect measure of the cost of living.

____ 2. An increase in the price of a domestically produced capital good will increase the GDP deflator but not the
CPI.

____ 3. The interest rate a bank pays is the nominal interest rate, and the interest rate adjusted for inflation is the real
interest rate.

____ 4. Indexation is only used in the payment of transfers.

____ 5. When inflation is high, lenders will charge a high nominal interest rate.

Multiple Choice
Identify the choice that best completes the statement or answers the question.

____ 1. The base year for the CPI is updated:

a. so that every change in consumer purchases can be immediately included
b. to provide work for government economists
c. because the pattern of consumer purchases changes over time
d. because the CPI always uses the current year as the base year
____ 2. For any given year, the CPI is:
a. the price of the basket of goods and services in the base year divided by the price of the
basket in the given year, then multiplied by 100
b. higher than the previous year
c. the price of the basket of goods and services in the given year divided by the price of the
basket in the base year, then multiplied by 100
d. the price of the basket of goods and services in the base year divided by the price of the
basket in the given year, then divided by 100
____ 3. The price of a specific good or service in comparison with the prices of other goods and services is called:
a. a relative price
b. a real price
c. indexing
d. indexing
____ 4. If all prices, including the price of beef, increase by 3%, then the relative price of beef has ____ and there
____ inflation.
a. increased; is
b. increased; is no
c. remained constant; is
d. remained constant; is no
____ 5. The substitution bias in the CPI results from the index not taking into account:
a. the substitution of new goods for old goods in the purchases of consumers
 b. that consumers substitute towards goods that have become relatively less expensive
c. the substitution of new prices for old prices in the basket of goods from one year to the
next
d. the substitution of quality for quantity in consumer purchases over time
____ 6. An important difference between the GDP deflator and the CPI is that:
a. the GDP deflator reflects the prices of all goods and services produced domestically,
whereas the CPI reflects the prices of goods and services bought by consumers
b. the GDP deflator reflects the prices of goods and services bought by producers, whereas
the CPI reflects the prices of goods and services bought by consumers
c. the GDP deflator reflects the prices of all goods and services produced by a nation’s
resources, whereas the CPI reflects the prices of goods and services bought by consumers
d. the GDP deflator reflects the prices of goods and services bought by producers and
consumers, whereas the CPI reflects the prices of goods and services bought by consumers
____ 7. Karl’s 1950 salary was $15 000. The CPI is 27 for 1950, and 150 for 2009. What is Karl’s salary in 2009
dollars?
a. $83 333
b. $27 000
c. $40 500
d. $22 500
____ 8. Which of the following is the most accurate statement about the relationship between the nominal interest rate
and the real interest rate?
a. The real interest rate is the nominal interest rate times the rate of inflation
b. The real interest rate is the nominal interest rate plus the rate of inflation
c. The real interest rate is the nominal interest rate minus the rate of inflation
d. The real interest rate is the nominal interest rate divided by the rate of inflation
e. None of the above are accurate statements
____ 9. Masako buys a house in 1999. She obtains a mortgage that carries an annual interest rate of 12 per cent, and
makes payments of $880 per month. The CPI in 1999 is 100, in 2000 it is 110, and in 2001 it is 120. What is
the inflation rate in 2001?
a. 120 per cent
b. 20 per cent
c. 10 per cent
d. nine per cent
____ 10. If a borrower and lender agree to an interest rate on a loan when inflation is expected to be seven per cent and
inflation turns out to be 10 per cent over the life of the loan, then the borrower ____ and the lender ____.
a. gains; gains
b. gains; loses
c. is not affected; gains
d. loses; gains
Chapter 24
Answer Section

TRUE/FALSE

1. ANS: F PTS: 1 DIF: Moderate TOP: The consumer price index

2. ANS: T PTS: 1 DIF: Moderate
TOP: The GDP deflator versus the consumer price index
3. ANS: T PTS: 1 DIF: Moderate TOP: Real and nominal interest rates
4. ANS: F PTS: 1 DIF: Easy TOP: Indexation
5. ANS: T PTS: 1 DIF: Easy TOP: Real and nominal interest rates

MULTIPLE CHOICE

1. ANS: C PTS: 1 DIF: Difficult

TOP: How the consumer price index is calculated
2. ANS: C PTS: 1 DIF: Moderate
TOP: How the consumer price index is calculated
3. ANS: A PTS: 1 DIF: Easy
TOP: How the consumer price index is calculated
4. ANS: C PTS: 1 DIF: Moderate TOP: FYI: What is in the CPI’s basket?
5. ANS: B PTS: 1 DIF: Difficult
TOP: Problems in measuring the cost of living
6. ANS: A PTS: 1 DIF: Difficult
TOP: The GDP deflator versus the consumer price index
7. ANS: A PTS: 1 DIF: Difficult
TOP: The GDP deflator versus the consumer price index
8. ANS: C PTS: 1 DIF: Moderate TOP: Real and nominal interest rates
9. ANS: D PTS: 1 DIF: Difficult TOP: Real and nominal interest rates
10. ANS: B PTS: 1 DIF: Moderate TOP: Real and nominal interest rates