1. Which of the following questions is more likely to be studied by a microeconomist than a macroeconomist?

a. Why do prices in general rise by more in some countries than in others?

b. Why do wages differ across industries?
c. Why do production and income increase in some periods and not in others?
d. How rapidly is GDP currently increasing?

2. For an economy as a whole, income must equal expenditure because

a. the number of firms is equal to the number of households in an economy.
b. international law requires that income equal expenditure.
c. every dollar of spending by some buyer is a dollar of income for some seller.
d. every dollar of saving by some consumer is a dollar of spending by some other consumer.

3. Gross domestic product adds together many different kinds of goods and services into a single measure of the
value of economic activity. To do this, GDP makes use of
a. market prices.
b. prices that government economists believe reflect the true value of goods and services to society.
c. the assumption that quantities of goods and services produced are unchanged from year to year.
d. the assumption that prices of goods and services are unchanged from year to year.

4. Transactions involving items produced in the past, such as the sale of a 5-year-old automobile by a used car
dealership or the purchase of an antique rocking chair by a person at a yard sale, are
a. included in current GDP because GDP measures the value of all goods and services sold in the
current year.
b. included in current GDP but valued at their original prices.
c. not included in current GDP because GDP only measures the value of goods and services produced
in the current year.
d. not included in current GDP because these items have no current value.

5. In the equation Y = C + I + G + NX,

a. Y represents the economy’s total expenditure.
b. C represents household expenditures on services and durable goods.
c. all of the variables are always positive numbers.
d. All of the above are correct.

6. Which of the following subcomponents of GDP can be either positive or negative?

a. inventory investment
b. exports
c. government purchases
d. All of the above are correct.

7. In the economy of Wrexington in 2008, consumption was $2000, exports were $800, GDP was $4800,
government purchases were $840, and investment was $1400. What were Wrexington’s imports in 2008?
a. -$560
b. -$240
c. $240
d. $560

8. Which of the following statements about GDP is correct?

a. Nominal GDP values production at current prices, whereas real GDP values production at constant
prices.
b. Nominal GDP values production at constant prices, whereas real GDP values production at current
prices.
c. Nominal GDP values production at market prices, whereas real GDP values production at the cost
of the resources used in the production process.
d. Nominal GDP consistently underestimates the value of production, whereas real GDP consistently
overestimates the value of production.
9. : Definitional
18. The inflation rate in year 2 equals
a.

.
b.

.
c.

.
d.

10. In the economy of Wrexington in 2008, nominal GDP was $18 billion and the GDP deflator was 120. What
was Wrexington’s real GDP in 2008?
a. $6.7 billion
b. $15 billion
c. $21.6 billion
d. $38 billion

11. The consumer price index is used to

a. convert nominal GDP into real GDP.
b. turn dollar figures into meaningful measures of purchasing power.
c. characterize the types of goods and services that consumers purchase.
d. measure the quantity of goods and services that the economy produces.

12. Which of the following is correct?

a. The GDP deflator is better than the CPI at reflecting the goods and services bought by consumers.
b. The CPI is better than the GDP deflator at reflecting the goods and services bought by consumers.
c. The GDP deflator and the CPI are equally good at reflecting the goods and services bought by
consumers.
d. The GDP deflator is more commonly used as a gauge of inflation than the CPI is.

13. The steps involved in calculating the consumer price index and the inflation rate, in order, are as follows:
a. Choose a base year, fix the basket, find the prices, compute the basket’s cost, compute the index,
and compute the inflation rate.
b. Choose a base year, fix the basket, find the prices, compute the inflation rate, compute the basket's
cost, and compute the index.
c. Fix the basket, find the prices, compute the basket's cost, choose a base year and compute the index,
and compute the inflation rate.
d. Fix the basket, find the prices, compute the inflation rate, compute the basket’s cost, and choose a
base year and compute the index.

14. Suppose a basket of goods and services has been selected to calculate the CPI and 2002 has been selected as
the base year. In 2002, the basket’s cost was $50; in 2004, the basket’s cost was $52; and in 2006, the
basket’s cost was $54.60. The value of the CPI in 2006 was
a. 91.6.
b. 104.6.
c. 109.2.
d. 154.6.
15. The price index was 120 in 2006 and 127.2 in 2007. What was the inflation rate?
a. 5.7 percent
b. 6.0 percent
c. 7.2 percent
d. 27.2 percent

16. When the relative price of a good increases, consumers respond by buying
a. a larger quantity of that good and a larger quantity of substitutes for that good.
b. a larger quantity of that good and a smaller quantity of substitutes for that good.
c. a smaller quantity of that good and a larger quantity of substitutes for that good.
d. a smaller quantity of that good and a smaller quantity of substitutes for that good.

17. Two alternative measures of the overall level of prices are

a. the inflation rate and the consumer price index.
b. the inflation rate and the GDP deflator.
c. the GDP deflator and the consumer price index.
d. the cost of living index and nominal GDP.

18. You know that a candy bar costs sixty cents today. You also know the CPI for 1962 and the CPI for today.
Which of the following would you use to compute the price of the candy bar in 1962 prices?
a. sixty cents (today's CPI - 1962 CPI)
b. sixty cents (1962 CPI - today's CPI)
c. sixty cents (today's CPI / 1962 CPI)
d. sixty cents (1962 CPI / today's CPI)

19. Henri earned a salary of $50,000 in 2001 and $70,000 in 2006. The consumer price index was 177 in 2001
and 265.5 in 2006. Henri's 2006 salary in 2001 dollars is
a. $35,000.00.
b. $46,666.67.
c. $61,950.00
d. $105,000.00.

20. Mavis is offered a Job in Minneapolis that pays $80,000. She is offered a similar job in Memphis that pays
$64,000. Which pair of CPIs would make the two salaries have the same purchasing power?
a. 90 in Minneapolis and 80 in Memphis
b. 90 in Minneapolis and 72 in Memphis
c. 90 in Minneapolis and 66 in Memphis
d. 90 in Minneapolis and 50 in Memphis

21. Which of the following statements is correct?

a. The level of real GDP is a good gauge of economic prosperity, and the growth of real GDP is a
good gauge of economic progress.
b. The level of real GDP is a good gauge of economic progress, and the growth of real GDP is a good
gauge of economic prosperity.
c. The level of real GDP is a good gauge of economic prosperity, and the level of real GDP per person
is a good gauge of economic progress.
d. The level of real GDP is a good gauge of economic progress, and the level of real GDP per person
is a good gauge of economic prosperity.

22. If one wants to know how the material well-being of the average person has changed over time in a given
country, one should look at the
a. level of real GDP.
b. growth rate of nominal GDP.
c. growth rate of real GDP.
d. growth rate of real GDP per person.
23. Last year real GDP per person in the imaginary nation of Olympus was 4,500. The year before it was 4,250.
By about what percentage did Olympian real GDP per person grow during the period?
a. 4.6 percent
b. 5.2 percent
c. 5.9 percent
d. 6.5 percent

24. Suppose that over the last ten years productivity grew faster in Oceania than in Freedonia and the
population of both countries was unchanged.
a. It follows that real GDP per person must be higher in Oceania than in Freedonia.
b. It follows that real GDP per person grew faster in Oceania than in Freedonia.
c. It follows that the standard of living must be higher in Oceania than in Freedonia.
d. All of the above are correct.

25. If there are constant returns to scale, the production function can be written as
a. xY = 2xAF(L, K, H, N).
b. Y/L = A F(xL, xK, xH, xN).
c. Y/L = A F( 1, K/L, H/L, N/L).
d. L = AF(Y, K, H, N).

26. An increase in the saving rate would, other things the same,
a. increase growth more for a poor country than for a rich country, and raise growth permanently.
b. increase growth more for a poor country than for a rich country, but raise growth temporarily.
c. increase growth more for a rich country than for a poor country, and raise growth permanently.
d. increase growth more for a rich country than for a poor country, but raise growth temporarily.

27. Consider three imaginary countries. In Old York, saving amounts to $3,000 and consumption amounts to
$7,000; in New Frank, saving amounts to $2,000 and consumption amounts to $8,000; and in Ganzee,
saving amounts to $4,500 and consumption amounts to $10,500. The saving rate is
a. higher in Old York than in Ganzee, and it is higher in Ganzee than in New Frank.
b. higher in New Frank than in Ganzee, and it is higher in Ganzee than in Old York.
c. higher in Ganzee than in New Frank, and it is the same in New Frank and Old York.
d. higher in Old York than in New Frank, and it is the same in Old York and Ganzee.

28. In the U.S., each additional year of schooling has historically raised a person's wage on average by about
a. 5 percent. In less developed countries the gap between the wages of educated and uneducated
workers is smaller.
b. 10 percent. In less developed countries the gap between the wages of educated and uneducated
workers is smaller.
c. 5 percent. In less developed countries the gap between the wages of educated and uneducated
workers is larger.
d. 10 percent. In less developed countries the gap between the wages of educated and uneducated
workers is larger.

29. Which of the following is not correct?

a. China allows only one child per family and couples that violate this rule are subject to substantial
fines.
b. In developed countries, population growth is consistently about 3 percent per year; in developing
countries it is consistently about 5 percent per year.
c. Educational attainment tends to be lowest in countries with the highest population growth.
d. Economists generally believe that a country that decreases a high population growth rate can
increase its economic growth rate.
30. All else equal, if there are diminishing returns, then which of the following is true if a country increases its
capital by one unit?
a. Output will rise by more than it did when the previous unit was added.
b. Output will rise but by less than it did when the previous unit was added.
c. Output will fall by more than it did when the previous unit was added.
d. Output will fall but by less then it did when the previous unit was added.

31. Cyclical unemployment is closely associated with

a. long-term economic growth.
b. short-run ups and downs of the economy.
c. fluctuations in the natural rate of unemployment.
d. changes in the minimum wage.

32. Unemployment data are collected

a. from unemployment insurance claims.
b. through a regular survey of about 60,000 households.
c. through a regular survey of about 200,000 firms.
d. Unemployment data are collected using all of the above.

33. Ipo did not work last week because flooding forced an evacuation of her workplace. The Bureau of Labor
Statistics counts Ipo as
a. unemployed and in the labor force.
b. unemployed and not in the labor force.
c. employed and in the labor force.
d. employed and not in the labor force.

34. In 2004, based on concepts similar to those used to estimate U.S. employment figures, the Canadian adult
non-institutionalized population was 25.022 million, the labor force was 16.956 million, and the number
of people employed was 15.864 million. According to these numbers, the Canadian labor-force
participation rate and unemployment rate were about
a. 63.4% and 4.4%.
b. 63.4% and 6.4%.
c. 67.8% and 4.4%.
d. 67.8% and 6.4%.

35. If you were told that someone you knew nothing else about had just become unemployed, your best guess
would be
a. that they would be unemployed for a long time, and that most of the unemployed they’ve joined
have been unemployed for a long time.
b. that they would be unemployed for a long time, even though most of the unemployed they’ve
joined have been unemployed for a short time.
c. that they would be unemployed for a short time, even though most of the unemployed they’ve
joined have been unemployed for a long time.
d. that they will be unemployed for a short time, and that most of the unemployed they’ve joined have
been unemployed for a short time.

36. Government-run employment agencies and public training programs are operated by the government to try
to facilitate job search and reduce unemployment.
a. Almost all economists agree that such programs are of no use.
b. Almost all economists agree that such programs work very well.
c. Some economists claim that the government can do these things no better than firms and
individuals could do them for themselves.
d. Some economists claim that these programs increase frictional unemployment.
37. When unions raise wages in some sectors of the economy, the supply of labor in other sectors of the
economy
a. decreases, raising wages in industries that are not unionized.
b. decreases, reducing wages in industries that are not unionized.
c. increases, raising wages in industries that are not unionized.
d. increases, reducing wages in industries that are not unionized.

38. Minimum-wage laws, unions, and efficiency wages contribute to

a. both structural unemployment and the natural rate of unemployment.
b. neither structural unemployment nor the natural rate of unemployment.
c. structural unemployment, but not the natural rate of unemployment.
d. the natural rate of unemployment, but not structural unemployment.

39. The theory of efficiency wages explains why

a. setting wages at the equilibrium level may increase unemployment.
b. it may be in the best interest of firms to offer wages that are above the equilibrium level.
c. the most efficient way to pay workers is to pay them according to their skills.
d. it is efficient for firms to set wages at the equilibrium level.

40. Daisy is the newly appointed CEO of a company that manufactures CD drives on an assembly line. Her
staff has told her that the output the firm produces, given the number of workers employed, indicates that
some workers may be shirking. According to efficiency wage theory, what should she do?
a. pay all workers more than the equilibrium wage rate
b. pay all workers below the equilibrium wage rate to make up for the loss from shirking
c. make sure that workers are getting paid exactly the equilibrium wage rate
d. pay bonuses to workers who report the shirking of other workers

41. If you were to start a business delivering documents, you might need to purchase cell phones, bicycles,
desks, and chairs.
a. These purchases are called capital investment. If you raise the funds from others to purchase them
you are a saver.
b. These purchases are called capital investment. If you raise the funds from others to purchase them
you are a borrower.
c. These purchases are called consumption. If you raise the funds from others to purchase them you
are a saver.
d. These purchases are called consumption. If you raise the funds from others to purchase them you
are a borrower.

42. Long-term bonds are

a. riskier than short-term bonds, and so interest rates on long-term bonds are usually lower than
interest rates on short-term bonds.
b. riskier than short-term bonds, and so interest rates on long-term bonds are usually higher than
interest rates on short-term bonds.
c. less risky than short-term bonds, and so interest rates on long-term bonds are usually lower than
interest rates on short-term bonds.
d. less risky than short-term bonds, and so interest rates on long-term bonds are usually higher than
interest rates on short-term bonds.
43. Suppose the city of Springfield has a high credit rating, and so when Springfield borrows funds by selling
bonds,
a. the city’s high credit rating and the tax status of municipal bonds both contribute to a lower interest
rate than would otherwise apply.
b. the city’s high credit rating and the tax status of municipal bonds both contribute to a higher interest
rate than would otherwise apply.
c. the city’s high credit rating contributes to a lower interest rate than would otherwise apply, while
the tax status of municipal bonds contributes to a higher interest rate than would otherwise apply.
d. the city’s high credit rating contributes to a higher interest rate than would otherwise apply, while
the tax status of municipal bonds contributes to a lower interest rate than would otherwise apply.

44. Jerry has the choice of two bonds, one that pays 3 percent interest and one that pays 6 percent interest.
Which of the following is most likely?
a. The 6 percent bond is less risky than the 3 percent bond.
b. The 6 percent bond is a U.S. government bond, and the 3 percent bond is a junk bond.
c. The 6 percent bond has a longer term than the 3 percent bond.
d. The 6 percent bond is a municipal bond, and the 3 percent bond is a U.S. government bond.

45. A high demand for a company’s stock is an indication that

a. the company is in need of funds.
b. the company has recently sold a large quantity of bonds.
c. people are optimistic about the company’s future.
d. people are pessimistic about the company’s future.

46. Metals, Inc. has a price of $20 a share, outstanding shares of 2.5 million, retained earnings of $1 million
dollars, and a dividend yield of 2 percent. It has a price-earnings ratio of
a. 50, which is high by historical standards.
b. 50, which is low by historical standards.
c. 25, which is high by historical standards.
d. 25, which is low by historical standards.

47. The identity that shows that total income and total expenditure are equal is
a. GDP = Y.
b. Y = DI + T + NX.
c. GDP = GNP - NX.
d. Y = C + I + G + NX.

48. Suppose the government were to replace the income tax with a consumption tax so that interest on savings
was not taxed. The result would be that the interest rate
a. and investment both would increase.
b. and investment both would decrease.
c. would increase and investment would decrease.
d. would decrease and investment would increase.

49. If the nominal interest rate is 6 percent and the real interest rate is 2 percent, then what is the inflation rate?
a. 8 percent
b. 4 percent
c. 3 percent
d. None of the above is correct.

50. Which of the following are effects of an increased budget deficit?

a. the supply of loanable funds does not change; a higher interest rate reduces private saving
b. the supply of loanable funds does not change; a higher interest rate raises private saving
c. at any interest rate the supply of loanable funds is less; a higher interest rate reduces private saving
d. at any interest rate the supply of loanable funds is less; a higher interest rate raises private saving
51. Commodity money is
a. backed by gold.
b. the principal type of money in use today.
c. money with intrinsic value.
d. receipts created in international trade that are used as a medium of exchange.

52. Given the following information, what are the values of M1 and M2?

Small time deposits $650 billion

Demand deposits and other checkable deposits $300 billion
Savings deposits $750 billion
Money market mutual funds $600 billion
Travelers' checks $25 billion
Large time deposits $600 billion
Currency $100 billion
Miscellaneous categories in M2 $25 billion

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.

53. Which group within the Federal Reserve System meets to discuss changes in the economy and determine
monetary policy?
a. the Board of Governors
b. the FOMC
c. the regional Federal Reserve Bank presidents
d. the Central Bank Policy Commission

54. Which of the following statements is correct?

a. In the special case of 100-percent-reserve banking, the reserve ratio is 1, the money multiplier is 2,
and banks create money.
b. In the special case of 100-percent-reserve banking, the reserve ratio is 1, the money multiplier is 1,
and banks do not create money.
c. When the reserve ratio is 0.5, then the money multiplier is 1 and banks do not create money.
d. When the reserve ratio is 0.125, then the money multiplier is 8, and each bank loans $8 for every $1
that it accept in deposits.

55. If the reserve ratio is 4 percent, then $81,250 of new money can be generated by
a. $325 of new reserves.
b. $3,250 of new reserves.
c. $20,312.50 of new reserves.
d. $2,031,250 of new reserves.

56. If a bank uses $100 of excess reserves to make a new loan when the reserve ratio is 20 percent, this action
by itself initially makes the money supply
a. and wealth increase by $100.
b. and wealth decrease by $100.
c. increase by $100 while wealth does not change.
d. decrease by $100 while wealth decreases by $100.

57. If the reserve ratio increased from 10 percent to 20 percent, the money multiplier would
a. rise from 10 to 20.
b. rise from 5 to 10.
c. fall from 10 to 5.
d. not change.
58. If the reserve ratio for all banks is 5 percent, then $2,500 of additional reserves can create up to
a. $62,500 of new money.
b. $50,000 of new money.
c. $45,600 of new money.
d. $37,500 of new money.

59. Which of the following lists two things that both increase the money supply?
a. make open market purchases, raise the reserve requirement
b. make open market purchases, lower the reserve requirement
c. make open market sales, raise the reserve requirement
d. make open market sales, lower the reserve requirement

60. The discount rate is

a. the interest rate the Fed charges banks.
b. one divided by the difference between one and the reserve ratio.
c. the interest rate banks receive on reserve deposits with the Fed.
d. the interest rate that banks charge on overnight loans to other banks.

61. Which of the following is correct?

a. A period of hyperinflation is a period of extraordinarily high or extraordinarily low inflation.
b. A period of deflation is any period during which the inflation rate is decreasing.
c. During the 1990s, U.S. inflation averaged about 2 percent per year.
d. All of the above are correct.

62. If P denotes the price of goods and services measured in terms of money, then
a. 1/P represents the value of money measured in terms of goods and services.
b. P can be interpreted as the inflation rate.
c. the supply of money influences the value of P, but the demand for money does not.
d. All of the above are correct.

63. If M = 3,000, P = 2, and Y = 12,000, what is velocity?

a. 1/2
b. 2
c. 4
d. 8

64. If velocity = 3.5, the quantity of money = 15,000, and the price level = 1.2, then the real value of output is
a. 3,571.43.
b. 4,285.71.
c. 5,142.86.
d. 43,750.00.

65. When the money market is drawn with the value of money on the vertical axis, if the price level is above
the equilibrium level, there is an
a. excess demand for money, so the price level will rise.
b. excess demand for money, so the price level will fall.
c. excess supply of money, so the price level will rise.
d. excess supply of money, so the price level will fall.

66. On a given morning, Franco sold 40 pairs of shoes for a total of $80 at his shoe store.
a. The $80 is a real variable. The quantity of shoes is a nominal variable.
b. The $80 is a nominal variable. The quantity of shoes is a real variable.
c. Both the $80 and the quantity of shoes are nominal variables.
d. Both the $80 and the quantity of shoes are real variables.
67. Nominal GDP measures
a. the total quantity of final goods and services produced.
b. the dollar value of the economy's output of final goods and services.
c. the total income received from producing final goods and services measured in constant dollars.
d. None of the above is correct.

68. Which of the following is not implied by the quantity equation?

a. If velocity is stable, an increase in the money supply creates a proportional increase in nominal
output.
b. If velocity is stable and money is neutral, an increase in the money supply creates a proportional
increase in the price level.
c. With constant money supply and output, an increase in velocity creates an increase in the price
level.
d. With constant money supply and velocity, an increase in output creates a proportional increase in
the price level.

69. Banks advertise

a. the real interest rate, which is how fast the dollar value of savings grows.
b. the real interest rate, which is how fast the purchasing power of savings grows.
c. the nominal interest rate, which is how fast the dollar value of savings grows.
d. the nominal interest rate, which is how fast the purchasing power of savings grows.

70. When inflation rises, people tend to go to the bank

a. more often, giving rise to menu costs.
b. more often, giving rise to shoeleather costs.
c. less often, giving rise to redistribution costs.
d. less often, thereby lessening the severity of the inflation tax.

71. Gary and Diane must prepare a presentation for their marketing class. As part of their presentation, they
must do a series of calculations and prepare 50 PowerPoint slides. It would take Gary 10 hours to do the
required calculation and 10 hours to prepare the slides. It would take Diane 12 hours to do the calculations
and 20 hours to prepare the slides.
a. How much time would it take the two to complete the project if they divide the calculations equally
and the slides equally?
b. How much time would it take the two to complete the project if they use comparative advantage and
specialize in calculating or preparing slides?
c. If Diane and Gary have the same opportunity cost of $5 per hour, is there a better solution than for
each to specialize in calculating or preparing slides?

72. When can two countries gain from trading two goods?
a. when the first country can only produce the first good and the second country can only produce the
second good
b. when the first country can produce both goods, but can only produce the second good at great cost,
and the second country can produce both goods, but can only produce the first good at great cost
c. when the first country is better at producing both goods and the second country is worse at
producing both goods
d. Two countries could gain from trading two goods under all of the above conditions.
73. 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 bowed outward, then “?” could be

a. 100.
b. 150.
c. 200.
d. 250.

74. Assume for the United States that the opportunity cost of each airplane is 100 cars. Then 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)

75. 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 20 bushels of corn or 5 bushels of oats per year. There are 20 workers
in Cornland and 20 workers in Oatland. Which of the following statements is true?
a. Both countries could gain from trade with each other.
b. Neither country could gain from trade with each other because Cornland has an absolute advantage
in both goods.
c. Neither country could gain from trade with each other because neither one has a comparative
advantage.
d. Oatland could gain from trade between the two countries, but Cornland definitively would lose.

76. Table 3-9

Barb and Jim run a business that sets up and tests computers. Assume that Barb and Jim can switch between
setting up and testing computers at a constant rate. The following table applies.

Minutes Needed to Number of Computers Set

Up or Tested in a 40-Hour
Week
Set Up 1 Test 1 Computers Computers
Computer Computer Set Up Tested
Barb 48 ? 50 40
Jim 30 40 80 60
108. Refer to Table 3-9. The number of minutes needed by Barb to test a computer is
a. 36.
b. 48.
c. 60.
d. 64.
77. Figure 3-4
Perry’s Production Possibilities Frontier Jordan’s Production Possibilities Frontier
poems poems
20 20

18 18

16 16

14 14

12 12

10 10

8 8

6 6

4 4

2 2

1 2 3 4 5 6 7 8 novels 1 2 3 4 5 6 7 8 novels

Refer to Figure 3-4. If Jordan must work 3 months to write each novel, then her production possibilities
frontier is based on how many months of work?
a. 1 month
b. 3 months
c. 4 months
d. 12 months

78. Figure 3-5

Puneet’s Production Possibilities Frontier Chirag’s Production Possibilities Frontier
wallets wallets
10 10

9 9

8 8

7 7

6 6

5 5

4 4

3 3

2 2

1 1

1 2 3 4 5 6 7 8 9 10 purses 1 2 3 4 5 6 7 8 9 10 purses

1Refer to Figure 3-5. If Puneet must work 0.5 hour to make each purse, then his production possibilities
frontier is based on how many hours of work?
a. 2 hours
b. 5 hours
c. 20 hours
d. 50 hours
79. Figure 3-9
Uzbekistan’s Production Possibilities Frontier Azerbaijan’s Production Possibilities Frontier
nails nails
100 100

90 90

80 80

70 70

60 60

50 50

40 40

30 30

20 20

10 10

5 10 15 20 25 30 35 40 45 50 bolts 5 10 15 20 25 30 35 40 45 50 bolts

Refer to Figure 3-9. If Uzbekistan and Azerbaijan each divides its time equally between making bolts and
making nails, then total production is
a. 15 bolts and 40 nails.
b. 25 bolts and 70 nails.
c. 30 bolts and 80 nails.
d. 50 bolts and 140 nails.

80. Assume for the United States that the opportunity cost of each airplane is 100 cars. Then 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)

81. Juan lives in Ecuador and purchases a motorcycle manufactured in the United States. The motorcycle is
a. both a U.S. and Ecuadorian export.
b. both a U.S. and Ecuadorian import.
c. a U.S. import and an Ecuadorian export.
d. a U.S. export and an Ecuadorian import.

82. The value of Peru's exports minus the value of Peru's imports is called
a. Peru's foreign portfolio investment.
b. Peru's foreign direct investment.
c. Peru's net exports.
d. Peru's net imports.

83. The increase in international trade in the United States is partly due to
a. improvements in transportation.
b. advances in telecommunications.
c. increased trade of goods with a high value per pound.
d. All of the above are correct.

84. Stacey, a U.S. citizen, buys a bond issued by an Italian pasta manufacturer.
a. This purchase is foreign direct investment. By itself it increases U.S. net capital outflow.
b. This purchase is foreign direct investment. By itself it decreases U.S. net capital outflow.
c. This purchase is foreign portfolio investment. By itself it increases U.S. net capital outflow.
d. This purchase is foreign portfolio investment. By itself it decreases U.S. net capital outflow.
85. A U.S. firm buys cement mixers from China and pays for them with U.S. dollars.
a. The purchase of the cement mixers increases U.S. net exports and the payment with dollars
increases U.S. net capital outflow.
b. The purchase of cement mixers increases U.S. net exports and the payment with dollars decreases
U.S. net capital outflow.
c. The purchase of cement mixers decreases U.S. net exports and the payment with dollars increases
U.S. net capital outflow.
d. The purchase of cement mixers decreases U.S. net exports and the payment with dollars decreases
U.S. net capital outflow.

86. If Ireland's domestic investment exceeds national saving, then Ireland has
a. positive net capital outflows and negative net exports.
b. positive net capital outflows and positive net exports.
c. negative net capital outflows and negative net exports.
d. negative net capital outflows and positive net exports.

87. If the exchange rate were .8 Canadian dollars per U.S. dollar, a watch that costs $8 US dollars would cost
a. 6.4 Canadian dollars.
b. 10 Canadian dollars.
c. 12.50 Canadian dollars.
d. None of the above is correct.

88. If purchasing power parity holds, a bushel of rice costs $10 in the U.S., and the nominal exchange rate is 2
Thai bhat per dollar, what is the price of rice in Thailand?
a. 20 bhat
b. 10 bhat
c. 5 bhat
d. 2 bhat

89. If P = domestic prices, P* = foreign prices, and e is the nominal exchange rate, which of the following is
implied by purchasing-power parity?
a. P = e/P*
b. 1 = e/P*
c. e = P*/P
d. None of the above is correct.

90. If the Kenyan nominal exchange rate declines, and prices are unchanged in Kenya and abroad, then the
Keynan real exchange rate
a. does not change.
b. rises.
c. declines
d. None of the above is necessarily correct.

91. In an open economy, the demand for loanable funds comes from
a. only those who want to borrow funds to buy domestic capital goods.
b. only those who want to borrow funds to buy foreign assets.
c. those who want to borrow funds to buy either domestic capital goods or foreign assets.
d. neither those who want to borrow funds to buy domestic capital goods nor those who want to
borrow funds to buy foreign assets.

92. If the quantity of loanable funds supplied is greater than the quantity demanded, then
a. there is a shortage of loanable funds and the interest rate will fall.
b. there is a shortage of loanable funds and the interest rate will rise.
c. there is a surplus of loanable funds and the interest rate will fall.
d. there is a surplus of loanable funds and the interest rate will rise.
93. If foreigners want to buy more U.S. bonds, then in the market for foreign-currency exchange the exchange
rate
a. and the quantity of dollars traded rises.
b. rises and the quantity of dollars traded falls.
c. falls and the quantity of dollars traded rises.
d. and the quantity of dollars traded falls.

94. Figure 32-4

Refer to Figure 32-4. Suppose that U.S. firms desire to purchase more capital in the U.S. The effects of this
could be illustrated by
a. shifting the demand curve in panel a to the right and the demand curve in panel c to the left.
b. shifting the demand curve in panel a to the right and the supply curve in panel c to the left.
c. shifting the supply curve in panel a to the right and the demand curve in panel c to the left.
d. shifting the supply curve in panel a to the right and the supply curve in panel c to the right.

95. If the U.S. imposed an import quota on construction equipment, then the sales of U.S. construction
equipment producers would
a. rise and the exports of other U.S. industries would rise.
b. rise and the exports of other U.S. industries would fall.
c. fall and the exports of other U.S. industries would rise.
d. fall and the exports of other U.S. industries would fall.
96. The diagram below represents the market for loanable funds and the market for foreign-currency exchange
in Mexico. Use the diagram to answer the following questions.
Figure 32-7

Refer to Figure 32-7. Supposing that the Mexican economy starts at r0 and E1. Which of the following is
consistent with the effects of capital flight?
a. the shift from D0 to D1 in Panel A
b. the shift from NCO0 to NCO1 in Panel B
c. the shift from S0 to S1 in Panel C
d. All of the above shifts are consistent with the effects of capital flight.

97. If U.S. citizens decide to save a smaller fraction of their incomes, U.S. domestic investment
a. increases, and U.S. net capital outflow increases.
b. increases, and U.S. net capital outflow decreases.
c. decreases, and U.S. net capital outflow increases.
d. decreases, and U.S. net capital outflow decreases.

98. Trade policies

a. affect a country's overall trade balance, but affect all firms and industries the same.
b. affect a country's overall trade balance, but affect some firms or industries differently than others.
c. do not affect a country's overall trade balance, but affect some firms or industries differently than
others.
d. do not affect either a country's overall trade balance or specific firms or industries.

99. If the U.S. imposed an import quota on corn, then in the U.S.
a. exports and imports would rise.
b. exports and imports would fall.
c. exports would rise and imports would fall.
d. exports would fall and imports would rise.
100. A tax on imported goods is called a(n)
a. excise tax.
b. tariff.
c. import quota.
d. None of the above is correct.

101. During a recession the economy experiences

a. rising employment and income.
b. rising employment and falling income.
c. rising income and falling employment.
d. falling employment and income.

102. Below are pairs of GDP growth rates and unemployment rates. Economists would be shocked to see most
of these pairs in the U. S. Which pair of GDP growth rates and unemployment rates is realistic?
a. 5 percent, 1 percent
b. 3 percent, 5 percent
c. -1 percent, 3 percent
d. -2 percent, 4 percent

103. Other things the same, an increase in the price level causes the interest rate to
a. increase, the dollar to depreciate, and net exports to increase.
b. increase, the dollar to appreciate, and net exports to decrease.
c. decrease, the dollar to depreciate, and net exports to increase.
d. decrease, the dollar to appreciate, and net exports to decrease.

104. Suppose a stock market boom makes people feel wealthier. The increase in wealth would cause people
to desire
a. increased consumption, which shifts the aggregate-demand curve right.
b. increased consumption, which shifts the aggregate-demand curve left.
c. decreased consumption, which shifts the aggregate-demand curve right.
d. decreased consumption, which shifts the aggregate-demand curve left.

105. Which of the following shifts aggregate demand to the right?

a. an increase in the money supply
b. an increase in net exports due to something other than a change in domestic prices
c. an investment tax credit
d. All of the above are correct.

106. Which of the following shifts the long-run aggregate supply curve to the right?
a. both an increase in the capital stock and technological improvements
b. an increase in the capital stock but not technological improvements
c. an increase in the capital stock but not technological improvements
d. neither an increase in the capital stock nor an technological improvements

107. The equation: quantity of output supplied = natural rate of output + a(actual price level - expected price
level), where a is a positive number, represents
a. an upward-sloping short-run aggregate supply curve
b. a vertical short-run aggregate supply curve
c. a downward-sloping aggregate demand curve
d. None of the above is correct.
108. Which of the following would cause prices and real GDP to rise in the short run?
a. an increase in the expected price level
b. an increase in the money supply
c. a decrease in the capital stock
d. None of the above is correct.

109. Figure 33-1

A
D B
C

Refer to Figure 33-1. An increase in the money supply would move the economy from C to
a. B in the short run and the long run.
b. D in the short run and the long run.
c. B in the short run and A in the long run.
d. D in the short run and C in the long run.

110. In the short-run an increase in the costs of production makes

a. output and prices rise.
b. output rise and prices fall.
c. output fall and prices rise.
d. output and prices fall.

111. The interest-rate effect

a. depends on the idea that increases in interest rates decrease the quantity of goods and services
demanded.
b. depends on the idea that increases in interest rates decrease the quantity of goods and services
supplied.
c. is responsible for the downward slope of the money-demand curve.
d. is the least important reason, in the case of the United States, for the downward slope of the
aggregate-demand curve.

112. According to the theory of liquidity preference,

a. if the interest rate is below the equilibrium level, then the quantity of money people want to hold is
less than the quantity of money the Fed has created.
b. if the interest rate is above the equilibrium level, then the quantity of money people want to hold is
greater than the quantity of money the Fed has created.
c. the demand for money is represented by a downward-sloping line on a supply-and-demand graph.
d. All of the above are correct.
113. Figure 34-1

Refer to Figure 34-1. If the current interest rate is 2 percent,

a. there is an excess supply of money.
b. people will sell more bonds, which drives interest rates up.
c. as the money market moves to equilibrium, people will buy more goods.
d. All of the above are correct.

114. Figure 34-3.

Refer to Figure 34-3. What quantity is represented by the vertical line on the left-hand graph?
a. the supply of money

b. the demand for money

c. the rate of inflation
d. the quantity of bonds that was most recently sold or purchased by the Federal Reserve

115. Assume there is a multiplier effect, some crowding out, and no accelerator effect. An increase in
government expenditures changes aggregate demand more,
a. the smaller the MPC and the stronger the influence of income on money demand.
b. the smaller the MPC and the weaker the influence of income on money demand.
c. the larger the MPC and the stronger the influence of income on money demand.
d. the larger the MPC and the weaker the influence of income on money demand.
116. If the multiplier is 7 and if there is no crowding-out effect, then a $50 billion increase in government
expenditures causes aggregate demand to
a. increase by $250 billion.
b. increase by $175 billion.
c. increase by $350 billion.
d. None of the above are correct.

117. Figure 34-6.

Refer to Figure 34-6. The aggregate-demand curve could shift from AD1 to AD2 as a result of
a. an increase in government purchases.
b. a decrease in stock prices.
c. consumers and firms becoming more optimistic about the future.
d. an increase in the price level.

118. In the short run,

a. the price level alone adjusts to balance the supply and demand for money.
b. output responds to changes in the aggregate demand for goods and services.
c. changes in the money supply cause a proportional change in the price level.
d. increases in the money supply shift the aggregate supply curve causing output to rise.

119. In the long run, the level of output

a. depends on the money supply.
b. depends on the price level.
c. is determined by supply-side factors.
d. All of the above are correct.

120. During periods of expansion, automatic stabilizers cause government expenditures

a. and taxes to fall.
b. and taxes to rise.
c. to rise and taxes to fall.
d. to fall and taxes to rise.