Chapter 26: Saving, Investment and The Financial System

1. We would expect the interest rate on Bond A to be higher than the interest rate on Bond B if the two
bonds have identical characteristics except that
A. the credit risk associated with Bond A is lower than the credit risk associated with Bond B.
B. Bond A was issued by the city of Philadelphia and Bond B was issued by Red Hat Corporation.
C. Bond A has a term of 20 years and Bond B has a term of 2 years.
D. All of the above are correct.
2. A national chain of grocery stores wants to finance the construction of several new stores. The firm
has limited internal funds, so it likely will
A. demand the required funds by buying bonds.
B. demand the required funds by selling bonds.
C. supply the required funds by buying bonds.
D. supply the required funds by selling bonds.
3. Municipal bonds pay a relatively
A. low rate of interest because of their high default risk and because the interest they pay is
subject to federal income tax.
B. low rate of interest because of their low default risk and because the interest they pay is not
subject to federal income tax.
C. high rate of interest because of their high default risk and because federal taxes must be paid
on the interest they pay.
D. high rate of interest because of their low default risk and because the interest they pay is not
subject to federal income tax.
4. In the Coen Brothers’ movie The Hudsucker Proxy the board of directors picks someone to run the
company who they believe will make poor decisions. If things turn out as they plan,
A. the price of a share of stock in the Hudsucker corporation should decline as the demand for
shares falls.
B. the price of a share of stock in the Hudsucker corporation should rise as the demand for shares
rises.
C. the price of a share of stock in the Hudsucker corporation should decline as the supply of
existing shares falls.
D. the price of a share of stock in the Hudsucker corporation should rise as the supply of existing
shares rises.
5. In 2008, CDZ Corporation had total earnings of $500 million and CDZ retained 30 percent of its
earnings for future investments. If the price of a share of CDZ stock is $70 and if 80 million shares of
its stock were outstanding, then what is the price-earnings ratio?
A. 0.14
B. 11.2 Earnings per share = 500/80 = 6.25, P/E = 70/6.25 = 11.2 (not all information provided is
relevant)
C. 16.0
D. 37.3
6. XDF Corporation had a P/E ratio of 25, earnings per share of $4, and retained earnings per share of
$3. What was its dividend yield?
A. 4% 25*4=100
4-3=1
B. 3% 1/100=1%
C. 1%
D. None of the above is correct.
Use the following table to answer the following questions.
Table 26-1
Stock Sym Yld % P/E Vol 100s Hi Lo Close Net Chg.
GenMills GIS 2.5 35 13758 44.3 43.5 43.97 –0.63
Gillette G 2.2 31 30428 31.1 29.7 30 0.17
Graco GGG 1.2 16 705 24.2 23.1 23.95 –0.53
Hershey HSY 2.1 38 5418 63.4 61.7 62.45 0.72
7. Refer to Table 26-1. In dollar terms, which company paid the highest dividend per share?
A. GenMills
B. Gillette close price= average price
C. Graco
D. Hershey
8. Refer to Table 26-1. What was Hershey's earnings per share?
A. $38
earning= close/(P/E)
B. $1.64
C. $1.31
D. $0.61
9. Refer to Table 26-1. Assume that the closing price was also the average price at which each stock
transaction took place. What was the total dollar volume of Gillette stock traded that day?
A. $912,840,000
B. $91,284,000
vol*100*30

C. $9,128,400
D. $912,840
10. Refer to Table 26-1. Which firm had the P/E ratio that was closest to the historically typical P/E
ratio?
A. GenMills
h.typical P/E = 15
B. Gillette
C. Graco
D. Hershey
11. Which of the following is an example of financial intermediation?
A. John buys shares of stock issued by a fast food company.
B. A foreign government buys bonds issued by the U.S. Treasury.
C. Susan makes a deposit at a bank and the bank uses this money to make an auto loan to
Ferguson.
D. None of the above is correct.
12. Stocks and bonds
A. and checking accounts are all stores of value and commonly function as mediums of
exchange.
B. and checking accounts are all stores of value, but only stocks and bonds commonly function as
mediums of exchange.
C. and checking accounts are all stores of value, but only checking accounts commonly function
as mediums of exchange.
D. and checking accounts all commonly function as mediums of exchange, but only stocks and
bonds are a store of value.
13. In a closed economy, what remains after paying for consumption and government purchases is
A. national disposable income.
B. national saving.
C. public saving.
D. private saving.
14. In a closed economy, what does (Y - T - C) represent?
A. national saving
B. government tax revenue
C. public saving
D. private saving
15. In a small closed economy investment is $50 billion and private saving is $55 billion. What are
public saving and national saving?
A. $60 billion and $5 billion
B. $50 billion and -$5 billion
C. $5 billion and $60 billion
D. -$5 billion and $50 billion
16. According to the definitions of national saving and private saving, if Y, C, and G remained the
same, an increase in taxes would
A. raise both national saving and private saving.
B. raise national saving and reduce private saving.
C. leave national saving and private saving unchanged.
D. leave national saving unchanged and reduce private saving.
17. Suppose that in a closed economy GDP is 11,000, consumption is 7,500, and taxes are 2,000.
What value of government purchases would make national savings equal to 1,000 and at that value
would the government have a deficit or surplus?
A. 2,500, deficit
B. 2,500, surplus
y=11000 c=7500 T=2000 s=1000
C. 1,000, deficit
D. 1,000, surplus T - G + 1500 = 1000
18. In the small closed economy of San Lucretia, the currency is the denar. Statistics for last year
show that private saving was 60 billion denars, taxes were 70 billion denars, government purchases of
goods and services were 80 billion denars, there were no transfer payments by the government, and
GDP was 400 billion denars. What were consumption and investment in San Lucretia?
A. 270 billion denars, 50 billion denars
B. 260 billion denars, 60 billion denars
C. 250 billion denars, 70 billion denars
D. None of the above is correct.
19. The slope of the demand for loanable funds curve represents the
A. positive relation between the real interest rate and investment.
B. negative relation between the real interest rate and investment.
C. positive relation between the real interest rate and saving.
D. negative relation between the real interest rate and saving.
20. If there is a surplus of loanable funds, then
A. the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied
and the interest rate is above equilibrium.
B. the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied
and the interest rate is below equilibrium.
C. the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded
and the interest rate is above equilibrium.
D. the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded
and the interest rate is below equilibrium.
21. Which of the following would necessarily increase the equilibrium interest rate?
A. The demand for and the supply of loanable funds shift right.
B. The demand for and the supply of loanable funds shift left.
C. The demand for loanable funds shifts right and the supply of loanable funds shifts left.
D. The demand for loanable funds shifts left and the supply of loanable funds shifts right.
22. According to the loanable funds model, which of the following events would result in higher inter-
est rates and greater saving?
A. Firms become pessimistic about the future and, as a result, they cut back on their plans to buy
new equipment and build new factories.
B. The government goes from running a budget deficit to running a budget surplus.
C. Congress passes a reform of the tax laws that encourages greater saving.
D. Congress passes a reform of the tax laws that encourages greater investment.
Figure 26-1. The figure depicts a demand-for-loanable-funds curve and two supply-of-loanable-funds
curves.

S1 S2

Demand

23. Refer to Figure 26-1. What is measured along the vertical axis of the graph?
A. the nominal interest rate
B. the real interest rate
C. the quantity of investment
D. the quantity of saving
24. Refer to Figure 26-1. Which of the following events would shift the supply curve from S1 to S2?
A. In response to tax reform, firms are encouraged to invest more than they previously invested.
B. In response to tax reform, households are encouraged to save more than they previously
saved.
C. Government goes from running a balanced budget to running a budget deficit.
D. Any of the above events would shift the supply curve from S1 to S2.
Chapter 29: The Monetary System
1. Consider five individuals with different occupations.
Mary (provides legal advice; wants knives sharpened)
Clark (grows tomatoes; wants legal advice)
Nathan (styles hair; wants tomatoes)
Polly (brews beer; wants knives sharpened)
Paul (sharpens knives; wants beer)
Which of the following pairs of individuals has a double coincidence of wants?
A. Mary and Clark
B. Clark and Nathan
C. Nathan and Polly
D. Polly and Paul
2. You pay for cheese and bread from the deli with currency. Which function of money does this best
illustrate?
A. medium of exchange
B. unit of account
C. store of value
D. liquidity
3. Paper dollars
A. are commodity money and gold coins are fiat money.
B. are fiat money and gold coins are commodity money.
C. and gold coins are both commodity monies.
D. and gold coins are both fiat monies.
4. Money market mutual funds are included in
A. M1 but not M2.
B. M1 and M2.
C. M2 but not M1.
D. neither M1 nor M2.
5. Values of Assets (Table). Refer to Value of Assets. What is the value of M1 in billions of dollars?
Asset Amount in $Billions
Small time deposits 780
 Large time deposits 1,700
Demand deposits 450
Other checkable deposits 370
Savings deposits 4950
Traveler's checks 5
Money market mutual funds 740
Currency 880
Miscellaneous categories of M2 50

A. 1,705
450+370+5+880
B. 2,485
C. 6,295
D. 7,075
6. Values of Assets (Table). Refer to Value of Assets. What is the value of M2 in billions of dollars?
A. 9,925
1705 + 4950 + 740 + 50 + 780
B. 8,225
C. 7,485
D. 7,445
7. Given the following information, what are the values of M1 and M2?
A. M1 = $400 billion, M2 = $2,475 billion.
B. M1 = $125 billion, M2 = $3,025 billion.
C. M1 = $425 billion, M2 = $2, 450 billion.
D. M1 = $425 billion, M2 = $1,875 billion.
8. The New York Federal Reserve Bank
A. president always gets to vote at the FOMC meetings.
B. conducts open market transactions.
C. is one of 12 regional Federal Reserve Banks.
D. All of the above are correct.
9. An open-market purchase
A. increases the number of dollars and the number of bonds in the hands of the public.
B. increases the number of dollars in the hands of the public and decreases the number of bonds
in the hands of the public.
C. decreases the number of dollars and the number of bonds in the hands of the public.
D. decreases the number of dollars in the hands of the public and increases the number of bonds
in the hands of the public.
10. The Fed can influence unemployment in
A. the short run and in the long run.
B. the short run, but not in the long run.
C. the long run, but not in the short run.
D. neither the short nor the long run.
11. Suppose the banking system currently has $300 billion in reserves; the reserve requirement is 10
percent; and excess reserves amount to $3 billion. What is the level of deposits?
A. $3,300 billion
B. $2,970 billion
C. $2,700 billion
D. $2,673 billion
12. A bank loans Kellie's Print Shop $350,000 to remodel a building near campus to use as a new
store. On their respective balance sheets, this loan is
A. an asset for the bank and a liability for Kellie's Print Shop. The loan increases the money
supply.
B. an asset for the bank and a liability for Kellie's Print Shop. The loan does not increase the
money supply.
C. a liability for the bank and an asset for Kellie's Print Shop. The loan increases the money
supply.
D. a liability for the bank and an asset for Kellie's Print Shop. The loan does not increase the
money supply.
13. In the nation of Wiknam, the money supply is $80,000 and reserves are $18,000. Assuming that
people hold only deposits and no currency, and that banks hold no excess reserves, then the reserve
requirement is
A. 29 percent.
B. 22.5 percent. 22.5% (80,000 = Money Multiplier x 18,000)
C. 16 percent.
D. None of the above is correct.
Table 29-2.
Assets Liabilities
Reserves $750 Deposits
$10,000
 Loans 9,250

14. An economy starts with $10,000 in currency. All of this currency is deposited into a single bank,
and the bank then makes loans totaling $9,250. The T-account of the bank is shown below. Refer to
Table 29-2. The bank’s reserve ratio is
A. 7.50 percent.
B. 8.12 percent.
C. 92.50 percent.
D. 100 percent.
15. Table 29-2. An economy starts with $10,000 in currency. All of this currency is deposited into a
single bank, and the bank then makes loans totaling $9,250. The T-account of the bank is shown
below. Refer to Table 29-2. If all banks in the economy have the same reserve ratio as this bank, then
the value of the economy’s money multiplier is
A. 1.33.
B. 10.00. Increase 150 reserves reserve ratio= 750/10000*100= 7.5%
Money multi =1/R=1/7.5%= 13.3
C. 10.81.
D. 13.33.
16. Table 29-2. An economy starts with $10,000 in currency. All of this currency is deposited into a
single bank, and the bank then makes loans totaling $9,250. The T-account of the bank is shown
below. Refer to Table 29-2. If all banks in the economy have the same reserve ratio as this bank, then
an increase in reserves of $150 for this bank has the potential to increase deposits for all banks by
A. $866.67.
Increase 150 reserves reserve ratio= 750/10000*100= 7.5%
B. $1,666.67. Money multi =1/R=1/7.5%= 13.3
MS= Toltal reserve x1/R= 150x13.3=2000
C. $2,000.00.
D. an infinite amount.
17. To decrease the money supply, the Fed can
A. buy government bonds or increase the discount rate.
B. buy government bonds or decrease the discount rate.
C. sell government bonds or increase the discount rate.
D. sell government bonds or decrease the discount rate.
18. In a fractional-reserve banking system, a decrease in reserve requirements
A. increases both the money multiplier and the money supply.
B. decreases both the money multiplier and the money supply.
C. increases the money multiplier, but decreases the money supply.
D. decreases the money multiplier, but increases the money supply.
19. If the reserve ratio is 15 percent, and banks do not hold excess reserves, and people hold only
deposits and no currency, then when the Fed sells $65 million worth of bonds to the public, bank
reserves
A. increase by $65 million and the money supply eventually increases by $266.67 million.
B. increase by $65 million and the money supply eventually increases by $433.33 million.
C. decrease by $65 million and the money supply eventually decreases by $266.67 million.
D. decrease by $65 million and the money supply eventually decreases by $433.33 million.
20. The banking system currently has $100 billion of reserves, none of which are excess. People hold
only de-posits and no currency, and the reserve requirement is 10 percent. If the Fed lowers the
reserve requirement to 8 percent and at the same time buys $10 billion worth of bonds, then by how
much does the money supply change?
A. It rises by $225 billion.
Reserve =100;reserve requirement=10% gim xung 8%
B. It rises by $375 billion. Ms= total reservex1/R
C. It rises by $675 billion. Ms c= 100 x1/10%= 1000
D. None of the above is correct.
Ms mi= 110x1/8%= 1375
1375-1000= 375 tng lên
Chapter 30: Money Growth and Inflation
1. In which of the following cases was the inflation rate 10 percent over the last year?
A. One year ago the price index had a value of 110 and now it has a value of 120.
B. One year ago the price index had a value of 120 and now it has a value of 132.
C. One year ago the price index had a value of 126 and now it has a value of 140.
D. One year ago the price index had a value of 145 and now it has a value of 163.
2. Deflation
A. increases incomes and enhances the ability of debtors to pay off their debts.
B. increases incomes and reduces the ability of debtors to pay off their debts.
C. decreases incomes and enhances the ability of debtors to pay off their debts.
D. decreases incomes and reduces the ability of debtors to pay off their debts.
3. The value of money falls as the price level
A. rises, because the number of dollars needed to buy a representative basket of goods rises.
B. rises, because the number of dollars needed to buy a representative basket of goods falls.
C. falls, because the number of dollars needed to buy a representative basket of goods rises.
D. falls, because the number of dollars needed to buy a representative basket of goods falls.
4. Suppose the money market, drawn with the value of money on the vertical axis, is in equilibrium. If
the money supply increases, then at the old value of money there is an
A. excess demand for money that will result in an increase in spending.
B. excess demand for money that will result in a decrease in spending.
C. excess supply of money that will result in an increase in spending.
D. excess supply of money that will result in a decrease in spending.
5. In the 1970s, in response to recessions caused by an increase in the price of oil, the central banks
in many countries increased their money supplies. The central banks might have done this by
A. selling bonds on the open market, which would have raised the value of money.
B. purchasing bonds on the open market, which would have raised the value of money.
C. selling bonds on the open market, which would have raised the value of money.
D. purchasing bonds on the open market, which would have lowered the value of money.
6. When the money market is drawn with the value of money on the vertical axis, if the Federal
Reserve sells bonds, then the money supply curve
A. shifts rightward, causing the value of money measured in terms of goods and services to rise.
B. shifts rightward, causing the value of money measured in terms of goods and services to fall.
C. shifts leftward, causing the value of money measured in terms of goods and services to rise.
D. shifts leftward, causing the value of money measured in terms of goods and services to fall.
7. The price level falls if either
A. money demand or money supply shifts rightward.
B. money demand shifts rightward or money supply shifts leftward.
C. money demand shifts leftward or money supply shifts rightward.
D. money demand or money supply shifts leftward.
Figure 30-1

8. Refer to Figure 30-1. If the money supply is MS2 and the value of money is 2, then there is an
excess
A. demand for money that is represented by the distance between points A and C.
B. demand for money that is represented by the distance between points A and B.
C. supply of money that is represented by the distance between points A and C.
D. supply of money that is represented by the distance between points A and B.
9. Refer to Figure 30-1. If the money supply is MS2 and the value of money is 2, then
A. the quantity of money demanded is greater than the quantity supplied; the price level will rise.
B. the quantity of money demanded is greater than the quantity supplied; the price level will fall.
C. the quantity of money supplied is greater than the quantity demanded; the price level will rise.
D. the quantity of money supplied is greater than the quantity demanded; the price level will fall.
10. Refer to Figure 30-1. When the money supply curve shifts from MS1 to MS2,
A. the demand for goods and services decreases.
B. the economy's ability to produce goods and services increases.
C. the equilibrium price level decreases.
D. None of the above is correct.
11. Refer to Figure 30-1. When the money supply curve shifts from MS1 to MS2,
A. the equilibrium value of money decreases.
B. the equilibrium price level decreases.
C. the supply of money has decreased.
D. the demand for goods and services will decrease.
12. Refer to Figure 30-1. If the current money supply is MS1, then
A. there is no excess supply or excess demand if the value of money is 2.
B. the equilibrium is at point C.
C. there is an excess supply of money if the value of money is 1.
D. None of the above is correct.
13. An associate professor of physics gets a $200 a month raise. She figures that with her new
monthly salary she can buy more goods and services than she could buy last year.
A. Her real and nominal salary have risen.
B. Her real and nominal salary have fallen.
C. Her real salary has risen and her nominal salary has fallen.
D. Her real salary has fallen and her nominal salary has risen.
14. Suppose ice cream cones costs $3. Molly holds $60. What is the real value of the money she
holds?
A. $60. If the price of ice cream cones rises, to maintain the real value of her money holdings she
need to hold more dollars.
B. $60. If the price of ice cream cones rises, to maintain the real value of her money holdings she
need to hold fewer dollars.
C. 20 ice cream cones. If the price of ice cream cones rises, to maintain the real value of her
money holdings she needs to hold more dollars.
D. 20 ice cream cones. If the price of ice cream cones rises, to maintain the real value of her
money holdings she needs to hold fewer dollars.
15. If M = 10,000, P = 2, and Y = 20,000, then velocity =
A. 4. Velocity will rise if money changes hands more frequently.
B. 4. Velocity will rise if money changes hands less frequently.
C. 8. Velocity will rise if money changes hands more frequently.
D. 8. Velocity will rise if money changes hands less frequently.
16. According to the quantity equation, the price level would change less than proportionately with a
rise in the money supply if there were also
A. either a rise in output or a rise in the rate at which money changes hands.
B. either a rise in output or a fall in the rate at which money changes hands.
C. either a fall in output or a rise in the rate at which money changes hands.
D. either a fall in output or a fall in the rate at which money changes hands.
17. Suppose the money supply tripled, but at the same time velocity fell by half and real GDP was
unchanged. According to the quantity equation the price level
A. is 1.5 times its old value.
B. is 3 times its old value.
C. is 6 times its old value.
D. is the same as its old value.
18. The inflation tax refers to
A. the revenue a government creates by printing money.
B. higher inflation which requires more frequent price changes.
C. the idea that, other things the same, an increase in the tax rate raises the inflation rate.
D. taxes being indexed for inflation.
19. In which case below does a person’s purchasing power from saving increase the least?
A. the nominal interest rate = 10% and inflation = 8%
B. the nominal interest rate = 9% and inflation = 6%
C. the nominal interest rate = 8% and inflation = 4%
D. the nominal interest rate = 7% and inflation = 2%
20. Suppose that monetary neutrality and the Fisher effect both hold. An increase in the money supply
growth rate increases
A. the inflation rate and real interest rates.
B. the inflation rate, but not real interest rates.
C. real interest rates, but not the inflation rate.
D. neither the inflation rate nor real interest rates.
21. Higher inflation makes relative prices
A. more variable, making it more likely that resources will be allocated to their best use.
B. more variable, making it less likely that resources will be allocated to their best use.
C. less variable, making it more likely that resources will be allocated to their best use.
D. less variable, making it less likely that resources will be allocated to their best use.
22. The nominal interest rate is 4%, the inflation rate is 1% and the tax rate is 20%. Given U.S. tax
laws, how is after-tax real return computed?
A. .03(1-.20)
B. .04(1 -.20)
C. .04(1 - .20) - .01
D. None of the above is correct.
Chapter 3: Interdependence and the Gains from Trade
1. A production possibilities frontier is a straight line when
a. the more resources the economy uses to produce one good, the fewer resources it has
available to produce the other good.
b. an economy is interdependent and engaged in trade instead of self-sufficient.
c. the rate of tradeoff between the two goods being produced is constant.
d. the rate of tradeoff between the two goods being produced depends on how much of each
good is being produced.
2. The following table contains some production possibilities for an economy for a given month.
Sweaters Gloves
4 300
6 ?
8 100

If the production possibilities frontier is a straight line, then “?” must be

a. 100.
b. 150.
c. 200.
d. 250.
3. Assume for the United States that the opportunity cost of each airplane is 100 cars. Which of these
pairs of points could be on the United States' production possibilities frontier?
a. (200 airplanes, 5,000 cars) and (150 airplanes, 4,000 cars)
b. (200 airplanes, 10,000 cars) and (150 airplanes, 20,000 cars)
c. (300 airplanes, 15,000 cars) and (200 airplanes, 25,000 cars)
d. (300 airplanes, 25,000 cars) and (200 airplanes, 40,000 cars).
4. If Korea is capable of producing either shoes or soccer balls or some combination of the two, then
a. Korea should specialize in the product in which it has an absolute advantage.
b. it would be impossible for Korea to have an absolute advantage over another country in both
products.
c. it would be difficult for Korea to benefit from trade with another country if Korea is efficient in
the production of both goods.
d. Korea’s opportunity cost of shoes is the inverse of its opportunity cost of soccer balls.
5. Suppose a gardener produces both green beans and corn in her garden. If she must give up 14
bushels of corn to get 5 bushels of green beans, then her opportunity cost of 1 bushel of green beans
is
a. 0.36 bushel of corn.
14/5=2.8
b. 2.8 bushels of corn.
c. 14 bushels of corn.
d. 70 bushels of corn.
6. Mike and Sandy are two woodworkers who both make tables and chairs. In one month, Mike can
make 4 tables or 20 chairs, while Sandy can make 6 tables or 18 chairs. Given this, we know that
a. Mike has an absolute advantage in chairs.
b. Mike has a comparative advantage in tables.
c. Sandy has an absolute advantage in chairs.
d. Sandy has a comparative advantage in chairs.
7. Suppose Jim and Tom can both produce two goods: baseball bats and hockey sticks. Which of the
following is not possible?
a. Jim has an absolute advantage in the production of baseball bats and in the production of
hockey sticks.
b. Jim has an absolute advantage in the production of baseball bats and a comparative
advantage in the production of hockey sticks.
c. Jim has an absolute advantage in the production of hockey sticks and a comparative
advantage in the production of baseball bats.
8. Canada and the U.S. both produce wheat and computer software. Canada is said to have the
comparative advantage in producing wheat if
a. Canada requires fewer resources than the U.S. to produce a bushel of wheat.
b. the opportunity cost of producing a bushel of wheat is lower for Canada than it is for the U.S.
c. the opportunity cost of producing a bushel of wheat is lower for the U.S. than it is for Canada.
d. the U.S. has an absolute advantage over Canada in producing computer software.
9. Suppose that a worker in Radioland can produce either 4 radios or 1 television per year and a
worker in Teeveeland can produce either 2 radios or 5 televisions per year. Each nation has 100
workers, and each country specializes according to the principle of comparative advantage. If
Radioland trades 100 televisions to Teeveeland in exchange for 100 radios each year, then each
country's maximum consumption of new radios and televisions per year will be
a. higher than it would be in the absence of trade because of the gains from trade.
b. the same as it would be in the absence of trade.
c. less than it would be in the absence of trade because neither country is specializing in the
product in which it has a comparative advantage.
d. less than it would be in the absence of trade because Teeveeland has an absolute advantage
in both goods and so it cannot benefit by trading with Radioland.
10. Suppose that a worker in Radioland can produce either 4 radios or 1 television per year, and a
worker in Teeveeland can produce either 2 radios or 4 televisions per year. Each nation has 100
workers. Also suppose that each country completely specializes in producing the good in which it has
a comparative advantage. If Radioland trades 100 radios to Teeveeland in exchange for 100
televisions each year, then each country's maximum consumption of new radios and televisions per
year will be
a. 100 radios, 300 televisions in Radioland and 300 radios, 100 televisions in Teeveeland.
b. 300 radios, 100 televisions in Radioland and 100 radios, 300 televisions in Teeveeland.
c. 200 radios, 100 televisions in Radioland and 100 radios, 200 televisions in Teeveeland.
d. 300 radios, 100 televisions in Radioland and 100 radios, 400 televisions in Teeveeland.
11. Suppose that a worker in Cornland can grow either 40 bushels of corn or 10 bushels of oats per
year, and a worker in Oatland can grow either 5 bushels of corn or 50 bushels of oats per year. There
are 20 workers in Cornland and 20 workers in Oatland. If the two countries do not trade, Cornland will
produce and consume 400 bushels of corn and 100 bushels of oats, while Oatland will produce and
consume 60 bushels of corn and 400 bushels of oats. If each country made the decision to specialize
in producing the good in which it has a comparative advantage, then the combined yearly output of the
two countries would increase by
a. 280 bushels of corn and 450 bushels of oats.
b. 340 bushels of corn and 500 bushels of oats.
c. 360 bushels of corn and 520 bushels of oats.
d. 360 bushels of corn and 640 bushels of oats.
Assume that Sardi and Tinaka can switch between producing corn and producing pork at a constant
rate.

Minutes Needed to Make 1

Bushel of Pound of
Corn Pork
Sardi 20 12
Tinaka 15 10

12. Refer to Table 3-1. Assume that Sardi and Tinaka each has 360 minutes available. If each
person divides his time equally between the production of corn and pork, then total production is
a. 10.5 bushels of corn and 16.5 pounds of pork.
b. 21 bushels of corn and 33 pounds of pork.
c. 35 bushels of corn and 22 pounds of pork.
d. 42 bushels of corn and 66 pounds of pork.
13. Refer to Table 3-1. Which of the following combinations of corn and pork could Sardi produce in
one 8-hour day?
a. 6 bushels of corn and 35 pounds of pork
b. 9 bushels of corn and 25 pounds of pork
c. 15 bushels of corn and 20 pounds of pork
d. 24 bushels of corn and 40 pounds of pork
14. Refer to Table 3-1. Which of the following combinations of corn and pork could Tinaka not
produce in one 10-hour day?
a. 10 bushels of corn and 45 pounds of pork
b. 20 bushels of corn and 30 pounds of pork
c. 25 bushels of corn and 25 pounds of pork
d. 30 bushels of corn and 15 pounds of pork
15. Refer to Table 3-1. What is Sardi’s opportunity cost of producing one bushel of corn?
a. 3/5 pound of pork
b. 6/5 pounds of pork
c. 4/3 pounds of pork
d. 5/3 pounds of pork
16. Refer to Table 3-1. What is Sardi’s opportunity cost of producing one pound of pork?
a. 3/5 bushel of corn
b. 6/5 bushels of corn
c. 4/3 bushels of corn
d. 5/3 bushels of corn
17. Refer to Table 3-1. What is Tinaka’s opportunity cost of producing one bushel of corn?
a. 2/3 pound of pork
b. 3/4 pound of pork
c. 5/6 pound of pork
d. 3/2 pounds of pork
18. Refer to Table 3-1. What is Tinaka’s opportunity cost of producing one pound of pork?
a. 2/3 bushel of corn
b. 3/4 bushel of corn
c. 5/6 bushel of corn
d. 3/2 bushels of corn
19. Refer to Table 3-1. Sardi has an absolute advantage in the production of
a. corn and Tinaka has an absolute advantage in the production of pork.
b. pork and Tinaka has an absolute advantage in the production of corn.
c. both goods and Tinaka has an absolute advantage in the production of neither good.
d. neither good and Tinaka has an absolute advantage in the production of both goods.
20. Refer to Table 3-1. Sardi has a comparative advantage in the production of
a. corn and Tinaka has a comparative advantage in the production of pork.
b. pork and Tinaka has a comparative advantage in the production of corn.
c. both goods and Tinaka has a comparative advantage in the production of neither good.
d. neither good and Tinaka has a comparative advantage in the production of both goods.
21. Refer to Table 3-1. Sardi should specialize in the production of
a. corn and Tinaka should specialize in the production of pork.
b. pork and Tinaka should specialize in the production of corn.
c. both goods and Tinaka should specialize in the production of neither good.
d. neither good and Tinaka should specialize in the production of both goods.
22. Refer to Table 3-1. Assume that Sardi and Tinaka each has 60 minutes available. If each person
spends all his time producing the good in which he has a comparative advantage, then total production
is
a. 3 bushels of corn and 6 pounds of pork.
b. 3.5 bushels of corn and 5.5 pounds of pork.
c. 4 bushels of corn and 5 pounds of pork.
d. 7 bushels of corn and 11 pounds of pork.
23. Refer to Table 3-1. At which of the following prices would both Sardi and Tinaka gain from trade
with each other?
a. 6 bushels of corn for 10.5 pounds of pork
b. 12 bushels of corn for 19 pounds of pork
c. 24 bushels of corn for 34 pounds of pork
d. Sardi and Tinaka could not both gain from trade with each other at any price.