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Contents
Chapter7 TheMacroeconomy:Unemployment,Inflation,andDeflation.................................1
Chapter8 MeasuringtheEconomysPerformance.....................................................................97
Chapter9 GlobalEconomicGrowthandDevelopment...........................................................195
Chapter10 RealGDPandthePriceLevelintheLongRun.......................................................264
Chapter11 ClassicalandKeynesianMacroAnalyses.................................................................339
Chapter12 Consumption,RealGDP,andtheMultiplier...........................................................435
Chapter13 FiscalPolicy..................................................................................................................547
Chapter14 DeficitSpendingandthePublicDebt.......................................................................620
Chapter15 Money,Banking,andCentralBanking.....................................................................657
Chapter16 DomesticandInternationalDimensionsofMonetaryPolicy................................772
Chapter17 StabilizationinanIntegratedWorldEconomy........................................................864
Chapter18 PoliciesandProspectsforGlobalEconomicGrowth..............................................953
Chapter7
TheMacroeconomy:Unemployment,Inflation,andDeflation
7.1Unemployment
1) Whichofthefollowingistrueofunemployment?
A) Itisdefinedasthenumberofpeopleactivelylookingforworkwhodonothavejobs.
B) Theresultisthattheeconomyoperatesinsideitsproductionpossibilitiescurve.
C) Therearepsychologicalconsequencesassociatedwithunemployment.
D) Alloftheabove.
Answer: D
Diff:2
Topic: 7.1Unemployment
AACSB: Analyticskills
QuestionStatus: PreviousEdition
2) Whichofthefollowingistrueaboutthelaborforce?
A) Itincludesthoseover16agesoldandareemployed.
B) Itincludesthoseover16agesoldandareunemployed.
C) BothAandBarecorrect.
D) Noneoftheaboveiscorrect.
Answer: C
Diff:2
3) Acountryslaborforceisequalto
A) thepopulationbetweentheagesof16and65.
B) thenumberofemployedpeople.
C) thetotalnumberofemployedandunemployedpeople.
D) thetotalnumberofemployedpeople,unemployedpeople,anddiscouragedworkers.
Answer: C
Diff:2
4) Whichofthefollowingpeoplewouldbeconsidered unemployed?
A) Homer,wholosthisjobatthepowerplantandisnotlookingforwork
B) Lenny,whoisworkingparttimeatafastfoodrestaurant
C) Abe,whoisretired
D) Edna,wholostherjobasateacherandiscurrentlysearchingforanewjob
Answer: D
Diff:2
Copyright2014PearsonEducation,Inc.
2MillerEconomicsToday,17 thEdition
5) Thetermunemploymentisbestdescribedasthetotalnumberof
A) peoplenotworking.
B) peoplewhohavebeenlaidoffandhavestoppedlookingforwork.
C) adultswhoworkfewerhoursthantheywishtowork.
D) adultswhoarelookingforworkbuthavenotfoundajob.
Answer: D
Diff:1
6) Accordingtothetext,duringwhichtimeperioddidtheUnitedStateshavethehighest
unemploymentrates?
A) 1930s B) 1950s C) 1980s D) 2000s
Answer: A
Diff:2
7) Individualswhohavestoppedlookingforworkbecausetheyareconvincedthattheywillnot
findajobareconsidered
A) structurallyunemployed. B) discouragedworkers.
C) partofthelaborforce. D) underemployed.
Answer: B
Diff:2
8) WhichfederalagencypublishestheUnitedStatesunemploymentfigures?
A) HealthandHumanServices
B) TheBureauofLaborStatistics
C) TheFederalReserve
D) TheSenateCommitteeonLaborRelations
Answer: B
Diff:1
9) Overthelast125yearsintheUnitedStates,unemploymentreacheditshighestrate
A) inthePanicof1893.
B) inthe1930s.
C) intheperiodbetweenWorldWarIIandtheKoreanWar.
D) intheGreatRecessionofthelate2000s.
Answer: B
Diff:1
Chapter7TheMacroeconomy:Unemployment,Inflation,andDeflation 3
10) WhendidtheUnitedStatesregisteritslowestunemploymentrate?
A) Inthe1920s B) Intheeconomicboomofthe1990s
C) IntheRoaringNineties(1890s) D) AttheendofWorldWarII
Answer: D
Diff:1
11) Thepopulationofindividualsatleast16yearsofagecanbebrokeninto3groups.Theyare
A) theunemployed,discouragedworkers,andretirees.
B) thoseemployedfull-time,thoseemployedonlypart-time,andtheunemployed.
C) thoseworkinginthefor-profitsector,thoseworkinginthenonprofitsector,and
individualswhoareunemployed.
D) noneoftheabove.
Answer: D
Diff:1
12) Therateofunemploymentiscalculatedasthenumberof
A) unemployedworkersdividedbythenumberofemployedworkers.
B) peopleinthecivilianlaborforcedividedbythenumberofunemployed.
C) unemployeddividedbythenumberofpeopleinthecivilianlaborforce.
D) employedworkersdividedbythenumberofunemployedworkers.
Answer: C
Diff:1
13) AccordingtotheBureauofLaborStatistics,ifyouvoluntarilyleaveyourjobtosearchfor
anotherjob,thenyou
A) areclassifiedasunemployed.
B) areeligibleforunemploymentcompensation.
C) maynotre-enterthelaborforceforsixmonths.
D) areclassifiedasajobloser.
Answer: A
Diff:1
14) Officialunemploymentratesmayunderestimatethetruerateofunemploymentbecausethe
officialrate
A) includesthoseworkerswhoonlyworkparttime.
B) mayincludesomeindividualswhoarenotactuallyinthelaborforce.
C) doesnotincludeindividualsreceivinganytypeofunemploymentcompensation.
D) failstoincludediscouragedworkers.
Answer: D
Diff:1
15) Theofficialunemploymentratemayunderstatethetruerateofunemploymentbecauseof
A) workerswhoholdtwojobs.
B) increasesinworkerproductivity.
C) changesinwagerates.
D) discouragedworkerswhonolongerareactivelyseekingworkandareexcludedfromthe
statistics.
Answer: D
Diff:1
16) Historically,theUnitedStateshasexperienced
A) continuousdecreasesintheunemploymentratesinceWorldWarII.
B) periodsofbothincreasesanddecreasesintheunemploymentratesinceWorldWarII.
C) continuousincreasesintheunemploymentratesinceWorldWarII.
D) nochangesintheunemploymentratesinceWorldWarII.
Answer: B
Diff:1
17) WhenJoe,whoisamongthehighest-paidworkersinafieldinwhichtherearenumerousjob
openingsacrossthenation,recentlybecameunemployed,hisopportunitycostofjobsearchis
A) average,sothelengthofhisperiodofunemploymentislikelytobelong.
B) relativelyhigh,sothelengthofhisperiodofunemploymentislikelytobeshort.
C) relativelylow,sothelengthofhisperiodofunemploymentislikelytobelong.
D) relativelyhigh,sothelengthofhisperiodofunemploymentislikelytobelong.
Answer: B
Diff:1
18) IftheU.S.economyentersarecession,the
A) economyexperiencesfullemployment.
B) unemploymentratetendstoincrease.
C) laborforcetendstoincrease.
D) entirepopulationwillbepartiallyunemployed.
Answer: B
Diff:1
19) Thetotalcivilianlaborforceiscomprisedof
A) theunemployedandtheemployed.
B) onlytheemployed.
C) allindividualsover16yearsofage,whetherornottheyworkorareseekingwork.
D) onlyfull-timeemployedindividualsbetweentheagesof18and55.
Answer: A
Diff:1
20) Thelaborforceincludesindividualswhoare:
I. Employed
II. Unemployed
III. Discouragedworkers
A) Ionly. B) BothIandII.
C) BothIandIII. D) AllI,IIandIII..
Answer: B
Diff:2
21) Whichofthefollowingbestfitsthedefinitionofunemployed?
A) Retiredandnotworking
B) Workinglessthanafullworkweek
C) Notworkingbutlookingforajob
D) Notworkingatagainfulpursuit,eitherinoroutofthehome
Answer: C
Diff:1
22) Bydefinition,thelaborforceparticipationrateis
A) thepercentageofinstitutionalizedworking-ageindividualswhoareemployedorseeking
employment.
B) thepercentageofnoninstitutionalizedworking-ageindividualswhoareemployedor
seekingemployment.
C) theannualrateofgrowthinthenumberofpeoplewhoareeitheremployedorsearching
foravailablejobs.
D) theannualrateofgrowthinthenumberofpeoplewhoareunemployedandsearchingfor
availablegovernment-providedunemploymentbenefits.
Answer: B
Diff:1
23) Therateofunemploymentisfoundby
A) dividingthenumberunemployedbythenumberofpeopleinthelaborforce.
B) dividingthenumberunemployedbythenumberemployed.
C) dividingthenumberemployedbythenumberofpeopleinthelaborforce.
D) dividingthenumberemployedbythenumberunemployed.
Answer: A
Diff:1
24) Includingdiscouragedworkersinthecalculationoftheunemploymentratewould
A) increasethereportedrate.
B) lowerthereportedrate.
C) notchangethereportedrate.
D) changethereportedrate,butinanunpredictablemanner.
Answer: A
Diff:1
25) Unemploymentismeasuredas
A) allteensandadultsinthecivilianlaborforcewhoarenotworking.
B) alladultsinthecivilianlaborforcewhoarewillingandabletoworkandwhoareactively
lookingforwork,buthavenotfoundajob.
C) alladultsinthecivilianlaborforce,regardlessofwhetherornottheyhavebeenengaged
inactivelyseekingemployment,whodonothavethejobtheywant.
D) alladultsinthecivilianlaborforcewhoarenotworking.
Answer: B
Diff:1
26) Thelaborforceisdefinedasthenumberof
A) employedplusthenumberofunemployed.
B) peoplewhoareworking.
C) peoplewhoareworkinginlabor-typejobs.
D) unionmemberswhoareworking.
Answer: A
Diff:1
27) TheU.S.DepartmentofLaborclassifiesallindividualsintheUnitedStatesas
A) laborforceparticipants.
B) eitheremployed,unemployed,ornotinthelaborforce.
C) eitheroveremployedorunderemployed.
D) potentialemployees.
Answer: B
Diff:1
28) Apersonwhopreviouslyhadafull-timejobhasbeenparoledfromprisonandhasappliedfor
ajobisconsidered
A) areentrant. B) ajobloser.
C) anewentrant. D) notinthelaborforce.
Answer: A
Diff:2
29) Increasesinthedurationofunemploymentmay
A) reflectageneraldownturnineconomicactivitythatdepressesjobopenings.
B) increasethenumberofdiscouragedworkers.
C) increasetheunemploymentrate.
D) alloftheabove.
Answer: D
Diff:1
30) Whichcategoryofunemployedindividualsmakesupthegreatestshareofthosewhoare
unemployed?
A) Newentrants B) Reentrants C) Joblosers D) Jobleavers
Answer: C
Diff:1
31) Whichofthefollowingisastockvariable?Thenumberof
A) unemployedpeople. B) reentrants.
C) joblosers. D) jobleavers.
Answer: A
Diff:1
32) Thenumberofpeoplethatarefiredinamonthis
A) astock. B) aflow.
C) bothastockandaflow. D) neitherastocknoraflow.
Answer: B
Diff:1
33) Whenthereisanincreaseinthedurationofunemployment,theU.S.Congresstypically
respondsby
A) loweringincometaxes.
B) extendingunemploymentbenefits.
C) encouragingunemployedU.S.workerstoseekemploymentoverseas.
D) redefiningunemployedsotheunemploymentratedoesnotlooksobad.
Answer: B
Diff:1
34) Thelabor-forceparticipationrateshowsthepercentageof
A) peoplenotworking,butwhowanttowork.
B) peoplewhoarenotactivelyparticipatinginmeaningfuleconomicactivity.
C) newentrantsintothelaborforce.
D) non-institutionalizedworking-agepeoplewhoareactuallyworkingorseeking
employment.
Answer: D
Diff:1
35) ThelargestmajorchangeintheU.S.laborforceparticipationrateduringthelastfewdecades
hasbeen
A) thenumberofprisonersdroppingoutofthelaborforce.
B) theincreaseinthenumberofworkingwomen.
C) thedecreaseinthenumberofworkingwomen.
D) theincreaseinthenumberofillegalimmigrantsintheUnitedStates.
Answer: B
Diff:2
36) IntheUnitedStates,thelabor-forceparticipationratesince1960hasbeen
A) increasingforfemales. B) decliningforfemales.
C) decliningforbothmalesandfemales. D) unchangedforbothmalesandfemales.
Answer: A
Diff:1
37) Ifapersonislaidofffromajob,heisconsideredbytheBureauofLaborStatisticstobea
A) jobloser. B) reentrant. C) jobleaver. D) newentrant.
Answer: A
Diff:1
38) IfIvoluntarilyendmyemployment,theBureauofLaborStatisticswouldconsidermetobe
A) ajobloser. B) ajobleaver.
C) adiscouragedworker. D) areentrant.
Answer: B
Diff:1
39) WhichofthefollowingwouldNOTbeconsideredunemployed?
A) Anewentranttothelaborforce
B) Ajobleaverwhoislookingforabetterjob
C) Anindividualfiredbyheremployer
D) Anewlyretiredworker
Answer: D
Diff:1
40) Thelargestcategoryoftheunemployedare
A) joblosers. B) reentrants. C) jobleavers. D) newentrants.
Answer: A
Diff:1
41) Whichofthefollowingcancauseofficialunemploymentfigurestounderestimatethetrue
unemploymentrate?
A) Somepeoplegetdiscouragedandquitlookingforajob.
B) Somepeopleengageinillegalactivities.
C) Somepeopleworkoffthebooks.
D) Somepeopleworkovertime.
Answer: A
Diff:2
42) Theunemploymentratewillrisewhen
A) peoplegetdiscouragedandquitlookingforajob.
B) theaverageworkweekfallsfrom40hoursto39hours.
C) thedurationofunemploymentincreases.
D) thesizeofthelaborforceincreaseswithoutanincreaseinemployment.
Answer: C
Diff:2
43) Inrecentyearsthelaborforceparticipationratehasbeenfairlystable,
A) ashasthelaborforceparticipationrateformales,females,minorities,andnonminorities.
B) althoughthefemalelaborforceparticipationratehasfallenwhilethemalelaborforce
participationratehasincreased.
C) althoughthemalelaborforceparticipationratehasfallenwhilethefemalelaborforce
participationratehasincreased.
D) althoughthelaborforceparticipationrateofyoungadultshasincreasedwhilethelabor
forceparticipationrateofthoseinthe40-55ageclassificationhasfallen.
Answer: C
Diff:2
44) Ifthedurationofunemploymentinacountryincreasesfrom16weeksto18weeks,then
A) theunemploymentratewilldecrease. B) theunemploymentratewillincrease.
C) thesizeofthelaborforcewillincrease. D) thesizeofthelaborforcewilldecrease.
Answer: B
Diff:1
45) Thedurationofunemploymenttendsto
A) increasewhenbusinessactivitydecreases.
B) increasewhenemploymentincreases.
C) increasewhenthelaborforceshrinks.
D) stayconsistentlythesameoverlongperiodsoftime.
Answer: A
Diff:1
46) Peoplewhohavedroppedoutofthelaborforceandwhoarenolongerlookingforajobbecause
theybelievethejobmarkethaslittletoofferthemareclassifiedbytheLaborDepartmentas
A) unemployed. B) non-participants.
C) discouragedworkers. D) wage-ratebusters.
Answer: C
Diff:1
47) WhichofthefollowingpeoplewouldbeconsideredunemployedbytheBureauofLabor
Statistics?
I. Mrs.Xretiresfromherjobanddoesnotlookforanotherjob.
II. Mr.Ywaslaidofffromhisjobasawelder,butexpectstoberehiredin8months.
A) Ionly B) IIonly C) BothIandII D) NeitherInorII
Answer: B
Diff:1
48) Tobeofficiallycountedasunemployed,apersonmustbe
A) atleast16yearsold.
B) atleast18yearsold.
C) atleast21yearsold.
D) anyage,solongasyouarelookingforwork.
Answer: A
Diff:1
49) Whoisconsideredofficiallyunemployed?
A) Sixmonthsafterfailingtogetajob,Abbaquitlooking.
B) Monicagraduatedfromcollegelastsummerbutisstillunemployeddespiteherspirited
search.
C) Kariukiisaretiredteacher.
D) Chenisgoingtoschoolfulltime.
Answer: B
Diff:1
50) Costsofunemploymentinclude
A) structuralunemployment.
B) theoutputlostduetothefactthattheeconomyisnotrunningatfullemployment.
C) reductioninthelaborforce.
D) higherwages.
Answer: B
Diff:1
51) Jasimevoluntarilyquitherjobandisnowsearchingforanewposition.Jasimeisclassifiedasa
A) jobloser. B) jobreentrant. C) jobleaver. D) newentrant.
Answer: C
Diff:1
52) Ifthereisunemploymentandallbusinessesareoperatingatlessthanfullcapacity,then
A) therearetoomanyworkers,andsomepeopleoughttoleavethelaborforce.
B) wearenotexperiencinganetsocialcosttounemploymentbecauseitisoffsetbythe
capacitylevelsofthefactories.
C) societyisproducinginsideitsproductionpossibilitiescurve.
D) societyisatthewrongpointontheproductionpossibilitiescurve.
Answer: C
Diff:2
53) Thelaborforceparticipationrateincludes
A) onlythosewhoareemployed.
B) onlythoseemployedbutlookingforajob.
C) bothemployedworkersanddiscouragedworkersnotseekingjobs.
D) bothemployedworkersandthoseunemployedbutseekingemployment.
Answer: D
Diff:2
54) Onemajorreasonthateconomistsareconcernedaboutunemploymentisthat
A) unemploymentalwaysleadstofrictionalunemployment.
B) unemploymentreducesthesizeofthelaborforce.
C) unemploymentshiftstheproductionpossibilitiescurveoutward.
D) theeconomyisproducinglessoutputthaniftherewerefullemployment.
Answer: D
Diff:1
55) WhichofthefollowingindividualsisNOTcountedasunemployed?
A) Jamil,whorecentlyquithisjobandislookingforanewposition
B) Jackie,whowasrecentlyfiredandisnowapplyingforanotherjob
C) Jack,whohasbecomediscouragedabouteverfindingajobandhasstoppedlooking
D) Jennifer,whojustgraduatedfromcollegeandisnowseekingemploymentwiththe
companyofherdreams.
Answer: C
Diff:1
56) Tobeconsideredofficiallyunemployed,apersonmustbeatleast16yearsold
A) andnotworking.
B) andnotinschoolandnotworking.
C) andbeadiscouragedworker.
D) andnotworkingbutisactivelyseekingemployment.
Answer: D
Diff:1
57) Overthelast100yearsintheUnitedStates,unemploymentreacheditshighestrate
A) inthe1920s. B) inthe1930s. C) inthe1970s. D) inthe1980s.
Answer: B
Diff:1
58) Thepopulationis1,200million,thelaborforceis150million,andthenumberofunemployedis
15million.Whatistheunemploymentrate?
A) 7.5percent B) 4.3percent C) 10percent D) 5percent
Answer: C
Diff:1
59) Tobeofficiallyclassifiedasunemployed,apersonmustbe
A) collectingunemploymentbenefits.
B) atleast18andnotworking.
C) atleast16,notworkingandactivelyseekingemployment.
D) laidofforfired.
Answer: C
Diff:1
60) Thelaborforceisdefinedas
A) allindividualswhoarecurrentlyemployed.
B) allindividualswhoareatleast16yearsoldandarecurrentlyemployed.
C) allindividualswhoareatleast16yearsoldandarecurrentlyemployedorunemployed.
D) allindividualswhoareatleast16yearsoldandareemployed,lookingforworkornot
lookingforwork.
Answer: C
Diff:1
61) Thelaborforceincludesallofthefollowingindividualswhoare16yearsorolderEXCEPT
A) peoplewhohaveneverbeeninthelaborforcebuthavejustfoundajob.
B) theemployed.
C) theunemployed.
D) peoplewhoareretiredandnotactivelyseekingwork.
Answer: D
Diff:2
62) Thedefinitionoftheadultpopulationisthosewhoare16yearsandolderandwhoare
A) employedorunemployed.
B) inthelaborforce.
C) inthelaborforceornotinthelaborforce.
D) notinthelaborforce.
Answer: C
Diff:1
63) Apersonwhohastakenmedicalleaveis
A) inthelaborforce. B) notinthelaborforce.
C) unemployed. D) ajobleaver.
Answer: A
Diff:2
64) Bythelegaldefinitionofunemployment,apersonwhohasquithisjobtotakecareofhis
childrenfulltimeis
A) unemployed. B) employed.
C) inthelaborforce. D) notinthelaborforce.
Answer: D
Diff:1
65) Thelaborforceisdefinedas
A) thenumberofpeopleover16yearsofage.
B) thenumberofpeoplewhoareworking.
C) thesumoftheemployedandtheunemployed.
D) thenumberofpeopleinblue-collarjobs.
Answer: C
Diff:1
66) Unemploymentisa________concept,measuringthe________.
A) flow;numberofpeoplewhoarefirstenteringthelaborforce.
B) flow;numberofpeoplewholosttheirjobswithinthelastweek.
C) stock;numberofpeoplewhoarenotworking.
D) stock;numberofpeopleatapointintimewhoarenotworkingbutwhoarelookingfor
work.
Answer: D
Diff:2
67) Unemploymentisa
A) flowconcept. B) stockconcept.
C) bothaflowandastockconcept. D) neitherastocknoraflowconcept.
Answer: B
Diff:2
68) Supposethatlastweek100,000peoplelosttheirjobsorquit.Wecansaythat
A) thenumberofunemployedincreasedby100,000people.
B) thenumberofunemployedincreasedbylessthan100,000peoplebecauseweshouldnot
countthosewhoquittheirjobs.
C) the100,000peoplerepresentaflowknownasjobdepartures.
D) the100,000peoplerepresentastockknownasthenewunemployed.
Answer: C
Diff:3
69) Lastmonth100millionpeoplewereinthelaborforcewith6millionbeingunemployed.200,000
peoplelosttheirjobslastmonthand300,000foundjobs.Distinguishingbetweenstockmeasures
andflowmeasures,thestockmeasuresare
A) thelaborforceonly.
B) thenumberofpeoplewholosttheirjobsandthenumberofpeoplewhofoundjobsonly.
C) thetotalnumberofpeoplewhoareunemployedonly.
D) thetotalnumberinthelaborforceandthetotalnumberofpeoplewhoareunemployed
only.
Answer: D
Diff:2
70) Lastmonth100millionpeoplewereinthelaborforcewith6millionbeingunemployed.200,000
peoplelosttheirjobslastmonthand300,000foundjobs.Distinguishingbetweenstockmeasures
andflowmeasures,theflowmeasuresare
A) thelaborforceonly.
B) thenumberofpeoplewholosttheirjobsandthenumberofpeoplewhofoundjobsonly.
C) thetotalnumberofpeoplewhoareunemployedonly.
D) thetotalnumberinthelaborforceandthetotalnumberofpeoplewhoareunemployed
only.
Answer: B
Diff:2
71) Supposethereare100millioninthelaborforce,and6millionunemployedpeople.Duringthe
nextmonth,200,000peoplelosetheirjobsand300,000findjobs.Thenewtotalofemployedis
________andthenewunemploymentrateis________.
A) 100.1million;5.8percent. B) 100million;6.1percent.
C) 94.1million;5.9percent. D) 93.9million;6.1percent.
Answer: C
Diff:2
72) SupposethepopulationofElCampois120,000.Ofthepopulation16yearsandolder,50,000are
employed,10,000haveneverworkedandarenotlookingforwork,5,000arenotworkingand
arelookingforwork,and15,000areretiredandnotlookingforwork.Thelaborforceequals
A) 50,000. B) 55,000. C) 65,000. D) 80,000.
Answer: B
Diff:2
QuestionStatus: Revised
73) SupposethepopulationofElCampois120,000.Ofthepopulation16yearsandolder,50,000are
employed,10,000haveneverworkedandarenotlookingforwork,5,000arenotworkingand
arelookingforwork,and15,000areretiredandnotlookingforwork.Thenumberunemployed
equals
A) 5,000. B) 10,000. C) 15,000. D) 20,000.
Answer: A
Diff:2
74) Inasmallcountry,thepopulationequals5,000.Thereare4,000peopleinthelaborforceand
3,000peopleareemployed.Theunemploymentrateequals
A) 0.25
B) 0.6
C) 0.75
D) anundeterminedamountgiventhelackofinformation.
Answer: A
Diff:3
75) Inasmallcountry,theadultpopulationis10,000.Inthatcountry,7,000peopleareinthelabor
forceand6,300peopleareemployed.Theunemploymentrateequals
A) 0.63percent.
B) 7percent.
C) 10percent.
Answer: C
Diff:2
76) Inasmallcountry,theadultpopulationequals10,000.Inthatcountry,8,000peopleareinthe
laborforceand200peopleareunemployed.Theunemploymentrateequals
A) 2.5percent.
B) 2percent.
C) 4percent.
Answer: A
Diff:2
77) Ajobloserisanindividual
A) inthelaborforcewhoseemploymentwasinvoluntarilyterminated.
B) whousedtoworkfulltimebutleftthelaborforceandhasnowreentereditlookingfora
job.
C) inthelaborforcewhoquitsvoluntarily.
D) whohasneverheldafull-timejoblastingtwoweeksorlongerbutisnowseeking
employment.
Answer: A
Diff:1
78) Areentrantisanindividual
job.
employment.
Answer: B
Diff:1
79) Ajobleaverisanindividual
job.
employment.
Answer: C
Diff:1
80) Anindividualinthelaborforcewhoseemploymentwasinvoluntarilyterminatedis
A) ajobleaver. B) ajobloser. C) ajobreentrant. D) partofthePPI.
Answer: B
Diff:1
81) AllofthefollowingareconsideredtobeunemployedEXCEPT
A) jobleavers. B) discouragedworkers.
C) jobreentrants. D) newjobentrants.
Answer: B
Diff:2
82) Newentrantstothelaborforceusuallyaccountforaround________percentofthe
unemployed.
A) ten B) twenty C) twenty-five D) thirty
Answer: A
Diff:1
83) Anewentrantisanindividual
job.
employment.
Answer: D
Diff:1
84) Theunemploymentratecanincreasewhen
A) thenumberofjobfindersincreases.
B) thesizeofthemilitaryincreases.
C) theproportionof18-22yearoldsthatgotocollegeincreases.
D) thenumberofunemployedworkersincreases.
Answer: D
Diff:1
85) Thedurationofunemploymenttendstorisewhen
A) peopleleavetheirjobsratherthanlosetheirjobs.
B) thenumberofentrantsexceedsthenumberofreentrants.
C) businessactivitystartsbackupafteralongperiodofdecline.
D) businessactivitygoesintoadownturn.
Answer: D
Diff:2
86) Discouragedworkers
A) areconsideredpartoftheunemployedbecausetheyarenotworking.
B) areconsideredpartoftheunemployedbecausetheyarestillinthelaborforce.
C) arenotconsideredpartoftheunemployedbecausetheyquittheirjobsvoluntarily.
D) arenotconsideredpartoftheunemployedbecausetheyarenotactivelyseekingwork.
Answer: D
Diff:2
87) Adiscouragedworkerissomeonewho
A) hasbeenfired. B) isunemployed.
C) isnotinthelaborforce. D) isemployed.
Answer: C
Diff:1
88) Onecriticismoftheunemploymentrateisthatit
A) doesnotincludethenumberofdiscouragedworkersasunemployed.
B) doesnotincludepeoplewhoarenotworkingandarenotlookingforwork.
C) countsanewentrantthatisactivelyseekingworkasunemployed.
D) isastockmeasure.
Answer: A
Diff:1
89) Theunemploymentratewilldecreasewhen
A) thedurationofunemploymentincreases.
B) theaverageworkweekfallsfrom40to39hours.
C) theageofthelaborforceincreases.
D) peoplegetdiscouragedandquitlookingforwork.
Answer: D
Diff:2
90) Thepercentageofthenoninstitutionalizedworking-ageindividualswhoareemployedor
seekingworkisknownas
A) thelaborforce.
B) thelaborforceparticipationrate.
C) discouragedworker.
D) thestockofemployedandunemployedworkers.
Answer: B
Diff:1
91) Anincreaseinthelaborforceparticipationrate
A) impliesthattheunemploymentratemustfall.
B) impliesthattheunemploymentratemustrise.
C) meanstherearemorediscouragedworkers.
D) isconsistentwitheitherariseorafallintheunemploymentrate.
Answer: D
Diff:2
92) Thelaborforceparticipationrateisthe
A) proportionofthenoninstitutionalizedadultpopulationinthelaborforce.
B) proportionofthelaborforcethatisemployed.
C) proportionofthelaborforcethatisunemployed.
D) proportionofthenoninstitutionalizedadultpopulationthatisemployed.
Answer: A
Diff:1
93) ThemajorchangeinAmericanlabormarketsthiscentury is
A) thesteadyriseoftheunemploymentrate.
B) thesteadyriseoftheemploymentrate.
C) theincreaseinthefemalelabor-forceparticipationrate.
D) theincreaseinthelabor-forceparticipationrate.
Answer: C
Diff:2
94) WhichofthefollowingwouldNOTbeafactorthathascontributedtotherisingfemalelabor
forceparticipationrate?
A) Greateraccesstoeducation
B) Greateraccesstotraining
C) Increasingfamilysize
D) Reductionofbarrierstocompetingwithmenforjobs
Answer: C
Diff:3
95) Inasmallcountry,theadultpopulationequals5,000.Thereare4,000peopleinthelaborforce
and3,000peopleareemployed.Thelaborforceparticipationrateequals
A) 25percent.
B) 80percent.
C) 30percent.
Answer: B
Diff:3
96) Inasmallcountry,theadultpopulationequals10,000.Thereare3,000peopleunemployedand
4,000peopleareemployed.Thelaborforceparticipationrateequals
A) 70percent.
B) 57percent.
C) 40percent.
Answer: A
Diff:3
97) Inasmallcountry,thereare5,000peopleinthelaborforceand3,000peopleareemployed.The
laborforceparticipationrateequals
A) 40percent.
B) 60percent.
C) 62.5percent.
Answer: D
Diff:3
98) Tobecountedinthelaborforce,
A) apersonhastobeworkingatleast40hoursperweek.
B) apersonhastobeatleast16orolder,haveajob,orifunemployedhastobeactively
seekingemployment.
C) aperson,irrespectiveofhisorherage,hastobeworkingor,ifoutofwork,actively
seekingemployment.
D) apersonhastobeover16yearsofage,irrespectiveofwhethersheorheisactivelyseeking
work.
Answer: B
Diff:1
99) TobecountedasunemployedintheUnitedStatesapersonhastobe
A) atleast16andoutofwork.
B) atleast16,outofwork,andactivelyseekingemployment.
C) atleast16andlessthan65andactivelyseekingemployment.
D) outofworkandactivelyseekingemployment.
Answer: B
Diff:2
100) AllofthefollowingareexamplesofaflowEXCEPT
A) anewentrantintothelaborforce.
B) anindividualwhovoluntarilyleavesthelaborforce.
C) apersonwhoisfiredfromajob.
D) thecurrentunemploymentrate.
Answer: D
Diff:1
101) Apersonwhoiscurrentlynotworkingandhasstoppedlookingforajobbecauseheorsheis
convincedthereisnojobavailableisclassifiedasa
A) discouragedworker. B) disgruntledworker.
C) depressedworker. D) dissatisfiedworker.
Answer: A
Diff:2
102) Thelaborforceparticipationrateis
A) thepercentageofthepopulationwhoareinthelaborforce.
B) thepercentageofthenon-institutionalizedworkingagepopulationwhoisinthelabor
force.
C) thepercentageofthenon-institutionalizedpopulationwhoisinthelaborforce.
D) thepercentageoftheentirepopulationwhoisinthelaborforce.
Answer: B
Diff:2
103) Since1950,thelaborforceparticipationrateintheUnitedStates
A) ofmenandwomenbothincreased.
B) ofmenincreasedandwomendecreased.
C) ofmenandwomenbothdecreased.
D) ofmendecreasedandforwomenincreased.
Answer: D
Diff:2
104) Whichoneofthefollowingstatementsistrue?
A) Theexistenceofunemploymentplacestheeconomyatapointinsideitsproduction
possibilitiescurve.
B) Theunemploymentrateisthepercentageofthepopulationnotworking.
C) Tobecountedaspartofthelaborforce,anindividualmustbeworkingmorethan40
hoursaweek.
D) Thesumofwageslostbyallunemployedworkersgivesanaccurate,comprehensive
estimateofthetotalcostofunemployment.
Answer: A
Diff:2
105) DuringtheGreatDepression,
A) theunemploymentratewasnotunusuallyhigh,butwagelevelswerelow.
B) unemploymentstatisticswerenotcollected.
C) theU.S.unemploymentratereacheditshistoricalhighest.
D) mostpeoplewhocouldntfindworkleftthelaborforce,sotheofficialunemploymentrate
remainedlow.
Answer: C
Diff:1
106) WhichoneofthefollowingindividualsisNOTcountedasunemployed?
A) arecentcollegegraduatecurrentlywithoutanyemploymentandlookingforherfirst
full-timejob
B) a35-year-oldwomanfiredfromherpriorworkbecauseofpoorperformanceandlooking
foranotherjob
C) a50-year-oldwomanlaidofffromherformerjobbecauseofadownturninthe
companyssalesandlookingforanotherjob
D) a22-year-oldaspiringactresscurrentlywithoutanyshowbusinessemployment,but
workingtemporarilyasawaitresswhilesheauditionsforactingjobs
Answer: D
Diff:1
107) Theaveragedurationofunemploymentacrossthelaborforceisabout
A) 25weeks. B) 15weeks. C) 8weeks. D) 4weeks.
Answer: B
Diff:1
108) Whatisthedefinitionofadiscouragedworker?
A) amemberofthelaborforcewhoisworkingbutisdiscouragedabouthisprospectsfor
advancementwithinthecompany
B) amemberofthelaborforcewhoisworkingbutisdiscouragedabouttheperformanceof
hiscompanywithintheindustry
C) apersonwhohasdroppedoutofthelaborforcebecauseheisdiscouragedabouthis
prospectsforemployment
D) anemployedmemberofthelaborforcewhoisdiscouragedabouthispay
Answer: C
Diff:2
109) WhichoneofthefollowingaccuratelydescribesthetrendsinU.S.laborforceparticipationover
thepast50years?
A) Thelaborforceparticipationrateofmenhasclimbedfromabout75percentto90percent.
B) Thelaborforceparticipationrateofwomenhasclimbedfrombelow40percenttoabout60
percent
C) Thelaborforceparticipationratesforbothmenandwomenhavedeclined.
D) Theoveralllaborforceparticipationratehasheldsteadyatabout85percent.
Answer: B
Diff:1
110) Isitpossiblefortheunemploymentratetoriseatthesametimethatthenumberofpeople
workingincreases?
A) No
B) Yes,ifthenewworkersareemployedlessthanfulltime
C) Yes,iflaborforcegrowthoutpacesgrowthinthenumberofpeopleworking
D) Yes,ifestablishedworkerskeeptheirjobsbutnolongerhavetheoptionofworking
overtime
Answer: C
Diff:3
111) Whichoneofthesefactorsplaysaroleindeterminingtheextentanddurationoffrictional
unemployment?
A) theeasewithwhichjobseekerscanobtaininformationaboutjobopenings
B) thedegreetowhichtheoveralllevelofbusinessactivityfluctuatesupanddown
C) theextenttowhichgovernmentlegislationrequiresfirmstoprovidehealthinsurancefor
employees
D) theeducationandskilllevelsoflaborforceparticipants
Answer: A
Diff:2
112) ThelaborforceintheUnitedStatesincludes
A) discouragedworkers.
B) thoseovertheageof16whoareemployedorareseekingemployment.
C) thosebetweenages12and16whoareactuallyworking.
D) alloftheabove.
Answer: B
Diff:2
Totalpopulation 745,000
Workingagepopulation 550,000
Numberemployed 361,000
Numberofunemployed 19,000
113) Usingtheabovetable,theemploymentrateis
A) 65.6percent. B) 48.5percent. C) 95.0percent. D) 69.1percent.
Answer: C
Diff:2
114) Usingtheabovetable,theunemploymentrateXis
Answer: B
Diff:2
115) Usingtheabovetable,thelaborforceis
A) 380,000. B) 911,000. C) 930,000. D) 569,000.
Answer: A
Diff:2
116) Usingtheabovetable,thelaborforceparticipationrateis
Answer: D
Diff:2
117) Unemploymentstatisticsareoftencriticizedfor
A) understatingthenumberofpeopleoutofwork,becausediscouragedworkersare
excludedinthestatistics.
B) overstatingthenumberofpeopleoutofwork,becauseretireesareincludedinthe
statistics.
C) understatingthenumberpeopleoutofwork,becausefull-timecollegestudentsare
excluded.
D) overstatingthenumberofpeopleoutofwork,becausetheunemploymentstatistics
includealllow-incomeworkers.
Answer: A
Diff:2
118) IfTimworksathometakingcareofthehousehold,
A) heispartofthelaborforce. B) heisnotpartofthelaborforce.
C) heisconsideredtobeemployed. D) heisconsideredtobeunemployed.
Answer: B
Diff:2
119) Whichofthefollowingwouldbeconsideredamemberofthelaborforce?
A) anengineerwhohasbeenlaidoffayearagoandsincethenhasnotlookedforwork
B) aninmateinastateprisonmakinglicenseplates
C) apersoninamentalinstitution
D) acomputerprogrammerlookingforwork
Answer: D
Diff:2
120) Whichofthefollowingpeoplewouldbeconsideredunemployedassumingthattheyare
activelyseekingemployment?
A) thosewhowerefiredfromtheirjob B) thosewhoresignedfromtheirjob
C) newentrantsintothejobmarket D) Alloftheabovearecorrect.
Answer: D
Diff:2
121) ThehighestmeasuredrateofunemploymentintheUnitedStatesoccurredduring
A) thepost-WWIIyears. B) thePanicof1893.
C) theCarteradministration. D) theGreatDepression.
Answer: D
Diff:1
122) WhichofthefollowinggroupswouldNOTbeconsideredaspartofthecivilianlaborforce?
A) full-timestudentswhoarenotworkingorlookingforwork
B) thosealreadyemployed
C) thosewhoareunemployed
D) allindividualsonlyworkingpart-time
Answer: A
Diff:2
123) Assumingthereare150millionpeopleemployedintheUnitedStatesand5millionpeople
unemployed,theunemploymentratewouldthereforeapproximatelyequal
Answer: B
Diff:1
124) Discouragedworkers
A) wouldbeconsideredasunemployed.
B) wouldnotbeconsideredasunemployed.
C) wouldbeconsideredaspartofthelaborforce.
D) would,accordingtosome,tendtoskewtheunemploymentrateupward.
Answer: B
Diff:3
125) Thedefinitionofajobloserisanindividual
A) whoquitshisjobvoluntarily.
B) whoseemploymentwasterminatedinvoluntarilyduetoadownturnintheeconomy.
C) whocompetedforapromotionathiscompanyanddidnotgetit.
D) whoisunderemployed.
Answer: B
Diff:1
126) Thedefinitionofajobleaverisanindividual
A) whoterminateshisjobvoluntarilyinordertoworkforafamilybusiness.
B) whoseemploymentwasterminatedinvoluntarily.
C) whocompetedforapromotionathiscompanyanddidnotgetit.
D) whoisunderemployed.
Answer: A
Diff:1
127) Since1950,itcanbeobservedthatthefemaleparticipationrateinourlaborforcehas
A) increased. B) decreased.
C) stayedconstant. D) movederraticallyupanddown.
Answer: A
Diff:1
128) Anindividualwhohasstoppedlookingforajobbecauseheisconvincedthathecannotfinda
jobisreferredtoas
A) acontingentworker. B) aproductiveworker.
C) adiscouragedworker. D) anunemployedworker.
Answer: C
Diff:1
129) Anniehadajobasahumanresourcemanagerofarestaurantchainthatwentoutofbusiness
duetoadownturnintheeconomy.Shelookedforworkforsixmonthsandgaveupbecauseshe
wasconvincedthatshecouldnotfindasuitablejobtofitherskillset.Inthisinstanceshewould
becountedasa
A) jobleaver. B) reentrant.
C) discouragedworker. D) laborforceparticipant.
Answer: C
Diff:2
130) Withregardtoemploymentstatus,theadultpopulationisdividedintowhatthreegroups?
Howisitdeterminedwhethersomeoneisinthelaborforceornot?
Answer: Theadultpopulationisinoneofthreegroupstheemployed,theunemployed,andthose
notinthelaborforce.Tobeinthelaborforce,onemustbe16yearsoldorolder,and
eitherbeworkingoractivelylookingforwork.
Diff:1
131) WhatarethefourcriteriausedbytheBureauofLaborStatisticstodeterminewhetheran
individualisunemployedornot?
Answer: Firstarejoblosers,whobecameunemployedvoluntarilythroughterminationorlayoff.
Secondarereentrants,whicharepeoplewhoworkedatafull -timejobbeforebuthave
beenoutofthelaborforceforawhile.Thirdarejobleaverswhovoluntarilyleavetheir
jobs,andthelastarenewentrants,whoarepeoplewhoneverworkedafull -timejobfor
twoweeksorlonger.
Diff:1
132) Whoarediscouragedworkers,andhowdotheyaffectlaborforceparticipationand
unemploymentrates?
Answer: Discouragedworkersarepeoplewhohavedroppedoutofthelaborforcebecausethey
dontbelievetheycanfindajobthattheywouldwant.Tobeconsideredinthelabor
force,onemustbeactivelylookingforwork,soadiscouragedworkerisnotconsidered
inthelaborforceandisnotconsideredunemployed.Hence,theexistenceofdiscouraged
workersimpliesthatthepublishedunemploymentratesunderstatethetruelevelof
unemployment.
Diff:2
133) Distinguishbetweenastockandaflow.Howdotheseconceptsrelatetounemployment?
Answer: Astockisaquantityofsomethingmeasuredatagivenpointintime,whileaflowisa
quantitymeasuredperunitoftime.Unemploymentisastockconcepttherearesomany
peopleoutofworkatagivenpointintime.Overtime,itincreasesordecreases
dependingonwhathappenstoflowssuchasjobfindersandjoblosers.
Diff:2
134) Ifthedurationofunemploymentincreases,whathappenstotheunemploymentrate,other
thingsbeingequal?Why?
Answer: Anincreaseinthedurationofunemploymentincreasestheunemploymentrate.If
workersstayunemployedlonger,otherthingsconstant,therewillbemoreworkers
unemployedatanygivenpointintime.
Diff:2
135) Whatisunemploymentandwhatistheunemploymentrate?Whatarethecostsof
unemployment?
Answer: Unemploymentreferstosomeonewhoiswithoutajobbutwhoisactivelylookingfor
work.Theunemploymentrateistheproportionofthelaborforce,whichisthepeople16
andolderwhoeitherareworkingorarelookingforwork,thatisunemployed.Thecost
ofunemploymentisthereducedoutputthatcouldhavebeenmadewithfull
employment,aswellasthepsychologicalcoststotheunemployed.
Diff:1
7.2TheMajorTypesofUnemployment
1) Frictionalunemploymentwillalwaysexistsince
A) someworkerswillalwayswanttomakeajobtransition.
B) thecapitalistsystempromotesunemployment.
C) mismatchesinskillswillalwaysexist.
D) theU.S.economywillcontinuetoshrink.
Answer: A
Diff:1
Topic: 7.2TheMajorTypesofUnemployment
2) SupposethatMattquitsajobwiththeXYZCorporationinordertolookformorerewarding
employment.Mattwouldbe
A) countedasstillbeingemployed.
B) includedintheeconomyshiddenemployment.
C) countedasfrictionallyunemployed.
D) countedascyclicallyunemployed.
Answer: C
Diff:1
3) Ifapersonlosesherjobbecauseherabilitiesandskillsareapoormatchwithcurrent
requirementsofemployers,thispersonisconsidered
A) structurallyunemployed. B) frictionallyunemployed.
C) adiscouragedworker. D) seasonallyunemployed.
Answer: A
Diff:1
4) Ifapersonisfiredforpoorperformancebutpossessesskillsrequiredtoobtainanotherjobafter
somesearching,thispersonisconsidered
A) seasonallyunemployed. B) frictionallyunemployed.
C) structurallyunemployed. D) adiscouragedworker.
Answer: B
Diff:2
5) Bobsassemblylinejobhasbeenreplacedbyrobots,andBoblacksabilitiesandskillsrequired
toattainotherjobs.Heisconsidered
C) seasonallyunemployed. D) adiscouragedworker.
Answer: A
Diff:2
6) Collinhaslosthisjobwithatelemarketingcompany,whichhasmoveditsoperationtoIndia.
Collinisconsidered
C) seasonallyunemployed. D) adiscouragedworker.
Answer: A
Diff:2
7) Manyeconomistswouldarguethatsomefrictionalunemployment
A) createsmassiveeconomicdisruptionsandshouldbeeliminatedasquicklyasfeasible.
B) shouldbeeliminatedwhateverthecost.
C) nolongerexistsbecauseincreasedunemploymentbenefitshavegenerallysolvedthis
problem.
D) cannotandprobablyshouldnotbeeliminated.
Answer: D
Diff:1
8) Frictionalunemploymentwouldincreasewhen
A) migrantworkersareunemployedafterharvestseason.
B) thenumberofindividualswhoquitonejobtofindanotherincreases.
C) discouragedworkersdropoutoftheworkforce.
D) workersarereplacedbymachinesinproduction.
Answer: B
Diff:1
9) Arecentaccountinggraduatefromamajorbusinessschoolissearchingforaplacetobeginhis
careerasanaccountant.Thisindividualis
A) structurallyunemployed. B) seasonallyunemployed.
C) cyclicallyunemployed. D) frictionallyunemployed.
Answer: D
Diff:1
10) Whenanindividualisfrictionallyunemployed,theunemploymentarisesfrom
A) ashort-termeliminationofjobsbecauseofaslowdowninbusinessactivity.
B) imperfectlabormarketinformationwhichrequiresindividualstosearchforappropriate
employment.
C) thepermanenteliminationofjobsbecauseofachangeinthestructureoftheeconomy.
D) areductionintheoveralldemandforlaborsskills.
Answer: B
Diff:1
11) Whichoneofthefollowingindividualswouldbeclassifiedasstructurallyunemployed?
A) Bennettlosthisconstructionjobbecausetherewasareductioninthenumberofhouses
builtduringthewinterof2010.
B) Gaillostherjobwiththestatebecausetherewasareductioninthestatebudget.
C) Tommylosthisjobwhenthesteelmillwhereheworkedclosedbecausedomestic
producerswouldnotproduceasefficientlyandcheaplyasforeignfirms.
D) FaylostherjobinearlyJanuarywhentheChristmasstorewheresheworkedclosed.
Answer: C
Diff:1
12) Thefactthatanumberoflifeguardslosetheirjobsattheendofeachsummerwouldbecounted
as
A) cyclicalunemployment. B) frictionalunemployment.
C) seasonalunemployment. D) structuralunemployment.
Answer: C
Diff:1
13) Alifeguardwhoisoutofworkinthewinteris
A) frictionallyunemployed. B) structurallyunemployed.
C) cyclicallyunemployed. D) seasonallyunemployed.
Answer: D
Diff:1
14) Anexampleofafrictionallyunemployedindividualis
A) Charles,whohaslosthisjobasanautoworkerbecauseofincreasedimports.
B) Mary,whoquitherjobtofindworkclosertoherhome.
C) Sam,wholosthisjobasarealestatesalespersonwhenthehousingmarketwentsoft.
D) Cynthia,whohasfewskillsandisnolongerlookingforwork.
Answer: B
Diff:1
15) Cyclicalunemploymentoccurswhen
A) individualsenterthelabormarketandmaketheroundsofpotentialemployers.
B) individualswithskillsnolongervaluedinthedomesticlabormarketcannotfind
employment.
C) individualsgiveupthesearchforemployment.
D) adownturnineconomicactivitydecreasesemployment.
Answer: D
Diff:1
16) Anexampleofacyclicallyunemployedindividualis
A) Charles,wholosthisjobasarealestatesalespersonwhenthehousingmarketwentsoft.
B) Alice,whoquitherjobtoentercollege.
C) Mary,wholostherjobinthetextileindustryfollowingadecreaseinthetariffontextiles.
D) Bob,whohasjustgraduatedfromcollegeandisenteringthelabormarket.
Answer: A
Diff:1
17) Ifanoutdoorvendorlosesherjobwhenwinterweathercomes,thisindividualis
A) seasonallyunemployed. B) cyclicallyunemployed.
C) structurallyunemployed. D) chronicallyunemployed.
Answer: A
Diff:1
18) Structuralunemploymentresultswhen
A) areductioninconsumerincomereducesdemandforproducts.
B) individualsenterthelabormarketinJunefollowinggraduation.
C) workersfacelayoffsfollowingadecreaseineconomicactivity.
D) theintroductionofaproductsubstituteleadstoalargedeclineinthemarketdemandfora
productsothatworkersspecializingintheproductionofthatproductfindthemselvesout
ofwork.
Answer: D
Diff:1
19) Whichofthefollowingexplainswhyfrictionalunemploymentexists?
A) Someworkershaveskillsthathavebecomeobsolete.
B) Thereareindividualswhoworkpart-timebutprefertoworkfull-time.
C) Therearecostsassociatedwithsearchingforjobs.
D) Policymakershavebeenunabletopreventrecessions.
Answer: C
Diff:2
20) Unemploymentthatiscausedbybusinessrecessionsiscalled
A) frictionalunemployment. B) cyclicalunemployment.
Answer: B
Diff:1
21) Apersonquitsherjobinordertospendtimelookingforabetterpayingjob.Thisisanexample
of
Answer: A
Diff:2
22) EnvironmentalregulationreducesthedemandforWestVirginiacoalandtheunemployment
rateinWestVirginiaincreases.Thisisanexampleof
C) structuralunemployment. D) regulatoryunemployment.
Answer: C
Diff:2
23) Unemploymentduetothefactthatworkershavedifficultyinthesearchforappropriatejob
offersis
A) frictionalunemployment. B) structuralunemployment.
C) cyclicalunemployment. D) seasonalunemployment.
Answer: A
Diff:1
24) Unemploymentthatresultsfromamismatchofworkersabilitiesandskillswithcurrent
requirementsofemployersis
Answer: B
Diff:1
25) Unemploymentthatresultsfrombusinessrecessionsthatoccurwhenaggregatedemandis
insufficienttocreatefullemploymentis
Answer: C
Diff:1
26) Unemploymentthatresultsfromtheseasonalpatternofworkinspecificindustriesis
Answer: D
Diff:1
27) Frictionalunemploymentalwaysexistsbecause
A) someworkersquittheirjobswithouthavinganotherjobalreadylinedup.
B) thegovernmenthasneverinstitutedfullemploymentpolicies.
C) workersarelazyandrefusetoacceptcertainjobs.
D) recessionsarenecessarysometimestokeeptheeconomyhealthy.
Answer: A
Diff:2
28) Frictionalunemploymentis
A) relatedtojobsearchdifficultiesforpotentialworkers.
B) aresultofapoormatchofworkersabilitiesandskillswithcurrentrequirementsof
employers.
C) aresultofbusinessrecessionsthatoccurwhenaggregatedemandisinsufficienttocreate
fullemployment.
D) aresultoftheseasonalpatternofworkinspecificindustries.
Answer: A
Diff:1
29) Aworkerwhohasquitherjobtoobtainahigherpayingjobwouldbeincludedinwhich
unemploymentcategory?
A) Frictionalunemployment B) Cyclicalunemployment
C) Structuralunemployment D) Seasonalunemployment
Answer: A
Diff:1
30) Topreventfrictionalunemployment,wewouldhaveto
A) makesurethatmarketdemandforgoodsisstableovertime.
B) eliminatethebusinesscycle.
C) preventpeoplefromleavingtheirjobsbeforefindinganotherjob.
D) makesureeveryonewenttocollege.
Answer: C
Diff:2
31) Structuralunemploymentis
A) duetothefactthatworkersmustsearchforappropriatejoboffers.
employers.
fullemployment.
Answer: B
Diff:1
32) Cyclicalunemploymentis
A) relatedtojobsearchdifficultiesforpotentialworkers.
employers.
fullemployment.
Answer: C
Diff:1
33) Cyclicalunemploymentiscausedby
A) technologicalchange.
B) fluctuationsinthebusinesscycle.
C) adynamiceconomyinwhichpeoplewanttoswitchjobssometimes.
D) predictableshiftsinproductionassociatedwithdifferentseasons.
Answer: B
Diff:1
34) Seasonalunemploymentis
A) duetothefactthatworkersmustsearchforappropriatejoboffers.
employers.
fullemployment.
Answer: D
Diff:1
35) Theseasonallyadjustedunemploymentrate
A) reportsonlyseasonalunemployment.
B) removestheseasonalvariationfromtheunemploymentrate.
C) isimpossibletocomputesincenooneknowswhattheseasonalcomponentequals.
D) isanothernameforstructuralunemployment.
Answer: B
Diff:1
36) Whichofthefollowingstatementsistrueabouttheseasonallyadjustedunemploymentrate?
A) Theseasonallyadjustedunemploymentrateisthesumofthefrictionalunemployment
rate,structuralunemploymentrate,andcyclicalunemploymentrate.
B) Theseasonallyadjustedunemploymentrateshowshowtheunemploymentratefluctuates
withthevariousseasons.
C) Theseasonallyadjustedunemploymentrateisthesameasthenaturalrateof
unemployment.
D) TheseasonallyadjustedunemploymentrateistheratecomputedforFall,Spring,Summer
andWinter.
Answer: A
Diff:1
37) Apersongraduatesfromcollege,thenstartstolookforajob.Thisisanexampleof
Answer: B
Diff:2
38) Whentheautomobilereplacedthehorseastheprimarymeansoftransportation,the
unemploymentrateofblacksmithsincreased.Thiswasanexampleof
Answer: D
Diff:2
39) Acutbackinthespaceprogramduetoasloweconomycausesanincreaseinunemployment
amongaeronauticalengineers.Thisisanexampleof
Answer: A
Diff:2
40) Arecessioncausesadecreaseinthedemandforhousing,resultinginsubstantiallayoffsinthe
constructionindustry.Thisisanexampleof
Answer: A
Diff:2
41) TheUnitedStatesexperiencedadeeprecessionbetween2007and2009.Whichtypeof
unemploymentwouldmostlikelyincreaseduringthatperiodofrecession?
A) cyclicalunemployment B) frictionalunemployment
C) seasonalunemployment D) structuralunemployment
Answer: A
Diff:2
42) ReductionsinemploymentintheU.S.autoindustrycausedbytheincreasedadoptionofnew
technologiestoproducecarsmoreefficientlyisanexampleof
Answer: D
Diff:1
43) Apersonwhoisemployedintheconstructionindustrymayfrequentlyexperience
C) seasonalunemployment. D) technologicalunemployment.
Answer: C
Diff:1
44) Corrinajustgraduatedfromcollege,isunemployed,andlookingforherfirstrealjob.Thisisan
exampleof
C) seasonalunemployment. D) cyclicalunemployment.
Answer: A
Diff:2
45) LoisworkedforGeneralMotorsandwaslaidoffwhencarsalesfellduringarecessionwith
fallingincomes.Thisisanexampleof
Answer: D
Diff:2
46) Supposethatunemploymentincreasesbecausethegovernmentrequiresemployerstoprovide
morefundsfortheiremployeesretirementprograms.Theincreaseinunemploymentismost
likelyaresultofanincreasein
C) thenaturalrateofunemployment. D) cyclicalunemployment.
Answer: B
Diff:2
47) Mrs.Garcialostherjobatatextilemillduetocompetitionfromcheaperimportedgoods.She
wouldbeclassifiedas
A) frictionallyunemployed. B) notinthelaborforce.
C) cyclicallyunemployed. D) structurallyunemployed.
Answer: D
Diff:2
48) Aftercompletingcollege,JohnSmithspenttwomonthslookingforajob.Duringthisperiodhe
wouldbeclassifiedas
A) frictionallyunemployed. B) notinthelaborforce.
C) cyclicallyunemployed. D) structurallyunemployed.
Answer: A
Diff:2
49) UnemployedU.S.residentswhoare,ineffect,merelysearchingforworkbetweenjobs,are
definedas
Answer: A
Diff:2
50) Fredrecentlylosthisjobasatelleratthebank.Thebankexplainedthattheywerereplacing
FrankandotherswithATMmachines.Fredfallsintoacategoryofunemploymentknownas
Answer: B
Diff:3
51) In2009,policymakersintheUnitedStatesweredealingwitharecession.Workerswhowere
laidoffduetotheeconomicslowdownwouldbe
Answer: C
Diff:3
52) Anniehadajobasahumanresourcemanagerofarestaurantchainthatwentoutofbusiness
duetoadownturnintheeconomy.Thisisanexampleof
A) cyclicalunemployment. B) structuralunemployment.
C) seasonalunemployment. D) technologicalunemployment.
Answer: A
Diff:2
53) TheunemploymentratereportedbytheBureauofLaborStatisticsincludesallofthefollowing
typeofunemploymentwiththeexceptionof
C) hiddenunemployment. D) cyclicalunemployment.
Answer: C
Diff:1
54) Apersonwhoisunemployedbecauseofamismatchbetweenthepersonsskillsandcurrent
employmentrequirementsisexperiencing
Answer: B
Diff:2
55) Describethemajortypesofunemployment.
Answer: Frictionalunemploymentisthecontinuousflowofpeoplefromjobtojob.Seasonal
unemploymentreferstochangesinemploymentrelatedtoseasonal -typeofwork,such
asworkatsummerresortsorwinterskilodges.Structuralunemploymentrefersto
unemploymentofworkersoverlengthyintervalsresultingfromskillmismatchesof
prospectiveemployeesabilitiesandskillswithrequirementsofemployers,andfrom
fewerjobsbeingofferedbyemployersconstrainedbygovernmentregulationsandlabor
marketpolicies.Cyclicalunemploymenthastodowiththoseunemployedduetoa
downturninbusinessactivity.
Diff:1
7.3FullEmploymentandtheNaturalRateofUnemployment
1) TheestimateofthecurrentnaturalrateofunemploymentrateintheUnitedStatesis
approximately
A) 0percent. B) 0.5percent.
C) 10percent. D) noneoftheabove.
Answer: D
Diff:1
Topic: 7.3FullEmploymentandtheNaturalRateofUnemployment
2) Whichofthefollowingbestdescribesaneconomywithfullemployment?
A) Everyonewhoislookingforajobwillhaveone.
B) Nopersonisunemployedforwhateverreason.
C) Fullemploymentoccursonlywhentheeconomyhasazeropercentunemploymentrate.
D) Thelevelofunemploymentthatcorrespondstothenormalfrictioninthelabormarket.
Answer: D
Diff:1
3) Fullemploymentdoesnotnecessarilymeanthateveryadulthasajobbecause
A) studentsandhomemakersarealwayslookingforwork.
B) therearealwayssomediscouragedworkers.
C) policymakersneverwanttoachievefullemployment.
D) therearetransactioncostsinfindingajobinthelabormarket.
Answer: D
Diff:1
4) ThenaturalrateofunemploymentdoesNOTincludewhichofthefollowing?
A) cyclicalunemployment B) frictionalunemployment
C) seasonalunemployment D) alloftheabove
Answer: A
Diff:1
5) Anunemploymentrateofzerocannotbeexpectedsince
A) therearesomepeoplewhodonotwanttowork.
B) therewillalwaysbediscouragedworkers.
C) someportionofthelaborforcewillalwaysbebetweenjobs.
D) aggregatedemandcannevercreateenoughjobvacancies.
Answer: C
Diff:1
6) Whichofthefollowingstatementsaboutfullemploymentiscorrect?
I. Fullemploymentmeansthattheunemploymentrateislessthan1/2of1percent.
II. Fullemploymentmeansthatthetransactioncostsassociatedwithgettingajobarezero.
Answer: D
Diff:1
7) Fullemploymentmeansthat
A) everyonewhowantsajobhasajob,althoughitmaynotbethejobtheyreallywant.
B) everyonewhowantsajobhasajob,andtheyhavethejobtheymostprefer.
C) takingseasonalfluctuationsintoaccount,onlyfrictionalandstructuralunemployment
exist.
D) thesumofstructuralandcyclicalunemploymentisgreaterthanfrictionalunemployment.
Answer: C
Diff:2
8) FullemploymentisdefinedbytheCouncilofEconomicAdvisersas
A) 4percent.
B) everyadultwhowantstoworkhasajob.
C) theunemploymentrateassociatedwithzeroinflation.
D) theunemploymentrateassociatedwiththenormalfrictionsinthelabormarket.
Answer: D
Diff:2
9) Thenaturalrateofunemploymentwhenseasonallyadjustedincludes
A) frictionalandstructuralunemploymentbutnotcyclical.
B) frictionalandcyclicalunemploymentbutnotstructural.
C) frictionalunemploymentonly.
D) cyclicalandstructuralunemploymentbutnotfrictional.
Answer: A
Diff:1
10) Inconditionsoffullemployment,
A) nooneinoroutofthelaborforceisunemployed.
B) theonlyunemploymentresultsfromanormalfrictionsandstructuralmismatchesinthe
labormarket.
C) theonlyunemploymentresultsfromcyclicalswingsineconomicactivity.
D) nooneinthelaborforceisunemployed.
Answer: B
Diff:1
11) Fullemploymentisnotzerounemploymentbecause
A) therearestatisticalerrorswhendeterminingtheunemploymentratethatcannotbe
overcome.
B) thereisnormalfrictionintheeconomymadeupofthoseworkerswhoarebetweenjobs
andthosenewentrantstothelaborforce.
C) thereareundocumentedworkersintheeconomywhoarenotcountedbytheBureauof
LaborStatistics.
D) governmentworkersarenotcountedinthelaborforce.
Answer: B
Diff:2
12) Currently,economistsestimatethatthenaturalrateofunemploymentintheUnitedStatesis
about
A) 10percent. B) 2percent. C) 5percent. D) 0percent.
Answer: C
Diff:1
13) Fullemploymentis
A) zerounemployment.
B) whentheunemploymentlevelisreducedtothegoalsetbyCongress.
C) theunemploymentlevelwhenthenormalfrictionintheeconomyistakeninaccount.
D) whenalladultslookingforworkcanfindfulltimeoccupation.
Answer: C
Diff:1
14) Thenaturalrateofunemploymentistherateofunemploymentthat
A) allworkersandemployershavefullyadjustedtoanychangesintheeconomy.
B) occurswhenallworkersfindworkintheeconomy.
C) isanunrealisticgoalsetbypolicymakers.
D) occurswhenemployersfindmorethanonejobapplicantforeachjobavailable.
Answer: A
Diff:2
15) FullemploymentintheUnitedStatestoday
A) meansa100%employmentrate.
B) means0%unemploymentfor6months.
C) meansabouta95%employmentrate.
D) meansthatthecyclicalunemploymentrateisabout5%.
Answer: C
Diff:2
16) Thelevelofunemploymentthatisequaltothefrictionalandstructuralrateinthelongrunis
sometimesreferredtoas
A) cyclicalemployment. B) thenaturalrateofunemployment.
C) thetotalrateofunemployment. D) thezerounemploymentrate.
Answer: B
Diff:2
17) Whatismeantbyfullemployment?Whyisntthefullemploymentratezero?Whatcauses
frictionalunemployment?
Answer: Fullemploymentisthelevelofunemploymentthatcorrespondstonormalfrictioninthe
labormarket.Sinceadynamiceconomywillalwaysexperiencechangesindemandfor
goodsandservices,therewillalwaysbesomefrictionalunemployment.Frictional
unemploymentreferstotheunemploymentresultingfromthetimepeoplespend
betweenjobs,lookingforotherwork.
Diff:3
7.4InflationandDeflation
1) Amajorelementoftheconceptsofinflation anddeflation is
A) theideathatpricechangesaremeasureddaily.
B) theirdependenceonaverageratherthanindividualprices.
C) therequirementthatALLpricesmustbemovinginthesamedirection.
D) eachhouseholdswillingnesstoreportwhattheypayforgoodsandserviceseachmonth.
Answer: B
Diff:1
Topic: 7.4InflationandDeflation
2) Asustaineddecreaseintheaverageofallpricesofgoodsandservicesintheeconomyisknown
as
A) inflation. B) disinflation. C) deflation. D) hyperinflation.
Answer: C
Diff:1
3) Thestatisticalmeasureofaweightedaverageofpricesofgoodsandservicesthatfirmsproduce
andsellisknownas
A) theinflationrate.
B) theconsumerpriceindex(CPI).
C) theproducerpriceindex(PPI).
D) theGrossDomesticProduct(GDP)deflator.
Answer: C
Diff:1
4) Inflationisbestdescribedasasituationinwhich
A) relativepricesarechanging.
B) somepricesarerisingfasterthanothers.
C) relativepricesarechanging,butthepurchasingpowerofthedollarisunchanged.
D) theaverageofallpricesareonasustainedriseoveraperiodoftime.
Answer: D
Diff:1
5) Deflationisdefinedasasituationinwhich
A) therateofinflationisbelow2percent.
B) theaverageofallpricesofgoodsandservicesinaneconomyisfalling.
C) thevalueofthedollarisrisingrelativetoothercurrencies.
D) theGrossDomesticProductsgrowthrateislessforagivenquarterthanitwasforthe
priorquarter.
Answer: B
Diff:1
6) Inflationisbestdefinedas
A) asustainedincreaseinthepriceofALLgoodsandservicesinaneconomy.
B) arelativepriceincrease.
C) asustainedincreaseintheaverageofallpricesofgoodsandservicesinaneconomy.
D) asustainedincreaseinthepriceofasinglegoodorservice.
Answer: C
Diff:1
7) Deflationreferstoasituationinwhich
A) theinflationratedecreases. B) theaverageofallpricesisfalling.
C) thereisarecessionandinflation. D) pricesarenotchanging.
Answer: B
Diff:1
8) Therateofinflationandthepurchasingpowerofmoneyare
A) positivelyrelated. B) totallyunrelated.
C) inverselyrelated. D) randomlyrelated.
Answer: C
Diff:2
9) Thefasterthedropinthepurchasingpowerofmoney,thefasterthe
A) dropintheinflationrate. B) dropinthedeflationrate.
C) increaseinthedeflationrate. D) increaseintheinflationrate.
Answer: D
Diff:2
10) Thevalueofyourmoneyincome,intermsofbuyinggoodsandservices,isreferredtoasyour
moneys
A) stayingpower. B) rigidityfactor.
C) purchasingpower. D) transactioncost.
Answer: C
Diff:1
11) Bydefinition,thepurchasingpowerofmoneyalwaysdropswhen
A) inflationoccurs.
B) deflationoccurs.
C) theeconomyisexperiencingfullemployment.
D) thereisapresidentialelectionyear.
Answer: A
Diff:1
12) Thenominalvalueofagoodis
A) thegoodsvalueexpressedinpurchasingpowerterms.
B) thegoodsanticipatedvalueoneyearfromnow.
C) thepriceofthegoodintodaysdollars,minusananticipatedinflationpremium.
D) thepriceofthegoodintodaysdollars.
Answer: D
Diff:1
13) Theformulaforcomputingabasicpriceindexis
A) (costofmarketbaskettoday/costofmarketbasketinbaseyear)100.
B) (costofmarketbasketinbaseyear/100) costofmarketbaskettoday.
C) (costofmarketbasketinbaseyear/costofmarketbaskettoday)100.
D) (100/costofmarketbasketinbaseyear) + costofmarketbaskettoday.
Answer: A
Diff:2
14) Ifthecurrentpriceofamarketbasketofgoodsis$850andthebaseyearpriceforthesame
marketbasketis$500,whatisthevalueofthepriceindex?
A) 140 B) 170 C) 120 D) 100
Answer: B
Diff:1
15) Assumethatthecurrentpriceofamarketbasketofgoodsis$2,500andthebaseyearpriceof
thesamemarketbasketis$1,340.Thepriceindexis
A) 53.6. B) 40.0. C) 138.3. D) 186.6.
Answer: D
Diff:1
Year CurrentWidget BaseWidget

Period Price Price
1 $0.75 $0.75
2 1.35 0.75
3 1.60 0.75
4 2.10 0.75
16) Accordingtotheabovetable,inYear3,thepriceindexforwidgetsis
A) 100. B) 213.3. C) 46.9. D) 180.
Answer: B
Diff:1
17) Accordingtotheabovetable,inthebaseperiod(Year1),thepriceindexis
A) 100. B) 213.3. C) 46.9. D) 180.
Answer: A
Diff:1
18) TheConsumerPriceIndexmeasures
A) theaverageofrawmaterialpricespaidbyproducingfirms.
B) thelevelofpriceswithrespecttogoodsandservicespurchasedbyatypicalconsumerin
urbanareas.
C) theaverageofthepricesofallgoodsproducedinacountryandgoodsimportedfrom
othercountries.
D) hourlywageratesofmanufacturingworkers.
Answer: B
Diff:1
19) Whichofthefollowingpriceindexesisdesignedtomeasurechangesinthepricesofgoodsand
servicespurchasedbyatypicalindividual?
A) ProducerPriceIndex B) GrossDomesticProduct(GDP)Deflator
C) IndexofLeadingEconomicIndicators D) ConsumerPriceIndex
Answer: D
Diff:1
20) Apriceindexshows
A) thecurrentcostofabasketofgoods.
B) therelativepriceofnecessities.
C) thepriceofgoodsinthefuture.
D) thecostoftodaysgoodsexpressedintermsofthecostofgoodsinabaseyear.
Answer: D
Diff:1
21) Assumethattherewasa10percentincreaseinthepriceofallgoodsin2010;ifthebaseyearis
2009,thenthepriceindexin2010willbe
A) 90. B) 110. C) 200. D) 1100.
Answer: B
Diff:1
22) Thestatisticalmeasureoftheweightedaverageofpricesofgoodspurchasedbyatypical
individualiscalledthe
A) ProducerPriceIndex.
B) GrossDomesticProduct(GDP)deflator.
C) ConsumerPriceIndex.
D) PersonalConsumptionExpenditureIndex.
Answer: C
Diff:1
23) Thebroadestindicationofeconomy-wideinflationiscapturedbythe
A) ConsumerPriceIndex.
B) GrossDomesticProduct(GDP)deflator.
C) ProducerPriceIndex.
Answer: B
Diff:1
24) Whichofthefollowingmeasuresgivestheearliestwarningofincreasinginflation?
A) TheConsumerPriceIndex
B) TheProducerPriceIndex
C) ThePersonalConsumptionExpenditureIndex
D) Alloftheseshouldsignalthesameshort-runinflation
Answer: B
Diff:1
25) Lastyearthepriceofadozeneggswas$1,andthisyearthepriceis$1.30.Whichofthe
followingdoesNOTexpressthispricechangeaccurately?
A) Thepriceincreased30percent.
B) Thepriceincreasedby30cents.
C) Iflastyearwasthebaseyear,theindexnumberforthisyearwouldbe130.
D) Ifthisyearisthebaseyear,theindexnumberforlastyearwouldbe130.
Answer: D
Diff:2
26) Lastyearyoupurchased20CDsat$12apiece,10shirtsat$15each,and5sweatersat$30each
(totalspendingequals$540).Thisyearyoubuy18CDsat$15each,10shirtsat$16each,and6
sweatersat$36each(totalspendingequals$640).Iflastyearsindexwas100,thisyearsindex
A) is119.6. B) is118.5. C) is83.6. D) is30.
Answer: B
Diff:3
27) Incomputingapriceindex,
A) themostrecentyearisalwayssetequalto100.
B) boththequantitiesinthemarketbasketandthepriceschangefromyeartoyear.
C) thequantitiesinthemarketbasketstaythesamewhilethepricesdiffer.
D) thebaseyearmustbeoneforwhichtheinflationratewaszero.
Answer: C
Diff:2
28) ThepriceindexthatmeasuresthechangesinpricesofALLgoodsandservicesproducedbythe
economyisthe
A) CPI.
B) PPI.
C) GrossDomesticProduct(GDP)deflator.
Answer: C
Diff:1
29) Theconsumerpriceindex(CPI)isameasureofinflationfor
A) farmers.
B) anelderlycouplerecentlyretiredtoYuma,Arizona.
C) AppleComputer.
D) atypicalconsumerofthemarketbasketusedtocalculatetheindex.
Answer: D
Diff:3
Market Quantity 2009 2010

Basket Price Price
CDs 10 $32 $24
Gasoline 200 gal $2.00 $2.50
30) If2009isthebaseyear,whatisthepriceindexforamarketbasketofgoodsfor2010inthe
abovetable?
A) 97.3
B) 102.8
C) 128.0
D) Zero,sincethepriceofCDsfellandthepriceofgasolineincreased
Answer: B
Diff:2
31) WhichofthefollowingisameasureofgeneralinflationthatisNOTbasedonafixedmarket
basketofgoodsandservices?
A) consumerpriceindex
B) producerpriceindex
C) personalconsumptionexpenditureindex
D) medicalpriceindex
Answer: C
Diff:1
32) Therelationshipbetweentheproducerpriceindex(PPI)andtheconsumerpriceindex(CPI)is
suchthat,intheshortrun,
A) theCPIusuallyincreasesbeforethePPI.
B) theCPIandthePPIusuallymovesimultaneously.
C) thePPIusuallyincreasesbeforetheCPI.
D) theCPIandthePPIusuallymoveinoppositedirections.
Answer: C
Diff:1
33) IftheBureauofLaborStatisticschangedthewayitcalculatestheconsumerpriceindex(CPI)so
astotakeintoaccountproductqualitychangesandthechangingmixofproductsandservices
purchasedbytheaveragefamily,theresultwouldmostlikely
A) showahigherrateofinflation.
B) showalowerrateofinflation.
C) causeanincreaseinSocialSecuritypayments.
D) causehigherwageincreasesforunionemployeeswithcontractsthatspecifyautomatic
wageboostswhentheCPIrises.
Answer: B
Diff:1
34) Inflationreferstothesituationwhen
A) thepricesofnecessitiesincrease.
B) theaverageofallpricesisincreasing.
C) allpricesrisebythesamerate.
D) therateatwhichpricesarerisingisrising.
Answer: B
Diff:1
35) Deflationisthesituationwhen
A) therateatwhichpricesincreasefalls.
B) theaverageofallpricesisdeclining.
C) therealrateofinterestisnegative.
D) somepricesareincreasingandsomearedeclining.
Answer: B
Diff:1
36) WhichofthefollowingstatementsisNOTtrueaboutinflation?
A) Inflationisasustainedincreaseintheaveragepricesofgoodsintheeconomy.
B) Duringaninflationaryperiod,thepricesofsomegoodswillincreasewhilethepriceof
somegoodswilldecrease.
C) Whenthereisinflation,thepurchasingpowerofadollardecreases.
D) Duringaninflationaryperiod,thepricesofallgoodswillincrease.
Answer: D
Diff:1
37) Thepurchasingpowerofmoneyincreaseswhen
A) theinflationrateincreases. B) thereisinflation.
C) thereisdeflation. D) therearemoredollarsintheeconomy.
Answer: C
Diff:2
38) Thevalueofmoneyforbuyinggoodsandservicesisknownas
A) inflation. B) nomination.
C) nominalincome. D) purchasingpower.
Answer: D
Diff:1
39) Whichofthefollowingstatementsistrueifyourmoneyincomestaysthesamebutthepriceof
onegoodthatyouarebuyinggoesup?
A) Youreffectivepurchasingpowerfalls.
B) Yournominalincomehasbeendecreased.
C) Youwillhavetoreducethequantitiesyoupurchaseofallgoods.
D) Yourrealincomehasincreased.
Answer: A
Diff:1
40) Thegreatertheinflationrate,the
A) fasterthedecreaseinthepurchasingpowerofmoney.
B) slowerthedecreaseinthepurchasingpowerofmoney.
C) betteritistoholdmoneyascash.
D) betteritistoputmoneyintosavingsaccounts.
Answer: A
Diff:2
41) Anincreaseinthepriceofelectricity,ceterisparibus,indicatesthat
A) thepurchasingpowerofmoneyisdecreasing.
B) thepurchasingpowerofmoneyisincreasing.
C) electricityisrelativelymorescarcethanitwasbefore.
D) inflationisincreasing.
Answer: C
Diff:2
42) Thevalueofanitemexpressedinpurchasingpowerthatvarieswiththeoverallpricelevelis
knownas
A) inflation. B) deflation.
C) thenominalvalue. D) therealvalue.
Answer: D
Diff:1
43) Thevalueofanitemexpressedintodaysdollarsisknownas
A) inflation. B) deflation.
C) thenominalvalue. D) therealvalue.
Answer: C
Diff:1
44) Robertreceiveda$100giftcertificatetoabookstoreayearago.Theeconomyhasbeeninan
inflationaryperiodforthelastyear.Thisgiftcertificateis
A) expressedinrealtermsandisworthmore.
B) expressedinnominaltermsandisworthless.
C) notexpressedineitherrealornominaltermssinceitisnotmoney.
D) adjustedintermsoftheCPI.
Answer: B
Diff:2
45) Apriceindexisthe
A) costofamarketbasketofgoodstoday.
B) costofamarketbasketofgoodsandservicesayearagoexpressedasapercentageofthe
costofthesamemarketbaskettoday.
C) costofamarketbasketofgoodsandservicestodayexpressedasapercentageofthecost
ofthesamemarketbasketduringabaseyear.
D) yearthatischosenasthepointofreferenceforcomparisonofpricesinotheryears.
Answer: C
Diff:1
46) Inthebaseyearthepriceindex
A) willbebetween1and100.
B) willalwaysequal100.
C) equals100timesthecostofthemarketbasketinthebaseyear.
D) willequaltheyear.
Answer: B
Diff:1
47) Theyearthatischosenasthepointofreferenceforcomparisonofpricesinotheryearsisknown
asthe
A) baseyear. B) priceindex.
C) purchasingpower. D) consumerpriceindex.
Answer: A
Diff:1
48) LastyearaCDhadapriceof$12andthisyearitis$15.WhichofthefollowingdoesNOT
expressthispricechangeaccurately?
A) Priceroseby25percent.
B) Priceroseby$3.
C) Ifthisyearisthebaseyear,theindexnumberforlastyearwouldbe80.
D) Iflastyearisthebaseyear,theindexnumberforthisyearwouldbe80.
Answer: D
Diff:2
49) Lastyearyoupurchased20shirtsat$15apiece,30CDsat$12each,and5sweatersat$25
apiece.Thisyearyoubuy20shirtsat$20apiece,30CDsat$12apiece,and5sweatersat$20a
apiece.Iflastyearsindexwas100,thisyearsindexis
A) 91.3. B) 102.0. C) 109.5. D) 9.5.
Answer: C
Diff:3
2005
MarketBasket 2005 2015
Commodity Quantity Price Price
A 50 3 4
B 75 2 3
50) Refertotheabovetable.YouaregiveninformationonJasminsconsumptionfor2005and2015.
Using2005asthebaseyear,computethepriceindexfor2015.Theindexequals
A) 1.5. B) 70.588. C) 141.667. D) 107.143.
Answer: C
Diff:3
2005
A 40 5 7
B 30 6 8
Using2005asthebaseyearcomputethepriceindexfor2015.Theindexequals
A) 0.75. B) 73.007. C) 87.50. D) 136.842.
Answer: D
Diff:3
2005
A 20 4 5
B 40 3 6
A) 170. B) 58.823. C) 0.5823. D) 0.17.
Answer: A
Diff:3
2005
A 30 7 9
B 80 6 18
A) 40.35. B) 247.826. C) 0.4035. D) 0.2478.
Answer: B
Diff:3
54) Ifallpricesintheeconomygoupfromoneyeartothenext,theCPIindex,usingtheprevious
yearasthebasewould
A) belessthan100.
B) begreaterthan100.
C) notbeinfluencedsincequantitieshaveremainedunchanged.
D) notbedeterminedsinceenoughinformationisgiven.
Answer: B
Diff:1
55) Whencomputingapriceindex,thebaseyearis
A) theearliestyearforwhichdataareavailable.
B) theyearthatischosenasthepointofreferenceforcomparisonofpriceswithotheryears.
C) themostrecentyearforwhichdataareavailable.
D) themostrecentyearinwhichtheinflationratewasclosetozero.
Answer: B
Diff:1
56) TheGDPdeflatoris
A) anindexthatutilizesaconsumersmarketbasketofgoodsincalculatingtheinflationrate.
B) themostgeneralindicatorofinflationsinceitmeasureschangesinthepricesofallgoods
andservicesintheeconomy.
C) anindexusedtocalculateinflationatthewholesalelevel.
D) theleastusedindexbecauseitissocostlytocalculate.
Answer: B
Diff:2
57) TheConsumerPriceIndex(CPI)isa
A) statisticalmeasureofaweightedaverageofpricesofaspecificsetofgoodsandservices
purchasedbyconsumersinurbanareas.
B) statisticalmeasureofaweightedaverageofpricesofcommoditiesthatfirmsproduceand
sell.
C) priceindexmeasuringthechangesinpricesofallnewgoodsandservicesproducedinthe
economy.
D) statisticalmeasureofaveragepricesusingannuallyupdatedweightsbasedonsurveysof
consumerspending.
Answer: A
Diff:1
58) TheProducerPriceIndex(PPI)isa
purchasedbywageearnersinurbanareas.
sell.
economy.
D) priceindexthattracksthepriceleveeofcommoditiesthatfirmspurchasefromotherfirms.
Answer: B
Diff:1
59) ThePersonalConsumptionExpenditureIndex(PCE)isa
sell.
economy.
D) statisticalmeasureofaveragepricesusingannuallyupdatedweightsbasedonsurveysof
consumerspending.
Answer: D
Diff:1
60) TheGDPdeflatorisa
sell.
economy.
D) priceindexthattracksthepricelevelofcommoditiesthatfirmspurchasefromotherfirms.
Answer: C
Diff:1
61) Supposemedicalcaremakesup5percentoftheCPIindex,andthatpricesriseinthemedical
careareafasterthanintherestoftheeconomy.Anelderlycouplespends15percentoftheir
incomeonmedicalcare.Forthiscouple,theCPI
A) understatestheinflationratebecauseoftheimportanceofmedicalcareforthisfamily.
B) overstatestheinflationratebecausethisfamilyisnottypicalofthecountryasawhole.
C) understatestheinflationratebecausetheCPIalwaysunderstatesinflation.
D) isagoodmeasureofinflationsincethebiasinherentintheCPIisoffsetbytheincreased
emphasisonhealthcareforthisfamily.
Answer: A
Diff:3
62) FortheCPI.thevalueoftheindexinthebaseyear
A) alwaysequals100.
B) dependsuponpriceandquantitythatareconstantlychanging.
C) isalwaysgreaterthan100.
D) dependsuponwhatpricesdidtheyearbefore.
Answer: A
Diff:1
63) Theindexthatisnotbasedonafixedmarketbasketofgoodsandservicesisthe
A) CPI. B) PPI.
C) WholesalePriceIndex. D) GDPPriceDeflator.
Answer: D
Diff:1
64) Theindicesthatarebasedonafixedmarketbasketofgoodsandservicesare
A) CPIandGDPdeflator. B) PPIandGDPdeflator.
C) CPIandPPI. D) CPI,PPIandGDPdeflator.
Answer: C
Diff:1
65) TheCPItendstooverstatethetrueinflationratebecause
A) wecannotknowwhatthetrueinflationrateis.
B) itfailstoconsidertheeffectsofnewproductsinthemarketplace.
C) themarketbasketactuallyselectedisinappropriate.
D) themarketbasketfailstoweighhousingcostssufficiently.
Answer: B
Diff:2
66) WhichofthefollowingisNOTacriticismoftheCPI?
A) TheCPIdoesnotaccountforthewayconsumersubstitutelessexpensiveitemsforhigher
priceditems.
B) TheCPIignoreschangesinconsumptionpatternsthatoccurbetweenyearsinwhichit
revisestheindex.
C) TheCPIignoressuccessfulnewproductsuntillongaftertheyhavebeenintroduced.
D) TheCPIignoresthechangesofpricesofgoodsthatfirmsproduceandselltoeachother.
Answer: D
Diff:1
67) ThroughoutU.S.history,inflationhasbeenhighest
A) rightafterarecession. B) rightbeforearecession.
C) duringperiodsofwar. D) duringRepublicanadministrations.
Answer: C
Diff:1
Year1Prices Year2Prices
5textbooks $75/book $80/book
100pens $2/pen $2.50/pen
68) Usingtheabovetable,thefollowingistheoutputofatwo -producteconomy.Thepriceindexin

thiseconomyinYear2,assumingYear1isthebaseyear,is
A) 113.0. B) 88.5. C) 107.1. D) 106.7.
Answer: A
Diff:2
69) Inflationcanbedefinedas
A) anincreaseinthepurchasingpowerofmoney.
B) adecreaseinthepurchasingpowerofmoney.
C) nochangeinthepurchasingpowerofmoney.
D) anincreaseinrealincome.
Answer: B
Diff:1
70) WhichofthefollowingisNOTameasureofthegenerallevelofprices?
A) ConsumerPriceIndex B) ProducerPriceIndex
C) GDPDeflator D) PersonalSalesDeflatorIndex
Answer: D
Diff:1
71) Anincreaseininflationwillcauseareductioninwhichofthefollowing?
A) thenominalvalueofmoney B) theProducerPriceIndex
C) theGDPdeflator D) therealvalueofmoney
Answer: D
Diff:1
72) Whichoneofthefollowingistrue?
A) Inflationincreasestherealvalueofmoney.
B) Inthebaseyear,thevalueofapriceindexis100.
C) Theconsumerpriceindexmeasureschangesintheaverageincomeofconsumers.
D) Themarketbasketdefinedfortheconsumerpriceindexcontainsmoreitemsthandoesthe
marketbasketdefinedfortheGDPdeflator.
Answer: B
Diff:2
73) EconomistsagreethatthestructureoftheConsumerPriceIndexhassomeproblemsthatlimit
itsusefulnessasareliablemeasureofinflation.Whatisoneofthesedrawbacks?
A) Itisbasedonthefaultyassumptionthateachconsumerbuysonlyoneunitofeachitem.
B) Itisbasedonthefaultyassumptionthatconsumptionchoicesarenotinfluencedby
incomelevels.
C) Itignoreschangesinconsumptionpatternsbroughtaboutbychangesintherelativeprices
ofconsumergoods.
D) Itisbasedonamarketbasketofmail-orderitemsanddoesnotincludethegoodsthat
consumerstypicallypurchase.
Answer: C
Diff:3
74) Whichgovernmentagencycompilestheconsumerpriceindex?
A) theCongressionalBudgetOffice
B) theGovernmentAccountingOffice
C) theBureauofLaborStatistics
D) Itisnotcompiledbyagovernmentagency,butratherbyanindependentresearch
institutioncalledtheConferenceBoard.
Answer: C
Diff:1
75) WhichisthebroadestpriceindexreportedintheUnitedStates?
A) theCPI-U B) theGDPdeflator
C) theconsumerpriceindex D) theproducerpriceindex
Answer: B
Diff:1
76) TheGDPdeflatorisnotafixed-quantitypriceindex,buttheCPIis.Whatisthesignificanceof
thisfact?
A) TheGDPdeflatordoesnotincludeenoughitemsinitsmarketbasket.
B) AbaseyearcannotbedefinedfortheGDPdeflator.
C) TheGDPdeflatorreflectsnotonlychangesinprices,butalsochangesinconsumption
patternsasconsumerssubstitutebetweengoods.
D) TheGDPdeflatoroverstatesthetruerateofinflation,whereastheCPIunderstatesit.
Answer: C
Diff:3
77) HowhasthepatternofmovementsintheU.S.pricelevelchangedsinceWorldWarII?
A) Periodsofinflationhavelargelybeeneliminated.
B) Periodsofdeflationhavelargelybeeneliminated.
C) Theannualrateofinflationhasneverrisenabove3percent.
D) Thepricelevelhasbecomemorevolatile.
Answer: B
Diff:2
78) Thepriceindexforanydesignatedbaseyearmustalwaysequal
A) theCPIforthatyear.
B) 0.
C) 100.
D) onedividedbythenominalpricechangefortheyear.
Answer: C
Diff:1
79) ThegovernmentagencywhichhasbeengiventhetaskofcalculatingtheConsumerPriceIndex
(CPI)is
A) theBureauofEconomicResearch. B) theDepartmentofState.
C) theCouncilofEconomicAdvisors. D) theBureauofLaborStatistics.
Answer: D
Diff:1
80) Thepurchasingpowerofthedollar
A) increasesasthepriceofbasicgoodsandservicesincreases.
B) istheamountofgoodsandservicesthatcanbepurchasedwiththedollar.
C) hasbeenrisingintheUnitedStatessince1945.
D) hasremainedunchangedinthelast20years.
Answer: B
Diff:1
CommodityMarket 2010Price CostofMarket2015PriceCostofMarket

BasketQuantity perUnit Basketin2010perUnitBasketin2015
Milk 10gallon 2.00 20.00 2.50 25.00
Eggs 10dozen 2.00 20.00 3.00 30.00
Bread 10loaves 2.00 20.00 3.00 30.00
81) Inthetableshownabove,thetotalcostofthemarketbasketin2010was
A) $6.00. B) $8.50. C) $60.00. D) $85.00.
Answer: C
Diff:2
82) Inthetableshownabove,thetotalcostofthemarketbasketin2015was
A) $6.00. B) $8.50. C) $60.00. D) $85.00.
Answer: D
Diff:2
83) If2010isthebaseyearinthetableshownabove,whatisthepriceindexfortheyear2010?
A) 100.0 B) 121.3 C) 147.1 D) 141.7
Answer: A
Diff:2
84) If2010isthebaseyearinthetableshownabove,whatisthepriceindexfortheyear2015?
A) 100.0 B) 114.7 C) 147.1 D) 141.7
Answer: D
Diff:2
85) Consideringthedatainthetableshownaboveand2010asthebaseyear,whatistheinflation
ratebetweenyears2010and2015?
A) 0.0percent B) 41.7percent C) 17.1percent D) 3.4percent
Answer: B
Diff:3

ATwo-GoodMarket
MarketBasket 2010Price 2015Price
Item Quantity perUnit perUnit
LightBulbs 500 $1.00 $2.00
Volleyballs 1,000 $5.00 $7.00
86) Inthetableshownabove,assumingthatthemarketbasketcostoflightbulbsandvolleyballsin
thebaseyearwas$4500,whatwouldthepriceindexforthistwo -goodmarketequalintheyear
2010?
A) 104.86 B) 100.00 C) 112.52 D) 122.22
Answer: D
Diff:3
87) Consideringthedatafromthetableshownabove,assumingthatthemarketbasketcostoflight
bulbsandvolleyballsinthebaseyearwas$4500,whatwouldbethepriceindexfortheyear
2015?
A) 177.78 B) 156.30 C) 100.00 D) 92.70
Answer: A
Diff:3
88) IntheUnitedStates,mostoftenthe________changesfirst,andthe________follows.
A) CPI;PPI B) GDPdeflator;CPI
C) PPI;CPI D) PCE;CPI
Answer: C
Diff:2
89) Thetermmarketbasketmeansa
A) collectionofgoodsthatcanfitintoanaverageshoppingcart.
B) collectionofgoodsthatchangeseveryyearandisdefinedbyCongress.
C) collectionofgoodsthatisusedbyatypicalfamily.
D) collectionofgoodsthatispurchasedduringaholidayseason.
Answer: C
Diff:1
90) Themarketbasketcost$300in2013,whileitcost$250inthebaseyear.Therefore,theprice
indexfor2013is
A) 83.
B) 120.
C) 80.
D) cannotbecalculatedbecausetheinflationrateisnotgiven.
Answer: B
Diff:2
91) Youreceiveafivepercentraiseinyourhourlywage.Theinflationrateisfourpercent.Your
purchasingpowerhas
A) increased. B) decreased.
C) stayedthesame. D) isindeterminate.
Answer: A
Diff:1
92) Youreceivea5percentraiseinyoursalary.Theinflationrateis6percent.Thepurchasing
powerofyoursalaryhas
A) increasedby1percent. B) decreasedby1percent.
C) increasedby11percent. D) decreasedby11percent.
Answer: B
Diff:1
93) In2013,thepriceforamarketbasketofconsumergoodsis$1,600.Inthebaseyear,thecostof
theidenticalmarketbasketwas$1,000.Thepriceindexinthiscaseis
A) 16.0. B) 130.0. C) 200.0. D) 160.0.
Answer: D
Diff:2
94) In2013,thepriceforamarketbasketofconsumergoodsis$800.Inthebaseyear,thecostofthe
identicalmarketbasketwas$1,000.Thepriceindexinthiscaseis
A) 80.0. B) 130.0. C) 800.0. D) 180.0.
Answer: A
Diff:3
95) Accordingtoyourtext,duringthe2000s,theinflationratewasinwhichrangeofpercentages?
A) 0-5% B) 5-10% C) 10-15% D) 15-20%
Answer: A
Diff:1
96) Howareinflationandthepurchasingpowerofmoneyrelated?
Answer: Inflationisthesituationinwhichtheaveragepriceofallgoodsandservicesisrising.The
purchasingpowerofmoneyisthevalueofmoneyforbuyinggoodsandservices.The
fastertheinflationratethegreaterthedropinthepurchasingpowerofmoney.
Diff:1
97) Inwhatwaysistheconsumerpriceindexflawed?
Answer: ThereareatleastthreeproblemswiththeCPI.First,itisafixed-quantityindex,which
meansthatitdoesnttakeintoconsiderationthewaypeoplechangetheirpurchasesof
goodsandserviceswhentherearerelativepricechanges.Second,itfailstoaccountfor
qualitychangesingoods.Third,itignorestheintroductionofnewgoods.
Diff:3
98) Whatisapriceindex?HowdotheCPI,thePPI,thePCEIndexandtheGDPdeflatordiffer?
Answer: Apriceindexisthecostoftodaysmarketbasketofgoodsandservicesexpressedasa
percentageofthecostofthesamemarketbasketduringabaseyear.TheCPI,PPI,and
GDPdeflatordifferinthegoodsandservicestheycover.TheCPImeasurespricechanges
forgoodsandservicespurchasedbyconsumers.ThePPImeasurespricechangesfor
goodsandserviceschargedbyfirms.ThePCEIndexmeasuresaweightedaverageof
pricesofconsumergoodsandservicesbasedoncontinuouslyupdatedsurveysof
consumerspurchases.TheGDPdeflatormeasureschangesinpricesofeverything
producedintheeconomy.
Diff:2
7.5AnticipatedversusUnanticipatedInflation
1) Typically,nominalinterestratesandanticipatedinflationrates
A) moveinoppositedirections.
B) arenotrelated.
C) moveinthesamedirection.
D) aresuchthatthenominalrateisone-halftheanticipatedrate.
Answer: C
Diff:1
Topic: 7.5AnticipatedversusUnanticipatedInflation
2) Unanticipatedpositiveinflationwillcreate
A) lossesforcreditorsandgainsfordebtors.
B) lossesforbothcreditorsanddebtors.
C) gainsforbothcreditorsanddebtors.
D) gainsforcreditorsandlossesfordebtors.
Answer: A
Diff:1
3) Mostoftheproblemscausedbyinflationarecausedbythefactthat
A) therearenowaysavailableforpeopletoprotectthemselvesagainstinflation.
B) anticipatedinflationinducespeopletoprotectthemselvesagainstinflation.
C) inflationcausesthepurchasingpowerofthedollartoincrease.
D) theinflationisoftenunanticipatedandthereforecomesasasurprisetoindividualsinthe
economy.
Answer: D
Diff:2
4) Fullyanticipatedinflationoccurswhen
A) theactualinflationrateequalstheanticipatedinflationrate.
B) theactualinflationrateislessthantheanticipatedinflationrate.
C) theinflationrateiszero.
D) theanticipatedinflationrateandtheunanticipatedinflationrateareequal.
Answer: A
Diff:2
5) Therealrateofinterestisthe
A) nominalrateofinterestminustheanticipatedrateofinflation.
B) currentrateactuallypaidbytheborrower.
C) differencebetweenthebankslendingandsavingsrates.
D) currentratewhichthegovernmentpaysonitsdebt.
Answer: A
Diff:1
6) Iftherateofinflationis4percentandtherealinterestrateis3percent,thenominalinterestrate
shouldbe
Answer: C
Diff:1
7) Underwhichoneofthefollowingsituationswouldyoubebetteroff?
A) Youhave$10,000inyoursavingsaccountpaying5percentperyearandunanticipated
inflationis8percentperyear.
B) Youhavepaid$500fora$1,000U.S.savingsbondthatmaturesin10yearsand
unanticipatedinflationis10percentperyear.
C) Youlendafriend$1,000at6percenttoberepaidinoneyearandunanticipatedinflationis
7percentduringtheyear.
D) Youborrowed$2,500at7percenttopayforthisyearscollegeexpensesandunanticipated
inflationis12percentduringtheyear.
Answer: D
Diff:2
8) Supposethatyouborrow$5,000fromthebanktopurchasesomelandandyouagreetopay9
percentinterestontheloan.Iftheloanmustberepaidin12monthsandtheinflationrateis13
percentduringtheyear,then
A) youwillrepaythebankwithdollarswithmorepurchasingpowerthanyouinitially
borrowed.
B) youwillrepaythebankwithfewerdollarsthanthebankinitiallyloanedyou.
C) youwillrepaythebankwithdollarswithlesspurchasingpowerthanitinitiallyloaned
you.
D) thebankwillreceivefewerdollars,becauseofinflation,thanithadinitiallyexpectedto
receive.
Answer: C
Diff:2
9) Therealrateofinterestisdefinedas
A) zero.
B) thenominalrateofinterest.
C) thenominalrateofinterestminustheanticipatedinflationrate.
D) thenominalrateofinterestplustheanticipatedinflationrate.
Answer: C
Diff:2
10) Theannualrateofinflationaveraged2percentduringthepastdecade,butborrowersand
lendersanticipatethatthepricelevelwillriseatarateof3percentnextyear.Thecurrent
nominalinterestrateis7percent.Therealrateofinterestis
Answer: D
Diff:2
11) Assumeyouborrowfundstobuyanewcarat10percentinterestandyouthinkthatthe
economy-widerateofinflationoverthelifeoftheloanwillbe8percent.Ifyouarecorrectin
yourassumption,yourrealrateofinterestonthecarloanwillbe
Answer: A
Diff:1
12) Whostandstogainasaresultofunanticipatedinflation?
A) Creditors B) Debtors
C) Personslivingonafixedincome D) Retiredindividuals
Answer: B
Diff:1
13) Duringaperiodofunanticipatedinflation,thegroupthatismostlikelytobenefitis
A) debtors. B) savers.
C) creditors. D) retiredindividuals.
Answer: A
Diff:1
14) Whentheunanticipatedinflationrateiszero,
A) creditorsgainattheexpenseofdebtors.
B) debtorsgainattheexpenseofcreditors.
C) neithercreditorsnotdebtorsgainorlose.
D) bothcreditorsanddebtorsloseattheexpenseofthegovernment.
Answer: C
Diff:2
15) Thecostofinflationtosocietyincludes
I. Theopportunitycostsofresourcesusedbypeopletoprotectthemselvesagainstinflation
II. Thecostsassociatedwithrecalculatingprices
Answer: C
Diff:3
16) Inflationcancauseamisallocationofresourcesbecause
A) inflationdoesntproceedevenlywhichmeansthatpeoplehaveadifficulttime
determiningwhenapricechangesignalsachangeinrelativeprices.
B) firmshavetochangetheirpricelabelsatunusualtimes.
C) thenominalrateofinflationdoesntequaltherealrateofinflation.
D) peopleareencouragedtoborrowtoomuch.
Answer: A
Diff:3
17) Anunexpectedreductionininflationwouldtendtobenefitwhichofthefollowing?
A) creditors B) debtors
C) creditorsanddebtors D) neithercreditorsnordebtors
Answer: A
Diff:1
18) Formostpeople,theproblemsofinflationarecausedbythefactthat
A) theinflationisunanticipated.
B) theinflationisanticipated.
C) theinflationratecausesthepurchasingpowerofmoneytoincrease.
D) allpriceschangesothereisnowaytoprotectthemselvesagainstthedeclineintheir
wealth.
Answer: A
Diff:2
19) Unanticipatedinflationoccurswhen
A) everyoneknowsperfectlythetruerateofinflation.
B) theactualinflationratediffersfromtheanticipatedinflationrate.
C) theinflationrateiszero.
D) thereisnochangeinthepurchasingpowerofmoney.
Answer: B
Diff:1
20) Supposetheactualinflationrateislessthantheanticipatedinflationrate.Giventhis
information,weknowwithcertaintythattherealrateofinterest
A) isnegative.
B) ismorethanthenominalrateofinterest.
C) equalsthenominalrateofinterest.
D) noneoftheabove(i.e.,moreinformationisneededtoanswerthisquestion).
Answer: D
Diff:2
21) Thenominalrateofinterestis
A) CPIminusaninflationarypremium.
B) PPIminusaninflationarypremium.
C) themarketrateofinterestexpressedintodaysdollars.
D) therealrateofinterestminustheanticipatedrateofinflation.
Answer: C
Diff:1
22) Therealrateofinterestis
A) thenominalrateofinterestdividedbytheanticipatedrateofinflation.
B) negativeiftheanticipatedrateofinflationiszero.
D) thenominalrateofinterestminustheanticipatedrateofinflation.
Answer: D
Diff:1
23) Withrespecttotheinterestrate,theinflationarypremium
A) isaddedtothenominalrateofinteresttoobtaintherealrateofinterest.
B) istheinterestrateexpressedintodaysdollars.
C) coversanticipateddepreciationinpurchasingpower.
D) isderivedfromtheCOLA.
Answer: C
Diff:1
24) Thepricelevelhasbeenrising5percentayearfortwentyyearsandisexpectedtocontinueto
doso.Thenominalrateofinterestis8percent.Therealrateofinterestis
A) 0percent. B) 8/5= 1.6percent.
C) 3percent. D) 5percent.
Answer: C
Diff:2
25) Theinflationratehasbeen4percentfortwentyyears,andthenominalinterestratehasbeen8
percentduringthissametimeperiod.Suddenly,thepublicanticipatesthattheinflationratewill
be8percentthiscomingyear.Therealrateofinterestforthecomingyearis
Answer: A
Diff:2
A) theinterestrateobservedintodaysmarket.
B) theinterestrateobservedinthemarketminustheinflationpremium.
C) notinfluencedbyinflation.
D) avaluethatdependsuponthestockmarket.
Answer: A
Diff:1
A) theinterestrateobservedinthemarket.
B) theinterestrateobservedinthemarketminustheanticipatedinflationrate.
C) notinfluencedbyinflation.
D) avaluethatdependsuponthestockmarket.
Answer: B
Diff:1
28) Therealrateofinterestequals5%andtheexpectedrateofinflationequals2%.Thenominalrate
ofinterestequals
A) 2%. B) 3%. C) 5%. D) 7%.
Answer: D
Diff:1
29) Therealrateofinterestequals8%,andtheexpectedrateofinflationequals2%.Thenominal
rateofinterestis
A) 2%. B) 6%. C) 8%. D) 10%.
Answer: D
Diff:1
30) Debtorsgainandcreditorslosewhen
A) theanticipatedrateofinflationisgreaterthantheactualrateofinflation.
B) theanticipatedrateofinflationislessthantheactualrateofinflation.
C) theanticipatedrateofinflationisthesameastheunanticipatedrateofinflation.
D) theunanticipatedrateofinflationiszero.
Answer: B
Diff:2
31) Themenucostofinflationinvolves
A) themistakesproducersmakeinadjustingprices.
B) themistakepeoplemakewhentheydonotknowtheactualrateofinflation.
C) cost-of-livingadjustments.
D) thecostsassociatedwithchangingpricelists.
Answer: D
Diff:1
32) Unanticipatedpositiveinflation
A) hurtseveryone. B) hurtscreditors.
C) hurtsdebtors. D) benefitsbanks.
Answer: B
Diff:1
33) ACOLAis
A) unanticipatedpositiveinflation.
B) unanticipatednegativeinflation.
C) thecostassociatedwithrecalculatingpricesandprintingnewpricelistswhenthereis
inflation.
D) anautomaticincreaseinwagesthattakesintoaccountincreasesinthepricelevel.
Answer: D
Diff:1
34) Aclauseinacontractthatautomaticallyincreaseswagestoaccountforincreasesintheprice
levelis
A) theGDPdeflation. B) thePCEindex.
C) aCOLA. D) therealrateofinterest.
Answer: C
Diff:1
35) ThepurposeofCOLAsistoprotect
A) lenders. B) borrowers. C) workers. D) businesses.
Answer: C
Diff:1
A) Thenominalrateofinterestistherealrateplustheanticipatedrateofinflation.
B) Therealrateofinterestisthenominalrateplustheanticipatedrateofinflation.
C) Increasesinanticipatedinflationincreasetherealinterestrate.
D) IncreasesintheCPIincreasetherealinterestrate.
Answer: A
Diff:2
37) Therealrateofinterestcanbedefinedasthe
A) nominalinterestratelesstheanticipatedrateofinflation.
B) anticipatedrateofinflationlessthenominalinterestrate.
D) nominalrateofinterestlesstheunanticipatedrateofinflation.
Answer: A
Diff:2
38) Empiricalevidenceshowsthatthenominalinterestratetypicallyrisesatthesametimethe
inflationrateincreases.Whatdoesthissuggest?
A) Therealrateofinterestiszero.
B) Increasesinthecurrentinflationrateleadborrowersandlenderstoexpectthatinflationin
thefuturewillbehigherthanpreviouslythought.
C) InterestratechangesarethemaincomponentoftheCPI.
D) InterestratechangesarethemaincomponentoftheGDPdeflator.
Answer: B
Diff:3
39) Whichoneofthefollowingwouldbenefitfinanciallyfromunanticipatedinflation?
A) aborrowerwhoseloanhasafixednominalinterestrate
B) aborrowerwithanadjustableratemortgage
C) abankthathasmadeloansatafixednominalinterestrate
D) afirmwhoseworkersarecoveredbyaCOLAagreement
Answer: A
Diff:2
40) Supposetherateofinflationunexpectedlydecreasesfrom7%to4%.Whichoneofthe
followingwouldmostlikelybenefitfromthisunexpectedreductionintherateofinflation?
A) creditors.
B) aborrowerwhoseloanhasafixednominalinterestrate.
C) debtors.
D) workerswhoarecoveredbyaCOLAagreement.
Answer: A
Diff:2
41) Unanticipatedinflationbenefits
A) peopleorbusinesseswhoowefunds.
B) peopleorbusinesseswholendfunds.
C) peoplewholiveonafixedincome.
D) peoplewithCDs(certificatesofdeposits)inthebank.
Answer: A
Diff:1
42) Whoislikelytobehelpedbyunanticipatedinflation?
A) lenders B) borrowers C) allconsumers D) allproducers
Answer: B
Diff:2
43) Whyistherearesourcecostassociatedwithinflation?
A) becauseunemploymentincreaseswhenthereisinflation
B) becausemostworkersendupworkingfewerhoursduringperiodsofinflation
C) becauseconsumers,workers,andfirmsdevoteresourcestoprotectingthemselvesfrom
thefinancialcostsofinflation
D) becausetheexistenceofinflationdiscouragespeoplefromplacingtheirsavingsin
interest-bearingaccounts,whereitisneededtofundcapitalinvestment
Answer: C
Diff:2
44) Ifabankadvertises3percentinterestforacheckingaccountandtheanticipatedrateofinflation
is3.5percent,
A) therealrateofinterestearnedontheaccountis0.5percent.
B) therealrateofinterestearnedontheaccountis-0.5percent.
C) therealrateofinterestearnedontheaccountis6.5percent.
D) therealrateofinterestearnedontheaccountis3.25percent.
Answer: B
Diff:1
45) Howmuchshouldabankchargeforaloan,iftheanticipatedinflationrateis4percent,andthe
bankwantstoearn3percentonthis$1,000,000loan?
A) $30,000 B) $40,000 C) 7percent D) 1percent
Answer: C
Diff:2
46) Ifyourincomerisesat5percentandinflationhasrisenat2percent,thenthepurchasingpower
ofyourincomehas
A) eroded. B) stayedthesame.
C) fallen,butwillincreaseduetoindexing. D) increased.
Answer: D
Diff:2
47) Ifyouanticipatethattheinflationrateisgoingtorisefromthreepercentto10percentnextyear
,youshould
A) saveyourfundsatafixedrateofinterest.
B) borrowfundsatafixedrateofinterest.
C) keepyourfundsinyoursockdrawer.
D) waittobuyahouseuntilnextyear.
Answer: B
Diff:2
48) Therealinterestrateis
A) thenominalinterestrateplustheanticipatedinflationrate.
B) thenominalinterestrateminustheanticipatedinflationrate.
C) thenominalinterestrateplusaCOLA.
D) thenominalinterestrateplustheGDPdeflator.
Answer: B
Diff:1
49) Ifthenominalinterestrateis9percentandtheanticipatedinflationrateis4percent,then
A) therealinterestrateis5percent. B) therealinterestrateis13percent.
C) therealinterestrateis-5percent. D) therealinterestrateis2.25percent.
Answer: A
Diff:2
50) Duringanunanticipatedinflation
A) creditorsarehelpedanddebtorsarehurt.
B) creditorsarehurtanddebtorsarehelped.
C) bothcreditorsanddebtorsarehurt.
D) bothcreditorsanddebtorsarehelped.
Answer: B
Diff:1
51) Anautomaticincreaseinawageratefoundinsomecontractsisknownasa
A) changeoflaboragreement. B) costoflaborarrangement.
C) costoflivingadjustment. D) chargeforlivingamendment.
Answer: C
Diff:2
52) Howisinflationrelatedtointerestrates?
Answer: Peoplebasetheirdecisionsonborrowing,lending,andinvestingonthebasisofthereal
interestrate.Ifthereisanticipatedinflation,thenominalrateofinterestwillequalthereal
rateofinterestplustheanticipatedinflationrate.So,interestratesvarydirectlywith
anticipatedinflation.Unanticipatedinflationleadstoarealinterestratedifferentfrom
whatpeoplethought,andthedecisionspeoplemadeturnouttobemistaken.
Diff:2
53) Whatarethecoststosocietyofinflation?Whoisharmedbyinflationandwhobenefits?
Answer: Theresourcesusedbypeopletoprotectthemselvesagainstinflationisthemajorcostof
inflationtosocietyasawhole.Thereisresourcemisallocationduetopeoplemaking
decisionsbasedonfaultyinformationaboutthetruerateofinflation.Ingeneral,creditors
areharmedbyunanticipatedinflationanddebtorsbenefit.
Diff:2
7.6ChangingInflationandUnemployment:BusinessFluctuations
1) Thetermbusinessfluctuationsrefersto
A) changesinoverallbusinessactivity,asevidencedbychangesinnationalincome,
employment,andthepricelevel.
B) changesinthegeneralpricelevelfrominflationtodeflation,orviceversa.
C) changesinthefullemploymentlevelofeconomicactivity.
D) changesinthevalueofthedollar.
Answer: A
Diff:1
Topic: 7.6ChangingInflationandUnemployment:BusinessFluctuations
2) Insequentialorder,thefourphasesofthebusinesscycleare
A) trough,peak,expansion,contraction. B) peak,contraction,trough,expansion.
C) expansion,contraction,peak,trough. D) contraction,trough,peak,expansion.
Answer: B
Diff:1
3) Thepeakphaseofthebusinesscyclerepresents
A) atemporarymaximumoutputlevelofGrossDomesticProduct(GDP).
B) anincreaseinforeigninvestment.
C) alaborsurplus.
D) fallingprices.
Answer: A
Diff:2
4) Wheneconomy-widebusinessactivitiesareincreasing,theyarereferredtoas
A) contractions. B) expansions. C) anti-cycles. D) corrections.
Answer: B
Diff:1
5) Arecessionmaybedefinedas
A) aperiodduringwhichtherateofgrowthofbusinessactivityisconsistentlylessthanits
long-termtrend.
B) anincreaseinrealeconomicoutputfromoneperiodtothenext.
C) nochangeinrealeconomicoutputoveraperiodoftime.
D) nochangeinthedollar(money)valueofeconomicoutputoveraperiodoftime.
Answer: A
Diff:1
6) AllofthefollowingaresignalsofarecessionEXCEPT
A) acyclicalreductioninemploymentoflabor.
B) aslightreductioninacurrentlyhighrateofgrowthineconomicactivity.
C) increasingunemployment.
D) afallinglevelofeconomicactivity.
Answer: B
Diff:2
7) Aneconomyrecoveringfromarecessionmoves
A) upfromitstroughtoaperiodofexpansion.
B) upfromitspeaktoaperiodofexpansion.
C) downfromitstroughtoaperiodofdepression.
D) downfromitspeaktoaperiodofexpansion.
Answer: A
Diff:1
8) Duringarecession
A) incomesriseandemploymentdecreases.
B) incomesfallandunemploymentincreases.
C) incomesfallandunemploymentfalls.
D) incomesriseandunemploymentincreases.
Answer: B
Diff:1
9) Wheneconomy-widebusinessfluctuationsarenegative,theyarereferredtoas
A) contractions/recessions. B) booms.
C) expansions. D) peaks.
Answer: A
Diff:1
10) Contractionsarecharacterizedby
A) increasesintherateofgrowthofeconomicactivity.
B) anupwardmovementtowardapeakineconomicactivity.
C) adownwardmovementtowardatroughineconomicactivity.
D) alongperiodinwhichnocyclesareobservedineconomicactivity.
Answer: C
Diff:2
11) Thebusinesscyclephasethatmustcomebeforethepeakisa(n)
A) trough. B) expansion. C) recession. D) contraction.
Answer: B
Diff:1
12) When,overasustainedperiodoftime,thegrowthofaggregatebusinessactivityfallsbelow
whatisconsideredthenormalgrowthrate,theeconomynecessarilyexperiences
A) inflation. B) deflation. C) anexpansion. D) arecession.
Answer: D
Diff:1
13) Aperiodoftimeinwhichtheoverallbusinessactivityisrisingatarapidrateisknownas
A) inflation. B) hyperinflation. C) anexpansion. D) acontraction.
Answer: C
Diff:1
14) Theofficialdatingofrecessionsisdoneby
A) thePresident.
B) theCongress.
C) theNationalBureauofEconomicResearch.
D) theCouncilofEconomicAdvisors.
Answer: C
Diff:1
15) Anextremelysevererecessionisknownasa
A) trough. B) peak. C) contraction. D) depression.
Answer: D
Diff:1
16) Aperiodoftimeinwhichtheoverallpaceofbusinessactivityisfallingisknownas
A) inflation. B) deflation. C) anexpansion. D) acontraction.
Answer: D
Diff:1
17) Aperiodinwhichthelevelofbusinessisconsistentlylessthanitslong-termtrendisknownas
A) depression. B) recession. C) businesscycle. D) growthtrend.
Answer: B
Diff:1
18) Aperiodoftimeinwhichtheoverallpaceofbusinessactivityisrisingisknownas
A) inflation. B) deflation. C) anexpansion. D) acontraction.
Answer: C
Diff:1
19) Theofficialdatingofrecessionsisdoneby
A) theCouncilofEconomicAdvisors.
B) theNationalBureauofEconomicResearch.
C) theGovernmentAccountingOffice.
D) theSecretaryoftheTreasury.
Answer: B
Diff:1
20) Thelong-runtrendinbusinessactivityis
A) downward.
B) constant.
C) upward.
D) suchthatitcannotbedescribedasatrend.
Answer: C
Diff:1
21) Businessfluctuations
A) influenceunemploymentbutnotinflation.
B) influenceinflationbutnotunemployment.
C) caninfluenceinflationandunemployment.
D) havenoinfluenceoninflationandunemployment.
Answer: C
Diff:1
22) Whichofthefollowingwouldbeconsideredanexternalshock?
A) Adeclineintaxrevenuesduringarecession
B) Arecession
C) Adepression
D) Awar
Answer: D
Diff:1
23) Whichofthefollowingisatruestatement?
A) Allrecessionsareduetoexternalshocks.
B) Ultimately,norecessionhasbeenduetoanexternalshock.
C) Therehavebeenrecessionsthatcannotbeexplainedbyexternalshocks.
D) Allrecessionsandallexpansionsareduetoexternalshocks.
Answer: C
Diff:2
24) Refertotheabovefigure.PointBisknownas
A) apeak. B) atrough. C) anexpansion. D) acontraction.
Answer: B
Diff:2
25) Refertotheabovefigure.PointCisknownas
Answer: A
Diff:2
26) Refertotheabovefigure.ThepointsbetweenAandBareknownas
Answer: D
Diff:2
27) Refertotheabovefigure.ThepointsbetweenBandCareknownas
Answer: C
Diff:2
28) Refertotheabovefigure.Arecessionisbestdescribedas
A) theupwardlinearline. B) theperiodbetweenPointBandPointC.
C) theperiodbetweenPointAandPointB. D) noneoftheabove.
Answer: C
Diff:2
29) Refertotheabovefigure.AtPointB,theactualunemploymentrate
A) willdecreaseovertime.
B) isnegative.
C) tendstobehigherthanthenaturalunemploymentrate.
D) tendstobelowerthanthenaturalunemploymentrate.
Answer: C
Diff:3
30) Upsanddownsinbusinessactivityarereferredtoas
A) ebbandflow. B) contractions.
C) variability. D) businessfluctuations.
Answer: D
Diff:1
31) BusinessfluctuationsintheUnitedStatesare
A) smoothandsteady. B) predictable.
C) controllable. D) irregularandunpredictable.
Answer: D
Diff:2
32) ExamplesofexternalshocksareallofthefollowingEXCEPT
A) war. B) drought.
C) oilshock. D) U.S.federaltaxpolicies.
Answer: D
Diff:2
33) Whentheeconomyisexperiencingacontraction,thereisanincreasein
Answer: D
Diff:2
34) Thetroughofacontractionis
A) thepointintimeatwhichthelevelofnationalbusinessactivityreachesaminimumbefore
expandingagain.
B) thepointintimeatwhichthelevelofnationalbusinessactivityreachesamaximumbefore
contractingagain.
C) therateatwhichthelevelofbusinessactivityisdeclining.
D) anexternalshockthatcauseseconomicactivitytodecline.
Answer: A
Diff:2
35) HowhasthepatternoffluctuationsinoverallU.S.businessactivitychangedsinceWorldWar
II?
A) Ithasbecomelessvolatile. B) Expansionshavebeeneliminated.
C) Contractionshavebeeneliminated. D) Recessionshavebeeneliminated.
Answer: A
Diff:1
36) Changesinbusinessactivityare
A) referredtoasbusinessfluctuations.
B) referredtoastheebbandflowofbusiness.
C) alwaysundesirable.
D) causedbythechangingseasonseveryyear.
Answer: A
Diff:1
37) Adeclineinbusinessactivityiscalled
A) arecession. B) atrough. C) anexpansion. D) apeak.
Answer: A
Diff:1
38) Whichofthefollowingwouldbealeadingindicator?
A) thenumberofunemploymentclaims B) therealinterestrate
C) personalincomeintheUnitedStates D) anincreaseinstockprices
Answer: A
Diff:3
39) Whichofthefollowingstatementsiscorrect?
A) Thedepthandthelengthofallbusinesscyclesareidentical.
B) Thedepthandthelengthofallbusinesscyclesaredifferent.
C) Businesscyclesarecausedbyseasonalunemploymentchanges.
D) Businesscyclesarecausedbyunanticipatedinflation.
Answer: B
Diff:2
40) Asevereandprolongedrecessioniscalled
A) aslump. B) astagnation. C) atrough. D) adepression.
Answer: D
Diff:1
41) Historicallyspeaking,businessfluctuationsinaneconomyweremorecommonlyreferredtoas
A) inflationarypressures. B) economicgrowth.
C) theGDPdeflator. D) businesscycles.
Answer: D
Diff:2
42) Accordingtobusinessactivitychartsforthelast100years,thepointofthehighestbusiness
activityintheUnitedStatesoccurred
A) duringthe1920sbullmarketboom. B) duringWorldWarII.
C) duringtheVietnamWar. D) duringtheClintonadministration.
Answer: B
Diff:1
43) Abusinessfluctuationwhenthepaceofeconomicactivityisslowingdowniscalled
A) areduction. B) acontraction. C) adepression. D) aslowdown.
Answer: B
Diff:1
44) Typicallyduringarecession,
A) incomesfall,andunemploymentfalls.
B) incomesandunemploymentrise.
C) incomesfall,andunemploymentrises.
D) incomesincrease,andunemploymentfalls.
Answer: C
Diff:1
45) Changesinleadingindicatorssignal
A) thechangesinthefrictionalandseasonalunemploymentrate.
B) thechangesthatwilloccurintheeconomy.
C) thechangesinthefrictionalunemploymentrateandthechangesintheinflationrate.
D) thechangesinthemarketbasket.
Answer: B
Diff:2
46) TheNationalBureauofEconomicResearchis
A) fundedbyCongressandevaluatesthebudgetappropriations.
B) fundedbytheFederalReserveBanksandanalyzesthebankingsystem.
C) anonprofitorganizationandevaluatesthebusinesscycles.
D) anonprofitorganizationandevaluatestheU.S.monetarypolicy.
Answer: C
Diff:1
47) Theperiodbetweenthetroughandthepeakofabusinessfluctuationiscalled
A) thegrowthphase. B) thespreadingout.
C) thedevelopment. D) theexpansion.
Answer: D
Diff:1
48) Refertheabovefigure.Stage1oftheeconomyiscalled
A) thetop. B) thepeak. C) thetrend. D) theclimax.
Answer: B
Diff:1
A) acontraction. B) apeak. C) atrough. D) anexpansion.
Answer: A
Diff:1
50) Refertotheabovefigure.Stage3oftheeconomyiscalled
A) adevelopment. B) apit.
C) atrough. D) ahole.
Answer: C
Diff:1
A) amaturity. B) aspreadingout.
C) anexpansion. D) adevelopment.
Answer: C
Diff:1
52) Abusinessfluctuationwhenthepaceofbusinessactivityisspeedingupisknownas
A) acontraction. B) atrough. C) anexpansion. D) arecession.
Answer: C
Diff:1
53) AwarintheMiddleEastthatdisruptsU.S.economicactivityisknownas
A) anexternalshock. B) anexpansion.
C) ademandshock. D) aninternalshock.
Answer: A
Diff:2
54) Whatisthebusinesscycle?Howcyclicalisit?Whatcausesthebusinesscycle?
Answer: Thebusinesscyclereferstotheupsanddownsinoverallbusinessactivityovertime.Itis
cyclicalinthesensethatexpansionseventuallygivewaytocontractions,whichare
followedagainbyanexpansion.But,thepatternoftheexpansionsandcontractionsare
neithersymmetricalnorrepeating.Externalshocksareimportantinexplainingthe
businesscycle,althoughtheyareinsufficientalonetoexplainthecycle.
Diff:2
Chapter8
MeasuringtheEconomysPerformance
8.1TheSimpleCircularFlow
1) Thesimplecircularflowofincomeshowsthatthetotalincomeinaneconomyequals
A) totalprofitsearnedbyfirms.
B) alltaxespaidbyhouseholds.
C) thetotalamountofmoneysuppliedbythegovernment.
D) totalexpenditures.
Answer: D
Diff:2
Topic: 8.1TheSimpleCircularFlow
2) Theobservationthatgoodsandservicesflowinonedirectionandmoneypaymentsflowin
anotherdirectionistheprinciplebehind
A) thedoublecoincidenceofwants. B) abartereconomy.
C) apurecommandeconomy. D) thecircularflowofincome.
Answer: D
Diff:1
3) Whichofthefollowingistrueaboutproductmarkets?
A) Goodsandservicesflowfromhouseholdstofirms.
B) Goodsandservicesflowfromfirmstohouseholds.
C) Factors(land,labor,capital,andentrepreneurialability)flowfromhouseholdstofirms.
D) Factors(land,labor,capital,andentrepreneurialability)flowfromfirmstohouseholds.
Answer: B
Diff:1
4) Accordingtothecircularflow,thedollarvalueofanationsoutputisequalto
A) profits. B) totalincome.
C) netincomeminustaxes. D) wages.
Answer: B
Diff:1
5) Inthefactormarket,households
A) sellresources.
B) buyresources.
C) areneitherbuyersnorsellersofresources.
D) arebothbuyersandsellersofresources.
Answer: A
Diff:1
6) SupposeanindividualbuysanewCDofherfavoritemusicalartist.Thispurchasehastaken
placeinthe
A) productmarkets. B) factormarkets.
C) labormarkets. D) resourcemarkets.
Answer: A
Diff:1
7) Intheproductmarkets,households
A) arethebuyersofgoodsandservices.
B) arethesellersofresources.
C) areneitherbuyersnorsellersinthemarket.
D) noneoftheaboveiscorrect.
Answer: A
Diff:1
8) Whichofthefollowingwouldmostlikelybesoldintheproductmarkets?
A) Anewcar B) Stocksandbonds
C) Ironore D) Entrepreneurialability
Answer: A
Diff:1
9) Thevalueoftotaloutputandtotalincomeinthesimplecircularflowmodel
A) aremeasuresoftheeconomyslevelofsavings.
B) includeonlyintermediategoods.
C) areequaltoeachother.
D) arerelatedinthesensethatnationalincomeislessthannationalproduct.
Answer: C
Diff:1
Chapter8MeasuringtheEconomysPerformance99
10) WhichofthefollowingstatementsisFALSE?
A) Onedefinitionoftotalincomeisthatitistheannualcostofproducingtheentireoutputof
finalgoodsandservices.
B) Transactionsinwhichhouseholdsbuyfinalgoodsandservicesoccurinthefactormarket.
C) Thevalueoftotaloutputisidenticaltototalincome.
D) Savingisthedifferencebetweenconsumerincomeandexpenditures.
Answer: B
Diff:1
A) Thevalueoftotalincomeisequalinvaluetototaloutputbecauseprofitisacostof
production.
B) Inthecircularflowmodel,householdssellfactorservicestobusinessesinreturnforfactor
payments.
C) Businessessellgoodsandservicestohouseholdswhousetheirincometopayforthem.
D) Totalincomeisalwaysgreaterthantotaloutput.
Answer: D
Diff:1
12) Whichofthefollowingisconsistentwiththecircularflowofincome?
I. Goodsandservicesflowinonedirection.
II. Paymentsandincomesflowinonedirection.
III. Sellersreceivelessthanwhatbuyersspend.
A) Ionly B) IIonly C) IIIonly D) BothIandII
Answer: D
Diff:1
13) Accordingtothecircularflow,thevalueoftotaloutputproducedandtotalincome
A) shoulddifferbythevalueofintermediategoods.
B) shouldincreasebytheunanticipatedrateofinflation.
C) willalwaysbeincreasinginacapitalisteconomy.
D) willbeequal.
Answer: D
Diff:1
14) Oneoftheprinciplesbehindtheconceptofthecircularflowisthat
A) ineveryeconomicexchange,thesellerreceivesexactlythesameamountthatthebuyer
spends.
B) ineveryeconomicexchange,thesellerreceiveslessthantheamountthatthebuyer
spends.
C) thesellerofgoodsreceivesexactlythesameamountthatthebuyerspends,buttheseller
ofresourcesreceiveslessthanthebuyerspends.
D) inexchangeinvolvingproducts,thesellerreceiveslessthantheamountthebuyerspends,
butinresourcemarketsthesellerreceivesmorethanthebuyerspends.
Answer: A
Diff:1
15) Thecircularflowofincomeshows
A) goods,services,andmoneypaymentsflowinginthesamedirection.
B) goodsandmoneypaymentsflowinginonedirectionandservicesflowingintheopposite
direction.
C) goodsandservicesflowinginonedirectionandmoneypaymentsintheotherdirection.
D) goodsflowinginonedirectionandservicesandmoneypaymentsflowingintheother
direction.
Answer: C
Diff:1
16) Inthesimplecircularflowmodel,
A) householdsspendtheincometheyreceivefromlaborservicesbutsavetheincomethey
receivefromsellingtheotherfactorsofproduction.
B) businessesbuylaborservicesfromhouseholds,butsupplyotherfactorsofproduction
themselves.
C) householdsspendtheirentireincomeonconsumerproducts.
D) profitsareatypeofincomethatisnotreceivedbyhouseholds.
Answer: C
Diff:2
17) Inthecircularflowmodel,profitsareconsideredtobe
A) asubtractionfromtheGrossDomesticProduct(GDP).
B) acostofdoingbusiness.
C) equaltozero,orelsethecircularflowwouldbeoutofbalance.
D) aformofinterestpayment.
Answer: B
Diff:1
18) Economistsconsiderprofittobe
A) acostofproducinggoodsandservices.
B) thesameasasalary.
C) arewardforincurringlosses.
D) somethingthatshouldbeeliminatedbyantitrustlaws.
Answer: A
Diff:1
19) Profitsrepresent
A) theincomeearnedfromabond.
B) thepaymentsfirmsmaketotheiremployees.
C) arewardtoentrepreneurs.
D) thedifferencebetweentotaltaxrevenueandtotalgovernmentspending.
Answer: C
Diff:1
20) Howdoeconomistsviewprofits?
A) Profitsareanassetthebusinessholds.
B) Profitsareoneofthecostspaidtoafactorofproduction.
C) Profitsareguaranteedaslongasafirmoperatesethically.
D) Thefirmsprofitequalsthesumofallpaymentstothe5factorsofproduction.
Answer: B
Diff:1
21) Inthecircularflow,________providethefactorservices.
A) households B) businesses
C) producers D) businessesandhouseholds
Answer: A
Diff:1
22) Thecircularflowofincomeinvolvestheideathat
A) ineveryeconomicexchangeonepartytakesadvantageoftheotherparty.
B) thesellerofagoodreceiveslessthanthebuyerspends.
C) thesellerofagoodreceivesmorethanthebuyerspends.
D) thesellerofagoodreceivesexactlythesameamountasthebuyerspends.
Answer: D
Diff:1
23) Thecircularflowofincomeshows
A) thedollarvalueofoutputislessthanthetotalincome.
B) thedollarvalueofoutputismorethanthetotalincomebecauseoftheexistenceofprofits.
C) thedollarvalueofoutputisexactlyequaltothetotalincome.
D) thedollarvalueofoutputismoreorlessthanthetotalincome,dependingonwhether
profitsarepositiveornegative.
Answer: C
Diff:1
24) Thecircularflowofincomeassumesthat
A) profitisnotacostofproduction.
B) thenationalincomeaccountingapproachisnotanadequatewaytomeasurethe
economysperformance.
C) goodsandservicesflowinonedirectionandmoneypaymentsflowintheother.
D) totalincomeisthesumofthevalueofintermediategoodsandfinalgoodsandservices.
Answer: C
Diff:1
25) Inthecircularflowmodel,
A) householdsdemandgoodsandserviceswhicharesuppliedbyfirms,andthefirms
demandresourcesthataresuppliedbyintermediatefirms.
B) householdsdemandgoodsandservicesthataresuppliedbyfirms,whilesupplying
resourcesthataredemandedbyfirms.
C) householdsbuygoodsandservicesandfirmssupplygoods.Resourcesaresuppliedby
otherfirms.
D) householdsbuygoodsandserviceswhilefirmssellgoodsandservices.Firmsobtainlabor
fromhouseholds,capitalfromgovernment,andrawmaterialsfromfirms.
Answer: B
Diff:1
26) Goodsandservicesaresold
A) intheproductmarkets. B) inthefactormarkets.
C) byhouseholds. D) onlyasintermediategoods.
Answer: A
Diff:1
27) Resourcescanbepurchased
A) intheproductmarkets. B) inthefactormarkets.
C) exclusivelythroughthegovernment. D) atagrocerystore.
Answer: B
Diff:1
28) Totalincome
A) istheyearlyamountearnedbyownersofthenationsresources.
B) includesonlywagesreceivedbyworkers.
C) includesonlywagesandinterestpayments.
D) excludesprofits.
Answer: A
Diff:1
29) Theamountearnedbyownersofthenationsfactorsofproductionis
A) thewagesandfringebenefitsreceivedbythenationsworkers.
B) allprofitsreceivedbybusinesses.
C) totalincome.
D) privateandgovernmenttransferpayments.
Answer: C
Diff:2
30) Profits
A) areacostofdoingbusinessbecauseentrepreneurswouldnotincurtheriskofstartinga
businessiftheydidntexpecttoearnprofits.
B) areacostofdoingbusinessbecausetheyarepaymentstoothers.
C) arenotacostofdoingbusinessbecausetheyareowedtoresourceowners.
D) arenotacostofdoingbusinessbecausetheyareoftenzeroornegative.
Answer: A
Diff:2
31) Whichofthefollowingstatementsistrueaboutprofits?
A) Profitsareexcludedfromthecircularflowoftheincomediagram.
B) Theonlyportionofprofitsthatareincludedinthecircularflowdiagramaretheportion
paidoutintheformofdividends.
C) Profitsareconsideredoneoftheresourcesnecessaryforproduction.
D) Profitsareconsideredacostofdoingbusiness.
Answer: D
Diff:1
32) Totalincomeisdefinedas
A) thetotalreceiptsoffirmsbeforetaxes.
B) thetotalamountearnedbyallresourceowners.
C) thesumofthetotalreceiptsoffirmsandtheamountearnedbyhouseholds.
D) thesumofthetotalreceiptsoffirmslesstheamountoftaxthatmustbepaid.
Answer: B
Diff:1
33) AllofthefollowingareincomesearnedinthefactormarketEXCEPT
A) wages. B) pricesofgoodsandservices.
C) profits. D) rents.
Answer: B
Diff:1
34) Theannualcostofproducingtheentireoutputofgoodsandservicesintheeconomy
A) includesfinancialtransactions.
B) canbecalculatedentirelyonthebasisoffinancialtransactions.
C) includesdurablegoodsbutexcludesnondurablegoods.
D) istotalincome.
Answer: D
Diff:1
35) Householdsreceivetheirincomeinthecircularflowdiagramby
A) sellingtheuseoftheirproperty.
B) sellingthegoodstheyproduceathome.
C) obtainingdividendsandinterestpayments.
D) sellingresourcestheyowntobusinessfirms.
Answer: D
Diff:1
36) Inthesimplecircularflowmodel,thefundsreceivedbyacarmakerwhenitsellsacargoesto
A) theworkerswhohelpedbuildthecar.
B) theownersoffirmswhosoldmaterialstothecarmaker,andthereststayswiththefirm.
C) onlytheownersofthecarmaker.
D) theownersofalloftheresourcesusedtomakethecar.
Answer: D
Diff:2
37) WhichofthefollowingisNOTafinalgoodorservice?
A) anautomobile B) bread C) flour D) acookie
Answer: C
Diff:1
38) Refertotheabovefigure.Thetoptwoarrowsofthefigurerefertotheproductmarkets.The
bottomarrowsrefertothefactormarkets.Whicharrowrepresentsthetotalmonetaryvalueof
allgoodsandservices?
A) ArrowA B) ArrowB C) ArrowC D) ArrowD
Answer: A
Diff:3
bottomarrowsrefertothefactormarkets.Whicharrowrepresentsthefinalconsumergoods
andservices?
Answer: B
Diff:3
bottomarrowsrefertothefactormarkets.Whicharrowrepresentsfactorservices?
Answer: C
Diff:3
bottomarrowsrefertothefactormarkets.Whicharrowrepresentstotalincome?
Answer: D
Diff:3
42) Refertotheabovefigure.Whicharrowsrepresentitemsthataremeasuredindollarterms?
A) ArrowsAandB B) ArrowsCandD
C) ArrowsAandD D) ArrowsBandC
Answer: C
Diff:3
43) Refertotheabovefigure.Whicharrowsrepresentitemsthatarenotmeasuredindollarterms?
A) ArrowsAandB B) ArrowsCandD
C) ArrowsAandD D) ArrowsBandC
Answer: D
Diff:3
44) Afirmproducesagoodandgenerates$5millioninreceipts.Wagesare$3million,rentis
$500,000,andinterestpaymentsare$1million.Then
A) profitsare$500,000,thecostofproductionis$4.5million,andhouseholdsreceiveincome
equalto$4.5million.
B) profitsare$500,000,thecostofproductionis$5million,andhouseholdsreceiveincome
equalto$4.5million.
C) profitsare$500,000,thecostofproductionis$5million,andhouseholdsreceiveincome
equalto$5million.
D) profitsare$500,000,thecostofproductionis$5million,andhouseholdsreceiveincome
equalto$3.5million.
Answer: C
Diff:3
45) Householdsreceiveatotalincomeof$5million.Ofthis,$3.5millionarewagesreceivedfor
laborservices,$1millionarerentalpayments,and$250,000areinterestpaymentsreceived.
Whatarethecostsofproductionandprofitsequaltorespectively?
A) $5million;$500,000 B) $5million;$250,000
C) $4.75million;$250,000 D) $4.75million;0
Answer: B
Diff:3
46) Thedollarvalueoffinaloutput
A) islessthantotalincome. B) isequaltototalincome.
C) isgreaterthantotalincome. D) equalsprofits.
Answer: B
Diff:1
47) WhichofthefollowingstatementsisNOTtrueabouttherelationshipbetweenthedollarvalue
oftotaloutputandtotalincome?
A) Thedollarvalueoftotaloutputequalstotalincomebecausethespendingofonegroupis
theincomeofanother.
B) Thedollarvalueoftotaloutputequalstotalincomebecauseprofitisconsideredacostof
production.
C) Thedollarvalueoftotaloutputequalstotalincomebecauseprofitisnotconsideredacost
ofproduction.
D) Thedollarvalueoftotaloutputequalstotalincomebecauseoftheeconomicdefinitionof
profit.
Answer: C
Diff:2
48) Howmuchofeachdollarspentbyaconsumerultimatelybecomesincometosomeoneelse?
A) 100percent
B) 67percent
C) Itdependsonhowmuchlaborwasneededtoproducethegoodtheconsumerbuys.
D) Itdependsonhowmuchoverheadthereisinthedistributionchannelthatdeliversthe
goodfromthemanufacturertotheconsumer.
Answer: A
Diff:1
49) Thetwosectorsoftheeconomyinthesimplecircularflowmodelare
A) theemployedandtheunemployed. B) foreignmarketsanddomesticmarkets.
C) householdsandbusinesses. D) theprivatesectorandthepublicsector.
Answer: C
Diff:2
50) Inthesimplecircularflowmodel,totalincomeintheUnitedStatesmustequal
A) wages+rents+interest+ profits.
B) thetotalmonetaryvalueofallfinalgoodsandservices.
C) theyearlyamountearnedbyournationsresources.
D) Alloftheabovearecorrect.
Answer: D
Diff:2
51) Whichofthefollowingwouldmostlikelybedefinedasafinalgoodorservice?
A) ironore B) wheat
C) apersonalcomputer D) lumber
Answer: C
Diff:1
52) Inthesimplecircularflow,
A) businessestradegoodsandservicesforresourcesintheproductmarket.
B) consumerstraderesourcesforgoodsandservicesinthefactormarket.
C) consumerstradegoodsandservicesformonetarypaymentsinthefactormarket.
D) producerstradegoodsandservicesformonetarypaymentsintheproductmarket.
Answer: D
Diff:2
53) Intheproductmarket,
A) businessestradegoodsandservicesforresources.
B) consumerstraderesourcesforgoodsandservices.
C) consumerstradegoodsandservicesforresources.
D) consumerstrademonetarypaymentsforgoodsandservices.
Answer: D
Diff:1
54) Whichofthefollowingoccursinthefactormarket?
A) firmsexchangegoodsandservicesforresources.
B) householdsexchangeresourcesforgoodsandservices.
C) householdsexchangemoneyforgoodsandservices.
D) firmsexchangemoneyforresources.
Answer: D
Diff:1
55) Profitsarepartofthe
A) totalincome. B) monetaryvalueofoutput.
C) finalconsumergoods. D) factorservices.
Answer: A
Diff:1
56) Explaintheconceptofthecircularflow.
Answer: Thecircularflowreferstotheinterrelationshipsbetweenincomeandoutput.Inevery
exchangethesellerreceivesexactlywhatthebuyerpays.Thisalsomeansthatsomeones
receiptissomeoneelsespayment.Goodsandservicesflowinonedirectionandmoney
paymentsintheother.Thetotalincomereceivedbypeoplemustequalthetotalspending
ofpeople.Businessesprovidegoodsandservicesandsellthemtohouseholds,and
householdsprovidetheresourcesusedbyfirmsinexchangeforincome.
Diff:2
57) Whymusttotalincomebeidenticaltothedollarvalueoftotaloutput?
Answer: Totalincomemustbeidenticaltothedollarvalueoftotaloutputbecausespendingby
onepersonisincomeforanother.Further,thedefinitionofprofitisimportant.Profitis
theamountleftoverfromtotalbusinessreceiptsafterallothercostshavebeenpaid.
Hence,profitistheresidualthatmakestotalincomeequaltothedollarvalueoftotal
output.
Diff:2
58) Wheredoesprofitenterinthecircularflow?Why?
Answer: Profitisapaymentmadetoentrepreneursjustaswagesareapaymentmadetolabor.
Entrepreneursmustberewardedforprovidingtheirservices,andprofitisthereward.
Hence,profitisacostofproduction.
Diff:1
8.2NationalIncomeAccounting
1) Thedollarvalueoftotaloutput
A) equalsthevalueofallphysicalgoodssoldintheUnitedStates.
B) equalsthemarketvalueofallfinalgoodsandservicesproducedintheUnitedStates.
C) equalsonlythevalueofstocksontheNewYorkStockExchange.
D) equalsonlythevalueofnewservicesintheeconomy.
Answer: B
Diff:2
Topic: 8.2NationalIncomeAccounting
2) ThemeasurementsystemusedbytheU.S.governmenttoestimatenationalincomeis
A) theGDPdeflator.
B) nationalincomeaccounting.
C) thesumoffinancialtransactions,transferpaymentsandsecondhandgoods.
D) thesumofconsumptionplusinvestmentexpenditures.
Answer: B
Diff:1
3) TheapproachusedintheU.S.tomeasuretheeconomysaggregateperformanceis
A) nationalincomeaccounting.
B) toaddupthevalueofintermediategoods.
C) thetotalvalueofsecurities.
D) toaddupthetotalvalueoffinancialtransactions,transferpayments,andsecondhand
goods.
E) alloftheabove
Answer: A
Diff:1
4) WhichofthefollowingwouldbeincludedinthecalculationofGrossDomesticProduct(GDP)?
A) Thevalueoftransferpayments
B) Thevalueofthesaleofausedguitar
C) Thevalueofthesaleof1,000sharesofIBMstock
D) Thevalueofspendingonnewmachineryandequipment
Answer: D
Diff:1
5) U.S.GrossDomesticProduct(GDP)doesNOTincludewhichofthefollowing?
A) businessinvestment
B) thevalueofgoodsproducedinCanadabyU.S.ownedfirms
C) netexports
D) thepurchaseofallfinalgoodsandservicesbyU.S.households
Answer: B
Diff:2
6) WhichofthefollowingbestdescribesanationsGrossDomesticProduct?
A) Themarketvalueofallgoodsandservicesproducedintheeconomy,including
intermediategoods
B) Thetotalmarketvalueofallfinalgoodsandservicesproducedintheeconomyduringa
year
C) Theconstantdollarvalueofallgoodsproducedintheeconomyduringayearperiod
D) Themarketvalueofallgoodsandserviceslessdepreciation
Answer: B
Diff:1
7) Thetotalmarketvalueoffinalgoodsandservicesproducedinaneconomyduringaone -year
periodis
A) GrossDomesticProduct. B) netnationalproduct.
C) profit. D) personalincome.
Answer: A
Diff:1
8) GrossDomesticProductmeasures
A) thetotalvalueoflaborusedintheeconomy.
B) thetotalmarketvalueoffinalgoodsandservicesproducedwithinanationsborders.
C) thetotalincomereceivedbyresidentsofanation.
D) thetotalworthofallgoodsconsumedwithinthebordersofanation.
Answer: B
Diff:1
9) GrossDomesticProductisbestdefinedas
A) thetotalmarketvalueofallfinalgoodsandservicesproducedduringayearbyfactorsof
productionlocatedwithinanationsborders.
B) thetotalmarketvalueofallintermediategoodsandservicesproducedduringayearby
factorsofproductionlocatedwithinanationsborders.
C) thevalueaddedtoallgoodsproducedinaneconomyduringayear.
D) thetotalmarketvalueofallfinalgoodsandservicesthatexistinaneconomyatagiven
pointintime.
Answer: A
Diff:1
10) SupposethetotalvalueofallassetsintheCountryXis$10trillion.In2013,thetotalvalueofall
finalservicesproducedinCountryXwas$150billion,thetotalvalueofallfinalgoodsproduced
inCountyXwas$350billion,andthetotalvalueofallfinalgoodsandservicesproducedby
CountyXsfirmsinothercountrieswas$100billion.Inthissituation,CountryXsGross
DomesticProductfor2013was
A) $600billion. B) $510billion. C) $500billion. D) $10.5trillion.
Answer: C
Diff:3
11) WhichofthefollowingtransactionsisincludedinGrossDomesticProduct?
A) ASocialSecuritycheckreceivedbyaretiredcouple
B) Agiftcardthatamothergivesherson
C) AusedtextbookthatonestudentgivesanotherstudentinexchangeforaniPod
D) TipsreceivedbyawaitresswhoreportsthemtotheIRS
Answer: D
Diff:2
12) Whichofthefollowingisincluded indeterminingGrossDomesticProduct?

A) Thepurchaseofanewcar
B) Thepurchaseofausedcar
C) Ahousewifepreparingbreakfast
D) Agardenercanningvegetablesforconsumptionduringthewinter
Answer: A
Diff:1
13) Goodsthatareusedupentirelyintheproductionoffinalgoodsareknownas
A) durablegoods. B) valueaddedgoods.
C) intermediategoods. D) capitalgoods.
Answer: C
Diff:1
14) WhichofthefollowingwouldbeincludedwhencalculatingGrossDomesticProduct?
A) Thepurchaseofapreviouslyownedhousefor$70,000
B) Thepurchaseofaused$10,000automobile
C) ASocialSecuritycheckfor$800
D) noneoftheabove
Answer: D
Diff:1
15) IntermediategoodsareNOTincludedinGrossDomesticProduct(GDP)calculationsbecause
A) theyareusedintheproductionoffinalgoodsandwouldthenbecountedtwice.
B) theyareproducedoverseas.
C) theyaremadefromforeignrawmaterials.
D) theyhaveverylowvalueadded.
Answer: A
Diff:2
16) IfJackrefinishedhisbasementhimself,thevalueofhiswork
A) isnotincludedinGrossDomesticProduct(GDP).
B) isincludedinGrossDomesticProduct(GDP).
C) isonlyincludedinGrossDomesticProduct(GDP)ifheusesU.S.madecomponents.
D) isincludedinthenextyearsGrossDomesticProduct(GDP).
Answer: A
Diff:2
17) Wheatusedforproducingbreadis
A) afinalgood. B) notgoingtogenerateanyemployment.
C) anintermediategood. D) adurablegood.
Answer: C
Diff:1
18) WhichofthefollowingtransactionswouldbeincludedinthecalculationofGrossDomestic
Product(GDP)?
A) Thepurchaseoflegalservices
B) ThepurchaseofashareofstockinGeneralMotors
C) Thepurchaseofwheattomakebread
D) Thepurchaseofasecond-handlawnmowerfromyourneighbor
Answer: A
Diff:1
19) Whichofthefollowingisafinalgood?
A) Seedusedforcorn
B) Wheatusedforbread
C) Electricityusedforproducingautomobiles
D) Alawnmowerpurchasedbyahousehold
Answer: D
Diff:1
20) Thefarmerpays20centsfortheseedthatissoldtothemillerfor35cents;themillermakesflour
andsellsittothebakerfor55cents.Thebakermakesbreadandsellsittothegrocerystorefor
80centsandthestoresellsittoconsumersfor$1.00.ThecontributiontoGrossDomestic
Product(GDP)is
A) $2.90. B) $1.90. C) $1. D) 20cents.
Answer: C
Diff:2
21) Afarmerbuysseedfor20centsthatisusedtogrowwheat.Thefarmersellsthewheattothe
millerfor35cents,andthemillermakesflour,whichisthensoldtothebakerfor55cents.The
bakermakesbreadandsellsittothegrocerfor80cents,andthegrocersellsthebreadtoa
familyfor$1.Whatisthevalueaddedofthebakerandwhatisthesumofthevalueaddedat
eachstageofproduction?
A) 80cents;$1 B) 80cents;$2.90 C) 25cents;$2.90 D) 25cents;$1
Answer: D
Diff:2
22) Thetermvalueaddedreferstothedollarvalueof
A) anindustryssalesplusprofits.
B) theintermediategoodsandservicespurchasedbyanindustry.
C) anindustryssaleslessthedollarvalueoftheintermediategoodspurchasedbythe
industry.
D) theintermediategoodspurchasedbyanindustryplustheprofitsoftheindustry.
Answer: C
Diff:1
23) TheownerofanoilwellinTexassells1000barrelsofoiltoarefineryinMexicofor$12,000for
refining.Thistransaction
A) willincreaseGrossDomesticProduct(GDP)by$12,000.
B) hasnoeffectonGrossDomesticProduct(GDP)becausetherefineryisinMexico.
C) decreasesGrossDomesticProduct(GDP)becauseoilreserveshavefallenby1000barrels.
D) hasnoeffectonGrossDomesticProduct(GDP)becausethisisthesaleofanintermediate
product.
Answer: D
Diff:2
24) Intermediategoodsaregoodsthatareusedupentirelyintheproductionoffinalgoods.As
such,intermediategoods
A) areexcludedincalculatingGrossDomesticProduct(GDP)becausetheyarenotvaluable.
B) areexcludedincalculatingGrossDomesticProduct(GDP)becausetodosowouldbeto
doublecountthem.
C) makeuponlyasmallportionofGrossDomesticProduct(GDP).
D) areincludedinGrossDomesticProduct(GDP)onlyifproducedwithinthebordersofthe
UnitedStates.
Answer: B
Diff:1
25) WhymightahomemakerbeupsetwiththewayGrossDomesticProduct(GDP)iscalculated?
A) Becausethegovernmentalwaysunderestimatesthedollarvalueofthehouseholdservices
producedathomeandoutsidethemarketthatareincludedintheGrossDomesticProduct
(GDP)statistic
B) Becausehouseholdservicesproducedathomeandoutsidethemarketareonlyincludedin
GrossDomesticProduct(GDP)ifthehomemakerisaman
C) Becausehouseholdservicesproducedathomeandoutsidethemarketthataresoldto
othersarenotincludedinGrossDomesticProduct(GDP)
D) Becausenoneofthehouseholdservicesproducedforathomeandoutsidethemarketare
includedinGrossDomesticProduct(GDP)eventhoughtheycontributegreatlytothe
welfareofthefamily
Answer: D
Diff:1
26) SocialSecuritypaymentsare
A) includedinGrossDomesticProduct(GDP).
B) notincludedinGrossDomesticProduct(GDP),butareincludedinGrossDomestic
Incomeaccounts.
C) notincludedinGrossDomesticProduct(GDP).
D) notincludedinGrossDomesticProduct(GDP),butareincludedinNetDomesticProduct.
Answer: C
Diff:1
A) GrossDomesticProduct(GDP)measuresthemarketvalueoffinalgoodsandservices
producedduringaparticulartimeperiod.
B) TransfersofusedgoodsarenotincludedinGrossDomesticProduct(GDP).
C) Privatetransferpayments,suchasaninheritance,areincludedintheGrossDomestic
Product(GDP).
D) Ifstatisticianscountedintermediategoods,theestimateofGrossDomesticProduct(GDP)
wouldbetoohigh.
Answer: C
Diff:1
28) Acarsoldfromausedcarlot
A) wouldbecountedinGrossDomesticProduct(GDP).
B) wouldfallundernetexports,andwouldthenbecountedinGrossDomesticProduct
(GDP).
C) wouldnotbecountedinGrossDomesticProduct(GDP).
D) wouldonlybecountedinGrossDomesticProduct(GDP)ifitwasaforeignmadecar.
Answer: C
Diff:2
29) WhichofthefollowingisincludedinGrossDomesticProduct(GDP)?
A) Thebuyingandsellingofsecurities
B) Governmenttransferpayments
C) Privatetransferpayments
D) Thesaleofusedgoods
E) Noneoftheabove
Answer: E
Diff:1
30) AvalidrationaleforthedecisionNOTtoincludenon-compensatedhouseworkinGross
DomesticProduct(GDP)calculationsisthat
A) itwoulddecreasetheemploymentratefordomesticwork.
B) thereissomedifficultyinmeasuringqualityandquantity.
C) itisnotaproductorservice.
D) itwouldunderstatethevalueofproductionintheeconomy.
Answer: B
Diff:2
31) WhichofthefollowingisNOTincludedinthecalculationofGrossDomesticProduct(GDP)?
A) ThepurchaseofaraincoatbyMr.Z
B) Mrs.Tsuseofalawyer
C) Mr.JspurchaseofashareofGeneralMotorsstock
D) Allofthesewouldbeincluded
Answer: C
Diff:1
32) ThepurchaseofashareofstockisexcludedinthecalculationofGrossDomesticProduct(GDP)
becauseit
A) isanintermediategood.
B) producesvalueadded.
C) onlyrepresentsthetransferofownershiprights.
D) isafinalserviceandnotagood.
Answer: C
Diff:1
33) WhichofthefollowingtransactionswouldbeincludedinGrossDomesticProduct(GDP)?
A) Thepurchaseofnewtiresbyafamilytoreplacewornouttiresonthefamilycar
B) Thepurchaseofausedcar
C) Thepurchaseof100sharesofGeneralMotorsstock
D) Thepurchaseof2gramsofcocaine
Answer: A
Diff:2
34) Ifyoubuystocksandbonds,thedollarvalueofthosestocksandbondsis
A) includedinGrossDomesticProduct(GDP)underinvestment.
B) includedinGrossDomesticProduct(GDP)underconsumerexpenditures.
C) notincludedincalculatingGrossDomesticProduct(GDP)fortheymerelyrepresenta
transferofownership.
D) includedinGrossDomesticProduct(GDP)ifthestocksandbondswereissuedby
businessfirmsbutnotiftheywereissuedbygovernments.
Answer: C
Diff:2
35) GrossDomesticProduct(GDP)figuresmayunderstatethevalueofgoodsandservicesdueto
A) theexclusionoftheundergroundeconomy.
B) theinclusionofhouseholdproduction.
C) theinclusionoflegalnon-reported,non-taxedincome.
D) theexclusionofthevalueofstocks.
Answer: A
Diff:1
36) WhichofthefollowingwouldNOTbeincludedinanationsGrossDomesticProduct(GDP)?
A) Thegovernmentpurchases100newtrucksfortheArmy.
B) Theinventoryofpapertowelsgoesup.
C) Alandlordrentsanapartment.
D) Inapokergameastudentwins$500thathedoesnotreportasincome.
Answer: D
Diff:1
37) Nationalincomeaccountingis
A) howtheamountofunemploymentinthesystemismeasured.
B) usedonlytodeterminethegovernmentdeficit.
C) anapproachtomeasuringaneconomysaggregateperformance.
D) thesystemthatmeasuresthevalueoftheDowJonesaverage.
Answer: C
Diff:1
38) WhichofthefollowingitemsareincludedinGDP?
A) ausedcars B) alltransactionsinvolvingbonds
C) allnewhomes D) allfoodstamps
Answer: C
Diff:1
39) WhichofthefollowingisincludedinGDP?
A) Acomputermanufacturerproducesandsellsacomputer.
B) Awomanmowsherownyardandtrimsherownhedges.
C) Anindividualsmugglesillegaldrugsintothecountryandsellsthem.
D) Anillegalgamblingoperationprofitsfromsecretbettingactivities.
Answer: A
Diff:1
40) WhichofthefollowingitemsisexcludedfromGDP?
A) Servicesabarberperformsincuttinghair
B) Productionandsaleofhair-cuttingequipment
C) Servicesabarberperformsinrepairinghisownhair-cuttingequipment
D) Theconstructionofanewbarbershop
Answer: C
Diff:1
41) GrossDomesticProduct(GDP)is
A) thetotalwholesalevalueofallfinalgoodsandservicesproducedbyfactorsofproduction
ownedbycitizensofanation.
B) thetotalmarketvalueofallservicesproducedbyfactorsofproductionlocatedwithina
nationsborders.
C) thetotalmarketvalueofallgoodsproducedwithinanationsborders.
D) thetotalmarketvalueofallfinalgoodsandservicesproducedbyfactorsofproduction
locatedwithinanationsborders.
Answer: D
Diff:1
42) Thetotalvalueofallfinalgoodsandservicesproducedbyfactorsofproductionlocatedwithin
anationsbordersis
A) GDP. B) NI.
C) PI. D) netinvestment.
Answer: A
Diff:1
43) Supposethatin2013,thetotalvalueofallfinalservicesproducedinanationwas$300billion;
thetotalvalueofallfinalgoodsproducedinthatnationwas$400billion;andthetotalvalueof
allfinalgoodsandservicesproducedbythatnationsfirmsinothercountrieswas$200billion.
Grossdomesticproductwas
A) $600billion. B) $500billion. C) $900billion. D) $700billion.
Answer: D
Diff:2
44) GDP
A) isastockmeasuresinceitrepresentsthetotalmarketvalue.
B) isaflowmeasuresinceitrepresentsthevalueofaflowofproductionoverayearsperiod.
C) isneitherastockorflowmeasuresinceitismeasuredindollars.
D) couldbeeitherastockorflowmeasuredependinguponwhetheritismeasuredindollars
orunitsofproduction.
Answer: B
Diff:1
45) GDPisa
A) stockbecauseitmeasuresincomefortheentirecountry.
B) stockbecauseitmeasureswealthatadistinctpointintime.
C) flowbecausedollarvaluesareused.
D) flowbecauseitmeasuresincomeoveraperiodoftime.
Answer: D
Diff:2
46) Whendealingwithanythingthatismeasuredasaflow,onemust
A) usedollarvalues.
B) makesurethethingcanbemeasuredaccurately.
C) specifyatimeperiod.
D) specifyonedayintime.
Answer: C
Diff:1
47) Intermediategoodsare
A) goodsthatareusedupentirelyintheproductionoffinalgoods.
B) thestockofallresourcesexcludinglabor.
C) goodsthatgetsoldtotheU.S.government.
D) equaltothereceiptsoffirms.
Answer: A
Diff:1
48) GDPdoesNOTincludeintermediategoodsbecause
A) intermediategoodsarenotvaluable.
B) intermediategoodsarenotusefultoconsumers.
C) thatwouldcountthevalueofintermediategoodstwice.
D) thatwouldunderstatethetruesizeofGDP.
Answer: C
Diff:1
49) Thefarmerpays15centsforwheatseeds.Whenthewheatisgrownandharvested,thefarmer
sellsittothemillerfor30cents,whomakesflourandsellstheflourtothebakerfor60cents.
Thebakermakesbreadandsellsittothegrocerfor90cents,andthegrocersellsittoafamily
for$1.25.ThecontributiontoGDPis
A) 35cents. B) $1.25. C) $1.95. D) $3.20.
Answer: B
Diff:2
50) Valueaddedis
A) thepriceofanintermediateproduct.
B) theamountofdollarvaluecontributedtoaproductateachstageofitsproduction.
C) thesumofthepricesofintermediateproducts.
D) thedollarvaluecontributedtoaproductatthelaststageofitsproduction.
Answer: B
Diff:1
51) Thedollarvalueofanindustryssalesminusthevalueofintermediategoodsis
A) GDP. B) NDP.
C) transferpayments. D) valueadded.
Answer: D
Diff:1
52) Thetotalvalueadded
A) equalstheretailprice.
B) equalsthewholesaleprice.
C) equalsthesumofthepricesontheintermediategoods.
D) equalstheretailpricelessthewholesaleprice.
Answer: A
Diff:1
StageofProduction DollarValueofSale ValueAdded
---------0.08
Stage1 0.08
Stage2 0.10
Stage3 0.25
Stage4 0.32
0.75
53) Refertotheabovetable.Theproductionofthisgoodgoesthrough4differentstagesof
production.WhatisthevalueaddedatStage2?
A) $0.02 B) $0.08 C) $0.10 D) $0.75
Answer: A
Diff:1
54) Refertotheabovetable.Theproductionofthisgoodhasbeenthroughthefirst3stagesof
production.WhatisthetotalvalueaddedinStage1through3?
A) $0.75
B) $0.43
C) $0.07
D) Cannotbecomputedwithoutmoreinformation.
Answer: B
Diff:1
production.Whatisthetotaldollarvalueaddedwhenproductioniscompleted?
A) $0.07
B) $0.32
C) $0.75
Answer: C
Diff:1
production.Whatdoesthetotalvalueaddedequal?
A) $0.07
B) $0.32
C) $0.75
Answer: C
Diff:1
millerfor30cents,whomakesflour.Theflourissoldtothebakerfor60centsandthebaker
makesbread,whichissoldtothegrocerfor90cents.Thegrocersellsthebreadfor$1.25.What
isthevalueaddedforthemiller?
A) 60cents B) 45cents C) 30cents D) 90cents
Answer: C
Diff:2
58) Theproductionofacertaingoodinvolves5stages.Thevalueaddedafterthefirststageof
productionoccursisis$1.20.Thesalepriceofthegoodis$2.50.Whatamountisusedto
measureGDP?
A) $0.025 B) $1.20 C) $1.30 D) $2.50
Answer: D
Diff:1
millerfor30cents,whomakesflour.Theflourissoldtothebakerfor60centsandthebaker
makesbread,whichissoldtothegrocerfor90cents.Thegrocersellsthebreadfor$1.25.What
isthevalueaddedforthegrocer?
A) 15cents B) 30cents C) 35cents D) $1.25
Answer: C
Diff:2
60) Agoodgoesthroughthreestagesofproduction.Thevalueaddedatstage1is$3;thevalue
addedatstage2is$5;thevalueaddedatstage3is$2.Whatistheretailpriceofthegood?
A) $2
B) $10
C) $20
D) Cannotbedeterminedbasedontheinformationgiven.
Answer: B
Diff:1
61) WhichofthefollowingtransactionswouldNOTbeincludedinGDP?
A) thepurchaseof100sharesofnewlyissuedMicrosoftstock
B) thepurchaseofanewlyissuedgovernmentbond
C) thepurchaseofpreviouslyissuedcorporatebond
D) alloftheabove
Answer: D
Diff:2
62) WhichofthefollowingtransactionsisincludedinGDP?
A) fundsgiventoacollegestudentbyherparents
B) fundsreceivedbyacollegestudentforworkinginthecollegedininghall
C) fundsgiventoafamilyonwelfare
D) SocialSecuritycheckreceivedbyanelderlycouple
Answer: B
Diff:2
63) WhichofthefollowingisincludedinmeasuringGDP?
A) Thevalueaddedateachstageofproductionofafinalproduct
B) Thebuyingandsellingofsecurities
C) Thetransferofsecondhandgoods
D) Householdservicesrenderedbyhomemakers
Answer: A
Diff:1
64) WhichofthefollowingitemsisincludedinGDP?
A) ThenewcarthatJamesjustbought B) Thevalueofastay-at-homemom
C) Proceedsforagaragesale D) Purchaseofagovernmentbond
Answer: A
Diff:1
65) WhichofthefollowingitemsisNOTincludedinGDP?
A) purchaseofahamburgeratafast-foodrestaurant
B) salesatagrocerystore
C) saleofMicrosoftstock
D) downloadsofnewmusicalbumschargedtoacreditcard
Answer: C
Diff:1
66) GDPisameasureofallofthefollowingEXCEPT
A) theoveralllevelofeconomicactivity B) thetotalofproduction
C) overallwelfare D) thetotalvalueofexpenditures
Answer: C
Diff:1
67) Afamilysellsthehousetheyhavelivedinfortwoyearstoafriend.Theyreceived$150,000and
paid$120,000twoyearsago.Thistransaction
A) increasesGDPby$150,000
B) increasesGDPby$30,000
C) hasnoeffectonGDPbecausethehousewasnotmadethisyear
D) hasnoeffectonGDPbecausethehouseisanintermediategood
Answer: C
Diff:2
68) WhichofthefollowingstatementsisNOTtrueofGDP?
A) GDPexcludesnonmarketproduction.
B) TherearenosignificantweaknessesinusingGDPasameasureofthenationseconomic
performance.
C) GDPisthevalueoffinalgoodsandservicesproducedintheeconomy.
D) GDPisnotameasureofanationsoverallwelfare.
Answer: B
Diff:1
69) WhichofthefollowingisasignificantweaknessofGDPasameasureofthenationseconomic
performance?
A) GDPexcludesthesecondhandgoodmarketbecauseitisimpossibletoobtainanestimate
oftheamountsold.
B) GDPexcludesthevalueofthebuyingandsellingofsecurities.
C) GDPconsidersproductandfactormarketsbutnotservices.
D) GDPexcludesnonmarketproduction,suchasblackmarketactivities.
Answer: D
Diff:1
70) GDPdoesNOTmeasurethewell-beingofanationsresidentsbecauseit
A) excludesthesaleofsecondhandgoods.
B) excludesthevalueofintermediategoods.
C) includesthevalueoffinalgoodsandservicesproducedintheeconomy.
D) excludesnonmarkettransactions.
Answer: D
Diff:1
71) WhenconsideringGDPasameasureofthenationseconomicperformance,whichofthe
followingstatementsisNOTtrue?
A) GDPisagoodmeasureofanationsoverallwelfare.
B) GDPisusefultomapchangesintheeconomysdomesticeconomicperformanceover
time.
C) GDPisunderestimatedbecauseitdoesnotincludeillegalactivities.
D) GDPwouldbeabettermeasureofeconomicperformanceifitincludednonmarket
activities.
Answer: A
Diff:2
72) WhichofthefollowingisamainlimitationofGDP?
A) GDPfiguresaregrosslyinaccurateduetosamplingerrors.
B) TherealdefinitionofwhatisandisnotincludedinGDPisunclear.
C) GDPisnotagoodmeasureofanationsoverallwelfare.
D) GDPincludessomeproducts,whichbytheirverynaturearebadproducts,suchas
militaryweapons.
Answer: C
Diff:2
73) WhichoneofthefollowingisNOTincludedinGDP?
A) Youpayaroofer$3,000torepairyourroofafteritisdamagedinahailstorm.
B) Youpayaroofer$3,000torepairyourroofafteryoudiscoverleakshaveappeareddueto
normalwearandtear.
C) Yougiveupaweekendofleisuretorepairyourroofyourself.
D) Youpurchase$60worthoffirstaidsuppliesatthelocaldrugstoretotreatthecutsand
scrapesyousufferedwhilecrawlingaroundontheroof.
Answer: C
Diff:1
A) Youlookafteryourneighborsplantsduringhervacationinexchangeforheragreement
tofeedyourfishwhileyouaregone.
B) Ahomeownerhiresacleaningservicetotakecareofhouseholdchoresshechoosesnotto
dobecauseofthedemandsofherjob.
C) Abicyclemanufacturerpaysanadvertisingagencytodevelopanewpromotional
campaign.
D) Youpurchasenewtiresforyouroldcar.
Answer: A
Diff:2
75) WhichofthefollowingisincludedinGDP?
A) Anewlylaid-offworkerreceiveshis$400unemploymentcompensationcheckfromthe
stategovernment.
B) Acollegeseniorreceivesa$1,000graduationgiftfromagrandparent.
C) Youbuya$12snowshoveltohaveonhandforthenextsnowstorm.
D) Youpurchase$300worthofclothesfromathriftshopsellingsecond-handclothing.
Answer: C
Diff:2
76) GDPisameasureof
A) production. B) innovation.
C) inflation. D) theamountofmoneyavailable.
Answer: A
Diff:2
77) Thetotalmarketvalueofthenationsannualfinalproductsproduceddomesticallybestdefines
the
A) GDP. B) GNP. C) CPI. D) PPI.
Answer: A
Diff:1
78) Grossdomesticproductisameasureof
A) thetotalvalueofalltransactionsinU.S.markets.
B) theaddedvalueofproduction.
C) thedollarvalueoffinalgoodsandservicesproducedintheUnitedStates.
D) thedollarvalueoftheaggregatemeasureofbusinessasmeasuredbytheDowJones
IndustrialAverage.
Answer: C
Diff:1
79) WhichofthefollowingisNOTincludedwhencalculatingGDP?
A) thedollarvalueofanewbook
B) thedollarvalueofanewiPod
C) thedollarvalueofanewlyissuedcorporatebond
D) thedollarvalueoftuitionexpendituresatacommunitycollege
Answer: C
Diff:2
80) WhichofthefollowingiscountedintheGDPinagivenyear?
A) thesaleofMicrosoftstock
B) thesaleofausedMustangconvertible
C) thedollarvalueofthehouseworkdonebyastay -at-homemom
D) thesaleofanewhandmadeukulele
Answer: D
Diff:2
81) Supposeyoudrivedowntown,payforparkingataprivateparkinggarage,andgotoseean
investmentadvisor.Hechargesyoua$100feetoadviseyoutopurchase500sharesofstock,
whichyoudo.WhichofthesetransactionsisNOTincludedinGDP?
A) thepurchaseofgasforthetrip
B) payingtheparkingfee
C) payingthe$100feetotheinvestmentadvisor
D) yourpurchaseofthestock
Answer: D
Diff:2
A) Thefederalgovernmentpaysadefensecontractortodevelopanewweaponssystem.
B) Youvolunteertoorganizeaneighborhoodwatchgrouponyourblock.
C) Youpayyourmonthlyapartmentrent.
D) Amail-orderfirmconstructsanewwarehouseinKansasasacentraldistributionfacility.
Answer: B
Diff:1
83) Nationalincomeaccountingis
A) usedbybusinessestocalculatetheirprofitsduringagivenyear.
B) asystemutilizedtomeasuremacroeconomicactivity.
C) ameasureofconsumerincome.
D) usedbyaccountantstocalculatethetaxobligationsofmultinationalcorporations.
Answer: B
Diff:1
84) Grossdomesticproductisthe
A) marketvalueofallintermediateandfinalgoodsproducedinayear.
B) marketvalueofallfinalgoodsproducedinayear.
C) totalspendinginaneconomyinayear.
D) valueoftotalexportsinayear.
Answer: B
Diff:1
85) ThevalueaddedmethodofcalculatingGDPmeans
A) addingupthemarketvaluesofallintermediategoods.
B) calculatingthepercentagechangesintheGDPbetweentwoyears.
C) addinguptheincomesofallbusinessesinagivenyear.
D) addingupthedifferencebetweenthesalepriceandthevalueofintermediategoodsof
eachproductateverystageofproduction.
Answer: D
Diff:1
86) Yourparentssurpriseyouwitha$500check.Asaresult,theU.S.GDP
A) increasesbecausethisisunexpectedincometoyou.
B) decreasesbecauseyouwillspenditonuselessgoods.
C) remainsunchangedbecauseitwascountedwhenyourparentsearnedit.
D) decreasesbecauseyouhavetopaytaxesonthisincome.
Answer: C
Diff:2
ProductionStep SalesValue/Textbook
Purchaseoftimber $2.50
Convertingtimbertopaper $8.40
Shippingpapertoprinter $10.00
Printing $26.00
Shippingbookstobookstores $32.00
Retailsalespriceoftextbook $40.00
87) Usingabovetable,howmuchiscontributedtotheGDPfromtheproductionofthetextbook?
A) $118.90 B) $32.00 C) $78.90 D) $40.00
Answer: D
Diff:2
88) Usingabovetable,themarketpriceofthetextbookis
A) $118.90. B) $32.00. C) $78.90. D) $40.00
Answer: D
Diff:1
89) Considerthefollowing:
FarmerJonesboughtseedandfertilizerfor$100.
HegrewwheatthathesoldtotheAcmeBreadCompanyfor$200.
AcmeBreadproducedandsoldbreadtotheABCGroceryStorefor$250.
Consumersboughtthebreadfromthegroceryfor$350.
HowmuchwasaddedtotheGDP?
A) $700 B) $800 C) $350 D) $600
Answer: C
Diff:2
90) WhichofthefollowingtransactionswouldNOTcontributetotheGDP?
A) thepurchaseof100sharesofGeneralMotorsstock
B) thepurchaseofanewChevroletautomobile
C) thepurchaseofapackageofchewinggumfromtheconveniencestore
D) thepurchaseofgasolineforyourautomobile
Answer: A
Diff:2
91) WhichofthefollowingwouldNOTbeincludedinthecalculationoftheGDP?
A) thevalueoftheserviceoflegallyproducedgamblingservicesinLasVegas
B) thevalueoftheservicesofahomemaker
C) thevalueoflegallyproducedliquor
D) thevalueoftheproductionofnuclearweapons
Answer: B
Diff:2
92) TheSocialSecuritycheckreceivedbyyourgrandmother
A) isincludedintheGDPbecauseitwillbespentongoodsandservices.
B) isexcludedfromGDPcalculationsbecauseincludingitwouldresultindoublecounting.
C) isincludedintheGDPbecausesheisentitledtoitasacitizen.
D) isincludedintheGDPbecauseitispartofherincome.
Answer: B
Diff:2
93) WhichofthefollowingwillbeincludedinthisyearsGDP?
A) aPabloPicasso(1881-1973)paintingpurchasedthisyearbytheartmuseum
B) thepurchaseofausedtextbookbyyourfriend
C) thepurchaseof100sharesofIBMstockthroughyourbroker
D) thepurchaseofaninsurancepolicyforausedcar
Answer: D
Diff:2
94) GDPmeasures
A) thenationseconomicwelfare.
B) thenationseconomicactivity.
C) thechangesintheunemploymentrateinagivenyear.
D) theamountofundergroundactivityinanation.
Answer: B
Diff:1
95) GDPmeasures
A) theannualtotalvalueofallservicesproducedbyfactorsofproductionlocatedwithina
nationalborder.
B) theannualvalueoffinalgoodsandservicesproducedbyfactorsofproductionlocated
withinanationalborder.
C) theannualvalueofgoodsandservicesproducedbyfactorsofproductionownedby
companiesheadquarteredinagivencountry.
D) thevalueofallgoodsandservicessoldinagivencountry.
Answer: B
Diff:2
96) Goodsusedupentirelyintheproductionoffinalgoodsare
A) intermediategoods. B) productiongoods.
C) processgoods. D) inventorygoods.
Answer: A
Diff:1
97) IncalculatingGDP,thevalueofintermediategoodsiseliminatedbyusingthe
A) distributivemethod. B) valueassociationmethod.
C) valueaddedmethod. D) FederalReservemethod.
Answer: C
Diff:1
98) Thesumofthevalueaddedatallstagesofproductionforaproductis
A) theproductsfinalprice.
B) theproductspriceplusthevalueofintermediategoods.
C) theproductspriceminusthevalueofintermediategoods.
D) thesumofallthetransactionsintheproductionoftheproduct.
Answer: A
Diff:1
99) WhichofthefollowingtransactionsisincludedinGDP?
A) salesofusedgoods
B) buyingandsellingofstocksandbonds
C) thesalesofhousesproducedinthatgivenyear
D) governmenttransferpayments
Answer: C
Diff:2
100) ConsumptionexpendituresdoNOTincludepurchasesof
A) durablegoods. B) nondurablegoods.
C) intermediategoods. D) services.
Answer: C
Diff:1
101) ManyeconomistsarguethatrealGDPis
A) notagoodmeasureofeconomicwell-beingbecauseitovervaluesincreasesinleisure
time.
B) notagoodmeasureofeconomicwell-beingbecauseitexcludesincreasesinleisuretime.
C) agoodmeasureofeconomicwell-beingbecauseitincludesincreasesinleisuretime.
D) agoodmeasureofeconomicwell-beingbecauseitincludeschangesinpersonalsafety.
Answer: B
Diff:2
102) ManyeconomistsarguethatrealGDPisnotagoodmeasureofeconomicwell-beingbecause
A) itovervaluestheincreasesinnonmarkettransactions.
B) itexcludesSocialSecuritypaymentsmadetoretirees.
C) itincludesthetaxeswepaytothefederalgovernment.
D) itexcludestheenvironmentalqualityoflife.
Answer: D
Diff:2
103) WhichofthefollowingtransactionsisincludedintheGDP?
A) payingalawyertocreateafamilytrust B) givingyourfriend$20
C) sellingyour2004ToyotaCamry D) cleaningyourhouse
Answer: A
Diff:2
104) SupposeyoubuyanewFordFusion.Thetiresthatcomewiththecarare
A) finalgoods. B) intermediategoods.
C) transfergoods. D) financialgoods.
Answer: B
Diff:1
105) WhatisvalueaddedandhowisitrelatedtoGrossDomesticProduct(GDP)?
Answer: Valueaddedisthedollarvalueofanindustryssalesminusthevalueofintermediate
goodsusedinproduction.BothGrossDomesticProduct(GDP)andvalueaddeddonot
includethevalueofintermediategoods.GrossDomesticProduct(GDP)canbecalculated
byaddingupthevalueaddedateachstageofproduction.
Diff:2
106) SupposeGrossDomesticProduct(GDP)figureswerechangedtoreflecthouseholdproduction.
HowwouldthesizeofhouseholdproductionrelativetoGrossDomesticProduct(GDP)have
changedoverthelastfiftyyears?
Answer: Therelativesizeofhouseholdproductionwouldbelessaspeoplehavesubstituted
marketproductionforhouseholdproduction.Fiftyyearsago,peopledidnoteatoutas
muchasnow.Asthelaborforceparticipationrateofwomenhasincreased,familieshave
reliedlessonhouseholdproductionandmoreonmarketproduction.
Diff:3
107) Defineandexplaingrossdomesticproduct.
Answer: Grossdomesticproductisthetotalmarketvalueofallfinalgoodsandservicesproduced
byfactorsofproductionlocatedwithinacountrysborders.GDPdoesnotcount
intermediategoodsbutcountsonlyfinalgoodsandservices.GDPisalsomeasuredfora
givenperiodoftime,usuallyayear,soitisaflowconcept.Italsocountsonlymarket
transactions,sothevalueofhomeproductionisnotincluded.
Diff:1
108) Whyarentfinancialtransactions,salesofsecondhandgoods,andhouseholdproduction
includedinmeasuringGDP?
Answer: Financialtransactionsdonotinvolvetheproductionoffinalgoodsandservices,sothey
arenotincluded.Secondhandgoodsalsowerenotproducedintherelevanttimeperiod.
TheywerecountedinGDPwhentheyweresoldasnewproducts.Hence,includingthem
whentheyarenotnewwouldbedouble-countingthem.Householdproductionisnot
includedbecauseitisanonmarketactivity.
Diff:2
8.3TwoMainMethodsofMeasuringGDP
1) ThetwoprinciplemethodsofmeasuringGrossDomesticProductarethe
A) flowapproachandthestockapproach.
B) expendituresapproachandtheincomeapproach.
C) intermediateapproachandthevalue-addedapproach.
D) domesticapproachandtheinternationalapproach.
Answer: B
Diff:1
Topic: 8.3TwoMainMethodsofMeasuringGDP
2) WhichofthefollowingstatementsisTRUE?
A) ThevalueofillegalactivitiesisincludedinGrossDomesticProduct(GDP).
B) ThevalueofahomemakersservicesisincludedinGrossDomesticProduct(GDP).
C) ThevalueofintermediategoodsisincludedinGrossDomesticProduct(GDP).
D) GrossDomesticProduct(GDP)maybecalculatedusingtheincomeortheexpenditure
approach.
Answer: D
Diff:1
3) WhichoneofthefollowingstatementsaboutGDPistrue?
A) GDPcanbecalculatedusingtheincomeapproach.
B) ThevalueofhouseholdproductionisexcludedfromGDP.
C) GDPcanbecalculatedusingtheexpendituresapproach.
D) alloftheabove.
Answer: D
Diff:2
4) Whenweusethetermfixedinvestment,weincludeininvestment
A) thepurchaseofstocksandbonds.
B) thepurchaseofconsumergoods.
C) thepurchaseofprivatebonds,butnotgovernmentbonds.
D) thepurchaseofequipmentandothercapitalgoods.
Answer: D
Diff:1
5) Whenoneusestheexpenditureapproach tocalculateGrossDomesticProduct(GDP),whichofthe
followingwouldbeincluded?
A) governmentspendingatthestatelevel B) householdpurchasesoflegalservices
C) inventoryinvestment D) alloftheabove
Answer: D
Diff:1
6) SupposethatfortheeconomyofSpringfield,wehavethefollowinginformationfor2013:
consumptionexpenditures=$4,000;wages=$3,500;grossprivatedomesticinvestment=
$1,300;governmentexpenditures=$2,000;exports=$900;imports=$1,100.Usingthe
expenditureapproachwhatwouldtheGrossDomesticProduct(GDP)beforSpringfieldin2013?
A) $6,200 B) $7,100 C) $7,500 D) $10,600 E) $12,800
Answer: B
Diff:1
7) WhichofthefollowingspendingcomponentsmakesupthelargestpercentageofGross
DomesticProduct(GDP)?
A) Consumptionexpenditures
B) Governmentexpenditures
C) Grossprivatedomesticinvestmentexpenditures
D) Expendituresonnetexportsofgoodsandservices
Answer: A
Diff:1
8) DurableconsumergoodsincludeallofthefollowingEXCEPT
A) anautomobile. B) stockinIBM.
C) acomputer. D) acompactdiscplayer.
Answer: B
Diff:1
9) ExamplesofnondurableconsumergoodsincludeallofthefollowingEXCEPT
A) apizzadeliveredtoyourhome. B) acupofcoffee.
C) astereosystem. D) atickettothemovies.
Answer: C
Diff:1
10) ServicesincludeallofthefollowingEXCEPT
A) paymentforadoctorsvisit. B) thepurchasepriceofashareofstock.
C) schooltuition. D) paymentsforautorepair.
Answer: B
Diff:1
11) Whichofthefollowingisanexampleofthegrossprivatedomesticinvestmentcomponentof
GrossDomesticProduct(GDP)?
A) YoubuyashareofGMstock.
B) GMbuysanewdrillpress.
C) Youputmoneyintoyoursavingsaccount.
D) Youputmoneyintoyourcheckingaccount.
Answer: B
Diff:1
12) Whichofthefollowingareexamplesofthegrossprivatedomesticinvestmentcomponentof
I. Thepurchaseofproductionmachinery
II. Anincreaseinfinishedgoodsinventory
Answer: C
Diff:1
13) Whichofthefollowingispartofgrossprivatedomesticinvestment?
A) Purchasesofstocksandbonds
B) Adeclineinconsumerdebt
C) Purchasesofhamburgersforafamilydinner
D) Apositivechangeinbusinessinventories
Answer: D
Diff:1
14) Whichoneofthefollowingisadurableconsumergood?
A) Furniture
B) Gasoline
C) Food
D) Officesuppliesthatwillbeusedupthisyear
Answer: A
Diff:1
15) WhenthetotalquantityofunsoldnewChevroletsincreasesfrom50,000to75,000,
A) theeconomyexperiencesaperiodofdisinvestment.
B) theeconomyslevelofcompetitionincreases.
C) thereisanincreaseintherateofaggregateoutput.
D) theproducerengagesinaninventoryinvestment.
Answer: D
Diff:2
16) Inventoryinvestmentoccurswhen
A) grocerssellstocksofcannedgoodsofftheirshelves.
B) individualsinvestinaninvention.
C) shopkeeperschecktheirinventories.
D) automobiledealersaddtotheirstocksofunsoldcars.
Answer: D
Diff:1
17) Durableconsumergoodsaregoodsthat
A) lastformorethanthreeyears. B) lastformorethanoneyear.
C) areusedupwithinthreeyears. D) areusedupwithinoneyear.
Answer: A
Diff:1
18) Foodandgasolinecanbeclassifiedas
A) nondurablegoods. B) durablegoods.
C) capitalgoods. D) long-termgoods.
Answer: A
Diff:2
19) CalculatingGrossDomesticProduct(GDP)bytheexpenditureapproachrequiressummingthe
valueof
A) allincomepaidtoindividuals.
B) alltransactionsintheeconomy.
C) allfinalgoodsandservicesproducedintheeconomy.
D) allexpendituresbyindividuals.
Answer: C
Diff:1
20) Whichofthefollowingisincludedingrossprivatedomesticinvestment?
I. Thepurchaseofnewcapitalgoods
II. Anincreaseinbusinessinventories
Answer: C
Diff:1
21) Ifafirmproducesmoreoutputthanitsells,therewillbe
I. Anincreaseinthefirmsinventories
II. Anincreaseinthegrossprivateinvestmentofthenation
Answer: C
Diff:2
22) Fixedinvestmentincludes
A) businessspendingonplantandequipment.
B) businessspendingonprintingpaper.
C) businesssalaries.
D) laborunioncontracts.
Answer: A
Diff:2
23) WhichofthefollowingisanexampleofinvestmentincomputingGrossDomesticProduct
(GDP)?
A) Anincreaseofinventorystockinanautodealership
B) Adepositof$2,000inabank
C) Alaptoppurchasedbyastudent
D) Thepurchaseofgovernmentbondsbyaretiree
Answer: A
Diff:2
24) WhichofthefollowingisincludedinGrossDomesticProduct(GDP)?
A) Purchasesofstocksandbondsbyindividuals
B) Purchasesofstocksandbondsbyfirms
C) Salesoffinancialassetstoforeignfirms
D) Investmentspendingoncapitalgoods
Answer: D
Diff:1
25) Depreciationis
A) addedtoGrossDomesticProduct(GDP)toreachNetDomesticProduct(NDP).
B) thereductioninthevalueofcapitalgoodsduetophysicalwearandtear.
C) notincludedinGrossDomesticProduct(GDP)fromtheincomeside.
D) alwayshigherthanthecapitalconsumptionallowance.
Answer: B
Diff:1
26) Netdomesticproduct(NDP)is
A) GrossDomesticProduct(GDP)minusdepreciation.
B) GrossDomesticProduct(GDP)minusprivateinvestment.
C) GrossDomesticProduct(GDP)minustheforeignsector.
D) GrossDomesticProduct(GDP)minusgovernmenttransfers.
Answer: A
Diff:1
27) ThecomponentsoftheexpenditureapproachtomeasuringGrossDomesticProduct(GDP)
includeallofthefollowingEXCEPT
A) governmentpurchasesofgoodsandservices.
B) governmentSocialSecuritypayments.
C) durableconsumergoods.
D) nondurableconsumergoods.
Answer: B
Diff:1
28) Anexampleofanincreaseingrossprivatedomesticinvestmentspendingthatalsoincreases
GrossDomesticProduct(GDP)iswhen
A) afamilysellsitshomebecauseofatransfer.
B) afarmerbuysausedtractor.
C) inventoriesofnewcarsaccumulateonthelotsofcardealers.
D) governmentincreasesspendingoninfrastructure.
Answer: C
Diff:3
29) Acapitalgoodis
A) oneproducedbythegovernment.
B) partofinvestmentspendingwhenpurchasedbyeitherprivatebusinessesorbythefederal
government.
C) onethatispurchasedinordertomakeothergoodsandservices.
D) notpartofGrossDomesticProduct(GDP)becauseitisanintermediateproduct.
Answer: C
Diff:1
30) Ifallotherfactorsareheldconstant,anincreaseinimports
A) causesanincreaseinexportsofthesamesize.
B) causesGrossDomesticProduct(GDP)toincrease.
C) causesGrossDomesticProduct(GDP)todecrease.
D) cancauseGrossDomesticProduct(GDP)toincreaseordecrease,dependingonwhether
theimportsarepurchasedbyconsumersorbybusinessfirms.
Answer: C
Diff:2
31) IfGrossDomesticProduct(GDP)equals$1trillion,grossprivateinvestmentexpendituresare
$200billion,exportsequalimports,andgovernmentspendingis$400billion,then
A) consumptionexpendituresare$200billion.
B) consumptionexpendituresare$400billion.
C) spendingonconsumerdurablesmustbe$400million.
D) wecannotdeterminewhatexpendituresonconsumptionarewithoutmoreinformation.
Answer: B
Diff:2
32) Becauseofimprovedproductivity,wagesincrease10percent.Asaresult,grossdomestic
incomeincreases.WhathappenstoGrossDomesticProduct?
A) GrossDomesticProductalsoincreasessinceconsumptionexpenditureswouldincrease.
B) GrossDomesticProductdecreasesaspeoplepaymoretaxesontheirhigherincomes.
C) GrossDomesticProductwouldnotchangesinceconsumptionexpenditureswouldrise
butinvestmentspendingwouldfall.
D) GrossDomesticProductwoulddecreasebecausebusinessesarespendingmoreonwages.
Answer: A
Diff:3
33) AdecreaseinU.S.incomeearnedabroadwillmakeallofthefollowingsmallerEXCEPT
A) nationalincome. B) netdomesticproduct.
C) personalincome. D) disposablepersonalincome.
Answer: B
Diff:2
34) IfNetDomesticProduct(NDP)is$50lessthanGrossDomesticProduct(GDP),weknowthat
A) inventoriesincreasedovertheyear. B) inventoriesdecreasedovertheyear.
C) netinvestmentequals$50. D) depreciationequals$50.
Answer: D
Diff:2
35) IfC=consumption,G=governmentexpenditures,andI= grossprivateinvestment

expenditures,themathematicalrepresentationofGrossDomesticProduct(GDP)usingthe
expenditureapproachis
A) GrossDomesticProduct(GDP)= C+ I+ G+ Transfers.
B) GrossDomesticProduct(GDP)= C+ I+ G+ Imports.
C) GrossDomesticProduct(GDP)= C+ Imports.
D) GrossDomesticProduct(GDP)= C+ I+ G+ Netexports.
Answer: D
Diff:1
36) OnemethodofcalculatingGrossDomesticProduct(GDP)istoaddtogether
A) investment,consumption,grossprofits,andnetexports.
B) consumption,investment,governmentspending,andnetexports.
C) wages,grossprofits,netinvestment,andnetexports.
D) consumption,wages,interest,rentalincome,andexports.
Answer: B
Diff:1
37) GrossDomesticProduct(GDP)exceedsnetdomesticproductbyanamountequalto
A) indirectbusinesstaxes.
B) corporateprofitspluspersonaltaxes.
C) thecapitalconsumptionallowance(depreciation).
D) transferpaymentsminuspersonaltaxes.
Answer: C
Diff:1
Consumptionexpendituresongoodsandservices $1,500
Totalgovernmentspendingongoodsandservices 590
Grossprivatedomesticinvestment 355
Imports 50
Exports 70
Depreciation(capitalconsumptionallowance) 200
NetU.S.incomeearnedabroad -75
38) Accordingtotheabovetable,GrossDomesticProduct(GDP)is
A) $2,190. B) $2,840. C) $2,465. D) $2,750.
Answer: C
Diff:1
39) WhichofthefollowingisincludedwhenmeasuringGrossDomesticProduct(GDP)?
A) Thevalueofservicesofdurablegoodspurchasedinpreviousyears
B) Thevalueofleisuretime
C) Thevalueofservicesprovidedbyhomemakers
D) Therentalincomereceivedbyalandlord
Answer: D
Diff:1
40) WhenusingtheincomeapproachtoestimateGrossDomesticProduct(GDP),whichofthe
followingwouldNOTbeincluded?
A) Theimplicitrentalvalueofowner-occupiedhousing
B) Proprietorsincome
C) Personalconsumptionexpenditures
D) Netinterestreceivedbyhouseholds
Answer: C
Diff:1
41) ThevalueofGrossDomesticProduct(GDP),whenestimatedbytheincomeapproach,isthe
sumof
A) consumptionexpenditures,investmentspending,andprofits.
B) consumption,wages,rents,interest,andprofits.
C) incomeearnedbyallfactorsofproduction,indirectbusinesstaxes,corporateincometaxes,
andpersonalincometaxes.
D) depreciation,businessincomeadjustmentslessindirectbusinesstaxes,U.S.netincome
earnedabroadandincomeearneddomesticallybyfactorsofproduction.
Answer: D
Diff:1
Netinterest $739
NetU.S.incomeearnedabroad 36
Wagesandsalaries 8,735
Rentalincome 237
Otherbusinessincome 1,202
adjustmentslessbusinesstransfers
Changeinbusinesspayments 262
Inventories 14
Personalconsumption 1,250
Proprietorialincome 1,128
Grossinvestmentspending 1,479
Indirectbusinesstaxes 1,059
Corporateprofitsbeforetaxes 1,194
Exports 249
Depreciation 1,833
42) Accordingtotheabovetable,GrossDomesticProductascalculatedbytheincomeapproachis
A) $10,121billion. B) $10,646billion. C) $14,925billion. D) $15,619billion.
Answer: C
Diff:2
43) Accordingtotheabovetable,netdomesticproductis
Answer: C
Diff:1
44) Accordingtotheabovetable,nationalincomeis
Answer: A
Diff:1
IndirectBusinessTaxes $1,200
GrossCorporateProfitsplusProprietorsIncome $2,140
RentalIncome(includingimplicitrents) $175
NetInterest $650
Depreciation(capitalconsumptionallowance) $1,775
WageandSalaryIncome $8,200
45) Accordingtotheabovetable,GrossDomesticProductis
A) $14,140. B) $13,965. C) $13,315. D) $12,115
Answer: A
Diff:1
A) $14,390. B) $13,190. C) $12,540. D) $12,365.
Answer: D
Diff:1
47) CalculatingGrossDomesticProduct(GDP)bytheincomeapproachwouldrequireincluding
A) alltransferpaymentsbythegovernment.
B) allwagespaid.
C) allrestaurantsales.
D) themarketvalueofallfinalgoodsandanyprofits.
Answer: B
Diff:1
48) WhichofthefollowingisincludedinthecalculationofGrossDomesticProduct(GDP)usingthe
incomeapproach?
I. Wagesandsalaries.
II. Netexports.
Answer: A
Diff:1
49) Non-incomeexpenseitemsincludedintheGrossDomesticProduct(GDP)calculationinclude
A) depreciationandindirectbusinesstaxes.
B) depreciationandcorporateprofits.
C) corporateprofitstaxandindirectbusinesstaxes.
D) indirectbusinesstaxesandcorporateprofits.
Answer: A
Diff:1
50) Indirectbusinesstaxesreferto
A) depreciationexpenses. B) salesandlocaltaxespaidbybusiness.
C) paymentsforlow-skilledlabor. D) dividendtaxespaidbythecorporation.
Answer: B
Diff:1
51) Thelargestcategoryofgrossdomesticincomeis
A) interest. B) rent. C) wages. D) profits.
Answer: C
Diff:1
52) Ifhouseholdspay$1,000ininterestpaymentsandreceive$1,200ininterest,wagesequal$8,000,
rentalreceiptsonlandare$200,totalbusinessprofitsbeforetaxesare$2,200,depreciationis
$1,750,andindirectbusinesstaxesare$1,000,thengrossdomesticincomeis
A) $15,350. B) $13,350. C) $13,150. D) $11,400.
Answer: B
Diff:3
53) ThetwomainmethodsofmeasuringGDPare
A) theincomeapproachandtheexpenditureapproach.
B) theincomeapproachandthereceiptsapproach.
C) thegoodsapproachandtheservicesapproach.
D) thesavingapproachandtheinvestmentapproach.
Answer: A
Diff:1
54) TheexpenditureapproachtomeasuringGDP
A) addsthedollarvalueoffinalgoodsandservices.
B) addstheincomereceivedbyallfactorsofproduction.
C) excludesdurableconsumergoodssincetheylastmorethanayear.
D) excludesprofitssinceprofitsareacostofproduction.
Answer: A
Diff:1
55) ThecomputationofGDPbyaddingupthedollarvalueatcurrentmarketpricesofallfinal
goodsandservicesis
A) theexpenditureapproach. B) theincomeapproach.
C) transferpayments. D) thevalueofallsecurities.
Answer: A
Diff:1
56) ThecomponentsoftheexpenditureapproachtomeasuringGDPincludeallofthefollowing
EXCEPT
A) netexports.
B) governmentpurchasesofgoodsandservices.
C) expendituresforbusinessinvestments.
D) theimplicitpaymentsforunpaidhouseholdwork.
Answer: D
Diff:1
57) IncalculatingGDP,yourtuitionexpendituresatcollegeareclassifiedas
A) consumerexpendituresonservices.
B) consumerexpendituresongoods.
C) consumerexpendituresondurablegoods.
D) investmentspending.
Answer: A
Diff:2
58) Aconsumergoodthathasalifespanofmorethanthreeyearsisa(n)
A) durableconsumergood. B) nondurableconsumergood.
C) service. D) investment.
Answer: A
Diff:1
59) Aconsumergoodthatisusedupwithinthreeyearsisa(n)
Answer: B
Diff:1
60) Mentalorphysicallabororhelppurchasedbyconsumersisa(n)
Answer: C
Diff:1
61) Durableconsumergoodsaregoodsthatlastmorethan
A) oneyear. B) threeyears. C) fiveyears. D) sevenyears.
Answer: B
Diff:1
62) WhichofthefollowingwouldNOTbeincludedinconsumptionexpenditureswhencalculating
GDP?
A) anindividualspurchaseofanewcar
B) anindividualspurchaseofmedicalservices
C) anindividualspurchaseofnewlyissuedsharesofIBMstock
D) anindividualspurchaseoflegalservices
Answer: C
Diff:1
63) Anondurablegood
A) hasalifespanofmorethan3years. B) isusedupwithin3years.
C) appliesonlytoservices. D) isanintangiblecommodity.
Answer: B
Diff:1
64) Adurablegood
A) hasalifespanofmorethan3years. B) isusedupwithin3years.
C) appliesonlytoservices. D) isanintangiblecommodity.
Answer: A
Diff:1
65) Anexampleofadurablegoodis
A) itemspurchasedatagrocerystore. B) arefrigerator.
C) thepurchaseoflaborforabusiness. D) theservicesofacleaningperson.
Answer: B
Diff:1
66) Anexampleofanondurablegoodis
A) itemspurchasedatagrocerystore. B) arefrigerator.
C) thepurchaseoflaborforabusiness. D) theservicesofacleaningperson.
Answer: A
Diff:1
67) WhichofthefollowingisincludedingovernmentexpenditureswhenmeasuringGDP?
A) SocialSecuritypayments B) Unemploymentexpenditures
C) GoodsimportedintotheUnitedStates D) ThePresidentsincome
Answer: D
Diff:2
68) Wheneconomistsrefertoinvestmentexpenditurestheymeanthe
A) purchaseofaconsumernondurablegoods.
B) purchaseofstocksorbonds.
C) useoftodaysresourcestoexpandtomorrowsproductionorconsumption.
D) productionofintermediategoods.
Answer: C
Diff:1
69) Supposeafirmpurchasesnewequipmenttoreplaceworn-outequipmentatitsfactory.This
purchaseofnewequipmentisconsidered
A) durableconsumptiongoods. B) inventoryinvestment.
C) grossprivatedomesticinvestment. D) noneoftheabove.
Answer: C
Diff:1
70) Anyuseoftodaysresourcestoexpandtomorrowsproductionorconsumptionisa(n)
Answer: D
Diff:1
71) AnincreaseinfixedinvestmentspendingthatincreasesGDPoccurswhen
A) afamilypurchasesanewcar.
B) abusinessbuysanewcomputer.
C) inventoriesofnewcarsaredrawndownonthelotsofcardealers.
D) thegovernmentbuildsanewofficebuilding.
Answer: B
Diff:2
72) Acapitalgoodis
A) agoodthatlastsmorethanthreeyears.
B) agoodthatisusedtomakeothergoodsandservices.
C) anintermediateproductandthereforenotpartofGDP.
D) agoodthatshouldincreaseinvalueovertime.
Answer: B
Diff:1
73) Capitalpurchasesbybusinessesofnewlyproduceddurablesisknownas
C) fixedinvestment. D) inventoryinvestment.
Answer: C
Diff:1
74) Changesinthestocksoffinishedgoodsandgoodsinprocessaswellaschangesintheraw
materialsthatbusinesseskeeponhandisknownas
Answer: D
Diff:1
75) Fixedinvestmentis
A) thechangeinstocksoffinishedgoods.
B) thechangeinthestocksofgoodsinprocess.
C) capitalpurchasebybusinessesofnewlyproduceddurables.
D) purchasesbyconsumersofnewlyproducedconsumerdurables.
Answer: C
Diff:1
76) Anincreaseinnetexports
A) causesGDPtoincrease.
B) causesGDPtodecrease.
C) causesanincreaseinimportsofthesamesize.
D) cancauseGDPtoeitherincreaseordecrease,dependingonwhethertheexportsare
durableornondurable.
Answer: A
Diff:2
77) Netexportsequalthe
A) totalvalueofallexports.
B) totalvalueofallgovernmentproducedexports.
C) valueofexportsminusthevalueofimports.
D) valueofimportsminusthevalueofexports.
Answer: C
Diff:1
78) Usingtheexpenditureapproach,GDPiscalculatedas
A) wages+interest+rent+ profits
B) consumptionexpenditures+ wages
C) consumptionexpenditures+ wages+ interest
D) consumptionexpenditures+ investmentexpenditures+ governmentexpenditures+ net
exports
Answer: D
Diff:1
79) ThecomponentsofGDPusingtheexpendituremethodare
A) consumptionexpenditures,investmentexpenditures,andgovernmentexpenditures.
B) consumptionexpenditures,investmentexpenditures,governmentexpenditures,andnet
exports.
C) wagesandinterest.
D) wages,interest,rents,andprofits.
Answer: B
Diff:1
80) C+I+G+Xequals
A) GDP. B) DPI. C) NDP. D) PI.
Answer: A
Diff:1
81) C+netI+G+Xequals
A) GDP. B) DPI. C) NDP. D) PI.
Answer: C
Diff:1
82) Ifimportsare$100millionlessthanexports,governmentspendingis$500million,consumer
expendituresare$1billion,andinvestmentspendingis$500million,thenGDPis
A) $1billion. B) $1.9billion. C) $2billion. D) $2.1billion.
Answer: D
Diff:2
83) Ifconsumptionexpendituresare$500million,spendingonfixedinvestmentis$100million,the
increaseininventoriesequals$5million,importsare$50million,exportsare$55million,
governmentspendingongoodsandservicesis$200million,thanGDPis
A) $790million. B) $800million. C) $810million. D) $830million.
Answer: C
Diff:3
84) Grossdomesticproductis
A) NDPplusnetexports. B) NDPplustaxes.
C) NDPplusdepreciation. D) NDPlesschangesininventories.
Answer: C
Diff:1
85) Netinvestmentrefersto
A) thechangeinthecapitalstockaftersubtractingoutdepreciation.
B) thechangeininventoriesovera1-yearperiod.
C) thechangeininvestmentspendingandthechangeingovernmentexpenditureson
infrastructure.
D) exportsminusimports.
Answer: A
Diff:1
86) Ifconsumptionexpendituresare$100million,netinvestmentis$50million,importsare$20
million,exportsare$10million,governmentspendingongoodsandservicesis$40million,
SocialSecurityspendingis$15million,andsalesofexistinghomesequals$40million,then
whatisthemeasureofGDP?
A) GDP=$225million B) GDP= $180million
C) GDP=$295million D) GDP= $195million
Answer: B
Diff:3
87) ThecomponentsofGDPusingtheincomemethod(excludingindirectbusinesstaxesand
depreciation)are
A) consumptionexpenditures,investmentexpenditures,andgovernmentexpenditures.
B) consumptionexpenditures,investmentexpenditures,governmentexpenditures,andnet
exports.
C) wagesandinterest.
D) wages,interest,rents,andprofits.
Answer: D
Diff:1
88) Allofthefollowingareincludedinthecalculationofgrossdomesticincome(GDI)EXCEPT
A) consumerexpenditures. B) wages.
C) profits. D) indirectbusinesstaxes.
Answer: A
Diff:1
89) Excludingindirectbusinesstaxesanddepreciation,GrossDomesticIncome(GDI)
A) isthesumofallincomepaidtothefactorsofproduction.
B) neverequalsGDP.
C) wouldequalGDPiftherewasnodepreciation.
D) cannotbecomputed.
Answer: A
Diff:1
90) Whichofthefollowingstatementsistrue?
A) GDP=NDP B) GDP= NI C) GDP= GDI D) GDP=PI
Answer: C
Diff:3
91) TheincomeapproachtomeasuringGDP
A) addsthedollarvalueoffinalgoodsandservices.
B) addstheincomereceivedbyallfactorsofproduction.
C) excludesdurableconsumergoodssincetheylastmorethanayear.
D) excludesprofitssinceprofitsareacostofproduction.
Answer: B
Diff:1
92) ThecomputationofGDPbyaddingupallcomponentsofnationalincomeincludingwages,
interest,rentandprofitsis
C) transferpayments. D) thevalueofallsecurities.
Answer: B
Diff:1
93) Thelargestcomponentofgrossdomesticincomeis
A) interestpayments. B) wages.
C) profits. D) taxes.
Answer: B
Diff:1
94) IndirectbusinesstaxesincludeallofthefollowingEXCEPT
A) salestaxes. B) taxesonbusinessproperty.
C) taxesoncorporateprofits. D) taxesonbusinessequipment.
Answer: C
Diff:1
95) Ifhouseholdsreceive$100ininterestpaymentsandmakeinterestpaymentsof$110,wages
equal$500,rentalreceiptsare$200,royaltiesare$100,profitsare$200,depreciationis$50,and
indirectbusinesstaxesare$50,thengrossdomesticincomeis
A) $1090. B) $1110. C) $1180. D) $1280.
Answer: A
Diff:3
96) Becauseofterriblewinterstorms,grossdomesticproductforthefirstquarterofthecalendar
yearfallsby10percent.Asaresult,grossdomesticincome
A) fallsbylessthan10percent.
B) alsofallsby10percentbecausetheyalwayshavetobeequal.
C) fallsbymorethan10percentbecauseincomesalwaysvarymorethanGDP.
D) wouldnotchangesincethetimespanislessthanayear.
Answer: B
Diff:3
97) WhichofthefollowingisfromthecalculationofinvestmentforGDPpurposes?
A) thepurchaseofnewcapitalgoods B) changesinbusinessinventories
C) newhomeconstruction D) alloftheabove
Answer: D
Diff:2
98) Netexportsisequalto
A) totalexportsminustotalimports. B) totalimportsminustotalexports.
C) totalexportsadjustedforpricechanges. D) totalexportsminustransferpayments.
Answer: A
Diff:1
99) Indirectbusinesstaxesinclude
A) propertytaxesandcorporateincometaxes.
B) salestaxesandincometaxes.
C) businesspropertytaxesandsalestaxes.
D) incometaxesandSocialSecuritytaxes.
Answer: C
Diff:2
100) Ifnoothernationalincomevariableschangewhen________increase,thenGDPwilldecrease.
A) inventories B) imports
C) investments D) levelsofpollution
Answer: B
Diff:2
101) GDPcanbecalculatedusing
A) theexpenditureapproachandtheproductionapproach.
B) theexpenditureapproachandtheincomeapproach.
C) theexpenditureapproachandthefactorofproductionapproach.
D) theexpenditureapproachandtheresourceapproach.
Answer: B
Diff:1
102) Whyareexportsaddedto(ratherthansubtractedfrom)theotherexpenditurecomponentsto
arriveatGDPusingtheexpendituremethod?
A) becauseexportsaccountforthosegoodsthatwereproducedintheeconomybutthatwere
notdevotedtodomesticconsumption,usedfordomesticinvestment,orprovidedas
governmentgoods
B) becauseexportshaveahigherprofitmarginformanufacturersthandosimilarproducts
soldindomesticmarkets
C) becauseexportedgoodsarenotvaluedproperly,duetoproblemswiththepurchasing
powerparityindex
D) becauseitisonlythroughexportingthatwecangeneratejobsinourowneconomy
Answer: A
Diff:2
A) Netinvestmentisnegativewhengrossinvestmentisgreaterthandepreciation.
B) Ourproductivecapacitydeclineswhennetinvestmentislessthanzero.
C) Negativenetinvestmentoccurswhenimportsarelessthanexports.
D) Negativenetinvestmentoccurswhenexportsarelessthanimports.
Answer: B
Diff:3
104) Inventoryinvestmentcanbedefinedas
A) changesinthestocksoffinishedgoodsandrawmaterials.
B) thesystemofaccountsthatisusedtocountcertaingoods.
C) goodsthatmustbeexcludedfromtheGDPtoavoiddoublecounting.
D) thevalueofmonetarytransactionsbybusinesses.
Answer: A
Diff:1
105) NetexportsfortheUnitedStates
A) arealwayspositivenumbers.
B) maybenegative.
C) arearesultofdecreasinginvestmentinthemanufacturingindustries.
D) arearesultofdecreasingdomesticconsumption.
Answer: B
Diff:1
106) Theexpenditureapproachtoderivinggrossdomesticproductsumsthefollowingcategoriesof
spending:
A) consumption,investment,governmentspending,andnetexports.
B) consumption,income,governmentspending,andnetexports.
C) consumption,savings,investment,andgovernmentspending.
D) consumption,governmentspending,transferpayments,andnetexports.
Answer: A
Diff:1
107) Usingtheexpenditureapproachtoderivinggrossdomesticproduct,ifU.S.importsriseand
exportsremainthesame
A) GDPrises. B) GDPremainsthesame.
C) GDPfalls. D) GDPindicatesarecession.
Answer: C
Diff:2
108) Grossdomesticincomecanbedefinedas
A) thesumofallincomesearnedbyallfactorsofproductioninayear.
B) thesumofallincomesearnedbyindividuals.
C) thesumofallprofitsearnedbybusinessesinayear.
D) thesumofallprofitsearnedminusdepreciation.
Answer: A
Diff:2
109) ThetwomainapproachestomeasuringGDParethe
A) conceptapproachandtherealityapproach.
B) flowapproachandthestockapproach.
C) governmentapproachandtheconsumerapproach.
D) incomeapproachandtheexpenditureapproach.
Answer: D
Diff:1
110) WhatistheproperformulaforcomputingtheGDPusingtheexpenditureapproach?
A) S+I+G+X B) C+I+ G+ X C) C+ O+ G+ S D) 0.5(w+r)+k
Answer: B
Diff:2
111) Giventhefollowingdata,calculatetheGDP.
wages=$500 governmentspending=$2,500 privateinvestment=$2,100
rent=$100 consumerspending=$7,800 netexports=$-400
A) GDP=$11,400 B) GDP= $12,000 C) GDP= $12,400 D) GDP=$13,000
Answer: B
Diff:3
112) TheappropriateformulaforcomputingGrossDomesticProductusingtheincomeapproach
(excludingdepreciationandindirectincometaxes)is
A) consumption+investment+ governmentspending+ netexports
B) wages+rent+interest+ profits
C) wages+rent+interest+ profits+ indirectbusinesstaxes
D) wages+rent+interest+ profits+ indirectbusinesstaxes+ depreciation
Answer: D
Diff:2
113) TocalculateGDPoncenationalincomehasbeencomputed,wemust
A) addindirectbusinesstaxesandtransfersandsubtractprofits.
B) adddepreciationandsubtractindirectbusinesstaxes.
C) adddepreciationandindirectbusinesstaxesandtransferpaymentsandsubtractother
businessincomeadjustmentsandnetU.S.incomeearnedabroad.
D) addindirectbusinesstaxesandtransfersandsubtractdepreciation,otherbusinessincome
adjustments,andnetU.S.incomeearnedabroad.
Answer: C
Diff:2
114) ThedifferencebetweenGrossDomesticIncome(GDI)andGrossDomesticProduct(GDP)is
that
A) GDIisGDPlessindirectbusinesstaxesanddepreciation.
B) GDPisGDIlessindirectbusinesstaxesanddepreciation.
C) GDIisequaltoGDP.
D) GDPisalwayssmallerthanGDI.
Answer: C
Diff:3
115) Whichsectorofoureconomyaccountsforthelargestpercentagetototalspending?
A) households B) businesses C) government D) exports
Answer: A
Diff:1
116) IncalculatingGDPusingtheexpenditureapproach,thelargestcomponentis
A) consumptionspending. B) governmentspending.
C) investmentspending. D) spendingondurablegoods.
Answer: A
Diff:1
117) Whatconstitutesinvestmentwhenmeasuringgrossprivatedomesticinvestment?
Answer: Investmentistheuseoftodaysresourcestoexpandtomorrowsproductionor
consumption.Itincludesthepurchaseofcapitalgoods,whichcanincreasefuture
productionandconsumption,andinventoryinvestmentswhichcanincreasefuture
consumption.Itdoesnotincludefinancialtransactionssuchasbuyingstocksandbonds.
Diff:2
118) Ifwesumupallfactorpayments,wewillgetgrossdomesticincome.Doyouagreeordisagree
withthisstatement?Why?
Answer: Disagree.Thesumofallfactorpaymentsleavesoutnon-incomeexpenseitemsthatmust
beincluded.Theseitemsareindirectbusinesstaxesanddepreciation.
Diff:2
119) ExplainthetwomainmethodsusedtomeasureGDP.
Answer: ThetwomethodsusedtomeasureGDParetheexpenditureapproachandtheincome
approach.TheexpenditureapproachmeasuresGDPbyaddinguptheflowsof
expendituresconsumption,government,grossprivatedomesticinvestment,andnet
exports.TheincomeapproachmeasuresGDPbyaddinguptheflowsofincome wages,
interest,rent,andprofits.
Diff:1
120) HowdoGDPandNDPdiffer?Whatdoesitmeanifnetinvestmentisnegative?
Answer: NetdomesticproductequalsGDPminusdepreciation,whichisalsoknownasthecapital
consumptionallowance.Inthecourseofayear,machinesandplantsdeteriorate.
Depreciationistheestimateofthevalueofthiswearandtearoncapitalgoods.Net
investmentisgrossinvestmentminusdepreciation,andmeasuresthechangeinthe
capitalstock.Ifdepreciationisgreaterthantheadditionofnewcapital,thecapitalstock
getssmaller.Whenthishappens,futureproductionand/orconsumptionpossibilitieswill
bediminished.
Diff:3
121) HowisinterestmeasuredwhenusedinderivingGDP?
Answer: Interestisexpressedinnetterms.Itistheinterestreceivedbyhouseholds,lessthe
interesttheypay.Italsoincludesthenetinterestreceivedfromforeigners.
Diff:1
8.4OtherComponentsofNationalIncomeAccounting
1) AllofthefollowingstatementsarecorrectEXCEPT
A) NDP=GrossDomesticProduct(GDP)- depreciation(capitalconsumptionallowance).
B) NI=NDP+indirectbusinesstaxes.
C) Netexports=totalexports- totalimports.
D) GrossDomesticProduct(GDP)= NDP+ capitalconsumptionallowance(depreciation).
Answer: B
Diff:1
Topic: 8.4OtherComponentsofNationalIncomeAccounting
2) Ifconsumptionexpendituresare$500,spendingonfixedinvestmentis$100,importsare$40,
exportsare$75,thecapitalconsumptionallowanceis$25,governmentspendingis$50,and
inventorieshavefallenby$5,thenGrossDomesticProduct(GDP)is
A) $25greaterthanNDP. B) $20greaterthanNDP.
C) $50greaterthanNDP. D) thesameasNDP.
Answer: A
Diff:3
3) NationalincomeincludesallofthefollowingEXCEPT
A) proprietorsincome. B) netinterest.
C) corporateprofits. D) depreciation.
Answer: D
Diff:1
4) Theamountofincomehouseholdsreceiveafterpersonalincometaxeshavebeenpaidisknown
as
A) nationalincome. B) personalincome.
C) disposablepersonalincome. D) grossdomesticincome.
Answer: C
Diff:1
5) Nationalincomeisequalto
A) GrossDomesticProduct(GDP)plusdepreciationandindirectbusinesstaxes.
B) thesumofallfactorpaymentstoresourceowners.
C) GrossDomesticProduct(GDP)minusindirectbusinesstaxes.
D) GrossDomesticProduct(GDP)minusNDP.
Answer: B
Diff:2
6) Theannualcostofproducingtheentireoutputoffinalgoodsandservicesinaneconomyis
A) equaltothequantityoftotaloutputproduced.
B) greaterthanthetotalincomeofhouseholdsintheeconomy.
C) equaltototalincome.
D) equaltothetotalincomeofhouseholdsintheeconomyonlyifprofitsarezero.
Answer: C
Diff:2
7) Thetotalfactorpaymentstoallresourceownersiscalled
A) netdomesticproduct. B) personalincome.
C) nationalincome. D) grossdomesticincome.
Answer: C
Diff:2
8) Supposenetdomesticproductis$4.8billion,netincomeearnedabroadis$0.7billion,other
businessincomeadjustmentsnetofindirectbusinesstaxesandtransfersare$0.4billion,and
personalincometaxesare$0.8billion.Then,nationalincomeequals
A) $2.9billion. B) $3.6billion. C) $5.9billion. D) $6.7billion.
Answer: C
Diff:2
9) GrossDomesticProduct(GDP)=$13.0trillion,consumption= $9.5trillion,depreciation=$1.8
trillion,otherbusinessincomeadjustmentslessindirectbusinesstaxes=$0.2trillion,andnet
U.S.incomeearnedabroad=$0.1trillion.Usethisinformationtocalculatenationalincome(NI).
A) NI=$11.0billion B) NI= $11.3billion
C) NI=$11.4billion D) NI= $11.5billion
Answer: D
Diff:3
10) Nationalincomeisincome________thefactorsofproduction.
A) paidby B) earnedby
C) investedin D) householdsoweto
Answer: B
Diff:1
11) Personalincomeisequalto
A) NDPminusnationalincome.
B) disposablepersonalincomepluspersonalincometaxes.
C) disposablepersonalincomepluspersonalandcorporateincometaxes.
D) nationalincomeminus(corporateincometaxesandSocialSecurity).
Answer: B
Diff:1
12) Ifyoutakenationalincomeandaddtransferpayments,thensubtractincomeearnedbutnot
received,theresultwillbe
A) netnationalproduct. B) disposablepersonalincome.
C) personalincome. D) wages.
Answer: C
Diff:1
13) Thedifferencebetweenpersonalincomeanddisposablepersonalincomeisthat
A) disposablepersonalincomeincludesonlythefundsavailabletospendonnon-necessities.
B) personalincometaxesarenotincludedindisposablepersonalincome.
C) personalincomeincludespersonalincometaxesandindirectbusinesstaxes,whicharenot
includedindisposablepersonalincome.
D) personalincomedoesnotincludetransferpayments,suchasSocialSecuritypaymentsor
welfarepaymentsanddisposablepersonalincomeincludesthem.
Answer: B
Diff:3
14) Theamountofincomereceivedbyhouseholdspriortothepaymentofpersonalincometaxesis
called
A) disposablewages. B) personalincome.
C) nationalincome. D) netdomesticproduct.
Answer: B
Diff:2
15) Ifdisposablepersonalincome(DPI)= $800andpersonalincometaxes= $80,thenwhatis

personalincome(PI)?
A) $720 B) $800
C) $880 D) canttellfromtheinformationprovided
Answer: C
Diff:2
16) Whichofthefollowingwillbethesmallestinvalue?
A) Nationalincome B) Netdomesticproduct
C) Personalincome D) Disposablepersonalincome
Answer: D
Diff:2
17) Disposablepersonalincomeisfoundbytaking
A) personalincometaxesminuspersonalincome.
B) personalincomeminuspersonalincometaxes.
C) personalincometaxespluspersonalincome.
D) personalincometimespersonalincometaxes.
Answer: B
Diff:1
18) Disposablepersonalincomeisequalto
A) nationalincomeminuspersonalincometaxes.
B) personalincomeplustransferpayments.
C) GrossDomesticProduct(GDP)minusdepreciation.
D) personalincomeminuspersonalincometaxpayments.
Answer: D
Diff:1
19) Incomeearnedbythefactorsofproductioniscalled
A) grossdomesticincome. B) disposablepersonalincome.
C) personalincome. D) nationalincome.
Answer: D
Diff:1
20) Whichofthefollowingaccuratelydescribesrepresentsincomeearnedbyallfactorsof
production?
A) NationalIncome B) PersonalIncome
C) DisposablePersonalIncome D) Wagesandsalaries
Answer: A
Diff:1
21) Incomereceivedbythefactorsofproductioniscalled
Answer: C
Diff:1
22) Theincomethatindividualshaveafterpersonalincometaxeshavebeenpaidiscalled
Answer: B
Diff:1
23) Onekeydifferencebetweennationalincomeandnetdomesticproductis
A) netdomesticproductdoesnotincludeincomeearnedbythefactorsofproductionwhile
nationalincomedoes.
B) netdomesticproductrepresentsincomethatisavailabletoindividualswhilenational
incomedoesnot.
C) netdomesticproductincludesindirectbusinesstaxesandtransferswhilenationalincome
doesnot.
D) netdomesticproductonlyincludesthenetadditionstotheeconomysstockofcapital
whilenationalincomedoesnot.
Answer: C
Diff:1
24) Individualsreceiveincomeandpaytaxesoverthecourseofayear.Thedifferencebetweenthe
incometheyreceiveandthetaxestheypayisreferredtoas
A) netnationalincome. B) netdomesticproduct.
C) percapitarealGDP. D) disposablepersonalincome.
Answer: D
Diff:1
25) Thedifferencebetweenpersonalincomeanddisposablepersonalincomeis
A) disposablepersonalincomeiswhatisleftafterpersonalincometaxeshavebeenpaid
whilepersonalincomeincludespersonalincometaxes.
B) personalincomeiswhatisleftafterpersonalincometaxeshavebeenpaidwhile
disposableincomeincludespersonalincometaxes.
C) personalincomeincludestransferpaymentswhiledisposablepersonalincomedoesnot.
D) personalincomeincludesindirectbusinesstaxeswhiledisposableincomedoesnot.
Answer: A
Diff:1
26) Supposegrossdomesticproductis$5billion,governmenttransferpaymentsare$1billion,
indirectbusinesstaxesandtransfersare$0.5billion,anddepreciationis$0.5billion.Then
nationalincomeequals
A) $5billion. B) $4billion. C) $3billion. D) $2.7billion.
Answer: B
Diff:2
27) Whichofthefollowingwillhavethesmallestdollarvalue?
A) Personalincome. B) Disposablepersonalincome.
C) Nationalincome. D) Netdomesticproduct.
Answer: B
Diff:1
28) Onedifferencebetweennetdomesticproductandnationalincomeisthat
A) netdomesticproductincludesdepreciation.
B) nationalincomeincludesgovernmentandbusinesstransferpayments.
C) netdomesticproductincludesindirectbusinesstaxesandtransfers.
D) netdomesticproductdoesntincludeSocialSecuritytaxesorcorporateretainedearnings.
Answer: C
Diff:3
29) AnincreaseinSocialSecuritycontributionswillmake
A) netdomesticproductsmaller. B) nationalincomelarger.
C) nationalincomesmaller. D) personalincomesmaller.
Answer: D
Diff:2
30) Personalincometaxesarethedifferencebetween
A) nationalincomeandpersonalincome.
B) personalincomeanddisposablepersonalincome.
C) nationalincomeanddisposablepersonalincome.
D) netdomesticproductandpersonalincome.
Answer: B
Diff:2
31) Nationalincomeis$500,corporatetaxesare$20,SocialSecuritycontributionsare$60,retained
earningsare$10,personaltaxesare$100,andtransferpaymentsare$80.Disposableincomeis
A) $510. B) $450. C) $410. D) $390.
Answer: D
Diff:3
32) Anincreaseincorporateincometaxeswouldreduce
A) netdomesticproduct. B) grossdomesticproduct.
C) nationalincome. D) personalincome.
Answer: D
Diff:2
33) SupposeSocialSecuritycontributionsriseby$1billionwhileSocialSecuritybenefitsalsoriseby
$1billion.Further,personalincometaxesfallby$500million.Asaresult,
A) bothpersonalanddisposablepersonalincomeshouldincrease.
B) nationalincome,personalincome,anddisposableincomeshouldincrease.
C) disposableincomeshouldincreasewhilepersonalincomeandnationalincomeare
unchanged.
D) personalincome,disposablepersonalincome,andnationalincomeremainunchanged.
Answer: C
Diff:3
34) Whatisthedifferencebetweenpersonalincomeanddisposablepersonalincome?
A) theamountofpersonalincometaxes B) indirectpersonaltaxesandtransfers
C) netU.S.incomeearnedabroad D) depreciation
Answer: A
Diff:2
35) Transferpaymentsareincludedin
A) grossdomesticproduct. B) netdomesticproduct.
C) nationalincome. D) personalincome.
Answer: D
Diff:2
Governmentspending 50 Profit 28
SocialSecuritycontributions 20 Indirectbusinesstaxes 10
Corporatetaxes 5 Imports 5
Personalincometaxes 8 Exports 3
Rent 54 Interest 5
Wages 231 Depreciation 10
Consumptionexpenditures 250 Governmenttransferpayments 8
GrossPrivateDomesticInvestment 40
36) Usingtheabovetable,theGrossDomesticProduct(GDP)forthecountryis
A) 662. B) 84. C) 746. D) 338.
Answer: D
Diff:2
37) Usingtheabovetable,theNetDomesticProduct(NDP)forthecountryis
A) 662. B) 84. C) 328. D) 338.
Answer: C
Diff:2
38) Usingtheabovetable,theNationalIncome(NI)forthecountryis
A) 338. B) 228. C) 318. D) 662.
Answer: C
Diff:2
39) Usingtheabovetable,thePersonalIncome(PI)forthecountryis
A) 84. B) 228. C) 155. D) 301.
Answer: D
Diff:2
40) Usingtheabovetable,theDisposablePersonalIncome(DPI)forthecountryis
A) 78. B) 220. C) 147. D) 293.
Answer: D
Diff:2
41) Personalincomeis
A) thesumofallincomesreceivedbyhouseholdsonwelfare.
B) theincomehouseholdshaveafterpayingfederaltaxes.
C) thesumofallincomesreceivedbyhouseholds.
D) thesumofallincomesearnedbysoleproprietorshipsandpartnerships.
Answer: C
Diff:1
42) WhichofthefollowingwouldNOTbeapartofpersonalincome?
A) indirectbusinesstaxes
B) paymentsreceivedfromSocialSecurity
C) retirementchecks
D) corporatedividendpaymentstoshareholders
Answer: A
Diff:1
43) Theamountofincomethathouseholdsactuallyreceivebeforetheypaypersonalincometaxes
defines
A) nationalincome(NI). B) personalincome(PI).
C) disposablepersonalincome(DPI). D) netdomesticproduct(NDP).
Answer: B
Diff:2
BillionsofDollars
Consumption 6,500
Grossprivatedomesticinvestment 1,900
Governmentspendinglesstransferpayments 1,200
Imports 600
Exports 500
Depreciation 1,500
Indirectbusinesstaxesandtransfers 750
44) Usingtheabovetable,theGDPis(inbillionsofdollars)
A) 10,200. B) 8,200. C) 8,900. D) 9,500.
Answer: D
Diff:3
45) Usingtheabovetable,thenetdomesticproductis(inbillionsofdollars)
A) 8,000. B) 9,700. C) 8,300. D) 6,500.
Answer: A
Diff:3
46) Usingtheabovetable,thenationalincomeis(inbillionsofdollars)
A) 8,950. B) 7,250. C) 6,850. D) 8,050.
Answer: B
Diff:3
47) GDPminusdepreciationequals
A) nationalincome. B) aggregatespending.
C) personalincome. D) netdomesticproduct.
Answer: D
Diff:1
48) Whichoneofthefollowingaccountingidentitiesistrue?
A) Disposablepersonalincomeplusindirectbusinesstaxesequalspersonalincome.
B) Disposablepersonalincomeplusnon-incomeexpenseitemsequalspersonalincome.
C) Disposablepersonalincomepluspersonalincometaxesequalspersonalincome.
D) Nationalincomeplusprofitequalspersonalincome.
Answer: C
Diff:2
49) SocialSecuritypaymentsreceivedbyyourgrandmother
A) areexcludedfromGDP,butareincludedinpersonalincome.
B) areincludedinbothGDPandpersonalincome.
C) areincludedinGDP,butareexcludedfrompersonalincome.
D) areexcludedinbothGDPandpersonalincome.
Answer: A
Diff:2
50) Nationalincomeis
A) thetotaloffactorpaymentstoownersofresources.
B) thedollarvalueofallfinalgoodsandservicesproducedinacountryinayear.
C) theamountofmonetarypaymentshouseholdsactuallyreceivebeforepayingpersonal
incometaxes.
D) theamountofmonetarypaymentshouseholdsactuallyreceiveafterpayingpersonal
incometaxes.
Answer: A
Diff:2
51) Disposablepersonalincomeis
A) thetotaloffactorpaymentstoownersofresources.
B) thedollarvalueofallfinalgoodsandservicesproducedinacountryinayear.
C) theamountofmonetarypaymentshouseholdsactuallyreceivebeforepayingpersonal
incometaxes.
D) theamountofmonetarypaymentshouseholdsactuallyreceiveafterpayingpersonal
incometaxes.
Answer: D
Diff:2
Consumptionexpendituresongoodsandservices $1,500
Totalgovernmentspendingongoodsandservices 590
Imports 50
Exports 70
Depreciation(capitalconsumptionallowance) 200
NetU.S.incomeearnedabroad -75
52) Accordingtotheabovetable,netdomesticproduct(NDP)is
A) $1,995. B) $2,265. C) $2,550. D) $2,850.
Answer: B
Diff:1
A) $2,190. B) $2,550. C) $2,465. D) $2,750.
Answer: A
Diff:1
54) Whichofthefollowingisacomponentofnetdomesticproduct(NDP),butNOTofnational
income?
A) Capitalconsumptionallowance B) Indirectbusinesstaxes
C) Corporatetaxes D) Personaltaxes
Answer: B
Diff:1
55) Tocomputenationalincome,whichofthefollowingitemsareaddedtonetdomesticproduct
(NDP)?
I. businessincomeadjustmentsnetofindirectbusinesstaxesandtransfers
II. capitalconsumptionallowance
III. U.S.netincomeearnedabroad
A) Ionly B) IIonly C) bothIandIII D) bothIIandIII
Answer: C
Diff:1
(amountsinbillionsofdollars)
Exports 233
Dividends 81
Consumptionexpenditures 9163
Businessincomeadjustmentsnetof 106
indirectbusinesstaxesandtransfers
U.S.netincomeearnedabroad 51
Undistributedcorporateprofits 148
Personalincometaxes 1386
Imports 720
Federalgovernmentexpenditures 2520
Changesinbusinessinventories 16
Corporatetaxes 103
Depreciation 1806
Stateandlocalgovernmentexpenditures 258
SocialSecuritygovt.contribution 250
56) Accordingtotheabovetable,GrossDomesticProductascalculatedbytheexpenditure
approachis
Answer: B
Diff:1
Answer: D
Diff:1
Answer: B
Diff:1
59) ExplainhowdisposablepersonalincomeisderivedfromGrossDomesticProduct.
Answer: Grossdomesticproductisthesamethingasgrossdomesticincome.Nationalincomeis
foundbytakingNDPandaddingnetU.S.incomeearnedabroadandotherbusiness
incomeadjustmentslessindirectbusinesstaxesandtransfers.Personalincomeisfound
bysubtractingincomeearnedbutnotreceived(corporatetaxes,SocialSecurity
contributions,andcorporateretainedearnings)andaddingingovernmenttransfer
payments.Subtractingallpersonalincometaxesandnontaxpaymentsgenerates
disposablepersonalincome.
Diff:2
8.5DistinguishingBetweenNominalandRealValues
1) Wheneconomistsdiscussthenominalvalueofaneconomicvariable,thevariableis
A) expressedincurrentdollars. B) expressedasanindexfigure.
C) adjustedforachangingpricelevel. D) expressedasapercentage.
Answer: A
Diff:1
Topic: 8.5DistinguishingBetweenNominalandRealValues
2) Supposethatin2011,nominalGrossDomesticProduct(GDP)fortheeconomyofChiconiawas
$10trillionandtheGrossDomesticProduct(GDP)priceindexwas200.0.WhatisChiconias
realGrossDomesticProduct(GDP)in2011?
A) $5trillion B) $10trillion C) $20trillion D) $200trillion
Answer: A
Diff:1
3) WhichofthefollowingstatementsdoesNOTdescribetherealvalueofaneconomicvariable?
A) Itisadjustedforchangesinthepricelevel.
B) Itisexpressedinconstantdollars.
C) Itisameasureofthepurchasingpowerofthevariable.
D) Itisthevariablesnominalvalueadjustedforunemployment.
Answer: D
Diff:1
4) IfnominalGrossDomesticProduct(GDP)in2005was$500billionwithapriceindexof100,
whatwouldbetherealGrossDomesticProduct(GDP)in2013ifthe2013nominalGross
DomesticProduct(GDP)was$900billionandthe2013priceindexwas140?
A) $900billion B) $540billion C) $800billion D) $643billion
Answer: D
Diff:1
5) IfnominalGrossDomesticProduct(GDP)in2001was$1trillion,nominalGrossDomestic
Product(GDP)in2013was$2trillion,andthe2001and2013priceindexeswere100and250
respectively,
A) realGrossDomesticProduct(GDP)increasedbetween2001and2013.
B) realGrossDomesticProduct(GDP)decreasedbetween2001and2013.
C) realGrossDomesticProduct(GDP)remainedconstant.
D) wecannotdrawanyconclusionsaboutchangesinrealGrossDomesticProduct(GDP).
Answer: B
Diff:1
6) IfnominalGrossDomesticProduct(GDP)in2013was$3,000billion,andthepricelevelindex
was330(1985=100),thenrealGrossDomesticProduct(GDP)intermsofthepricelevelin2013
wasabout
A) $105billion. B) $4,220billion. C) $909billion. D) $537billion.
Answer: C
Diff:1
7) Thedifferencebetweennominalandrealvaluesisthatrealvaluestakeintoaccount
A) depreciation. B) changesinthecompositionofoutput.
C) changesinpricesbetweenyears. D) thepresenceofdurablegoods.
Answer: C
Diff:1
8) ThenominalvalueofGrossDomesticProduct(GDP)isexpressedin
A) inflation-adjustedprices. B) constantdollars.
C) base-yeardollars. D) noneoftheabove.
Answer: D
Diff:1
9) AdjustingnominalGrossDomesticProduct(GDP)forpricechangesfromabaseyearyields
A) currentGrossDomesticProduct(GDP).
B) realGrossDomesticProduct(GDP).
C) constantdisposableincome.
D) GrossDomesticProduct(GDP)netofrelativepricechanges.
Answer: B
Diff:1
10) ConstantdollarGrossDomesticProduct(GDP)
A) isthesameasnominalGrossDomesticProduct(GDP).
B) isnominalGrossDomesticProduct(GDP)dividedbythepriceindex.
C) isequaltorealGDPmultipliedbytheoverallpricelevel.
D) alloftheabove.
Answer: B
Diff:1
11) Suppose2009isthebaseyear.From2009to2010,thepriceindexincreasesfrom100to102.5.If
nominalGrossDomesticProduct(GDP)is$2,800in2010,thentherealGrossDomesticProduct
(GDP)in2010is
A) $2,700. B) $2,800. C) $2,732. D) $2,870.
Answer: C
Diff:2
12) IfGrossDomesticProduct(GDP)andothernationalincomeaccountsareexpressedinnominal
values,thentheyare
A) measuredinrealvalues.
B) measuredinmarketpricesatwhichgoodsactuallysold.
C) measuredinconstantpricesinsteadofactualmarketprices.
D) readilycomparabletoGrossDomesticProduct(GDP)figuresforotheryears.
Answer: B
Diff:1
13) Theprice-correctedvalueforGrossDomesticProductis
A) realGrossDomesticProduct(GDP). B) netGrossDomesticProduct(GDP).
C) netnationalproduct. D) percapitaincome.
Answer: A
Diff:2
14) NominalincomeperpersonintheUnitedStatesin1960wasabout$2,800peryear,whilein
1990nominalincomeperpersonwasabout$21,000.Thisindicatesthat
A) nominalincomewasabout7.5timesgreaterin1990,butwecanttellifthisincreaseisdue
toinflation,economicgrowth,oracombinationofthetwo.
B) peopleenjoyedastandardoflivingabout7.5timeshigherin1990thanin1960.
C) adollarin1960wasworthlessthanadollarin1990.
D) theaveragepersonwouldconsiderhim/herselfabout7.5timeshappierin1990thanin
1960.
Answer: A
Diff:2
15) IfdeflationisoccurringandnominalGrossDomesticProduct(GDP)isincreasingovertime,
thenrealGrossDomesticProduct(GDP)is
A) decreasing.
B) increasingatthesamerateasnominalGrossDomesticProduct(GDP).
C) increasingmoreslowlythannominalGrossDomesticProduct(GDP).
D) increasingfasterthannominalGrossDomesticProduct(GDP).
Answer: D
Diff:3
16) Todeterminehowwellaneconomyisdoing,itisbettertouse
A) nominalGrossDomesticProduct(GDP)figures.
B) realGrossDomesticProduct(GDP)figures.
C) GrossDomesticProduct(GDP)figuresmeasuredbytheexpenditureapproach.
D) GrossDomesticProduct(GDP)figuresmeasuredbytheincomeapproach.
Answer: B
Diff:1
17) Nominalvaluesare
A) measuredintermsofactualmarketpricesatwhichthegoodsaresold.
B) basedoninflation-adjustments.
C) basedonGrossDomesticProduct(GDP)percapita.
D) measuredintermsoftotalpurchasingpower.
Answer: A
Diff:2
18) PercapitarealGrossDomesticProduct(GDP)is
A) realGrossDomesticProduct(GDP)dividedbythepopulation.
B) realGrossDomesticProduct(GDP)dividedbyapriceindex.
C) realGrossDomesticProduct(GDP)minusdepreciation.
D) populationdividedbyrealGrossDomesticProduct(GDP).
Answer: A
Diff:1
19) PercapitarealGrossDomesticProduct(GDP)
A) doesnottellusthewelfarelevelinthecountry.
B) tellsustheoverallwelfareconditionsofallthecountryscitizens.
C) givesonlythewelfareofthecountryscorporations.
D) givesonlythewelfareoftherichestareasofthecountry.
Answer: A
Diff:2
20) SupposeCountryAandCountryBeachhavethesamerealGrossDomesticProduct(GDP),
equalto$440billion.CountryAhas100millionpeopleandCountryBhas175millionpeople.
Inthissituation,percapitarealGrossDomesticProduct(GDP)is
A) thesameinbothcountries. B) higherinCountryA.
C) higherinCountryB. D) anirrelevantfactor.
Answer: B
Diff:1
21) Supposethatthefollowingoccurredintwocountriesduringthepastdecade.CountryA,real
GrossDomesticProduct(GDP)rose40percentandpopulationrose46percent;CountryB,real
GrossDomesticProduct(GDP)increased80percentandpopulationincreased75percent.Based
onthisinformation,whichistrue?
A) BothcountrieshaveexperiencedgrowthinpercapitarealGrossDomesticProduct(GDP).
B) NeithercountryhasexperiencedgrowthinpercapitarealGrossDomesticProduct(GDP).
C) ChancesforanimprovedstandardoflivingaregreaterinCountryA.
D) OnlyCountryBhasexperiencedgrowthinitspercapitarealGrossDomesticProduct
(GDP).
Answer: D
Diff:2
Year NominalGDP PriceDeflator

2010 500 95.4
2011 600 100.0
2012 700 102.5
2013 800 103.1
22) Refertotheabovetable.RealGDPin2010is
A) 190.8. B) 477. C) 500. D) 524.1.
Answer: D
Diff:2
A) 146.4. B) 682.9. C) 700. D) 717.5.
Answer: B
Diff:2
A) 103.1. B) 128.9. C) 775.9. D) 824.8.
Answer: C
Diff:1
25) Refertotheabovetable.AllrealGDPnumbersareexpressedintermsofthepurchasingpower
ofdollarsin
A) 2010. B) 2011. C) 2012. D) 2013.
Answer: B
Diff:1
26) WhenGDPandothernationalincomeaccountsaremeasuredinnominalvalues,thenthey
A) aremeasuredincurrentmarketprices.
B) aremeasuredinrealvalues.
C) arenotcomparablebecausetheyarenotinrealterms.
D) shouldbeconvertedintomoneyvaluesbeforecomparingthemovertime.
Answer: A
Diff:1
27) Betweentwoyears,GDPatconstantpricesincreasedby5percentwhileGDPatcurrentprices
increasedby8percent.Basedonthisinformation,thepricelevel
A) increasedby3percent. B) increasedby13percent.
C) decreasedby3percent. D) decreasedby13percent.
Answer: A
Diff:1
28) TheGDPdeflatorisequalto.
A) nominalGDPdividedbyrealGDP. B) nominalGDPmultipliedbyrealGDP.
C) nominalGDPminusrealGDP. D) nominalGDPplusrealGDP.
Answer: A
Diff:1
29) WhichofthefollowingrepresentshowrealGDPiscalculated?
A) nominalGDPmultipliedbytheGDPdeflator
B) nominalGDPdividedbythepopulation
C) nominalGDPdividedbythePPI,theproducerpriceindex
D) nominalGDPdividedbytheGDPdeflator
Answer: D
Diff:1
30) Thenominalvalueofaneconomicvariableis
A) theconsumerpriceindex.
B) theproducerprice.
C) expressedintermsofactualmarketpricesatwhichgoodsaresold.
D) computedbytakingthenominalvalueanddividingbytheappropriatepriceindex.
Answer: C
Diff:1
31) Therealvalueofaneconomicvariableis
A) theconsumerpriceindex.
B) theproducerprice.
C) expressedintermsofactualmarketpricesatwhichgoodsaresold.
D) computedbytakingthenominalvalueanddividingbytheappropriatepriceindex.
Answer: D
Diff:1
32) Constantdollarsare
A) thesameascurrentdollars.
B) dollarscorrectedforgeneralpricelevelchanges.
C) whatnominalGDPismeasuredin.
D) whenanindividualdoesnotreceiveacostoflivingincrease.
Answer: B
Diff:1
33) ThevaluesofvariablessuchasGDPexpressedincurrentdollarsarereferredtoas
A) thepriceindex. B) adeflator.
C) nominalvalues. D) realvalues.
Answer: C
Diff:1
34) Measurementofeconomicvaluesafteradjustmentshavebeenmadeforchangesintheaverage
ofpricesbetweenyearsinknownas
A) thepriceindex. B) adeflator.
C) nominalvalues. D) realvalues.
Answer: D
Diff:1
35) RealGDPis
A) thenominalvalueofallrealgoodsproducedinthenationinayear.
B) GDPcorrectedforchangesintheaverageofoverallprices.
C) amisnomersinceallGDPfigureshavetobeindollarvalues.
D) thevalueofoutputincurrentdollars.
Answer: B
Diff:1
36) ComparingtwocountriesnominalGDPovertimeislikelytobemisleadingifonewantsto
determinewhetherstandardsoflivingarebetterinonecountrybecause
A) thefiguresmustbeadjustedfordifferenttypesofcurrency.
B) thefiguresmustbeadjustedforpricechangesandpopulationdifferences.
C) thefiguresmustbeadjustedtoaccountforproductiondifferences.
D) NDPinsteadofGDPshouldbeused.
Answer: B
Diff:3
Nominal Price Real

Year GDP Deflator GDP
2000 $3405.0 87.2
2001 91.0 $4146.2
2002 4038.7 94.4
2003 96.9 4405.2
2004 4539.9 4539.9
2005 4900.4 103.9
2006 108.5 4839.4
2007 5222.2 113.1
2008 117.8 4819.6
2009 5967.1 4923.6
2010 6158.8 122.9
37) Refertotheabovetable.ThevalueoftheGDPdeflatorin2009is
A) 121.2. B) 122.1.
C) 122.9. D) uncertainwithoutmoreinformation.
Answer: A
Diff:3
38) Refertotheabovetable.Between2009and2010realGDP
A) increasedby$191.7billion. B) increasedby$1.7billion.
C) increasedby$87.6billion. D) increasedby$158.2billion.
Answer: C
Diff:3
39) Refertotheabovetable.ThenominalGDPfor2008is
A) $4819.6. B) $4091.3.
C) $5677.5. D) Uncertainwithoutmoreinformation.
Answer: C
Diff:3
40) Refertotheabovetable.RealGDPforyear2007was
A) $4819.6billion. B) $5222.2billion.
C) $4617.3billion. D) uncertainwithoutmoreinformation.
Answer: C
Diff:3
41) IfanationsnominalGDPis$3,257millionanditspricelevelis132,thenitsrealGDPis
A) $4.05million. B) $24.67million.
C) $4299.24million. D) $2467.42million.
Answer: D
Diff:1
42) SupposenominalGDPinCanadaincreasedby5%in2013.Giventhisinformation,weknow
withcertaintythat
A) theaggregatepricelevelinCanadaincreasedin2013.
B) realGDPinCanadaincreasedin2013.
C) boththeaggregatepricelevelANDrealGDPincreasedinCanadain2013.
D) moreinformationisneededtoanswerthisquestion.
Answer: D
Diff:3
43) NominalGDPiscalculatedusing
A) themarketpricesduringtheyearunderconsideration.
B) thepricesfromsomebaseyeartoadjustforpricechanges.
C) theaverageofpricesfromthethreeprecedingyears.
D) thepricesfromtheprecedingyear.
Answer: A
Diff:1
44) RealGDPis
A) nominalGDPadjustedfordepreciation.
B) nominalGDPadjustedforpricechanges.
C) nominalGDPadjustedfortransferpayments.
D) nominalGDPadjustedforindirectbusinesstaxes.
Answer: B
Diff:1
45) Measuringtotalaggregateproductionincurrentdollarsuseswhichofthefollowingmeasures?
A) realpersonalincome B) realgrossdomesticproduct
C) nominalgrossdomesticproduct D) nominalnetdomesticproduct
Answer: C
Diff:2
46) AssumethatthenominalGDPforagivenyearisequalto$12,400billionandtheGDPdeflator
equals112.RealGDPforthatyearisapproximately
A) $13,888.0billion. B) $12,512.0billion.
C) $11,071.4billion. D) $12,228.1billion.
Answer: C
Diff:3
47) Constantdollarsaredollars
A) correctedforgeneralpricelevelchanges.
B) measuredintermsofcurrent-yearprices.
C) issuedbytheU.S.Treasurywithvaluesthatfailtochangeeveninthefaceofinflationor
deflation.
D) issuedbytheFederalReservewithvaluesthatfailtochangeeveninthefaceofinflationor
deflation.
Answer: A
Diff:2
48) WhenoneconvertsnominalGDPtorealGDP,onetakesintoaccountwhichofthefollowing?
A) changesinthepopulation B) changesinthequalityofgoods
C) changesinthedistributionofincome D) noneoftheabove
Answer: D
Diff:1
49) Measuringtotalaggregateproductioninconstantdollarsuseswhichofthefollowingmeasures?
A) realpersonalincome B) realgrossdomesticproduct
C) nominalgrossdomesticproduct D) nominalnetdomesticproduct
Answer: B
Diff:2
NominalGDP PriceLevelIndex
Year (billionsofdollarsperyear) (baseyear2005=100)
2005 8,950 100
2013 9,250 120
50) Usingthedataintheabovetable,whatistherealGDPforyear2005(inbillionsofconstant
dollars)?
A) 9,250 B) 8,500 C) 7,708 D) 8,950
Answer: D
Diff:2
51) Usingthedataintheabovetable,whatistherealGDPforyear2013(inbillionsofconstant
dollars)?
A) 9,250 B) 8,500 C) 7,708 D) 8,950
Answer: C
Diff:3
A) Duringperiodsofinflation,nominalGDPincreasesmorerapidlythandoesrealGDP.
B) Nominalvaluesareexpressedinconstantdollars.
C) Realvaluesareexpressedincurrentdollars.
D) IncreasesinrealGDPareevidencethatthedistributionofwealthisbecomingmoreequal.
Answer: A
Diff:3
53) Islookingatchangesingrossdomesticproductovertimeagoodwaytodeterminewhetherthe
peopleinacountryareexperiencinganincreaseintheirstandardsofliving?Whyorwhynot?
Answer: No.GDPfiguresneedtobecorrectedforinflation,sorealGDPandnotnominalGDP
shouldbeused.ButevenusingrealGDPmaybeincorrectbecauseincreasesinrealGDP
willnotmeanahigherstandardoflivingifpopulationisgrowingfasteryet.Abetter
measureispercapitarealGDP.Eventhisisnotperfectbecausetherearemanyimportant
economicactivitiesthatarenotincludedinrealGDP,andrealGDPfiguresignore
householdproductionandthevalueofleisuretime.
Diff:3
8.6ComparingGDPThroughouttheWorld
1) Themostaccuratewaytocomparestandardsoflivingthroughouttheworldistolookat
A) totalGrossDomesticProduct(GDP). B) GNP.
C) purchasingpowerparity. D) foreignexchangerates.
Answer: C
Diff:1
Topic: 8.6ComparingGDPThroughouttheWorld
2) Theforeignexchangerateis
A) anadjustmentthattakesintoaccountdifferencesinthetruecostoflivingacrosscountries.
B) thepriceofonecurrencyintermsofanother.
C) anothernameforpurchasingpowerparity.
D) partofthecircularflowdiagram.
Answer: B
Diff:1
3) ComparingGDPacrosscountriesisunrealisticunlesswemakeadjustmentinexchangeratesto
takeintoaccountdifferencesinthecostoflivingvia
A) realGDP. B) purchasingpowerparity.
C) priceindex. D) internationalGDP.
Answer: B
Diff:1
4) Purchasingpowerparityrefersto
A) adjustmentsinGDPfigurestoputeverythingintoonecommoncurrencyforcomparison
sake.
B) adjustmentsinexchangerateconversionsthattakeintoaccountdifferencesininflation
ratesacrosscountries.
C) adjustmentsinexchangerateconversionsthattakeintoaccountthedifferencesintruecost
oflivingacrosscountries.
D) calculatingreal,percapitaGDPindollars.
Answer: C
Diff:1
5) TheproblemwithusingforeignexchangeratestoconvertonecountrysGDPintodollarsisthat
A) thevaluesofcurrenciesarenotcomparable.
B) exchangeratesdonotreflectdifferencesininflationrates.
C) notallgoodsandservicesaresoldonworldmarkets.
D) thedollarhasbeenlosingvalueoverthelasttwentyyears.
Answer: C
Diff:2
6) TofindtheU.S.dollarequivalentofagivenamountofMexicanpesos,youwouldhavetoknow
A) percapitaGDPinMexico.
B) percapitaGDPintheUnitedStates.
C) percapitaGDPinboththeUnitedStatesandMexico.
D) theforeignexchangeratebetweendollarsandpesos.
Answer: D
Diff:2
7) Apurchasingpowerparityindexwouldhelpyou
A) predictchangesinU.S.realGDP.
B) identifythosegoodsandservicesthatarebecomingrelativelymoreimportantin
chain-weightedGDP.
C) makeinternationalcomparisonsoflivingstandards.
D) estimatethegrowthrateofU.S.personalincome.
Answer: C
Diff:3
8) Theforeignexchangerate
A) isthepriceofonegoodorserviceascomparedtoasimilargoodorservice.
B) isthesameasthepriceofaproductinU.S.dollars.
C) isnotrelevantwhencomparingtheGDPsofvariouscountries.
D) isthepriceofonecurrencyintermsofanother.
Answer: D
Diff:2
9) Ofthefollowing,whichcountryhasthehighestannualrealGDPpercapitaaccordingtothe
InternationalMonetaryFundandWorldBank?
A) China B) Italy C) UnitedStates D) Brazil
Answer: C
Diff:2
10) Purchasingpowerparityexistswhendomesticcurrency
A) maintainsafixedexchangeratewithaforeigncurrency.
B) isnotconvertibletoaforeigncurrency.
C) buysmoregoodsathomethanabroad.
D) buysasmanygoodsabroadasathome.
Answer: D
Diff:1
11) AssumethataGMcarsellsfor$20,000intheUnitedStatesandthattheexchangerateis$1 = 1.3

euros.Forpurchasingpowerparitytohold,thesamecarinItalyshouldsellfor
A) 20,000euros. B) 15,385euros. C) 26,000euros. D) 16,542euros.
Answer: C
Diff:1
12) HowmanyU.S.dollarsdoesaU.S.importerneedtopayforaninvoiceof1millionyenwhen
thepriceof1yenis$0.006?
A) $1,666million B) $1.66million C) $166.7 D) $6,000
Answer: D
Diff:2
13) Whichofthefollowingallowsustocompareaveragelevelsofrealproductionperpersonin
differentnationsinawaythatadjustsfordifferencesintruecostsofliving?
A) nominalGDPbasedonpurchasingpowerparity
B) percapitarealGDPbasedonpurchasingpowerparity
C) realGDPbasedonforeignexchangerates
D) percapitanominalGDPbasedonforeignexchangerates
Answer: B
Diff:2
14) Supposeyouknowthatacertaincountrywithagrowingpopulationhasexperiencedsteady
growthinrealpercapitaGDP.Whatdoyouthenalsoknowtobetrue?
A) Thedistributionofincomeinthiscountryhasbecomerelativelymoreequal.
B) Thegrowthingoodsandservicesproducedandexchangedinthemarketplacehas
outpacedthegrowthinpopulation.
C) Thiscountryexportsmorethanitimports.
D) Thiscountryimportsmorethanitexports.
Answer: B
Diff:2
15) Theadjustmentinexchangerateconversionsthattakesintoaccountdifferencesinthetruecost
oflivingacrosscountriesiscalled
A) nominalpurchasingpower. B) purchasingpowerparity.
C) rawpurchasingpower. D) currency-adjustedpurchasingpower.
Answer: B
Diff:1
16) ThemostmeaningfulwaytocomparepercapitaGrossDomesticProduct(GDP)across
countriesisto
A) useforeignexchangeratestoconverteachcountryspercapitaGrossDomesticProduct
(GDP)intodollars.Thencompare.
B) firstadjusteachcountryspercapitaGrossDomesticProduct(GDP)toexcludeallthe
goodsandservicesthatarenotexchangedwithothercountries.
C) assumethatthecostoflivingineachcountryisthesameastheUnitedStatescostof
living.
D) firstusepurchasingpowerparitytofactorineachcountrystruecostofliving.
Answer: D
Diff:2
17) Howcanwecomparestandardsoflivingacrosscountries?
Answer: Itisdifficulttocomparestandardsoflivingacrosscountries.PercapitaGrossDomestic
Product(GDP)isagoodstartingpoint,butfiguresusingdifferentcurrenciesmustbe
convertedtoonecurrencyifcomparisonsaretobemade.Thereareproblemswithusing
theexchangeratetomaketheseconversionsbecausenotallgoodsandservicesaresold
inworldmarkets.Thebestmeasureistousepurchasingpowerparitycomparisons,but
thishasdrawbacks,too,becausethevalueofleisureandthevalueofhousehold
productionarenotincluded.
Diff:3
Chapter9
GlobalEconomicGrowthandDevelopment
9.1HowDoWeDefineEconomicGrowth?
1) Anincreaseingrowthrateswillcausetheproductionpossibilitiescurveto
A) shiftinward. B) becomesteeper.
C) becomeflatter. D) shiftoutward.
Answer: D
Diff:1
Topic: 9.1HowDoWeDefineEconomicGrowth?
2) Anoutwardshiftoftheproductionpossibilitiescurverepresents
A) economiccontraction. B) economicgrowth.
C) economicrecession. D) economicinflation.
Answer: B
Diff:1
3) Whichofthefollowingvariablesisusedtomeasureeconomicgrowth?
A) nominalGDP B) nominalGDPpercapita
C) realGDP D) realGDPpercapita
Answer: D
Diff:1
4) Accordingtoyourtext,whichofthefollowingcountriescurrentlyhasthehighestannualper
capitaGrossDomesticProduct(GDP)growthrate?
A) China B) Japan C) Germany D) UnitedStates
Answer: A
Diff:1
5) Thetermeconomicgrowthreferstoincreasesin
A) resourcesuse. B) nominalincome.
C) satisfaction. D) productivecapacity.
Answer: D
Diff:1
6) Economicgrowthisusuallydefinedas
A) therateofincreaseinoutputdividedbytheincreaseinlabor.
B) theincreaseinoutputovertime,asmeasuredbyrealpercapitaGrossDomesticProduct
(GDP).
C) theincreaseininputavailability.
D) thereductionintherealcostofnecessities.
Answer: B
Diff:1
7) Usingaproductionpossibilitiescurve,economicgrowthisrepresentedby
A) anoutwardshiftinthecurve. B) amovementalongthecurve.
C) aninwardshiftofthecurve. D) apivotofthecurve.
Answer: A
Diff:1
8) Economicgrowthisbestmeasuredbyincreasesin
A) nominalpersonalincome.
B) nominalGrossDomesticProduct(GDP).
C) percapitarealGrossDomesticProduct(GDP).
D) percapitanominalGrossDomesticProduct(GDP).
Answer: C
Diff:1
9) WhenCountryXhashigheconomicgrowth,thiscountryhas
A) ahighlevelofrealGrossDomesticProduct(GDP).
B) ahighlevelofpercapitarealGrossDomesticProduct(GDP).
C) alargeincreaseinpercapitarealGrossDomesticProduct(GDP).
D) alargeincreaseinpersonalincome.
Answer: C
Diff:2
Chapter9GlobalEconomicGrowthandDevelopment197
2012 2013 2012 2013

RealGDP RealGDP Population Population
Country (Millions) (Millions) (Millions) (Millions)
A $280,000 $300,000 832.5 849.5
B 235,000 260,000 14.8 14.9
C 28,200 33,400 2.7 3.0
D 5,200,000 5,445,000 248.8 250.0
10) Refertotheabovetable.Whichcountryexperiencedthegreatesteconomicgrowthfrom2012to
2013?
A) A B) B C) C D) D
Answer: B
Diff:2
11) Refertotheabovetable.WhichcountryhadthehighestgrowthrateofrealGrossDomestic
Product(GDP)from2012to2013?
A) A B) B C) C D) D
Answer: C
Diff:2
12) Economicgrowthmayunderstatechangesinstandardsoflivingif
A) thegrowthisaccompaniedbyincreasingcongestion.
B) leisuretimeisalsoincreasing.
C) thetypesofjobsgeneratedfeelingsofalienation.
D) deflationistakingplace.
Answer: B
Diff:2
13) Thereareanumberofbenefitsthatusuallyaccompanyeconomicgrowth.Thefollowingare
suchbenefitsEXCEPT
A) increaseinliteracy. B) increasedexpectedlife-spans.
C) politicalstability. D) urbancongestion.
Answer: D
Diff:2
14) CostsassociatedwitheconomicgrowthincludeallofthefollowingEXCEPT
A) environmentalpollution.
B) psychologicalproblemssuchasdepression.
C) urbancongestion.
D) improvedhealthcare.
Answer: D
Diff:1
15) ThegrowthrateofpercapitarealGrossDomesticProduct(GDP)isareasonablemeasureof
A) inflation. B) productiveactivity.
C) personalwell-being. D) qualityoflife.
Answer: B
Diff:2
16) Whichofthefollowingbestrepresentseconomicgrowth?
A) amovementdownagivenproductionpossibilitiescurve.
B) amovementupagivenproductionpossibilitiescurve.
C) anoutwardor,equivalently,arightwardshiftoftheproductionpossibilitiescurve.
D) aninwardor,equivalently,leftwardshiftoftheproductionpossibilitiescurve.
Answer: C
Diff:1
17) Thefastereconomicgrowthis,the
A) steepertheslopeoftheproductionpossibilitiescurve.
B) farthertheproductionpossibilitiescurveshiftsout.
C) closertotheorigintheproductionpossibilitiescurvebecomes.
D) morebowedtheproductionpossibilitiescurvebecomes.
Answer: B
Diff:2
18) WhichofthefollowingisNOTanimportantfactoraffectingeconomicgrowth?
A) Therateofsaving B) Thegrowthofleisure
C) Therateofgrowthofcapital D) Therateofgrowthinlaborproductivity
Answer: B
Diff:1
19) Whichofthefollowingistrue?
A) Realstandardsoflivingcanincreasewithoutanypositiveeconomicgrowth.
B) Realgrowthratesfailtoaccountforbypricelevelchanges.
C) Realandnominalvaluesarenotrelated.
D) Realstandardsoflivingdecreasewithpositiveeconomicgrowth.
Answer: A
Diff:3
20) WhenanationsrealpercapitaGrossDomesticProduct(GDP)increases,whichofthefollowing
istrue?
A) Everyindividualinthatnationsharesintheeconomicgain.
B) Anationmustchannelmostoftheeconomicgainstoitspoorestcitizens.
C) Lowincomepeopleareguaranteedtolose;theynevershareintheirnationseconomic
gains.
D) Wedontknowwhohasmostbenefitedfromeconomicgrowthunlesswelookatthe
distributionofincome.
Answer: D
Diff:2
21) Isitpossibletoseegainsinanationsrealstandardoflivingwithoutanypositiveeconomic
growth?
A) No.Withouteconomicgrowthanationsstandardoflivingcannotimprove.
B) Yes,butonlyifthegovernmentprintsmoremoneysopeoplefeelwealthier.
C) Yes.Ifworkerscanproducethesamelevelofoutputinfewerworkhours,leisuretime
gainscouldpushuptherealstandardofliving.
D) Noneoftheabove.
Answer: C
Diff:2
22) Anationstechnologicalgainshaveincreasedlaborproductivityand,asaresult,theaverage
numberofhoursworkedeachweekhasbeenfalling.HowdoGrossDomesticProduct(GDP)
calculationsaccountforthisshorteningoftheaverageworkweek?
A) RealGrossDomesticProduct(GDP)doesnotfactorinanincreaseinleisuretimebutper
capitarealGrossDomesticProduct(GDP)does.
B) NeitherrealGrossDomesticProduct(GDP)norpercapitarealGrossDomesticProduct
(GDP)includestheincreaseinleisuretimethatresults,sothenationsactualeconomic
growthwillbeoverstated.
C) Gainsinleisuretimearedollar-valuedandincludedinrealpercapitaGrossDomestic
Product(GDP)gains.
D) GainsinleisuretimearenotincludedinGrossDomesticProduct(GDP),soanyincreasein
realpercapitaGrossDomesticProduct(GDP)willunderstatethenationsactualeconomic
growth.
Answer: D
Diff:3
23) HowshouldpercapitarealGrossDomesticProduct(GDP)beused?
A) Itisanaccuratemeasureofeconomicwell-being.
B) Itisareasonablygoodmeasureofproductiveactivity.
C) PercapitarealGrossDomesticProduct(GDP)isagoodgaugeofanationsqualityoflife
becauseittakesintoaccountanationsculturalandspiritualvalues.
D) Alloftheabove.
Answer: B
Diff:2
24) Doeseconomicgrowthhaveanynegativesideeffects?
A) No.Everypersoninanationexperiencingeconomicgrowthwillbenefit.
B) No,becausewherenegativesideeffectsdooccur,anationsgovernmentisrequiredto
neutralizethem.
C) Quitepossibly.Somesayeconomicgrowthputspeopleonanever-endingquesttosatisfy
newlycreatedwants,sowealwaysfeeldisappointedwithourlives.
D) Yes,butonlyforthepoorestsegmentofanationspopulation.
Answer: C
Diff:2
25) Countriesareconcernedaboutsmallchangesintheiraverageannualgrowthratesinpercapita
incomebecause
A) growthratestendtodeclineovertime.
B) thepowerofcompoundingmeanssmallchangeshavelargeeffectsovertime.
C) thefasteracountrygrowstoday,thelessitwillbeabletoconsumeinthefuture.
D) growthratesareafactorinU.N.participation.
Answer: B
Diff:2
26) SupposethatCountryAandCountryBeachhadthesamepercapitarealGrossDomestic
Product(GDP)of$10,000in2008.CountryAspercapitalrealGrossDomesticProduct(GDP)
hadagrowthrateof3percentperyearandCountryBspercapitalrealGrossDomesticProduct
(GDP)hadagrowthrateof4percentperyear.By2013,theper -capitarealGrossDomestic
Product(GDP)forthetwocountries,respectively,were
A) $11,941and$12,653. B) $11,593and$12,167.
C) $10,300and$10,400. D) $14,000and$16,000.
Answer: B
Diff:2
27) Economicgrowthismeasuredby
A) increasesinGDP.
B) increasesinpercapitarealGDP.
C) increasesinthepopulation.
D) increasesinthevalueofthetotaloutputofsociety.
Answer: B
Diff:1
28) Economicgrowthcanbedepictedas
A) amovementupontheproductionpossibilitiescurve.
B) amovementdownontheproductionpossibilitiescurve.
C) anoutwardshiftontheproductionpossibilitiescurve.
D) aninwardshiftontheproductionpossibilitiescurve.
Answer: C
Diff:1
29) Economicgrowthcanbedefinedasapercentageincreasein
A) percapitarealGDP. B) realGDP.
C) nominalGDP. D) consumptionbyhouseholds.
Answer: A
Diff:1
30) WhichofthefollowingstatementsisNOTtrueabouteconomicgrowth?
A) Whengrowthoccurstheproductionpossibilitiescurveshiftsoutward.
B) Growthrepresentsanincreaseinanationsproductivecapacity.
C) GrowthismeasuredastheoveralllevelofrealGDP.
D) Growthgenerallymeansthatoverallthemembersofthenationarebetteroffmaterially.
Answer: C
Diff:1
31) Whichofthefollowingnationshasexperiencedthehighestaverageannualrateofgrowthofper
capitarealGDPsince1990?
A) India B) UnitedStates C) China D) Germany
Answer: C
Diff:1
32) PercapitarealGDPisaserviceablemeasureof
A) economicwelfare. B) costoflivingstandards.
C) culturalsuperiority. D) productiveactivity.
Answer: D
Diff:2
33) Whichofthefollowingisabenefitofeconomicgrowth?
A) reductioninilliteracy B) reductioninpoverty
C) improvedhealth D) alloftheabove
Answer: D
Diff:1
34) TherealGDPinanationhasjustincreasedfrom$2billionto$2.1billion.
A) Thiscountryhasexperiencedeconomicgrowthbecausethereisa$.1billionincreasein
realGDP.
B) Wedonotknowifthiscountryexperiencedeconomicgrowthsincetheincreaseinthe
populationwasnotgiven.
C) Wedonotknowifthiscountryexperiencedeconomicgrowthsinceinformationon
nominalGDPwasnotgiven.
D) Thiscountrydidnotexperienceeconomicgrowthsince$.1billionisnotalargenumber.
Answer: B
Diff:1
35) ThehistoricalrecordfortheUnitedStatessince1900shows
A) mostlypositiveeconomicgrowth,withtwosubstantialperiodsofnegativeeconomic
growth.
B) economicgrowthforabouthalftheyearsandeconomicdeclinefortheotherhalf.
C) growthuntil1970andthenaperiodofconstantpercapitarealGDP.
D) continuouseconomicgrowth,althoughatdifferentrates,throughouttheentirecentury.
Answer: A
Diff:1
36) SupposepercapitarealGDPgrowsby7%peryear.BasedontheRuleof70,approximately
howmanyyearswillittakeforthelevelofpercapitarealGDPtodouble?
A) 4.9years B) 7years
C) 10years D) noneoftheabove
Answer: C
Diff:2
37) Whichofthefollowingisatruestatementconcerningeconomicgrowth?
A) ChangesinpercapitanominalGDPareusedtomeasureeconomicgrowthbecause
populationgrowthcandistortthefiguresandwewanttousethenominalamountssince
thatiswhatpeopleidentifywith.
B) ChangesinpercapitanominalGDPareusedtomeasureeconomicgrowth,butthereare
seriousproblemsconcerningthedesirabilityofusingfiguresthatdonotaccountfor
pollutionandurbansprawl.
C) ChangesinpercapitarealGDPareusedtomeasureeconomicgrowthbecausethis
accuratelymeasuresallthedifferencesinlivingstandardsacrosscountries.
D) ChangesinpercapitarealGDPareusedtomeasureeconomicgrowthbecauseinflation
andpopulationgrowthcandistortnominalGDPfiguresortotalGDPfigures.
Answer: D
Diff:2
38) WhichofthefollowingstatementsisNOTtrueaboutusingpercapitarealGDPtomeasurea
nationseconomicgrowth?
A) Thedefinitiondoesnotindicatehowtheincreaseingrowthisbeingdisturbedamongthe
nationspopulation.
B) Thedefinitionassumesthatsomeoftheincreaseinproductivitygoestothepoor.
C) Thedefinitionhasunderstatedactualeconomicgrowthbecauseitdoesnottakeinto
considerationchangesinleisure.
D) Thedefinitionisnotperfectformeasuringincreasesinanationsproductivecapacity.
Answer: B
Diff:2
39) Whenexaminingthegrowthrecordofanynation
A) allthatmustbeexaminedisincreasesinpercapitalrealGDP.
B) noconsiderationshouldbegiventothechangeintheaverageamountofleisuretimein
thenation.
C) increasesinpercapitarealGDPmustbeconsideredalongwithhowfartheproduction
possibilitiescurvehasshifted.
D) wemustconsiderwhichincomegroupshavebenefitedmostfromthegrowth.
Answer: D
Diff:1
2012 2013 2012 2013

RealGDP RealGDP Population Population
Country (Millions) (Millions) (Millions) (Millions)
A $214,200 $256,300 767.70 798.40
B 164,300 174,700 37.20 37.80
C 166,700 184,300 6.53 7.00
D 200,800 222,500 114.49 114.85
40) Refertotheabovetable.WhichcountryhadthelargestincreaseinpercapitarealGDPbetween
2012and2013?
A) A B) B C) C D) D
Answer: C
Diff:2
41) Refertotheabovetable.WhichcountryhasthelowestincreaseinpercapitarealGDPbetween
2012and2013?
A) A B) B C) C D) D
Answer: A
Diff:2
42) Ifweareinterestedinknowingwhetherapoorcountryisimprovingeconomically,wewantto
knownotonlywhattheeconomicgrowthrateis,butalso
A) whethertheeconomicgrowthrateisfasterthanothernationsgrowthrates.
B) whethergovernmentspendingisgrowingatthesamerate.
C) whethertheeconomicgrowthrateisgreaterthanlastyearsrate.
D) whetherthelowestincomegroupsarebenefitingfromthegrowth.
Answer: D
Diff:3
43) Realstandardsoflivingcanincrease
A) ifthecountryisproducingthesameamounttheytraditionallyhaveandareenjoyingmore
leisuretime.
B) onlyifthereispositiveeconomicgrowth.
C) ifthereispositivegrowthinthemanufacturingsector.
D) onlyatthecostofincreasedurbancongestion.
Answer: A
Diff:1
44) Economicgrowthmayoverstatechangesinthestandardoflivingif
A) peopleareretiringatayoungerage.
B) theaverageworkweekisincreasing.
C) thenumberofstudentsattendingcollegeisincreasing.
D) expectedlifespansareincreasing.
Answer: B
Diff:2
45) AcountryhashaditspercapitalrealGDPremainconstantforseveralyears.Duringthisperiod
thiscountry
A) hasnotexperiencedanyeconomicgrowth.
B) mayhaveexperiencedeconomicgrowthiftheaveragehoursworkedperweekhave
fallen.
C) willhaveexperiencedaninwardshiftoftheproductionpossibilitiescurve.
D) willhaveanincreaseinthenumberofpoorpeople.
Answer: B
Diff:2
46) Anexampleofacostofeconomicgrowthis
A) longerlifespans. B) politicalinstability.
C) alienation. D) increasesinilliteracy.
Answer: C
Diff:2
47) Themeasurementofeconomicgrowthcannottakeintoaccount
A) theservicesectorofaneconomy.
B) productiveactivityinaneconomy.
C) culturalaspectsoflifeinacountry.
D) differencesininflationratesacrosscountries.
Answer: C
Diff:2
48) SupposetwocountrieshaveidenticalgrowthratesofrealGDPandthesameinitialvalueofper
capitarealGDP.Weknow,then,that
A) lifeexpectanciesarethesameinbothcountries.
B) economicwellbeingisthesameinbothcountries.
C) livingstandardsmaydifferinthetwocountriesbecausewedontknowhowincomeis
distributedinthecountries.
D) livingstandardsinthetwocountriesareprobablyidentical,orveryclosetoeachother.
Answer: C
Diff:3
49) Thereasonthatdifferencesineconomicgrowthratesareimportantinthelongrunisthat
A) growthcompoundsovertime.
B) populationnaturallyshrinksinmostcountries.
C) realGDPusuallydropswhenadjustedforinflation.
D) nominalGDPtypicallyincreasesfasterthanrealGDP.
Answer: A
Diff:1
50) Aonepercentagepointinthegrowthrate
A) doesnotmakemuchdifferenceinthelongrunpercapitarealGDP.
B) willnotinfluencetherealstandardoflivinginacountry.
C) canmakeabigdifferenceinthepercapitarealGDPbecauseofurbancongestion.
D) canmakeabigdifferenceinthepercapitarealGDPbecauseofcompounding.
Answer: D
Diff:1
51) Asmallreductioninacountrysgrowthrateisaconcerntopolicymakersbecause
A) asmallchangecanhavelargeeffectsonpercapitaGDPovertime.
B) areductionusuallyleadstofuturereductionsuntilfinallytheeconomystagnates.
C) policymakersfocustoomuchoneconomicgrowthandnotenoughonincreasingsavings
rates.
D) thelargerGDPisthebettertheeconomicwelfarewillbeinthefuture.
Answer: A
Diff:3
52) SupposetwocountrieshavepercapitarealGDPof$20,000in2010.CountryAhasagrowthrate
of4percentandCountryBhasagrowthrateof5percent.By2013,thepercapitarealGDPsfor
thetwocountries,respectively,are(rounded)
A) $21,630and$22,050. B) $22,400and$23,000.
C) $22,500and$23,150. D) $25,000and$26,500.
Answer: C
Diff:2
Years 3% 4% 5% 6% 8% 10% 20%

1 1.03 1.04 1.05 1.06 1.08 1.10 1.20
2 1.06 1.08 1.10 1.12 1.17 1.21 1.44
3 1.09 1.12 1.16 1.19 1.26 1.33 1.73
4 1.13 1.17 1.22 1.26 1.36 1.46 2.07
5 1.16 1.22 1.28 1.34 1.47 1.61 2.49
6 1.19 1.27 1.34 1.41 1.59 1.77 2.99
7 1.23 1.32 1.41 1.50 1.71 1.94 3.58
8 1.27 1.37 1.48 1.59 1.85 2.14 4.30
9 1.30 1.42 1.55 1.68 2.00 2.35 5.16
10 1.34 1.48 1.63 1.79 2.16 2.59 6.19
20 1.81 2.19 2.65 3.20 4.66 6.72 38.30
30 2.43 3.24 4.32 5.74 10.00 17.40 237.00
40 3.26 4.80 7.04 10.30 21.70 45.30 1470.00
50 4.38 7.11 11.50 18.40 46.90 117.00 9100.00
53) Accordingtotheabovetable,ifpercapitarealGDPiscurrently$1000,thenataconstantannual
rateofgrowthof8percent,percapitarealGDPtenyearsfromnowwillbeequalto
A) $2000. B) $2140. C) $2160. D) $2590.
Answer: C
Diff:2
54) Refertotheabovetable.HowlongwouldittakeforacountrytotripleitsGDPiftheGDPgrew
ata20percentrate?
A) 2years B) 4years C) 6years D) 10years
Answer: C
Diff:2
55) Refertotheabovetable.TwocountrieshavepercapitarealGDPsin2010of$5000.IfcountryA
hasa4percentgrowthrateandCountryBa5percentgrowthrate,whatwillthepercapitareal
GDPsofeachbeintheyear2060?
A) A:$40,000;B:$60,000 B) A:$35,550;B:$57,500
C) A:$24,000;B:$35,200 D) A:$15,000;B:$30,000
Answer: B
Diff:2
56) Refertotheabovetable.SupposeonecountryhasapercapitarealGDPof$1000andanother
hasapercapitarealGDPof$10,000,ortentimeslarger.Ifbothcountrieshaveagrowthrateof5
percent,howmuchlargerwillpercapitarealGDPbeinthesecondcountrybethanthefirst
after50years?
A) 4timeslarger B) 5timeslarger C) 8timeslarger D) 10timeslarger
Answer: D
Diff:2
57) Refertotheabovetable.CountryAhasapercapitarealGDPof$1000andBhasapercapita
realGDPof$10,000.Aisgrowingatarateof5percentayearandBatarateof4percentayear.
After50years,howmuchlargerispercapitarealGDPinBthanA?Howmuchisthisinreal
dollars?
A) Bis8timeslarger,or$175,000largeronarealpercapitabasis.
B) Bis12timeslarger,or$230,000largeronarealpercapitabasis.
C) Bisalittleover6timeslarger,oralmost$60,000largeronarealpercapitabasis.
D) Bisalittlelessthan2timessmaller,oralmost$20,000smalleronarealpercapitabasis.
Answer: C
Diff:3
58) Refertotheabovetable.IfaneconomyscurrentpercapitarealGDPis$3,000,andifits
economygrowsatanconstantannualrateof5percentfor50years,whatwillbeitspercapita
realGDPattheendofthatperiod?
A) $13,140 B) $21,330 C) $34,500 D) $55,200
Answer: C
Diff:2
59) Refertotheabovetable.Youhaveachoiceamongfouralternatives.ChoiceAletsyouinvest
$250,000at4percent;Bletsyouinvest$125,000at6percent;Cletsyouinvest$62,500at8
percent,andDletsyouinvest$31,250at10percent.Whichchoicewillgetyouto$1million
faster?
A) A B) B C) C D) D
Answer: A
Diff:3
60) AllofthefollowingwillcausethereportedgrowthrateinacountrytochangeEXCEPT
A) populationchanges.
B) changesinthenumberofpoorpeopleinthecountry.
C) ashiftoftheproductionpossibilitiescurve.
D) changesinproductivity.
Answer: B
Diff:2
61) Graphically,economicgrowthisrepresentedas
A) amovementalongtheproductionpossibilitiescurve.
B) amovementfromapointinsidetheproductionpossibilitiescurvetoapointonthecurve
itself.
C) aninwardshiftoftheproductionpossibilitiescurve.
D) anoutwardshiftoftheproductionpossibilitiescurve.
Answer: D
Diff:2
62) Oneoftheproblemswiththedefinitionofeconomicgrowthisthat
A) itoverstateseconomicgrowthbecauseitdoesnotaccountforleisuretime.
B) itdoesnotaccountforthedistributionofincome.
C) itoverstateseconomicgrowthbecauseitdoesnotaccountforthereductioninworktime.
D) itunderstateseconomicgrowthbecauseitdoesnotaccountforthereductioninworktime.
Answer: B
Diff:2
63) Economicgrowthis
A) anincreaseintheperpersonrealproductioninanation.
B) anincreaseinstockmarketvalues.
C) anincreaseinrealestatevalues.
D) anincreaseinthenumberofpeopleemployedinagriculture.
Answer: A
Diff:2
64) Thevariableusedtomeasureeconomicgrowthis
A) thegrowthofthemoneysupply. B) thetradesurplus.
C) thegrowthinpercapitarealGDP. D) thenumberofnewjobscreated.
Answer: C
Diff:1
65) Whydoverysmalldifferencesinannualgrowthratesamounttobigdifferencesinthedegreeof
long-termeconomicgrowth?
A) Becausethefaster-growingcountriesgainapoliticaladvantageoverpoorercountries,and
usethatadvantagefortheireconomicgain.
B) Becausetheannualgrowthrateiscompoundedovertime.
C) Becausetheslower-growingcountriessavetoomuch.
D) Becausetheslower-growingcountriesdontexportenough.
Answer: B
Diff:2
66) Anoutwardshiftoftheproductionpossibilitiescurvedemonstrates
A) arecession. B) anincreasedrateofinflation.
C) economicgrowth. D) acyclicalshock.
Answer: C
Diff:1
67) Economicgrowthisdefinedas
A) anincreaseinthesatisfactionofallpeoplewithinacountry.
B) anincreaseinpercapitarealGDPmeasuredbyitsrateofchangeperyear.
C) anyincreaseinpercapitanominalGDPmeasuredbyitsrateofchangeperyear.
D) anincreaseinthesupplyofmoneymeasuredbyitsrateofchangeperyear.
Answer: B
Diff:2
68) AccordingtotheWorldBankandtheInternationalMonetaryFund,whichofthefollowing
countrieshasshownthegreatestrateofeconomicgrowthinthepasttwodecades?
A) China B) Germany C) UnitedStates D) Mexico
Answer: A
Diff:2
69) Whichofthefollowingwouldtypicallybeconsideredacostofeconomicgrowth?
A) increasedilliteracy B) decreasedlevelsofhealth
C) increasedpoverty D) urbancongestion
Answer: D
Diff:2
70) Asmallincreaseintheannualrateofeconomicgrowthcanleadtoalargerincreaseingrowth
overtimeduetotheeffectsof
A) themoneysupply. B) compounding.
C) regressiontowardsthemean. D) averaging.
Answer: B
Diff:1
71) Thedefinitionofeconomicgrowthistheannualpercentage
A) increaseinthepercapitarealGDP. B) increaseinthepercapitanominalGDP.
C) increaseinthetotalnominalGDP. D) increaseintotalexports.
Answer: A
Diff:1
72) Economicgrowthwill
A) shifttheproductionpossibilitiescurveinward.
B) shifttheproductionpossibilitiescurveoutward.
C) shiftalongtheproductionpossibilitiescurvetowardtheX-axis.
D) beamovementfrominsidetheproductionspossibilitiescurvetothecurveitself.
Answer: B
Diff:1
73) SupposepercapitarealGDPgrowsby3.5%peryear.BasedontheRuleof70,approximately
howmanyyearswillittakeforthelevelofpercapitarealGDPtodouble(i.e.,increaseby
100%)?
A) 3.5years B) 10years C) 20years D) 35years
Answer: C
Diff:2
74) Assumeacountryproducestwotypesofgoods:manufacturedgoodsandagriculturalgoods.
Whenthiscountryexperienceseconomicgrowth,weknowthat
A) theproductionpossibilitiescurvewillshiftoutward.
B) theproductionpossibilitiescurvewillshiftinward.
C) therewillbeamovementalongthecurvetowardmoremanufacturedgoods.
D) therewillbemovementalongthecurvetowardmoreagriculturalgoods.
Answer: A
Diff:2
75) Whenlookingateconomicgrowthinacountry,thedistributionofoutputandincome
A) generallyfollowspredictablepatterns.
B) isnottakenintoconsideration.
C) isskewedtowardthelowestquintileofthepopulation.
D) issharedequally.
Answer: B
Diff:2
76) WhichofthefollowingisNOTabenefitofeconomicgrowth?
A) urbancongestion B) reductioninilliteracy
C) improvedhealth D) longerlives
Answer: A
Diff:2
77) Whichofthefollowingisanegativeeffectofeconomicgrowth?
A) higherinflation B) higherunemployment
C) environmentalpollution D) alloftheabove
Answer: C
Diff:1
78) Achangeinthegrowthrateofacountryofonepercentagepointannuallyhas
A) verylittleimpactontheeconomyofacountry.
B) alargeimpactinthefutureduetocompounding.
C) asmallimpactinthecurrentyear,andsmallerimpactinthefuturebecauseof
compounding.
D) alargeimpactontheeconomyinthecurrentyear,butnotinthefuture.
Answer: B
Diff:3
79) Themodificationofmanufacturingprocessessoastoreducetheresultingenvironmental
damageisanendeavorthatrequirescapitalinvestment,laborinputs,andtechnology.What
thenfollowsfromthisstatement?
A) Economicgrowthcanbenefittheenvironment.
B) Environmentaldamageisaregrettablebutnecessarysideeffectofeconomicgrowth.
C) Theconditionoftheenvironmentwillbebetterinslower-growingcountries.
D) Thewaytoreducepollutionistoeducatepeopleaboutitseffects.
Answer: A
Diff:3
80) WhatistherealGDPafterfouryearsifCountryXsaverageannualgrowthrateis8.6percent
andtheinitialrealGDPwas$2,756.0million?
A) $2,993.0million B) $3,833.5million
C) $1,077.5million D) $3,250.4million
Answer: B
Diff:3
81) ThepercapitaGDPforHungaryin2011was$12,000andin2012was$12,360.Howmuchdid
theeconomygrowin2012?
A) 97percent B) 3percent C) 2percent D) 1percent
Answer: B
Diff:2
82) AconstantrateofU.S.economicgrowthoveragivenperiodofyearswouldinvolve
A) addingthesameamountofnominaldollarstorealGDPpercapitaeachyear.
B) addingthesameamountofrealdollarstorealGDPpercapitaeachyear.
C) compoundingthepercentageincreaseinrealGDPpercapitaovertheyears.
D) Noneoftheabovearecorrect.
Answer: C
Diff:2
83) Wheneconomicgrowthiscomparedbetweencountries,thebestmeasuretouseis
A) nominalGDP. B) realGDP.
C) chain-weightedGDP. D) realGDPpercapita.
Answer: D
Diff:2
84) Whatiseconomicgrowthandwhyaregrowthratessoimportant?
Answer: EconomicgrowthismeasuredbyincreasesinpercapitarealGrossDomesticProduct
(GDP).Economicgrowthresultsinahigherstandardofliving,measuredinproduction
ofnewfinalgoodsandservices,fortheaveragememberofsociety.Sustainedsmall
increasesinthegrowthrateofpercapitarealGrossDomesticProduct(GDP)canleadto
largeabsoluteincreasesinpercapitarealGrossDomesticProduct(GDP)duetothe
powerofannualgrowthcompounding.
Diff:1
85) Thereisadirectrelationshipbetweeneconomicgrowthratesandthewealthofanation.Do
youagreeordisagree?Why?
Answer: Disagree.Wealthiernationsoftenhavesmallergrowthratesthanpoorernations.Partof
thereasonisthatatwopercentgrowthrateforarichnationmeansalotmoreactual
growthofthelevelofpercapitarealGrossDomesticProduct(GDP)thanitdoesfora
poornation.
Diff:2
86) WhataretheshortcomingsofusingchangesinpercapitarealGDPtomeasureeconomic
growth?
Answer: GDPdoesnotincludeallgoodsandservicesthatpeopleconsidervaluable.Household
productionisleftout,asisthevalueofleisure.GDPalsodoesnottakeintoconsideration
culturalandspiritualaspectsoflife.Totheextenteconomicgrowthisaccompaniedby
environmentaldegradation,itisnotallagain.Andfinally,thelevelofpercapitareal
GDPdoesnotprovideinformationabouthowtheincomeisdistributedacrossthe
population.
Diff:2
9.2ProductivityIncreases:TheHeartofEconomicGrowth
1) Ifpopulationgrowthisgreaterthanthegrowthofrealoutput,
A) realpercapitaGrossDomesticProduct(GDP)growthwillbelessthanthegrowthofreal
GrossDomesticProduct(GDP).
B) theproductionpossibilitiescurveisshiftingtotheleft.
C) realpercapitaGrossDomesticProduct(GDP)growthwillbegreaterthanthegrowthof
realGrossDomesticProduct(GDP).
D) realpercapitaGrossDomesticProduct(GDP)andrealGrossDomesticProduct(GDP)will
begrowingatthesamerate.
Answer: A
Diff:1
Topic: 9.2ProductivityIncreases:TheHeartofEconomicGrowth
2) Laborproductivitycanbestbecalculatedas
A) realGrossDomesticProduct(GDP)/GrossDomesticProduct(GDP)priceindex.
B) realGrossDomesticProduct(GDP)/numberofworkers.
C) numberofworkers/hoursofwork.
D) realwages/hoursofwork.
Answer: B
Diff:1
3) WhichresourceisthemaincontributortoeconomicgrowthintheUnitedStates,LatinAmerica,
andSouthAsia?
A) growthinphysicalcapital B) growthinhumancapital(education)
C) growthinlabor D) growthinland
Answer: C
Diff:1
4) Whichofthefollowingvariablescanbeusedtomeasurelaborproductivity?
A) realGDP B) numberofworkers
C) numberoflaborhours D) alloftheabove
Answer: D
Diff:1
5) Themajorityofevidencepointstothefactthat,inthelastdecadeintheUnitedStates,labor
productivityhas
A) decreased.
B) increased.
C) stayedthesame.
D) decreasedinthemanufacturingsectorbutincreasedintheservicesector.
Answer: B
Diff:1
6) Laborproductivityriseswhen
A) averageworkeroutputfalls. B) businessinvestmentfalls.
C) averageworkeroutputrises. D) nominalwagesfall.
Answer: C
Diff:2
7) Laborproductivityincreaseswhen
A) theaveragenumberofhourspeopleworkgoesup.
B) theunemploymentratedecreases.
C) theaverageoutputproducedperworkerduringaspecifiedtimeperiodincreases.
D) theaverageoutputproducedperworkerduringaspecifiedtimeperioddecreases.
Answer: C
Diff:1
8) Supposeacountryexperiencesanincreaseinoutputperworker.Suchadevelopment
representswhichofthefollowing?
A) adecreaseineconomicgrowth B) anincreaseinlaborproductivity
C) areductioninthesavingrate D) anincreaseinpopulationgrowth
Answer: B
Diff:1
9) Whichofthefollowingwillcauseanincreaseineconomicgrowth?
A) anincreaseinhumancapital
B) areductioninthestockofphysicalcapital
C) areductionintheunemploymentrate
D) areductioninlaborforceparticipation
Answer: A
Diff:2
10) Laborproductivityiscomputedas
A) percapitarealGDPdividedbythenumberofworkers.
B) realGDPdividedbypopulation.
C) percapitarealGDPdividedbypopulation.
D) realGDPdividedbythenumberofworkers.
Answer: D
Diff:1
11) Laborproductivityis
A) theaverageamountproducedtimesthenumberofworkers.
B) theaverageamountproducedtimesthenumberofpeopleinthelaborforce.
C) theaverageamountproducedperworker.
D) therateofchangeinthetotalamountproducedperworker.
Answer: C
Diff:2
12) Themostimportantthingabouthigherlaborproductivityisthatitmeans
A) wearedoingbetterthananyoneelseis.
B) wecancompetewellwithothernations.
C) wecanachieveahappierpopulation.
D) wecanhaveahigherstandardofliving.
Answer: D
Diff:2
13) Economicgrowthcanbedefinedas
A) therateofgrowthintheproductivityoflabor.
B) therateofgrowthintheproductivityofcapital.
C) therateofgrowthoflaborplustherateofdepreciationofcapital.
D) therateofgrowthoflaborplustherateofgrowthofcapitalplustherateofgrowthinthe
productivityoflaborandcapital.
Answer: D
Diff:1
14) Productivityrelatesto
A) workingharderovertime.
B) workinglongerovertime.
C) producingthesameoutputwithfewerlaborhours.
D) producingthesameoutputwithmorelaborhours.
Answer: C
Diff:1
15) Whichofthefollowingisanexampleofameasureoflaborproductivity?
A) Farmworkersproduce30bushelsofwheatperworkerperday.
B) Autosget30gallonstothemile.
C) ThegrowthrateofpercapitarealGDPis3.5percentperyear.
D) Wagesincreaseby3.5percentperyearfor5years.
Answer: A
Diff:2
16) Laborproductivityincreaseswhen
A) thepopulationincreases.
B) outputincreasesevenifthelaborforcehasdecreased.
C) outputincreasesatthesamerateasthelaborforceincreases.
D) outputincreasesfasterthanpopulationincreases.
Answer: B
Diff:2
17) IntheUnitedStates,themaincontributortoeconomicgrowthisduetothegrowthin
A) physicalcapital. B) education(humancapital).
C) laborresources. D) capitalandlaborproductivity.
Answer: C
Diff:1
18) Improvementsinlaborproductivity
A) affectthelevelofwages,butdonotaffecttherateofeconomicgrowth.
B) affectthelevelofprofit,butdonotaffecttherateofeconomicgrowth.
C) hindereconomicgrowth,becausetheycauseunemployment.
D) contributetoeconomicgrowth.
Answer: D
Diff:3
19) Laborproductivityiscommonlymeasuredas
A) thenumberofworkersdividedbyrealGDP.
B) thechangeinrealGDPdividedbychangeinnumberofworkers.
C) nominalGDPdividedbynumberofworkers.
D) realGDPdividedbynumberofworkers.
Answer: D
Diff:1
20) Anincreaseinhumancapitalwilltendtocausewhichofthefollowing?
A) increaseeconomicgrowth B) increasethestandardofliving
C) increaselaborproductivity D) alloftheabove
Answer: D
Diff:1
21) WhichoneofthefollowingdoesNOTcontributetoeconomicgrowth?
A) thegrowthofcapitalandlaborproductivity
B) thegrowthofthecapitalstock
C) thegrowthofthelaborforce
D) increasesinthepricelevel
Answer: D
Diff:2
22) Theformulaforthecomputationoflaborproductivityis
A) realGDP/population. B) realGDP/numberofworkers.
C) nominalGDP/population. D) nominalGDP/numberofworkers.
Answer: B
Diff:2
23) Laborproductivityisdefinedas
A) theamountofoutputperworker.
B) theamountofinputperworker.
C) theamountofworkersperunitofinput.
D) theincreaseinoutputperunitofmachinery.
Answer: A
Diff:1
24) Laborproductivitycanbeincreasedif
A) peoplespendlesstimedevelopingskillsbeforeenteringtheworkforce.
B) thegovernmentmandatesit.
C) thereisanincreaseincapitalgoods.
D) thestandardoflivingdeclines.
Answer: C
Diff:2
25) Laborproductivitymeasures
A) thegrowthofpercapitarealGDP. B) thegrowthofrealoutput.
C) realoutputperlaborhour. D) thegrowthinthequantityoflabor.
Answer: C
Diff:2
26) Laborproductivitycanbeincreasedwith
A) educationandtrainingoftheworkforce.
B) anincreaseincapitalgoodsused.
C) improvementsinmanagement.
D) alloftheabove
Answer: D
Diff:2
27) Bydividingthevalueoftotaldomesticoutput(realGrossDomesticProduct(GDP))bythe
numberofworkers,economistsderive
A) thenetdomesticproduct. B) laborproductivity.
C) thesizeofthelaborforce. D) therateofcapitalaccumulation.
Answer: B
Diff:1
28) Wheneveraverageoutputproducedperworkerduringaspecifictime-periodincreases,then
A) leisuretimeincreases. B) nominalGDPdecreases.
C) laborproductivityincreases. D) thestandardoflivinggoesdown.
Answer: C
Diff:1
29) Improvementsininformationtechnologyoverthepastdecadehaveenhancedlabor
productivity.Whathasbeenalikelyresultofthischange?
A) Capitalproductivityhasdeclined.
B) Unemploymenthasincreased.
C) Therateofeconomicgrowthhasincreased.
D) Entrepreneursnolongerhaveanincentivetoinvestininformationtechnology.
Answer: C
Diff:2
30) Whichofthefollowingcontributestoeconomicgrowth?
A) increaseinlaborproductivity
B) increaseinconsumerspending
C) increaseinlaborregulationsrestrictingthehoursofovertimeallowed
D) increaseinenvironmentalprotectionpolicies
Answer: A
Diff:2
31) Explaintherelationshipbetweeneconomicgrowthandlaborproductivity.
Answer: Economicgrowthequalsthesumofthegrowthratesofallinputsplustherateofgrowth
intheproductivityoftheinputs.Hence,otherthingsconstant,anincreaseinlabor
productivityleadstoanincreaseineconomicgrowth.
Diff:2
9.3Saving:AFundamentalDeterminantofEconomicGrowth
1) Givingupconsumptiontodayforconsumptiontomorrowaccelerateseconomicgrowthby
A) havingtheeconomyproducenoconsumergoods.
B) increasingsavingoutofdisposableincome.
C) increasingtheexpectedrateofinflation.
D) rapidexpansionofthemoneysupply.
Answer: B
Diff:1
Topic: 9.3Saving:AFundamentalDeterminantofEconomicGrowth
2) Oneimportantfactorthataffectseconomicgrowthis
A) goldreserves.
B) therateofsaving.
C) whichpoliticalpartyisinpower.
D) thenumberofworkersinheavyindustry.
Answer: B
Diff:2
3) Accordingtothetext,EthiopiaprobablyhasalowpercapitarealGrossDomesticProduct
(GDP)because
A) ithastoomanyresources.
B) ithasacorruptgovernment.
C) ithasalowrateofsaving.
D) therearetoomanyskilledworkersinthecountry.
Answer: C
Diff:2
4) EconomicgrowthoccursasaresultofallofthefollowingEXCEPT
A) morelaborhours. B) growthofcapital.
C) technologicalprogress. D) lesssaving.
Answer: D
Diff:1
5) Ahigherrateofsavingshouldleadto
A) highercurrentconsumption.
B) lessgrowth.
C) moreinvestment,highercapitalgrowth,andmorefutureconsumption.
D) ahigherpricelevelandreducedfutureconsumption.
Answer: C
Diff:1
6) Therateofeconomicgrowthwillbefasterif
A) therateofgrowthofthemoneysupplyishigher.
B) therateofsavingishigher.
C) therateofgrowthofthepopulationishigher.
D) consumptionspendingisgreater.
Answer: B
Diff:2
7) Otherthingsbeingequal,ahighersavingrate
A) leadstohigherinterestrates.
B) meanshigherstandardsoflivinginthefuture.
C) meanshigherstandardsoflivingtoday.
D) isassociatedwithadeclineintherateofgrowthofthepopulation.
Answer: B
Diff:2
8) Otherthingsbeingequal,anincreaseinconsumptionspendingimplies
A) adeclineinsaving.
B) adeclineingovernmentspending.
C) ahigherstandardoflivinginthefuture.
D) thateconomicgrowthwillsoonincrease.
Answer: A
Diff:2
9) Economicgrowthtendstobehigherinacountrythat
A) hasalowsavingrate.
B) hasanopeneconomythatencouragestherapidspreadoftechnology.
C) hasanundevelopedsystemofpropertyrights.
D) doesnotgrantpatentstoinvestors.
Answer: B
Diff:1
10) Whencomparingacrosscountries,thehighertherateofsaving,
A) thelowerthelevelofpercapitarealGrossDomesticProduct(GDP).
B) thehigherthelevelofpercapitarealGrossDomesticProduct(GDP).
C) thelessindustrializedthecountry.
D) thelowertheproductivityrates.
Answer: B
Diff:1
11) Animportantfactorindeterminingacountrysrateofeconomicgrowthis
A) thediversityofitspopulation.
B) itsrateofsaving.
C) thesizeofitslaborforce.
D) theproportionoftheadultpopulationthatisworking.
Answer: B
Diff:2
12) Otherthingsheldconstant,highersavingratesleadto
A) alowerstandardofliving.
B) increasesinthenumberofhoursworkerswork.
C) decreasesinrealpercapitaGDP.
D) higherlivingstandards.
Answer: D
Diff:1
13) Savingisimportantforeconomicgrowthbecause
A) ahighersavingratereducesinvestmentspending.
B) ahighersavingrateincreasesinvestmentspending.
C) moresavingincreasesconsumptionimmediately.
D) ahighersavingratewilldecreasethestandardoflivinginthefuture.
Answer: B
Diff:1
14) Areductioninacountryssavingratewilltendtocausewhichofthefollowinginthelongrun?
A) anincreaseinthestandardofliving B) areductionineconomicgrowth
C) anincreaseinlaborproductivity D) anincreaseinpercapitarealGDP
Answer: B
Diff:2
15) TherelationshipbetweentherateofsavingandpercapitarealGDPis
A) positive. B) negative. C) constant. D) notstable.
Answer: A
Diff:1
16) TherehasbeensomeconcernintheUnitedStatesthatpeoplearenotsavingenough.Thisisa
concernbecause
A) decreasesinsavingleadtodecreasesinlaborproductivity.
B) decreasesinsavingleadtodecreasesininvestment.
C) decreasesinsavingleadtoincreasesinthecapitalstock.
D) decreasesinsavingleadtoincreasesinconsumptioninthefuture.
Answer: B
Diff:2
17) Ifallincomeisconsumedinayear,then
A) investmentspendingwillincrease.
B) incomenextyearwillincrease.
C) investmentspendingwillbezero.
D) anyinvestmentspendingwillbedonebythegovernment.
Answer: C
Diff:2
18) Manycountriesfinditdifficulttoachieveeconomicgrowth.Thisisbecauseeconomicgrowth
A) isnotunderstoodwellbyeconomists,soitisdifficulttoadvisepolicymakersonthebest
policiestopursue.
B) requiressaving,andsavingmeanslessconsumptiontoday.Apoorcountrymayfindit
difficulttoconsumelesstoday.
C) appearstobepredeterminedandnotsubjecttofactorsthatpolicymakerscanhaveany
affecton.
D) dependsontechnologicalchangeandtechnologicalchangedependsonnoneconomic
factorssuchasthegrowthrateofscientificknowledge.
Answer: B
Diff:3
19) Itislikelythatasmallincreaseinacountryssavingratewillhave
A) alargeeffectonpercapitarealGDPmanyyearslaterbecausetheincreaseinsavingleads
toaslightlyhigherrateofeconomicgrowthwhichhaslargeeffectsovertime.
B) alargeeffectonpercapitarealGDPimmediatelybecausetheincreaseinsavingleadstoa
muchlargerrateofeconomicgrowth.
C) asmalleffectonpercapitarealGDPmanyyearslaterbecausetheincreaseinsavingwill
haveverylittleeffectonthegrowthrate.
D) asmalleffectonpercapitarealGDPmanyyearslaterbecausetheincreaseinsavingwill
beoffsetinlateryearsbyadecreaseinthesavingrate.
Answer: A
Diff:3
20) Countrieswithhigherratesofsaving
A) experiencelowergrowthratesinthefuture.
B) havealargepopulation.
C) haveagreaternumberofpoorpeople.
D) havehigherratesofgrowth.
Answer: D
Diff:1
21) Economicgrowthdependson
A) lowtaxrates.
B) highgovernmentspending.
C) highratesofconsumption.
D) increasesinthecapitalstockasaresultofsaving.
Answer: D
Diff:2
A) Savingdeterseconomicgrowth,becauseittakesmoneyoutofcirculation.
B) Savingenableseconomicgrowthbyprovidingforinvestmentinthecapitalstock.
C) Internationalcomparisonshavefoundnorelationshipbetweentherateofsavingandthe
levelofpercapitarealGDP.
D) Economieswithsophisticatedcreditmarkets,suchastheUnitedStates,havenoneedfor
saving.
Answer: B
Diff:3
23) Ofthefollowingnations,thecountrywiththehighestsavingrateis
A) theUnitedStates. B) Japan.
C) Mexico. D) Ethiopia.
Answer: B
Diff:2
24) Regardingtheroleofsavingineconomicgrowth,studiesindicatethat
A) thereisapositiverelationshipbetweeneconomicgrowthandsaving.
B) thereisnorelationshipbetweeneconomicgrowthandsaving.
C) thereisanegativerelationshipbetweeneconomicgrowthandsaving.
D) thereisbothapositiveandanegativerelationshipbetweeneconomicgrowthandsaving.
Answer: A
Diff:1
25) Whichofthefollowingisanimportantfactoraffectingeconomicgrowth?
A) therateofsaving B) exchangerates
C) therateofinterest D) thelevelofprices
Answer: A
Diff:1
26) Anincreaseinacountryssavingratewilltendtocausewhichofthefollowinginthelongrun?
A) areductioninpercapitarealGDP B) anincreaseineconomicgrowth
C) anincreaseintheunemploymentrate D) anincreaseintherateofinflation
Answer: B
Diff:1
27) Inordertobeabletoconsumemoreinthefuture,youhavetoconsume
A) lesstodayandsavethedifference. B) moretodaytoincreasesupply.
C) moreconsumergoods. D) fewercapitalgoods.
Answer: A
Diff:2
28) Highersavingratesmeanhigherfuturegrowthratesbecause
A) theinterestearnedfromsavingsgivesyoumorewealth.
B) thebankshavemoremoneytodistributetotheirshareholders.
C) savingcontributestolessinvestment,whichyieldsalargercapitalstock.
D) savingcontributestomoreinvestment,whichyieldsalargercapitalstock.
Answer: D
Diff:2
29) Inorderforanationtobeabletoconsumemoreinthefuture,itneedsto
A) consumelesstodayinaggregateandsavethedifferencebetweenconsumptionand
income.
B) consumemoretodayinaggregateandborrowthedifferencebetweenconsumptionand
income.
C) producemoretodayinaggregateandsavethedifferencebetweenconsumptionand
production.
D) producelesstodayinaggregateandsavethedifferencebetweenconsumptionand
income.
Answer: A
Diff:2
30) Whyareeconomicgrowthandsavingrelated?
Answer: Toconsumemoreinthefuturelessmustbeconsumedtoday.Thatis,savingisnecessary
forinvestmenttooccur,andinvestmentisnecessaryforeconomicgrowthtooccur.
Diff:1
9.4NewGrowthTheoryandtheDeterminantsofGrowth
1) Proponentsofthenewgrowththeoryarguethatwhichofthefollowingisadeterminantof
economicgrowth?
A) Aneffectivesystemofpatentprotection
B) Thequalityandsizeofthenationseducationalsystem
C) Theproportionofincomethatgoesintoresearchanddevelopment
D) alloftheabove.
Answer: D
Diff:1
Topic: 9.4NewGrowthTheoryandtheDeterminantsofGrowth
2) Whichofthefollowingarementionedasforcesofthe newgrowththeorythatinfluenceeconomic
growth?
I. Technology
II. Research
III. Innovations
A) Ionly
B) IandIIonly
C) IandIIIonly
D) IIandIIIonly
E) I,II,andIII
Answer: E
Diff:1
3) Akeyideaofthenewgrowththeoryisthat
A) technologyisnotanimportantdeterminantofeconomicgrowth.
B) economicgrowthisnotasimportantasleisuretimegrowth.
C) thegreatertherewardsfortechnologicaladvances,thegreaterthenumberoftechnological
advances.
D) therewardsassociatedwithtechnologicaladvanceshavelittletodowiththeactualrateof
inventionorinnovation.
Answer: C
Diff:1
4) Newgrowththeorysupportstheideathat
I. economicgrowthcancontinueaslongaswekeepfindingnewideas.
II. increasesinhumancapitalcanleadtogreaterratesofeconomicgrowth.
Answer: C
Diff:1
5) Accordingtothenewgrowththeory,economicgrowthwillcontinuewith
A) thedevelopmentofnewideas.
B) increasesinpopulationgrowth.
C) increasesininterestrates.
D) anincreasedfocusonlabor-intensivejobs.
Answer: A
Diff:2
6) AllofthefollowingarefactorsthatraiseeconomicdevelopmentEXCEPT
A) establishingalegalsystem.
B) aneducatedworkforce.
C) reducingtradebarriers.
D) governmentcontrolofthecountrysresources.
Answer: D
Diff:2
7) Innovationtypicallyincreaseswhen
A) marketincentivesandprivatepropertyrightsareencouraged.
B) governmentcontrolstheresourcebase.
C) hightaxesarepresent.
D) thelegalsystemisweak.
Answer: A
Diff:2
8) Thedevelopmentofastrainofwheatthatwillyieldtwocropsperyearratherthanonecropper
yearisanexampleofeconomicgrowthresultingfrom
A) capitalaccumulation. B) increasedgrossinvestment.
C) technologicalprogress. D) anincreaseinpercapitarealincome.
Answer: C
Diff:1
9) Accordingtonewgrowththeory,astechnologybecomesmoreimportanttogrowth,sodoes
A) humancapital. B) militaryspending.
C) increasingtaxes. D) increasingtradebarriers.
Answer: A
Diff:2
10) Economiststypicallyagreethatthespecialprotectiongiventoownersofpatentstendsto
A) reduceexpendituresonresearchanddevelopment.
B) increaseexpendituresonresearchanddevelopment.
C) reduceeconomicgrowth.
D) reduceproductivity.
Answer: B
Diff:1
11) Thetransformationofaninventionintosomethingthatbenefitstheeconomyisknownas
A) aninnovation. B) apatent. C) anexternality. D) acompounder.
Answer: A
Diff:1
12) Whenthegovernmentgrantsaninventorapatent,
A) hehastheexclusiverighttomake,sellorusehisinventionfor5years.
B) thepatentholderhaslessincentivetoinvestinR&Dbecauseonesuccessfulinvention
removestheneedtodevelopothers.
C) thepatentholderisguaranteedaprofitonhisinvention.
D) theprotectionofacurrentinventionwouldincreasespendingonR&D.
Answer: D
Diff:1
13) Regardingopeneconomies,economiststendtofindevidencethat
A) themoreclosedaneconomyis,thehighertherateofgrowththeeconomywillexperience.
B) tradetariffstendtoimproveeconomicgrowth.
C) freetradeencouragesamorerapidspreadoftechnology,andhenceincreaseseconomic
growth.
D) openeconomiestendtohaveaccesstosmallermarketsthandoclosedeconomies.
Answer: C
Diff:1
14) Accordingtothetext,datasupportstheconclusionthatlowertradebarriers
A) helpboostpercapitarealGrossDomesticProduct(GDP)growth.
B) helptoincreasewelfarepayments.
C) decreasethestandardoflivinginthecountry.
D) decreaselifeexpectancy.
Answer: A
Diff:2
15) Freetradeisviewedaskeytoeconomicdevelopmentbecause
A) itencouragesafasterspreadoftechnology.
B) itencouragesacountrysexportsonly.
C) itbringsinexpensivenewtechnology.
Answer: A
Diff:2
16) Whichofthefollowingdoesfreetradeencourage?
A) Morerapidspreadoftechnology
B) Higherratesofeconomicgrowth
C) Domesticindustriesaccesstolargermarkets
D) Alloftheabove
Answer: D
Diff:2
17) PaulRomerstheoryontheimportanceofknowledgediffersfromtraditionaltheoryinthat
Romer
A) arguesthataninvestment-knowledgecycleallowsaonce-and-for-allincreasein
investmenttopermanentlyraiseacountrysgrowthrate,whiletraditionaltheoryargues
thataonce-and-for-allincreaseininvestmentleadstoahigherstandardoflivingbutnot
toahighergrowthrate.
B) argues,thatinvestmentisnotimportantinpromotinggrowth,butthattheacquisitionof
knowledgeisthesoledeterminantofeconomicgrowth.
C) argues,thataninvestment-knowledgecycleexistswhichrequiresthatinvestmentrates
keepincreasingorelsegrowthrateswillfall,whiletraditionaltheoryarguesthatgrowth
rateswillnotfall,althoughtheywillnotincreaseeither.
D) emphasizesinvestmentrateswhiletraditionaltheoryemphasizestheimportanceof
knowledgeasafactorofproduction.
Answer: A
Diff:3
18) AccordingtoeconomistPaulRomer,economiesthatwishtoexperiencegrowthmust
A) investmostoftheirsavingsinnationaldefense.
B) investinknowledge.
C) drasticallylowertheirstandardsofliving.
D) becomecommandeconomies.
Answer: B
Diff:1
19) Fordevelopingcountries,oneofthemoreeffectivewaystobecomemoredevelopedis
A) toinvestinsecondaryschools. B) toinvestmoreinthemilitary.
C) toincreasetradebarriers. D) toreducedirectforeigninvestment.
Answer: A
Diff:2
20) WhatdoesthefactthatU.S.studentsarefallingbehindothernationsstudentsinmathand
sciencehavetodowitheconomicgrowth?
A) Nothing.PeopleintheUnitedStatesjustdontliketofallbehindinanythingasamatterof
pride.
B) IfU.S.studentsdontexcelinmathandscience,thenationwillseefewerplayswrittenand
fewerpiecesofmusiccomposed.
C) Bettertechnology,akeytoeconomicgrowth,dependslargelyonmathandscienceskills.
D) Mathandscienceskillsdontfostereconomicgrowth,butittakesmathskillstocalculatea
nationsrateofeconomicgrowth.
Answer: C
Diff:2
21) Humancapitalis
A) thesavingdonebyhumanbeings.
B) theknowledgeandskillsthatpeopleintheworkforceacquirethrougheducationand
training.
C) ameasureofthelaborproductivityofworkers.
D) theinvestmentpeoplemakeinindustriesthatmakecapitalgoods.
Answer: B
Diff:1
22) WhichofthefollowingistrueoftrendsinthenumberofnewU.S.patents?
A) Therewasasteadyincreaseinnewpatentsthroughoutthe1970s.
B) Therewasasurgeinnewpatentsinthelatterpartofthe1990s.
C) Thenumberofnewpatentsgrantedeachyearhasremainedunchangedsincetheearly
1970s.
D) Thenumberofnewpatentsgrantedeachyeardeclinedbymorethan50percentafter2001.
Answer: B
Diff:2
23) Traditionally,economistsregardedimprovementsintechnologyas
A) themostimportantfactorthathelpedexplaineconomicgrowth,andbasicallytheonly
factorthatwouldcauseeconomicgrowth.
B) anoutsidefactorthathelpedexplaineconomicgrowth.
C) animportantfactorinexplainingeconomicgrowththatwasduetoeconomicforcesthat
alsocouldeasilybeexplained.
D) unrelatedtoeconomicgrowthinanysystematicway.
Answer: B
Diff:2
24) WhichofthefollowingisNOTassociatedwiththenewgrowththeory?
A) Naturalresources B) Research
C) Technology D) Innovation
Answer: A
Diff:1
25) Newgrowththeoryisconcernedwith
A) findingagoodwaytomeasureeconomicgrowth.
B) increasingthesavingsrateintheU.S.
C) understandingtheforcesthatincreaseproductivity.
D) understandinghowcompoundingworks.
Answer: C
Diff:1
26) Recentlyeconomistshaveaddedwhatfactorasamajorexplanationofeconomicgrowth?
A) Thegrowthrateoflabor
B) Thegrowthrateofcapital
C) Thegrowthrateinlaborandcapitalproductivity
D) Technology
Answer: D
Diff:1
27) Newgrowththeoryarguesthat
A) growthisduetothepropergovernmentpoliciesconcerninginterestrates.
B) growthreliesonmaintaininglowergrowthratesofpopulation,especiallyinless
developedcountries.
C) technologycannotbelookedatasanoutsidefactorwithoutanexplanationofwhatdrives
it.
D) technologyisthekeyfactorthatexplainsgrowthbuttechnologyisbeyondeconomic
explanationitself.
Answer: C
Diff:2
28) Animportantfoundationofthenewgrowththeoryisthat
A) wewillgetmoretechnologicaladvancesthemorethegovernmentisinvolved.
B) wewillgetmoretechnologicaladvanceswhentherewardsforproducingthemare
greater.
C) thegrowthrateofthecapitalstockismoreimportantthanthegrowthrateofnew
knowledgeingeneratingeconomicgrowth.
D) improvementsinlaborproductivityarepoormeasuresoftechnologicalgrowth.
Answer: B
Diff:2
29) Whichofthefollowingwilltendtocauseanincreaseintechnology?
A) anincreaseinresearchanddevelopmentexpenditures.
B) thedevelopmentofnewideas.
C) increasesinhumancapital.
D) alloftheabove.
Answer: D
Diff:1
30) Thedevelopmentofnewproductsthroughresearchanddevelopmentinnewgrowththeoryis
importantbecause
A) therecanbeapositiveimpactonfuturegrowth.
B) societysscarceresourcesarebeingusedwhentheycouldbeusedforcurrent
consumption.
C) itwillleadtoareductioninthesavingsrate.
D) newpatentsarecreated.
Answer: A
Diff:1
31) Firmsaremorelikelytodevoteresourcestoresearchanddevelopmentwhen
A) thecountryisinrecession.
B) theyexpecttoearnrewardsfromsuccessfulresearchanddevelopment.
C) itiseasytocopynewtechniquesofotherfirms.
D) thecountryhasbeenexperiencingsloweconomicgrowthinordertospureconomic
growth.
Answer: B
Diff:2
32) Apatentis
A) agovernmentprotectionthatgivesaninventortheexclusiverighttotheinventionfora
limitedtimeperiod.
B) agovernmentprotectionthatgivesaninventortheexclusiverighttotheinventionforan
unlimitedtimeperiod.
C) therighttomakeaproductandsellitatareasonableprice.
D) arecognizablerighttotheprofitsassociatedwithanewproductornewwayofmaking
goodsgrantedbybusinessassociations.
Answer: A
Diff:1
33) Thereasonthatpatentsaregrantedis
A) toencourageahighrateofconsumption.
B) toprotectnewtechniquesdevelopedthroughresearchanddevelopment.
C) toencouragefreetrade.
D) toincreasethelaborforce.
Answer: B
Diff:1
34) IntheUnitedStates,apatentlasts
A) 7years. B) 14years. C) 20years. D) forever.
Answer: C
Diff:1
35) Patentsstimulatetechnologicaladvanceby
A) makingcapitalmoreproductive.
B) enablingthegovernmenttodeterminewhichpotentialtechnologicaladvancesfirms
shouldpursue.
C) providinginformationaboutthestatusoftechnicalknowledgeintheeconomy.
D) allowinginventorstocapturetheeconomicrewardsoftheirinventions.
Answer: D
Diff:3
36) Thebenefitsfromresearchanddevelopmentactivities
A) arelimitedtothefirmwinningapatent.
B) arelimitedtothefirmsinvestinginsimilarresearchanddevelopmentprojects.
C) arelimitedtothenationinwhichtheresearchanddevelopmentistakingplace.
D) spillovertoothers,includingforeignresidents.
Answer: D
Diff:2
37) ForeignresidentscanbenefitfromU.S.researchanddevelopmentactivitybecause
A) theyignoreU.S.patentlawsandstealthetechnology.
B) theycanimportthegoods,obtaininginputsatlowercostthantheywouldotherwise.
C) countriesusuallysharepatentedideas.
D) patentsdoapoorjobofprotectingtheinventor.
Answer: B
Diff:2
38) Onereasonthateconomistsencouragefreetradeisthat
A) itencouragesamorerapidspreadoftechnology.
B) itallowsustoexploittheworkersoflessdevelopedcountries.
C) wecansellmoregoods.
D) itincreasesourcapitalstock.
Answer: A
Diff:1
39) WhichofthefollowingisNOTareasonthatfreetradestimulateseconomicgrowth?
A) Freetradeencouragesamorerapidspreadoftechnology.
B) Industrieshavelargermarkets.
C) Theimportationoftechnicallyadvancedproductsenablesthecountrytoimitatethe
technology.
D) Freetradekeepsdomesticpricesup,enablingfirmstomakemoreprofitsthatcanbespent
onresearchanddevelopment.
Answer: D
Diff:2
40) Accordingtothetext,therelationshipbetweeneconomicgrowthandthedegreeofhowclosed
aneconomyis
A) positive. B) negative. C) constant. D) unstable.
Answer: B
Diff:1
41) Accordingtothetext,anopeneconomyislikelytohaveallthefollowingEXCEPT
A) higheconomicgrowth. B) relativelymoretradebarriers.
C) hightechnologicalprogress. D) relativelymorerapidspreadofideas.
Answer: B
Diff:1
42) Innovationis
A) anothertermforsomethingnew.
B) thetransformationofaninventionintosomethingthatisusefultohumans.
C) thetermforinventionwhenafirmobtainsapatent.
D) thetermforinventionsintheelectronicandcomputerindustries.
Answer: B
Diff:1
43) WhichofthefollowingstatementsisNOTconsistentwithnewgrowththeoristsbeliefs?
A) Innovationcanleadtolowerproductivitycosts.
B) Inventionsaremuchmoreimportantthaninnovation.
C) Technologymustbeunderstoodintermsofwhatdrivesit.
D) Rewardsleadtotechnologicaladvances.
Answer: B
Diff:2
44) Newgrowththeoristsbelievethat
A) wealthcreationcomesfrominnovation.
B) wealthcreationcomesfromsaving.
C) wealthcreationisduetocapitalspendingandnotresearchanddevelopmentspending
sincemuchresearchanddevelopmentspendingfailstoproduceaninvention.
D) inventionsspreadveryrapidly,therebycurtailingtheneedformoreinnovations.
Answer: A
Diff:2
45) PaulRomerstheoryofeconomicgrowthdiffersfromtraditionaltheoriesinthat
A) Romerarguesthatinvestmentincapitalgoodsisnotimportantinencouraginggrowth
whileinvestmentinhumancapitalis,whereastraditionaltheoristsemphasizebothhuman
andphysicalcapital.
B) Romerarguesthatinvestmentinhumancapitalalwaysoccursbeforeinvestmentin
physicalcapital,whiletraditionaltheoriesemphasizethepriorityofphysicalcapital.
C) Romerarguesaninvestment-knowledgecyclecanexist,butrequiresconstantincreasesin
investmentrates,whiletraditionaltheoriesarguethatinvestmentratescanbeconstant.
D) Romerarguesaninvestment-knowledgecycleallowsaone-timeincreaseininvestmentto
permanentlyincreaseacountrysgrowthrate,whiletraditionaltheoryarguedsuchan
investmentwouldhaveonlyashort-termeffect.
Answer: D
Diff:3
46) AccordingtoRomer,
A) capitaldriveseconomicgrowth. B) inventiondriveseconomicgrowth.
C) ideasdriveeconomicgrowth. D) governmentdriveseconomicgrowth.
Answer: C
Diff:1
47) Accordingtonewgrowththeorists,moretechnologicalimprovementscanbebroughtaboutby
A) agovernmentpolicythatencouragesincreasedconsumption.
B) governmentpoliciesthatleadtoincreasesinhumancapital.
C) tougherimmigrationlaws.
D) thegovernmenttakingamoreactiveroleinregulatingindustries.
Answer: B
Diff:1
48) Whichoneofthefollowinghelpspreserveincentivestodevelopnewtechnologies?
A) patents B) tariffs
C) quantityrestrictionsonimports D) incometaxes
Answer: A
Diff:2
49) Accordingtothenewgrowththeory,
A) technologyshouldbeconsideredasafactorofproduction.
B) technologyplaysaminorroleineconomicdevelopment.
C) technologyprovidesfewrewardstothesociety.
D) technologyisanaturalby-productofinvention.
Answer: A
Diff:1
50) NewgrowththeoryemphasizesallofthefollowingEXCEPT
A) technology. B) importrestrictions.
C) researchanddevelopment. D) innovation.
Answer: B
Diff:1
51) Agovernmentprotectionforaninventorthatprovidestheinventorwiththerighttomakeuse
ofherinventioninanywayshedesiresis
A) aninnovation. B) acopyright. C) apatent. D) atrademark.
Answer: C
Diff:1
52) Oneoftheimplicationsofnewgrowththeoryisthateconomicgrowtharisesfrom
A) limitsoninternationaltrade.
B) investmentsinknowledge.
C) financialsafetynetsforthepoor,suchasMedicaid.
D) reductionsinthebirthrate.
Answer: B
Diff:2
53) Newgrowththeoristsconcludethat
A) inventionismoreimportantthaninnovationinspurringeconomicgrowth.
B) theamountoftechnologicalinnovationinaneconomyisindependentoftherewards
offeredforinnovation.
C) ratesofglobaleconomicgrowtharelimitedbytheamountofrawmaterialsavailable.
D) economicgrowthcancontinueaslongaswekeepcomingupwithnewideas.
Answer: D
Diff:3
54) Thedevelopmentofhumancapital
A) isaformofinvestment.
B) doesnotappeartoenhanceeconomicgrowth.
C) enhanceseconomicgrowth,butitdoesnotimprovetheproductivityofthelaborforce.
D) enhanceseconomicgrowth,buttheindividualsacquiringthecapitalarenotmadebetter
offthemselves.
Answer: A
Diff:1
55) Whichofthefollowingfactorsareconsideredundernewgrowththeory?
A) technology B) research
C) innovation D) Alloftheabovearecorrect.
Answer: D
Diff:1
56) Whenconsideringinternationaltrade,whichofthefollowingwouldbemostconduciveto
domesticeconomicgrowth?
A) aclosedeconomy
B) aneconomyinwhichitsdomesticindustriesareprotectedbytariffs
C) aneconomywithfreeandopenmarketstotheoutsideworld
D) aneconomyinwhichmostdecisionsaremadebyacentralgovernmentalauthority
Answer: C
Diff:1
57) Thenewgrowththeoryexaminestheroleof
A) technologyineconomicgrowth. B) naturalresourcesineconomicgrowth.
C) exportsineconomicgrowth. D) governmentineconomicgrowth.
Answer: A
Diff:1
58) Thenewgrowththeoryofeconomicgrowthexaminestheinteractionof
A) laborandpopulation. B) regulationsandcapitalexpansion.
C) resourcesandlaborproductivity. D) technology,research,andinnovation.
Answer: D
Diff:2
59) Apatentisagovernmentprotectionthatgives
A) consumerstherighttosuewhenproductsareunsafe.
B) inventorsexclusiverightstotheirproductforatime.
C) monopoliestherighttobesoleproducersduetoeconomiesofscale.
D) companiestherighttoproduceanygoodtheychoose.
Answer: B
Diff:1
60) Thereasonthatthegovernmentoffersinventorsexclusiverightstotheirproductforaperiodof
timeisto
A) reducemarketconcentration. B) increaseprofitsofcertaincompanies.
C) maximizeconsumerutility. D) promoteinnovation.
Answer: D
Diff:2
61) Economicgrowthoccurswhenthereis
A) growthintechnologythatincreasesproductivity.
B) growthingovernmentspending.
C) lowertaxesonindividuals.
D) moreenvironmentalregulation.
Answer: A
Diff:1
62) Freetrade
A) hurtseconomicgrowthbecauseforeignersarenotboundbythesamepatentlawsaswe
are.
B) helpseconomicgrowthbyencouragingthesharingoftechnologyandindustrialideas.
C) hurtseconomicgrowthbecauseforeigncountriescanproducegoodswithlowerlabor
costs.
D) helpseconomicgrowthbyincreasingtariffs.
Answer: B
Diff:2
63) AllofthefollowingunambiguouslycontributetoeconomicgrowthEXCEPT
A) increaseinhumancapital. B) increaseintechnology.
C) increaseinlaborproductivity. D) increaseingovernmentspending.
Answer: D
Diff:2
64) Apatentis
A) abondissuedbythegovernment.
B) abondissuedbyastate.
C) themonopolyrightgiventoaproducer/company.
D) anagreementbetweenaunionandmanagementoncertainlaborissues.
Answer: C
Diff:1
65) Whichofthefollowingismostlikelytoreducetherateofeconomicgrowth?
A) ahighdomesticsavingrate B) investmentinhumancapital
C) subsidiesforR&Dactivities D) slowtechnologicalprogress
Answer: D
Diff:1
66) Innovationis
A) alwaysfinancedbythegovernment.
B) aninventionfinancedbythesaleofbonds.
C) thetransformationofaninventionintosomethinguseful.
D) aninventionfinancedbythesaleofstockcertificates.
Answer: C
Diff:1
67) Accordingtonewgrowththeory,economicgrowthisdrivenby
A) positiveexternalities. B) thedivisionoflabor.
C) higherbirthrates. D) newideas.
Answer: D
Diff:1
68) Agovernmentgrantthatgivesaninventortheexclusiverightorprivilegetomake,use,orsell
hisorherinventionisknownas
A) apositiveexternality. B) anegativeexternality.
C) aprotectionismclause. D) apatent.
Answer: D
Diff:1
69) Thefederalgovernmentawardsapatentholdertheexclusiverighttomake,use,andsellan
inventionforaperiodof
A) 20years. B) 17years.
C) unlimitedperiod. D) 100years.
Answer: A
Diff:2
A) Themostimportantsourcesofeconomicgrowtharethequantityandqualityoftheland
andothernaturalresourcesacountrycontrols.
B) Themostimportantsourceofeconomicgrowthistherateofpopulationgrowthsincea
growingpopulationstimulatesdemandforgoodsandservices,andprovidesthelaborto
producethegoodsandservices.
C) Themostimportantsourcesofeconomicgrowtharethenewideasgeneratedby
entrepreneursinaneconomicsystemthatpermitsthemtocapturetherewardsoftheir
entrepreneurialactivities.
D) Themostimportantsourceofeconomicgrowthistheextenttowhichthegovernment
directlyentersintodecisionswhereresearchanddevelopmentactivitiesshouldbe
directedandwhoshouldbeinvolvedinresearchanddevelopmentactivity.
Answer: C
Diff:3
71) WhichoneofthefollowingdoesNOTappeartocontributetoeconomicgrowth?
A) innovation
B) knowledge
C) protectionism
D) asystemofwell-definedpropertyrights
Answer: C
Diff:2
72) Whatistheeconomicroleofapatent?
Answer: Apatentgrantstheinventortheexclusiverighttomake,use,orsellaninventionfor20
years.Thisgivestheinventorpropertyrightsontheinvention,whichenablesthe
inventortoprofitfromtheinvention.Thenumberofinventionsshouldbegreaterif
peoplecanprofitfrominventiveactivity,sopatentshelpstimulateinvestmentinnew
technologyandeconomicgrowth.
Diff:2
73) Howdoesinnovationdifferfrominvention?Whyisinnovationrequiredforeconomicgrowth?
Answer: Innovationinvolvesthetransformationofaninventionintosomethingthatbenefitsthe
economybyloweringproductioncostsorbyprovidinganewgoodorservice.Itis
innovation,then,thatstimulateseconomicgrowth.
Diff:2
74) AccordingtoRomerandothernewgrowththeorists,whatcouldpoorcountriesdotostimulate
greatereconomicgrowth?
Answer: Accordingtonewgrowththeory,poorcountriescanstimulategreatereconomicgrowth
byinvestingmoreinhumancapitalaswellasphysicalcapital,bymovingtowardfreer
trade,andbyencouraginginnovation.
Diff:3
75) Explainhowthenewgrowththeorytreatstechnologydifferentlyfromthewayeconomists
usedtotreattechnology.
Answer: Technologyusedtobetreatedasanoutsidefactorofgrowththatcouldnotbeexplained
itself.Thenewgrowththeoryincludestechnologyasanotherfactorofproductionand
arguesthatthegreatertherewardtotechnologythegreaterwillbetechnological
advance.Firmsengageinresearchanddevelopmentactivitywiththeexpectationsof
increasingtheirprofitability.
Diff:2
76) WouldanewgrowththeoristexpecteconomicgrowthtobeveryrapidinoneoftheCommunist
nationsbeforethefallofCommunism?Whyorwhynot?
Answer: No.Thesecentrallyplannedeconomiesdidnotprovideforprivatepropertyrights,which
reducestheincentivespeoplehavetousetheassetsefficiently.Further,thelackof
propertyrightsreducestheincentivetoengageinresearchactivity.Finally,these
economiestendedtobemoreclosed,andthereisanegativerelationshipbetween
protectionismandeconomicgrowth.Freetradeencouragesamorerapidspreadofnew
technologyandideas.
Diff:3
77) ExplainPaulRomersideasconcerningeconomicgrowth.
Answer: Romerarguesthatknowledgeisafactorofproductionjustascapitalandlaborare.
Economiesmustinvestineducationastheydoincapital.Pastinvestmentsincapital
makeitprofitabletoacquiremoreknowledge,implyingthatinvestmentleadstonew
knowledgethatleadstonewinvestment.Therecanbeaninvestment -knowledgecycle
thatcontinuallystimulateseconomicgrowth.AccordingtoRomer,ideasdriveeconomic
growth.
Diff:3
9.5Immigration,PropertyRights,andGrowth
1) Ofthefollowingviewsontheeffectsofimmigrationonthereceivingnationseconomicgrowth,
whichhaveNOTbeensuggestedbyeconomistsMichaelKremerandJulianSimon?
A) Technologicalprogressisdrivenbypopulationgrowth.
B) Immigrantsraisethestandardoflivingofanationsnativepopulation.
C) Immigrationincreasesanationslaborpoolandencouragesingenuity.
D) Immigrationcoststhelocalpopulationjobsandgreatlylowerstheirincomes.
Answer: D
Diff:2
Topic: 9.5Immigration,PropertyRights,andGrowth
2) WhichofthefollowingwillNOTleadtoincreasedcapitalinvestmentwithinacountry?
A) Increaseduncertaintyaboutprivatepropertyrights
B) Increasedcertaintyaboutprivatepropertyrights
C) Thedecreasedpossibilityofnationalizationofprivateproperty
D) Increasedcertaintyaboutbeingabletoreapthegainsfrominvesting
Answer: A
Diff:1
3) Themorecertainprivatepropertyrightsare,
A) thelesspeopleneedtoinvestineducationorhumancapitaldevelopment.
B) thelessentrepreneurshiptherewillbe.
C) themorecapitalaccumulationtherewillbe.
D) themoreaneconomymustgrowtomaintainacertainlivingstandard.
Answer: C
Diff:2
4) Asystemofprivatepropertyrights
A) enhanceseconomicgrowthbycreatingincentivestotheFedtomaintainstableprices.
B) enhanceseconomicgrowthbyincreasingtheprobabilitythatapersoncangainfrom
makinginvestmentstoday.
C) retardseconomicgrowthbyservingtheinterestsofthewealthyonly.
D) retardseconomicgrowthbylimitingtheoptionsofpeoplewhoownnothing.
Answer: B
Diff:2
5) Entrepreneurshipfunctionsbetterwhen
A) thegovernmentperformstheentrepreneurialfunction.
B) thereisawell-definedpropertyrightssystem.
C) savingisrelativelylow.
D) mostofthepopulationhaslowlevelsofeducation.
Answer: B
Diff:2
6) Theimmediateeffectofincreasedpopulationgrowth,withrealGDPgrowthunchanged,isto
A) reduceeconomicgrowthbyreducingpercapitarealGDP.
B) increaseeconomicgrowthbystimulatingmoresaving.
C) increaseeconomicgrowthbyboostingthecapitalstock.
D) leaveeconomicgrowthunchanged.
Answer: A
Diff:2
7) AccordingtothelateJulianSimon,
A) legalimmigrantshaveafavorableimpactonthewelfareofAmericancitizens,butillegal
immigrantshaveanegativeimpact.However,thepositiveeffectofthelegalimmigrantsis
strongerthanthenegativeimpactoftheillegalimmigrants.
B) legalimmigrantshaveafavorableimpactonthewelfareofAmericancitizens,butillegal
immigrantshaveanegativeimpactthatalmostexactlyoffsetsthepositiveeffectofthe
legalimmigrants.
C) legalandillegalimmigrantshaveapositiveeffectonthewelfareofAmericancitizens.
D) legalandillegalimmigrantshaveanegativeeffectonthewelfareofAmericancitizens.
Answer: C
Diff:2
8) Asystemofprivatepropertyrights
A) encourageseconomicgrowthbycreatingincentivestoinvestincapitalandtobe
innovative.
B) discourageseconomicgrowthbydiscouragingthedevelopmentofnewideasandwaysof
doingthings.
C) reducestheefficiencyofgovernment,whichreducesthegrowthrateoftheeconomyover
time.
D) encouragesinvestmentbutdiscouragesentrepreneurialactivity,sotheeffectoneconomic
growthisuncertain.
Answer: A
Diff:2
9) Entrepreneurshipfunctionsbetterwhen
A) patentlawsarenotstronglyenforcedsincetheymakeimitationdifficult.
B) governmentprovidestechnicalsupporttoentrepreneurs.
C) asystemofprivatepropertyrightspermitsentrepreneurstocapturetherewardsfrom
theirentrepreneurialactivities.
D) universitiesprovideresearchthatiscloselyinterrelatedwiththeentrepreneurialactivities.
Answer: C
Diff:3
10) Theprotectionofpropertyrightsleadsto
A) morepoverty. B) moreilliteracy.
C) morecapitalformation. D) unemployment.
Answer: C
Diff:1
11) Entrepreneursoftenundertaketheinnovationsthatarenecessarytobringinventionstothe
marketplace.Accordingly,whatempiricalpatternshouldbeexpectedinaninternational
comparison?
A) Countrieswithhigherratesofentrepreneurshiphavehigherratesofpoverty.
B) Countrieswithhigherratesofentrepreneurshiphavelowerratesofimmigration.
C) Countrieswithhigherratesofentrepreneurshiphavelowerratesofeconomicgrowth.
D) Countriesthatprotectthepropertyrightsofentrepreneurswillhavehigherratesof
economicgrowth.
Answer: D
Diff:2
12) Intheabsenceofwell-definedpropertyrights,wewouldlikelyfind
A) peoplewithmoreincentivestotakerisks.
B) peoplewithlessincentivestotakerisks.
C) highereconomicgrowthrates.
D) increasesininvestmentactivity.
Answer: B
Diff:2
13) Well-definedpropertyrightsgiveentrepreneurstheincentiveto
A) engageinriskybusinessendeavorsinordertoaccumulatefuturewealth.
B) usetheeminentdomainlawstoseizepropertyforpublicuse.
C) lobbyCongressinordertoincreaseenvironmentalregulations.
D) evadetaxes.
Answer: A
Diff:2
14) Wouldoneexpecteconomicgrowthtobehigherorlowerinacountrythathadpoorlydefined
propertyrights?Why?
Answer: Lower,becauseentrepreneursaremorelikelytoengageinentrepreneurialactivitywhen
propertyrightsallowthemtocapturetherewardsfromtheseactivities.Further,
innovationismorelikelywhentherearepropertyrightsonideas.
Diff:2
15) Whymightpopulationgrowthandimmigrationstimulateeconomicgrowth?
Answer: Fasterpopulationgrowthmeansthepoolofinnovatorsislarger,andinnovationleadsto
moregrowth.Further,immigrantstendtobeentrepreneurialandhelpstimulate
innovationandgrowth.
Diff:2
9.6EconomicDevelopment
1) EconomistshavefoundthatasanationspercapitarealGrossDomesticProduct(GDP)
increases,
A) therateofpopulationgrowthdeclines.
B) therateofpopulationgrowthexperiencesdramaticincreases.
C) thereisnoeffectonpopulationgrowth.
D) therateofpopulationgrowthincreasesatthesamerateaseconomicgrowth.
Answer: A
Diff:2
Topic: 9.6EconomicDevelopment
2) AllofthefollowingarelistedinthetextasbeingkeystoeconomicdevelopmentEXCEPT
A) asystemofpropertyrights. B) aneducatedpopulation.
C) anopeneconomy. D) ahigherlevelofprotectionism.
Answer: D
Diff:1
3) WhatdidMalthussayaboutpopulationgrowth?
A) Populationgrowthisthekeytoanationseconomicgrowth.
B) Populationgrowthisnotaproblemiffoodproductionkeepsup,andMalthuspredicted
thatitwould.
C) Populationgrowthisahugeproblemifhousingandmedicalcaredontalsoincrease.
D) Thepopulationwouldgrowfasterthanfoodsupplies,whichwouldbearecipefor
disaster.
Answer: D
Diff:2
4) HaveMalthuspredictionsaboutpopulationgrowthcometrue?
A) No,becausemodernbirthcontrolhaslimitedpopulationgrowthinallnations.
B) Yes,asevidencedbythefamineandfoodshortagesaffectingeverynationtoday.
C) No,becausetheworldsfoodsupplyhasgrownmuchmorerapidlythanMalthusforesaw.
D) Yes.Theworldsfoodsupply,measuredbycaloriesperperson,continuestofall.
Answer: C
Diff:2
5) Thethreestagesofeconomicdevelopmentinclude
A) theagriculturestage,themanufacturingstage,andtheservicesectorstage.
B) thecomputerizedstage,theagriculturestage,andthemanufacturingstage.
C) thefeudalstage,theagriculturestage,andthetotalitarianstage.
D) theagriculturestage,themanufacturingstage,andthesocialiststage.
Answer: A
Diff:2
6) Whatoccursinthesecondstageofeconomicdevelopment?
A) Mostofthelaborforceworksinagriculture.
B) Theservicesectorcomestotheforefront.
C) Themanufacturingsectordeclinesinimportance.
D) Manufacturinggainsinimportanceandemploysalargeportionofthelaborforce.
Answer: D
Diff:1
7) Economistshavedeterminedthattherearefourfactorsthatseemtostronglyaffectanations
rateofeconomicdevelopment.WhichisNOToneofthesefourfactors?
A) Establishingasystemofpropertyrights
B) Developinganeducatedpopulation
C) Supportingcurrentindustriesandthejobstheyprovideinsteadofadoptingnew
technologythatbringsdisruptivesocialchanges
D) Limitingtheextenttowhichthegovernmentimposestradebarriers
Answer: C
Diff:2
8) Thestudyoffactorsthatcontributetotheeconomicgrowthofacountryisknownas
A) naturalresourceeconomics. B) entrepreneurialeconomics.
C) developmenteconomics. D) savingseconomics.
Answer: C
Diff:2
9) Thestudyoffactorsthatcontributetotheeconomicdevelopmentofacountryis
A) populationgrowtheconomics.
B) developmenteconomics.
C) thetheoryoftechnologicaladvancements.
D) thenewtechnologytheory.
Answer: B
Diff:1
10) Asmoreeconomicdevelopmentoccurs,
A) technologicalprogressslows. B) capitalaccumulationdecreases.
C) thepopulationgrowthratedecreases. D) thepopulationgrowthrateincreases.
Answer: C
Diff:1
11) WhichofthefollowingisNOTastageofdevelopmentthatmodernrichnationshavegone
through?
A) Servicestage B) Agriculturalstage
C) Manufacturingstage D) Inflationstage
Answer: D
Diff:1
12) Toraiseeconomicdevelopment,developingcountriesshould
A) focusontheircomparativeadvantage.
B) focusonproducingservicegoods.
C) producegoodsthatarecapitalintensiveandnotlaborintensive.
D) notfocusoneconomicgrowth.
Answer: A
Diff:1
13) ToencourageeconomicdevelopmentacountryshoulddoallofthefollowingEXCEPT
A) investinhumancapital.
B) limittheamountofimportsallowedintothecountry.
C) allowcreativedestructiontorunitscourse.
D) establishasystemofpropertyrights.
Answer: B
Diff:1
14) Creativedestructionrefersto
A) thedestructionofthegovernmentsystemwhichlimitseconomicgrowth.
B) themovementfromanagriculturalsocietytoaserviceeconomy.
C) themechanismforestablishingpropertyrights.
D) thecreationofnewjobsandeconomicgrowthafterdestroyingoldjobs.
Answer: D
Diff:1
15) Tradebetweencountriesshouldbe
A) encouragedfordevelopedcountriesbutnotfordevelopingcountries.
B) encouragedforbothdevelopedanddevelopingcountries.
C) discouragedfordevelopedcountriesbutencouragedfordevelopingcountries.
D) discouragedforbothdevelopedanddevelopingcountries.
Answer: B
Diff:1
16) WhichofthefollowingfactorswillNOTincreaseeconomicdevelopment?
A) Increasingtheamountofeducationinthepopulation.
B) Establishingasystemofpropertyrights.
C) Creativedestructionwhereoldjobs,companiesandindustriesaredestroyed.
D) Increasingtheamountofprotectionism.
Answer: D
Diff:1
17) Thetermcreativedestructionrefersto
A) theprocessbywhichimmigrantsbuildanewlifeintheircountryofdestination.
B) theprocessbywhichnewjobsarecreatedandoldonesdestroyed.
C) theeffectsofpopulationgrowthontheenvironment.
Answer: B
Diff:3
18) Aneconomythatisanactiveparticipantininternationaltradeis
A) anegalitarianeconomy.
B) aclosedeconomy.
C) aneconomywhosecurrencyvaluefluctuateswidely.
D) anopeneconomy.
Answer: D
Diff:1
19) Researchindicatesthat
A) countrieswithlowertariffratesexperiencehigherratesofeconomicgrowth.
B) countrieswithlowertariffratesexperiencelowerratesofeconomicgrowth.
C) thereisnorelationshipbetweentheleveloftariffratesandeconomicgrowth.
D) countrieswithhighertariffratesexperiencehigherratesofeconomicgrowth.
Answer: A
Diff:1
20) Theconceptofanopeneconomymeansthat
A) importsshouldbelimitedwhileexportsshouldbeexpanded.
B) anationsbordersareopentoflowsofimportsandexports.
C) exportsshouldbecontrolledbutimportsshouldbeallowedinwithoutrestriction.
D) importsandexportsshouldberestricted.
Answer: B
Diff:1
21) Whichoneofthefollowingisakeytoeconomicdevelopment?
A) theremovalofpropertyrights
B) thepreservationofestablishedmeansofproduction
C) aneducatedpopulation
D) ahighlevelofprotectionagainstimportedproducts
Answer: C
Diff:1
22) Thestudyofdevelopmenteconomicsistounderstand
A) whysomeproductsaresuccessfulinthemarketassoonastheyaredeveloped,whereas
othersdonotcatchonforyears.
B) whymostofthepatentsonrecordhavebeengiventomenratherthantowomen.
C) whysomecountriesarerichandothersarepoor.
D) thepersonalityfactorsthatleadpeopletobecomeentrepreneurs.
Answer: C
Diff:2
A) Asacountrybecomesmoreprosperous,itexperiencesahigherbirthrate.
B) Overthepastcentury,thesupplyoffoodhasgrownmorequicklythanhasthedemand
forfood.
C) Overthepastcentury,therealpriceoffoodhasrisen,reflectingthepressureofpopulation
growthonfoodsupplies.
D) Overthenexthalf-century,itisexpectedthatpopulationgrowthinindustriallyadvanced
nationswilloutpacepopulationgrowthindevelopingcountries.
Answer: B
Diff:2
24) WhichoneofthefollowingdescribesthecurrentstateofeconomicdevelopmentintheUnited
States?
A) TheUnitedStatesisrunningoutofnaturalresources,andthereforeitwillsoonexperience
adropintherateofeconomicgrowth.
B) Employmentisdeclininginthemanufacturingsectorandgrowingintheservicesector.
C) Employmentisdeclininginthemanufacturingsectorandgrowingintheagricultural
sector.
D) Thelackofwell-definedpropertyrightsintheUnitedStatesmeansthatentrepreneursdo
notexpecttocapturethebenefitsofinnovationstheybringtothemarketplace.
Answer: B
Diff:2
A) Investmentsinsecondaryeducationproducegainsintheformofeconomicgrowth.
B) Secondaryeducationdoesnotboosteconomicgrowthindevelopingnations,becauseso
muchoftheworkforceremainsinagriculture.
C) Newgrowththeorysuggeststhatthereisnoconnectionbetweenthelevelofeducationin
acountryanditsrateofeconomicgrowth.
D) Newgrowththeorysuggeststhateducationbenefitsonlythosepeoplewhoreceiveit,and
notthepopulationasawhole.
Answer: A
Diff:2
A) Foreverycountrythatexperiencesanincreaseinitsgrowthrate,theremustbeanother
experiencingadecline.
B) Smallchangesintheannualgrowthrateamounttoameasurabledifferenceinthe
long-termgrowthtrendofacountry.
C) Restrictingimportswillenhanceacountryseconomicgrowth.
D) Awell-definedsystemofpropertyrightsbenefitsonlythewealthy,andconsequentlyit
producesincomeinequalitythatwillstifleeconomicgrowth.
Answer: B
Diff:2
27) Whatcanbeexpectedtohappeninacountrythatenactstradebarriers?
A) Therateofimmigrationwillincrease.
B) Therateoftechnologicalinnovationwillincrease.
C) Therateofeconomicgrowthwilldecrease.
D) Therateofpopulationgrowthwilldecrease.
Answer: C
Diff:2
28) WhichofthefollowingisNOTanobstacletoeconomicdevelopment?
A) lackofentrepreneurship B) politicalinstability
C) corruption D) acentralbank
Answer: D
Diff:1
29) Whichofthefollowingisanobstacletoeconomicdevelopment?
A) poorlydefinedpropertyrights B) foreigndirectinvestment
C) immigration D) opennesstotrade
Answer: A
Diff:1
30) Agoodestimateoftheworldspopulationthatlivesonlessthananinflation -adjusted$1.5per

dayis
Answer: A
Diff:2
31) ThomasRobertMalthusbelieved
A) thatfoodsupplieswouldalwaysbemorethansufficienttofeedtheworldspopulation.
B) thattheworldspopulationwouldeventuallyoutstripfoodsupplies.
C) thatpopulationgrowthwasgoodfortheworld.
D) thatpopulationgrowthwouldeventuallyleadtoanincreaseinthequalityoflifefor
everyone.
Answer: B
Diff:1
32) Accordingtomanyeconomists,asnationsbecomewealthier,whathappenstofamilysizes?
A) Theyincrease. B) Theydecline.
C) Thereisnoeffect. D) Theyincrease,butlaterinlife.
Answer: B
Diff:2
33) WhenanalyzingstagesofeconomicdevelopmentintheUnitedStates,itappearsthatwehave
enteredthetertiarystage.Thisisastagemarkedbyashifttoward
A) agriculture. B) manufacturing.
C) services. D) populationincreases.
Answer: C
Diff:2
34) Whichofthefollowingfactorsareconsideredbyeconomistswhostudyeconomicdevelopment
tobedirectlyrelatedtotherateofeconomicgrowth?
A) plentifulnaturalresources B) opennesstointernationaltrade.
C) aneducatedpopulation D) Alloftheabovearecorrect.
Answer: D
Diff:2
35) AllofthefollowingarekeystoeconomicdevelopmentEXCEPT
A) aneducatedworkforce.
B) establishmentofasystemofpropertyrights.
C) minimizingcreativedestruction.
D) openeconomies.
Answer: C
Diff:2
36) Whichofthefollowingfactorswouldeconomistsconsiderkeytoeconomicdevelopment?
A) expansionarymonetarypolicy
B) establishingasystemofpropertyrights
C) policiesthatpromoteconsumptionexpendituresbyhouseholds
D) Alloftheabovearecorrect
Answer: B
Diff:2
37) Limitingprotectionismmeans
A) reducingtradebarriers. B) reducingcorruption.
C) reducingconsumerfraud. D) reducingpoliticaldishonesty.
Answer: A
Diff:1
38) WhichofthefollowingdodevelopmenteconomistsNOTrecommendtonationsseekingto
increasetheirratesofeconomicgrowth?
A) protectinghomeproducersfrominternationalcompetition
B) lettingcreativedestructionrunitscourse
C) promotingincreasededucation
D) promotingprivatepropertyrights
Answer: A
Diff:2
39) Aneducatedpopulacecontributestoeconomicgrowthbecause
A) schoolsprovidemanyjobsforteachers.
B) educationallowsworkerstodevelopskillsthatincreasetheirproductivecapabilities.
C) educatedpeoplearemorelikelytoliveinpoverty.
D) educatedpeopleunderstandtheimportanceofprotectionism.
Answer: B
Diff:1
40) Institutionsandlaws,suchaspatentprotection,thatfosterinnovationsleadtoeconomicgrowth
becausethey
A) allowthegovernmentcontroloftheinnovations.
B) giveconfidencetoinventorsthattheywillprofitfromtheirinnovation.
C) giveconfidencetoconsumersthattheproductstheybuyaresafe.
D) givebusinessesloanstobuynewmachinery.
Answer: B
Diff:2
41) AccordingtotheUnitedNations,thelargestexpectedgrowthinpopulationforthecoming
decadeswilloccuronwhichcontinent?
A) Europe B) SouthAmerica C) NorthAmerica D) Africa
Answer: D
Diff:2
42) ItcanbearguedthatThomasMalthus AnEssayonthePrincipleofPopulationstatementthat

populationgrowthwillalwaysoutstripfoodproductionhasbeendiscrediteddueto
A) increaseintheworld-widefarmingpopulation.
B) lessworld-wideconsumptionofgrains.
C) improvementintechnologyoffoodproduction.
D) increaseinfoodprocessingfacilities.
Answer: C
Diff:2
43) Ofthefollowing,whichbestexplainswhyThomasMalthuswasincorrectinhispredictionthat
populationwouldoutstripfoodsupplies?
A) Malthusfailedtorealizethatthathumanpopulationwouldincreaseconsiderably.
B) Malthusfailedtorecognizethateconomicgrowthisaccompaniedbysmallerfamilysizes.
C) Malthusincorrectlybelievedthateconomicgrowthwouldreducebirthrates.
D) Malthusincorrectlypredictedthatmodernizationwouldincreasethedemandforchildren.
Answer: B
Diff:2
Chapter10
RealGDPandthePriceLevelintheLongRun
10.1OutputGrowthandtheLong-RunAggregateSupplyCurve
1) Theaggregatesupplycurve
A) showswhateachproduceriswillingandabletoproduceateachincomelevel.
B) relatesplannedaggregateproductiontopricelevel.
C) becomesverticalifthereisexcessproductioncapacitywithintheeconomy.
D) showsanegativerelationshipbetweenthepricelevelandrealGrossDomesticProduct
(GDP).
Answer: B
Diff:1
Topic: 10.1OutputGrowthandtheLong-RunAggregateSupplyCurve
2) Thetotalofallplannedproductionfortheentireeconomyisknownas
A) aggregateexpenditures. B) aggregatedemand.
C) aggregatesupply. D) aggregateinflation.
Answer: C
Diff:1
3) Thelongrunaggregatesupplycurve(LRAS)alsorepresents
A) thefull-informationlevelofoutput. B) thefull-employmentlevelofoutput.
C) thefull-adjustmentlevelofoutput. D) alloftheabove.
Answer: D
Diff:1
4) AllofthefollowingwouldshifttheLRAScurvetotherightEXCEPT
A) anincreaseinthesizeofthelaborforce. B) anetinflowofhumancapital.
C) anincreaseintheoverallpricelevel. D) animprovementintechnology.
Answer: C
Diff:1
Chapter10RealGDPandthePriceLevelintheLongRun265
5) Long-runaggregatesupplyreflects
A) totalproductionintheeconomyatfullemployment.
B) totalspendingintheeconomyatfullemployment.
C) bothproductionandspendingintheeconomy.
D) onlyforeignproductionfromU.S.subsidiaries.
Answer: A
Diff:1
6) Thelong-runaggregatesupplycurveis
A) horizontalatthefull-employmentlevelofrealGrossDomesticProduct(GDP).
B) verticalatthefull-employmentlevelofrealGrossDomesticProduct(GDP).
C) slopingupwardduetotheeffectsofpricelevelchangesonrealGrossDomesticProduct
(GDP).
D) thesameastheshortrunaggregatesupply(SRAS)curve.
Answer: B
Diff:1
7) Thelong-runaggregatesupplycurve
A) shiftstotherightwhenthereisataxincrease.
B) indicatesthelevelofoutput(GDP)thatoccurswhenresourcesarefullyemployed.
C) indicatesthatanincreaseintheoverallpricelevelwillcauseanincreaseinproduction.
D) shiftstotherightwhentheFederalReserveincreasesthemoneysupply.
Answer: B
Diff:1
8) Thelong-runaggregatesupplycurveisverticalbecause
A) theeconomyhasyettouseallitsavailableresources.
B) theeconomyhasreacheditspotentialrealGrossDomesticProduct(GDP)andisatfull
employment.
C) theeconomyhascontracted.
D) theeconomyhaslargenumbersofunemployed.
Answer: B
Diff:2
9) Thelong-runaggregatesupplycurve
A) showsthatathigherprices,potentialrealGrossDomesticProduct(GDP)increases.
B) slopesupandtotheright.
C) showsthatlong-runaggregatesupplyequalspotentialrealGrossDomesticProduct
(GDP).
D) isverysensitivetochangesinthepricelevel.
Answer: C
Diff:1
10) Whatismeasuredontheverticalaxisoftheaggregatedemand/aggregatesupplymodel?
A) RealGrossDomesticProduct(GDP) B) Nominalincome
C) Thepricelevel D) Theinterestrate
Answer: C
Diff:1
A) Thelong-runaggregatesupplycurveisupwardsloping.
B) Thelong-runaggregatedemandcurveisupwardsloping.
C) Theshort-runaggregatesupplycurveisvertical.
D) Thelong-runaggregatesupplycurveisvertical.
Answer: D
Diff:1
12) Long-runaggregatesupplyis
A) thesumofplannedexpendituresbyconsumersandfirms.
B) thelevelofoutputthatoccurswhentheeconomyisoperatingontheproduction
possibilitiescurve.
C) downwardsloping.
D) upwardsloping.
Answer: B
Diff:1
A) upwardsloping. B) downwardsloping.
C) vertical. D) horizontal.
Answer: C
Diff:1
14) Thelong-runaggregatesupplycurveofaneconomycorrespondsto
A) apointinsidetheproductionpossibilitiescurve.
B) apointoutsidetheproductionpossibilitiescurve.
C) apointontheproductionpossibilitiescurve.
D) noneoftheabove:thereisnorelationshipbetweenthelong -runaggregatesupplycurve
andtheproductionpossibilitiescurve.
Answer: C
Diff:2
15) Ifanationsproductionpossibilitiescurveshiftsoutward,weshouldexpectitslong -run

aggregatesupplycurveto
A) haveanupwardmovementalongthecurve.
B) haveadownwardmovementalongthecurve.
C) havearightwardshift.
D) havealeftwardshift.
Answer: C
Diff:2
16) Thefull-employmentandfull-adjustmentlevelofrealGrossDomesticProduct(GDP)inthe
economyisrepresentedby
A) theLRAScurve.
B) thehorizontallineatthepricelevel.
C) theADcurve.
D) thedistancebetweentheLRAScurveandtheADcurve.
Answer: A
Diff:1
17) Ahumanresourcesuchasingenuitycanbethoughtofas
A) apositiveforimports.
B) partofacountrysendowment.
C) partofgovernmentspendingprograms.
D) acausalfactorforaggregatesupplyshiftingleft.
Answer: B
Diff:1
18) WhichofthefollowingwillNOTcausealeftwardshiftintheLong-RunAggregateSupply
curve?
A) anetoutflowofhumancapital B) areductionintheamountofoil
C) areductionintheamountofcapital D) areductioningovernmentspending
Answer: D
Diff:2
19) Whichofthefollowingwillcausethelong-runaggregatesupplycurvetoshift?
I. Changesintechnology.
II. Changesingovernmentspending.
III. Changesinthemoneysupply.
A) Ionly B) IIonly C) I,II,andIII D) onlyIandII
Answer: A
Diff:1
20) Asthecapitalstockgrowsandtechnologyimproves,wewouldexpectthelong -runaggregate

supplycurveto
A) shiftright. B) shiftleft.
C) remainthesame. D) firstshiftright,thenshiftleft.
Answer: A
Diff:2
21) Thelong-runaggregatesupplywillincreasewhen
A) laborsupplydecreases.
B) internationaltradebarriersareremoved.
C) thepricelevelincreases.
D) taxratesincrease.
Answer: B
Diff:2
22) Acountryslong-runaggregatesupplycurvewillshifttotheleftwhenthereis(are)
A) fewerregulatoryimpedimentstobusiness.
B) adiscoveryofnewoilreservesinthatcountry.
C) areductioninthelaborforce.
D) areductioninthemoneysupply.
Answer: C
Diff:2
23) Overtimeinagrowingeconomy,thelongrunaggregatesupplycurvewill
A) movesoastomatchtheshortrunaggregatesupply(SRAS)curve.
B) shiftoutwardtotheright.
C) shiftinwardtotheleft.
D) becomeincreasinglysteep.
Answer: B
Diff:1
24) Aggregatesupplyis
A) thesummationofallproductsupplycurves.
B) thehorizontalsummationofallsupplycurvesforservices.
C) thestockofallgoodsintheeconomy.
D) thesumofallplannedproductionintheeconomy.
Answer: D
Diff:1
25) Economicgrowthcanbedepictedas
A) ashiftoftheLRAScurvetotheleft.
B) aninwardshiftoftheproductionpossibilitiescurve.
C) ashiftoftheLRAScurvetotheright.
D) amovementalongtheproductionpossibilitiescurve.
Answer: C
Diff:1
26) AnassumptionontheLRAScurveis
A) technologyremainsunchanged.
B) anincreaseintheaveragepriceleveloccurs.
C) theeconomyisoperatingtotherightoftheproductionpossibilitiescurve.
D) laborproductivityisincreasing.
Answer: A
Diff:1
27) Thetotalofallplannedproductionfortheeconomyis
A) aggregatesupply. B) aggregatedemand.
C) endowments. D) real-balanceeffect.
Answer: A
Diff:1
28) Thetotalofallplannedproductionfortheeconomyis
A) determinedonlybyindividualsandfirms.
B) determinedonlybythegovernment.
C) aggregatedemand.
D) aggregatesupply.
Answer: D
Diff:1
29) Whentalkingaboutaggregatesupply,itisnecessaryto
A) focusontheshortrun.
B) focusonthelongrun.
C) distinguishbetweenthelong-runaggregatesupplycurveandtheshort-runaggregate
supplycurve.
D) distinguishbetweenthelong-runaggregatesupplycurveandthelongrunaggregate
demandcurvewhenalladjustmentstopricelevelchangeshavebeenmade.
Answer: C
Diff:1
30) Therealoutputoftheeconomyunderconditionsoffullemployment
A) islong-runaggregatesupply. B) islong-runaggregatedemand.
C) happensonlywhenthereisnoinflation. D) isdeterminedbythereal-balanceeffect.
Answer: A
Diff:1
31) Thefull-employmentlevelofGDPis
A) endowments. B) long-runaggregatedemand.
C) long-runaggregatesupply. D) economicgrowth.
Answer: C
Diff:1
32) Thepositionofthelong-runaggregatesupplycurveisdeterminedby
A) thelong-runaggregatedemandcurve. B) theproductionpossibilitiescurve.
C) theopeneconomyeffect. D) theinterestrateeffect.
Answer: B
Diff:1
33) Thelong-runaggregatesupplywhenresourcesarefullyemployed
A) hasnorelationshipwiththeproductionpossibilitiescurve.
B) willalwaysbeassociatedwithapointoutsidetheproductionpossibilitiescurve.
C) willalwaysbeassociatedwithapointontheproductionpossibilitiescurve.
D) isdeterminedbydemand.
Answer: C
Diff:1
A) horizontal. B) vertical.
C) upwardsloping. D) downwardsloping.
Answer: B
Diff:1
35) Thelongrunaggregatesupplycurveisverticalbecause
A) theproductionpossibilitiescurveisvertical.
B) theaggregatedemandcurveisdownwardsloping.
C) technologyincreasesataconstantrate.
D) achangeinthelevelofpriceswillhavenoeffectonrealoutputinthelong-run.
Answer: D
Diff:1
36) Thelong-runaggregatesupplycurveoccursatthelevelofrealGDPconsistentwith
A) individualstastesandpreferences. B) thenaturalrateofunemployment.
C) noinflation. D) lowlevelsofinflation.
Answer: B
Diff:1
37) WhichofthefollowingdoesNOTaffectthelong-runaggregatesupplycurve?
A) Technology B) Productionpossibilitiescurve
C) Endowmentsofresources D) Pricelevel
Answer: D
Diff:2
38) Anincreaseinthelevelofpricesofgoodsandserviceswilldowhattothelong-runaggregate
supplycurve?
A) Shiftittotheright
B) Shiftittotheleft
C) Notshiftthecurveatall
D) Dependsuponthelong-runaggregatedemandcurve
Answer: C
Diff:1
39) Thelong-runaggregatesupplycurveisdeterminedbyallofthefollowingEXCEPT
A) aggregatedemand.
B) endowments.
C) technology.
D) theamountofresourcesthatexistintheeconomy.
Answer: A
Diff:1
40) Thelong-runaggregatesupplycurvecanbethoughtofasthe
A) levelofoutputthatthenationiscurrentlyproducing.
B) full-employmentlevelofrealGDP.
C) levelofrealGDPassociatedwithaconstantpricelevel.
D) levelofoutputforwhichrealGDPequalsnominalGDP.
Answer: B
Diff:2
41) Thelong-runaggregatesupplycurvewillshifttotheleftwhen
A) populationdecreases. B) thepricelevelincreases.
C) technologyimproves. D) newsourcesofoilarediscovered.
Answer: A
Diff:2
42) Thelong-runaggregatesupplycurvewillshiftoutwardtotherightwhen
A) thereiseconomicgrowth. B) thepriceleveldecreases.
C) thereal-balanceeffectincreases. D) theamountoflabordecreases.
Answer: A
Diff:1
43) Thenaturalrateofunemploymentwillhelpdetermine
A) theopeneconomyeffect.
B) thepositionofthelong-runaggregatesupplycurve.
C) thelevelofeconomicgrowthintheeconomy.
D) lowlevelsofinflation.
Answer: B
Diff:1
44) Theabovefigureshowsa
A) short-runaggregatedemandcurve. B) short-runaggregatesupplycurve.
C) long-runaggregatedemandcurve. D) long-runaggregatesupplycurve.
Answer: D
Diff:1
45) Thecurveintheabovefigurewillshifttotherightwhen
A) thepricelevelfalls.
B) technologyincreases.
C) populationfalls.
D) theproportionofthepopulationthatiselderlyincreases.
Answer: B
Diff:2
46) WhichofthefollowingwillNOTleadtoarightwardshiftofthelong-runaggregatesupply
curve?
A) Increaseinlaborproductivity B) Increaseinaggregatedemand
C) Increaseincapital D) Increaseinlabor
Answer: B
Diff:1
47) Whichofthefollowingwouldcausethelong-runaggregatesupplycurvetoshifttotheright?
A) Anincreaseinwages B) Anincreaseindemand
C) Anincreaseinproductivity D) Anincreaseintaxesonprofits
Answer: C
Diff:1
48) Ifoureconomyisgrowingataconstantrateof5percentperyear,thenoveraperiodof10years
wewouldexpecttoseewhichofthefollowing?
A) Nice,steadyflat-linegrowth
B) Anupwardslopinggrowthpath
C) Adownwardslopinggrowthpath
D) Itisimpossibletosaywhatkindofgrowthpathwewouldsee.
Answer: B
Diff:1
49) Economicgrowthcanbethoughtofas
A) anincreaseinthepricelevel.
B) adecreaseinthepricelevel.
C) anincreaseinlong-runaggregatesupply.
D) anincreaseinaggregatedemand.
Answer: C
Diff:1
50) RealGDPwillincreaseoverthelongrunif
A) pricescontinuallygoup.
B) thelong-runaggregatesupplycurveshiftscontinuallytotheright.
C) thelong-runaggregatesupplycurveshiftscontinuallytotheleft.
D) thelong-runaggregatedemandcurveshiftscontinuallytotheleft.
Answer: B
Diff:1
51) Refertotheabovefigures.Whichpanel(s)representeconomicgrowth?
A) PanelAonly. B) PanelsAandConly.
C) PanelDonly. D) PanelsBandDonly.
Answer: B
Diff:1
52) Refertotheabovefigures.Whichpanel(s)representtheeffectofanincreaseinthepricelevel?
C) PanelDonly. D) Noneofthepanels.
Answer: D
Diff:1
53) Refertotheabovefigures.Whichpanel(s)representtheeffectofadecreaseinlabor
productivity?
C) PanelDonly. D) PanelsBandDonly.
Answer: D
Diff:2
54) Theaggregatesupplycurvecannottellus
A) anythingaboutthequantitydemandedofallcommoditiesandthepricelevel.
B) whattheeffectofchangesininterestrateswillbeonrealGDP.
C) howthetotaldollarvaluesofspendingwillultimatelybedividedbetweenoutputand
prices.
D) howchangesinthepricelevelaffectquantitydemandedofallcommodities.
Answer: C
Diff:2
55) Theaggregatesupplycurveshows
A) thetotalofallplannedproductionforaneconomy.
B) thevariousquantitiesofgoodsconsumerswillpurchase.
C) thatrealGDPcanonlyincreasewhenthepricelevelincreases.
D) whataneconomycanproduceifresourcepricesareconstant.
Answer: A
Diff:2
56) Aggregatesupply
A) isthetotalamountofrawmaterialsavailableinaneconomy.
B) istheoverallwealthwithinaneconomy.
C) isthetotalamountofmoneycirculatinginaneconomy.
D) isthetotalofallplannedproductioninaneconomy.
Answer: D
Diff:1
57) Wedrawthelong-runaggregatesupplycurveasaverticallinetoreflectthefactthat
A) theproductivecapacityoftheeconomyneverchangesafterfulladjustmenthasoccurred.
B) changesinthepriceleveldonotaltertheleveloflong-runrealGDPafterfulladjustment
hasoccurred.
C) technologyandresourceendowmentsdonotaffectlong-runrealGDPafterfull
adjustmenthasoccurred.
D) anaccuratedepictionoftheproductionpossibilitiescurveisverticalafterfulladjustment
hasoccurred.
Answer: B
Diff:3
58) ThelevelofrealGDPidentifiedbythelong-runaggregatesupplycurveis
A) thefull-employmentlevelofrealGDP.
B) thelevelofGDPatwhicheachbusinessfirmisexperiencinggrowthinsales.
C) thelevelofGDPatwhicheachindustryisexperiencinggrowthinsales.
D) thelevelofGDPatwhichnooneisbelowthepovertyline.
Answer: A
Diff:2
59) Whatismeasuredontheverticalaxiswhenwedrawagraphoflong -runaggregatesupply?

A) productionofcapitalgoods B) outputofconsumergoods
C) thepricelevel D) realGDP
Answer: C
Diff:1
60) Thevaluesontheaxesofthelong-runaggregatesupplydiagramare
A) realGDPperyearandthepricelevel. B) nominalGDPandthepricelevel.
C) realGDPandinterestrates. D) realGDPandnominalGDP.
Answer: A
Diff:1
61) Whentheproductionpossibilitiescurveshiftsoutward,
A) thelong-runaggregatesupplycurveshiftstotheleft.
B) thelong-runaggregatesupplycurveisunchanged.
C) thepricelevelrisesinthelongrun.
D) thelong-runaggregatesupplycurveshiftstotheright.
Answer: D
Diff:2
62) Whatismeasuredonthehorizontalaxiswhenwedrawagraphofthelong -runaggregate

supplycurve?
A) productionofcapitalgoods B) productionofconsumergoods
C) thepricelevel D) realGDP
Answer: D
Diff:1
63) Whatcausesthelong-runaggregatesupplycurvetoshiftright?
A) economicgrowth B) inflation
C) unemployment D) scarcity
Answer: A
Diff:1
64) Thelong-runaggregatesupplycurveshiftsrightatthesametimeas
A) theLaffercurveshiftsupward.
B) theproductionpossibilitiescurveshiftsoutward.
C) theproductionpossibilitiescurveshiftsinward.
D) theinflationrateincreases.
Answer: B
Diff:2
65) Arightwardshiftofthelong-runaggregatesupplycurveiscausedby
A) anincreaseintheminimumwage.
B) anincreaseintheaveragedurationofunemployment.
C) improvementsintechnologyandresourceendowments.
D) anincreaseintheGDPdeflator.
Answer: C
Diff:2
66) Thelong-runaggregatesupplycurveassumesthat
A) theunemploymentrateismorethan9percent.
B) allfactorsofproductionarefullyemployed.
C) onlylaborersarefullyemployed.
D) thereisnogovernmentpurchasingofgoodsandservices.
Answer: B
Diff:1
A) U-shaped. B) horizontal.
C) upwardsloping. D) vertical.
Answer: D
Diff:1
68) Long-runaggregatesupplycurvecorrespondsto
A) realGDPwhentheeconomyisabovefullemployment.
B) realGDPwhentheeconomyisatfullemployment.
C) theeconomyoutsideitsproductionpossibilitiescurve.
D) theeconomyinsideitsproductionpossibilitiescurve.
Answer: B
Diff:2
69) Theslopeofthelong-runaggregatesupplycurveis
A) positive. B) negative. C) zero. D) undefined.
Answer: D
Diff:3
70) Whyisthelong-runaggregatesupplycurveaverticalline?
A) AtthatlevelofrealGDP,theunemploymentrateis0percent.
B) AtthatlevelofrealGDP,theinflationrateis0percent.
C) AtthatlevelofrealGDP,theproductioncostsareattheirlowestlevel.
D) AtthatlevelofrealGDP,productioncostshavefullyadjustedtopricechanges.
Answer: D
Diff:2
71) Long-runaggregatesupplyis
A) thepossiblecombinationsofrealGDPandinputsafterfulladjustmentshavebeenmade.
B) theextractionofnaturalresources.
C) therealproductionofgoodsandservicesafterfulladjustmentshavebeenmade.
D) allofthephysicalandhumanresourcesintheeconomy.
Answer: C
Diff:1
72) Long-runaggregatesupplyandacountrysproductionpossibilitycurve(PPC)
A) arecloselyrelated. B) areinverselyrelated.
C) havenorelationship. D) areexamplesofmicroeconomicmodels.
Answer: A
Diff:1
73) Along-runaggregatesupplycurvemaygraphicallyberepresentedasa
A) verticalline. B) horizontalline.
C) anupwardslopingline. D) adownwardslopingline.
Answer: A
Diff:2
74) Economicgrowthisrepresentedontheaggregatesupplymodelbya
A) shiftinthelong-runaggregatesupplycurvetotheleft.
B) shiftinthelong-runaggregatesupplycurvetotheright.
C) shiftintheshort-runaggregatesupplycurvetotheleft.
D) shiftintheshort-runaggregatesupplycurvetotheright.
Answer: B
Diff:2
75) Economicgrowthcanbeshownby
A) aleftwardshiftintheaggregatesupplycurve.
B) nochangeintheaggregatesupplycurve.
C) arightwardshiftintheaggregatesupplycurve.
D) aleftwardshiftintheproductionpossibilitiescurve.
Answer: C
Diff:1
76) EconomicgrowthisdemonstratedbytheLRASasit
A) shiftstotheright. B) shiftstotheleft.
C) becomesmorehorizontal. D) becomesmorevertical.
Answer: A
Diff:2
77) Economicgrowthcausesthe
A) productionpossibilitiescurvetoshiftrightwardandthelong-runaggregatesupplycurve
toshiftrightward.
B) productionpossibilitiescurvetoshiftleftwardandthelong-runaggregatesupplycurveto
shiftrightward.
C) productionpossibilitiescurvetoshiftrightwardandthelong-runaggregatesupplycurve
toshiftleftward.
D) productionpossibilitiescurvetoshiftleftwardandthelong-runaggregatesupplycurveto
shiftleftward.
Answer: A
Diff:2
78) Whatistheshapeofthelong-runaggregatesupplycurve?Why?
Answer: Thelong-runaggregatesupplycurveisverticalbecause,inthelongrun,peoplehavefull
informationaboutallrelevantfactsandmaketheirdecisionsbasedonlyonrelativeprices
andnotontheabsolutepricelevel.
Diff:1
10.2TotalExpendituresandAggregateDemand
1) Whichofthesequestionsdoesaggregatedemandhelpusanswer?
I. Whatdeterminesthetotalamountofouroutputthatindividuals,firms,governmentsand
foreignerswanttobuy?
II. Whatistheeconomyslong-runrealGrossDomesticProduct(GDP)?
III. Whatdeterminestheeconomysequilibriumpricelevelandtherateofinflation?
A) Ionly B) IandII C) IIandIII D) IandIII
Answer: D
Diff:1
Topic: 10.2TotalExpendituresandAggregateDemand
2) Thetotallevelofallplannedexpendituresintheeconomybestdescribes
A) aggregatesupply. B) aggregatedemand.
C) aggregateexpenditures. D) bothBandCarecorrect.
Answer: D
Diff:1
3) AllofthefollowingexplainthedownwardslopeoftheaggregatedemandcurveEXCEPT
A) changesinthestockofrealwealthheldbyindividuals.
B) theeffectofchanginginterestratesonthequantitydemandedofinterest -rate-sensitive
goods.
C) theavailabilityofforeignsubstitutegoods.
D) thepresenceofunusedproductioncapacityandunemployment.
Answer: D
Diff:1
4) Otherthingsbeingequal,theeconomysaggregatedemandcurveshowsthat
A) asthepricelevelfalls,totalplannedexpendituresfallaswell.
B) achangeinthegeneralpricelevelcausesthecurvetoshift.
C) achangeinthegeneralpricelevelcausesachangeinthequantityoffinalgoodsand
servicespurchased.
D) realGrossDomesticProduct(GDP)andthepricelevelarenotrelated.
Answer: C
Diff:1
5) Aggregatedemandreflects
A) plannedtotalspendingintheeconomy.
B) plannedtotalproductionintheeconomy.
C) bothspendingandproductionintheeconomy.
D) planneddemandforconsumergoodsonly.
Answer: A
Diff:1
6) Whatismeasuredonthehorizontalaxisoftheaggregatedemand/aggregatesupplymodel?
A) Prices B) RealGrossDomesticProduct(GDP)
C) Realwealth D) Nominalincome
Answer: B
Diff:1
7) Thesumofallplannedexpendituresfortheentireeconomyateachpossiblepricelevelis
A) aggregatesupply. B) effectivedemand.
C) aggregatedemand. D) actualexpendituresbyconsumers.
Answer: C
Diff:1
8) Theaggregatedemandcurveplots
A) desiredexpendituresagainstproduction.
B) totalexpendituresagainstthelevelofemployment.
C) plannedexpendituresagainstthepricelevel.
D) employmentagainstthepricelevel.
Answer: C
Diff:1
9) Theaggregatedemandcurveisusually
A) vertical. B) upwardsloping.
C) downwardsloping. D) horizontal.
Answer: C
Diff:1
10) Thehorizontalaxisforanaggregatedemandcurvemeasures
A) quantitydemandedoftherepresentativegood.
B) realGrossDomesticProduct(GDP).
C) outputofallgoodsandservicesmeasuredasaquantityindex.
D) disposablepersonalincome.
Answer: B
Diff:1
11) WhichofthefollowingisNOTareasonfortheslopeoftheaggregatedemandcurve?
A) Thesubstitutioneffect B) Therealbalanceeffect
C) Theinterestrateeffect D) Theopen-economyeffect
Answer: A
Diff:1
12) Ateachpricelevel,theaggregatedemandcurveindicates
A) thenominalvalueoftotalproductionofgoodsandservicesdomesticincomethatwillbe
produced.
B) thetotalamountofrealplannedexpenditures.
C) thenominalGrossDomesticProduct(GDP)thatwillbeproduced.
D) thetotalamountofrealGrossDomesticProduct(GDP)thatwillbeproduced.
Answer: B
Diff:1
13) Theaggregatedemandcurveshowsthat,ifotherfactorsareheldconstant,
A) higherpricelevelswillresultinlowertotalplannedspending.
B) higherpricelevelswillresultinhighertotalplannedspending.
C) higherpricelevelswillresultinlowerinterestrates.
D) lowerpricelevelswillresultininflationaryconditions.
Answer: A
Diff:1
14) Accordingtotheinterestrateeffect,anincreaseinthepricelevel,ifotherfactorsareheld
constant,willleadto
A) areductionintotalrealspendingoninterest-rate-sensitivegoods.
B) anincreaseinthestockofrealwealthheldbythepublic.
C) anoutwardshiftoftheaggregatedemandcurve.
D) anincreaseintherealinterestrate.
Answer: A
Diff:1
15) Thereal-balanceeffectimpliesthatwhen
A) thepriceleveldecreases,thevalueofmoneybalancesheldbyindividuals,firms,
government,andforeignersincreasesandspendingdecreases.
B) thepricelevelincreases,thevalueofmoneybalancesheldbyindividuals,firms,
government,andforeignersincreasesandspendingincreases.
C) thepricelevelincreases,thevalueofmoneybalancesheldbyindividuals,firms,
government,andforeignersdecreasesandspendingdecreases.
D) thepriceleveldecreases,thevalueofmoneybalancesheldbyindividuals,firms,
government,andforeignersdecreasesandspendingdecreases.
Answer: C
Diff:2
16) Thereal-balanceeffectrefersto
A) theeconomysresponsetointerestratechanges.
B) thechangeinthevalueofcashbalancesduetopricelevelchanges.
C) thechangeinnetexports.
D) theeconomysabilitytobalancerecessionandexpansion.
Answer: B
Diff:1
17) Whenpricesincrease,therealinterestrate
A) willincreaseandtotalplannedspendingongoodsandserviceswillincrease.
B) willincreaseandtotalplannedspendingongoodsandserviceswilldecrease.
C) willdecreaseandtotalplannedspendingongoodsandserviceswilldecrease.
D) willnotbeaffected.
Answer: B
Diff:1
18) Intheabovefigure,amovementfrompointAtopointBcanbeexplainedby
A) andecreaseinthequantityofmoneyincirculation.
B) adecreaseintherealvalueofcashbalances.
C) thedecreaseininterestrates.
D) theincreaseinexportstotheforeignsector.
Answer: B
Diff:2
19) Intheabovefigure,amovementfrompointBtopointAcanbeexplainedby
A) anincreaseinspendingduetoawar.
B) anincreaseinspendingduetoincreasesineducationexpenditures.
C) anincreaseinthedemandformanufacturinggoodsduetonewtechnology.
D) adropinthepricelevel.
Answer: D
Diff:1
20) Theinterestrateeffectoperatesthrough
A) creditmarketsbychangingborrowingcosts.
B) thepurchasingpowerofindividualscheckingaccounts.
C) governmentspendinglevels.
D) laborsupply.
Answer: A
Diff:2
21) Whenachangeinthepricelevelcausesachangeinthepurchasingpowerofcurrency,which
thenchangesplannedrealexpendituresatallincomelevels,itiscalled
A) thereal-balanceeffect. B) thesubstitutioneffect.
C) theopen-economyeffect. D) theinterestrateeffect.
Answer: A
Diff:1
22) Onereasonthattheaggregatedemandcurveslopesdownwardisbecause
A) higherpricelevelsincreaserealwealthandconsumption.
B) higherpricelevelsreducenetexports.
C) higherpricelevelsreduceinterestrates.
D) higherpricelevelsincreaseinvestment.
Answer: B
Diff:2
23) Ariseinthepricelevelhasadirecteffectonspendingbecause
A) peopleliketospendmorewhenpricesarehigher.
B) therealvalueofthemoneypeoplehavevariesdirectlywiththepricelevel.
C) therealvalueofthemoneypeoplehavedecreasesandtheycanbuylesswithit.
D) ahigherpricegivespeoplemoremoney,andsothemoregoodsandservicestheycanbuy.
Answer: C
Diff:2
24) Thereal-balanceeffectshowsthat
A) aggregatedemandisupwardsloping.
B) ahigherpricelevelleadstohigherinterestrates.
C) alowerpricelevelwillincreasethepurchasingpowerofcurrencyandincreasepersonal
consumption.
D) consumptionandthepricelevelarepositivelycorrelated.
Answer: C
Diff:2
25) Anothertermforthereal-balanceeffectis
A) thesubstitutioneffect. B) thewealtheffect.
C) theindirecteffect. D) theinterestrateeffect.
Answer: B
Diff:1
26) Ifotherfactorsareheldconstant,anincreaseinthepricelevel
A) causesdesirednetexportspendingtorise.
B) causesdesirednetexportspendingtofall.
C) causestherealvalueofthemoneytoincrease.
D) inducespeopletospendtheirmoneyfaster.
Answer: B
Diff:2
27) Theinterestrateeffectthathelpsexplaintheslopeoftheaggregatedemandcurvearises
because
A) interestratesandtotalplannedrealexpendituresareunrelated.
B) anincreaseinthepricelevelleadtodecreasesininterestrates,whichinducesmore
borrowingandhenceraisesplannedrealexpenditures.
C) anincreaseinthepricelevelboostsinterestrates,whichdiscouragesborrowingandhence
reducesplannedrealexpenditures.
D) adecreaseinthepricelevelboostsinterestrates,whichdiscouragesborrowingandhence
freesupincomeformoreplannedrealexpenditures.
Answer: C
Diff:2
28) Higherinterestratestendto
A) reducethetotalplannedspendingongoodsandservices.
B) lowerthecostsofbuildingnewplantsandequipment.
C) increasethequantitydemandedofgoodsandservices.
D) makeitlesscostlyforpeopletobuyhousesandcars.
Answer: A
Diff:2
29) Wheninterestratesrise,
A) borrowingcostsincrease,andtotalplannedrealexpendituresdecline.
B) borrowingcostsincreaseandtotalplannedrealexpendituresincrease.
C) borrowingcostsdecline,andtotalplannedrealexpendituresincrease.
D) borrowingcostsdecline,andtotalplannedrealexpendituresdecline.
Answer: A
Diff:1
30) WhentherelativepricesofU.S.-manufacturedgoodsgoup,theresultis
A) anincreaseinexports. B) adecreaseinexports.
C) adecreaseinimports. D) nonetchangeinimportsorexports.
Answer: B
Diff:1
31) Apricelevelincreasetendstoreducenetexports,therebyreducingtheamountofrealgoods
andservicespurchasedintheUnitedStates.Economistsrefertothisphenomenonas
A) thewealtheffect.
B) thebarriereffect.
C) theopen-economyeffect.
D) theGrossDomesticProduct(GDP)effect.
Answer: C
Diff:1
32) Ifthepricelevelincreases,
A) thebuyingpowerofyourcheckingaccountfalls.
B) thebuyingpowerofyourcheckingaccountsriseswithit.
C) thereisnoeffectonbuyingpower.
D) theeconomytendstogrowfaster.
Answer: A
Diff:2
33) Oneimpactofariseinthedollarsvalueisthat
A) importsbecomecheaperfortheU.S.consumer.
B) exportswillincreasesharply.
C) U.S.goodswillbecomecheaperoverseas.
D) U.S.goodsarecheaperdomestically.
Answer: A
Diff:2
34) Anindividualholds$10,000inanon -interest-earningcheckingaccount,andtheoverallprice

levelrisessignificantly.Otherthingsbeingconstant,wewouldexpect
A) theindividualsrealwealthtodecreaseandconsumptiontodecline.
B) theindividualsstockofrealwealthtodecreasebutrealnationalincometoincrease.
C) nochangeintheindividualsrealwealthbutadeclineinrealnationalproduct.
D) theindividualswealthtoincrease.
Answer: A
Diff:1
35) Ahigherdomesticpricelevelshould
A) decreasenetexports. B) increasedesiredinvestment.
C) increaserealwealthandconsumption. D) noneofthese.
Answer: A
Diff:1
36) Accordingtotheinterestrateeffect,adecreaseinthepricelevelwill
A) decreasetherealvalueofmoneybalances,whichcausestotalplannedrealexpendituresto
increase.
B) causeinterestratestofall,whichgeneratesanincreaseinborrowing,sothattotalplanned
realexpendituresincrease.
C) leadtoadecreaseinnetexports,whichcausestotalplannedrealexpenditurestodecrease.
D) increasetherealvalueofmoneybalances,whichcausesinterestratestoincrease,thereby
reducingtotalplannedexpenditures.
Answer: B
Diff:3
37) Whathappenswhenthepricelevelfalls?
A) Totalplannedrealspendingremainsconstant.
B) Totalplannedrealspendingincreases.
C) Totalplannedrealspendingalsofalls.
D) Plannedrealspendingongoodsincreasesbutplannedrealspendingonservicesfalls.
Answer: B
Diff:1
38) WhentheU.S.pricelevelfalls,theopeneconomyeffectindicatesthat
A) U.S.importswillrise.
B) U.S.residentswillmoveawayfromdomesticgoodsandbuymoreforeigngoods.
C) U.S.exportswillincrease.
D) foreignerswillbuyfewerU.S.goods.
Answer: C
Diff:1
39) Theaggregatedemandcurvediffersfromanindividualdemandcurveinthat
A) theaggregatedemandcurvemaynotslopedownwhileanindividualdemandcurvemust
alwaysslopedown.
B) theaggregatedemandcurvelooksattheentirecircularflowofincomeandproduct,while
anindividualdemandcurvelooksatonegood,holdingeverythingelseconstant.
C) priceschangealonganindividualdemandcurvebutpricesareheldconstantalongan
aggregatedemandcurve.
D) theaggregatedemandcurveslopesupwhileanindividualdemandcurveslopesdown.
Answer: B
Diff:3
40) Howdoesaggregatedemandcurve(AD)differfromanindividualdemandcurve(D)?
A) ADisgenerallyverticalwhileDisusuallydownwardsloping.
B) Drepresentstheprice-quantityrelationshipforasinglegoodorservicewhileADlooksat
theentireeconomicsystem.
C) LookforDinmacroeconomicanalysesandforADinmicroeconomics.
D) ADisgenerallyadownwardslopingcurvewhileDusuallyslopesupward.
Answer: B
Diff:1
41) Aggregatedemandis
A) thehorizontalsummationofalldemandcurvesforaproduct.
B) thesumofallplannedexpendituresfortheeconomy.
C) thetotalquantityofallgoodssoldinaneconomyinayear.
D) thehorizontalsummationofalldemandcurvesforstate,local,andfederalgovernments
andbusinessfirms.
Answer: B
Diff:1
42) Thetotalofallplannedexpendituresintheentireeconomyisthedefinitionof
A) aggregatesupply. B) productionpossibilitiescurve.
C) aggregatedemand. D) netdomesticproduct.
Answer: C
Diff:1
43) Theopeneconomyeffectsuggeststhat
A) adecreaseindomesticpricelevelwillcauseforeignresidentstobuyfewerdomestic
goods,increasingnetexports.
B) adecreaseindomesticpricelevelwillcauseforeignresidentstobuymoredomesticgoods,
increasingnetexports.
C) ariseindomesticpricelevelwillcauseforeignresidentstobuymoredomesticgoods.
D) ariseindomesticpricelevelwillcausedomesticresidentstobuyfewerimportedgoods.
Answer: B
Diff:1
44) Theinterestrateeffectsuggeststhat
A) anincreaseinthepriceleveldecreasestheinterestrate,whichcausesbusinessesand
consumerstoreducedesiredspending.
B) anincreaseinthepricelevelincreasestheinterestrate,whichcausesbusinessesand
C) adecreaseinthepriceleveldecreasestheinterestrate,whichcausesbusinessesand
D) anincreaseinthepricelevelincreasesthemoneysupply,whichcausesbusinessesand
consumerstoincreasedesiredspending.
Answer: B
Diff:1
45) Theaggregatedemandcurvegivesthe
A) plannedpurchasesforallgoodsandservicesintheeconomy,holdingotherthingssuchas
thepricelevelconstant.
B) plannedpurchaseratesforallgoodsandservicesintheeconomyatvariouspricelevels.
C) demandforgoodsandservicesbythegovernmentatvariouspricelevels.
D) amountofallgoodseveryonewantstobuyatvariousincomelevels.
Answer: B
Diff:1
46) Thetotalofallplannedexpendituresintheentireeconomyis
A) theopeneconomyeffect. B) LRAS.
C) aggregatesupply. D) aggregatedemand.
Answer: D
Diff:1
47) Thevariousquantitiesofallfinalcommoditiesdemandedatvariouspricelevels,ceterisparibus,
isthe
A) LRAS. B) productionpossibilitiescurve.
C) aggregatedemandcurve. D) aggregatesupplycurve.
Answer: C
Diff:1
48) Theaggregatedemandcurvegives
A) thetotalamountofrealdomesticoutputthatwillbepurchasedateachpricelevel.
B) thetotalamountofnominaldomesticincomethatwillbepurchasedateachpricelevel.
C) thetotalvalueofnominalGDPinaneconomyforayear,holdingincomeandtechnology
constant.
D) thetotalvalueofoutputproducedbyworkersinbothforeignanddomesticmarketsat
eachpricelevel.
Answer: A
Diff:1
49) AllofthefollowingarecomponentsofaggregatedemandEXCEPT
A) consumptionspending.
B) governmentpurchases.
C) theleveloftechnology.
D) netforeignspendingondomesticproduction.
Answer: C
Diff:1
50) Theaggregatedemandcurve
A) isverticalatthefull-employmentlevelofoutput.
B) ishorizontalatthefull-employmentlevelofoutput.
C) isdownwardsloping.
D) isupwardsloping.
Answer: C
Diff:1
51) Theaggregatedemandcurvehas
A) norelationshipbetweenthepricelevelandrealGDP.
B) anegativerelationshipbetweenthepricelevelandrealGDP.
C) apositiverelationshipbetweenthepricelevelandrealGDP.
D) apositiverelationshipbetweenthepricelevelandnominalGDP.
Answer: B
Diff:1
52) Whichofthefollowingexplainswhytheaggregatedemandcurveisdownwardsloping?
A) theinterestrateeffect B) thereal-balanceeffect
C) theopeneconomyeffect D) alloftheabove
Answer: D
Diff:1
53) Supposethatalongtheaggregatedemandcurve,realGDPequals$14.2trillionwhentheGDP
deflatoris90.IftheGDPdeflatorwere95,realGDPalongtheaggregatedemandcurvewould
equal
A) lessthan$14.2trillion.
B) $14.2trillion.
C) morethan$14.2trillionbutlessthan$14.8trillion.
D) morethan$14.8trillion.
Answer: A
Diff:2
54) Otherthingsbeingequal,alonganaggregatedemandcurve,ahigherpricelevelisassociated
with
A) ahigherrealGDP. B) alowerrealGDP.
C) alowernominalGDP. D) higherincomelevels.
Answer: B
Diff:1
55) Otherthingsbeingequal,thelowerareplannedrealexpendituresalonganaggregatedemand
curve,the
A) moretheproductionpossibilitiescureshiftstotheleft.
B) lowerthepricelevel.
C) higherthepricelevel.
D) lowerthelevelofendowments.
Answer: C
Diff:1
56) Whenthepricelevelincreases,totalplannedrealexpendituresongoodsandservicesfalls.All
ofthefollowingareresponsibleEXCEPT
A) thesubstitutioneffect. B) thereal-balanceeffect.
C) theinterestrateeffect. D) theopeneconomyeffect.
Answer: A
Diff:1
57) Whichofthefollowingisafactorthatdeterminestheshapeoftheaggregatedemandcurve?
A) Thereal-balanceeffect B) Thenominal-balanceeffect
C) Thepriceleveleffect D) Thewageeffect
Answer: A
Diff:1
58) Accordingtothereal-balanceeffect,anincreaseinthepricelevelwill
A) leavetotalplannedrealexpendituresunchangedsincethepricelevelofallgoodshas
increased.
B) decreasetotalplannedrealexpendituresbecauseofanincreaseininterestrates.
C) leadtoacorrespondingincreaseintotalplannedrealexpendituressincebusinessesare
nowearninghigherprofits.
D) decreasetotalplannedrealexpendituresasaresultofadecreaseintherealvalueof
moneybalances.
Answer: D
Diff:1
59) Thechangeintotalplannedrealexpendituresresultingfromachangeintherealvalueof
moneybalanceswhenthepricelevelchanges,allotherthingsheldconstant,is
A) thereal-balanceeffect. B) theinterestrateeffect.
C) theopeneconomyeffect. D) demandsideinflation.
Answer: A
Diff:1
60) Thereal-balanceeffectrefersto
A) therealinterestrate.
B) theproductionofrealgoodsandservicesasopposedtofinancialinstruments.
C) thepricesofgoodsandservices.
D) therealvalueofcashbalancesthatapersonisholding.
Answer: D
Diff:1
61) Ifyouhave$5000andtheGDPdeflatordecreasesfrom100to80
A) the$5000willbuy20percentlessofthegoodsandservicesproducedbysociety.
B) the$5000willbuy20percentmoreofthegoodsandservicesproducedbysociety.
C) thevalueofthe$5000decreases.
D) thevalueofthe$5000remainsconstant.
Answer: B
Diff:2
62) Thewealtheffectisanothertermforthe
A) substitutioneffect. B) theindirecteffect.
C) thereal-balanceeffect. D) theinterestrateeffect.
Answer: C
Diff:1
63) Holdingnominalmoneybalancesconstant,adecreaseinthepricelevel
A) causestherealvalueofthemoneybalancestoincrease,inturnincreasingtotalplanned
realexpenditures.
B) causestherealvalueofthemoneybalancestodecrease,inturndecreasingtotalplanned
realexpenditures.
C) causestherealvalueofthemoneybalancestoincrease,therebyincreasingtheinterestrate.
D) generatesareductioninthevalueofthemoneybalances,leadingtohigherinterestrates
andadecreaseintotalplannedrealexpenditures.
Answer: A
Diff:3
64) Anindirecteffectofanincreaseinthepricelevelworksthrough
A) peoplesubstitutingoutofdomesticgoodsandintoforeigngoodsasexchangeratesrise.
B) changesintradebalancesasdomesticgoodsbecomemoreexpensive,causinginterest
ratestomoveintheoppositedirectionfromthechangeintheexchangerate.
C) interestratesaspeoplesavemoreasthehigherpricesmaketheirmoneybalancesless
attractive.
D) interestratesaspeopleborrowtomaintaintheirmoneybalances,biddingupinterestrates
andreducingtotalplannedrealexpenditures.
Answer: D
Diff:2
65) Theinterestrateeffectispartofthereason
A) theshort-runaggregatesupplycurveisupwardsloping.
B) thelong-runaggregatesupplycurveisvertical.
C) theaggregatedemandcurveisupwardsloping.
D) theaggregatedemandcurveisdownwardsloping.
Answer: D
Diff:1
66) Whichofthefollowingstatementsistrueabouttheinterestrateeffect?
A) Theinterestrateeffectiswhytheaggregatedemandcurveisupwardsloping.
B) Alowerpricelevellowerstheinterestrate,whichcausesbusinessesandconsumersto
increasetheirdesiredspending.
C) Ahigherpricelevellowerstheinterestrate,whichcausesbusinessandconsumersto
increasetheirdesiredspending.
D) Expenditureswillchangeasaresultofachangeintherealvalueofmoneybalanceswhen
thereisachangeinthepricelevel.
Answer: B
Diff:2
67) Higherinterestrates
A) reducetotalplannedrealexpendituresbecausetheyincreasethecostofborrowingfunds.
B) reducetotalplannedrealexpendituresbecausetheyreducetheincomeofbankersand
othercreditors.
C) increasetotalplannedrealexpendituresbecausetheyincreasetheincomesofallpeoplein
theeconomy.
D) increasetotalplannedrealexpendituresbecausetheylowerthecostsofbuildingnew
plantsandequipment.
Answer: A
Diff:1
68) Ifthepricelevelincreases,then
A) theexchangeratewillincrease,causingU.S.goodstobecomecheaperandincreasingtotal
plannedrealexpenditures.
B) importsincreasebutexportsdonotchange.Therefore,thereisnoeffectontotalplanned
realexpenditures.
C) foreignresidentsbuyfewerU.S.goods,leavingmoregoodsforU.S.residentsandan
increaseintotalplannedrealproductionbyfirms.
D) domesticgoodsaremoreexpensiverelativetoforeigngoods,whichreducestotalplaned
realexpenditures.
Answer: D
Diff:3
69) Theopeneconomyeffectreferstothefactthat
A) thepositionandshapeofthelongrunaggregatesupplycurveispartiallyduetothefact
thatweimportgoods.
B) theaggregatesupplycurveshiftswhentheeconomygrows.
C) theslopeoftheaggregatedemandcurveispartiallyexplainedbythereductioninthe
desiretobuyfewerU.S.goodsbyU.S.residentsandforeignresidentsasaresultofa
higherpricelevel.
D) theimmigrationpoliciesoftheUnitedStatesaredisruptivetolabormarkets.
Answer: C
Diff:1
70) Ashiftawayfromexpendituresondomesticgoodsandashifttowardexpendituresonforeign
goodswhenthedomesticpricelevelincreasesisknownas
C) theopeneconomyeffect. D) demandsideinflation.
Answer: C
Diff:1
71) Supposeacountryhasnotradewithothercountriesandpeoplecanborrowasmanyfundsas
theywantatthecurrentinterestrate.Anincreaseinthepricelevelwillgenerate
A) adecreaseintotalplannedrealexpendituresbecauseofthereal -balanceeffect.
B) adecreaseintotalplannedrealexpendituresbecauseoftheopen -economyeffectandthe
indirecteffect.
C) adecreaseintotalplannedrealexpendituresbecausethereal -balanceeffectwillbe
strongerthantheindirecteffectandtheopen-economyeffect.
D) adecreaseintotalplannedrealexpendituresbecausetheindirecteffectwillbestronger
thanthereal-balanceeffect.
Answer: A
Diff:3
72) Afallinthepricelevel
A) increasestherealvalueofmoneybalances,whichcausesborrowingtodecrease,leadingto
adecreaseininvestmentandtotalplannedrealexpenditures.
B) causesexportstoriseandimportstofall,leadingtoanincreaseintotalplannedreal
expenditures.
C) leadstoanincreaseintotalplannedrealexpendituresbecauseoftheindirecteffect.
D) causestotalplannedrealexpenditurestoincreaseaslongasthefallislessthanthefallin
thepricelevelinothercountries.
Answer: B
Diff:3
73) Theaggregatedemandcurve
A) islikeindividualdemandcurvesinthatpricesofothergoodsareheldconstant.
B) islikeindividualdemandcurvesinthatincomeisconstant.
C) differsfromindividualdemandcurvesinthattheaggregatedemandcurveisnot
downwardsloping.
D) differsfromindividualdemandcurvesinthattheaggregatedemandcurvelooksatthe
entirecircularflowofincomeandproductwhiletheindividualdemandcurvelooksat
onlyonegood.
Answer: D
Diff:3
74) WhichofthefollowingisNOTtrueabouttheaggregatedemandcurve?
A) Theproductionpossibilitiescurvedeterminestheslopeoftheaggregatedemandcurve.
B) Theaggregatedemandcurveshowstotalplannedrealexpendituresatdifferentprice
levels.
C) Changesintheeconomicconditionsinothercountrieswillleadtoashiftoftheaggregate
demandcurve.
D) Theaggregatedemandcurveconsiderstheentirecircularflowofincome.
Answer: A
Diff:1
75) Whichofthefollowingistrueabouthowtheaggregatedemandcurvediffersfromthe
individualsdemandcurve?
A) Theindividualsdemandcurveshowstherelationshipbetweenpriceandquantity
demandedwhiletheaggregatedemandcurveisnotinfluencedbyprice.
B) Fortheindividualsdemandcurveequilibriumisdeterminedbytheintersectionofsupply
anddemandwhilefortheaggregatedemandcurveequilibriumisdeterminedbythereal
balanceeffect.
C) Theindividualsdemandcurveisjustforanindividualwhiletheaggregatedemandcurve
looksattheentirecircularflowofincome.
D) Theindividualsdemandcurvewillshiftwhenthereisachangeintaxeswhilethe
aggregatedemandcurvewillnot.
Answer: C
Diff:1
76) WhatdeterminesthetotalvalueofaggregatedemandforU.S.realGDP?
A) thespendingdecisionsofconsumers,firms,andgovernments
B) theCongressionalBudgetOffice
C) theFederalReserveBoard
D) WallStreet
Answer: A
Diff:1
77) Totalplannedexpendituresfordomesticallyproducedgoodsandservicesconsistof
A) governmentspending,businessspending,andimportspendingonly.
B) consumerspending,businessspending,andnetexportspendingonly
C) consumerspending,businessspending,governmentspending,andnetexportspending
D) consumerspending,businessspending,governmentspending,andimportspending.
Answer: C
Diff:2
78) WhichoneofthefollowingisNOTacomponentofaggregatedemand?
A) merchandiseinventories B) consumptionspending
C) investmentexpenditures D) governmentpurchases
Answer: A
Diff:1
79) Thetotalofallplannedrealexpendituresintheeconomyiscalled
A) aggregatedemand. B) aggregatespending.
C) aggregateGDP. D) aggregateconsumption.
Answer: A
Diff:1
80) Theaggregatedemandcurveshowstherelationshipbetweenplannedpurchasesof
A) allfinalgoodsandservicesandinterestrates.
B) allfinalgoodsandservicesandthepricelevel.
C) allfinalgoodsandservicesandnominalGDP.
D) allfinalgoodsandservicesandtotalplannedproduction.
Answer: B
Diff:1
81) Theaggregatedemandcurveshows
A) adirectrelationshipbetweenchangesinthepricelevelandchangesinrealGDP.
B) realGDPdoesnotchangeasthepricelevelchanges.
C) aninverserelationshipbetweenthepricelevelandrealGDP.
D) aninverserelationshipbetweenchangesinthepricelevelandchangesinnominalGDP.
Answer: C
Diff:1
82) WhichofthefollowingisNOTanexplanationfortheshapeoftheaggregatedemandcurve?
A) realbalanceeffect B) interestrateeffect
C) openeconomyeffect D) investmenteffect
Answer: D
Diff:2
83) Thedownwardslopeoftheaggregatedemandcurveshowsthat
A) anincreaseinaggregatedemandreducesthelong -runaggregatesupply.
B) anincreaseinaggregatedemandincreasesthelong-runaggregatesupply.
C) ahigherpricelevelwillcauseplannedpurchaseratesforfinalgoodsandservicestobe
higher.
D) alowerpricelevelwillcauseplannedpurchaseratesforfinalgoodsandservicestobe
higher.
Answer: D
Diff:3
84) Whatisoneimplicationofthereal-balanceeffect?
A) Thepartofyourwealththatyouholdintheformofcashlosessomeofitsvalueasthe
pricelevelrises.
B) Whenthepricelevelrises,peoplehaveanincentivetoworkharderinordertoearna
higherincome.
C) Whenthepricelevelfalls,mostconsumersreallocatetheirspendingsoastohaveanequal
balancebetweennecessitiesandluxuries.
D) Aggregatedemandandaggregatesupplycanneverreachlong -runequilibrium.
Answer: A
Diff:2
85) Theopeneconomyeffectandinterestrateeffectaretwoofthereasonswhy
A) higherpricelevelsincreaselong-runaggregatesupply.
B) theaggregatedemandcurveslopesdownward.
C) capitalformationdoesnotcontributetoeconomicgrowthinpoorcountries.
D) growthofthelaborforcedoesnotcontributetoeconomicgrowthinwealthycountries.
Answer: B
Diff:3
86) Theaggregatedemandcurveshowsthe
A) totalamountofplannedexpendituresongoodsandservicesateachpossiblepricelevel.
B) totalamountofnominalgoodsthattheparticipantsintheeconomywanttopurchase.
C) totalamountofrealgoodsthatforeignerswanttopurchase.
D) amountofgoodsproducerswillproduceasproductioncostsfall.
Answer: A
Diff:2
87) Theaggregatedemandcurveis
A) downwardsloping. B) vertical.
C) horizontal. D) Ushaped.
Answer: A
Diff:1
88) Theaggregatedemandcurveis
A) horizontaliffullemploymentexistsintheeconomy.
B) verticaliffullemploymentexistsintheeconomy.
C) downwardslopingbecauseofthereal-balance,interestrate,andopeneconomyeffects.
D) downwardslopingbecausemoregoodsareproducedasperunitcostofproducingeach
itemfalls.
Answer: C
Diff:1
89) Thereal-balanceeffectindicatesthatathigherpricelevels
A) therealvalueofmoneyholdingsfall,resultingindecreasedspending.
B) therealvalueofmoneyholdingsincrease,resultinginincreasedsaving.
C) thepurchasingpowerofmoneywillincrease.
D) thevalueofthedollarwillincrease.
Answer: A
Diff:1
90) Whichofthefollowingwilloccurwhenaneconomyspricelevelincreases?
A) Aggregatedemandwillincrease.
B) Thepurchasingpowerofmoneywillincrease.
C) Thepurchasingpowerofmoneywilldecrease.
D) Therealvalueofwealthwillincrease.
Answer: C
Diff:2
91) Theinterestrateeffectshowsthatifthepricelevelincreases,
A) consumersandbusinesseswillincreasetheirspendingtobuythesameamountofgoods
asbeforetomakeupforthehigherinterestrates.
B) consumersandbusinesseswilldecreasetheirspendingastheinterestrateincreases,
therebypushingupthecostofacquiringfunds.
C) U.S.exportsandimportswillbothdecrease.
D) therealvalueoffinancialassetswillincrease.
Answer: B
Diff:2
92) AdecreaseinU.S.pricesrelativetoEuropeanprices
A) willdecreaseEuropeanexportstotheUnitedStates.
B) willincreaseU.S.importsfromEurope.
C) willdecreaseU.S.exportstoEurope.
D) willnotaffectU.S.tradewithEurope.
Answer: A
Diff:1
93) AnincreaseinU.S.pricesrelativetoJapanesepriceswill
A) increasetotalplannedspendingonU.S.goodsandservices.
B) increaseU.S.importsanddecreaseU.S.exports.
C) decreaseU.S.importsandincreaseU.S.exports.
D) decreasebothU.S.exportsandimports.
Answer: B
Diff:2
94) Whenthepriceleveldeclines,
A) theinterestraterises,andconsumersborrowfewerfunds,whichcausesamovementup
theaggregatedemandcurve.
B) theinterestratefalls,andconsumersborrowmorefunds,whichcausesamovementdown
alongtheaggregatedemandcurve.
C) theinterestrateisnotaffected,sothereisnomovementalongtheaggregatedemand
curve.
D) interestratesfall,andconsumersborrowmorefunds,whichcausestheaggregatedemand
curvetoshifttotheleft.
Answer: B
Diff:2
95) Whenthepricelevelfalls,
A) importsincrease,andexportsdecrease,whichcausesamovementupalongtheaggregate
demandcurve.
B) thereisnoimpactonimportsorexports,sothereisnoassociatedmovementalongthe
C) importsdecreaseandexportsincrease,whichcauseamovementdownalongthe
D) importsdecreaseandexportsincrease,whichcauseamovementupalongtheaggregate
demandcurve.
Answer: C
Diff:2
96) Thecurvethatdisplaystotalplannedrealspendingongoodsandservicesateachpricelevelby
households,businesses,thegovernment,andforeignresidentsiscalled
A) theaggregatesupplycurve. B) theaggregatedemandcurve.
C) thepricelevelcurve. D) theemploymentcurve.
Answer: B
Diff:1
97) Whichofthefollowingcausetheaggregatedemandcurvetoslopedownwardandtotheright?
A) thepricesofkeygoods
B) theinterestrateeffect
C) militaryexpendituresofthegovernment
D) thedemand-shockeffect
Answer: B
Diff:1
98) Whenahigherpricelevelgeneratesanincreaseintheinterestratethatinducesconsumersto
borrowlessandbuyless,thischainofeventsisreferredtoas
C) theopeneconomyeffect. D) thepriceleveleffect.
Answer: B
Diff:2
99) Totalplannedrealexpendituresmeasuredalongtheaggregatedemandcurvearemadeupof
A) consumptionspending,investmentspending,governmentspending,andnetexport
spending.
B) consumptionspending,income,governmentspending,andnetexportspending.
C) consumptionspending,saving,investmentspending,andgovernmentspending.
D) consumptionspending,factorpayments,investmentspending,andnetexportspending.
Answer: A
Diff:3
100) Whatismeasuredontheverticalaxisoftheaggregatedemandgraph?
A) nominalincome B) realGDPperyear
C) thepricelevel D) unemployment
Answer: C
Diff:1
101) Whatismeasuredonthehorizontalaxisontheaggregatedemandgraph?
A) nominalincome B) realGDPperyear
C) thepricelevel D) unemployment
Answer: B
Diff:1
102) Whenexpenditureschangeduetochangesintherealvalueofmoneycausedbyvariationsin
thepricelevel,thisisknownasthe
A) interestrateeffect. B) real-balanceeffect.
C) openeconomyeffect. D) aggregatebalanceseffect.
Answer: B
Diff:2
103) Whentotalplannedrealexpenditureschangeduetochangesinthecostofborrowingthatresult
fromvariationsinthepricelevel,thisisknownasthe
Answer: A
Diff:1
104) Whentotalplannedrealexpenditureschangeduetothechangesinnetexports,thisisknownas
the
Answer: C
Diff:1
105) Ifyourincomestaysthesameandthepricelevelincreases,youwillbuyfewergoodsand
servicesduetothe
Answer: B
Diff:2
106) Ifthedollarappreciatesandforeigngoodsbecomelessexpensive,thetotalplanned
expendituresondomesticgoodsandserviceswill
A) fallduetotheopeneconomyeffect.
B) fallduetotheinterestrateeffect.
C) increaseduetotheopeneconomyeffect.
D) increaseduetotheinterestrateeffect.
Answer: A
Diff:2
107) Whatistheaggregatedemandcurveandwhatdoesitrepresent?
Answer: Theaggregatedemandcurveshowstotalplannedrealspendingonallgoodsand
servicesintheeconomyatvariouspricelevels,otherthingsheldconstant.Itrepresents
thecomponentsofrealGrossDomesticProduct(GDP),includingconsumptionspending,
investmentexpenditures,governmentpurchases,andnetforeigndemandfordomestic
production.
Diff:1
108) Theaggregatedemandcurveslopesdownforthesamereasonthattheindividualdemand
curveforagoodslopesdown.Doyouagreeordisagreewiththisstatement?Why?
Answer: Disagree.Theaggregatedemandcurvedoesnotuseprice,butusesthepricelevel,and
quantitydemandedisnotforaspecificgood,butforthetotalexpendituresonrealgoods
andservices.Astherelativepriceofagoodfalls,individualswillsubstitutetowardthat
good.Thereareeconomy-widereasonsthatcausetheaggregatedemandcurvetoslope
downwards.Forexample,theloweraggregatepricelevelwillcauseareductioninthe
interestrateandanincreaseintheoveralldemandforgoods.
Diff:2
109) Whatistheinterestrateeffectofanincreaseinthepricelevel?
Answer: Higherpricelevelsindirectlyincreasetheinterestrate.Thehigherinterestratecause
peopletoreducedesiredrealspendingduetothehighercostofborrowing.Hence,the
higherpricelevelleadstoareductionintotalplannedrealspending.
Diff:2
110) Whatinformationisprovidedbytheaggregatedemandcurve?
Answer: Theaggregatedemandcurverelatestotalplannedrealexpenditurestoeachpricelevel.
ThepricelevelismeasuredbytheGDPdeflator.Theloweristhepricelevel,thehigher
aretotalplannedrealexpenditures,otherthingsbeingequal.
Diff:2
111) Whatisthereal-balanceeffectofanincreaseinthepricelevel?
Answer: Thereal-balanceeffectisthechangeintherealvalueofthemoneybalanceswhenthe
pricelevelchanges,allotherthingsconstant.Anincreaseinthepricelevelmeansthatthe
purchasingpowerofmoneybalancesisreduced.
Diff:2
112) Whatarethethreeforcesthatcausetheaggregatedemandcurvetoslopedown?Explain.
Answer: Thethreeforcesarethereal-balanceeffect,theinterestrateeffect,andtheopen-economy
effect.Anincreaseinthepricelevelcausesthepurchasingpowerofmoneybalancesto
fall,interestratestoincreaseandborrowingtofall,andimportstoincreaseandexportsto
decrease.Eachofthesecausetotalplannedrealexpenditurestodecrease.
Diff:3
10.3ShiftsintheAggregateDemandCurve
1) Whichofthefollowingwouldcauseaggregatedemandtodecrease?
A) Thegovernmentincreasestaxesonbothbusinessandpersonalincome.
B) Adropintheforeignexchangevalueofthedollar
C) TheFedincreasestheamountofmoneyincirculation.
D) Businessesandhouseholdsbelievethattheeconomyisheadedforgoodtimes,sothey
begintofeelincreasedsecurityabouttheirjobs.
Answer: A
Diff:1
Topic: 10.3ShiftsintheAggregateDemandCurve
2) Anaggregatedemandcurve
A) shiftstotherightwhenthepricelevelincreasesandtotheleftwhenthepricelevelfalls.
B) shiftstotherightwhenanynon-price-levelfactorincreasestotalplannedrealspending.
C) shiftstotherightwhenpopulationdecreasesandshiftstotheleftwhenpopulation
increases.
D) doesnotshift,unlikeindividualormarketdemandcurves.
Answer: B
Diff:2
I. Wheneconomistsderivetheaggregatedemandcurve,theyarelookingattheeffectofthe
pricelevelononecommodityonly.
II. Anynon-price-levelchangethatincreasestotalplannedrealspendingondomesticgoods
shiftstheADcurvetotheright.
Answer: B
Diff:1
4) EuropeandAsiabothfallintodeepeconomicrecessions.WhatimpactwillthishaveonU.S.
aggregatedemand?
A) None.Anationsaggregatedemandisonlyaffectedbyitsowneconomicconditions.
B) U.S.aggregatedemandwillremainunchanged.
C) U.S.aggregatedemandwilldecrease.
D) TheU.S.aggregatedemandcurvewillshifttotheright.
Answer: C
Diff:2
5) Anaggregatedemandcurve
A) shiftstotherightwhenanon-pricelevelchangeincreasestotalplannedrealexpenditures.
B) shiftstotherightwhenanon-pricelevelchangedecreasestotalplannedreal
expenditures.
C) shiftstotherightwhenthepricelevelfalls.
D) doesnotshifttotherightortotheleft.
Answer: A
Diff:2
6) Anincreaseintotalplannedrealexpendituresthatiscausedbyafactorotherthantheprice
levelwillleadtothe
A) aggregatesupplycurveshiftingtotheright.
B) aggregatedemandcurveshiftingtotheright.
C) aggregatesupplycurveshiftingtotheleft.
D) aggregatedemandcurveshiftingtotheleft.
Answer: B
Diff:1
7) Anincreaseinthemoneysupplywillcausewhichofthefollowingtooccur?
A) arightwardshiftoftheaggregatesupplycurve
B) aleftwardshiftoftheaggregatedemandcurve
C) aleftwardshiftoftheaggregatesupplycurve
D) arightwardshiftoftheaggregatedemandcurve
Answer: D
Diff:1
8) Theaggregatedemandcurvewouldshifttotherightasaresultof
A) adropinthepricelevel.
B) taxincreases.
C) anincreaseintheU.S.realinterestrate.
D) adecreaseintheamountofmoneyincirculation.
Answer: C
Diff:2
9) Whichofthefollowingwillcausealeftwardshiftintheaggregatedemandcurve?
A) areductioninthemoneysupply B) anincreaseintaxes
C) areductioningovernmentspending D) alloftheabove
Answer: D
Diff:3
10) WhichoneofthefollowingwouldNOTincreaseaggregatedemand?
A) anincreaseinlong-runaggregatesupply
B) areductioninrealinterestrates
C) taxdecreases
D) anincreaseintheamountofmoneyincirculation
Answer: A
Diff:2
11) AllofthefollowingwouldcausetheaggregatedemandcurvetoshiftEXCEPT
A) ariseinrealinterestrates.
B) anincreaseintaxes.
C) improvementsineconomicconditionsinothercountries.
D) adecreaseinthepricelevel.
Answer: D
Diff:2
12) WhichofthefollowingwillNOTshifttheaggregatedemandcurve?
A) achangeinthedomesticmarginaltaxrates
B) achangeingovernmentexpenditures
C) achangeinthedomesticpricelevel
D) depreciationinthevalueofthenationalcurrency
Answer: C
Diff:2
13) Theaggregatedemandcurvewillshifttotheleftif
A) peoplearemoreoptimisticabouttheirfuture.
B) areductioninthepricelevelpushesdownborrowingcosts.
C) governmentexpendituresincrease.
D) thenationalincomesofourtradingpartnersdecrease.
Answer: D
Diff:2
14) Aweakeninginconsumerconfidencecausesa
A) shiftoftheaggregatedemandcurvetotheright.
B) shiftoftheaggregatedemandcurvetotheleft.
C) movementupalongtheaggregatedemandcurve.
D) movementdownalongtheaggregatedemandcurve.
Answer: B
Diff:2
15) WhichofthefollowingwillNOTshifttheaggregatedemandcurve?
A) achangeinthepricelevel
B) achangeintaxrates
C) achangeintheamountofmoneyincirculation
D) achangeinrealinterestrates
Answer: A
Diff:2
16) Anincreaseintheamountofmoneyincirculationwouldcausea
A) shiftoftheaggregatedemandcurvetotheright.
B) shiftoftheaggregatedemandcurvetotheleft.
C) movementuptheaggregatedemandcurve.
D) movementdowntheaggregatedemandcurve.
Answer: A
Diff:2
17) AnincreaseintheU.S.pricelevelcausesa
A) shiftoftheU.S.aggregatedemandcurvetotheright.
B) shiftoftheU.S.aggregatedemandcurvetotheleft.
C) movementuptheU.S.aggregatedemandcurve.
D) movementdowntheU.S.aggregatedemandcurve.
Answer: C
Diff:2
18) Whichofthefollowingwouldlikelyresultinashiftoftheaggregatedemandcurvetotheright?
A) ataxcut
B) adecreaseinjobsecurity
C) ariseintherealinterestrate
D) adecreaseinthequantityofmoneyincirculation
Answer: A
Diff:2
19) Anincreaseinaggregatedemandisshownby
A) arightwardshiftintheaggregatedemandcurve.
B) aleftwardshiftintheaggregatedemandcurve.
C) amovementupalongtheaggregatedemandcurve.
D) themovementdownalongtheaggregatedemandcurve.
Answer: A
Diff:2
20) Whichofthefollowingwouldlikelyresultinadecreaseinaggregatedemand?
A) taxincreases
B) areductionintherealinterestrate
C) increasedjobandfutureincomesecurity
D) ariseinthequantityofmoneyincirculation
Answer: A
Diff:2
21) Otherthingsbeingequal,appreciationofthedollar
A) increasesaggregatedemandintheUnitedStates,andmayincreaseaggregatesupplyby
reducingthepricesofimportedresources.
B) increasesaggregatedemandintheUnitedStates,andmaydecreaseaggregatesupplyby
C) decreasesaggregatedemandintheUnitedStates,andmayincreaseaggregatesupplyby
D) decreasesaggregatedemandintheUnitedStates,andmaydecreaseaggregatesupplyby
increasingthepricesofimportedresources.
Answer: C
Diff:3
22) Otherthingsbeingequal,adepreciationofthedollar
A) increasesaggregatedemandintheUnitedStates,andmayincreaseaggregatesupplyby
B) increasesaggregatedemandintheUnitedStates,andmaydecreaseaggregatesupplyby
C) decreasesaggregatedemandintheUnitedStates,andmayincreaseaggregatesupplyby
D) decreasesaggregatedemandintheUnitedStates,andmaydecreaseaggregatesupplyby
Answer: B
Diff:2
23) Wheninvestorsbuymorecapitalgoodsbecausetheinterestrateshavefallen,theaggregate
demandcurve
A) shiftsright. B) shiftsleft. C) doesnotshift. D) staysthesame.
Answer: A
Diff:1
24) Intheabovefigure,amovementfrompointBtopointCcouldbeexplainedby
A) anincreaseinthepricelevel.
B) adecreaseinthequantityofmoneyincirculation.
C) increasedgovernmentspending.
D) thereal-balanceeffect.
Answer: C
Diff:2
25) Whichofthefollowingwouldcauseanincreaseinaggregatedemand(AD)?
A) Adecreaseinpricelevels
B) Anincreaseininterestrates
C) Adecreaseintaxes
D) Ariseintheforeignexchangevalueofthedollar
Answer: C
Diff:1
I. Adropintheforeignexchangevalueofthedollarwoulddecreaseaggregatedemand
II. Adecreaseintheamountofmoneyincirculationwouldincreaseaggregatedemand
Answer: D
Diff:1
27) Whatcausestheaggregatedemandcurvetoshift?
Answer: Anythingthatcausestotalplannedrealexpendituresondomesticgoodstoincreaseor
decrease,otherthanchangesinthepricelevel,causesthecurvetoshift.Theseinclude
thingslikechangesintheexchangerate,changesineconomicconditionsinother
countries,changesintherealinterestrate(notassociatedwithpricelevelchanges),anda
changeintheamountofmoneyincirculation.
Diff:1
28) Howcanthelong-runequilibriumlevelofrealGrossDomesticProduct(GDP)increasewithout
thepricelevelchanging?
Answer: Sincethelong-runaggregatesupplycurveisvertical,theonlywayrealGrossDomestic
Product(GDP)canincreasewithoutthepricelevelchangingisifaggregatedemand
increasesandlong-runaggregatesupplyincreases.Forthelattertohappen,eitherthe
endowmentofinputsmustincreaseortechnologymustchange.
Diff:2
10.4Long-RunEquilibriumandthePriceLevel
1) Theshapeoftheaggregatedemandcurvedoesnottellusanythingabouthowthetotaldollar
valueofspendingwillultimatelybedividedbetweenoutputandprices.Forthisweneed
A) informationaboutthestandardoflivinginthecountry.
B) informationthatonlytheConsumersPriceIndexcanprovide.
C) anaggregatesupplycurve.
D) toknowhowfarfromtheorigintheaggregatedemandcurveis.
Answer: C
Diff:2
Topic: 10.4Long-RunEquilibriumandthePriceLevel
2) Tofindaneconomyslong-runequilibriumpricelevel,locatethepointwhere________and
________crossandlooktotheleft.
A) demand;supply
B) aggregatedemand;short-runaggregatesupply
C) aggregatedemand;pricelevel
D) long-runaggregatesupply;aggregatedemand
Answer: D
Diff:1
3) Supposetotalplannedexpendituresequal$14.4trillionwhenthevalueofthepricelevelis95.If
thepriceleveldroppedto90,totalplannedrealexpenditureswillequal
A) lessthan$14.4trillionbutmorethan$1trillion.
B) lessthan$14.4trillion.
C) morethan$14.4trillion.
D) $14.4trillion.
Answer: C
Diff:2
4) Ifyouhave$1,000andtheGrossDomesticProduct(GDP)deflatorincreasesfrom100to120,
then
A) the$1,000willbuy20percentlessofthegoodsandservicesproducedbysociety.
B) the$1,000willbuy20percentmoreofthegoodsandservicesproducedbysociety.
C) thevalueofthe$1,000increases.
D) youwillbeabletobuyfewergoods,buttherealvalueofthosegoodswillincrease.
Answer: A
Diff:2
5) Apersistentlydecliningpricelevelresultingfromeconomicgrowthandunchangedaggregate
demandiscalled
A) demand-sidedeflation. B) supply-sidedeflation.
C) oziandeflation. D) seculardeflation.
Answer: D
Diff:1
6) Howiseconomicgrowthgraphicallydepicted?
A) Theaggregatedemandcurveshiftstotheleft.
B) Aggregatedemandshiftstotheright.
C) Short-runaggregatesupplyshiftsleft.
D) Thelong-runaggregatesupplycurveshiftsright.
Answer: D
Diff:1
7) Whichofthefollowingwillresultinseculardeflation?
A) Aone-timerightwardshiftoftheaggregatedemandcurve.
B) Continuousrightwardshiftsoftheaggregatedemandcurve.
C) Aone-timerightwardshiftofthelong-runaggregatesupplycurve.
D) Continuousrightwardshiftsofthelong-runaggregatesupplycurve.
Answer: D
Diff:2
8) Seculardeflationoccurswhen
A) thereisnoeconomicgrowthandaggregatedemandfalls.
B) aggregatedemandincreasesatthesametimethereisnoeconomicgrowth.
C) aggregatedemandremainsunchangedwhileeconomicgrowthincreaseslong -run
aggregatesupply.
D) bothaggregatedemandandaggregatesupplyareshiftingleft.
Answer: C
Diff:1
9) Anincreaseintheamountofphysicalcapitalwillcause
A) anincreaseinbothaggregatedemandandrealGDP,buthavenoeffectonthepricelevel.
B) aggregatedemandandaggregatesupplytoincreasebythesameamounts,causingreal
GDPtoincreaseandthepriceleveltoremainconstant.
C) anincreaseinbothaggregatesupplyandrealGDP,buthavenoeffectonthepricelevel.
D) anincreaseinbothaggregatesupplyandrealGDPandareductioninthepricelevel.
Answer: D
Diff:2
10) TheU.S.hasexperiencedinflationeveryyearsince1959dueto
A) asustaineddecreaseinaggregatedemand.
B) asustainedincreaseinaggregatedemandaccompaniedbyanevenlargerdecreasein
LRAS.
C) asustaineddecreaseinaggregatesupply.
D) asustainedincreaseinaggregatesupplyaccompaniedbyanevenlargerincreasein
aggregatedemand.
Answer: D
Diff:2
11) Supply-sideinflationiscausedby
A) adecreaseinaggregatesupplyandnochangeinaggregatedemand.
B) adecreaseinaggregatedemandandnochangeinaggregatesupply.
C) anincreaseinaggregatesupplyandnochangeinaggregatedemand.
D) anincreaseinaggregatedemandandnochangeinaggregatesupply.
Answer: A
Diff:2
12) Iftheeconomygrowssteadilyoverseveralyearsandatthesametimemaintainstheaggregate
demandcurveinitspresentposition,thentheeconomywillexperiencewhichofthefollowing?
A) inflation
B) astablepricelevel
C) seculardeflation
D) Thepricelevelcannotbedeterminedwithoutmoreinformation.
Answer: C
Diff:2
13) SupposetheFederalReserveimplementsexpansionarymonetarypolicywherethemoney
supplyincreases.Whichofthefollowingwilltendtooccurinthelongrunasaresultofthis
monetarypolicyaction?
A) Outputandthepricelevelwillbothincrease.
B) Outputwillincreasewithnochangeinthepricelevel.
C) Anincreaseinthepricelevelandnochangeinoutput.
D) Nochangeineitherthepriceleveloroutput.
Answer: C
Diff:2
14) Whenthepricelevelisbelowthelevelatwhichtheaggregatedemandcurvecrossesthelong
runaggregatesupplycurve
A) therewillbenopricelevelchange.
B) therewillbepressuresthatwillleadtoashiftofeithertheaggregatedemandorthelong
runaggregatesupplycurves.
C) totalplannedrealexpenditureswillexceedactualrealGDP,andthepricelevelwill
increase.
D) totalplannedrealexpenditurewillbelowerthanactualrealGDP,andthepricelevelwill
increase.
Answer: C
Diff:1
15) Whenthepricelevelisbelowthelevelatwhichtheaggregatedemandcurvecrossesthelong
runaggregatesupplycurve,
A) therewillbenopricelevelchange.
B) therewillbepressuresthatwillleadtoashiftofeithertheaggregatedemandorthelong
runaggregatesupplycurves.
C) actualrealGDPwouldbelessthantotalplannedrealexpenditures,andthepricelevelwill
rise.
D) actualrealGDPwouldexceedtotalplannedrealexpenditures,andthepricelevelwillfall.
Answer: C
Diff:1
16) Economicgrowthwillbeassociatedwithaconstantpricelevelwhen
A) theincreaseinaggregatedemandexactlyequalstheincreaseinlong -runaggregate
supply.
B) theincreaseinaggregatedemandismorethantheincreaseinlong-runaggregatesupply.
C) theincreaseinaggregatedemandislessthantheincreaseinlong-runaggregatesupply.
D) theincreaseinaggregatedemandisaccompaniedbyareductioninshort -runaggregate
supply.
Answer: A
Diff:2
17) Overthelasttwentyyears,realGDPintheU.S.economyhasincreasedandtherehasbeen
inflation.Thisindicatesthat
A) aggregatedemandhasincreasedwhileaggregatesupplyhasbeenconstant.
B) aggregatedemandhasbeenconstantwhileaggregatesupplyhasincreased.
C) aggregatedemandhasincreasedmorethanaggregatesupply.
D) aggregatedemandhasincreasedlessthanaggregatesupply.
Answer: C
Diff:3
18) Economicgrowthtakesplace
A) onlywhenbothaggregatedemandandaggregatesupplyincrease.
B) whenaggregatesupplyincreases.
C) whenaggregatedemanddecreases.
D) onlyifthepricelevelisconstantorrising.
Answer: B
Diff:2
19) TheU.S.economyhashadpersistentinflationinrecentdecades.Apossibleexplanationforthe
inflationisthat
A) therehavebeendecreasesinthegrowthratewhileaggregatedemandhasremained
unchanged.
B) therehavebeenincreasesinthegrowthratewhileaggregatedemandhasremained
unchanged.
C) therehavebeendecreasesinaggregatedemandwhileaggregatesupplyhasremained
unchanged.
D) growthinaggregatedemandhasbeengreaterthangrowthinaggregatesupply.
Answer: D
Diff:3
20) Inthelongrun,anincreaseingovernmentspending,otherthingsequal,generates
A) ahigherrealGDPinthelongrun.
B) alowerrealGDPintheshortrun.
C) ahigherpricelevel.
D) bothahigherrealGDPandalowerpricelevel.
Answer: C
Diff:2
21) Refertotheabovefigure.Ifthepricelevelis80,
A) thetotalplannedrealexpendituresbyindividuals,businesses,andthegovernmentare
lessthantotalplannedproductionbyfirms.
B) thetotalplannedrealexpendituresbyindividuals,businesses,andthegovernmentexceed
totalplannedproductionbyfirms.
C) theeconomywillhaveeconomicgrowthandthenewequilibriumpricelevelwillbe80.
D) theaggregatedemandcurvewillautomaticallyshiftleadingtoastableequilibrium.
Answer: B
Diff:1
22) Theintersectionofaggregatedemandandlong-runaggregatesupplyidentifythepricelevelat
whichtotalplanned
A) realexpendituresequalactualnominalGDP.
B) realexpendituresequaltotalplannedproduction.
C) exportspendingequalstotalplannedimportspending.
D) governmentspendingequalstotalplannedtaxrevenues.
Answer: B
Diff:2
23) Whatwouldhappeninaneconomyiftotalplannedproductionexceededtotalplannedreal
expenditures?
A) Inventorieswouldbedepleted,andfirmswouldtendtolowerprices.
B) Inventorieswouldaccumulate,andfirmswouldtendtolowerprices.
C) Inventorieswouldbedepleted,andfirmswouldtendtoraiseprices.
D) Inventorieswouldaccumulate,andfirmswouldtendtoraiseprices.
Answer: B
Diff:2
24) Ifthecurrentpricelevelislowerthantheequilibriumpricelevel,thenitmustbetruethattotal
planned
A) governmentspendingislessthantotalplannedtaxrevenues.
B) governmentspendingexceedstotalplannedtaxrevenues.
C) realexpendituresarelessthantotalplannedproduction.
D) realexpendituresexceedtotalplannedproduction.
Answer: D
Diff:2
25) Considertheabovefigure.Atapricelevelof150,
A) totalplannedproductionexceedstotalplannedrealexpenditures.
B) totalplannedrealexpendituresexceedtotalplannedrealproduction.
C) inventoriesofunsoldgoodsdecline.
D) thepricelevelwouldrise.
Answer: A
Diff:3
26) Considertheabovefigure.Atapricelevelof120,
A) totalplannedrealexpendituresexceedtotalplannedproduction.
B) totalplannedproductionexceedstotalplannedexpenditures.
C) priceswouldfall.
D) inventorieswouldbegintoaccumulate.
Answer: A
Diff:3
27) Intheabovefigure,thelong-runequilibriumpricelevelis
A) 150. B) 130. C) 110. D) notdisplayed.
Answer: B
Diff:1
28) Intheabovefigure,thelong-runequilibriumrealGDPis
A) $10trillion. B) $11trillion. C) $12.trillion D) notdisplayed.
Answer: B
Diff:1
29) Intheabovefigure,ifthepricelevelis150,
A) totalplannedproductionexceedstotalexpenditures.
B) totalexpendituresexceedtotalplannedexpenditures.
C) totalplannedproductionequalstotalexpenditures.
D) totalplannedproductionislessthantotalexpenditures.
Answer: A
Diff:2
30) Ifconsumersconfidenceintheeconomyrises,
A) aggregatedemandwillshiftleftwardandthepricelevelwillrise.
B) aggregatedemandwillshiftleftwardandthepricelevelwillfall.
C) aggregatedemandwillshiftrightwardandthepricelevelwillrise.
D) aggregatedemandwillshiftrightwardandthepricelevelwillfall.
Answer: C
Diff:3
31) Apersistentdeclineinthepricelevelresultingfromeconomicgrowthinthepresenceofstable
aggregatedemandisknownas
A) demand-sidedeflation. B) theinterestrateeffect.
C) seculardeflation. D) therealbalanceeffect.
Answer: C
Diff:1
32) Ifaggregatedemandisstableandthereiseconomicgrowth,theeconomywillexperience
A) seculardegeneration. B) seculardeflation.
C) seculardecline. D) seculardepreciation.
Answer: B
Diff:2
33) Arightwardshiftoflong-runaggregatesupplywithoutanychangeinaggregatedemand
A) willleaverealGDPunchanged.
B) resultsinalowerpricelevel.
C) increasesthepricelevelwithoutanychangeinrealGDP.
D) increasesthepricelevelalongwithanincreaseinrealGDP.
Answer: B
Diff:2
34) Aneconomyexperiencesrealgrowthovertimewithstableaggregatedemand.Thiswould
likelyresultin
A) increasingprices. B) decreasingprices.
C) secularinflation. D) increasedunemployment.
Answer: B
Diff:2
35) Whichofthefollowingisconsistentwithseculardeflation?
A) apersistentlydecreasingpricelevelcausedbyseveralperiodsofeconomicgrowthwith
stableAD
B) apersistentlyincreasingpricelevelcausedbyseveralperiodsofeconomicgrowthwith
decreasingAD
C) apersistentlydecreasingpricelevelcausedbyincreasesingovernmentexpenditures
D) apersistentlydecreasingpricelevelcausedbymoneybeingwithdrawnfromtheeconomy
Answer: A
Diff:1
36) Ifpersistentinflationwasduetodeclinesinlong-runaggregatesupply,whatpatternwouldbe
observed?
A) IncreasesinthepricelevelwouldoccursimultaneouslywithdecreasesinrealGDP.
B) IncreasesinthepricelevelwouldoccursimultaneouslywithincreasesinrealGDP.
C) Onlypricesofgoodswouldincrease;pricesofserviceswouldremainconstant.
D) Onlypricesofserviceswouldincrease;pricesofgoodswouldremainconstant.
Answer: A
Diff:3
37) Inaneconomyinwhichaggregatedemandisstableandaperiodofsustainedandsignificant
productivitygrowthoccurs,therewillbe
A) seculardeflation. B) secularinflation.
C) aconstantpricelevel. D) ashiftofaggregatesupplytotheleft.
Answer: A
Diff:3
38) WhatcouldcauseadecreaseinthepricelevelandsimultaneouslyanincreaseinGDPsimilarto
the1920sintheUnitedStates?
A) anincreaseininterestrates B) adecreaseinconsumerconfidence
C) anincreaseinproductivity D) adecreaseininterestrates
Answer: C
Diff:3
39) Long-runequilibriumwilloccuratthepricelevelatwhich
A) thelong-runaggregatedemandandshort-runaggregatesupplycurvesintersect.
B) theaggregatedemandandshort-runaggregatesupplycurvesintersect.
C) theaggregatedemandandlong-runaggregatesupplycurvesintersect.
D) theshort-runaggregatesupplyandlong-runaggregatesupplycurvesintersect.
Answer: C
Diff:1
40) Explainhowaneconomycanexperiencelong-runeconomicgrowthanddeflationatthesame
time.
Answer: Ifaggregatedemandremainsrelativelyconstantduringthegrowthperiods,thanasthe
LRASsupplycurveshiftsright,thenewequilibriumpointofADandtheLRAScurve
willbelower,indicatingdeflation.
Diff:2
41) Howcanacountryexperienceeconomicgrowthandstableprices?
Answer: Acountrycanexperienceeconomicgrowthandstablepricesifaggregatesupplyand
aggregatedemandincreasebythesameamount.Thenewequilibriumthenisatthesame
pricelevel,butrealGDPishigher.
Diff:2
10.5CausesofInflation
1) Overthepastseveraldecades,whathasbeentrueaboutinflationintheUnitedStates?
A) Inflationrateshavebeenconsistentlynegative.
B) Thenationhasexperiencedpersistentdeflation.
C) Inflationhasbeenverystable.
D) Inflationrateshavebeenconsistentlypositive.
Answer: D
Diff:2
Topic: 10.5CausesofInflation
2) Supply-sideinflationcouldbecausedbywhichofthefollowing?
A) Anincreaseinaggregatedemand
B) Adecreaseinaggregatedemand
C) Anincreaseinlong-runaggregatesupply
D) Adecreaseinlong-runaggregatesupply
Answer: D
Diff:2
3) Iftherearesteadydecreasesinaggregatesupply,theeconomywillexperience
A) aslowdecreaseinpricelevels. B) demand-sideinflation.
C) anexpansionarygap. D) supply-sideinflation.
Answer: D
Diff:1
4) WhathascausedpersistentinflationintheUnitedStates?
A) Thenationslong-runaggregatesupplycurvehasshiftedtotheleft.
B) Supply-sideinflation
C) Adecreaseinlaborproductivity
D) Noneoftheabove
Answer: D
Diff:2
5) Wheneverthegenerallevelofpricesrisesbecauseofcontinualincreasesinaggregatedemand,
wesaythattheeconomyisexperiencing
A) supply-sideinflation. B) monetarystagflation.
C) demand-sideinflation. D) aggregatesupplyshock.
Answer: C
Diff:1
6) Demand-sideinflationoccurswhen
A) increasesinaggregatedemandarenotmatchedbyincreasesinaggregatesupply.
B) increasesinaggregatesupplyoutstripincreasesinaggregatedemand.
C) aggregatedemandfallsmorerapidlythanaggregatesupply.
D) long-runaggregatedemandrisesfasterthanshort-runaggregatesupply.
Answer: A
Diff:1
7) Inlookingbackoverthepast40years,whichofthefollowinghastheU.S.economy
experienced?
A) Persistentdeflation
B) Consistentinflationataslowconstantrate
C) Persistentinflation
D) Yearsofbothinflationanddeflation
Answer: C
Diff:1
8) Whichofthefollowingfactorscouldcausetheeconomytoexperiencesupply-sideinflation?
A) Increasedsecurityaboutjobsandfutureincome.
B) Governmentlawswhichsaythattheaverageworkweekmustbereducedbyonehour
everyyear.
C) Increasethenumberofimmigrantsallowedintothecountry.
D) Developnewtechnologytoincreaseproductivity.
Answer: B
Diff:2
9) Supplysideinflationcanbecausedby
A) acontinualincreaseinaggregatesupplywhileaggregatedemandremainsunchanged.
B) acontinualdecreaseinaggregatesupplywhileaggregatedemandremainsunchanged.
C) acontinualdecreaseinaggregatesupplywhileaggregatedemandhassignificant
decreases.
D) acontinualincreaseinaggregatedemandwhileaggregatesupplyremainsunchanged.
Answer: B
Diff:1
10) Whichofthefollowingisthemaincauseofthepersistentinflationthatwehaveexperiencedin
theUnitedStates?
A) Supply-sideinflationaryfactors.
B) Demand-sideinflationaryfactors.
C) Acombinationofsupply-anddemand-sideinflationaryfactors.
D) Supply-sidesecularityfactors.
Answer: B
Diff:1
11) Areductiontheamountofoil(aresource)willtendtocausewhichofthefollowing?
A) areductioninoutputandareductioninthepricelevel
B) areductioninoutputwithnochangeinthepricelevel
C) areductioninoutputandanincreaseinthepricelevel
D) anincreaseinthepricelevelandnochangeinoutputifaccompaniedbyanincreaseinthe
moneysupply
Answer: C
Diff:1
12) Ifthereispersistentinflation,
A) long-runaggregatesupplyisgrowingatafasterratethanaggregatedemand.
B) long-runaggregatesupplyisgrowingataslowerratethanaggregatedemand.
C) thereisanexcessoftotalplannedexpenditures.
D) long-runaggregatesupplyisconstant.
Answer: B
Diff:2
13) Seculardeflation
A) hasbeenaseriousproblemduringthelastthreedecadesintheUnitedStates.
B) althoughpresent,hasnotbeenaproblemduringthelastthreedecadesintheUnited
States.
C) hasnotbeenpresentintheUnitedStatessince1959.
D) cannotexistinacapitalisticeconomy.
Answer: C
Diff:2
14) WhichofthefollowingisthemostlikelyexplanationforinflationintheUnitedStates?
A) increasesinaggregatesupply B) decreasesinaggregatesupply
C) increasesinaggregatedemand D) decreasesinaggregatedemand
Answer: C
Diff:2
15) Inthelongrun,persistentinflationintheUnitedStatesiscausedby
A) leftwardshiftsinboththelong-runaggregatesupplycurveandintheaggregatedemand
curve.
B) rightwardshiftsinthelong-runaggregatesupplycurveandtheleftwardshiftofthe
C) afasterrightwardshiftoftheaggregatedemandcurvethantherightwardshiftof the
long-runaggregatesupplycurve.
D) leftwardshiftsintheaggregatedemandcurvewhilethepositionofthelong-runsupply
curveisunchanged.
Answer: C
Diff:2
16) Forsupply-sideinflationtooccurinthelongrun,
A) theaggregatedemandcurvehastoshifttotheleft.
B) theaggregatedemandcurvehastoshifttotheright.
C) thelong-runaggregatesupplycurvehastoshifttotheright.
D) thelong-runaggregatesupplycurvehastoshifttotheleft.
Answer: D
Diff:1
17) Whichofthefollowingcancausesupply-sideinflation?
A) anincreaseinhumancapital B) increasesinthemoneysupply
C) taxcuts D) noneoftheabove
Answer: D
Diff:2
18) Supposethataneconomyisinitiallyproducingatthefull-employmentlevelofoutput.Now
supposethereisareductioninthemoneysupply.Otherthingsbeingequalwecanexpect
A) supply-sideinflation. B) demand-sideinflation.
C) cost-pullinflation. D) deflation.
Answer: D
Diff:1
19) Whatwillbetheresultinagrowingeconomyifincreasesinaggregatedemandoutpace
rightwardshiftsofthelong-runaggregatesupplycurve?
A) seculardeflation
B) inflationaccompaniedbydeclinesinrealGDP
C) inflationaccompaniedbyincreasesinrealGDP
D) adeclineinconsumptionspending
Answer: C
Diff:2
20) Refertotheabovefigure.Supposetheeconomysinitialequilibriumisrepresentedbythe
intersectionofLRAS 1andAD 1 .Supposethereisapersistentreductioninlaborforce
participation,whichreducestotalplannedproductionatanygivenpricelevel.Theresulting
changeintheeconomyslong-runequilibriumpositionwouldberepresentedbya
A) movementfromAtoC. B) movementfromAtoB.
C) movementfromBtoC. D) movementfromCtoA.
Answer: A
Diff:3
21) Refertotheabovefigure.AmovementfromBtoCwouldbeNOTbetheresultof
A) anincreaseinforeignincomelevels. B) anincreaseingovernmentspending.
C) anincreaseinworkerproductivity. D) anincreaseinconsumptionspending.
Answer: C
Diff:3
22) Refertotheabovefigure.AmovementfromBtoDwouldbearesultof
A) anincreaseinthequantityofmoneyincirculation.
B) anincreaseinlaborproductivity.
C) anincreaseingovernmentexpenditures.
D) anincreaseinthemarginalincometaxrate.
Answer: B
Diff:3
23) Refertotheabovefigure.Supposetheeconomysinitialequilibriumisrepresentedbythe
intersectionofLRAS1andAD 1 .Nowthereisanincreaseinlaborproductivitywhichincreases
totalplannedproductionatanygivenpricelevelandaggregatedemandremainsstable.The
resultingchangeintheeconomyslong-runequilibriumpositionwouldberepresentedbya
A) movementfromBtoD. B) movementfromCtoD.
C) movementfromCtoB. D) movementfromAtoB.
Answer: A
Diff:3
24) Whentheeconomyisinlong-runequilibrium,thepriceleveladjustssoastoequatewhichtwo
valueswithoneanother?
A) importandexportspending
B) theinflationrateandtheunemploymentrate
C) governmentspendingandtaxrevenues
D) totalplannedrealexpendituresandtotalplannedproduction
Answer: D
Diff:1
25) Whatpatternwouldyouobserveinaneconomyinwhichaggregatedemandisincreasingbutin
whichlong-runaggregatesupplyremainedthesame?
A) seculardeflation
B) inflationaccompaniedbynochangeinrealGDP
C) inflationaccompaniedbydeclinesinrealGDP
D) adeclineinconsumptionspending
Answer: B
Diff:3
26) Steadilyimprovingimprovementsintechnology,otherthingsbeingequal,willresultin
A) nochangeinthepricelevelandsteadilyincreasingoutput.
B) persistentdeflation
C) steadilyrisingpricelevel(inflation)andsteadilyincreasingoutput.
D) asteadilyfallingpricelevelwithnochangeinoutput.
Answer: B
Diff:2
27) Whentheaggregatedemandcurveshifts________thanthelong -runaggregatesupplyshifts

rightward,theresultwillbeinflation.
A) rightwardataslowerrate B) leftwardataslowerrate
C) rightwardatafasterrate D) leftwardatthesamerate
Answer: C
Diff:3
28) Whatwouldlikelyhappentothelong-runaggregatesupplycurveiftheU.S.federal
governmentincreasesmarginaltaxratesonwages?
A) TheLRAScurvewouldshiftrightward.
B) TheLRAScurvewouldshiftleftward.
C) TheLRAScurvewouldremainstablewhiletheADcurvewouldshiftleftward.
D) TheLRAScurvewouldremainstablewhiletheADcurvewouldshiftrightward.
Answer: B
Diff:2
29) Whichofthefollowingwouldunambiguouslygenerateinflation?
A) adecreaseinaggregatedemandaccompaniedbyanincreaseinaggregatesupply
B) anincreaseinaggregatedemandaccompaniedbyanincreaseinaggregatesupply
C) adecreaseinaggregatedemandaccompaniedbyadecreaseinaggregatesupply
D) anincreaseinaggregatedemandaccompaniedbyadecreaseinaggregatesupply
Answer: D
Diff:2
30) Iflong-runeconomicgrowthisnotaccompaniedbyachangeinaggregatedemand,theresult
willbe
A) persistentinflation. B) seculardeflation.
C) devaluationofthedollar. D) appreciationofthedollar.
Answer: B
Diff:2
31) Whatcausesdemand-sideinflation?Whatcausessupply-sideinflation?
Answer: Demand-sideinflationiscausedbyanincreaseinaggregatedemandwhilelong -run
aggregatesupplyisconstant.Supply-sideinflationiscausedbyareductioninshort-run
aggregatesupply.
Diff:3
32) Whatarethreecausesofsupply-sideinflation?
Answer: ShiftingtheLRAStotheleftcanbecausedbyanyofthefollowingfactors:areductionin
thelaborforce,areductioninthelaborforceparticipationrate,highermarginaltaxeson
businesses,andgovernmentprogramswhichactasincentivesforunemployedworkers
tonotgobacktowork.
Diff:2
Chapter11
ClassicalandKeynesianMacroAnalyses
11.1TheClassicalModel
1) Whomamongthefollowingwasaclassicaleconomist?
A) AdamSmith B) A.C.Pigou
C) DavidRicardo D) alloftheabove
Answer: D
Diff:1
Topic: 11.1TheClassicalModel
2) AllofthefollowingwereclassicaleconomistsEXCEPT
A) AdamSmith B) A.C.Pigou
C) DavidRicardo D) JohnMaynardKeynes.
Answer: D
Diff:1
3) WhichofthefollowingisNOTanassumptionoftheclassicalmodel?
A) Wagesandpricesarefixed.
B) Peoplearemotivatedbytheownself-interest.
C) Purecompetitionexists.
D) Buyersreacttochangesinrelativeprices.
Answer: A
Diff:1
4) Theideathatsupplycreatesitsowndemandisknownas
A) thelawofsupply. B) thelawofdemand.
C) Keyneslaw. D) Sayslaw.
Answer: D
Diff:1
5) Intheclassicalmodel,anincreaseinaggregatedemandwillcause
A) anincreaseinactualoutput,orGrossDomesticProduct(GDP).
B) adecreaseinactualoutput,orGrossDomesticProduct(GDP).
C) anincreaseinpricelevel.
D) adecreaseinpricelevel.
Answer: C
Diff:1
6) Classicaleconomistsassumedthat
A) pricesweresticky.
B) individualssufferedfrommoneyillusion.
C) wageswereinflexible.
D) noneoftheabove.
Answer: D
Diff:1
7) Thefirstsystematicattempttoexplainthedeterminantsofthepricelevelandnationallevelsof
income,employment,consumptionandrealGrossDomesticProduct(GDP)wasmadeby
________economists.
A) Keynesian B) supply-side C) monetarist D) classical
Answer: D
Diff:1
8) Classicaleconomistswrotefromthe1770stothe________.
A) 1850s B) 1890s C) 1930s D) 1960s
Answer: C
Diff:1
9) Supplycreatesitsowndemandisknownas
A) Smithslaw. B) Sayslaw.
C) thecircularflow. D) theRicardiandilemma.
Answer: B
Diff:1
Chapter11ClassicalandKeynesianMacroAnalyses341
10) Sayslawsaysthat
A) consumptionisgreaterthansupply.
B) desiredexpendituresalwaysequalactualexpenditures.
C) peopleproducethegoodstheyconsume.
D) peopleconsumethegoodstheyproduce.
Answer: B
Diff:1
11) Sayslawarguesthat
I. overproductionistypicalinamarketeconomy.
II. supplycreatesitsowndemand.
Answer: B
Diff:1
12) Sayslawstatesthat
A) supplycreatesitsowndemand.
B) supplyanddemandareneverequal.
C) demandmaybegreaterthansupply.
D) supplywillusuallybegreaterthandemand.
Answer: A
Diff:1
13) Theclassicalmodelusestheassumptionthat
A) allwagesandpricesareflexible.
B) monopolyiswidespreadintheeconomy.
C) interestratesarenotflexible.
D) economicmarketsarefragileandhavenotendencytomovetowardsanequilibrium.
Answer: A
Diff:1
14) Accordingtotheclassicalmodel,theincomegeneratedbyproductionis
A) enoughtomeettheneedsofeveryoneinsociety.
B) enoughtopurchaseallthegoodsandservicesproduced.
C) fullyspentonsavings.
D) alwaysinsufficienttopurchaseallthegoodsandservicesproduced.
Answer: B
Diff:1
15) TheimplicationofSayslawisthat
A) GrossDomesticProductisthesamewhetherweusetheexpenditureapproachorthe
incomeapproach.
B) abartereconomyisthemostefficienteconomy.
C) increasedconsumptiontodayleadstoincreasedproductiontomorrow.
D) overproductioninamarketeconomyisnotpossible.
Answer: D
Diff:1
16) AllthefollowingareassumptionsoftheclassicalmodelEXCEPT
A) purecompetitionexists.
B) buyersandsellersreacttonominalmoneypricesratherthantorelativeprices.
C) peoplearemotivatedbyself-interest.
D) wagesandpricesareflexible.
Answer: B
Diff:2
17) Sayslawexplains
A) howlong-termrealGrossDomesticProduct(GDP)stabilityisachievedintheclassical
model.
B) howlong-runrealGrossDomesticProduct(GDP)stabilityisachievedintheKeynesian
model.
C) howtheeconomycangointorecession.
D) whyeconomiesexperiencebusinesscycles.
Answer: A
Diff:2
18) Ifaconsumerbuyslessgasolinebecausegaspricesincreasedby10percent,eventhoughall
otherpriceshavealsoincreasedby10percent,then
A) theconsumerispayingtoocloseattentiontochangesinrelativeprices.
B) wagesandpricesaretooflexible.
C) theconsumerhasbeenfooledbymoneyillusion.
D) inflationisnotaproblemintheeconomy.
Answer: C
Diff:1
19) Whichofthefollowingisanexampleofmoneyillusion?
A) Anindividualiswillingtoworkmorehourswhenthenominalwagerisesby5percent
andtheoverallpricelevelrisesby4percent.
B) Anindividualiswillingtoworkmorehourswhenthenominalwagerisesby5%andthe
overallpricelevelrisesby7percent.
C) Anindividualwillneitherincreasenordecreasethenumberofhourssheiswillingto
workwhenthenominalwagerisesby5percentandtheoverallpricelevelrisesby5
percent.
D) noneoftheabove.
Answer: B
Diff:2
20) Accordingtothecircularflowofincomeandoutput,savingcauses
A) totaloutputtofall.
B) consumptionexpendituresandtotaloutputtofall.
C) consumptionexpenditurestofallshortoftotaloutput.
D) investmentspendingtofall.
Answer: C
Diff:1
21) Onekeyassumptionoftheclassicalmodelis
A) governmentspendingplaysamajorrole.
B) moneyillusioncannotfoolworkers.
C) wagesaresticky.
D) pricesaresticky.
Answer: B
Diff:2
22) Classicaleconomiststendto
A) seeunemploymentasapersistenteconomicproblem.
B) believeinKeynesianeconomics.
C) rejecttheequalityofsavingsandinvestment.
D) supportSayslaw.
Answer: D
Diff:1
23) Intheclassicalmodel,anincreaseintheunemploymentrate
A) willpersistwhenthereductioninoutputiscausedbyareductioninaggregatedemand.
B) willresultinanincreaseinthepricelevelifthereductioninoutputiscausedbyachange
inaggregatedemand.
C) willlikelybetemporary.
D) isasignalofdemand-pullinflation.
Answer: C
Diff:2
24) Accordingtoclassicaleconomists,
A) Sayslawisnotvalid.
B) unemploymentwillnotbeaseriousprobleminamarketeconomy.
C) wagelevelsarealwayssticky.
D) demandstimulusisneededtoproducefullemployment.
Answer: B
Diff:1
25) Intheclassicalmodel,aggregatedemandandaggregatesupplywill
A) notexist.
B) intersectatlessthanfullemployment.
C) intersectatthepointoffullemployment.
D) notintersect.
Answer: C
Diff:1
26) Anindividualwhoissufferingfrommoneyillusionismoreconcernedwith
A) relativepricesthanwithnominalprices. B) relativepricesthanwithrealprices.
C) nominalpricesthanwithrelativeprices. D) realpricesthanwithnominalprices.
Answer: C
Diff:1
27) Anindividualwhosuffersfrommoneyillusionwill
A) feelthatadoublingofpricesandincomeimproveshiseconomicposition.
B) concentrateonrelativeprices.
C) neverbefooledbytheimpactofpricechangesonthepurchasingpowerofincome.
D) trytousecounterfeitmoney.
Answer: A
Diff:1
28) SupposeParisthinksa5percentincreaseinherhourlywageasanincentivetoworkmore
hourswhilethepricelevelalsoincreasesby5percent.Parisissaidtobesufferingfrom
A) moneyillusion. B) rationality.
C) irrationality. D) theeffectsofcompetition.
Answer: A
Diff:2
29) Theclassicalmodelassumesthat
A) imperfectcompetitionpredominatesinmostmarkets.
B) peoplehavemoneyillusion.
C) wagesandpricesareflexible.
D) wagesareflexiblebutpricesarenot.
Answer: C
Diff:1
30) AllofthefollowingareassumptionsoftheclassicalmodelEXCEPT
A) inflexiblewages. B) absenceofmoneyillusion.
C) purecompetition. D) self-interestofeconomicactors.
Answer: A
Diff:1
31) Onetenetofclassicaleconomicsisthat
A) theroleofthegovernmentshouldbelimited,sincethemarketwillalwaysbe
self-correcting.
B) thegovernmentshouldintervenewhenevernecessarytoavoidanyunemployment.
C) wagesandpricesarestickydownward.
D) thegovernmentshouldsetaminimumwageslightlyabovethenaturalmarket
equilibriumrate.
Answer: A
Diff:2
I. Ifotherfactorsareheldconstant,thelevelofemploymentintheeconomydeterminesreal
II. Accordingtoclassicaleconomists,onlyvoluntaryunemploymentexistsinthelongrun.
Answer: C
Diff:1
33) WhichofthefollowingstatementsabouttheclassicalmodeloftheeconomyisFALSE?
A) Savingsandinvestmentwillalwaysbeequal.
B) Wagesandpricesareflexible.
C) Theeconomywillalwaysmovetoward,orbeat,fullemployment.
D) Individualspursuethepublicinterest,nottheirownself-interest.
Answer: D
Diff:1
34) Ifyoufeelyouarebetteroffbecauseyoureceivea20percentraiseevenwhenthepricelevel
alsoincreasesby20percent,thenyouareavictimofthe
A) realincomeeffect. B) moneyincomeeffect.
C) moneyillusion. D) realpurchasingpowereffect.
Answer: C
Diff:1
A) Wagesandpricesareflexible. B) Peoplearemotivatedbyself-interest.
C) Moneyillusionexists. D) Purecompetitionexists.
Answer: C
Diff:1
36) Aclassicalmodeloftheeconomypredicts
A) fullemploymentinthelongrun.
B) a15to20percentunemploymentlevelwhenevertheeconomyisinequilibrium.
C) thesameunemploymentratesastheKeynesianmodel.
D) cyclicalchangesintheunemploymentrate.
Answer: A
Diff:1
37) Akeyassumptionintheclassicalmodelis
A) stickywages.
B) purecompetitionexists.
C) stickyprices.
D) thegovernmentplaysamajorroleineconomicproblems.
Answer: B
Diff:1
38) Accordingtotheclassicalmodel,moresavingleadstomoreinvestmentbecause
A) thepeoplewhosavearethesamepeoplewhoinvest.
B) theinterestrateadjuststokeepinvestmentequaltosaving.
C) savingandinvestmentaretwosidesofthesameactivity.
D) theinterestrateissetbythefederalgovernment.
Answer: B
Diff:1
39) Athigherratesofinterest,
A) householdssavelessandbusinessesinvestmore.
B) householdssavelessandbusinessesinvestless.
C) householdssavemoreandbusinessesinvestless.
D) householdssavemoreandbusinessesinvestmore.
Answer: C
Diff:1
40) Theequilibratingforceinthecreditmarketintheclassicalmodelis
A) theinterestrate. B) thepricelevel.
C) fullemployment. D) fiscalpolicy.
Answer: A
Diff:2
41) Classicaleconomistsarguedthat
A) therewouldalwaysbeanexcessofsavingoverinvestment.
B) workershadmoneyillusion.
C) excesssavingswouldcreateunemployment.
D) aflexibleinterestratewouldmakesavingequaltoinvestment.
Answer: D
Diff:1
42) Accordingtoclassicaleconomists,adecreaseintherateofinterestwill
A) increaseunemployment. B) increaseconsumersaving.
C) increasebusinessinvestment. D) increasebusinessfailures.
Answer: C
Diff:1
43) Individualswillincreasetheirsavingas
A) theinterestratefalls. B) businessinvestmentfalls.
C) therateofunemploymentincreases. D) theinterestrateincreases.
Answer: D
Diff:1
44) Intheclassicalmodel,desiredsaving
A) exceedsinvestment. B) isinverselyrelatedtorealincome.
C) isequaltodesiredinvestment. D) islessthandesiredinvestment.
Answer: C
Diff:1
45) Theclassicaleconomistsarguedthatplannedsavingandplannedinvestmentwillalwaysbe
equalbecauseofchangesin
A) thelevelofrealdisposableincome. B) theinterestrate.
C) thepricelevel. D) wages.
Answer: B
Diff:1
46) Accordingtoclassicaltheory,desiredsavingalwaysequalsinvestmentduetochangesin
A) prices. B) wages.
C) theinterestrate. D) taxes.
Answer: C
Diff:1
47) Ineconomics,investmentisdefinedas
A) thespendingbybusinessesoncapitalgoodsandinventories.
B) thespendingbyhouseholdsonhumancapitalanddurablegoods.
C) disposableincomeminusconsumption.
D) disposableincomeplusconsumption.
Answer: A
Diff:1
48) Withrespecttounemployment,theclassicalmodelstatesthat
A) unemploymentofanykindcannotexist.
B) onlyvoluntaryunemploymentexists.
C) unemploymentfluctuateswiththeinterestrate.
D) involuntaryunemploymentwillalwaysexceedvoluntaryunemployment.
Answer: B
Diff:1
49) Accordingtoclassicaltheory,fullemploymentinthelabormarketoccurs
A) wheneveraggregatedemandislessthanaggregatesupply.
B) atawagerateatwhichquantitydemandedequalsquantitysupplied.
C) onlywhentheeconomyhasjustexperiencedademandshock.
D) onlywhenactualexpendituresaregreaterthandesiredexpenditures.
Answer: B
Diff:1
50) Intheclassicalmodel,whatoccursifawageof$20/hourresultsinunemployedworkers?
A) Theworkerswillgoonstriketodemandthatmorejobsbecreated.
B) Producerswillquicklycreatemorejobsandhiretheunemployedworkers,so
unemploymentisshort-lived.
C) Thewageratewilldrop,moreworkerswillbehired,andtheunemploymentratefalls.
D) Thegovernmentwillstepinandorderfirmstohiremoreworkers.
Answer: C
Diff:1
51) Accordingtoclassicaltheory,totalemploymentandrealGrossDomesticProduct(GDP)are
A) unrelated. B) positivelyrelated.
C) inverselyrelated. D) negativelyrelated.
Answer: B
Diff:2
52) Intheclassicalmodel,theaggregatesupplycurveis
C) horizontal. D) vertical.
Answer: D
Diff:1
53) Intheclassicalmodel,realGrossDomesticProduct(GDP)peryearis
A) duetosupplyconditionsplustheextentofgovernmentinterventionintheeconomy.
B) determinedbysupplyanddemandconditionstogether.
C) supplydetermined.
D) demanddetermined.
Answer: C
Diff:1
54) Supposeaneconomyoriginallyinlong-runequilibriumexperiencesadecreaseinaggregate
demand.Accordingtotheclassicalmodel,
A) realGrossDomesticProduct(GDP)willnotchangebutthepricelevelwillfall.
B) realGrossDomesticProduct(GDP)willfall,andthenthepricelevelwillfallalso.
C) thepricelevelwillnotchangebutrealGrossDomesticProduct(GDP)willfall.
D) realGrossDomesticProduct(GDP)willfall,wageswillfall,butthepricesofgoodsand
serviceswillstaythesame.
Answer: A
Diff:1
55) Intheclassicalmodel,ashifttotherightinaggregatedemandwouldresultin
A) apermanentincreaseinunemployment.
B) apermanentincreaseinrealincomes.
C) anincreaseinthepricelevel.
D) apermanentshiftpastfullemployment.
Answer: C
Diff:2
56) Accordingtotheclassicaltheory,aninwardshiftinaggregatedemandwouldreduce
A) realGrossDomesticProduct(GDP)andthepricelevel.
B) thepricelevelbuthavenoeffectonrealGrossDomesticProduct(GDP).
C) realincomebuthavenoimpactonthepriceGrossDomesticProduct(GDP).
D) thepricelevelbutincreaserealGrossDomesticProduct(GDP).
Answer: B
Diff:1
57) Accordingtoclassicaltheory,ashiftinaggregatedemandwillaffect
A) thepricelevelonly.
B) realGrossDomesticProduct(GDP)only.
C) thelevelofemploymentonly.
D) bothrealGrossDomesticProduct(GDP)andthelevelofemployment.
Answer: A
Diff:1
58) Accordingtotheclassicalmodel,anincreaseinaggregatedemandwould
A) leadtheeconomytorecession.
B) leadtheeconomytoadeflationarycycle.
C) causeanadjustmenttoahigherpricelevel.
D) raiserealGrossDomesticProduct(GDP)butleavethepricelevelunchanged.
Answer: C
Diff:3
A) upwardslopingintheshortrunbutverticalinthelongrun.
B) alwaysvertical.
C) thesameastheaggregatesupplycurveintheKeynesianmodel.
D) flatatlowlevelsofoutputandtheneventuallyslopesupwardasoutputincreases.
Answer: B
Diff:1
60) Accordingtotheclassicaltheory,theaggregatesupplycurveis
A) downwardsloping. B) horizontal.
Answer: D
Diff:1
61) Accordingtoclassicaltheory,anychangesinaggregatedemandwill
A) leadtochangesinthepricelevel.
B) leadtochangesinrealGrossDomesticProduct(GDP),butnotinthepricelevel.
C) leadtochangesinbothrealGrossDomesticProduct(GDP)andthepricelevel.
D) havenoaffectonpricesorrealGrossDomesticProduct(GDP).
Answer: A
Diff:1
62) AccordingtoSayslaw,
A) desiredexpendituresarealwayslessthanactualexpenditures.
B) desiredexpendituresarealwaysmorethanactualexpenditures.
C) desiredexpendituresarealwaysequaltoactualexpenditures.
D) desiredexpenditurescannotbecomparedwithactualexpenditures.
Answer: C
Diff:1
63) Sayslawimpliesthat
A) thewillingnesstopurchaseothergoodsisunrelatedtotheproductionofgoodsand
services.
B) producinggoodsandservicesgeneratesthemeansandthewillingnesstopurchaseother
goodsandservices.
C) pricesandwagesarestickydownwards.
D) wagesandpricesareinflexible.
Answer: B
Diff:1
64) Inaclassicalmodel,
A) equilibriumrealGDPissupplydetermined.
B) equilibriumrealGDPisdemanddetermined.
C) equilibriumrealGDPisdeterminedbybothaggregatesupplyandaggregatedemand.
D) equilibriumrealGDPisneitherdeterminedbyaggregatesupplynorbyaggregate
demand.
Answer: A
Diff:1
65) Theconditionoffullyflexiblewagesandpriceswasassumedby
A) theclassicaleconomists. B) theKeynesianeconomists.
C) moderneconomists. D) noeconomists.
Answer: A
Diff:1
66) TheapproachtounderstandingthedeterminationofrealGDPandthepricelevelthat
emphasizesflexiblewagesandpricesandcompetitivemarketsis
A) theclassicalmodel. B) theKeynesianmodel.
C) AdamSmithsLaw. D) theaggregatedemandmodel.
Answer: A
Diff:1
67) Theclassicaleconomistsassumedthat
A) monopolywaswidespreadintheeconomy.
B) governmentinterventionintheeconomicsystemwasnecessaryandhelpful.
C) wagesandpriceswereinflexible,especiallydownward.
D) wagesandpriceswereflexible.
Answer: D
Diff:1
68) Accordingtotheclassicaleconomists,aneconomyproducing$15trillioningoodsandservices
A) maybeproducingtoomuchsincetheneedsofpeoplemaynotbethisgreat.
B) simultaneouslygeneratestheincomenecessarytopurchase$15trillioningoodsand
services.
C) issupplying$15trillioningoodsandservices,butcouldbedemandingmoreorlessthan
$15trillioningoodsandservicesforaverylongperiodoftime.
D) couldexperienceapermanentglutifnoonehasestimatedthedemandforgoodsand
servicesintheeconomy.
Answer: B
Diff:2
69) Accordingtotheclassicaleconomists,actualrealGDP
A) alwaysequalsactualaggregateincome.
B) sometimesequalsactualaggregateincome.
C) neverequalsactualaggregateincome.
D) isnotrelatedtoaggregateincome.
Answer: A
Diff:1
70) Supplycreatesitsowndemandisknownas
A) KeynesRule. B) thecircularflow.
C) Smithslaw. D) Sayslaw.
Answer: D
Diff:1
71) Theconceptthatproducinggoodsandservicesgeneratesthemeansandthewillingnessto
purchaseothergoodsandservicesis
A) theKeynesianapproach. B) moneyillusion.
C) SaysLaw. D) cost-pushinflation.
Answer: C
Diff:1
72) Sayslawstatesthat
A) desiredexpenditureswillequalactualexpenditures.
B) peopleproduceonlythegoodstheywant.
C) demandisalwayslessthansupply.
D) overproductionisneverpossiblebecauseoflimitedresources.
Answer: A
Diff:2
73) WhichofthefollowingstatementsisNOTtrueaboutSayslaw?
A) Desiredexpenditureswillequalactualexpenditures.
B) Surpluseswillbeeliminatedbyfallingpricesandshortageswillbeeliminatedby
increasingprices.
C) Peopleproducemoregoodsthantheywantfortheirownuseonlyiftheyseektotrade
themforothergoods.
D) Marketswouldberegularlyhitbysevereshortagesandsurpluses.
Answer: D
Diff:1
A) surplusesneveroccur.
B) surplusesorshortagesarepossible,butonlyforashorttime.
C) therewillalwaysbeunemployment.
D) shortagesneveroccur.
Answer: B
Diff:2
75) WhichofthefollowingisNOTtrueaccordingtoSayslaw?
A) Supplycreatesitsowndemand.
B) Nooverproductionispossibleinamarketeconomyinthelongrun.
C) Desiredexpenditureswillalwaysbehigherthanactualexpenditures.
D) Producinggoodsandservicesgeneratesthemeansandthewillingnesstopurchaseother
goodsandservices.
Answer: C
Diff:1
76) Anassumptionoftheclassicalmodelisthat
A) moneyillusioniswidespread.
B) peoplemakedecisionsbasedonnominalpricesratherthanrealprices.
C) pricesareflexiblewhilewagesareinflexible.
D) peoplearemotivatedbyself-interest.
Answer: D
Diff:1
A) Wagesandpricesareflexible. B) Investmentwillleadtomoneyillusion.
C) Peoplearemotivatedbyself-interest. D) Purecompetitionexists.
Answer: B
Diff:1
A) Buyersandsellersreacttochangesinrelativeprices.
B) Householdswanttomaximizeeconomicwellbeing.
C) Nosinglebuyerorsellerofacommoditycanaffectitsprice.
D) Wagesandpriceswillmovefreelyintheupwarddirectionbutnotthedownward
direction.
Answer: D
Diff:2
79) Giventheassumptionsoftheclassicalmodel,
A) theeconomywilloftenexperiencerecessionsandexpansions.
B) expansionwillbethenormalcondition,butrecessionswilloftenbesevereandrequire
governmentintervention.
C) themacroeconomyiserratic,andproblemswilloftenbeincreasedovertime.
D) themarketisaself-correctingmechanism.
Answer: D
Diff:2
80) Aconsumerwhobuysmorecoffeewhenthepriceofcoffeefalls5percent,whileallotherprices
fell5percenttoo,is
A) sufferingfrommoneyillusion.
B) worryingtoomuchaboutacomingrecession.
C) behavinginaccordancewithclassicaleconomictheory.
D) payingtoomuchattentiontochangesinrelativeprices.
Answer: A
Diff:2
81) Joesincreaseinwageshasbeenidenticaltotheincreaseinthepricelevel.Joethinksthatheis
betteroffandhasincreasedhisexpenditures.Joesbehaviorisconsistentwith
A) SaysLaw. B) theclassicalmodel.
C) averticalaggregatesupplycurve. D) moneyillusion.
Answer: D
Diff:1
82) Moneyillusionis
A) abasicconditionthatallclassicaleconomistsassumepeoplehave.
B) whenpeoplethinktheyarebetteroffwhentheirincomeincreaseseventhoughprices
haveincreasedbythesameamount.
C) whenpeoplearemotivatedbyself-interest.
D) couldnotexistiftheeconomydidnothavecompetitivemarkets.
Answer: B
Diff:1
83) Savingrepresents
A) asourceoffundsforbusinessinvestment.
B) anormalpartofthecircularflowofincomeandoutput.
C) aninjectiontothecircularflowofincomeandoutput.
D) acounter-exampletoSaysLawthattheclassicaleconomistsneverconsidered.
Answer: A
Diff:2
84) Leakagesinthecircularflowmodelare
A) causedbypeoplenotactingrational.
B) possiblewhenunemploymentexists.
C) reflectedintheverticallong-runaggregatesupplycurve.
D) causedbypeoplesavinginsteadofspending.
Answer: D
Diff:1
85) Inaneconomywithnogovernmentandnointernationaltrade,consumptionexpenditureswill
belessthanthetotalvalueofgoodsandserviceswhen
A) investmentiszero.
B) savingiszero.
C) peoplesavesomeoftheirincome.
D) peoplebarterratherthanusemoneyinmakingexchanges.
Answer: C
Diff:1
86) Savingisnotaproblemintheclassicalmodelbecause
A) theclassicaleconomistsassumethatsavingwasbeneficialtopeopleforretirement.
B) savingwouldbespentbyconsumerseventually.
C) interestratesareflexible,andsavingswerechanneledintoinvestment.
D) saversandinvestorsarethesamepeople.
Answer: C
Diff:2
A) Thereisadirectrelationshipbetweeninvestmentandtheinterestrate.
B) Thereisaninverserelationshipbetweeninvestmentandtheinterestrate.
C) Thereisnorelationshipbetweeninvestmentandtheinterestrate.
D) Investmentisalwayslessthansavings.
Answer: B
Diff:1
88) Athigherratesofinterest,
A) householdssavelessbecauseitismoreexpensivetosave.
B) householdssavemorebecausetheygetagreaterreturnontheirsavings.
C) businessesdemandmoreinvestmentbecausefutureprofitabilityislikelytobegreater.
D) businessesdemandmoreinvestmentbecausetherearemorefundsavailabletoinvest.
Answer: B
Diff:2
89) Regardingunemployment,theclassicalmodelimpliesthat
A) unemploymentalwaysexists.
B) unemploymentcannotexist.
C) voluntaryunemploymentiszero,butinvoluntaryunemploymentoftenisfairlyhigh.
D) onlyvoluntaryunemploymentexists.
Answer: D
Diff:1
90) Intheclassicalmodel,
A) unemploymentwillneverexistsinceworkerswillbewillingtoacceptlowerwagesand
willthenbeabletofindwork.
B) unemploymentwillneverexistbecauseemployerswillbewillingtopaythewagerate
demandedbytheworkers.
C) wageswillgoupbutnevergodown.
D) fullemploymentwillneverbereached.
Answer: A
Diff:1
91) Higherunemploymenttendstobeassociatedwith
A) theclassicalmodel. B) higherrealGDP.
C) highernominalGDP. D) lowerrealGDP.
Answer: D
Diff:1
92) Intheclassicalmodel,highunemploymentduetoachangeinaggregatedemand
A) canpersistforanindefiniteperiodoftime.
B) willreturntoitsnormallevelquicklyaswagesadjust.
C) willpersistifduetoasupplyshockbutnotifduetoademandshock.
D) neverexistsbecauseunemploymentcanneverdeviatefromitsnormallevel.
Answer: B
Diff:2
93) Theaggregatesupplycurveintheclassicalmodelis
Answer: B
Diff:1
94) Whichofthefollowingstatementsistrueaboutthelong-runandshort-runaggregatesupply
curveintheclassicalmodel?
A) Thelong-runaggregatesupplycurveisvertical,andtheshort-runcurveishorizontal.
B) Thelong-runaggregatesupplycurveisnotdefined,andtheshortruncurveisvertical.
C) Thelong-runandshort-runcurvesstartouthorizontalandeventuallybecomevertical.
D) Thelong-runcurveisvertical,andthereisnoshort-runcurvesincealladjustmentsoccur
quickly.
Answer: D
Diff:2
95) Theclassicalmodelmakeslittledistinctionbetweenthelongrunandshortrunbecause
A) themodelhasnotbeenfullydevelopedyet.
B) theclassicaleconomistsknewthatwearealwaysoperatingintheshortrun.
C) currentchangesinfluencethelongrun,soitisnotpossibletoplanforthefuture.
D) wagesandpricesadjustsofastthattheeconomyisquicklymovingtowardsthelongrun.
Answer: D
Diff:1
96) Intheclassicalmodel,theaggregatesupplycurve
A) ishorizontal.
B) ispositivelysloped.
C) isconsistentwiththenaturalrateofunemployment.
D) isnotrelatedtotheemploymentrate.
Answer: C
Diff:1
97) Intheclassicalmodel,anincreaseinaggregatedemandwillleadtoanincreaseinwagerates
whileadecreaseinaggregatedemandwill
A) leavewagesunchangedsinceworkerswillnottakeacutinpay.
B) decreasewages.
C) increasewagessincebusinesswillbedesperateforlabor.
D) changethepriceofcapital.
Answer: B
Diff:1
A) Purecompetition. B) Wagesandpricesareflexible.
C) Peoplearemotivatedbyself-interest. D) Wagerigidity.
Answer: D
Diff:2
99) Intheclassicalmodel,achangeinaggregatedemand
A) causesachangeinlong-runrealGDPbutnotinthepricelevel.
B) causesachangeinthepricelevelbutnotinthelong-runrealGDP.
C) causeschangesinboththelong-runrealGDPandinthepricelevel.
D) hasnoeffectoneitherrealGDPorthepricelevel.
Answer: B
Diff:2
100) Aneconomyinlong-runequilibriumexperiencesanincreaseinaggregatedemand.According
totheclassicalmodel,
A) thepricelevelwillrisefirst,thenrealGDPwillincrease.
B) thepricelevelandrealGDPwillincreaseatthesametime.
C) thepricelevelwillincrease,butrealGDPwillnotchange.
D) thepricelevelwillincrease,butrealGDPwilldecrease.
Answer: C
Diff:3
A) thelevelofrealGDPperyeardoesnotdependonthelevelofaggregatedemand.
B) thelevelofGDPisdemanddetermined.
C) changesinaggregatesupplyaffectthepricelevel,notrealGDP.
D) thelevelofGDPdeterminespricesindependentofdemand.
Answer: A
Diff:1
A) adecreaseinaggregatedemandwillleadtoadecreaseinthepricelevelandadecreasein
realGDP.
B) changesinaggregatesupplyleaverealGDPunchanged.
C) adecreaseinaggregatedemandwillleadtoanincreaseinthepricelevelandadecreasein
realGDP.
D) changesinaggregatedemandaffectonlythepricelevel,notrealGDP.
Answer: D
Diff:2
103) WhichofthefollowingisNOTakeyassumptionoftheclassicalmodel?
A) Thereisasinglemonopolysellerinmanymarketsforgoodsandservices.
B) Peoplecannotbefooledbymoneyillusion.
C) Peoplearemotivatedbyself-interest.
D) Wagesandpricesareflexible.
Answer: A
Diff:2
A) wagesandpricesarenotflexible.
B) peoplesupplygoodsandservicestothemarketbecausetheywanttoconsumeother
goodsandservices.
C) governmentregulationisneededtopreventshortagesfrombecomingaproblem.
D) governmentregulationisneededtopreventsurplusesfrombecomingaproblem.
Answer: B
Diff:2
105) Intheclassicalmodel,theinterestratewilladjusttoequate
A) consumptionspendingwithrealGDP.
B) savingwithinvestment.
C) theeconomicgrowthratewiththegrowthrateofimportspending.
D) exportspendingwithimportspending.
Answer: B
Diff:2
106) WhyisthereNOpersistentunemploymentintheclassicalmodel?
A) Thewageleveladjuststoeliminateunemployment.
B) Theinterestrateadjuststoeliminateunemployment.
C) Therateofeconomicgrowthisalwayshighenoughtoallowthosewhowanttoworkat
currentwagestofindjobs.
D) Unionizationcreatesjobsecurityforworkers.
Answer: A
Diff:2
107) WhichofthefollowingisNOTanassumptionoftheclassicalsystem?
A) Purecompetitionexists. B) Peoplearemotivatedbyselfinterest.
C) Wagesandpricesareinflexible. D) Thereisnomoneyillusion.
Answer: C
Diff:1
108) Intheclassicalmodel,changesininterestrateswillalwaysensurethat
A) consumptionequalsproduction. B) savingequalsinvestment.
C) consumptionequalsinvestment. D) consumptionequalsincome.
Answer: B
Diff:2
109) TheconceptofSayslawcanbesummedupbythephrase,
B) demandcreatesitsownsupply.
C) supplyanddemandareequivalentconcepts.
D) supplyanddemandareirrelevantconcepts.
Answer: A
Diff:1
110) Fullemploymentintheclassicalmodelismaintainedby
A) flexibleinterestrates. B) flexiblewagerates.
C) flexibleprices. D) flexibleincome.
Answer: B
Diff:1
A) ahorizontalline.
B) anupwardslopingline.
C) averticalline.
D) acombinationofhorizontal,upwardsloping,andverticallines.
Answer: C
Diff:1
112) Intheclassicalmodel,arightwardshiftintheaggregatedemandcurvewill,inthelongrun,
A) increaserealGDPandthepricelevel.
B) increaserealGDPandwillnotchangethepricelevel.
C) decreaserealGDPandwillnotchangethepricelevel.
D) notchangerealGDPandwillincreasethepricelevel.
Answer: D
Diff:2
113) Whyiswageandpriceflexibilityanimportantassumptionoftheclassicalmodel?
A) Flexiblewagesandpricesguaranteethattherewillbenoscarcity.
B) Flexiblewagesandpricesallowbusinessfirmstofooltheirworkersthroughthemoney
illusion.
C) Flexiblewagesandpricesallowbusinessfirmstofooltheircustomersthroughthemoney
illusion.
D) Flexiblewagesandpricesallowmarketstoreachequilibrium.
Answer: D
Diff:2
114) WhichoneofthefollowingstatementsisNOTtrue?
A) Theclassicalmodelassumesthatpeoplesufferfrommoneyillusion.
B) Theclassicalmodelassumesthatpeoplearemotivatedbyself -interest.
C) Theclassicalmodelassumesthatpurecompetitionexists.
D) Theclassicalmodelassumesthatnosinglesellerofacommoditycanaffectitsprice.
Answer: A
Diff:1
115) Whatistruewhenthecreditmarketisinequilibrium?
A) Desiredsavingequalsdesiredinvestment.
B) Desiredemploymentequalsthenumberofjobsavailable.
C) Desiredconsumptionspendingequalsthetotalofsavingplusinvestment.
D) Thelegalminimumwageequalstheactualwage.
Answer: A
Diff:2
116) Whatistrueoftheaggregatesupplycurveintheclassicalmodel?
A) Theaggregatesupplycurveisdownwardsloping.
B) Theaggregatesupplycurveishorizontal.
C) Theaggregatesupplycurveisvertical.
D) Theaggregatesupplycurveisnotdeterminedbythelevelofemployment.
Answer: C
Diff:2
117) Long-runaggregatesupplycurveintheclassicalmodel
A) isthelevelofrealGDPcorrespondingto100percentlaborforceparticipation.
B) isthelevelofrealGDPcorrespondingtothenaturalrateofunemployment.
C) isadownwardslopingline.
D) isdeterminedbythecapitalstockoftheeconomy,notthelaborforce.
Answer: B
Diff:2
118) Intheclassicalmodel,whatistheresultofanincreaseinaggregatedemand?
A) RealGDPincreases,andthepricelevelremainsconstant.
B) RealGDPdecreases,andthepricelevelremainsconstant.
C) Thepricelevelincreases,andrealGDPremainsconstant.
D) Thepriceleveldecreases,andrealGDPremainsconstant.
Answer: C
Diff:2
A) Theintersectionofaggregatedemandandaggregatesupplyidentifiesanequilibrium
interestrateandanequilibriumwagelevel.
B) Theintersectionofaggregatedemandandaggregatesupplyidentifiesanequilibrium
interestrateandanequilibriumlevelofexports.
C) Theintersectionofaggregatedemandandaggregatesupplyidentifiesanequilibriumlevel
ofemploymentandanequilibriumlevelofinvestment.
D) Theintersectionofaggregatedemandandaggregatesupplyidentifiesanequilibrium
pricelevelandanequilibriumlevelofrealGDP.
Answer: D
Diff:2
120) Intheclassicalmodel,howdoshiftsinaggregatedemandaffectrealGDP?
A) RealGDPwillremainunchanged.
B) IncreasesinaggregatedemandincreaserealGDP.
C) IncreasesinaggregatedemanddecreaserealGDP.
D) DecreasesinaggregatedemandincreaserealGDP.
Answer: A
Diff:2
A) Governmentinterventionisnecessaryforeconomicstability.
B) Noonebuyerorsellerofagoodorservicecanaffectthepriceofthegoodorservice.
C) Peoplearemotivatedbyself-interest.
D) Peoplearenotfooledbythemoneyillusion.
Answer: A
Diff:2
122) Accordingtotheclassicalmodel,desiredsavingis
A) afunctionofrealGDP.
B) equaltodesiredinvestment.
C) identicaltothedemandforsavingateachlevelofrealGDP.
D) affectedbythemoneyillusionatlowincomelevels.
Answer: B
Diff:2
123) Accordingtotheclassicalmodel,investment
A) isafunctionofrealGDP.
B) isafunctionofthenominalGDP.
C) isinverselyrelatedtotheinterestrate.
D) isinfluencedbythemoneyillusionatlowincomelevels.
Answer: C
Diff:2
124) Theclassicalmodelindicatesthatattheequilibriuminterestrate,savingis
A) equaltoinvestment. B) greaterthaninvestment.
C) unnecessaryforinvestment. D) lessthaninvestment.
Answer: A
Diff:2
125) Ifyourincomeandthepricelevelbothriseby5percent,andyouthinkyounowhavemorereal
income,youaresufferingfrom
A) diminishingmarginalexpectations. B) leakages.
C) injections. D) moneyillusion.
Answer: D
Diff:1
126) Long-rununemploymentintheclassicalmodelisconsideredtobeimpossiblebecause
A) thegovernmentwillintervenetoaidtheunemployed.
B) jobplacementandtrainingprogramsarerampantintheUnitedStates.
C) flexiblepricesandwageskeepworkersfullyemployed.
D) thelaborsupplyishorizontal.
Answer: C
Diff:3
127) Theideathatsupplycreatesitsowndemandisattributedtowhichofthefollowing
economists?
A) AdamSmith B) DavidRicardo C) J.B.Say D) A.C.Pigou
Answer: C
Diff:1
A) Purecompetitionexists.
B) Wagesandpricesareflexible.
C) Governmentspendingisnecessarytoachieveeconomicstability.
D) Peoplearemotivatedbyself-interest.
Answer: C
Diff:1
129) AccordingtoSayslaw,
B) demandcreatessupply.
C) changesinsupplycreatesupply-sideinflation.
D) changesindemandcreatedemand-sideinflation.
Answer: A
Diff:1
130) Accordingtotheclassicalmodel,
A) long-termunemploymentisunavoidable.
B) unemploymentisatemporaryphenomenon.
C) unemploymentonlyexistsduringperiodsofwar.
D) thenaturalrateofunemploymentiszero.
Answer: B
Diff:1
131) Accordingtotheclassicalmodel,pricesandwages
A) areflexible.
B) mustbesetbygovernment.
C) movedownwardeasily,butarestickyupward.
D) moveupwardeasily,butarestickydownward.
Answer: A
Diff:1
132) Accordingtoclassicaleconomists,thecreditmarketreachesanequilibriumwhen
A) plannedinvestmentequalsgovernmentexpenditures.
B) desiredinvestmentequalsplannedinvestment.
C) desiredinvestmentequalsplannedchangesinaggregatesupply.
D) desiredinvestmentequalsdesiredsaving.
Answer: D
Diff:1
133) Accordingtoclassicaleconomists,whenaggregatedemanddecreases,
A) unemploymentisreduced,thepricelevelincreases,andequilibriumrealGDPisreached.
B) unemploymentisreduced,thepriceleveldecreases,andequilibriumrealGDPisreached.
C) unemploymenttemporarilyincreases,thepricelevelincreases,andequilibriumrealGDP
isreached.
D) unemploymenttemporarilyincreases,thepriceleveldecreases,andequilibriumrealGDP
isreached.
Answer: D
Diff:2
134) Acongressmanstates,Ifagovernmentattemptstoincreaseemploymentthroughincreased
governmentspending,allwewillendupwithisahigherpricelevel.Thiscongressman
assumesthatthe
A) aggregatedemandcurveisahorizontalline.
B) aggregatedemandcurveisaverticalline.
C) aggregatesupplycurveisahorizontalline.
D) aggregatesupplycurveisaverticalline.
Answer: D
Diff:2
135) Q:Howmanyeconomistsdoesittaketoscrewinalightbulb?
A:None.Ifthelightbulbreallyneededchanging,marketforceswouldhavealreadycauseditto
happen.
Thisjokerepresentstheviewof
A) classicaleconomists.
B) Keynesianeconomists.
C) economistswhoconcludethatmoneyillusioniswidespread.
D) economistswhoconcludethatwagesandpricesareinflexible.
Answer: A
Diff:3
136) Classicaleconomistssuggestthatunemploymentisashort -livedphenomenonbecause

A) wagesadjustquicklytoequilibratequantityoflabordemandedwithquantityoflabor
supplied.
B) wagesremainunchangedwhenthequantityoflabordemandedexceedsthequantityof
laborsupplied.
C) wagesremainunchangedwhenthequantityoflaborsuppliedexceedsthequantityof
labordemanded.
D) wagestendtoriseslowlywhenthequantityoflabordemandedequalsthequantityof
laborsupplied.
Answer: A
Diff:1
137) Whichstatementbestcharacterizestheclassicaleconomistsviewofsavingandinvestment?
A) Savingequalsinvestment
B) Savingexceedsinvestment
C) Savingislessthaninvestment
D) Savingandinvestmentarenotrelatedtooneanother
Answer: A
Diff:2
138) Intheclassicalview,ifdesiredsavingexceedsdesiredinvestment,
A) governmentspendingmustfall. B) governmentspendingmustrise.
C) theinterestratewoulddecline. D) theinterestratewouldincrease.
Answer: C
Diff:2
139) Intheclassicalview,flexiblewagerateswouldassure
A) lowinflation. B) highratesofunemployment.
C) highsecularinflationrates. D) fullemployment.
Answer: D
Diff:1
140) Intheclassicalmodel,whathappenstothelevelofrealGDPifaggregatedemandincreases?
A) RealGDPincreases.
B) RealGDPdecreases.
C) RealGDPwouldincreaseatfirst,thendecrease.
D) RealGDPwouldremainthesame,atequilibrium.
Answer: D
Diff:2
141) Supplycreatesitsowndemandimpliesthat
A) theveryactofsupplyingaparticularlevelofgoodsandservicesnecessarilyequalsthe
levelofgoodsandservicesdemanded.
B) theveryactofdemandingaparticularlevelofgoodsandservicesnecessarilyequalsthe
levelofgoodsandservicessupplied.
C) thegovernmentwillbuyupanysurplusofgoodsandservicesinacountrytoavoid
economicproblems.
D) theveryactofsupplyingaparticularlevelofgoodsandserviceswillnotnecessarilyequal
thelevelofgoodsandservicesdemanded.
Answer: A
Diff:2
142) WhatisSaysLawandwhatdoesitmean?
Answer: SaysLawis:Supplycreatesitsowndemand.Itmeansthatageneralglutor
overproductionisnotpossible.Theveryprocessofproducingspecificgoodsisproofthat
othergoodsaredesired.Theincomereceivedfromsellingonesgoodsisusedto
purchaseothergoods.Whilesomegoodsmayhaveasurplus,otherswillhaveashortage,
andthesewouldbecorrectedbypricechanges.Therewillnotbeanexcessquantity
suppliedofallgoods.
Diff:2
143) Savingisaleakagefromthecircularflow.Whydidnttheclassicaleconomiststhinksaving
mightcauseconsumptionexpenditurestofallshortoftotaloutput?
Answer: Theclassicaleconomistsbelievedthateachdollarsavedwouldbeinvestedbyfirmsso
thattheleakageofsavingwouldbeexactlymatchedbyaninjectionofinvestment
spending.Theinterestratewouldadjusttoensurethatsavingequaledinvestment.
Diff:2
144) Intheclassicalmodel,theequilibriumlevelofrealGrossDomesticProduct(GDP)is
completelysupply-determined.Doyouagreeordisagree?Why?
Answer: Agree.Thelong-runaggregatesupplycurveisvertical,sotheequilibriumlevelofreal
GrossDomesticProduct(GDP)isdeterminedbythelocationoftheaggregatesupply
curve.Shiftsinaggregatedemandaffectonlythepricelevel.
Diff:3
145) Whydidtheclassicaleconomiststhinkthatlarge-scaleunemploymentwasnotpossibleina
marketeconomy?
Answer: TheclassicaleconomistsacceptedSaysLaw,whichindicatedthatdesiredexpenditures
willequalactualexpenditures.Theactofproducingindicatesonewantstobuyother
goods.Asurplusorshortageinonemarketwouldsoonbecorrectedbecausepricesand
wageswereassumedtobeflexible,andtheyassumedpeoplecouldnotbefooledby
moneyillusion.Theyalsoassumedpurecompetitionandthatpeopleweremotivatedby
self-interest.Combiningalltheseideas,theyconcludedthatfullemploymentwouldbe
thenorm.
Diff:3
146) ThelevelofemploymentinaneconomydeterminesitsrealGDP,otherthingsheldconstant.
Doyouagreeordisagree?Why?Whatassumptionsarenecessaryforyourconclusionbasedon
theclassicalmodel?
Answer: Agree.Productionrequiresworkerssothemoreworkersthatareemployedthegreater
totalproduction.Thisassumesthatworkerswhoareemployedactuallyworkandare
productive.
Diff:2
11.2KeynesianEconomicsandtheKeynesianShort-RunAggregateSupplyCurve
1) AccordingtotheKeynesianmodel,theshort -runaggregatesupply(SRAS)curveishorizontal
when
A) realGrossDomesticProduct(GDP)isatfullcapacitybutpricesarenotflexible.
B) therearenounemployedresourcesandwagesdonotchangewhenpriceschange.
C) pricesreacttoanaggregatedemandshockbutrealGrossDomesticProduct(GDP)does
not.
D) thereareunemployedresourcesandpricesdonotfallwhenaggregatedemandfalls.
Answer: D
Diff:1
Topic: 11.2KeynesianEconomicsandtheKeynesianShort-RunAggregateSupplyCurve
2) TheKeynesianmodelisbasically
A) along-runtheory.
B) ashort-runtheory.
C) acombinationoflong-andshort-runtheories.
D) atheoryabouttheeconomyinboththelongrunandtheshortrun.
Answer: B
Diff:2
3) AccordingtoKeynes,involuntaryunemploymentispossiblebecauseof
A) theexistenceofcapitalmarkets.
B) long-termlaborcontractsandtheexistenceoflaborunions.
C) governmentinterferenceinthemarketeconomy.
D) inflation.
Answer: B
Diff:1
4) Adecreaseinaggregatedemandwillcause
A) pricestofallaccordingtoclassicaleconomists,andunemploymenttoincreaseaccordingto
Keynes.
B) pricestofallandunemploymenttoincreaseaccordingtobothclassicaleconomistsand
Keynes.
C) aggregatesupplytofallaccordingtoclassicaleconomists,andpricestofallaccordingto
Keynes.
D) aggregatesupplytofallaccordingtoKeynes,andunemploymenttoincreaseaccordingto
classicaleconomists.
Answer: A
Diff:1
5) Involuntaryunemployment
A) occurswhenthewagerateisbelowtheequilibriumwagerate.
B) existswhenthereisanexcessquantityoflaborsupplied.
C) willincreaseasthewageratefalls.
D) existswhenthereisashortageoflabor.
Answer: B
Diff:1
6) IfashiftinaggregatedemandonlyaffectsrealGrossDomesticProduct(GDP),thenthe
short-runaggregatesupply(SRAS)curvemustbe
A) vertical. B) upwardsloping.
C) horizontal. D) downwardsloping.
Answer: C
Diff:1
7) TheKeynesianshort-runaggregatesupply(SRAS)curveis
A) upwardsloping. B) vertical.
Answer: C
Diff:1
8) Theabovefigurepresentstheviewoftheeconomyaccordingto
A) Keynesianeconomics. B) classicaleconomics.
C) microanalysis. D) Ricardianeconomics.
Answer: A
Diff:1
9) Refertotheabovefigure.SupposethecurrentaggregatedemandisrepresentedbyAD 2 .If
aggregatedemandfallstolineAD 3 ,then
A) thenewequilibriumwillbeatj.
B) thenewequilibriumwillbeatk.
C) thenewequilibriumrealGrossDomesticProduct(GDP)willbex.
D) anewpricelevelwillbeestablishedata.
Answer: C
Diff:1
10) Keynesarguedthat
I. Capitalismdidnotalwaysleadtofullemployment.
II. Nominalpricesweremoreimportantthanrelativeprices.
Answer: A
Diff:1
11) TheoriginalKeynesianeconomictheorystatesthat
A) theshort-runaggregatesupply(SRAS)curveisalwaysvertical.
B) manypriceswouldnotdeclineevenwhenaggregatedemanddecreases.
C) wagestendtofallmorequicklythantheoverallpricelevel.
D) theeconomynaturallyself-regulatessoastoreachfullemploymentquickly.
Answer: B
Diff:1
12) Keynesarguedthataneconomycouldbeinequilibriumwhentheeconomywas
A) operatingatmaximumpotentialcapacity.
B) operatingwithsomeunutilizedproductivecapacity.
C) tryingtooperateatsomeoutputlevelbeyonditspotentialcapacity.
D) operatingeitheratfullproductivecapacityoratlessthanfullcapacity.
Answer: D
Diff:1
13) Keynesandhisfollowersbelievedthat
A) capitalismwasoneeconomicsystemthatguaranteedfullemployment.
B) wagesandpricesintheshortrunwereflexible.
C) theeconomycouldnotoperateatanylevelofrealGrossDomesticProduct(GDP)lessthan
fullcapacity.
D) therewasnoguaranteethatacapitalisteconomywouldreachafullemployment
equilibrium.
Answer: D
Diff:1
14) AkeycomponentoftheKeynesianmodelisthat
A) pricesaresticky.
B) pricesareflexible.
C) wagesareflexible.
D) peoplearenotfooledbymoneyillusion.
Answer: A
Diff:1
15) AccordingtoKeynes,onceasystemattainsaneconomy -wideequilibrium,

A) theremayormaynotbeexcessproductivecapacity.
B) plannedconsumptionwillbezero.
C) plannedinvestmentwillbezero.
D) theeconomywillbeatfullproductivecapacity.
Answer: A
Diff:1
16) TheKeynesianportionoftheshort-runaggregatesupply(SRAS)curve
A) ishorizontal. B) isvertical.
C) slopesupward. D) slopesdownward.
Answer: A
Diff:1
17) ThesimpleKeynesianmodelassumesthat
A) grossprivatedomesticinvestmentexceedsnetinvestmentbythecapitalconsumption
allowance.
B) prices,especiallythepriceofwages,arestickydownward.
C) therewillneverbeanyexcesscapacityintheshortrun.
D) aggregatedemandwillalwaysequalaggregatesupply.
Answer: B
Diff:1
18) TheKeynesianportionoftheshort-runaggregatesupply(SRAS)curveimplies
A) anupwardslope. B) nopricelevelchanges.
C) adownwardslope. D) flexiblepricesandwages.
Answer: B
Diff:2
19) TheKeynesianshort-runaggregatesupply(SRAS)curve
A) showsthatrealGrossDomesticProduct(GDP)willincreaseonlyifthepricelevel
increases.
B) assumesafull-employmentlevelofrealGrossDomesticProduct(GDP).
C) ishorizontal.
D) doesnotreflectanychangesinnominalGrossDomesticProduct(GDP).
Answer: C
Diff:1
20) Inaneconomicdownturn,stickywagesandpricesreducetheeconomysspeedofadjustment
because
A) businessesareunabletoadjustquicklytochangesinaggregatedemand.
B) theycausedeflation.
C) hyperinflationwilllikelyoccur.
D) unionworkerswouldlikelyquitandlookforworkelsewhere.
Answer: A
Diff:2
21) Keynessuggestedthattheshort-runaggregatesupply(SRAS)curve
A) isvertical. B) ishorizontal.
C) slopesdownward. D) isnotarelevantconcept.
Answer: B
Diff:3
22) Keynesianeconomicspredictsthatifgovernmentpolicymakersdeemcurrentequilibriumreal
GrossDomesticProduct(GDP)tobetoolow,thenanappropriatepolicyactionwouldbeto
A) donothing,becausetheeconomyisself-adjusting.
B) raisegovernmentspending,therebyincreasingaggregatedemandandpushingupreal
GrossDomesticProduct(GDP)withlittleornoinflationaryconsequences.
C) increasetaxes,therebycausingaggregatedemandtoincreaseandinducingariseinreal
GrossDomesticProduct(GDP)withlittleornoinflationaryconsequences.
D) reducethemoneystock,therebycausingaggregatedemandtodecreaseandinducinga
riseinfallinthepricelevelthatgeneratesanincreaseintotalplannedexpenditures.
Answer: B
Diff:2
23) Theshort-runaggregatesupply(SRAS)curverepresentstherelationshipbetween
A) thepricelevelandtherealGrossDomesticProduct(GDP)withoutfulladjustmentorfull
information.
B) thepricelevelandtherealGrossDomesticProduct(GDP)withoutfulladjustmentbut
withfullinformation.
C) thepricelevelandthenominalGrossDomesticProduct(GDP).
D) thedecisionsofproducersandthedecisionsofconsumers.
Answer: A
Diff:1
24) Intheshortrun,anincreaseinthepricelevelinducesfirmstoexpandproductionbecause
A) pricesofinputsareheldconstant,sothehigherpricesforfirmsproductsimplythatitis
profitabletoexpandproduction.
B) eachfirmmustkeepitsproductionleveluptothelevelofitsrivals,andsomefirmswill
expandproductionasthepricelevelincreases.
C) higherpricesallowfirmstohiremoreinputsbyofferinghigherpricesforinputs,which
increasesproductivityandprofits.
D) theycanincreaseprofitsbyincreasingmaintenancecosts.
Answer: A
Diff:3
25) TherelationshipbetweenthepricelevelandtherealGrossDomesticProduct(GDP)without
fulladjustmentorfullinformationisrepresentedby
A) thelong-runaggregatesupplycurve.
B) theshort-runaggregatesupplycurve.
C) theaggregatedemandcurve.
D) thedistancebetweenthelong-runaggregatesupplycurveandtheshort-runaggregate
supplycurve.
Answer: B
Diff:1
26) AccordingtoKeynes,theclassicalmodelcouldnotexplain
A) arecessionordepression. B) periodsofrisingunemployment.
C) along-termeconomicdecline. D) periodsofrisinginterestrates.
Answer: C
Diff:1
27) InthesimpleKeynesianportionoftheupwardslopingshort -runaggregatesupplycurve,

A) equilibriumrealGDPisdemand-determined.
B) equilibriumrealGDPissupply-determined.
C) equilibriumrealGDPisneitherdeterminedbyaggregatesupplynorbyaggregate
demand.
D) equilibriumrealGDPisdeterminedbybothaggregatesupplyandaggregatedemand.
Answer: A
Diff:1
28) Theshort-runaggregatesupplycurveishorizontalwhen
A) pricesareinflexibleandtheeconomyisatfullemployment.
B) thereareunemployedresourcesandpricesdonotincreasewhenaggregatedemand
increases.
C) thereareunemployedresourcesandpricesdonotdecreasewhenaggregatesupply
increases.
D) therearenounemployedresourcesandpricesdonotincreasewhenaggregatedemandor
supplyincreases.
Answer: B
Diff:3
29) Refertotheabovefigure.Theclassicalaggregatesupplycurveisrepresentedby________and
theKeynesianshort-runaggregatesupplycurveisrepresentedby________.
A) curve2;curve1 B) curve2;curve3
C) curve3;curve4 D) curve2;curve4
Answer: D
Diff:2
30) RealGDPis________determinedintheclassicalmodeland________determinedinthe
Keynesianmodel.
A) supply;supply B) supply;demand
C) demand;supply D) demand;demand
Answer: B
Diff:2
31) IntheKeynesianmodel,tounderstandthedeterminationofincomeandemploymentitis
necessarytounderstand
A) howaggregatesupplyisdetermined.
B) howaggregatedemandisdetermined.
C) howlong-runaggregatesupplyisdetermined.
D) howinterestratesaredetermined.
Answer: B
Diff:2
32) AccordingtoKeynes,wagesareinflexiblebecause
A) oftheminimumwagesetbygovernment.
B) ofunionsandlong-termcontracts.
C) workersdonotbehaveintheirownself-interest.
D) theeconomyisneverinthelongrun.
Answer: B
Diff:1
A) Adecreaseinaggregatedemandwasnotpossibleaccordingtotheclassicaleconomistsbut
waspossibleaccordingtoKeynes.
B) Adecreaseinaggregatedemandhasnoshort-runeffectsaccordingtotheclassical
economistsbuthadsignificanteffectsaccordingtoKeynes.
C) ClassicaleconomistsbelievedrealGDPadjustedmorethanpriceswhenaggregate
demandfell,whileKeynesarguedthatpricesadjustedmorethanoutput.
D) Classicaleconomistsbelievedpriceadjustedmorethanoutputwhenaggregatedemand
fell,whileKeynesarguedrealGDPadjustedmorethanprices.
Answer: D
Diff:3
34) ThesimplifiedKeynesianmodel
A) holdsthepricelevelconstant.
B) holdsrealGDPconstant.
C) assumesinvestmentandsavingarealwaysequal.
D) assumesunemploymentisunrelatedtorealGDP.
Answer: A
Diff:1
35) AccordingtoKeynes,
A) theshort-runaggregatesupplycurveisvertical.
B) nominalwagesand/orpricesaresticky.
C) moneyillusiondoesnotexist.
D) marketsareperfectlycompetitive
Answer: B
Diff:1
36) TheapproachtounderstandingthedeterminationofrealGDPandthepricelevelthat
emphasizesincompleteadjustmentinthepricesofmanygoodsis
A) theclassicalmodel. B) theKeynesianmodel.
C) SaysLaw. D) theaggregatedemandmodel.
Answer: B
Diff:1
37) Toexplaintheexistenceofexcesscapacity,Keynesarguedthat
A) pricesandwagesareflexible,andeventuallymarketswouldgobacktoequilibrium.
B) thelongrunaveragecostcurveshouldnotoccuratthefullemploymentlevel.
C) theaggregatedemandcurvecanbemanipulatedbyadvertising.
D) pricesandwagesareinflexibleinthedownwarddirection.
Answer: D
Diff:1
38) Whichoftheofthefollowingisabasicdifferencebetweentheclassicalmodelandthe
KeynesianmodelinwhichtheKeynesianshort-runaggregatesupplycurveexists?
A) Theclassicalmodelassumesthatthelongrunaggregatesupplycurveisvertical,whilethe
Keynesianmodelassumesthelongrunaggregatesupplycurveishorizontal.
B) Theclassicalmodelassumesthatthepositionofthelongrunaggregatesupplycurveis
determinedbyfullemployment,whiletheKeynesianmodelassumesthatthelongrun
aggregatesupplycurvewillbetotheleftoffullemployment.
C) TheclassicalmodelassumesthatthelevelofrealGDPissupplydetermined,whilethe
Keynesianmodelassumesthatitisdemanddetermined.
D) TheclassicalmodelusesrealGDP,whiletheKeynesianmodelusesnominalGDP.
Answer: C
Diff:2
39) TheKeynesianshort-runaggregatesupplycurveishorizontalbecause
A) itrepresentsthefullemploymentlevelofrealGDP.
B) itreflectstheabsenceofmoneyillusion.
C) itreflectswageandpriceinflexibility.
D) itrepresentsSayslaw.
Answer: C
Diff:1
40) IntheKeynesianmodelinwhichtheKeynesianshort-runaggregatesupplycurveexists,
A) theshort-runaggregatesupplycurvedeterminesrealGDP.
B) theaggregatedemandcurvedeterminesthepricelevel.
C) unemploymentcannotpersistforlongperiodsoftime.
D) aggregatedemanddeterminesrealGDPperyear.
Answer: D
Diff:1
41) Q:Howmanyeconomistsdoesittaketochangealightbulb?
A:All.Becausethenyouwillgenerateemployment,moreconsumption,movingtheaggregate
demandcurvetotheright.
Thisjokerepresentstheviewof
A) classicaleconomists.
B) Keynesianeconomists.
C) economistswhocontendthatmoneyillusionneveroccurs.
D) economistswhoconcludethatwagesandpricesareveryflexible.
Answer: B
Diff:3
A) Theclassicalmodelcannotexplainperiodsofprolongedunemployment.
B) TheKeynesianmodelcannotexplainperiodsofprolongedunemployment.
C) TheKeynesianmodelassumescompleteflexibilityofwagesandprices.
D) TheKeynesianmodelshowsthatthelevelofrealGDPissupply-determined.
Answer: A
Diff:3
43) Keynesarguedthatbecauseofstickypricesandwages,
A) theshort-runaggregatesupplycurvecouldbehorizontal.
B) theshort-runaggregatesupplycurveisprobablyvertical.
C) thelong-runaggregatesupplycurveslopesdownward.
D) theaggregatedemandcurveisvertical.
Answer: A
Diff:2
44) IntheKeynesianmodelwhichincludestheKeynesianshort-runaggregatesupplycurve,
A) anincreaseinaggregatedemandwouldcausesthepriceleveltorise,butdoesnotchange
thelevelofrealGDP.
B) anincreaseinaggregatedemandcausesrealGDPtorisewithoutchangingthepricelevel.
C) anincreaseinaggregatedemandchangesneitherthepricelevelnorthelevelofrealGDP.
D) anincreaseinaggregatedemandcausesrealGDPandthepriceleveltodecrease.
Answer: B
Diff:2
45) Iftheeconomyisoperatingatapointatwhichshort-runaggregatesupplyishorizontal,then
A) realGDPcannotexpand.
B) realGDPcannotcontract.
C) increasesinaggregatedemanddonotincreasethepricelevel.
D) thenincreasesinaggregatedemanddonotincreaserealGDP.
Answer: C
Diff:3
46) WhyispersistentunemploymentapossibilityintheKeynesianmodelbutNOTintheclassical
model?
A) TheKeynesianmodelassumesthatpeopleworkformotivesotherthanthoseofearning
anincomeforthemselvesandsupportingafamily.
B) TheKeynesianmodelassumesthatnominalwagesareinflexibledownward.
C) TheKeynesianmodelassumesthatthelevelofrealGDPisinflexible.
D) TheKeynesianmodelassumesthatworkerscanlosetheirjobstoforeigncompetition
duringeconomicdownturns.
Answer: B
Diff:3
47) TheKeynesianshort-runaggregatesupplycurve
A) ishorizontal.
B) isvertical.
C) reflectsthefactthatrealGDPissupply-determined.
D) reflectsthefactthatrealGDPdoesnotvarywithchangesinaggregatedemand.
Answer: A
Diff:2
A) TheshapeoftheKeynesianshort-runaggregatesupplycurveisbasedontheconclusion
thatdomesticworkersareharmedbyimports.
B) TheshapeoftheKeynesianshort-runaggregatesupplycurveisbasedontheconclusion
thatthereisnocorrelationbetweenthelevelofrealGDPandtheemploymentlevel.
C) TheshapeoftheKeynesianshort-runaggregatesupplycurveisbasedontheconclusion
thatincreasesinaggregatedemandcanboostoutputintheshortterm.
D) TheshapeoftheKeynesianshort-runaggregatesupplycurveisbasedontheconclusion
thatincreasesinaggregatedemandwillincreasethepricelevel,butwillleaverealGDP
unaffectedintheshortterm.
Answer: C
Diff:3
A) TheactualbehaviorofpricesandrealGDPduringthedecadeofthe1930sisconsistent
withtheclassicalmodel.
B) TheactualbehaviorofpricesandrealGDPduringthedecadeofthe1930sisconsistent
withtheKeynesianmodel.
C) TheactualbehaviorofpricesandrealGDPduringthedecadeofthe1930sisconsistent
withtheideathatincreasesinaggregatedemandwillincreasethepricelevelbutwillleave
realGDPunchanged.
D) TheactualbehaviorofpricesandrealGDPduringthedecadeofthe1930sisconsistent
withaverticalshort-runaggregatesupplycurve.
Answer: B
Diff:2
50) Theshort-runaggregatesupplycurveishorizontalif
A) resourceswerefullyutilized.
B) thereareunutilizedresourcesintheeconomy.
C) resourcesareperfectlyadaptablebetweenproductionprocesses.
D) therearehighinflationrates.
Answer: B
Diff:2
51) TheKeynesiancontentionthattheshort-runaggregatesupplycurveishorizontalisbasedon
theassumptionthatthereare
A) stickyprices. B) flexibleprices.
C) realprices. D) upwardslopingprices.
Answer: A
Diff:2
52) Theshort-runaggregatesupplycurveisarelationshipbetween
A) unemploymentandrealGDP. B) inflationandtime.
C) realGDPandpricelevel. D) capitalgoodsandconsumergoods.
Answer: C
Diff:1
53) TheKeynesianshort-runaggregatesupplycurveisdemonstratedgraphicallyasa
A) verticalline. B) horizontalline.
C) upwardslopingcurve. D) downwardslopingcurve.
Answer: B
Diff:2
54) Keynesianeconomistsarguethat
A) equilibriumrealGDPisdemand-determined.
B) equilibriumrealGDPissupply-determined.
C) equilibriumrealGDPcanbereachedonlyinatheoreticaleconomy.
D) reachingequilibriumrealGDPalwaysresultsininflation.
Answer: A
Diff:2
A) pricesandwagesareflexible.
B) pricesandwagesmustbesetbygovernment.
C) pricesandwagesaresubjecttodownwardstickiness.
D) pricesandwagesdependonthedecisionsbytheFederalReserveBank.
Answer: C
Diff:2
A) thenaturalrateofunemploymentisbelowtheactualrate.
B) unemploymentisalong-lastingphenomenonintheeconomy.
C) unemploymentonlyexistsduringperiodsofwarintheeconomy.
D) thenaturalrateofunemploymentiszero.
Answer: B
Diff:1
57) JohnMaynardKeynesdevelopedhiseconomictheoriesinthe
A) 1870s. B) 1900s. C) 1930s. D) 1960s.
Answer: C
Diff:1
58) Refertotheabovefigure.WhichofthegraphsisconsistentwiththeKeynesianshort -run

aggregatesupplycurve?
A) GraphA B) GraphB C) GraphC D) GraphD
Answer: B
Diff:2
59) Refertotheabovefigure.Whichofthegraphsisconsistentwiththelong-runaggregatesupply
curve?
A) GraphA B) GraphB C) GraphC D) GraphD
Answer: A
Diff:2
60) WhichofthefollowingwillNOTshifttheKeynesianshort-runaggregatesupplycurve?
A) achangeintechnology B) achangeinprofitexpectations
C) achangeininputprices D) achangeinthepricelevel
Answer: D
Diff:1
61) WhichofthefollowingwillshifttheKeynesianshort-runaggregatesupplycurvedownward
andtotheright?
A) ariseinthepricelevel B) afallinthepricelevel
C) adecreaseininputcosts D) anincreaseininputcosts
Answer: C
Diff:2
62) Thehorizontalshort-runaggregatesupplycurve
A) assumesthatwagesandallotherinputpricesareconstant.
B) showsthatrealGDPcanbeincreasedonlywhenpricesincrease.
C) assumesthatthereisfullemploymentintheeconomy.
D) assumesthatopportunitycostisconstant.
Answer: A
Diff:1
63) AccordingtoKeynes,thestickinessofwageratescouldbestbeexplainedby
A) minimumwagelaws. B) unionsandlong-termlaborcontracts.
C) short-termlaborcontracts. D) governmentinterference.
Answer: B
Diff:1
64) AccordingtoKeynesianeconomics,ifthereareunutilizedresourcesintheeconomyand
aggregatedemandincreases,
A) realGDPwillriseandpricelevelwillremainconstant.
B) realGDPwillfallandpricelevelwillremainconstant.
C) realGDPwillriseandpricelevelwillrise.
D) realGDPwillriseandpricelevelwillfall.
Answer: A
Diff:1
65) AccordingtoKeynesianeconomics,ifthereareunutilizedresourcesintheeconomyand
aggregatedemanddecreases,
A) realGDPwillriseandpricelevelwillremainconstant.
B) realGDPwillfallandpricelevelwillremainconstant.
C) realGDPwillriseandpricelevelwillrise.
D) realGDPwillriseandpricelevelwillfall.
Answer: B
Diff:1
66) Keynesianeconomistswouldlikelyarguethattheclassicalmodeliswhichofthefollowing?
A) along-runtheory B) ashort-runtheory
C) bothalong-runandshort-runtheory D) astickypricetheory
Answer: A
Diff:2
67) Someeconomistsbelievethatapositiveaggregatedemandshocktoaneconomywithlarge
amountsofexcesscapacityandunemploymentdoesnotnecessarilycauseanincreaseinprices.
Economistswhoadheretothisbeliefarefollowersof
A) classicaleconomics. B) Sayslawsofeconomics.
C) Keynesianeconomics. D) supply-sideeconomics.
Answer: C
Diff:1
68) Usingagraph,analyzetheGreatDepressionfromaKeynesianperspective.Whathappenedto
unemployment?
Answer: Inthebelowfigure,theequilibriumbeforethedepressionwasatapricelevelof100and
realGDPof$1trillion.Thedepressionwascausedbyareductioninaggregatedemandto
AD1933.Becausepriceswerenotflexible,realGDPfellto$700billion.Thereduced
outputwouldbeassociatedwithalargeincreaseinunemployment.
Diff:3
69) WhatisthemajordifferencebetweentheclassicalmodelandtheKeynesianmodel?Explain.
Answer: Themajordifferenceistheshapeoftheaggregatesupplycurve.Theclassicalviewisthat
itisvertical,whiletheKeynesianviewisthatitishorizontal,oratleastalmostso.The
differencesinshapeareduetodifferencesinassumptionsabouttheflexibilityofprices.
Classicaleconomistsassumedpricesandwageswereflexibleandwouldquicklyadjustto
bringaboutanewfull-employmentequilibrium,whiletheKeynesianmodelassumes
pricesarenotflexible.
Diff:3
70) Forseveralyears,theU.S.unemploymentratehasbeenbelowtheEuropeanunemployment
rate.OfferaKeynesianexplanationforthis.
Answer: TheaggregatesupplycurveinEuropeisclosertohorizontalthanisthecaseintheUnited
States.ThelabormarketislessflexibleinEuropeduetohigherunemploymentbenefits
thatreducetheincentivetowork,andduetohighercoststofirmsforhiringworkers.
Diff:3
71) Whatshapedidtheshort-runaggregatesupplycurvehaveduringthe1930s,accordingto
Keynes?Explain.
Answer: Keynesarguedtheshort-runaggregatesupplycurvewashorizontalduringthe1930s.
Therewassubstantialunemploymentandexcesscapacityduringthedepression,sothat
shiftsinaggregatedemandwouldaffecttotaloutputwithoutaffectingthepricelevel.
Keynesarguedthatpricesandwageswereinflexible,especiallydownward,andcould
notbereliedupontobringaboutafull-employmentequilibrium.
Diff:2
72) AccordingtoKeynes,theeconomyisessentiallyaself-regulatingsystem.Doyouagreeor
disagree?Why?
Answer: Disagree.Theinflexibilityofpricesmeantthatchangesinaggregatedemandwouldaffect
outputandemploymentratherthanthepricelevel.Involuntaryunemploymentwas
likelywhenaggregatedemanddecreasedbecausethewagelevelwouldnotadjustto
bringaboutanew,full-employmentequilibrium.Hence,theeconomyisnota
self-regulatingsystemaccordingtoKeynes.
Diff:3
11.3OutputDeterminationUsingAggregateDemandandAggregateSupply:Fixed
versusChangingPriceLevelsintheShortRun
1) Whatistheunderlyingassumptionoftheoriginal,simplifiedKeynesianmodel?
A) Therelevantrangeoftheshort-runaggregatesupplycurve(SRAS)isvertical.
B) Therelevantrangeoftheaggregatesupplycurve(AS)isvertical.
C) Therelevantrangeoftheshort-runaggregatesupplycurve(SRAS)ishorizontal.
D) Therelevantrangeofthelong-runaggregatesupplycurve(LRAS)ishorizontal.
Answer: C
Diff:1
Topic: 11.3OutputDeterminationUsingAggregateDemandandAggregateSupply:FixedversusChangingPrice
LevelsintheShortRun
2) Howdoestheoriginal,simplifiedKeynesianmodelcomparewithmodernKeynesiananalysis?
A) TheoriginalKeynesianmodelassumedpriceflexibilitywhereasthemodernanalysisdoes
not.
B) Inbothcases,theshort-runaggregatesupplycurve(SRAS)ishorizontal.
C) ModernanalysisshowsanupwardslopingSRAStoreflectsomepriceflexibility.The
originalKeynesianmodelsSRASishorizontalandassumesstickyprices.
D) Alloftheabove.
Answer: C
Diff:2
LevelsintheShortRun
3) TheKeynesianshort-runaggregatesupplycurveinthesimplifiedKeynesianmodelis
unrealisticbecause
A) averticalcurvedoesnotmakeeconomicsense.
B) pricesandwageswillneverdecrease.
C) theclassicalmodelisbetterinexplaininghowtheeconomyoperates.
D) somepriceadjustmentsdotakeplaceintheshortrun.
Answer: D
Diff:1
LevelsintheShortRun
4) Thehorizontalportionoftheshort-runaggregatesupplycurveinwhichthereisexcessive
unemploymentandunusedcapacityintheeconomyis
A) Sayslaw.
B) theclassicalshort-runaggregatesupplycurve.
C) theKeynesianshort-runaggregatesupplycurve.
D) existswhenpricesareflexible.
Answer: C
Diff:1
LevelsintheShortRun
5) Theshort-runaggregatesupplycurveinmodernKeynesiananalysisis
Answer: C
Diff:1
LevelsintheShortRun
6) Theshort-runaggregatesupplycurveispositivelyslopedbecause
A) realinterestratesratherthannominalratesareused.
B) somepriceadjustmentstakeplaceintheshort-run.
C) nopriceadjustmentstakeplaceintheshort-run.
D) completepriceadjustmentstakeplaceintheshort-run.
Answer: B
Diff:1
LevelsintheShortRun
7) Theshort-runaggregatesupplycurveinmodernKeynesiananalysisrepresentstherelationship
between
A) therealoutputofgoodsandservicesintheeconomyandthepricelevel.
B) therealoutputofgoodsandservicesintheeconomyandthepricelevelwhenpeoplehave
fullyadjustedtheirbehavior.
C) therealoutputofgoodsandservicesintheeconomyandthepricelevelwhenpeoplehave
notfullyadjustedtheirbehavior.
D) thenominaloutputofgoodsandservicesandtherealoutputofgoodsandservices.
Answer: C
Diff:1
LevelsintheShortRun
8) Alongashort-runaggregatesupplycurve,whichofthefollowingis(are)heldconstant?
A) realGDP B) aggregatedemand
C) inputprices. D) profits
Answer: C
Diff:1
LevelsintheShortRun
9) Thefull-employmentrateofoutputcan
A) besurpassedinthelongrunonlyifinputpricesareflexible.
B) notbesurpassedineithertheshortrunorthelongrun.
C) besurpassedonlywhenfirmsarenotyetproducingatfullcapacity.
D) besurpassedonlyintheshortrun.
Answer: D
Diff:2
LevelsintheShortRun
10) Intheshortrun,realGDPcanincreasebeyondalevelconsistentwiththelong -rungrowthpath

if
A) existingcapitalandlaborareusedmoreintensely.
B) thepriceleveldecreasesaccordingly.
C) wemeasureinnominaltermsinsteadofrealterms.
D) thereisanincreaseinmarginaltaxrates.
Answer: A
Diff:1
LevelsintheShortRun
11) WhichofthefollowingisNOTareasonwhyrealGDPcanbeexpandedbeyondalevel
consistentwithitslong-rungrowthpathinmodernKeynesiananalysis?
A) Intheshortrun,existingworkerscanworkmorehours.
B) Pricesandwagesareflexible,allowingforneededadjustments.
C) Theexistingcapitalstockcanbeusedmoreintensively.
D) Higherpricesinducefirmstohiremoreworkers.
Answer: B
Diff:1
LevelsintheShortRun
12) Ifshort-runaggregatesupplyisupwardsloping,theassumptionisthat
A) pricesareperfectlysticky. B) pricesaresetbygovernmentmandate.
C) pricesareconstant. D) pricesadjustgradually.
Answer: D
Diff:2
LevelsintheShortRun
13) Anupwardslopingshort-runaggregatesupplycurvesuggeststhat
A) realGDPisdeterminedbyaggregatesupply.
B) pricesandwagesarecompletelyinflexible.
C) pricesandwagesarecompletelyflexible.
D) pricesandwagesadjustinparttoshort-rundemandchanges.
Answer: D
Diff:2
LevelsintheShortRun
14) InthemodernKeynesianmodel,overmuchofitsrangetheshort-runaggregatesupply(SRAS)
curveis
Answer: C
Diff:1
LevelsintheShortRun
15) Theshort-runaggregatesupplycurveinmodernKeynesiananalysis
A) isahorizontallinethesameasintheKeynesianmodel.
B) isaverticallinethesameasintheclassicalmodel.
C) isanupwardslopingcurve.
D) isanegativelyslopedcurve.
Answer: C
Diff:1
LevelsintheShortRun
16) Thereisadistinctionbetweenthelong-runaggregatesupply(LRAS)curveandtheshort-run
aggregatesupply(SRAS)curve.Inthelongrun,
A) technologyisfixed,butnotintheshortrun.
B) thepricelevelisconstantinthelongrun,butfluctuatesintheshortrun.
C) theaggregatesupplycurveishorizontal,whileintheshortrunitisupwardsloping.
D) alladjustmentstochangesinthepricelevelhavebeenmade,butintheshortrunall
changesinthepriceleveldonotoccur.
Answer: D
Diff:2
LevelsintheShortRun
17) Ifthepricelevelkeptincreasing,theshort-runaggregatesupply(SRAS)curvewouldget
steeperbecause
A) alltheunemployedwouldeventuallybehired.
B) therearelimitstohowlongworkerscanworklonghoursandcapitalcangowithout
propermaintenance.
C) therateatwhichcapacitycanbeexpandedincreasesindefinitely.
D) thelong-runaggregatesupplycurveishorizontal.
Answer: B
Diff:3
LevelsintheShortRun
18) Intheshortrun,ifthepricelevelrises,thentheoveralleconomycantemporarilyproduce
beyonditsnominalcapacity.Onereasonforthisisthat
A) workerscanbeswitchedfromcountedtouncountedproduction.
B) existingcapitalequipmentcanbeusedmoreintensively.
C) wageratesrisealmostsimultaneouslywiththepricelevel.
D) theunemploymentrateusuallyrisesdramaticallyalongwiththepricelevel.
Answer: B
Diff:1
LevelsintheShortRun
19) Thelong-runaggregatesupplycurveisverticalat$10trillion,buttheshort-runaggregate
supplycurveintersectstheaggregatedemandcurveat$12trillion.Fromthis,weknowthat
A) theeconomyisoperatingbelowfullcapacityintheshortrun,andwillhavetoadjustby
hiringmoreworkers,thusreducingunemployment.
B) thepricelevelistoohigh.Theonlywaylong-runequilibriumcanberestoredistolower
thepricelevel.
C) adjustmentswillhavetooccursothatthelong -runaggregatesupplyequals$12trillion.
D) adjustmentswillhavetooccursothattheshort-runaggregatesupplyintersectsthe
aggregatedemandcurveat$10trillion.
Answer: D
Diff:3
LevelsintheShortRun
20) Identifythe3curvesintheabovefigure.
A) (1)islong-runaggregatesupply,(2)isshort-runaggregatesupply,(3)isaggregate
demand.
B) (1)isaggregatedemand,(2)isshort-runaggregatesupply,(3)islong-runaggregate
supply.
C) (1)isshort-runaggregatesupply,(2)islong-runaggregatesupply,(3)isaggregate
demand.
D) (1)islong-runaggregatesupply,(2)isaggregatedemand,(3)isshort -runaggregate
supply.
Answer: A
Diff:1
LevelsintheShortRun
21) Whichpointorpointsontheabovefigureillustrateashort-runequilibrium?
A) PointA B) PointB
C) PointC D) PointsAandC
Answer: B
Diff:2
LevelsintheShortRun
22) Accordingtotheabovefigure,whatwillthepricelevelbeinthenewlong-runequilibrium?
A) 115 B) 110 C) 100 D) Lessthan100
Answer: A
Diff:2
LevelsintheShortRun
23) Whatistheshapeofthemodernshort-runaggregatesupply(SRAS)curve?Why?
Answer: Theshort-runaggregatesupplycurveisinitiallyhorizontal,thenupwardsloping.Ifthe
pricelevelincreasesintheshortrun,somecostsforfirmsstayconstant.Thehigher
productpriceleadstohigherprofits,andthefirmsexpandproduction.Hence,aggregate
outputcanincreaseintheshortrun.
Diff:2
LevelsintheShortRun
24) Comparetheeffectsofanincreaseinaggregatedemandwhenthepricelevelisfixedversus
whenitcanchange.
Answer:
Theabovefigureshowstheeffects.AnincreaseinaggregatedemandfromAD 1 toAD2
causesrealGrossDomesticProduct(GDP)toincrease,butthesizeoftheincreaseis
greaterforAS1 thanforAS2 .Whenthepricelevelcanchange,someoftheimpactofthe
increaseinaggregatedemandfallsonthepricelevelinsteadofoutput,whereasallofthe
impactisonoutputwhenthepricelevelisfixed.
Diff:2
LevelsintheShortRun
25) Supposetheeconomyinthediagrambelowisinlong-runequilibrium.Ifgovernmentspending
decreasesandcausesamovementfrompointAtopointBinthediagrambelow,whatarethe
short-runeffects?Explainfully.
Answer:
Intheabovefigure,pointAistheoriginalequilibrium,withapricelevelof100andtotal
plannedexpendituresonfinalgoodsandservicesequalto$14trillion.Adecreasein
governmentspendingcausestheaggregatedemandcurvetoshifttotheleft.Intheshort
run,totalplannedexpendituresandequilibriumrealGrossDomesticProduct(GDP)falls
to$13.5trillion.Thepricelevelfallsto90.
Diff:3
LevelsintheShortRun
11.4ShiftsintheAggregateSupplyCurve
1) Economicgrowthduetolaborforceexpansionorcapitalinvestmentswillresultin
I. Aleftwardshiftofshort-runaggregatesupply.
II. Arightwardshiftinlong-runaggregatesupply.
Answer: B
Diff:1
Topic: 11.4ShiftsintheAggregateSupplyCurve
2) Whichofthefollowingwillcauseanincreaseinaggregatesupply?
A) Decreasedcompetition B) Anincreaseinthepricelevel
C) Anincreaseinmarginaltaxrates D) Adecreaseininputprices
Answer: D
Diff:1
3) Refertotheabovefigure.AssumethatBisthecurrentlong-runaggregatesupply(LRAS)curve
andthatEisthecurrentshort-runaggregatesupply(SRAS)curve.Ifanewdiscoveryoflarge
oilfieldsinFloridaledtoanincreaseinthenationsproductivecapacities,thenwecouldexpect
theLRAScurveandtheSRAScurveto
A) remainBandE. B) movetoAandD.
C) movetoCandF. D) movetoAandF.
Answer: C
Diff:1
4) Refertotheabovefigure.AssumethatBisthecurrentlong-runaggregatesupply(LRAS)curve
andEisthecurrentshort-runaggregatesupply(SRAS)curve.Ifa90 -dayembargoofoilfrom
theMiddleEasttotheUnitedStateswereannounced,andifafterthat90 -dayperiodoilprices
wereexpectedtoreturntonormalpre-embargoprices,thenyouwouldexpect
A) theLRASandtheSRAStoremainatBandE,respectively.
B) theLRAStoremainatB,buttheSRAStoshifttoD.
C) theLRAStoremainatB,buttheSRAStoshifttoF.
D) theLRAStoshifttoC,andtheSRAStoshifttoF.
Answer: B
Diff:1
5) WhichofthefollowingisNOTaneventthatcausesBOTHtheshort-runaggregatesupply
(SRAS)curveandthelong-runaggregatesupply(LRAS)curvetoshift?
A) Achangeinaneconomysendowmentsofthefactorsofproduction
B) Technologicalchanges
C) Achangeinaneconomyslaborsupply
D) Atemporarychangeinthepriceofakeyinput
Answer: D
Diff:1
6) WhichofthefollowingwillNOTshifttheshort-runaggregatesupply(SRAS)curve?
A) Achangeinthewagerate
B) Technologicalprogress
C) Areductioninthepriceofarawmaterial
D) Achangeinthepricelevel
Answer: D
Diff:1
7) Allofthefollowingwillshifttheshort-runaggregatesupply(SRAS)curveEXCEPT
A) achangeinthepricelevel.
B) achangeinthepriceoflabor.
C) achangeinthepriceofaneededrawmaterial.
D) technologicalprogress.
Answer: A
Diff:2
8) AsrealGDPperyearincreasesalongtheshort-runaggregatesupply(SRAS)curve,theSRAS
curve
A) becomesincreasinglysteep. B) beginstolevelout.
C) shiftsinward. D) doesnotchange.
Answer: A
Diff:2
9) Boththelong-runandshort-runaggregatesupplycurveswillshiftwhen
A) thegovernmentincreasesdefensespending.
B) aneventoccurswhichisexpectedtolastonlyashortperiodoftime.
C) theyarebothupwardsloping.
D) theendowmentsofthefactorsofproductionchange.
Answer: D
Diff:1
10) Whichofthefollowingwouldincreaseaggregatesupply?
A) increasedtrainingandeducation B) areductionininputprices
C) adiscoveryofnewrawmaterials D) alloftheabove
Answer: D
Diff:1
11) Thediscoveryofnewironorefieldswillcause
A) thelong-runaggregatesupplycurvetoshifttotherightandtheshort-runaggregate
supplycurvetoshifttotheleft.
B) thelong-runaggregatesupplycurvetoshifttotheright,butnottheshort -runaggregate
supply.
C) theshort-runaggregatesupplycurvetoshifttotheright,butnotthelong -runaggregate
supplycurve.
D) boththelong-runandtheshort-runaggregatesupplycurvestoshifttotheright.
Answer: D
Diff:2
12) AmajorhurricanecausesproductionproblemsinGulfCoastregionoftheUnitedStates.This
wouldcause
A) theshort-runaggregatesupplycurvetoshifttotheleft,buttherewouldbenoeffecton
thelong-runaggregatesupplycurve.
B) theshort-runaggregatesupplycurvetoshifttotheleft,andthelong-runaggregate
supplycurvewouldshifttotheright.
C) boththeshort-runandthelong-runaggregatesupplycurvestoshifttotherightinequal
amounts.
D) boththeshort-runandthelong-runaggregatesupplycurvestoshifttotheleft,butthe
long-runaggregatesupplycurvewouldshiftmorethantheshort-runcurve.
Answer: A
Diff:2
13) Theshort-runaggregatesupplycurvewouldshiftandthelong-runaggregatesupplycurve
wouldremainfixedif
A) therewasatemporaryshocktoaggregatedemand.
B) therewasatemporaryshockthatinfluencedthesupplyside.
C) therewasapermanentincreaseinaggregatedemandalongwithapermanentdecreasein
aggregatesupply.
D) therewasapermanentincreaseinaggregatedemand.
Answer: B
Diff:1
14) Theshort-runaggregatesupplycurvewouldshiftandthelong-runaggregatesupplycurve
wouldremainfixedif
A) transportationworkerswentonstrikeforamonth.
B) therewasanincreaseinimmigration.
C) theretirementageincreasedbytwoyears.
D) toughnewenvironmentallawswerepassed.
Answer: A
Diff:2
15) Areductioninnominalwageswillcausewhichofthefollowing?
A) amovementalongtheshort-runaggregatesupplycurve
B) ashiftofboththeshort-runandlong-runaggregatesupplycurves
C) arightwardshiftintheshort-runaggregatesupplycurve
D) aleftwardshiftintheshort-runaggregatesupplycurvetoshifttotheleft
Answer: C
Diff:2
16) Apermanentreductionininternationaltradebarrierswould
A) decreaselong-runaggregatesupply. B) increaselong-runaggregatesupply.
C) decreaseaggregatedemand. D) increaseaggregatedemand.
Answer: B
Diff:1
17) Ashort-livedincreaseinoilpricescausedbydestructionofoil-producingandoil-refining
facilitiesbyalargehurricanewill
A) shifttheSRAScurvetotheright. B) shifttheLRAScurvetotheright.
C) shifttheSRAScurvetotheleft. D) shifttheADcurvetotheright.
Answer: C
Diff:2
18) IfthereisachangeintheU.S.endowmentoffactorsofproduction,thentherewouldbe
A) ashiftinjustLRAS. B) ashiftinbothLRASandSRAS.
C) shiftsinjustSRAS. D) amovementalongtheSRAScurve.
Answer: B
Diff:2
19) Allitemsbelowwilldecreaseshort-runaggregatesupplyEXCEPT
A) adecreaseinthemarginaltaxrates. B) anincreaseinthepricesofinputs.
C) adecreaseintrainingandeducation. D) adecreaseinlaborsupply.
Answer: A
Diff:1
20) Whichofthefollowingdecreasesaggregatesupply?
A) discoveriesofnewrawmaterials B) anincreaseincompetition
C) anincreaseintrainingandeducation D) adecreaseinlaborsupply
Answer: D
Diff:2
21) AtemporaryembargoonoilfromtheMiddleEastgoingintotheUnitedStateswould
A) shiftboththeshort-runandlong-runaggregatesupplycurvestotheleft.
B) shiftonlythelong-runaggregatesupplycurvetotheleft.
C) shiftthelong-runaggregatesupplycurvetotheright.
D) shiftonlytheshort-runaggregatesupplycurvetotheleft.
Answer: D
Diff:2
22) Anewdiscoveryoflargevolumesofpreviouslyunknowndepositsofnaturalgasin
Pennsylvaniawould
A) shifttheshort-runandlong-runaggregatesupplycurvestotheright.
B) shiftonlytheshort-runaggregatesupplycurvetotheright.
C) shiftonlythelong-runaggregatesupplycurvetotheright.
D) notaffecteithertheshort-runorlong-runaggregatesupplycurves.
Answer: A
Diff:2
23) Consideranationinwhichmostworkersareunionized.Ifallthenationsunionsbandtogether
andsucceedinboostingwagesestablishedbylong-termlaborcontracts,then
A) thereisaleftwardshiftinjustLRAS.
B) thereisaleftwardshiftinbothLRASandSRAS.
C) thereisarightwardshiftinjustSRAS.
D) thereisarightwardmovementalongtheSRAScurve.
Answer: B
Diff:2
24) AllofthefollowingwillcausetheaggregatesupplycurvetoshifttotherightEXCEPT
A) discoveriesofrawmaterials.
B) areductionininputprices.
C) anincreaseinmarginaltaxrates.
D) areductionininternationaltradebarriers.
Answer: C
Diff:2
25) Atemporaryincreaseinthepriceofoilwould
A) increasebothshort-runandlong-runaggregatesupply.
B) increaseshort-runaggregatesupplyanddecreaselong-runaggregatesupply.
C) decreaseshort-runaggregatesupplyandleavelong-runaggregatesupplyunchanged.
D) decreasebothshort-runandlong-runaggregatesupply.
Answer: C
Diff:2
11.5ConsequencesofChangesinAggregateDemand
1) Refertotheabovefigure.AnincreaseinaggregatedemandbetweenrealGrossDomestic
Product(GDP)levelsY0 andY1
A) wouldmostlikelyresultinsomeinflation.
B) wouldnotincreaseoutputsincetheeconomyisalreadyworkingatfullcapacity.
C) wouldhavenoeffectonthepricelevel.
D) wouldcausepricelevelstofall.
Answer: A
Diff:2
Topic: 11.5ConsequencesofChangesinAggregateDemand
2) Refertotheabovefigure.AnincreaseinaggregatedemandbeyondrealGrossDomestic
Product(GDP)levelY1 wouldresultin
A) higherrealGDPbutnotahigherpricelevel.
B) alowerpricelevelbutnochangeinrealGDP.
C) ahigherpricelevelbutnochangeinrealGDP.
D) alowerpricelevelandanincreasesinrealGDP.
Answer: C
Diff:1
3) ThegapthatexistswhenequilibriumrealGrossDomesticProduct(GDP)isgreaterthanfull
employmentrealGrossDomesticProduct(GDP)iscalleda(n)
A) employmentgap. B) inflationarygap.
C) recessionarygap. D) demandgap.
Answer: B
Diff:1
4) EconomicgrowthwillNOTresultindeflationifaggregatedemandshifts
A) outwardtotherightatthesamespeedasaggregatesupply.
B) inwardtotheleftatthesamespeedasaggregatesupply.
C) outwardtotherightasaggregatesupplyshiftsinwardtotheleft.
D) inwardtotheleftasaggregatesupplyshiftsoutwardtotheright.
Answer: A
Diff:1
5) Anunexpectedeventthatcausestheaggregatedemandcurvetoshiftinwardoroutwardisan
A) aggregatedemandshock. B) aggregatesupplyshock.
C) aggregatesupplyincrease. D) aggregatesupplydecrease.
Answer: A
Diff:1
6) Iftheeconomyisnearfullcapacity,theeffectofanegativeaggregatedemandshockisto
A) increasethelevelofaggregatedemand.
B) causethepriceleveltofall.
C) increasethefirmscostofproducingateverylevelofoutput.
D) increasethelevelofemployment.
Answer: B
Diff:2
7) Onepossibleresultofafallinaggregatedemandcoupledwithastableshort -runaggregate
supplyis
A) arecession. B) anincreaseinemploymentlevels.
C) aneconomicexpansion. D) ariseinthestockmarket.
Answer: A
Diff:1
8) IfequilibriumlevelofrealGrossDomesticProduct(GDP)islessthanthefull-employmentreal
GrossDomesticProduct(GDP)consistentwiththepositionoftheeconomyslong-run
aggregatesupply(LRAS)curve,thenthedifferencebetweenfull -employmentrealGross
DomesticProduct(GDP)andcurrentequilibriumrealGrossDomesticProduct(GDP)is
A) anaggregatedemandshock. B) anaggregatesupplyshock.
C) arecessionarygap. D) aninflationarygap.
Answer: C
Diff:1
9) Intheabovefigure,theinflationarygapcancorrectlybeidentifiedas
A) thedifferencebetween125and120.
B) thedifferencebetween12.2trillionand12trillion.
C) LRASminusSRAS.
D) AD1 .
Answer: B
Diff:1
10) Intheabovefigure,anincreaseinaggregatedemandhasresultedin
A) adeclineinthepricelevel. B) economicgrowth.
C) aninflationarygap. D) arecessionarygap.
Answer: C
Diff:1
11) ThereasonthatitispossiblefortheeconomyintheabovefiguretobeatE 2 ratherthanatE 1 is

that
A) inthelongrunthereisalwayslessthanfullemployment.
B) intheshortruntheeconomycanproducemorethanitcaninalong -runfull-adjustment
situation.
C) ADalwaysshiftsoutwardandnevershiftsinward.
D) theeconomymustbeinarecession.
Answer: B
Diff:1
12) Intheabovefigure,theeconomywouldmostlikelymovefromAD 1 toAD2 becauseof

A) anaggregatesupplyshock. B) anaggregatedemandshock.
C) arecession. D) adepression.
Answer: B
Diff:1
13) Ashort-runequilibriumoccurs
A) attheintersectionofthelong-runaggregatesupplycurveandtheaggregatedemand
curve.
B) attheintersectionoftheshort-runaggregatesupplycurveandthelong-runaggregate
supplycurve.
C) attheintersectionoftheshort-runaggregatesupplycurveandtheaggregatedemand
curve.
D) attherealGDPassociatedwithfullemployment.
Answer: C
Diff:1
14) AssumeequilibriumrealGDPperyearisequaltofull-employmentrealGDP.Whichofthe
followingwillcausearecessionarygap?
A) anincreaseinaggregatedemand B) areductioninaggregatedemand
C) adiscoveryofanewrawmaterial D) atemporaryreductioninthepriceofoil
Answer: B
Diff:1
15) IntheKeynesianmodel,anaggregatedemandshock
A) willcausetheaggregatedemandcurvetoshift,leadingtoachangeinthepriceleveland
realGDP.
B) willcausetheaggregatedemandcurvetoshift,leadingtoachangeinthepricelevelbut
notrealGDP.
C) willcausetheaggregatedemandcurvetoshift,leadingtoachangeinrealGDPbutnotthe
pricelevel.
D) willnotleadtoashiftoftheaggregatedemandcurve.
Answer: A
Diff:3
16) Thethreecurvesintheabovefigureare
A) (1)thelong-runaggregatesupplycurve,(2)theaggregatedemandcurve,and(3)the
short-runaggregatesupplycurve.
B) (1)thelong-runaggregatesupplycurve,(2)theshort-runaggregatesupplycurve,and(3)
theaggregatedemandcurve.
C) (1)theshort-runaggregatesupplycurve,(2)theaggregatedemandcurve,and(3)the
D) (1)theaggregatesupplycurve,(2)theshort-runaggregatedemandcurve,and(3)the
long-runaggregatedemandcurve.
Answer: C
Diff:1
17) Refertotheabovefigure.Whichpointorpointsrepresent(s)ashort -runequilibrium?

A) Aonly B) Bonly C) Conly D) bothAandB
Answer: C
Diff:2
18) Refertotheabovefigure.Whichpointorpointsrepresent(s)along-runequilibrium?
A) Aonly B) Bonly C) Conly D) bothAandB
Answer: A
Diff:2
19) Refertotheabovefigure.Attheinitiallong-runequilibrium,thepricelevelis________,andat
thenewlong-runequilibrium,thepricelevelwillbe________.
A) 20;45 B) 20;40 C) 40;45 D) 20;20
Answer: D
Diff:2
20) Refertotheabovefigure.Supposetheoriginallong-runequilibriumwasatpointB.Whatcould
havecausedthemovetothecurrentequilibrium?
A) Decreasesinthepricelevelcausedshort-runaggregatesupplytofall.
B) Inputpricesmusthaveincreased,causinglong-runaggregatesupplytoincrease.
C) Aggregatedemandmusthavedecreased.
D) Atemporaryreductioninproductionduetobadweather.
Answer: C
Diff:2
21) Supposethecurrentsituationissuchthatthepricelevelis120,realGDPis$14trillion,and
long-runaggregatesupplyis$13.6trillion.Wecanconcludethat
A) thepricelevelwillfalluntillong-runaggregatesupplyshiftsto$14trillion.
B) thepricelevelwillfallandinputpriceswillriseuntilrealGDPpullslong-runaggregate
supplyupto$14trillion.
C) inputpriceswillriseuntilrealGDPis$13.6trillion.
D) aggregatedemandwillincreaseuntilbothshort-runandlong-runaggregatesupplyequal
$14trillion.
Answer: C
Diff:3
22) Holdingthelevelofpricesfixedimpliesthatagivenincreaseinaggregatedemand
A) willhaveasmallereffectonrealGDPthanwouldbethecaseifpricesweremoreflexible.
B) willhavealargereffectonrealGDPthanwouldbethecaseifpricesweremoreflexible.
C) hasthesameeffectonrealGDPaswhenpricesaremoreflexible.
D) hasasmallereffectonnominalGDPthanwhenpricesaremoreflexible.
Answer: B
Diff:2
23) SupposeweobserverisingnominalGDP,arisingpricelevel,andconstantunemploymentasa
resultofanincreaseinaggregatedemand.Wewouldconcludethattheaggregatesupplycurve
is
Answer: C
Diff:3
24) IfaggregatedemandandnominalGDPincreasewhilethepricelevelisconstant,wewould
concludethat
A) theeconomyisalreadyatfullemployment.
B) theaggregatesupplycurveisupwardsloping.
C) theaggregatesupplycurveishorizontal.
D) theaggregatedemandcurveisvertical.
Answer: C
Diff:2
25) IfweobserveanincreaseinrealGDPandanincreaseinthepricelevelafteranincreasein
aggregatedemand,wecanconcludethat
A) theaggregatesupplycurveisupwardsloping.
B) theaggregatesupplycurveishorizontal.
C) theaggregatesupplycurveisvertical.
D) theeconomyisnowatfullemployment.
Answer: A
Diff:2
26) AchangeintastesforU.S.producedgoodswill
A) shiftboththeaggregatedemandcurveandthelong-runaggregatesupplycurve.
B) shifttheaggregatedemandcurve.
C) shifttheshort-runaggregatesupplycurve.
D) shiftthelong-runaggregatesupplycurve.
Answer: B
Diff:1
27) AssumeequilibriumrealGDPperyearisequaltofull-employmentrealGDP.Ifaggregate
demandfalls,then
A) thepricelevelwillincreaseintheshortrunanddecreaseinthelongrun.
B) therewillbeanexpansionarygap.
C) therewillbearecessionarygap.
D) long-runaggregatesupplywilleventuallydecreasetoo.
Answer: C
Diff:2
28) Theshort-runandlong-runaggregatesupplycurvesremainstable,andadecreaseinaggregate
demandoccurs.Whatistheresultintheshortrun?
A) AnincreaseinthepricelevelandrealGDPwilloccur.
B) Aperiodofexpansionandariseintheunemploymentratecouldoccur.
C) Aperiodofrecessionandariseintheunemploymentratecouldoccur.
D) ThepricelevelwillfallbutrealGDPwillremainthesame.
Answer: C
Diff:2
29) Aninflationarygapoccurswhen
A) aggregatedemandfalls,butotherthingsremainconstant.
B) short-runaggregatesupplyfalls,butotherthingsremainconstant.
C) theshort-runequilibriumlevelofrealGDPisgreaterthanlong-runaggregatesupply.
D) theshort-runequilibriumlevelofrealGDPislessthanlong-runaggregatesupply.
Answer: C
Diff:1
30) ThegapthatexistswhenequilibriumrealGDPislessthanfull-employmentrealGDPis
A) theshort-runaggregatesupplycurve. B) moneyillusion.
Answer: C
Diff:1
31) ThegapthatexistswhenequilibriumrealGDPisgreaterthanthelevelofrealGDPshownby
thepositionofthelong-runaggregatesupplycurveis
A) theshort-runaggregatesupplycurve. B) moneyillusion.
Answer: D
Diff:1
32) Refertotheabovefigure.SupposetheeconomyhadbeenatpointAandnowisatB.What
couldhavecausedthemovementtoB?
A) Unusuallygoodweathercausesthewheatcroptobelargerthannormal.
B) Governmentspendingincreasedcausingaggregatedemandtoincrease.
C) Winterstormscausefactoriesinthenorthtobeshutdownforseveralweeks.
D) Boththelaborforceandthepopulationincreased.
Answer: B
Diff:3
33) Arecessionarygapoccurswhen
A) aggregatedemandfalls,butotherthingsremainconstant.
B) short-runaggregatesupplyfalls,butotherthingsremainconstant.
C) theshort-runequilibriumlevelofrealGDPisgreaterthanthelevelconsistentwiththe
D) theshort-runequilibriumlevelofrealGDPislessthanthelevelconsistentwiththe
Answer: D
Diff:1
34) Anexampleofanaggregatesupplyshockis
A) inflationcausedbyasurgeindemand.
B) thecutoffofoilbytheOPECnationsintheearly1970s.
C) theincreaseinthelaborforceduetothebaby-boomergenerationreachingworkingage.
D) theincreaseincandysaleseveryFebruary.
Answer: B
Diff:2
35) Arecessionarygapistheamountbywhich
A) totalplannedrealexpendituresexceedtotalplannedproductioninthelongrun.
B) theshort-runequilibriumlevelnominalGDPisabovetheshort-runrealGDP.
C) theshort-runequilibriumlevelnominalGDPisbelowtheshort-runrealGDP.
D) theshort-runequilibriumlevelofrealGDPisbelowthefull-employmentlevelofreal
GDP.
Answer: D
Diff:2
36) Aninflationarygapistheamountbywhich
A) totalplannedproductionexceedstotalplannedrealexpendituresinthelongrun.
B) theshort-runequilibriumlevelofnominalGDPisabovetheshort-runlevelofrealGDP.
C) theshort-runequilibriumlevelofnominalGDPisbelowtheshort-runlevelofrealGDP.
D) theshort-runequilibriumlevelofrealGDPisabovethefull-employmentlevelofreal
GDP.
Answer: D
Diff:2
37) IftheU.S.governmentweretorelaxitsrestrictionsonoffshoreoilwelldrillingandopen
drillinginAlaskannationalparks,theresulttoaggregatesupplywouldbeto
A) causeashiftintheSRAStotheleft.
B) causeashiftintheLRAStotheleft.
C) causenolong-termshiftsinAS.
D) causeashiftinbothLRASandSRAStotheright.
Answer: D
Diff:2
38) Intheshortrun,ifaggregatedemandshiftstotheleftwhilethepositionoftheshort -run

aggregatesupplycurvedoesNOTchange,then
A) thelevelofeconomicactivityrises.
B) arecessionarygapoccurs.
C) thereisnochangeinrealGDPandthepricelevel.
D) aninflationarygapoccurs.
Answer: B
Diff:2
39) Intheabovefigure,whatarethelong-runequilibriumpricelevelandrealGDP?
A) 130and$12trillion B) 130and$11.5trillion
C) 120and$11.5trillion D) 120and$12trillion
Answer: A
Diff:1
40) Intheabovefigure,iftherelevantaggregatedemandcurveisAD 2 ,whataretheshort-run

equilibriumpricelevelandrealGDP?
A) 130and$12trillion B) 130and$11.5trillion
C) 120and$11.5trillion D) 120and$12trillion
Answer: C
Diff:1
41) Intheabovefigure,iftherelevantaggregatedemandcurveisAD 2 ,whattypeofgapexistsand

howlargeisit?
A) inflationarygapof$500billion B) inflationarygapof$1trillion
C) recessionarygapof$1trillion D) recessionarygapof$500billion
Answer: D
Diff:2
42) Intheabovefigure,whatcouldcausetheshiftofaggregatedemandfromAD1 toAD2 ?

A) depletionofrawmaterials
B) anincreaseininputprices
C) adecreaseinconsumerconfidence
D) anincreaseininternationaltradebarriers
Answer: C
Diff:3
43) IftheequilibriumlevelofrealGDPperyearisgreaterthanthefull-employmentlevelofGDP,
then
A) arecessionarygapoccurs.
B) theeconomyisatfullemploymentwithnopricechanges.
C) theeconomyexpandsthelevelofrealGDP.
D) aninflationarygapoccurs.
Answer: D
Diff:1
44) Whichofthefollowingactionswouldcausetheaggregatedemandcurvetoshifttotheleft?
A) anincreaseinconsumerspendingcausedbyacutinthepersonalincometaxrate
B) anincreaseingovernmentspendingcausedbyincreasedspendingonhighwaysand
bridgeconstruction
C) adecreasenetexportspendingcausedbyanappreciationofthehomecurrency
D) anincreaseinexportscausedbyanincreaseineconomicactivityintheEuropeanUnion
Answer: C
Diff:2
45) Arecessionarygapresultswhen
A) aggregatedemandisbelowthelevelconsistentwithfullemployment.
B) aggregatedemandisabovethelevelconsistentwithfullemployment.
C) aggregatesupplyandaggregatedemandarenotinshort -runequilibrium.
D) aggregatesupplydecreases.
Answer: A
Diff:2
46) Ifthefull-employmentlevelofrealGDPisgreaterthantheequilibriumlevelofrealGDP,the
nationwouldbeexperiencinga(n)
A) inflationarygap. B) recessionarygap.
C) demand-pullinflation. D) risingprices.
Answer: B
Diff:2
47) Considertheabovefigure.IftheaggregatedemandfellfromAD 1toAD2 ,ournationwouldbe

experiencing
A) aninflationarygap. B) arecessionarygap.
C) overemployment. D) risingprices.
Answer: B
Diff:3
48) Considertheabovefigure.IftheaggregatedemandcurverosefromAD 1toAD3 ,ournation

wouldbeexperiencing
C) unemployment. D) fallingprices.
Answer: A
Diff:3
49) Considertheabovefigure.IftheaggregatedemandwentfromAD 2toAD3 ,ournationwould

havegonefrom
A) arecessionarygaptoaninflationarygap.
B) arecessionarygaptofull-employmentrealGDP.
C) aninflationarygaptofull-employmentGDP.
D) full-employmentrealGDPtoaninflationarygap.
Answer: A
Diff:3
50) AccordingtomodernKeynesiananalysis,anincreaseinaggregatedemandleadstoahigher
pricelevelbecausethe
A) aggregatedemandcurveisupwardsloping.
B) short-runaggregatesupplycurveisupwardsloping.
C) aggregatedemandcurveisupwardhorizontal.
D) short-runaggregatesupplycurveisvertical.
Answer: B
Diff:2
51) Supposeaggregatedemandisincreasingovertime.WouldthemodernKeynesianmodel
assumethatthepricelevelwouldalwaysbeconstant?Explain.
Answer: No.Eventuallyfullemploymentwouldbereachedandfirmswouldbeproducingatfull
capacity.Thepricelevelwouldadjustaspriceswouldincrease.Thatis,theshort -run
aggregatesupplycurvecannotbehorizontalatallpossiblevaluesofrealGrossDomestic
Product(GDP).
Diff:3
11.6ExplainingShort-RunVariationsinInflation
1) Inflationthatiscausedbyanincreaseinaggregatedemandwhichisnotmatchedbyanincrease
inaggregatesupplyiscalled
A) demand-pushinflation. B) demand-pullinflation.
C) cost-pushinflation. D) cost-pullinflation.
Answer: B
Diff:3
Topic: 11.6ExplainingShort-RunVariationsinInflation
2) Thesignificantincreasesinoilpricesduringthelatter2000swasanexampleof
A) anaggregatedemandshockthatincreasedthepricelevelandincreasedtherateofgrowth
ofrealGrossDomesticProduct(GDP).
B) anaggregatedemandshockthatreducedthepricelevelandreducedtherateofgrowthof
C) anaggregatesupplyshockthatincreasedthepricelevelandreducedtherateofgrowthof
D) anaggregatesupplyshockthatreducedthepricelevelandincreasedtherateofgrowthof
Answer: C
Diff:1
3) Supposethatlastyear$1U.S.exchangedfor1.35euros.Ifthisyear$1exchangesfor1.25euros,
thenwecanconcludethat
A) thedollarisweakerthisyearthanitwaslastyearandthiswillcausetheUnitedStates
short-runaggregatesupply(SRAS)curvetoshifttotheleft.
B) thedollarisweakerthisyearthanitwaslastyearandthiswillcausetheUnitedStates
short-runaggregatesupply(SRAS)toshifttotheright.
C) thedollarisstrongerthisyearthanitwaslastyearandthiswillcausetheUnitedStates
short-runaggregatesupply(SRAS)curvetoshifttotheleft.
D) thedollarisweakerthisyearthanitwaslastyearbutthiswillhavenoimpactonthe
UnitedStatesshort-runaggregatesupply(SRAS)curve.
Answer: A
Diff:1
4) IftheU.S.dollarbecomesweakerininternationalforeignexchangemarkets,importedgoods
becomemoreexpensive.Oneresultofthisisthat
A) netexportsdecrease.
B) netexportsincrease.
C) domesticemploymentrises.
D) realGrossDomesticProduct(GDP)increases.
Answer: B
Diff:1
5) AstrongerU.S.dollarleadsto________inSRASand________inADsimultaneously.
A) aleftwardshift;arightwardshift B) arightwardshift;aleftwardshift
C) arightwardshift;arightwardshift D) aleftwardshift;aleftwardshift
Answer: B
Diff:1
6) IftheU.S.dollarbecomesweakerininternationalmarkets,theneteffectswillinclude
A) adecreaseinshort-runaggregatesupply(SRAS)andanincreaseinaggregatedemand.
B) anincreaseinshort-runaggregatesupply(SRAS)andadecreaseinaggregatedemand.
C) adecreaseinbothshortrunaggregatesupply(SRAS)andaggregatedemand.
D) anincreaseinbothshortrunaggregatesupply(SRAS)andaggregatedemand.
Answer: A
Diff:1
7) Demand-pullinflationis
A) inflationcausedbyincreasesinaggregatedemandthatgenerateanevenlargerincreasein
aggregatesupply.
B) inflationcausedbyincreasesinaggregatedemandthatarenotmatchedbyincreasesin
aggregatesupply.
C) inflationcausedbyreductionsinshort-runaggregatesupply.
D) inflationcausedbyreductionsinlong-runaggregatesupply.
Answer: B
Diff:1
8) Cost-pushinflationis
A) inflationcausedbyincreasesinaggregatedemandthatgenerateanevenlargerincreasein
aggregatesupply.
B) inflationcausedbyincreasesinaggregatedemandthatarenotmatchedbyincreasesin
aggregatesupply.
C) inflationcausedbydecreasesinaggregatesupplythatgenerateanevenlargerdecreasein
aggregatedemand.
D) inflationcausedbydecreasesinaggregatesupplythatarenotmatchedbydecreasesin
aggregatedemand.
Answer: D
Diff:1
9) Whichofthefollowingcancauseinflation?
A) Increasesinshort-runaggregatesupply
B) Increasesinlong-runaggregatesupply
C) Decreasesinshort-runaggregatesupply
D) Decreasesinaggregatedemand
Answer: C
Diff:2
10) Theinflationassociatedwiththeoilpriceshocksinthe1970safterOPECrestrictedthesupplyof
oilisanexampleof
A) cost-pushinflationduetoasupplyshock.
B) cost-pushinflationduetoademandshock.
C) demand-pullinflationduetoademandshock.
D) demand-pullinflationduetoasupplyshock.
Answer: A
Diff:2
11) AfterasmallhurricaneinFlorida,unemploymentislowasthereisagreatdealofconstruction
workandbusinessesrunatfullcapacity.Thissuggeststhat
A) theeconomyisoperatingabovethefull-employmentlevelandwilleventuallyadjustback
tolong-runaggregatesupply.
B) livingstandardsarefallingasemploymentandeconomicactivityaretoohigh.
C) theeconomyisoperatingbelowitslong-runlevelandlivingstandardsarelessthanthey
wouldhavebeenwithoutthehurricane.
D) thehurricaneisbeneficialsinceitisincreasingemploymentandreplacinglessefficient
capitalwithnewerandmoreefficientcapital.
Answer: A
Diff:3
12) AstrongerU.S.dollarinworldexchangemarketsmeansthat
A) adollarbuysmoreunitsofforeigncurrencythanitcouldbefore.
B) adollarbuyslessunitsofforeigncurrencythanitcouldbefore.
C) adollarbuysthesameamountofforeigncurrencythanitcouldbefore,withgoldbacking
upthevalueofthedollar.
D) foreignerssellthedollarsthattheyhave.
Answer: A
Diff:1
13) AstrongerdollarleadstocheaperinputpricesforU.S.firmsbecause
A) U.S.workersarewillingtoworkforlesspaybecauseofthestrongerdollar.
B) U.S.producersofintermediategoodslowerpricesinordertobenefitfromthestronger
dollar.
C) importsofrawmaterialsandintermediategoodsarecheaper.
D) exportsofrawmaterialsandintermediategoodsarecheaper.
Answer: C
Diff:2
14) Oneeffectofastrongerdollaris
A) anincreaseinU.S.exportsandareductioninU.S.imports.
B) areductioninU.S.exportsandanincreaseinU.S.imports.
C) anincreaseinnetexports.
D) anincreaseinbothimportsandexports.Theeffectonnetexportsisuncertain.
Answer: B
Diff:2
15) TheneteffectofastrongerdollaronrealGDPis
A) anincreaseinrealGDP.
B) adecreaseinrealGDP.
C) anincreaseinthepricelevel.
D) dependentonwhethertheincreaseinaggregatesupplyismoreorlessthanthedecrease
inaggregatedemand.
Answer: D
Diff:3
16) SupposeweobservethepricelevelincreasingandrealGDPdecreasing.Anexplanationforthis
isthat
A) thedollarweakenedandtheeffectonaggregatesupplywaslessthantheeffecton
aggregatedemand.
B) thedollarweakenedandtheeffectonaggregatesupplywasgreaterthantheeffecton
aggregatedemand.
C) thedollarstrengthenedandtheeffectonaggregatesupplywaslessthantheeffecton
aggregatedemand.
D) thedollarstrengthenedandtheeffectonaggregatesupplywasgreaterthantheeffecton
aggregatedemand.
Answer: B
Diff:3
17) EquilibriumrealGDPrisesafterthedollarstrengthened.Fromthis,wecanconcludethat
A) theincreaseinaggregatedemandwasgreaterthanthedecreaseinaggregatesupply.
B) thedecreaseinaggregatedemandwaslessthantheincreaseinaggregatesupply.
C) thedecreaseinaggregatedemandwasmorethantheincreaseinaggregatesupply.
D) theincreaseinaggregatedemandwaslessthanthedecreaseinaggregatesupply.
Answer: B
Diff:2
18) Refertotheabovefigure.SupposetheeconomyisatE.Astrongerdollarleadstoalowerreal
GDP.Whichoftheaggregatesupplycurvesmustbetherelevantcurveafterthechangeinthe
valueofthedollar?
A) 1 B) 2 C) 4 D) 5
Answer: B
Diff:2
19) Refertotheabovefigure.SupposetheeconomyisatEoriginally,whenthedollarincreasesin
value.WhichaggregatesupplycurveappliesifthevalueofrealGDPincreases?
A) 1 B) 2 C) 4 D) 5
Answer: A
Diff:2
20) Refertotheabovefigure.SupposeweareatE andthedollarweakens.Whichaggregatesupply

curvemustapplyifthepricelevelincreases?
A) 3only B) 4only C) 5only D) 4or5
Answer: D
Diff:2
21) SupposetheJapaneseyenincreasesinitsvaluerelativetotheU.S.dollar.IntheU.S.economy,
A) thepricelevelwillincreaseandrealGDPwillfalliftheincreaseinaggregatedemandis
lessthanthedecreaseinaggregatesupply.
B) thepricelevelwillincreaseandrealGDPwillfallifthedecreaseinaggregatedemandis
morethantheincreaseinaggregatesupply.
C) thepricelevelwillfallandrealGDPwillincreaseiftheincreaseinaggregatesupplyis
greaterthanthedecreaseinaggregatedemand.
D) thepricelevelwillfallandrealGDPwilldecreaseifthedecreaseinaggregatedemandis
lessthantheincreaseinaggregatesupply.
Answer: A
Diff:3
22) Cost-pushinflationoccurs
A) whentheaggregatesupplycurveshiftstotheleft,whileaggregatedemandremains
stable.
B) whentheaggregatesupplycurveshiftstotheright,whileaggregatedemandremains
stable.
C) whentheaggregatedemandcurveshiftstotheleft,whileaggregatesupplyremains
stable.
D) whentheaggregatedemandcurveshiftstotheright,whileaggregatesupplyremains
stable.
Answer: A
Diff:2
23) Demand-pullinflationoccurs
A) whentheaggregatesupplycurveshiftstotheleft,whileaggregatedemandremains
stable.
B) whentheaggregatesupplycurveshiftstotheright,whileaggregatedemandremains
stable.
C) whentheaggregatedemandcurveshiftstotheleft,whileaggregatesupplyremains
stable.
D) whentheaggregatedemandcurveshiftstotheright,whileaggregatesupplyremains
stable.
Answer: D
Diff:2
24) Ifthepricelevelshouldincreaseintheneartermduetodecreasesintheshort-runaggregate
supply,theresultwouldbe
A) demand-pullinflation. B) demand-pullrecession.
C) cost-pushinflation. D) cost-pullexpansion.
Answer: C
Diff:2
25) SupposetheFederalReserveincreasesthemoneysupply.Whichofthefollowingwilltendto
occurasaresultofthispolicyinaKeynesianmodel?
A) aninflationarygap
B) demand-pullinflation
C) amovementalongtheshort-runaggregatesupplycurve
D) alloftheabove
Answer: D
Diff:2
26) Otherthingsbeingequal,ifinputpricesriseinacountry,thentherewouldbe
A) cost-pushinflation.
B) demand-pullinflation.
C) cost-pushdeflation.
D) moreproductionandalowerpricelevel.
Answer: A
Diff:2
27) Anincreaseinaggregatedemandwilltendtocausewhichofthefollowing?
A) adeflationarygap B) arecessionarygap
C) cost-pushinflation D) noneoftheabove
Answer: D
Diff:1
28) Inflationcausedbycontinuallydecreasingshort-runaggregatesupplyis
A) cost-pullinflation. B) cost-pushinflation.
C) demand-pullinflation. D) demand-pushinflation.
Answer: B
Diff:1
29) Oilpricesincreasedsignificantlyin2008.AccordingtotheKeynesianmodel,thisincreaseinoil
pricesshouldhavecausedwhichofthefollowingtooccur?
A) demand-pullinflation B) demand-pushinflation
C) cost-pushinflation D) cost-pullinflation
Answer: C
Diff:2
30) Cost-pushinflationcanbeshownonanaggregatesupplyaggregatedemanddiagramas
A) arightwardshiftoftheaggregatesupplycurvewithnochangeinaggregatedemand.
B) arightwardshiftintheaggregatedemandcurvewithnochangeinaggregatesupply.
C) aleftwardshiftintheaggregatedemandcurvewithnochangeinaggregatesupply.
D) aleftwardshiftintheaggregatesupplycurvewithnochangeinaggregatedemand.
Answer: D
Diff:2
31) Demand-pullinflationiscausedby
A) aggregatedemandincreasingalongahorizontalaggregatesupplycurve.
B) aggregatedemanddecreasingalongahorizontalaggregatesupplycurve.
C) aggregatedemanddecreasingalonganupwardslopingoraverticalaggregatesupply
curve.
D) aggregatedemandincreasingalonganupwardslopingoraverticalaggregatesupply
curve.
Answer: D
Diff:2
32) IntheoriginalAustinPowers,Dr.Eviliscryogenicallyfrozenforthirtyyears(fromthelate1960s
tothelate1990s).Uponhisreturnhehatchesaplantoextortonemilliondollarsfromvarious
worldgovernments.Hishenchmenareunimpressed.Whattype(s)ofinflationhavemadeDr.
Evilsproposedblackmailamountseemtoosmall?
A) cost-pushinflation
B) demand-pullinflation
C) bothcost-priceandprice-pullinflation
D) bothcost-pushanddemand-pullinflation
Answer: D
Diff:3
33) Naturaldisasterslikesevereearthquakesaredevastatingtotheeconomyaswellastothe
individualsharmeddueto
A) supplyshocks. B) demandshocks.
C) demand-pullinflation. D) demand-pulldeflation.
Answer: A
Diff:2
34) SupposetheU.S.dollargainsstrengthagainsttheeuro(andagainstothermajorcurrencies).
Thisstrengtheningofthedollarwillcausewhichofthefollowingtooccur?
A) Theaggregatedemandcurvewillshifttotherightandtheshort -runaggregatesupply
willshifttotheright.
B) Theaggregatedemandcurvewillshifttotheleftandtheshort-runaggregatesupplywill
shifttotheright.
C) Theaggregatedemandcurvewillshifttotherightandtheshort -runaggregatesupply
willshifttotheleft.
D) theaggregatedemandcurvewillshifttotheleftandtheshort -runaggregatesupplywill
shifttotheleft.
Answer: B
Diff:2
35) SupposetheU.S.dollarweakensagainsttheeuro(andagainstothermajorcurrencies).This
weakeningofthedollarwillcausewhichofthefollowingtooccur?
A) Theaggregatedemandcurvewillshifttotherightandtheshort -runaggregatesupply
willshifttotheright.
B) Theaggregatedemandcurvewillshifttotheleftandtheshort-runaggregatesupplywill
shifttotheright.
C) Theaggregatedemandcurvewillshifttotherightandtheshort -runaggregatesupply
willshifttotheleft.
D) Theaggregatedemandcurvewillshifttotheleftandtheshort-runaggregatesupplywill
shifttotheleft.
Answer: C
Diff:2
36) Theexchangeratelastmonthwas$1= 3.2Swissfrancs.Thismonthitis$1=3.12Swissfrancs.

Wecansaythatthevalueofthedollar
A) fell,causingnetexportstoincreaseandaggregatedemandtorise.
B) fell,causingnetexportstodecreaseandaggregatedemandtofall.
C) increased,causingnetexportstodecreaseandaggregatedemandtofall.
D) increased,causingnetexportstodecreaseandaggregatedemandtorise.
Answer: A
Diff:2
37) Theexchangeratelastmonthwas$1= 1.15euros.Thismonthitis$1=1.35euros.Wecansay

thatthevalueofthedollar
A) fell;causingnetexportstoincreaseandaggregatedemandtorise.
B) fell;causingnetexportstodecreaseandaggregatedemandtofall.
C) increased;causingnetexportstodecreaseandaggregatedemandtofall.
D) increased;causingnetexportstodecreaseandaggregatedemandtorise.
Answer: C
Diff:2
38) AnappreciationoftheU.S.dollar________thepriceofU.S.imports,and________thepriceof
U.S.exports.
A) lowers,lowers B) increases,increases
C) increases,lowers D) lowers,increases
Answer: D
Diff:1
39) SupposetheU.S.dollarweakensagainsttheeuro(andagainstothermajorcurrencies).We
knowwithcertaintythatthisweakeningofthedollarwillcausewhichofthefollowingto
occur?
A) arecessionarygap B) aninflationarygap
C) adeflationarygap D) noneoftheabove
Answer: D
Diff:2
40) Supposetheeuroappreciatesagainstthedollar.ThiscausesU.S.exportstobecomeless
expensiveforconsumersintheEuropeanUnion,whichwouldlikelycausetheU.S.
A) aggregatesupplytoshiftleftward. B) aggregatesupplytoshiftrightward.
C) aggregatedemandtoshiftleftward. D) aggregatedemandtoshiftrightward.
Answer: D
Diff:2
41) Refertotheabovefigure.IftheaggregatedemandcurveshiftsbeyondAD 5 ,whichofthe

followingwouldweNOTexpect?
A) Strongdemand-pullinflation
B) NoincreaseinrealGrossDomesticProduct(GDP)
C) Strongandrapidincreasesinthepricelevel
D) Increasesinrealnetdomesticproduct
Answer: D
Diff:1
42) Refertotheabovefigure.IftheaggregatedemandcurveshiftsbeyondAD 5 ,thentheeconomy

willexperience
A) demand-pullinflation. B) cost-pushinflation.
C) structuralinflation. D) stagflation.
Answer: A
Diff:1
43) Whenthevalueofthedollarincreases,theneteffectontheeconomy
A) willbeanincreaseinshort-runaggregatesupplyandadecreaseinaggregatedemand.
B) willbedecreaseinshort-runaggregatesupplyandanincreaseinaggregatedemand.
C) willbeanincreaseinbothaggregatedemandandaggregatesupply.
D) willbeadecreaseinbothaggregatedemandandaggregatesupply.
Answer: A
Diff:1
44) Whenthevalueofthedollardecreases,theneteffectontheeconomy
A) willbeanincreaseinshort-runaggregatesupplyandadecreaseinaggregatedemand.
B) willbedecreaseinshort-runaggregatesupplyandanincreaseinaggregatedemand.
C) willbeanincreaseinbothaggregatedemandandaggregatesupply.
D) willbeadecreaseinbothaggregatedemandandaggregatesupply.
Answer: B
Diff:1
45) Whateffectdoesastrongerdollarhaveonaggregatesupply?Why?
Answer: AstrongerdollarmeansthatU.S.residentscanbuyforeigngoodsmorecheaply.Since
someoftheforeigngoodswillberawmaterialsandpartiallyprocessedgoods,input
pricesfall,whichcausesaggregatesupplytoincrease.
Diff:1
46) Usingagraph,showtheeffectsofaweakerdollarontheeconomy.Explain.
Answer: TheoriginalequilibriumisE1 .Aweakerdollarcausesaggregatesupplytodecrease,
representedbyashiftfromAS1 toAS2 .Buttheweakerdollarmakesimportsmore
expensiveandexportscheaper,soaggregatedemandincreasesfromAD 1 toAD2 .The
newequilibriumisE2 ,withanincreaseinrealGrossDomesticProduct(GDP)andarise
inthepricelevel.Thisresultisduetothefactthataggregatedemandshiftedfurtherthan
aggregatesupply.RealGrossDomesticProduct(GDP)wouldhavefalleniftheshiftin
aggregatesupplyhadbeengreaterthantheshiftinaggregatedemand.
Diff:3
Chapter12
Consumption,RealGDP,andtheMultiplier
12.1SomeSimplifyingAssumptionsinaKeynesianModel
1) WhichofthefollowingisNOTasimplifyingassumptioninthesimpleKeynesianmodel?
A) Netinvestmentandgrossinvestmentareequal.
B) Allprofitsaredistributedtothebusinessowners.
C) Realdisposableincomeequalsgovernmentpurchasesofgoodsandservices.
D) Thereisnoforeigntrade.
Answer: C
Diff:1
Topic: 12.1SomeSimplifyingAssumptionsinaKeynesianModel
2) Whichofthefollowingrepresentstherelationshipbetweendisposableincome(DI),
consumption(C),andsaving(S)?
A) DI+C=S B) DI= C+ S C) DI= C*S D) DI= C- S
Answer: B
Diff:1
3) Whichofthefollowingisasimplifyingassumptionassociatedwiththeshort-runKeynesian
modelofequilibriumrealGrossDomesticProduct(GDP)determination?
A) Grossprivatedomesticinvestmentexceedsnetprivatedomesticinvestment.
B) Mostbusinessprofitsaredistributedtoshareholders.
C) Businessespayindirecttaxes.
D) Thereisnodepreciation.
Answer: D
Diff:1
4) WhichofthefollowingwouldNOTbeconsideredaconsumptiongood?
A) Anewsweater
B) Toolsusedtocutmetalonanautoproductionline
C) AjarofSkippypeanutbutter
D) AbottleofScotchwhiskey
Answer: B
Diff:1
5) Thetermssavingandsavingsdifferinthat
A) savingisastock,andsavingsareaflow.
B) savingalwaysexceedssavings.
C) savingsareastock,andsavingisaflow.
D) savingscanbenegative,butsavingcannot.
Answer: C
Diff:1
6) WhenyoupurchaseGapclothingandbaseballtickets
A) youarebuyingconsumptiongoods. B) youarebuyingcapitalgoods.
C) youareconsumingintermediategoods. D) youarebuyingphysicalcapital.
Answer: A
Diff:2
7) Thedifferencebetweensavingandsavingsisthat
A) savingisdonebyhouseholdsandsavingsbybusinesses.
B) savingisundertakenasaprecautionagainstunemploymentandsavingsareundertaken
toincreaseinvestmentspending.
C) savingsaretheresultofpastandcurrentsaving.
D) savingisplacedinfinancialinstitutionssuchasbanks,whilesavingsarekeptathomeby
people.
Answer: C
Diff:1
8) WhichofthefollowingisNOTaflowvariable?
A) Consumption B) Investment C) Savings D) Saving
Answer: C
Diff:2
9) Atalevelofrealdisposableincomeof$0,supposeconsumptionis$2,000.Giventhis
information,weknowwithcertaintythatsavingequals
A) $0. B) $2,000. C) -$2,000. D) -$1,000.
Answer: C
Diff:1
Chapter12Consumption,RealGDP,andtheMultiplier437
A) Disposableincome- saving= consumption
B) Consumption+saving= disposableincome
C) Saving=disposableincome- consumption
D) Consumption=saving- disposableincome
Answer: D
Diff:1
11) Thinkingasaneconomistwould,whichistrueofinvestment?
A) Itistheportionofdisposableincomethatisnotusedforconsumptionorsaving.
B) Investmentrepresentsspendingoncapitalgoods.
C) Investmentisputtingmoneyintostocksandbonds.
D) Investmentisastockconcept.
Answer: B
Diff:1
12) Theincome-expendituremodelofrealGDPdeterminationisduetotheworkof
A) AdamSmith. B) J.B.Say.
C) JohnMaynardKeynes. D) RogerMiller.
Answer: C
Diff:1
13) Whichofthefollowingisconsideredinvestment?
A) Mainapurchasesanewcarforcommutingtoandfromwork.
B) Janepurchasesanewcarforcommutingtoandfromschool.
C) Johnnybuysanewcarforhiswifeasananniversarygift.
D) Jamespurchasesanewcartoreplaceanoldcarinhiscabbusiness.
Answer: D
Diff:1
14) Savingdiffersfromsavingsinthat
A) savingisaflowwhilesavingsisastock.
B) savingisastockwhilesavingsisaflow.
C) savingisbothaflowandastockwhilesavingsisastock.
D) savingisastockwhilesavingsisbothaflowandastock.
Answer: A
Diff:1
15) ConsumptionexpendituresincludeallofthefollowingEXCEPT
A) buyingapizza.
B) goingtoaconcert.
C) havingyourhousecleanedbyKleanMaids.
D) purchasingashareofstock.
Answer: D
Diff:1
16) Consumptiongoods
A) includegoodssuchasDVDsthatfirmsholdininventory.
B) areonlythegoodsboughtbyhouseholdsforimmediatesatisfaction.
C) includespendingonmachinesandbuildingssothatgoodscanbeproducedinthefuture.
D) aregoodsthatareusedtomakeothergoods.
Answer: B
Diff:1
17) Keynesthoughtthatthekeytodeterminingthebroadereconomiceffectsofinvestment
fluctuations
A) wastoexaminehowbusinessesreacttoflexiblepricesandwages.
B) wastocloselyregulatetherealinterestrate.
C) wastounderstandtherelationshipbetweenhowmuchpeopleearnandtheirwillingness
toengageinpersonalconsumptionspending.
D) wastounderstandhowchangesinthemoneysupplyinfluencesconsumptiondecisions.
Answer: C
Diff:1
18) Savingis
A) theamountonedoesnotconsumeinagivenperiodoftimewhilesavingsisthe
accumulationofpastperiodsofsaving.
B) theaccumulationofpastperiodsofsavingswhilesavingsistheamountofdisposable
incomethatisnotconsumedinagivenperiodoftime.
C) thedifferencebetweenrealGDPanddisposableincomewhilesavingsisthedifference
betweendisposableincomeandconsumptionspending.
D) thedifferencebetweendisposableincomeandspendingongoodsandserviceswhile
savingsisthedifferencebetweenrealGDPanddisposableincome.
Answer: A
Diff:2
19) Spendingonnewgoodsandservicesoutofahouseholdscurrentincomeis
A) consumption. B) thecapitalconsumptionallowance.
C) savings. D) investment.
Answer: A
Diff:1
20) Consumptiongoodsare
A) aformofinvestment.
B) goodspurchasedfromsavings.
C) aformofcapitalgoods.
D) goodspurchasedbyhouseholdstobeusedimmediately.
Answer: D
Diff:1
21) Thedifferencebetweenastockandaflowis
A) astockissomethingmeasuredatonepointintimewhileaflowissomethingthatis
expressedperunitoftime.
B) astockissomethingmeasuredatonepointintimewhileaflowissomethingthatisfixed.
C) astockisexpressedperunitoftimewhileaflowismeasuredatonepointintime.
D) astockreferstothesolidinventoryfirmshaveonhandwhileaflowreferstotheliquid
inventoryfirmshaveonhand.
Answer: A
Diff:1
22) Thedifferencebetweensavingsandsaving
A) isnonexistent.
B) isthatsavingsoccurswhenconsumptiondoesnotandsavingisusedtopurchase
consumptiongoods.
C) isthatsavingsisastockconceptandsavingisaflowconcept.
D) isthatsavingsismeasuredinrealtermswhilesavingismeasuredinnominalterms.
Answer: C
Diff:1
23) Whichofthefollowingisaflowvariable?
A) Savings B) Wealth C) Consumption D) Population
Answer: C
Diff:1
24) AllofthefollowingareflowvariablesEXCEPT
A) consumption. B) saving. C) investment. D) capitalgoods.
Answer: D
Diff:1
A) consumption+saving=disposableincome
B) consumption+saving=personalincome
C) consumption-investment=disposableincome
D) consumption-saving=personalincome
Answer: A
Diff:1
A) investment=disposableincome+ consumption
B) saving=personalincome-consumption
C) saving=disposableincome-consumption
D) saving=personalincome+consumption
Answer: C
Diff:1
27) Investmentis
A) thepurchasingofstocksandmutualfunds.
B) goodsboughtbyhouseholds.
C) spendingbybusinessesonthingswhichcanbeusedtoproducegoodsandservicesinthe
future.
D) theproductionofgoodsforimmediatesatisfaction.
Answer: C
Diff:1
28) Spendingbybusinessesonthingssuchasmachinesandbuildingswhichcanbeusedto
producegoodsandservicesinthefutureis
A) investment. B) consumption.
C) consumptiongoods. D) savings.
Answer: A
Diff:1
29) Expendituresbyfirmsonnewmachinesandbuildingsthatareexpectedtoyieldafuturestream
ofincomeisknownas
A) consumerdurable. B) consumptiongoods.
Answer: C
Diff:1
30) Changesinbusinessinventoriesareknownas
A) consumerdurable. B) consumptiongoods.
Answer: D
Diff:1
31) Fixedinvestmentis
A) whenafirmaddstoitsinventoriesofgoods.
B) whenafirmaccumulatesprofits.
C) dissavings.
D) anexpenditurebyfirmsonnewmachinesthatareexpectedtoproduceincomeinthe
future.
Answer: D
Diff:1
32) Investmentis
A) aflowconceptandismadeupoffixedinvestmentandinventoryinvestment.
B) aflowconceptandismadeupoffixedinvestment.
C) astockconceptandismadeupoffixedinvestmentandinventoryinvestment.
D) astockconceptandismadeupoffixedinvestment.
Answer: A
Diff:1
33) Nonconsumablegoodsthatfirmsusetomakeothergoodsare
A) consumptiongoods. B) capitalgoods.
C) dissaving. D) theMPC.
Answer: B
Diff:1
34) Howisinvestmentdefinedasaneconomicconcept?
A) Investmentisprimarilythemarketvalueofallsharesofstockheldbythepublic.
B) Investmentisprimarilythemarketvalueofallequipment,buildings,andinventoriesheld
bycorporations,partnerships,andproprietorships.
C) Investmentisprimarilythesumofexpendituresbybusinessesonnewcapitalgoodsthat
willyieldafuturestreamofincome.
D) Investmentisprimarilytheportionofyoursavingsheldinaninterest-earningaccount.
Answer: C
Diff:1
35) Savingsareanexampleof
A) aflowconcept. B) astockconcept.
C) adepreciationconcept. D) aninvestmentconcept.
Answer: B
Diff:1
36) Savingisanexampleof
A) aflowconcept. B) astockconcept.
C) adepreciationconcept. D) aninvestmentconcept.
Answer: A
Diff:1
37) Bydefinition,disposableincomeisequalto
A) consumptionplussaving. B) consumptionplusinvestment.
C) investmentplussaving. D) consumptionminussaving.
Answer: A
Diff:1
38) Investmentincludesspendingon
A) capitalgoods,buildings,andconsumerdurablegoods.
B) capitalgoods,buildings,andchangesinbusinessinventories.
C) capitalgoods,consumerdurablegoods,andchangesinbusinessinventories.
D) capitalgoods,buildings,andchangesinbusinesssavings.
Answer: B
Diff:1
39) Whichformulaiscorrect?
A) S=Yd-C B) Yd + S= C C) 2(Yd)- S= C D) Yd + C= S
Answer: A
Diff:2
40) Yourrealdisposableincomeisyourrealincomeafteryouhavepaid
A) rentandfoodexpenses. B) nettaxes.
C) medicalexpenses. D) consumptionexpenses.
Answer: B
Diff:2
41) Distinguishbetweensavingandsavings.Howdoesinvestmentrelatetothisdistinction,ifat
all?
Answer: Savingisaflowconceptandsavingsisastockconcept.Savingistheactofnot
consumingallofonesincomeinayear.Savingsisastockofwealthatapointintime.
Investmentisalsoaflowconcept.Forinvestmenttotakeplace,theremustbesaving.
Diff:1
12.2DeterminantsofPlannedConsumptionandPlannedSaving
1) Keynesiantheoryisbasedonthehypothesisthat
A) savingandconsumptionareinfluencedprimarilybyrealcurrentdisposableincome.
B) savingisinfluencedprimarilybytheinterestrate.
C) plannedsavingsequalplannedinvestmentonlyatfullemployment.
D) fullemploymentisautomaticallyattainedinanyeconomy.
Answer: A
Diff:1
Topic: 12.2DeterminantsofPlannedConsumptionandPlannedSaving
2) Supposethatwhendisposableincomeincreasesby$1,000,consumptionspendingincreasesby
$750.Giventhisinformation,weknowthatthemarginalpropensitytoconsume(MPC)is
A) .25. B) .75.
C) $1,000/$750=1.33. D) 1/.25= 4.
Answer: B
Diff:1
3) Supposethatwhendisposableincomedecreasesby$2,000,consumptionspendingincreasesby
$1500.Giventhisinformation,weknowthatthemarginalpropensitytoconsume(MPC)is
A) .25. B) .75.
C) $1,000/$750=1.33. D) 1/.25= 4.
Answer: B
Diff:1
A) MPC-MPS=1 B) MPC+ MPS=1
C) MPC*MPS=1 D) MPC/MPS=1
Answer: B
Diff:1
5) AccordingtoKeynesiantheory,themostimportantdeterminantofsavingandconsumptionis
A) thelevelofrealdisposableincome.
B) thestockofliquidassets.
C) thestockofdurablegoodsintheconsumerspossession.
D) thelevelofconsumerindebtedness.
Answer: A
Diff:1
6) TheKeynesianmodelisbasedontheideathat
A) savingdependsonlyontheinterestrate.
B) bothconsumptionandsavingaredirectlyrelatedtodisposableincome.
C) consumptionisunrelatedtothelevelofrealGrossDomesticProduct(GDP).
D) bothconsumptionandsavingareunrelatedtothelevelofrealGrossDomesticProduct
(GDP).
Answer: B
Diff:1
7) Theconsumptionfunctionshows
A) apositiverelationshipbetweenanindividualsstockofwealthandhislevelofplanned
consumption.
B) apositiverelationshipbetweendisposableincomeandplannedconsumption.
C) anegativerelationshipbetweenplannedconsumptionandaggregatesaving.
D) anegativerelationshipbetweendisposableincomeandplannedconsumption.
Answer: B
Diff:1
8) Therelationshipbetweenhouseholdsplannedconsumptionexpendituresandhouseholdslevel
ofdisposablerealincomeiscalled
A) theconsumptionfunction.
B) thesavingsfunction.
C) theinvestmentfunction.
D) thehouseholdaggregatedemandfunction.
Answer: A
Diff:1
9) AccordingtoKeynes,plannedconsumption
A) decreasesasdisposableincomeincreases.
B) isunstableandfluctuateswidelywithchangesindisposableincome.
C) ispositivelyrelatedtorealdisposableincome.
D) isindirectlyrelatedtotheinterestrate.
Answer: C
Diff:1
10) Theconsumptionfunctionshowstherelationship
A) betweenhouseholdsdisposableincomeandtheirconsumptionspending.
B) betweeninvestmentandrateofreturn.
C) betweenconsumptionspendingandcapitalgains.
D) betweengovernmentspendingandtaxcollection.
Answer: A
Diff:1
11) Whenanindividualspendsmorethanher/hisdisposableincome,thispersonis
A) saving. B) investing. C) dissaving. D) unemployed.
Answer: C
Diff:1
12) Alongalinearconsumptionfunction,
A) theaveragepropensitytoconsumefallswithanincreaseinincome.
B) themarginalpropensitytoconsumeriseswithanincreaseinincome.
C) theaveragepropensitytoconsumeriseswithincome,butthemarginalpropensityto
consumefallswithanincreaseinincome.
D) boththeaveragepropensitytoconsumeandthemarginalpropensitytoconsumerisewith
anincreaseinincome.
Answer: A
Diff:1
13) Dissavingoccurswhen
A) disposableincomeexceedsconsumption.
B) disposableincomeislessthanconsumption.
C) themarginalpropensitytosaveislessthan.5.
D) themarginalpropensitytoconsumeislessthan.5.
Answer: B
Diff:1
14) Savingequals
A) disposableincomeminustaxes.
B) disposableincomeminusconsumptionspending.
C) disposableincomeminussavings.
D) consumptionspendingminussavings.
Answer: B
Diff:1
15) AccordingtoKeynes,theprimarydeterminantofapersonssavingisNOT
A) thepersonslevelofincomebutthedesiredrealincomeoftheperson.
B) thepersonslevelofsavingsbuttheexpectedinterestrateinthenearfuture.
C) theinterestratebutthelevelofsavingsthepersonhas.
D) theinterestratebutthelevelofthepersonsrealdisposableincome.
Answer: D
Diff:2
16) AccordingtoKeynes,anindividualslevelofsavingisprimarilydeterminedby
A) theinterestrate.
B) theindividualscurrentlevelofdisposablerealincome.
C) theindividualsassessmentofthefuturedirectionofthestockmarket.
D) realGrossDomesticProduct(GDP)fortheeconomy.
Answer: B
Diff:1
17) Whichofthefollowingtheoriespredictsthatcurrentconsumptionincreaseswhenaperson
expectsanincreaseinfutureincome?
A) Thelife-cycletheoryofconsumption B) Thepermanentincomehypothesis
C) TheKeynesiantheoryofconsumption D) Alloftheabove
Answer: D
Diff:2
QuestionStatus: New
18) Accordingtothepermanentincomehypothesis,atemporaryincreaseinincomethatdoesnot
affectaveragelifetimeincomewould
A) causealargeincreaseinconsumption.
B) causenochangeinconsumption.
C) causeanincreaseinconsumptionandsavingbythesameamount.
D) causeadecreaseinconsumptionandsavingbythesameamount.
Answer: B
Diff:2
QuestionStatus: New
19) Accordingtothepermanetincomehypothesis,apersonsconsumptionincreasesonlywhen
A) thepersonsaveragelifetimeincomeincreases.
B) thepersonsavesmore.
C) thepersonsincomeincreasesunexpectedly.
D) thepersonscurrentincomeincreases.
Answer: A
Diff:2
QuestionStatus: New
20) Thelife-cycletheoryofconsumptionpredictsthatwhenapersonanticipatesahigherincomein
thefuture,thenthatpersonwill
A) consumemoreandsavelessinthecurrentperiod.
B) consumelessandsavemoreinthecurrentperiod.
C) consumelessandsavelessinthecurrentperiod.
D) notchangetheamountofconsumptionorsavinginthecurrentperiod.
Answer: A
Diff:1
QuestionStatus: New
21) Theconsumptionfunctionshowshowmuch
A) householdsplantoconsumeperyearateachlevelofrealdisposableincome.
B) householdsplantoconsumeperyearateachpossibleinterestrate.
C) realdisposableincomepeoplewillearnateachincometaxbracket.
D) householdsplantoconsumeperyearateachlevelofsavings.
Answer: A
Diff:1
22) AccordingtoKeynes,
A) consumptionispositivelyrelatedtotheinterestrate.
B) consumptionisdirectlyrelatedtoincomebutsavingisinverselyrelatedtoincome.
C) bothconsumptionandsavingarepositivelyrelatedtorealdisposableincome.
D) consumptionisdirectlyrelatedtoincomebutsavinghasnorelationshipwithincome.
Answer: C
Diff:2
23) Whenconsumptionspendingisgreaterthandisposableincome,weknowwithcertaintythat
wehave
A) dissaving. B) excessthrift.
C) positivesavings. D) negativenetinvestment.
Answer: A
Diff:1
24) Supposerealdisposableincomeincreasesby$1,000.Giventhisinformation,weknowthat
A) consumptionwillgenerallyincreasebyexactly$1,000.
B) consumptionwillgenerallyincreasebylessthan$1,000.
C) consumptionwillgenerallyincreasebymorethan$1,000.
D) savingwillgenerallyincreasebyexactly$1,000.
Answer: B
Diff:1
25) Supposewhenrealdisposableincomeis$5000,plannedrealconsumptionis$4000.Whenreal
disposableincomeincreasesto$6000,plannedrealsavingincreasesby$500.Thenewplanned
realconsumptionexpendituresis
A) $5,000. B) $4,500. C) $6,000. D) $3,500.
Answer: B
Diff:2
Planned Planned Planned Real

Consumption Saving Investment GDP
$6,000 -$1,000 $1,000 $5,000
10,000 0 - 10,000
14,000 1,000 - 15,000
18,000 2,000 - 20,000
22,000 - - 25,000
26,000 - - 30,000
26) Accordingtotheabovetable,ifrealGrossDomesticProduct(GDP)is$30,000,plannedsaving
equals
A) $2,000. B) $3,000. C) $4,000. D) $5,000.
Answer: C
Diff:2
27) Accordingtotheabovetable,themarginalpropensitytoconsumeis
A) 0.6. B) 0.5. C) 0.75. D) 0.8.
Answer: D
Diff:2
28) Accordingtotheabovetable,ifrealGrossDomesticProduct(GDP)equals$30,000,whatisthe
averagepropensitytoconsume?
A) 0.67 B) 0.75 C) 0.8 D) 0.87
Answer: D
Diff:3
29) Thebreak-evenpointontheconsumptionfunctionrepresentsthepointwhere
A) consumptionequalsspending.
B) incomeequalsconsumptionplusspending.
C) consumptioniszero.
D) consumptionequalsincome.
Answer: D
Diff:1
30) Inthegraphfortheconsumptionfunction,the45-degreeline
A) containsonlyaconsumptioncomponent.
B) representsbothplannedconsumptionandplannedinvestment.
C) showsvariouscombinationswhereplannedconsumptionequalsrealdisposableincome.
D) reflectsadecreasingAPCasrealdisposableincomerises.
Answer: C
Diff:1
31) Whenafamilysincomeislowanditisspendingmoreonconsumptionthanitisreceivingin
income,
A) theAPCmustbeincreasing.
B) theAPCmustbeequaltotheratioofplannedconsumptionexpendituretototalsaving.
C) theMPCmustbezero.
D) somesegmentoftheconsumptionfunctioncurveliesabovethe45 -degreeline,indicating
dissaving.
Answer: D
Diff:1
32) Atthebreak-evenpointfortheconsumptionfunction
A) savingispositive.
B) savingisnegative.
C) savingiszero.
D) themarginalpropensitytoconsumeequalsl.
Answer: C
Diff:1
33) Ifsavingequals$200whenrealdisposableincomeequals$1,000,thebreak -evenincomeis

A) lessthan$1,000. B) greaterthan$1,000.
C) equalto$1,000. D) equalto$1,200.
Answer: A
Diff:1
34) Accordingtotheabovefigure,plannedconsumptionandincomeareequalatanincomelevelof
A) Y2 . B) Y3 . C) Y1 . D) Y0 .
Answer: D
Diff:1
35) Accordingtotheabovefigure,atanincomelevelofY 1 ,
A) theeconomysavesanamountequaltoBD.
B) themarginalpropensitytosaveisfalling.
C) theaveragepropensitytosaveisgreaterthanone.
D) theeconomydissavesanamountequaltoBD.
Answer: D
Diff:1
36) Accordingtotheabovefigure,theaveragepropensitytosave(APS)iszeroatpoint
A) D. B) F. C) I. D) J.
Answer: B
Diff:1
37) Intheabovefigure,whendisposableincomeisgreaterthan600,
A) savingisnegative. B) theMPCisgreaterthan1.
C) savingispositive. D) theMPSisnegative.
Answer: C
Diff:1
38) Intheabovefigure,themarginalpropensitytoconsume(MPC)equals
A) 0.8. B) 0.9. C) 0.75. D) 0.85.
Answer: B
Diff:3
39) Intheabovefigure,achangeinautonomousconsumptionto100wouldcausetheconsumption
functionto
A) becomesteeper. B) becomeflatter.
C) shiftdown. D) shiftup.
Answer: D
Diff:1
40) Intheabovefigure,savingwillequalzerowhenrealdisposableincomeequals
A) 0. B) 60. C) 600. D) 500.
Answer: C
Diff:1
41) Intheabovefigure,whenrealdisposableincomeequals600
A) thereisdissaving.
B) consumptionislessthandisposableincome.
C) realdisposableincomeexceedsconsumption.
D) consumptionequalsrealdisposableincome.
Answer: D
Diff:1
42) Intheabovefigure,whenrealdisposableincomeislessthan600,then
A) consumptionislessthandisposableincome.
B) consumptionismorethandisposableincome.
C) consumptionisthesameasdisposableincome.
D) theMPCwillfall.
Answer: B
Diff:1
43) Alongtheportionoftheconsumptionfunctionthatliesabovethe45-degreeline,savingis
A) positive. B) negative.
C) equaltozero. D) equaltoconsumption
Answer: B
Diff:1
44) Refertotheabovefigure.IftheMPCisunchangedandlevelofautonomousconsumption
increases,whatoccurs?
A) LineEBDwillshiftup. B) LineABCwilldropdown.
C) LineABCshiftsup. D) LineEBDrotatesandbecomessteeper.
Answer: C
Diff:1
45) Refertotheabovefigure.LineABCiscalled
A) the45-degreeline. B) theconsumptionfunction.
C) thesavingfunction. D) aggregatesupply.
Answer: B
Diff:1
46) Refertotheabovefigure.LineEBDiscalled
A) the45-degreeline. B) theconsumptionfunction.
C) thesavingfunction. D) aggregatedemand.
Answer: A
Diff:1
47) Accordingtotheabovefigure,autonomousconsumptionequals
A) $0. B) $5,000. C) $20,000. D) -$5,000.
Answer: B
Diff:2
48) Refertotheabovefigure.Ifrealdisposableincomeislessthan$5,000,thensavingis
A) 0.
B) negative.
C) positive.
D) noneoftheabove:cannotbedeterminedwiththegiveninformation.
Answer: B
Diff:2
49) Wheretheconsumptionfunctionintersectsthe45-degreeline,
A) savingswillbenegative.
B) consumptionwillequalonlyautonomousconsumption.
C) theaveragepropensitytoconsumeis0.5.
D) savingwillbezero.
Answer: D
Diff:1
50) Ifthemarginalpropensitytoconsumeisunchangedandautonomousconsumption
expendituresincrease,then
A) savingateverylevelofdisposableincomeincreases.
B) thebreak-evendisposableincomedecreases.
C) thebreak-evendisposableincomeincreases.
D) savingisunaffected.
Answer: C
Diff:1
51) Autonomousconsumptionis
A) consumptionspendingthatisearnedratherthantransferredfromthegovernment.
B) consumptionspendingthatdoesnotdependonthelevelofincome.
C) theamountspentonconsumptionwhensavingequalszero.
D) consumptionspendingwhenthemarginalpropensitytoconsumeis1.
Answer: B
Diff:1
52) Ineconomics,thetermautonomousmeans
A) existingindependently. B) non-economicrelated.
C) disposableincome. D) cashpayments.
Answer: A
Diff:1
53) Whenahouseholdsdisposableincomefallstozero,whatdoweexpectwillhappen?
A) Thehouseholdsconsumptionspendingalsofallstozero.
B) Thehouseholdwillmaintainapositivelevelofsaving.
C) Thehouseholdwillmaintainitspreviouslevelofconsumption.
D) Consumptionwillfalltothelevelofautonomousconsumption.
Answer: D
Diff:1
54) Ifthelevelofconsumptionis$100billionanddisposableincomeis$125billion,thenthe
A) APC=0.6andsavingispositive. B) APC= 0.8andsavingisnegative.
C) APC=0.8andsavingispositive. D) APC= 0.6andsavingisnegative.
Answer: C
Diff:1
55) Ifdisposableincome=$200billionandtheAPS= 0.9,then

A) saving=$90billion. B) saving= $45billion.
C) saving=$180billion. D) savingcannotbedetermined.
Answer: C
Diff:1
56) Ifthemarginalpropensitytosaveis0.4anddisposableincomeincreasesfrom$1,000to$1,500,
savingwillincrease
A) $100. B) $200. C) $300. D) $400.
Answer: B
Diff:1
57) Ifconsumptionis$750whenrealdisposableincomeis$1,000,theaveragepropensityto
consumeis
A) 0.80. B) 0.75. C) 0.50. D) 0.25.
Answer: B
Diff:1
58) Theaveragepropensitytoconsumeisthe
A) percentageoftotaldisposableincomeconsumed.
B) rateatwhichrealdisposableincomechangesasplannedconsumptionchanges.
C) ratioofchangesinplannedconsumptiontochangesinrealdisposableincome.
D) slopeoftheconsumptionfunction.
Answer: A
Diff:1
59) Whichofthefollowingcorrectlydefinestheaveragepropensitytoconsume(APC)?
A) Changeinplannedconsumptiondividedbychangeinrealdisposableincome
B) Plannedconsumptiondividedbyrealdisposableincome
C) Realdisposableincomedividedbyplannedconsumption
D) Changeinrealdisposableincomedividedbychangeinplannedconsumption
Answer: B
Diff:1
60) Asrealdisposableincomeincreases,weexpecttheaveragepropensitytoconsume(APC)
A) toalwaysbebelowMPC. B) toincrease.
C) todecrease. D) toremainunchanged.
Answer: C
Diff:1
61) Iftheaveragepropensitytoconsumeis0.8,thentheaveragepropensitytosaveis
A) 0. B) 0.2. C) 0.8. D) 1.
Answer: B
Diff:1
62) Theaveragepropensitytoconsume(APC)equals
A) realdisposableincomedividedbyconsumptionexpenditures.
B) consumptionexpendituresdividedbyrealdisposableincome.
C) thechangeinconsumptionexpendituresdividedbythechangeinrealdisposableincome.
D) thechangeinrealdisposableincomedividedbythechangeinconsumptionexpenditures.
Answer: B
Diff:2
63) Iftheaveragepropensitytosave(APS)is0.60,thenthismeans
A) peoplearesaving60percentoftheirdisposableincome.
B) peoplearespending60percentoftheirdisposableincome.
C) themarginaltaxrateis60.
D) thegovernmentspends60percentofitsrevenues.
Answer: A
Diff:2
64) Whentheaveragepropensitytosave(APS)is0.20,thenthismeans
A) peoplearespending20percentoftheirdisposableincome.
B) peoplearespending80percentoftheirdisposableincome.
C) peoplearesaving$0.20ofthelastdollarearned.
D) peoplearespending60percentoftheirdisposableincomeandinvestingtheremaining20
percent.
Answer: B
Diff:2
65) Ifthemarginalpropensitytosave(MPS)= 0.1,then

A) theMPC=0.9.
B) theAPS=0.1.
C) theAPC=0.9.
D) consumptionequals$1,800whenincomeequals$2,000.
Answer: A
Diff:1
66) Themarginalpropensitytoconsume(MPC)canbestbedefinedasthatfractionof
A) realdisposableincomethatisconsumed.
B) realdisposableincomethatisnotconsumed.
C) achangeinrealdisposableincomethatisspent.
D) achangeinrealdisposableincomethatissaved.
Answer: C
Diff:1
67) Thefractionofachangeinrealdisposableincomethatisspentisreferredtoasthe
A) APC. B) MPC. C) MPS. D) APS.
Answer: B
Diff:1
68) Themarginalpropensitytoconsume(MPC)
A) showshowmuchrealdisposableincomechangeswhenconsumptionfalls.
B) isgreaterthan1onlyifthemarginalpropensitytosaveisgreaterthan1.
C) showshowmuchofanextradollarofrealdisposableincomeisspent.
D) showsthepercentageofrealdisposableincomeconsumedateachlevelofincome.
Answer: C
Diff:1
69) Themarginalpropensitytoconsumeexplainshowmuchofthenextdollarofdisposableincome
A) ahouseholdwillspend.
B) abusinesswillinvest.
C) thegovernmentwillspend.
D) foreignresidentswillusetopurchasedomesticexports.
Answer: A
Diff:1
RealDisposableIncome Consumption
0 $100
$100 $180
$300 $340
$500 $500
$700 $660
$900 $820
70) Intheabovetable,themarginalpropensitytoconsume(MPC)is
A) 0.9. B) 0.75. C) 0.8. D) 0.85.
Answer: C
Diff:1
71) Intheabovetable,savingispositivewhenrealdisposableincomeisgreaterthan
A) zero. B) $100. C) $300. D) $500.
Answer: D
Diff:1
72) Intheabovetable,savingequalszerowhenrealdisposableincomeequals
A) $0. B) $200. C) $300. D) $500.
Answer: D
Diff:2
73) Intheabovetable,themarginalpropensitytosaveis________.
A) 0.8 B) 0.6 C) 0.2 D) 0.4
Answer: C
Diff:2
74) Thearithmeticvalueof(1- MPC)equals

A) APC. B) MPS. C) APS. D) NDP.
Answer: B
Diff:1
75) Theratioofthechangeinconsumptiontothechangeindisposableincomeisthe
A) marginalpropensitytoconsume. B) marginalpropensitytosave.
C) averagepropensitytoconsume. D) averagepropensitytosave.
Answer: A
Diff:1
76) Themarginalpropensitytoconsumeiscalculatedby
A) dividingconsumptionbyincome.
B) dividingincomebyconsumption.
C) dividingthechangeinincomebythechangeinconsumption.
D) dividingthechangeinconsumptionbythechangeinincome.
Answer: D
Diff:1
77) Iftheaveragepropensitytoconsumeis1.0,themarginalpropensitytoconsumeis0.8,andreal
disposableincomeincreasesby$100,theadditionalsavingis
A) $0. B) $20. C) $80. D) $100.
Answer: B
Diff:3
78) IftheMPCis0.8,thentheMPSis
A) 0.2. B) 1. C) 5. D) 8.
Answer: A
Diff:1
RealDisposable Planned
Income Savings
$100 -$10
150 -5
200 0
300 10
360 16
500 30
79) Accordingtotheabovetable,thevalueoftheMPCis
A) 0.9. B) 0.1. C) 0.5. D) 0.7.
Answer: A
Diff:1
80) Accordingtotheabovetable,asthelevelofrealdisposableincomeincreases,
A) themarginalpropensitytosavedeclines.
B) theAPCincreases.
C) themarginalpropensitytoconsumeincreases.
D) theAPSincreases.
Answer: D
Diff:1
81) Accordingtotheabovetable,thevalueofMPSis________.
A) 0.9
B) 0.2
C) 0.1
D) increasingasrealdisposableincomerises.
Answer: C
Diff:1
82) ItisconceivablethattheAPC,APS,MPC,andMPScouldsimultaneouslybe
A) APC=1.0;APS=0.1;MPC= 0.8;MPS= 0.25.
B) APC=0.8;APS=0.2;MPC= 1.1;MPS= 0.1.
C) APC=1.3;APS=-0.3;MPC= 0.9;MPS= 0.1.
D) APC=1.0;APS=0;MPC= 1.0;MPS= 0.15.
Answer: C
Diff:3
83) WhatcanwesayaboutAPC+APSandMPC+ MPS?

A) Eachmustsumto1.
B) MPC+MPS=100%oftotalincome.
C) APC+APS=100%ofthechangeinincome.
D) MPC+MPSalwaysequals1,butthesumofAPC+ APScanvary.
Answer: A
Diff:1
84) Whichofthefollowingwouldbeexpectedtoshifttheconsumptionfunctionup?
A) Decreasesinwealth B) Expectationsofhardertimesahead
C) Increasesinthenationspopulation D) Changesinrealdisposableincome
Answer: C
Diff:1
85) Thenon-incomedeterminantsofconsumptionincludeallofthefollowingEXCEPT
A) stockofassetsownedbyhousehold. B) innovation.
C) theinterestrate. D) realwealth.
Answer: B
Diff:1
86) AllofthefollowingwillshifttheconsumptionfunctionEXCEPT
A) achangeinwealth.
B) achangeintherateofinterest.
C) achangeinincome.
D) achangeinexpectationsconcerningeconomicconditions.
Answer: C
Diff:1
87) Theconsumptionfunctionshiftsupwardwhen
A) realincomeincreases.
B) savingincreases.
C) therealwealthoftheaveragehouseholdincreases.
D) populationdecreases.
Answer: C
Diff:2
88) Theconsumptionfunctionwillshiftwith
A) anincreaseinrealdisposableincome. B) achangeinsaving.
C) adecreaseinrealdisposableincome. D) achangeinhouseholdwealth.
Answer: D
Diff:2
89) AccordingtoKeynes,theprimarydeterminantofapersonssavingis
A) thenominalinterestrate.
B) therealinterestrate.
C) thelevelofthepersonsconsumptionspending.
D) thelevelofthepersonsrealcurrentincome.
Answer: D
Diff:1
90) Whichofthefollowingiscorrect?
A) 1+MPS=MPC B) 1- MPC= MPS
C) 1-MPS=MPC+1 D) 1- MPS= MPC-1
Answer: B
Diff:1
91) Theconsumptionfunctionrelates
A) ahouseholdsconsumptiontoitswealth.
B) plannedhouseholdconsumptiontorealdisposableincome.
C) plannedhouseholdconsumptionandrealinterestrates.
D) realdisposableincomesearnedbyhouseholdswiththelevelofconsumptioncredit
desiredintheeconomy.
Answer: B
Diff:1
92) Howmuchpeopleplantoconsumeatvariouslevelsofdisposableincomeisknownas
A) dissaving. B) investment.
C) theconsumptionfunction. D) inventoryinvestment.
Answer: C
Diff:1
93) Therelationshipbetweenplannedrealconsumptionexpendituresofhouseholdsandtheir
currentlevelofrealdisposableincomeis
A) investment. B) dissaving.
C) saving. D) theconsumptionfunction.
Answer: D
Diff:1
94) IntheKeynesianmodel,consumption
A) ispositivelyrelatedtoincomeandsavingisnegativelyrelatedtothestockmarket.
B) ispositivelyrelatedtoincomebutsavingisnotsystematicallyrelatedtoeitherincomeor
interestrates.
C) andsavingarepositivelyrelatedtotherealinterestrate.
D) andsavingarepositivelyrelatedtoincome.
Answer: D
Diff:2
95) Dissavingis
A) impossibleinthesimpleKeynesianmodel.
B) thesituationwhensavingexceedsconsumption.
C) thesituationwhenconsumptionspendingexceedsdisposableincome.
D) thesituationwhenpeoplesavesmallerandsmalleramounts.
Answer: C
Diff:1
96) Asituationinwhichspendingexceedsincomeis
A) theconsumptionfunction. B) thesavingfunction.
C) averagepropensitytosave. D) dissaving.
Answer: D
Diff:1
97) Asrealdisposableincomeincreases,consumptionexpenditures
A) increasebythesameamount. B) increasebyasmalleramount.
C) increasebyalargeramount. D) remainconstant.
Answer: B
Diff:2
98) Whendisposableincomeequalsconsumptionexpenditures,then
A) savingiszero.
B) savingequals10percentofincome.
C) bothsavingandsavingsarezero.
D) wecanttellwhatsavingiswithoutmoreinformation.
Answer: A
Diff:1
99) Atalevelofrealdisposableincomeof0,consumptionis$4000.Then
A) savingequals0. B) savingequals-$4000.
C) savingsequal-$4000. D) savingequals$4000.
Answer: B
Diff:2
100) Refertotheabovefigure.LineBCDiscalled
A) thesavingfunction. B) thesavingsfunction.
C) the45-degreeline. D) theconsumptionfunction.
Answer: D
Diff:1
101) Refertotheabovefigure.LineACEiscalled
A) thesavingfunction. B) thesavingsfunction.
C) the45-degreeline. D) theconsumptionfunction.
Answer: C
Diff:1
102) Refertotheabovefigure.Ifrealdisposableincomeis$30,000,savingis
A) $0. B) $4000. C) $5000. D) $6000.
Answer: A
Diff:2
103) Refertotheabovefigure.Atanincomeof$10,000,savingis
A) 0. B) $13,000. C) $3,000. D) -$3,000.
Answer: D
Diff:2
104) Refertotheabovefigure.Autonomousconsumptionequals
A) 0. B) -$5000. C) $5000. D) $25,000.
Answer: C
Diff:2
105) Refertotheabovefigure.Themarginalpropensitytoconsumeandthemarginalpropensityto
save
A) are0.90and0.10,respectively. B) are0.83and0.17,respectively.
C) are0.75and0.25,respectively. D) dependonthelevelofincome.
Answer: B
Diff:2
106) Refertotheabovefigure.Thefigurerepresentstheconsumptionfunctionforaconsumer.Point
Arepresents
A) autonomousconsumption. B) positivesaving.
C) negativeconsumption. D) zerosaving.
Answer: A
Diff:3
Brepresents
C) negativesaving. D) zerosaving.
Answer: C
Diff:3
Crepresents
C) negativesaving. D) zerosaving.
Answer: D
Diff:3
Drepresents
A) autonomousconsumption. B) saving.
C) dissaving. D) zerosaving.
Answer: B
Diff:3
110) Refertotheabovefigure.Thefigurerepresentstheconsumptionfunctionforaconsumer.The
distancebetweenAandBrepresents
A) theamountofautonomousconsumption.
B) theamountofautonomoussaving.
C) theamountoftotalconsumption.
D) noneoftheabove.
Answer: D
Diff:2
111) Refertotheabovefigure.Thefigurerepresentstheconsumptionfunctionforaconsumer.The
distancebetweenCandDrepresents
B) theamountofsaving.
C) theamountofdissaving.
D) thepointwheresavingequalszero.
Answer: B
Diff:3
112) Refertotheabovefigure.Thefigurerepresentsthesavingfunctionfortheconsumer.PointA
represents
B) asituationinwhichsavingispositive.
C) asituationinwhichsavingisnegative.
D) thepointatwhichsavingequalszero.
Answer: C
Diff:3
113) Refertotheabovefigure.Thefigurerepresentsthesavingfunctionfortheconsumer.PointB
represents
Answer: D
Diff:3
114) Refertotheabovefigure.Thefigurerepresentsthesavingfunctionfortheconsumer.PointC
represents
Answer: B
Diff:3
115) Refertotheabovefigure.Autonomousconsumptionis
A) onlyatpointA. B) totheleftofpointB.
C) onlyatpointB. D) totherightofpointB.
Answer: A
Diff:3
116) Refertotheabovefigure.Thepointatwhichsavingequalszerois
Answer: C
Diff:2
117) Refertotheabovefigure.Dissavingoccurs,
Answer: B
Diff:3
118) Refertotheabovefigure.Savingoccursat
Answer: D
Diff:3
119) Alongthe45referenceline
A) consumptionexpendituresequalsaving.
B) therelationshipbetweenconsumptionandincomeisrepresented.
C) theaveragepropensitytoconsumeisrepresented.
D) plannedrealexpendituresequalrealdisposableincome.
Answer: D
Diff:1
120) Plannedexpendituresequalrealdisposableincome
A) ateverypointontheconsumptionfunction.
B) ateverypointonthesavingfunction.
C) ateverypointonthe45-degreeline.
D) whensavingequalszero.
Answer: C
Diff:2
121) Thebreak-evenpointrefersto
B) thepointatwhichplannedrealconsumptionequalsrealdisposableincome.
C) themaximumamountofdissavingapersoncanexperience.
D) apointatwhichplannedrealconsumptionisforgreaterthanrealdisposableincome.
Answer: B
Diff:1
122) Autonomousconsumption
A) isthesameasthebreak-evenpoint.
B) givestheamountapersonchangesplannedconsumptionforachangeinrealdisposable
income.
C) istheamountofconsumptionthatisindependentofthelevelofdisposableincome.
D) istheproportionoftotaldisposableincomethatisconsumed.
Answer: C
Diff:1
123) Thepartofconsumptionthatdoesnotdependuponthelevelofdisposableincomeis
A) autonomousconsumption. B) saving.
C) savings. D) averagepropensitytoconsume.
Answer: A
Diff:1
124) Averagepropensitytoconsume
income.
Answer: D
Diff:1
125) Theaveragepropensitytoconsumeis
A) realconsumptionexpendituresdividedbyrealdisposableincome.
B) realdisposableincomedividedbyrealconsumptionexpenditures.
C) realconsumptionexpendituresdividedbyrealsaving.
D) realsavingdividedbyrealconsumptionexpenditures.
Answer: A
Diff:1
126) Marginalpropensitytoconsume
income.
Answer: B
Diff:1
127) Theaveragepropensitytoconsumeis
A) realconsumption/realdisposableincome.
B) realsaving/realdisposableincome.
C) changeinrealconsumption/changeinrealdisposableincome.
D) changeinrealsaving/changeinrealdisposableincome.
Answer: A
Diff:2
128) Themarginalpropensitytosaveis
Answer: D
Diff:2
129) Whichofthefollowingisnegativeforthetypicalconsumeratsomelevelofrealdisposable
income?
A) Marginalpropensitytosave. B) Marginalpropensitytoconsume.
C) Averagepropensitytosave. D) Averagepropensitytoconsume.
Answer: C
Diff:2
130) Themarginalpropensitytoconsumeis
Answer: C
Diff:2
131) Theaveragepropensitytosaveis
Answer: B
Diff:2
realconsumption
132) Theequation isthe
realdisposableincome
A) averagepropensitytoconsume. B) averagepropensitytosave.
C) marginalpropensitytoconsume. D) marginalpropensitytosave.
Answer: A
Diff:2
realsaving
realdisposableincome
Answer: B
Diff:2
changeinrealconsumption
changeinrealdisposableincome
Answer: C
Diff:2
changeinrealsaving
changeinrealdisposableincome
Answer: D
Diff:2
Real PlannedReal
DisposableIncome Consumption
0 3,000
2,000 4,400
4,000 5,800
6,000 7,200
8,000 8,600
10,000 10,000
12,000 11,400
14,000 12,800
136) Refertotheabovetable.Thetablegivesthecombinationsofrealdisposableincomeandreal
consumptionforacollegestudentforayear.Whatdoesplannedrealsavingequalwhenreal
disposableincomeequals$12,000?
A) 0 B) 600 C) 3,000 D) 11,400
Answer: B
Diff:2
consumptionforacollegestudentforayear.Whatdoesplannedrealsavingequalwhenreal
disposableincomeequals$6,000?
A) -3,000 B) -1,200 C) 0 D) 7,200
Answer: B
Diff:2
consumptionforacollegestudentforayear.Whatisthevalueofthemarginalpropensityto
consume?
A) 0 B) 0.3 C) 0.7 D) 1
Answer: C
Diff:2
consumptionforacollegestudentforayear.Thebreak-evenlevelofrealdisposableincomeis
A) 0 B) 6,000 C) 10,000 D) 14,000
Answer: C
Diff:2
consumptionforacollegestudentforayear.Whatisthevalueoftheaveragepropensityto
consumewhenrealdisposableincomeequals$4,000?
A) -0.45 B) 0.69 C) 0.7 D) 1.45
Answer: D
Diff:2
consumptionforacollegestudentforayear.Whatisthevalueoftheaveragepropensitytosave
whenrealdisposableincomeequals$4,000?
A) -0.45 B) 0.69 C) 0.7 D) 1.45
Answer: A
Diff:2
consumptionforacollegestudentforayear.Whatisthevalueoftheaveragepropensityto
consumewhenrealdisposableincomeequals$14,000?
A) 0.09 B) 0.7 C) 0.91 D) 1.1
Answer: C
Diff:2
consumptionforacollegestudentforayear.Whatisthevalueoftheaveragepropensitytosave
equalwhenrealdisposableincomeequals$14,000?
A) 0.09 B) 0.7 C) 0.91 D) 1.1
Answer: A
Diff:2
144) Anincreaseinautonomousconsumptionmeansthat
A) theconsumptionfunctionshiftsdown.
B) theconsumptionfunctionshiftsup.
C) theconsumptionfunctionbecomessteeper.
D) theconsumptionfunctionbecomeslesssteep.
Answer: B
Diff:2
145) Iftheaveragepropensitytoconsumeisinitially1.0,themarginalpropensitytoconsumeis0.75,
andrealdisposableincomeincreasesby$1000,thenewvalueofsavingis
A) 0. B) $250. C) $750. D) $1000.
Answer: B
Diff:3
146) Supposeautonomousconsumptiondecreases.Thisreductioninautonomousconsumptionwill
causewhichofthefollowingtooccur?
A) Theconsumptionfunctionshiftsdown.
B) Theconsumptionfunctionshiftsup.
C) Theconsumptionfunctionbecomessteeper.
D) Theconsumptionfunctionbecomeslesssteep.
Answer: A
Diff:1
147) Thestockofassetsownedbyaperson,household,firmornationis
A) realdisposableincome. B) wealth.
C) capitalinvestment. D) capitalgoods.
Answer: B
Diff:1
148) TheaveragepriceofashareofstockontheNewYorkStockExchangefallsby30percent.Other
thingsbeingequal,wewouldexpect
A) anincreaseinthemarginalpropensitytoconsume.
B) adecreaseinthemarginalpropensitytoconsume.
C) ashiftupoftheconsumptionfunction.
D) ashiftdownoftheconsumptionfunction.
Answer: D
Diff:3
A) APC+APS=1 B) APC+ APS< 1
C) APC+MPS=1 D) APC+ APS+ MPC+ MPS=1
Answer: A
Diff:2
150) Anotherwayofstatingthatinvestmentisindependentofrealdisposableincomeistosaythatit
is
A) inverselyrelated. B) directlyrelated.
C) complementary. D) autonomous.
Answer: D
Diff:1
A) Intheclassicalmodel,thesupplyofsavingisdeterminedbytherateofinterest.
B) Intheclassicalmodel,thesupplyofsavingisdeterminedbythelevelofincome.
C) IntheKeynesianmodel,thesupplyofsavingisdeterminedbytherateofinterest.
D) IntheKeynesianmodel,thesupplyofsavingisdeterminedbythelevelofinvestment.
Answer: A
Diff:2
152) Theconsumptionfunctionshowstherelationshipbetween
A) interestratesandplannedrealconsumption.
B) employmentandplannedrealconsumption.
C) thepricelevelandplannedrealconsumption.
D) realdisposableincomeandplannedrealconsumption.
Answer: D
Diff:2
153) Therelationshipthattellsushowmuchapersonintendstospendatvariouslevelsofincomeis
A) thespendingfunction. B) theexpenditurefunction.
C) theconsumptionfunction. D) thebuyingfunction.
Answer: C
Diff:1
154) Thepartofconsumptionthatisindependentofdisposableincomeiscalled
A) automaticconsumption. B) fixedconsumption.
C) personalconsumption. D) autonomousconsumption.
Answer: D
Diff:1
155) Whichofthefollowingisfalse?
A) APC+MPS=1 B) MPC+ MPS=1
C) 1-APC=APS D) APC+ APS=1
Answer: A
Diff:1
156) Whichofthefollowingisfalse?
A) 1-MPC=MPS B) 1+ MPC= MPS
C) 1-APS=APC D) APC+ APS=1
Answer: B
Diff:1
A) APC+MPS=1 B) MPC+ MPS= 1
C) 1+APC=APS D) APC- APS= 1
Answer: B
Diff:1
A) APC+MPS=1 B) APC+ APS= 1
C) MPS+APS=1 D) APC*APS= 1
Answer: B
Diff:1
RealDisposable PlannedReal
IncomeperYear ConsumptionperYear
$0 $1,000
1,000 1,800
2,000 2,600
3,000 3,400
4,000 4,200
5,000 5,000
6,000 5,800
7,000 6,600
8,000 7,400
9,000 8,200
10,000 9,000
159) Intheabovetable,thelevelofautonomousconsumptionis
A) $0. B) $1,000. C) $5,000. D) $9,000.
Answer: B
Diff:2
160) Intheabovetable,dissavingoccursateverylevelofincomebelow
A) $10,000. B) $8,000. C) $7,000. D) $5,000.
Answer: D
Diff:2
161) Intheabovetable,themarginalpropensitytoconsumewhendisposableincomechangesfrom
$5,000to$6,000is
A) 0.8. B) 0.75. C) 0.6. D) 0.5.
Answer: A
Diff:2
162) Intheabovetable,themarginalpropensitytosavewhendisposableincomechangesfrom
$1,000to$2,000is
A) 0.1. B) 0.2. C) 0.8. D) -0.2.
Answer: B
Diff:3
163) Intheabovetable,theaveragepropensitytosavewhendisposableincomeis$5,000is
A) 0.2. B) 0.1. C) 0.0. D) -0.1.
Answer: C
Diff:2
164) Intheabovetable,theaveragepropensitytoconsumewhenincomeis$10,000is
A) 0.8. B) 0.2. C) 0.0. D) 0.9.
Answer: D
Diff:2
165) Atthepointatwhichplannedrealconsumptionspendingisequaltorealdisposableincome
A) theconsumptionfunctionisabovethe45-degreeline.
B) theconsumptionfunctionisbelowthe45-degreeline.
C) theconsumptionfunctionintersectsthe45-degreeline.
D) theconsumptionfunctionintersectsthesavingsfunction.
Answer: C
Diff:2
166) Whichoneofthefollowingwouldshiftyourconsumptionfunctioninanupwarddirection?
A) anincreaseinyourwealth
B) adecreaseinyourwealth
C) anincreaseinyourrealdisposableincome
D) adecreaseinyourrealdisposableincome
Answer: A
Diff:2
167) AccordingtoKeynes,themostimportantdeterminantofanindividualsrealsavingis
A) interestrates. B) theforeignexchangerate.
C) theindividualsrealdisposableincome. D) thelevelofinvestment.
Answer: C
Diff:2
168) AssumingthatYd=$20,000andC= $22,000,wewouldfindthattheaveragepropensityto

consumewouldbeequalto
A) 0.9. B) 1.1. C) 1.8. D) 0.8.
Answer: B
Diff:2
169) AssumingthatYd=$20,000andC= $22,000,wewouldfindthattheaveragepropensitytosave

equals
A) 0.9. B) 1.1. C) -0.1. D) -0.8.
Answer: C
Diff:2
170) Therelationshipbetweenplannedconsumptionandrealdisposableincomeisreferredtoas
A) thewealthfunction. B) thesavingfunction.
C) themultiplier. D) theconsumptionfunction.
Answer: D
Diff:2
171) Considertheabovefigure.Autonomousconsumption,inthisscenario,isequalto
A) $30. B) $40. C) $60. D) $80.
Answer: B
Diff:2
172) Considertheabovefigure.Atanincomeof$60wewouldexpectsavingtobeequalto
A) $60. B) $40. C) $10. D) $0.
Answer: D
Diff:3
173) Considertheabovefigure.AtincomelevelYd = $30,theAPCisequalto

A) 1.25. B) 1.67. C) 1.05. D) 0.05.
Answer: B
Diff:3
174) Considertheabovefigure.AtincomelevelYd = $110,theAPSisequalto

A) 0.64. B) 0.32 C) 1.10. D) -0.36.
Answer: B
Diff:3
175) Considertheabovefigure.Theequationfortheconsumptionfunctionis
A) C=40+60Yd. B) C= 40+ 50Yd.
C) C=40+0.33Yd. D) C= 40+ 0.1Yd.
Answer: C
Diff:3
176) Considertheabovefigure.Theequationforthesavingfunctionis
A) S=40-0.67Yd. B) S= 40+ 0.33Yd.
C) S=-40+0.67Yd. D) S= -40- 0.33Yd.
Answer: C
Diff:3
177) Theconsumptionfunctionistherelationshipbetween
A) realconsumptionspendingandrealtaxes.
B) realconsumptionspendingandinvestmentspending.
C) realconsumptionspendingandrealdisposableincome.
D) realconsumptionspendingandrealsaving.
Answer: C
Diff:1
178) Ifyourrealdisposableincomegoesupby$1,000perweek,andyourrealconsumption
spendinggoesupby$800perweek,youhaveamarginalpropensitytoconsumeof
A) 0.2. B) 0.8. C) 1.2. D) 1.0.
Answer: B
Diff:2
179) Ifyourrealdisposableincomegoesupby$1,000perweek,andyourrealconsumption
spendinggoesupby$800perweek,youhaveanmarginalpropensitytosaveof
A) 0.2. B) 0.8. C) 1.2. D) 1.0.
Answer: A
Diff:2
180) Whichofthefollowingchangeswillshifttheconsumptionfunctionupward?
A) anincreaseinwealth B) adecreaseinwealth
C) adecreaserealdisposableincome D) anincreaseinrealdisposableincome.
Answer: A
Diff:2
181) AccordingtoKeynes,realsavingandrealconsumptionspendingarefunctionsof
A) economicexpectations. B) anindividualsfutureearningpotential.
C) currenteducationalattainment. D) currentrealdisposableincome.
Answer: D
Diff:1
182) Theconsumptionfunctionshowstherelationshipbetweenplannedrealconsumptionspending
and
A) realdisposableincome. B) plannedrealsaving.
C) theaveragepropensitytoconsume. D) themarginalpropensitytoconsume.
Answer: A
Diff:1
183) Thesavingfunctionshowstherelationshipbetweenplannedrealsavingand
A) realwealth. B) realdisposableincome.
C) theaveragepropensitytosave. D) themarginalpropensitytosave.
Answer: B
Diff:1
184) Therelationshipbetweenrealconsumptionspendingandrealdisposableincome
A) isdirect. B) isinverse.
C) plotsaverticalline. D) plotsahorizontalline.
Answer: A
Diff:1
185) Ifrealdisposableincomeincreases,theaveragepropensitytoconsumewill
A) initiallyincrease,andthendecrease. B) remainconstant.
C) increase. D) decrease.
Answer: D
Diff:1
186) Ifrealdisposableincomeincreases,theaveragepropensitytosavewill
A) initiallyincrease,andthendecrease. B) remainconstant.
C) increase. D) decrease.
Answer: C
Diff:1
187) Autonomousconsumption
A) ismeasuredbytheslopeoftheconsumptionfunction.
B) isthereciprocalofconsumption.
C) isequaltotheminimumsavings.
D) ismeasuredbytheinterceptoftheconsumptionfunctionandtheY -axis.
Answer: D
Diff:1
188) Autonomousconsumptionisdefinedas
A) thelevelofrealconsumptionspendingthatisindependentofrealdisposableincome.
B) therealconsumptionspendingbytheautonomousgovernment.
C) thelevelofrealconsumptionspendingthatisequaltorealdisposableincome.
D) theconsumptionofforeign-madegoodsindependentofexchangerates.
Answer: A
Diff:1
189) Withreferencetotheconsumptionfunction,the45-degreelinerepresents
A) theplannedsavingsfunction.
B) allpointsatwhichplannedrealsavingisequaltorealdisposableincome.
C) allpointsatwhichplannedrealsavingisequaltoplannedrealconsumptionspending.
D) allpointsatwhichrealdisposableincomeisequaltorealconsumptionspending.
Answer: D
Diff:2
190) Intheconsumptionfunctionmodel,the45-degreelinerepresentswhere
A) therealdisposableincomeisequaltozero.
B) plannedrealsavingisequaltozero.
C) plannedrealconsumptionspendingisequaltozero.
D) plannedrealsavingisgreaterthanactualrealsavings.
Answer: B
Diff:2
191) Theaveragepropensitytoconsume(APC)is
A) therateatwhichrealconsumptionspendingchangesovertime.
B) thepercentageofrealdisposableincomesaved.
C) thepercentageofrealdisposableincomeconsumed.
D) thepercentageofadditionalrealdisposableincomethatwillgotowardadditional
consumptionspending.
Answer: C
Diff:1
192) Theaveragepropensitytosave(APS)is
A) therateatwhichrealsavingschangesovertime.
C) thedifferencebetweentheamountsofrealdisposableincomeconsumedandsaved.
D) thepercentageofadditionalrealdisposableincomethatwillgotowardrealsaving.
Answer: B
Diff:1
193) Themarginalpropensitytoconsume(MPC)is
A) therateatwhichrealconsumptionspendingchangesovertime.
C) thepercentageofrealdisposableincomeconsumed.
D) thepercentageofanadditionaldollarofrealdisposableincomethatwillgotoward
additionalrealconsumptionspending.
Answer: D
Diff:1
194) Themarginalpropensitytosave(MPS)is
A) therateatwhichrealsavingschangesovertime.
C) thedifferencebetweentheamountsofrealdisposableincomeconsumedandsaved.
D) thepercentageofanadditionaldollarofrealdisposableincomethatwillgotoward
additionalrealsavings.
Answer: D
Diff:1
195) Theslopeoftheconsumptionfunctionisthe
A) MPC. B) APC. C) APS. D) MPS.
Answer: A
Diff:3
196) Theslopeofthesavingfunctionisthe
A) MPC. B) APC. C) MPS. D) APS.
Answer: C
Diff:3
197) Dissavingoccurswhen
A) householdsdepositunusuallylargeamountsofmoneyintotheirsavingsaccount.
B) householdsreducetheirplannedmonthlysaving.
C) consumptionspendingexceedsrealdisposableincome.
D) theaveragesavingrateforthenationunexpectedlyfalls.
Answer: C
Diff:1
RealDisposableRealPlanned
Income Consumption
$0 $20
$50 $60
$75 $80
$100 $100
$125 $120
$150 $140
198) Usetheabovetable.Theautonomousconsumptioninthistableis
A) $140. B) $20. C) $0. D) $50.
Answer: B
Diff:1
199) Usetheabovetable.Dissavingoccursuptoadisposableincomelevelof
A) $0. B) $50. C) $100. D) $150.
Answer: C
Diff:1
200) Usetheabovetable.Whichofthefollowingistrueifrealdisposableincomeis$150?
A) APCislessthanMPC. B) APC= 0.8.
C) APS=0.2. D) APSislessthanMPS.
Answer: D
Diff:2
201) Usetheabovetable.Whenrealdisposableincomeis$125,
A) APC=0.96. B) APC= 0.80. C) APS= 0.20. D) MPS= 0.96.
Answer: A
Diff:2
202) Usetheabovetable.Wecaninferfromthetablethatwhenrealdisposableincomeis$175,
A) APC=0.91. B) APC= 0.80. C) APC= 0.20. D) APC= 0.09.
Answer: A
Diff:2
203) Usetheabovetable.TheMPCis
A) 0.91. B) 0.80. C) 0.20. D) 0.09.
Answer: B
Diff:1
204) Usetheabovetable.TheMPSis
A) 0.91. B) 0.80. C) 0.20. D) 0.09.
Answer: C
Diff:1
205) Usetheabovetable.Atanincomeof$50,
A) realsavingis$20. B) realdissavingis$10.
C) realsavingis$10. D) realdissavingis$50.
Answer: B
Diff:2
206) Usetheabovetable.Atanincomeof$150,
A) realsavingis$20. B) realdissavingis$10.
C) realsavingis$10. D) realdissavingis$50.
Answer: C
Diff:2
207) Whengraphingtheconsumptionfunction,whatpurposeisservedbythe45-degreeline?
A) Itidentifiesallthepointsatwhichsavingandconsumptionspendingareequal.
B) Itidentifiesallthepointsatwhichrealdisposableincomeandplannedrealconsumption
spendingareequal.
C) Itidentifiesallthepointsatwhichrealplannedinvestmentexpenditureandreal
autonomousconsumptionspendingareequal.
D) Itidentifiesallthepointswhererealdissavingandsavingareequal.
Answer: B
Diff:2
208) Autonomousconsumptionisthelevelofconsumptionthatis
A) consistentwiththeaveragestandardofliving.
B) observedatthepovertyline.
C) independentofrealincome.
D) availabletosomeoneearningtheminimumwage.
Answer: C
Diff:2
209) Atthepointatwhichtheconsumptionfunctionintersectsthe45degreereferenceline
A) plannedrealconsumptionequalsrealdisposableincome.
B) equilibriumoutputissupplydeterminedequilibriumoutputisdeterminedbyboth.
C) plannedrealsavingequalsrealdisposableincome.
D) plannedrealconsumptionofrealdisposableincomeequalszero.
Answer: A
Diff:1
210) AccordingtotheKeynesianmodel,whatarethetwocomponentsofconsumptionspending?
Whatdetermineshowconsumptionchangeswhenrealdisposableincomechanges?Explain.
Answer: Autonomousconsumptionisthepartofconsumptionthatdoesnotdependondisposable
income.Itistheamountofconsumptionexpendituresapersonmakeswhendisposable
incomeiszero.Theotherpartofconsumptionvariesasrealdisposableincomevaries.
Themarginalpropensitytoconsumeisthechangeinconsumptionexpendituresdivided
bythechangeinrealdisposableincome.Keynesarguedthatwhenpeoplereceivean
increaseindisposableincome,theyrespondbyincreasingtheirconsumption
expenditures,butbyasmalleramount.Theyalsoincreasetheirsaving.
Diff:2
211) WhatistheprimarydeterminantofrealsavingandrealconsumptionaccordingtoKeynes?
Explain.
Answer: Keynesarguedthatrealconsumptionandrealsavingdependprimarilyonan
individualscurrentrealdisposableincome.Assomeonesrealdisposableincomerises,
Keynesexpectedthepersonsrealconsumptionspendingandrealsavingtoincrease,too.
Hearguedthatindividualsdidnotrespondtotheinterestrateinmakingdecisionsabout
realsaving.
Diff:1
212) Supposethemarginalpropensitytoconsumeis0.75.Whatdoesthismean?Whatdoweknow
aboutthemarginalpropensitytosave?Whatdoweknowabouttheaveragepropensityto
consume?
Answer: Amarginalpropensitytoconsumeof0.75meansthataconsumerwillincreasereal
consumptionspending$75forevery$100increaseinrealdisposableincome.Sincea
personeitherconsumesorsavesrealdisposableincome,themarginalpropensitytosave
mustbe0.25.Wedonotknowwhattheaveragepropensitytoconsumeis.Itdependson
thelevelofrealdisposableincome.
Diff:2
12.3DeterminantsofInvestment
1) Comparedtoconsumptionspending,investmenthistoricallyhastendedtobe
A) greater. B) morestable. C) stagnant. D) morevariable.
Answer: D
Diff:1
Topic: 12.3DeterminantsofInvestment
2) Whichofthefollowingwouldincreasethelevelofplannedrealinvestment?
A) Anincreaseintheinterestrate B) Anexpectationofhigherfutureprofits
C) Anexpectationofhigherfuturecosts D) Anincreaseinbusinesstaxes
Answer: B
Diff:1
3) WhichofthefollowingisNOTincludedintheflowofinvestmentspendingthatispartoftotal
plannedexpendituresintheeconomy?
A) Purchasesofcorporatestock B) Spendingoncapitalgoods
C) Inventoryinvestment D) Fixedinvestment
Answer: A
Diff:1
4) Theplannedinvestmentfunctionshowsthat
A) realgrossinvestmentfallsasrealNNPincreases.
B) anegativerelationshipexistsbetweenthelevelofplannedinvestmentandtheinterest
rate.
C) apositiverelationshipexistsbetweenplannedconsumptionandplannedinvestment.
D) athigherlevelsofplannedsaving,plannedinvestmentincreases.
Answer: B
Diff:1
5) Anincreaseintheinterestratewillcause
A) plannedinvestmentspendingtoincrease.
B) plannedinvestmentspendingtodecrease.
C) theinvestmentfunctiontoshiftout.
D) theinvestmentfunctiontoshiftin.
Answer: B
Diff:2
6) Theinvestmentfunctionisrepresentedby
A) aninverserelationshipbetweentheinterestrateandthevalueofplannedinvestment.
B) thedirectrelationshipbetweentheinterestrateandthevalueofplannedinvestment.
C) thedirectrelationshipbetweentaxesandgovernmentspending.
D) theindirectrelationshipbetweentaxesandgovernmentspending.
Answer: A
Diff:2
7) Whathappensasinterestratesfall?
A) Thenumberofprofitableinvestmentopportunitiesdeclines.
B) Theopportunitycostofusingretainedearningstofinanceinvestmentspendingdeclines.
C) Plannedinvestmentspendingalsofalls.
D) Plannedinvestmentspendingremainsconstantsinceitdependsonprofitprojectionsnot
interestrates.
Answer: B
Diff:2
8) IntheKeynesianmodel,plannedinvestmentisinverselyrelatedto
A) theinterestrate. B) thelevelofincome.
C) thewagerate. D) thetaxrate.
Answer: A
Diff:1
9) Ifbusinessexecutivesbecomemoreoptimisticaboutthefuture,wewouldexpectthat
A) theinvestmentcurvewouldshiftoutwardtotheright.
B) thesavingfunctionwouldshiftup.
C) theconsumptioncurvewouldshiftup.
D) investmentspendingwoulddecrease.
Answer: A
Diff:2
10) Theinvestmentfunctionwouldshiftinwardtotheleftif
A) realdisposableincomedecreased.
B) interestratesincreased.
C) therewasanincreaseinbusinesstaxes.
D) therewasapositivechangeinproductivetechnology.
Answer: C
Diff:2
11) Anincreaseintheinterestrateresultsin
A) asmalleropportunitycostofinvestmentandsoplannedinvestmentspendingincreases.
B) asmalleropportunitycostofinvestmentandsoplannedinvestmentspendingdecreases.
C) agreateropportunitycostofinvestmentandsoplannedinvestmentspendingdecreases.
D) agreateropportunitycostofinvestmentandsoplannedinvestmentspendingincreases.
Answer: C
Diff:2
12) AllofthefollowingwillcauseanoutwardshiftoftheinvestmentfunctionEXCEPT
A) innovationthatimprovesproductionefficiencyateverylevelofoutput.
B) areductioninbusinesstaxes.
C) businesspeoplebecomingoptimisticaboutthefuture.
D) adecreaseintheinterestrate.
Answer: D
Diff:1
13) Theplannedinvestmentfunctionwillshiftdownwardif
A) realdisposableincomeincreases.
B) theinterestratefalls.
C) businessexpectationsbecomemorepessimistic.
D) theexistingstockofcapitaldecreases.
Answer: C
Diff:1
14) Technologicalprogressshouldleadto
A) anoutward(rightward)shiftintheinvestmentfunction.
B) adownwardmovementoftheinvestmentfunction.
C) anunchangedinvestmentfunction.
D) lesssaving.
Answer: A
Diff:1
15) Whichofthefollowingwouldcausealeftwardshiftintheinvestmentfunction?
A) Technologicalprogress
B) Areductionintherateofinterest
C) Optimisticexpectationsaboutbusinessconditions
D) Anincreaseinbusinesstaxes
Answer: D
Diff:1
16) Foraninvestmenttobeconsideredautonomous,itmust
A) benegativelyrelatedtotheinterestrate.
B) increaseasthelevelofincomeincreases.
C) includefixedcomponents.
D) beindependentofthelevelofrealdisposableincome.
Answer: D
Diff:1
17) InKeynesiananalysis,ifinvestmentremainsconstantwhenincomechanges,theinvestmentis
called
A) planned. B) autonomous. C) unplanned. D) discretionary.
Answer: B
Diff:1
18) Oftherelationshipsbelow,whichistheleaststable?
A) Consumption B) Saving C) Investment D) Netexports
Answer: C
Diff:1
19) Afirmwillinvestinaprojectif
A) theinterestrateexceedstheopportunitycostoftheproject.
B) thefirmslevelofcapitalisatthedesiredlevel.
C) thefirmslevelofcapitalishigherthanthedesiredlevel.
D) therateofreturnoftheprojectisgreaterthantheopportunitycostoftheinvestment.
Answer: D
Diff:1
20) Investmentspendingis
A) directlyrelatedtotheinterestrate.
B) inverselyrelatedtotheinterestrate.
C) directlyrelatedtorealdisposableincome.
D) inverselyrelatedtorealdisposableincome.
Answer: B
Diff:2
21) Whichofthefollowingisatruestatementrelativetoretainedearningsandinvestment?
A) Lowerinterestratesstimulateborrowingforinvestment,buthavenoeffectontheuseof
retainedearningsforinvestmentspending.
B) Lowerinterestratesstimulateborrowingforinvestment,butdiscouragetheuseof
retainedearningsforinvestment.
C) Lowerinterestratesreducetheopportunitycostofretainedearnings,stimulatingtheuse
ofthesefundsininvestment.
D) Lowerinterestrateshavenoeffectoninvestmentspendingatallbecauseinvestment
spendingisautonomous.
Answer: C
Diff:2
22) Theinvestmentfunctionwillshiftwhenthereisachangein
A) theinterestrate.
B) firmsprofitexpectations.
C) thecostofborrowing.
D) theopportunitycostofretainedearnings.
Answer: B
Diff:1
23) WhichofthefollowingwillNOTleadtoashiftintheinvestmentfunction?
A) Afirmdowngradesitsfutureprofitability.
B) Anewdiscoveryleadstoatechnologicaladvancement.
C) Thegovernmentjustloweredbusinesstaxes.
D) Thecostofborrowinghasjustdecreased.
Answer: D
Diff:1
A) Overtheyears,realconsumptionspendinghasbeenmorevolatilethanrealinvestment
spending.
B) Overtheyears,realinvestmentspendinghasbeenmorevolatilethanrealconsumption
spending.
C) DomesticrealinvestmentintheUnitedStateswashighestduringtheGreatDepression.
D) IntheKeynesianmodel,changesinthevolumeofrealinvestmentspendingarefully
explainedbychangesintherealinterestrate.
Answer: B
Diff:2
25) Changesinrealplannedinvestmentspendinghave
A) adirectrelationshiptochangesininterestrates.
B) aninverserelationshiptochangesintheinterestrate.
C) noidentifiablerelationshiptochangesintheinterestrate.
D) adirectrelationshiptochangesinthelevelofhouseholdsavings.
Answer: B
Diff:1
26) WhentheinvestmentisgraphedasafunctionofrealGDP,
A) itgraphsasaverticalstraightline.
B) itgraphsasa45-degreelinestartingattheindicatedlevelofinvestment.
C) itgraphsasanegativelyslopedlineindicatingtheinverserelationshipbetweeninterest
ratesandinvestment.
D) itgraphsasahorizontalstraightlineatthelevelofinvestment.
Answer: D
Diff:2
A) Theinvestmentfunctionispositivelyslopedtoreflectthefactthathigherinterestrates
causemorepeopletoinvesttheirfunds.
B) Theinvestmentfunctionispositivelyslopedtoreflectthefactthatlowerinterestrates
causemorefirmstoexpandtheiroperations.
C) Alongagiveninvestmentfunction,higherinterestratesresultinmoreinvestmentprojects
beingundertaken.
D) Alongagiveninvestmentfunction,higherinterestratesresultinfewerinvestmentprojects
beingundertaken.
Answer: D
Diff:3
28) Agingbaby-boomers,predisposedtohearinglossbecauseofyearsoflisteningtoloudmusic,
arenowapproachingtheagerangeinwhichhearinglossstartstobecomeapparent.Whateffect
doesthishaveoninvestmentspendingwithinthehearingaidindustry?
A) Therewillnolongerbeanopportunitycostassociatedwithinvestmentspending.
B) Therewillbenochangeinrealinvestmentspending,becausehearingaidmanufacturers
willlookonlyattheinterestrateindeterminingwhethertoexpandproduction.
C) Theinvestmentfunctionrelatingplannedrealinvestmentspendingtotheinterestratecan
beexpectedtoshiftrightward.
D) Theinvestmentfunctionrelatingplannedrealinvestmentspendingtotheinterestratecan
beexpectedtoshiftleftward.
Answer: C
Diff:3
29) Theinvestmentfunctiontellsus,atanygiveninterestrate,
A) howmanyfundspeoplewillinvestinthestockmarket.
B) howmanyfundspeoplewillearnontheirstockmarketinvestments.
C) howprofitableitwillbeforfirmstoexpand.
D) howmuchbusinesseswillspendonaddingtothecapitalstock.
Answer: D
Diff:2
30) Basedonhistoricaldata,whichofthefollowingtendedtobemostvariableovertime?
A) realconsumptionspending B) realsaving
C) realinvestmentspending D) theaveragepropensitytoconsume
Answer: C
Diff:2
31) Oneoftheprimarydeterminantsofplannedrealinvestmentspendingisthe
A) expectationoffutureprofits. B) rateofrealconsumptionspending.
C) rateofrealgovernmentspending. D) rateofrealsaving.
Answer: A
Diff:2
32) Whatwouldhappentotheplannedinvestmentfunctionifbusinesstaxeswereincreased?
A) Itwouldshifttotheright. B) Itwouldshifttotheleft.
C) Itwouldshiftupward. D) Therewouldbenochange.
Answer: B
Diff:2
33) Whichwouldincreaserealplannedinvestmentdemand?
A) adecreaseinnewtechnologiesavailable
B) adeclineinprofitexpectations
C) adecreaseinbusinesstaxes
D) anincreaseinnominalinterestrates
Answer: C
Diff:2
34) Adecreaseininterestrateswill
A) shifttheinvestmentfunctionrelatingplannedinvestmenttotheinterestratetotheright.
B) shifttheinvestmentfunctionrelatingplannedinvestmenttotheinterestratetotheleft.
C) beamovementalongtheinvestmentfunctionrelatingplannedinvestmenttotheinterest
rate.
D) havenoimpactontheinvestmentfunctionrelatingplannedinvestmenttotheinterestrate.
Answer: C
Diff:2
35) Allofthefollowingwouldcausetheinvestmentfunctionrelatinginvestmenttotheinterestrate
toshiftEXCEPT
A) achangeintherealinterestrate.
B) achangeinproducerexpectationsoffutureprofit.
C) achangeinplannedcapitalgoodsexpenditure.
D) achangeinproductivetechnology.
Answer: A
Diff:2
36) Ifbusinessesexpecttheeconomicactivitytoexpand,
A) theplannedinvestmentfunctionrelatinginvestmenttotheinterestratewillshifttothe
left.
B) theplannedinvestmentfunctionrelatinginvestmenttotheinterestratewillremain
unchanged,butwillmovedownwardalongthecurve.
C) theplannedinvestmentfunctionrelatinginvestmenttotheinterestratewillsteepen.
D) theplannedinvestmentfunctionrelatinginvestmenttotheinterestratewillshifttothe
right.
Answer: D
Diff:2
37) Realplannedinvestmentspendingisinverselyrelatedto
A) realdisposableincome. B) wealth.
C) theinterestrate. D) producerexpectationsoffutureprofit.
Answer: C
Diff:1
38) Therelationshipbetweenplannedrealinvestmentspendingandtheinterestrateis
A) inverse. B) direct. C) constant. D) highlyvolatile.
Answer: A
Diff:1
39) Ifweobservethatinterestratesrisebutrealinvestmentspendingstillincreases,whatmusthave
happenedtothefunctionrelatinginvestmenttotheinterestrate?
A) Itshiftedtotheright.
B) Itshiftedtotheleft.
C) Therewasamovementupthefunctionrelatinginvestmenttotheinterestrate.
D) Therewasamovementdownthefunctionrelatinginvestmenttotheinterestrate.
Answer: A
Diff:2
40) Theinvestmentscheduleisdownwardslopingandthesavingscheduleisupwardslopingwith
respecttotheinterestrate.Supposetheequilibriumrealinvestmentperyearatthemarketrate
ofinterestis$1trillion.Howisthisrepresentedwhenrealnationalincomeperyearisonthe
horizontalaxis?Howisthisincorporatedintotheconsumption-functiongraph?
Answer: Investmentspendingisafunctionoftheinterestrate,butitisautonomouswithrespectto
realGrossDomesticProduct(GDP).Sotheinvestmentfunctionisahorizontallineat$1
trillionwhenrealGrossDomesticProduct(GDP)peryearisonthehorizontalaxis.TheC
+Icurveisfoundbyverticallysummingtheupwardslopingconsumptioncurvewiththe
horizontalinvestmentcurve.TheC+Icurveslopesupandisalways$1trillionhigher
thantheCcurve.
Diff:3
41) WhatdeterminesinvestmentintheKeynesianframework?Howisinvestmentrelatedtoreal
Answer: Investmentisdeterminedbybusinesspeoplebasedontheirviewsofwhattheeconomic
futurelookslike.Otherthingsequal,investmentspendingisinverselyrelatedtothe
interestrate.InvestmentistreatedasautonomousandnotasafunctionofrealGross
DomesticProduct(GDP).
Diff:2
12.4DeterminingEquilibriumRealGDP
1) Iffirmsunplannedinventoriesareincreasing,theninaclosed,privateeconomy,
A) thelevelofrealnationalincomewillrise.
B) thelevelofrealnationalincomewillnotchangeintheforeseeablefuture.
C) actualconsumptionisgreaterthanplannedconsumption.
D) consumersaresavingmorethanbusinessesanticipated.
Answer: D
Diff:1
Topic: 12.4DeterminingEquilibriumRealGDP
2) Ignoringthegovernmentandforeignsectors,equilibriumrealGrossDomesticProduct(GDP)is
determinedby
A) theintersectionoftheplannedsavingandplannedinvestmentschedules.
B) theintersectionoftheplannedsavingandplannedconsumptionschedules.
C) theintersectionoftheconsumptionfunctionwiththe45-degreeline.
D) findingtherealGrossDomesticProduct(GDP)forwhichrealsavingsarezero.
Answer: A
Diff:1
3) Ignoringthegovernmentandforeignsectors,ifplannedinvestmentspendingis$500billion,
plannedsavingis$800billion,andrealGrossDomesticProduct(GDP)is$13trillion,then
unplannedinventorieswill
A) decrease$300billion. B) increase$300billion.
C) increase$800billion. D) notchange.
Answer: B
Diff:2
4) Ignoringthegovernmentandforeignsectors,thereisanunplanneddecreaseininventoriesof
$200billionatthecurrentlevelofrealnationalincomeof$12trillion.Fromthisinformation,we
knowthat
A) savingequals$200billion.
B) consumptionexpendituresequal$12trillionlesssavingless$200billion.
C) plannedinvestmentis$200billionmorethanplannedsaving.
D) plannedinvestmentis$200billionlessthanplannedsaving.
Answer: C
Diff:1
5) Apermanentincreaseinautonomousinvestmentcauses
A) amorethanproportionalincreaseinrealGrossDomesticProduct(GDP).
B) aproportionalincreaseinrealGrossDomesticProduct(GDP).
C) alessthanproportionalincreaseinrealGrossDomesticProduct(GDP).
D) anoffsettingchangeinsavingthatleavesrealGrossDomesticProduct(GDP)atthesame
level.
Answer: A
Diff:1
6) UsingrealGDPonthehorizontalaxisinsteadofrealdisposableincomeimpliesthatamarginal
propensitytoconsume0.75generatesforeveryadditional$100ofrealGDP
A) $75ofadditionalrealdisposableincome.
B) $25ofadditionalsaving.
C) $56.25ofadditionalconsumptionspending.
D) $25ofadditionalsavingandtaxes.
Answer: D
Diff:3
7) The45-degreereferencelineindicatesallpointsatwhich
A) plannedrealconsumptionexpendituresandplannedrealsavingareequal.
B) plannedrealsavingandplannedrealinvestmentareequal.
C) plannedrealconsumptionexpendituresandrealGDPareequal.
D) plannedrealsavingandplannedrealsavingareequal.
Answer: C
Diff:1
8) Investmentis
A) apositivefunctionofrealGDP. B) anegativefunctionofrealGDP.
C) autonomouswithrespecttorealGDP. D) apositivefunctionofinterestrates.
Answer: C
Diff:1
9) Theinvestmentfunctionintersectsthesavingscheduleataninterestrateof8percentandalevel
ofinvestmentof$1.2trillionayear.Iftheconsumptioncurveintersectsthe45-degreereference
lineat$3trillion,then
A) theC+Icurvewillintersectthe45-degreereferencelineat$1.2trillion.
B) theC+Icurvewillintersectthe45-degreelineat$1.8trillion.
C) theequilibriumlevelofrealGDPis$1.8trillion.
D) theequilibriumlevelofrealGDPis$4.2trillion.
Answer: D
Diff:3
10) Refertotheabovefigure.WhichvariableisautonomouswithrespecttorealGDP?
A) Realsaving
B) Realinvestmentspending
C) Realconsumptionspending
D) Thesumofrealconsumptionandrealsaving
Answer: B
Diff:2
11) Refertotheabovefigure.IfrealGDPis$4trillion,then
A) consumptionexpendituresaretoolow.
B) unplannedinventorieswilldecrease.
C) unplannedinventorieswillincrease.
D) actualinvestmentspendingequals$1trillionasplannedinvestmentspendingplus
unplannedinventoryincreasesequal$1trillion.
Answer: C
Diff:3
12) Refertotheabovefigure.AtrealGDPof$1trillion,actualinvestmentequals
A) plannedinvestmentof$1trillion.
B) plannedsavingof$1trillion.
C) actualsavingof0.
D) unanticipatedinventoryadjustmentsof$1trillion.
Answer: D
Diff:2
13) Foraclosedeconomywithnogovernment,weknowthatateverylevelofGDPactual
investmentequals
A) plannedinvestment.
B) plannedsaving.
C) thedifferencebetweenplannedsavingandactualsaving.
D) thedifferencebetweenplannedinvestmentandactualsaving.
Answer: B
Diff:3
14) Supposedactualinvestmentisgreaterthanplannedinvestmentatthecurrentlevelofoutputin
2010.Giventhisinformation,weknowthat
A) GDPwilltendtoincreaseovertime.
B) firmsstockofinventoriesmusthaveincreasedunexpectedlyin2010.
C) savingmustbelessthanplannedinvestment.
D) savingmustbeequaltoplannedinvestment.
Answer: B
Diff:2
15) IntheKeynesianmodel,wheneverplannedinvestmentisgreaterthanplannedsaving,
A) theamountofplannedinvestmentwilldecrease,andrealGDPwilldecrease.
B) theamountofplannedinvestmentwilldecrease,andrealGDPwillremainunchanged.
C) therewillbeanunplannedinventorydecrease,andGDPwilleventuallyincrease.
D) therewillbeanunplannedinventoryincrease,andGDPwilleventuallydecrease.
Answer: C
Diff:1
16) IntheKeynesianmodel,wheneverplannedinvestmentislessthanplannedsaving,
A) theamountofplannedinvestmentwilldecrease,andrealGDPwilldecrease.
B) theamountofplannedinvestmentwilldecrease,andrealGDPwillremainunchanged.
C) therewillbeanunplannedinventorydecrease,andrealGDPwilleventuallyincrease.
D) therewillbeanunplannedinventoryincrease,andrealGDPwilleventuallydecrease.
Answer: D
Diff:1
17) IntheKeynesianmodel,wheneverplannedsavingexceedsplannedinvestment,
A) therewillbeunplannedinventoryaccumulation.
B) therewillbeunplannedinventorydepletion.
C) realGDPwillnotbeinfluenced.
D) theinterestratewillremainunchanged.
Answer: A
Diff:1
18) IntheKeynesianmodel,wheneverplannedsavingislessthanplannedinvestment,
A) therewillbeunplannedinventoryaccumulation.
B) therewillbeunplannedinventorydepletion.
C) realGDPwillnotbeinfluenced.
D) theinterestratewillremainunchanged.
Answer: B
Diff:1
19) Alongthe45-degreereferenceline,
A) totalplannedrealexpenditures= realGDP.
B) totalplannedrealexpenditures= plannednominalexpenditures.
C) totalplannednominalexpenditures= consumption.
D) totalplannedinvestmentspending= plannedrealexpenditures.
Answer: A
Diff:2
20) Intheabovefigure,whatisautonomousconsumption?
A) $0.0trillion B) $1.0trillion C) $2.0trillion D) $3.0trillion
Answer: B
Diff:1
21) Intheabovefigure,whatistheequilibriumlevelofrealconsumptionspending?
Answer: C
Diff:1
22) Whengraphingtheconsumptionfunction,weincludea45-degreereferenceline.Whatistrue
atthepointsatwhichtheconsumptionfunctioncrossesthisline?
A) Plannedrealsavingiszero.
B) Plannedrealconsumptionspendingiszero.
C) Realdisposableincomeiszero.
D) RealGDPiszero.
Answer: A
Diff:2
23) Supposethatthereisnogovernmentandnointernationaltrade.WhenC +Iislessthanthelevel

ofrealGDP,
A) unplannedinventoriesdecrease,andrealGDPexpands.
B) unplannedinventoriesincrease,andrealGDPcontracts.
C) unplannedinventoriesequalzero,andthereisnochangeinthelevelofrealGDP.
D) realplannedinvestmentspendingequalsrealplannedsaving.
Answer: B
Diff:2
24) Autonomousrealinvestmentspendingis
A) thelevelofinvestmentexpenditurerequiredtokeeptheeconomyexpandingatitscurrent
growthrate.
B) thelevelofinvestmentexpenditurethatisindependentofrealGDP.
C) thelevelofinvestmentexpenditurerequiredtoreplacecapitallosttodepreciation.
D) thelevelofinvestmentexpenditurethatwouldprevailifinterestrateswerezero.
Answer: B
Diff:2
25) WhenrealGDPisinequilibriumwithnogovernmentandnointernationaltrade,
A) realplannedinvestmentspendingequalsrealplannedsaving.
B) realplannedinvestmentequalsrealplannedconsumptionspending.
C) unplannedinventoriesareincreasing.
D) unplannedinventoriesaredecreasing.
Answer: A
Diff:2
26) Intheabovefigure,pointErepresentsthelevelofrealGDPatwhichplannedsavingequals
plannedinvestment.AtpointA,
A) unplannedinventoriesincrease.
B) changesininventoriescannotbedetermined.
C) unusedindustrialcapacityexistsintheeconomy.
D) unplannedinventoriesdecrease.
Answer: D
Diff:3
27) Intheabovefigure,pointErepresentsthelevelofrealGDPatwhichplannedsavingequals
plannedinvestment.AtpointC,
A) unplannedinventoriesincrease.
B) changesininventoriescannotbedetermined.
C) unusedindustrialcapacityexistsintheeconomy.
D) unplannedinventoriesdecrease.
Answer: A
Diff:3
28) Whenrealplannedsavingisgreaterthanrealplannedinvestmentspending,
A) theinterestratewillincrease. B) theinterestratewilldecrease.
C) realGDPwillincrease. D) realGDPwilldecrease.
Answer: D
Diff:2
29) Whatistheresultwhenrealplannedsavingexceedsrealplannedinvestmentspending?
A) Theeconomyisinequilibrium.
B) Thereisunplannedaccumulationofbusinessinventories.
C) Thereisunplanneddepletionofbusinessinventories.
D) Employmentexpands.
Answer: B
Diff:2
30) Consideraclosedeconomywithoutagovernmentandwithoutinternationaltrade.Whatwillbe
truewhenthiseconomyisinequilibrium?
A) Totalplannedrealinvestmentspendingwillexceedtotalplannedrealexpenditures.
B) Plannedrealinvestmentspendingwillexceedrealplannedsaving.
C) PlannedrealconsumptionspendingequalsrealGDP.
D) Plannedrealconsumptionspendingplusplannedrealinvestmentspendingequalsreal
GDP.
Answer: D
Diff:2
31) Realconsumptionisafunctionofrealdisposableincome,butthesimpleKeynesianmodeluses
realGDPinsteadofrealdisposableincome.Thisisappropriatesince
A) realdisposableincometendstomoveproportionatelywithrealGDP.
B) realdisposableincomeisafixedpercentageofrealGDP.
C) realGDPisafixedpercentageofrealdisposableincome.
D) wecannotmeasureeitherexactlyandthepurposeoftheexerciseistheoreticalonly.
Answer: A
Diff:3
32) Inaclosedeconomy,equilibriumrealGrossDomesticProduct(GDP)occurswhere
A) theC+I+Glinecrossesthe45-degreeline.
B) plannedexpendituresexceednationalincome.
C) savingexceedsplannedinvestment.
D) allofthese.
Answer: A
Diff:1
33) IfrealGrossDomesticProduct(GDP)isatanequilibriumlevelinaclosedeconomy,
A) C+I+G=realGDP.
B) savingwillbelessthanplannedinvestment.
C) unplannedinventoryaccumulationwillequalplannedinventoryaccumulation.
D) C+T-G=realGDP.
Answer: A
Diff:1
34) InthesimpleKeynesianmodel,whydoesactualinvestmentspendinghavetoequalsavingin
theabsenceofthegovernmentandforeignsectors?Isthistrueonlyfortheequilibrium?
Explain.
Answer: RealGrossDomesticProduct(GDP)equalsactualinvestmentspendingplus
consumptionspending,andrealGrossDomesticProduct(GDP)equalsconsumption
spendingplussaving.Therefore,actualinvestmentspendingandsavingarealways
equal.However,plannedinvestmentspendingandsavingarenotalwaysequal.When
theyarenotequal,unplannedchangesininventoriesmakeactualinvestmentspending
andsavingequal.Inequilibrium,plannedinvestmentandsavingareequal.
Diff:2
35) Theabovefigureshowsaconsumptionfunctionanda45 -degreeline.Realconsumptionisa

functionofdisposableincome.WhyisrealGDPusedhereinstead?Whatismeasuredalongthe
verticalaxis?WhatismeasuredbypointB?ExplainthesignificanceofpointA.
Answer: RealdisposableincomeislessthanrealGDP,butcanbederivedfromrealGDP.Ifwe
assumethatrealdisposableincomeisthesameproportionofrealGDPeveryyear,then
thechangeisappropriate.RealGDPisusedbecausewewanttofindtheequilibriumreal
GDP.Plannedconsumptionexpendituresaremeasuredontheverticalaxis,andpointB
measuresautonomousconsumption.AtA,plannedconsumptionspendingequalsreal
GDP.SavingequalszeroatpointA.
Diff:2
36) Supposeautonomousconsumptionis$1trillion,investmentspendingis$1.5trillion,andthe
marginalpropensitytoconsumeis0.75.ShowthegraphfortheC+Icurve.Whatisthe
equilibriumlevelofrealGDP?Explainitsmeaning.
Answer: Inthebelowfigure,theCcurvehasaverticalinterceptat$1trillion,indicating
autonomousconsumptionspending.Investmentspendingisconstantat$1.5trillion,so
theverticalinterceptfortheC+Icurveis$2.5trillion.EquilibriumrealGDPis$10trillion
wheretheC+Icurveintersectsthe45-degreeline.Atthispoint,plannedexpenditures
exactlyequalsrealGDP.Further,savingequalsinvestment($1.5trillion).Consumption
spendingis$8.5trillion.
Diff:3
37) Intheabovediagram,whathappensiftherealGDPis$3trillion?$5trillion?$7trillion?Whatis
theequilibriumlevelofrealGDP?Why?
Answer: AtrealGDPof$3trillion,plannedrealinvestmentisgreaterthanrealsaving,which
meanshouseholdsarebuyingmorethanproducershadanticipated.Thereisan
unplannedinventorydecreaseof$500billion,andbusinessesincreaseproductionand
hiring.At$5trillion,plannedrealinvestmentandplannedrealsavingareequal,sothisis
theequilibrium.At$7trillion,plannedrealsavingisgreaterthanplannedrealinvestment
sothereisanunplannedincreaseininventoriesof$500billion.Businessesreduce
productionandlayoffworkers,forcingrealGDPbacktowards$6trillion.
Diff:3
12.5KeynesianEquilibriumwithGovernmentandtheForeignSectorAdded
1) Governmentpurchases
A) aredeterminedbythepublic. B) aredeterminedbythepoliticalprocess.
C) areinfluencedbyinterestrates. D) aredeterminedbysuppliers.
Answer: B
Diff:2
Topic: 12.5KeynesianEquilibriumwithGovernmentandtheForeignSectorAdded
2) Refertotheabovefigure.TheequilibriumlevelofrealGrossDomesticProduct(GDP)is
A) $6trillion. B) $7trillion. C) $12trillion. D) $20trillion.
Answer: C
Diff:1
3) Refertotheabovefigure.IfrealGrossDomesticProduct(GDP)is$2trillion,then
A) theleveloftotalplannedexpendituresislessthanrealGDP.
B) theleveloftotalplannedexpendituresequalsrealGDP.
C) theleveloftotalplannedexpendituresisgreaterthanrealGDP.
D) theleveloftotalplannedexpendituresequalszero.
Answer: C
Diff:2
4) Refertotheabovefigure.IfrealGrossDomesticProduct(GDP)is$6trillion,thenunplanned
businessinventorieswill
A) rise. B) bezero.
C) fall. D) beequaltoplannedinventories.
Answer: C
Diff:2
5) WhenrealGrossDomesticProduct(GDP)exceedstotalplannedrealexpenditures,
A) therewillbeunplanneddecreasesininventories.
B) thecircularflowwillincrease.
C) alowerlevelofequilibriumrealGrossDomesticProduct(GDP)willresult.
D) ahigherlevelofequilibriumrealGrossDomesticProduct(GDP)willprevail.
Answer: C
Diff:1
6) AhigherlevelofrealGrossDomesticProduct(GDP)willresultif
A) totalplannedrealexpendituresexceedrealGrossDomesticProduct(GDP).
B) aggregatesupplyexceedsaggregatedemand.
C) aggregatedemandexceedsaggregatesupply.
D) leakageexceedsinjections.
Answer: A
Diff:1
7) If,atsomelevelofoutput,totalplannedrealexpendituresarelessthanrealGrossDomestic
Product(GDP),
A) realGDPwillrise.
B) realGDPremainsunchanged.
C) realGDPwilleitherfallorremainunchanged,dependingontheMPC.
D) unplannedinventorieswillincreaseandrealGDPwillfall.
Answer: D
Diff:1
8) SupposetheeconomyisatanequilibriumwhenC+ I+ G+ X= $12trillion.Iftheeconomyis
currentlyatarealnationalincomelevelof$14trillion,thentotalplannedrealexpenditures
A) exceedrealGrossDomesticProduct(GDP),andrealGrossDomesticProduct(GDP)will
increase.
B) arelessthanrealGrossDomesticProduct(GDP),andrealGrossDomesticProduct(GDP)
willdecline.
C) areequaltorealGrossDomesticProduct(GDP),andtherewillbenochangeinrealGross
D) arelessthanrealGrossDomesticProduct(GDP),andrealGrossDomesticProduct(GDP)
willincrease.
Answer: B
Diff:1
9) SupposeequilibriumforaneconomyoccurswhenC+ I+ G+ X= $14trillion.IftherealGross
DomesticProduct(GDP)is$13trillion,thenunplannedinventoriesare
A) increasing,andrealGrossDomesticProduct(GDP)willexpand.
B) increasing,andrealGrossDomesticProduct(GDP)willcontract.
C) decreasing,andrealGrossDomesticProduct(GDP)willexpand.
D) decreasing,andrealGrossDomesticProduct(GDP)willcontract.
Answer: C
Diff:1
10) IfrealGrossDomesticProduct(GDP)isaboveitsequilibriumlevel,
A) firmsarenotmaximizingtheirprofits.
B) plannedinvestmentisgreaterthanplannedsaving.
C) firmsaccumulateunplannedinventories.
D) plannedconsumptionislessthanactualconsumption.
Answer: C
Diff:1
11) Intheabovefigure,atanincomelevelofY 3 andplannedexpendituresof(C+ I)1 ,

A) plannedsavingexceedsplannedinvestment.
B) theeconomyisinequilibrium.
C) thequantityofaggregatedemandexceedsrealGrossDomesticProduct(GDP).
D) thereisfullemployment.
Answer: B
Diff:1
12) Intheabovefigure,atanincomelevelofY 1 andplannedexpendituresof(C+I)1 ,thelevelof

autonomousinvestmentis
A) ED. B) EF. C) JK. D) GK.
Answer: B
Diff:1
13) Totalplannedexpendituresinaclosedeconomyareequalto
A) consumption+investment+ governmentexpenditures.
B) consumption+savings+ transfers+ investment.
C) saving+investment+ governmentexpenditures.
D) investment+saving+ transfers.
Answer: A
Diff:1
14) IftheMPCequals0.75,then
A) forevery$100increaseinconsumption,realGrossDomesticProduct(GDP)increasesby
$75.
B) consumptionisalwaysmorethanrealGrossDomesticProduct(GDP).
C) forevery$100increaseinrealGrossDomesticProduct(GDP),savingincreasesby$75.
D) forevery$100increaseinrealGrossDomesticProduct(GDP),savingincreasesby$25.
Answer: D
Diff:1
15) IntheKeynesianmodel,governmentspendingisconsidered
A) apositivefunctionofrealGDP.
B) anegativefunctionofrealGDP.
C) tobeanegativefunctionoftherealinterestrate.
D) tobeautonomous.
Answer: D
Diff:1
16) ThefollowingwouldcauseanupwardshiftintheC+ I+ G+ XcurveEXCEPT

A) anincreaseindisposableincome. B) anincreaseinexportspending.
C) adecreaseinimportspending D) anincreaseinhouseholdwealth.
Answer: A
Diff:1
17) Alump-sumtax,suchasa$1000taxthateveryfamilymustpayonetime,is
A) atypeofincometax. B) anautonomoustax.
C) negativelyrelatedtorealGDP. D) aregressivetax.
Answer: B
Diff:1
18) WhichofthefollowingdoesNOToccurwhentheeconomyisoperatingattheequilibriumlevel
ofGDP?
A) TotalplannedexpendituresequalrealGDP.
B) RealGDPtendstoriseovertime.
C) Plannedinvestmentequalsactualinvestment.
D) Inventoryinvestmentequalszero.
Answer: B
Diff:1
19) WhentheeconomyisoperatingattheequilibriumlevelofGDP,weknowthat
A) totalplannedrealconsumptionexpendituresequalrealGDP.
B) plannedrealinvestmentspendingequalsrealnetexportsofzero.
C) totalplannedrealexpendituresequalrealGDP.
D) realnetexportsequalinventorychanges.
Answer: C
Diff:2
20) Refertotheabovefigure.TheequilibriumlevelofrealGDPoccurs
A) atpointA.
B) totherightofpointA.
C) totheleftofpointA.
D) attheundeterminedpointonthegraphdependinguponthelevelofinvestment.
Answer: A
Diff:1
21) Refertotheabovefigure.PointB
A) equalsautonomousconsumption.
B) equalsautonomousconsumptionplusautonomousconsumptionplusplannedinvestment
plusautonomousgovernmentspendingplusautonomousnetexports.
C) hasnospecialsignificance.
D) equalsgovernmentexpenditures.
Answer: B
Diff:1
Real Real Real Real Real Real Real TotalReal

Real Net Disposable Consumption Planned Planned Government Net Planned
GDP Taxes Income Spending Saving Investment Spending Exports Spending
10 2 8 6.8 1.2 1.5 2 0.5 10.8
11 2 9 7.6 1.4 1.5 2 0.5 11.6
12 2 10 8.4 1.6 1.5 2 0.5 12.4
13 2 11 9.2 1.8 1.5 2 0.5 13.2
14 2 12 10.0 2.0 1.5 2 0.5 14.0
15 2 13 10.8 2.2 1.5 2 0.5 14.8
16 2 14 11.6 2.4 1.5 2 0.5 15.6
Note:Amountsin$trillions
22) Refertotheabovetable.WhichvariablesinthetableareNOTautonomous?
A) Taxes,governmentspending,andsaving.
B) Plannedinvestment,netexports,andgovernmentspending.
C) Plannedconsumptionandplannedsaving.
D) Plannedsavingonly.
Answer: C
Diff:2
Real
Natl Disp. Consmp. Plnd Plnd Govt Net Plnd
Income Tax IncomeSpending Saving Invst Exp. Export Exp.
10 2 8 6.8 1.2 1.5 2 0.5 10.8
11 2 9 7.6 1.4 1.5 2 0.5 11.6
12 2 10 8.4 1.6 1.5 2 0.5 12.4
13 2 11 9.2 1.8 1.5 2 0.5 13.2
14 2 12 10.0 2.0 1.5 2 0.5 14.0
15 2 13 10.8 2.2 1.5 2 0.5 14.8
16 2 14 11.6 2.4 1.5 2 0.5 15.6
23) Refertotheabovetable.WhichvariablesinthetableareNOTautonomous?
A) Taxes,governmentspending,andsaving.
B) Plannedinvestment,netexports,andgovernmentspending.
C) Plannedconsumptionandplannedsaving.
D) Plannedsavingonly.
Answer: C
Diff:2
24) Refertotheabovetable.TheequilibriumrealGDPis
A) $12trillion. B) $13trillion. C) $14trillion. D) $15trillion.
Answer: C
Diff:3
25) Refertotheabovetable.IfrealGDPis$12trillion,totalplannedexpendituresandunplanned
inventorychangesarerespectively
A) $14trillionand0. B) $13.2trillionand-$0.8trillion.
C) $12.4trillionand-$0.4trillion. D) $12.4trillionand$0.4trillion.
Answer: C
Diff:3
26) Refertotheabovetable.WhenrealGDPequals$10trillion,
A) governmentexpenditureswillincrease. B) theeconomyisinequilibrium.
C) unplannedinventorieswillincrease. D) unplannedinventorieswilldecrease.
Answer: D
Diff:3
27) Refertotheabovetable.WhenrealGDPequals$16trillion,
A) governmentexpenditureswillincrease. B) theeconomyisinequilibrium.
C) unplannedinventorieswillincrease. D) unplannedinventorieswilldecrease.
Answer: C
Diff:3
28) WhenevertotalplannedexpendituresdifferfromrealGDP,
A) unplannedinventorieswillremainunchanged.
B) unplannedinventorieswillchange.
C) governmentspendingwilladjust.
D) taxrevenueswillmovetheeconomybacktoequilibrium.
Answer: B
Diff:1
29) Inequilibrium,realGDPisequalto
A) C+I+G-X. B) C+ I+ X- G.
C) C+I+G+X. D) C+ I+ G+ X+ S.
Answer: C
Diff:1
30) Intheabovefigure,theequilibriumlevelofrealGDPperyearis
A) $1.0trillion. B) $2.0trillion. C) $3.0trillion. D) $4.0trillion.
Answer: D
Diff:1
31) Intheabovefigure,thesumofrealplannedinvestmentspending,governmentexpenditures,
andnetexportspendingisequalto
Answer: B
Diff:2
32) Intheabovefigure,theequilibriumlevelofplannedsavingplusnettaxesis
Answer: A
Diff:2
33) Whichoneofthefollowingistrueinanopeneconomywithagovernmentsector?
A) TheequilibriumlevelofrealGDPoccurswhenrealnetexportspendingequalszero.
B) TheequilibriumlevelofrealGDPoccurswhenplannedrealsavingequalsgovernment
spending.
C) TheequilibriumlevelofrealGDPoccurswhentotalplannedrealexpendituresequalreal
GDP.
D) TheequilibriumlevelofrealGDPoccurswhenplannedrealinvestmentspendingiszero.
Answer: C
Diff:2
34) Whateffectwouldtaxationhaveonrealconsumptionspendingwhengovernmentspendingis
autonomous?
A) Taxationreducesrealconsumptionspending.
B) Taxationincreasesrealconsumptionspending.
C) Taxationcausesbothrealconsumptionspendingandplannedrealsavingtoincrease.
Answer: A
Diff:2
35) Intheabovefigure,whatistheequilibriumlevelofrealGDPwithgovernmentandtheforeign
sector?
Answer: D
Diff:1
36) Intheabovefigure,attheequilibriumlevelofrealGDP,thereis
A) positivesaving. B) negativesaving.
C) zerosaving. D) anegativetaxrate.
Answer: A
Diff:2
37) Intheabovefigure,ifrealGDPis$1trillion,thereis
A) dissaving. B) positivesaving.
C) negativeinvestment. D) negativeconsumption.
Answer: A
Diff:2
38) IntheKeynesianmodelwithgovernmentandtheforeignsectoradded,whatarethe
componentsofspending?Whichofthesecomponentsareautonomousandwhicharenot?How
istheequilibriumfound?Whentheeconomyisnotatanequilibrium,whatadjustmentsare
made?
Answer: Therearefourcomponentstospendingconsumption,investment,government,andnet
exports.Thelastthreeareautonomousandconsumptionhasanautonomousparttoit.
However,consumptionisalsoafunctionofincome.Equilibriumisfoundatthepointat
whichtotalplannedrealspending(C+I+G+X)exactlyequalsrealGrossDomestic
Product(GDP).Whentheeconomyisnotatanequilibrium,adjustmentsaremadeby
unplannedinventorychanges.
Diff:2
39) ExplainhowtheaggregatedemandcurveisrelatedtotheC+ I+ G+Xcurve.

Answer: TheC+I+G+XcurvedeterminesequilibriumrealGrossDomesticProduct(GDP)fora
givenpricelevel.Ifthepricelevelrises,peoplereduceconsumptionateverylevelof
GrossDomesticProduct(GDP)becausetheirmoneybalancesarelessvaluable,
investmentspendingfallsbecauseinterestratesincrease,andnetexportsfallbecause
domesticgoodsarerelativelymoreexpensive.Hence,theC+I+G+Xcurveshiftsdown,
generatingalowerrealGrossDomesticProduct(GDP).Wehavetwopricelevelsandtwo
equilibriumlevelsofrealGrossDomesticProduct(GDP)andcanderivethedownward
slopingaggregatedemandcurve.
Diff:3
12.6TheMultiplier
1) Onedividedbythemarginalpropensitytosave(MPS)istheformulafor
A) oneminusthemultiplier. B) theinverseofthemultiplier.
C) themultiplier. D) autonomousconsumption.
Answer: C
Diff:1
Topic: 12.6TheMultiplier
2) Supposethatthemarginalpropensitytosave(MPS)equals0.2.Thevalueofthemultiplier
wouldbe
A) .8. B) 1.25. C) 2. D) 5.
Answer: D
Diff:1
3) Supposethatthemarginalpropensitytoconsume(MPC)is.75andthereisanincreasein
investmentspendingof$100,000.Asaresult,equilibriumrealGrossDomesticProduct(GDP)
wouldincreaseby
A) $75,000. B) $100,000. C) $400,000. D) $750,000.
Answer: C
Diff:1
4) Thelargeristhemarginalpropensitytoconsume(MPC),
A) thelargeristhemultiplier.
B) thesmalleristhemultiplier.
C) thesmalleristheslopeoftheconsumptionfunction.
D) thelargeristheslopeofthesavingfunction.
Answer: A
Diff:1
5) Ifthemarginalpropensitytoconsume(MPC)decreases,then
A) themarginalpropensitytosave(MPS)decreases.
B) themultiplierdecreases.
C) themultiplierincreases.
D) MPC+MPSislessthan1.
Answer: B
Diff:1
6) Ifthemarginalpropensitytoconsume(MPC)is0.9,thenthemultiplierforachangein
autonomousspendingwillbe
A) 0.1. B) 9. C) 10. D) 100.
Answer: C
Diff:1
7) Ifthemarginalpropensitytosave(MPS)increases,themultiplier
A) decreases.
B) increases.
C) staysthesame.
D) caneitherincreaseordecrease,dependingonwhathappenstothemarginalpropensityto
consume(MPC).
Answer: A
Diff:1
8) Ifthemultiplieris10andincomeincreasesby$100,thensavingwillincreaseby
A) $90. B) $9. C) $10. D) $100.
Answer: C
Diff:1
9) Ifthemultiplieris10,thenthemarginalpropensitytoconsume(MPC)is
A) 0.9. B) 0.1. C) 1. D) 9.
Answer: A
Diff:1
10) Ifthemarginalpropensitytoconsume(MPC)is0.8,themultiplierwillbe
A) 0.8. B) 1. C) 4. D) 5.
Answer: D
Diff:1
11) Ifthemarginalpropensitytosave(MPS)is0.1,themultiplierwillbe
A) 0.1. B) 1. C) 5. D) 10.
Answer: D
Diff:1
12) Ifthemultiplierintheeconomyis3,themarginalpropensitytosave(MPS)mustbe
A) 0.33. B) 0.67. C) 1. D) 3.
Answer: A
Diff:1
13) Ifthemultiplieris4,themarginalpropensitytoconsume(MPC)mustbe
A) 0.25. B) 0.5. C) 0.75. D) 1.
Answer: C
Diff:2
14) Themultipliereffecttendsto
A) generateinstability.
B) promotestabilityofthegeneralpricelevel.
C) magnifysmallchangesinspendingintomuchlargerchangesinrealGrossDomestic
Product(GDP).
D) increasetheMPC.
Answer: C
Diff:1
15) Ifaneconomysaves20percentofanyincreaseinrealGrossDomesticProduct(GDP),thenan
increaseininvestmentof$2billioncanproduceanincreaseinrealGrossDomesticProduct
(GDP)ofasmuchas
A) $2billion. B) $10billion. C) $0.4billion. D) $1.6billion.
Answer: B
Diff:1
16) IfinitialequilibriumrealGrossDomesticProduct(GDP)is$400billion,MPC=0.9,and
autonomousinvestmentincreases$40billion,equilibriumrealGrossDomesticProduct(GDP)
willbe
Answer: D
Diff:1
17) Otherthingsbeingconstant,ifthemarginalpropensitytosave(MPS)is0.1,andprivate
investmentspendingfallsby$100million,thenrealGrossDomesticProduct(GDP)
A) decreasesby$10million. B) increasesby$90million.
C) decreasesby$1billion. D) increasesby$1billion.
Answer: C
Diff:1
18) Ifanincreaseof$5billionininvestmentisassociatedwithanincreaseof$25billioninrealGross
DomesticProduct(GDP),themultiplieris
A) 1. B) 3. C) 5. D) 7.
Answer: C
Diff:1
19) Themultiplierhelpsexplain
A) whyariseingovernmentexpenditurescausesrealGrossDomesticProduct(GDP)torise
bymorethantheamountoftheincreaseingovernmentspending.
B) whyanincreaseindisposableincomecausesrealGrossDomesticProduct(GDP)toriseby
lessthantheamountoftheincreaseindisposableincome.
C) whyadecreaseintaxescausesrealGrossDomesticProduct(GDP)tofallbymorethanthe
amountofthedecreaseintaxes.
D) whyafallininvestmentcauserealGrossDomesticProduct(GDP)torisebymorethanthe
amountofthedecreaseininvestment.
Answer: A
Diff:2
20) Ifthemarginalpropensitytoconsume(MPC)is0.75andgovernmentpurchasesincreaseby
$200billion,then
A) equilibriumrealGrossDomesticProduct(GDP)willincreaseby$800billion.
B) equilibriumrealGrossDomesticProduct(GDP)willincreaseby$200billion.
C) equilibriumrealGrossDomesticProduct(GDP)willincreaseby$50billion.
D) theeffectonequilibriumrealGrossDomesticProduct(GDP)cannotbedeterminedfrom
thegiveninformation.
Answer: A
Diff:3
21) Ifthemarginalpropensitytosave(MPS)is0.5andnetexportsfallsby$100million,then
A) realGrossDomesticProduct(GDP)willincreaseby$100million.
B) realGrossDomesticProduct(GDP)willfallby$200million.
C) realGrossDomesticProduct(GDP)willnotchange.
D) theeffectonrealGrossDomesticProduct(GDP)cannotbedeterminedfromthegiven
information.
Answer: B
Diff:3
22) Ifautonomousinvestmentincreasesby$200billionandthemarginalpropensitytoconsume
(MPC)is0.5,then
A) realGrossDomesticProduct(GDP)willriseby$400billion.
B) realGrossDomesticProduct(GDP)willriseby$200billion.
C) realGrossDomesticProduct(GDP)willriseby$100billion.
D) realGrossDomesticProduct(GDP)willdecreaseby$100billion.
Answer: A
Diff:2
23) Adecreaseinautonomousinvestmentof$100thatoccurswhenthemarginalpropensitytosave
(MPS)equals0.25willleadtoadecreaseinrealGrossDomesticProduct(GDP)of
A) $25. B) $100. C) $400. D) $800.
Answer: C
Diff:1
24) Supposethemarginalpropensitytoconsume(MPC)equals0.80,anincreaseinautonomous
investmentof$100willleadtoanincreaseinrealGrossDomesticProduct(GDP)by
A) $100. B) $400. C) $500. D) $800.
Answer: C
Diff:2
25) IftheMPSisone-third,a$100increaseinnetexportswill
A) reducerealGrossDomesticProduct(GDP)by$100.
B) reducerealGrossDomesticProduct(GDP)by$300.
C) increaserealGrossDomesticProduct(GDP)by$33.
D) increaserealGrossDomesticProduct(GDP)by$300.
Answer: D
Diff:1
26) Themultiplieristheratioofthe
A) changeintheequilibriumlevelofrealGDPtothechangeinautonomousexpenditures.
B) equilibriumlevelofrealGDPtothechangeininducedexpenditures.
C) changeininducedexpenditurestothechangeinautonomousexpenditures.
D) changeinautonomousexpenditurestothechangeintheequilibriumlevelofrealGDP.
Answer: A
Diff:1
27) Ifthemultiplierhasavalueof10,thenthevalueofthemarginalpropensitytosave(MPS)is
A) 1.00. B) 0.90. C) 10.00. D) 0.10.
Answer: D
Diff:1
28) Themultiplieris
A) thepartofconsumptionthatisindependentofthelevelofdisposableincome.
B) theproportionoftotaldisposableincomethatisconsumed.
C) thepercentageofagivenchangeinincomethatgoestowardsconsumption.
D) thenumberwhichismultipliedbyanautonomouschangewhichgivesthechangeinthe
equilibriumlevelofrealGDP.
Answer: D
Diff:1
29) TheratioofthechangeintheequilibriumlevelofrealGDPtothechangeinautonomousreal
expendituresisthe
A) averagepropensitytoconsume. B) marginalpropensitytoconsume.
C) multiplier. D) unplannedinvestment.
Answer: C
Diff:1
30) Apermanentreductioninplannedrealinvestmentspendingleadsto
A) amorethanproportionalincreaseinrealGDP.
B) amorethanproportionaldecreaseinrealGDP.
C) alessthanproportionaldecreaseinrealGDP.
D) aproportionaldecreaseinrealGDP.
Answer: B
Diff:2
31) AnincreaseinrealnetexportsleadstoanincreaseinrealGDP.Further,
A) realconsumptionspendingandrealsavingincrease.
B) realconsumptionspendingincreasesbutrealsavingdoesnotchange.
C) realconsumptionspendingincreaseswhilerealinvestmentspendingdecreases.
D) realgovernmentspendingdecreasestooffsettheincreaseinrealnetexports.
Answer: A
Diff:2
32) Themultiplierequals
A) consumption/realdisposableincome.
B) changeinconsumption/changeinrealdisposableincome.
C) 1/MPC.
D) 1/(1-MPC).
Answer: D
Diff:1
33) Ifthemarginalpropensitytoconsume(MPC)is0.8,thespendingmultiplierwillbe
A) 0.2. B) 1.25. C) 4.0. D) 5.0.
Answer: D
Diff:2
34) Ifthemarginalpropensitytoconsume(MPC)is0.9,thespendingmultiplierwillbe
A) 10. B) 1.11. C) 0.9. D) 0.1.
Answer: A
Diff:2
35) Ifthemarginalpropensitytoconsume(MPC)is0.75andthereisanincreaseinplanned
investmentspendingof$0.5trillion,thensavingwill
A) increaseby$0.25trillion. B) increaseby$0.5trillion.
C) increaseby$1trillion. D) remainunchanged.
Answer: B
Diff:3
36) Supposethemarginalpropensitytoconsume(MPC)is0.8andthereisa$2,000increasein
autonomousconsumption.Giventhisinformation,realGDPwillincreaseby
A) $1,600. B) $2,000. C) $2,500. D) $10,000.
Answer: D
Diff:3
37) Supposemarginalpropensitytoconsume(MPC)is0.7andthereisa$1,000increasein
autonomousconsumption.Giventhisinformation,realGDPwillincreaseby
A) $3,333. B) $1,429. C) $1,000. D) $700.
Answer: A
Diff:3
plannedinvestment.Giventhisinformation,realGDPwillincreaseby
A) $3,000. B) $2,700. C) $30,000. D) $3,333.
Answer: C
Diff:3
plannedinvestment.Giventhisinformation,realGDPwillincreaseby
A) $4,000. B) $20,000. C) $5,000. D) $2,000.
Answer: B
Diff:3
40) Thelargerthemarginalpropensitytoconsume,
A) thelargerthemarginalpropensitytosaveis.
B) thelargerthemultiplieris.
C) thesmallerthemultiplieris.
D) thesmallerautonomousconsumptionis.
Answer: B
Diff:1
41) Ifthemarginalpropensitytoconsume(MPC)is0.8andthereisadesiretoincreaserealGDPby
$500billion,then
A) anincreaseinautonomousrealconsumptionspendingof$500billionwillgeneratethis
change.
B) adecreaseinautonomousrealsavingof$500billionwillgeneratethischange.
C) anincreaseinplannedrealinvestmentspendingof$200billionwillgeneratethischange.
D) anincreaseinrealautonomousspendingof$100billionwillgeneratethischange.
Answer: D
Diff:3
42) Themultipliertellsustherelationshipbetween
A) theinterestrateandthelevelofinvestmentexpenditure.
B) theexchangerateandthelevelofexports.
C) theexchangerateandthelevelofimports.
D) achangeinautonomousspendingandtheresultingchangeinequilibriumrealGDP.
Answer: D
Diff:1
43) Themultipliereffectappliestoany
A) changeinautonomousinvestmentbutnotautonomousconsumption.
B) changeinautonomousconsumptionbutnotautonomousinvestment.
C) changeinbothautonomousconsumptionandautonomousinvestment.
D) changeinanysourceofspendingotherthanconsumptionandinvestment.
Answer: C
Diff:2
44) Thelargerthevalueofthemarginalpropensitytosave(MPS),
A) thelargeristhevalueofthemultiplier.
B) thelargeristhevalueofthemarginalpropensitytoconsumption(MPC).
C) thelargeristhevalueofautonomousconsumption.
D) thesmalleristhevalueofthemultiplier.
Answer: D
Diff:2
45) IftheMPC=0.8,andplannedautonomousinvestmentincreasesby$80billion,then
equilibriumrealGDPwillincreaseby
Answer: D
Diff:2
46) IftheMPCis0.75,themultiplierisequalto
A) 0.25. B) 0.75/0.25= 3. C) 4. D) 5.
Answer: C
Diff:2
47) Thesizeofthemultiplierdependson
A) thelevelofautonomousinvestment. B) themarginalpropensitytoconsume.
C) thelevelofnetexports. D) thelevelofautonomousconsumption.
Answer: B
Diff:2
48) Ifthemarginalpropensitytoconsume(MPC)is0.75,whatisthevalueofthemultiplier?
A) 4.0 B) 3.0 C) 2.0 D) 1.0
Answer: A
Diff:1
49) Anincreaseinthemarginalpropensitytosave(MPS)
A) increasesthevalueofthemultiplier.
B) increasesautonomousconsumption.
C) increasesthemarginalpropensitytoconsume(MPC).
D) noneoftheabove.
Answer: D
Diff:1
50) Whenthemarginalpropensitytoconsume(MPC)increases,
A) themultiplierremainsunchanged.
B) themultiplierincreases.
C) themultiplierdecreases.
D) theaveragepropensitytosaveremainsunchanged.
Answer: B
Diff:1
51) Ifthemarginalpropensitytoconsume(MPC)is0.8,themultiplieris
A) 5.0. B) 1.2. C) 0.2. D) 0.8.
Answer: A
Diff:2
52) Supposegovernmentspendingdecreasesby$100billionandthemarginalpropensityto
consume(MPC)is0.8.Giventhisinformation,thisdecreaseingovernmentspendingwillcause
a(n)
A) increaseinequilibriumrealGDPequalto$500billion.
B) increaseinequilibriumrealGDPequalto$800billion.
C) decreaseinequilibriumrealGDPequalto$500billion.
D) decreaseinequilibriumrealGDPequalto$800billion.
Answer: C
Diff:2
53) Supposethereisa$200billionincreaseingovernmentspending.Weknowthatthisincreasein
governmentspendingwillcausewhichofthefollowingtooccur?
A) anincreaseinequilibriumrealGDPandanincreaseinthemultiplier.
B) anincreaseinequilibriumrealGDPandareductioninthemultiplier.
C) anincreaseinequilibriumrealGDPandnochangeinthemultiplier.
D) equilibriumrealGDPwillincreasebyexactly$200billion
Answer: C
Diff:2
54) Ifthatthemarginalpropensitytosave(MPS)increasedfrom0.20to0.25,thiswouldcausethe
multipliereffectto
A) decrease. B) increase.
C) staythesame. D) Noneoftheaboveiscorrect.
Answer: A
Diff:2
55) Apermanentreductioninnetexportsleadsto
A) amorethanproportionaldecreaseinrealGrossDomesticProduct(GDP).
B) alessthanproportionaldecreaseinrealGrossDomesticProduct(GDP).
C) aproportionalincreaseinrealGrossDomesticProduct(GDP).
D) areductionintaxes,autonomousgovernmentspending,andafallinrealGrossDomestic
Product(GDP).
Answer: A
Diff:1
56) Whatisthesignificanceofthemultiplier?Whatcausesthemultipliertobelargerorsmaller?
Answer: Themultiplierisimportantbecauseitmeansthatarelativelysmallchangein
autonomousspending,suchasinvestmentspendingornetexports,canhaveamuch
largereffectontotalspendingandrealGrossDomesticProduct(GDP).Thegreaterthe
marginalpropensitytoconsume(MPC),thegreaterthemultiplierbecausemoreofa
givenincreaseinincomeisspent,raisingtheincomeofotherpeoplebymore.
Diff:2
57) Whatisthemultiplier?Howisitcalculated?Whyisthemultiplierrelatedonlytoconsumption
spending?
Answer: Themultiplieristhenumberbywhichapermanentchangeinautonomousspendingis
multipliedtogetthechangeintheequilibriumlevelofrealGDP.Itisequalto1/(1-
MPC).Anincreaseinincomeleadstoanincreaseinconsumptionspending.Butthe
spendingincreasestheincomeofsomeoneelse.Thisincreaseinincomecausestheir
consumptionspendingtoincrease,whichisincomeforsomeoneelse,andsoon.Since
consumptionspendingistheonlycomponentofspendingthatdependsonincome,itis
theonlycomponentusedincalculatingthemultiplier.
Diff:3
12.7HowaChangeinRealAutonomousSpendingAffectsRealGDPWhenthePrice
LevelCanChange
1) Iftheaggregatesupplycurveisupwardsloping,thenanincreaseinautonomousconsumption
leadstoa(n)
A) increaseinaggregatedemandandariseinthepricelevel.
B) decreaseinaggregatedemandandariseinthepricelevel.
C) decreaseinaggregatedemandandafallinthepricelevel.
D) nochangeinaggregatedemandandnochangeinthepricelevel.
Answer: A
Diff:1
Topic: 12.7HowaChangeinRealAutonomousSpendingAffectsRealGDPWhenthePriceLevelCanChange
2) WhentheSRAScurveslopesupward,theactualaffectofanincreaseinrealautonomous
spendingonequilibriumrealGDPissmallerthanpredictedbythemultiplierbecause
A) thepricelevelfalls. B) thepricelevelrises
C) realGDPincreases. D) realGDPdecreases.
Answer: B
Diff:1
3) Becauseadecreaseinrealautonomousspendingresultsina________inthepricelevel,the
ultimateeffectonrealGDPis________thatpredictedbythemultiplier.
A) fall;smaller B) fall;larger C) rise;smaller D) fall,smaller
Answer: A
Diff:1
4) Whentheequilibriumpriceleveladjuststoanincreaseinautonomousinvestmentspending,the
impactofthemultipliereffectresultingfromthatspendingincrease
A) willincreaserealGDPbyanamountsmallerthanthemultipliereffectwouldindicate.
B) willincreasenominalGDPbyanamountsmallerthanthemultipliereffectwouldindicate.
C) willhavenoimpactontherealGDP.
D) isonlyfeltwhentherearechangesinconsumption.
Answer: A
Diff:3
5) Supposethataggregatedemandincreasesalongtheupwardslopingportionoftheaggregate
supplycurve.Whatistheresult?
A) NominalGDPandrealGDPdecreasebythesameamount.
B) NominalGDPandrealGDPincreasebythesameamount.
C) NominalGDPincreasesmorethanrealGDPincreases.
D) RealGDPincreasesmorethannominalGDPincreases.
Answer: C
Diff:3
12.8TheRelationshipBetweenAggregateDemandandtheC+ I+ G+ XCurve
A) TheC+I+G+Xcurvehasnorelationshiptotheaggregatedemandcurveotherthan
someofthevariablesthataffectonecurvealsoaffecttheother.
B) TheC+I+G+Xcurveisusedtoderivetheaggregatedemandcurve,butthe
C+I+G+Xcurveisdrawnforonepricelevelwhilepricelevelsvaryalongtheaggregate
demandcurve.
C) TheC+I+G+Xcurveisusedtoderivetheaggregatedemandcurve,buttheaggregate
demandcurveisdrawnforonepricelevel.
D) BoththeC+I+G+Xcurveandtheaggregatedemandcurvearedrawnforoneprice
level.
Answer: B
Diff:2
Topic: 12.8TheRelationshipBetweenAggregateDemandandtheC+ I+ G+ XCurve
2) Ahigherpricelevelcauses
A) theaggregatedemandcurvetoshifttotheleft.
B) theaggregatedemandcurvetoshifttotheright.
C) theC+I+G+Xcurvetoshiftdown.
D) theC+I+G+Xcurvetoshiftup.
Answer: C
Diff:2
3) AlowerpricelevelcausestheC+ I+ G+ Xcurvetoshiftasaresultofachangeinallthe
followingEXCEPT
A) anincreaseinrealwealth.
B) adecreaseininterestrates.
C) anincreaseinaggregatesupply.
D) anincreaseinforeignspendingondomesticgoods.
Answer: C
Diff:2
4) Ariseinthepricelevelcauses
A) anincreaseinaggregatedemand.
B) adecreaseinaggregatedemand.
C) areductionintotalplannedrealexpenditures.
D) anincreaseintotalplannedrealexpenditures.
Answer: C
Diff:1
5) Anincreaseinplannedrealinvestmentspendingcauses
A) amovementalongtheC+ I+ G+ Xcurveandashiftoftheaggregatedemandcurve.
B) ashiftoftheC+I+G+ Xcurveandamovementalongtheaggregatedemandcurve.
C) ashiftoftheC+I+G+ Xcurvebuthasnoeffectontheaggregatedemandcurve.
D) ashiftoftheC+I+G+ Xcurvethatcausestheaggregatedemandcurvetoshift.
Answer: D
Diff:2
6) Anincreaseinthepricelevelcauses
A) reducedinvestmentspending,becauseinterestratesincrease,butanincreaseinnet
exportsasU.S.residentsbuyfewerimports.Thechangeininvestmentisusuallygreater
thanthechangeinnetexports.
B) areductioninnetexportsashigherpricedU.S.goodsinduceforeignerstobuyfewer
Americanproducts,andanincreaseininvestmentspendingasthehigherpricesmake
businessesmoreprofitable.
C) reducedinvestmentspending,becauseinterestratesincreaseandadecreaseinnetexports
asthehigherpricesinduceforeignerstobuyfewerU.S.goods.
D) increasedgovernmentspending,whichcrowdsoutinvestmentspending,sothatthenet
effectonaggregatedemandisnil.
Answer: C
Diff:3
7) Ifsocietywantsaggregatedemandtoincreasewithoutchangesinthepricelevel,thenthere
mustbe
A) agapbetweenfullemploymentandthecurrentlevelofrealGDPandanincreasein
autonomousspending.
B) anincreaseinautonomousspendingcombinedwithanincreaseinthemarginal
propensitytosave.
C) anincreaseinautonomoussavingsothatautonomousinvestmentspendingcanincrease.
D) anincreaseinautonomousspendingandahorizontalshort -runaggregatesupplycurve.
Answer: D
Diff:3
8) HowdoesareductioninthepricelevelaffectthepositionoftheC + I+ G+ Xcurveandinturn
theequilibriumlevelofrealGDP?
A) TheC+I+G+Xcurveshiftsdown,therebyreducingtheequilibriumlevelofrealGDP.
B) TheC+I+G+Xcurveshiftsdown,therebyincreasingtheequilibriumlevelofrealGDP.
C) TheC+I+G+Xcurveshiftsup,therebyreducingtheequilibriumlevelofrealGDP.
D) TheC+I+G+Xcurveshiftsup,therebyincreasingtheequilibriumlevelofrealGDP.
Answer: D
Diff:2
9) HowdoesanincreaseinthepricelevelaffectthepositionoftheC+I+G+Xcurveandinturn
theequilibriumlevelofrealGDP?
A) TheC+I+G+Xcurveshiftsdown,therebyreducingtheequilibriumlevelofrealGDP.
B) TheC+I+G+Xcurveshiftsdown,therebyincreasingtheequilibriumlevelofrealGDP.
C) TheC+I+G+Xcurveshiftsup,therebyreducingtheequilibriumlevelofrealGDP.
D) TheC+I+G+Xcurveshiftsup,therebyincreasingtheequilibriumlevelofrealGDP.
Answer: A
Diff:2
12.9AppendixC:TheKeynesianModelandtheMultiplier
1) AccordingtotheKeynesianmodel,anincreaseinautonomousinvestmentleadsto
A) amorethanproportionaldecreaseinrealGrossDomesticProduct(GDP).
B) alessthanproportionaldecreaseinrealGrossDomesticProduct(GDP).
C) aproportionalincreaseinrealGrossDomesticProduct(GDP).
D) areductionintaxes,autonomousgovernmentspending,andafallinrealGrossDomestic
Product(GDP).
Answer: A
Diff:1
Topic: 12.9AppendixC:TheKeynesianModelandtheMultiplier
2) IntheKeynesianmodel,adecreaseinrealautonomousspendingresultsinamorethan
proportionaldecreaseinrealGrossDomesticProduct(GDP)because
A) consumptiondecreasesasaresultoflowerrealdisposableincome.
B) consumptionincreaseswhilerealdisposableincomedecreases.
C) realautonomousspendingdecreasesfurtherasrealdisposableincomedecreases.
D) governmentspendingalsodecreases.
Answer: A
Diff:2
3) IntheKeynesianmodel,anincreaseinrealautonomousspendingresultsinagreaterincreasein
realGrossDomesticProduct(GDP)if
A) themarginalpropensitytoconsume(MPC)islower.
B) themarginalpropensitytoconsume(MPC)ishigher.
C) theaveragepropensitytosave(APS)ishigher.
D) theaveragepropensitytosave(APS)islower.
Answer: B
Diff:2
4) Supposetheeconomyisinitiallyatequilibrium,inwhichtotalplannedrealexpendituresequals
realGDP.Whichofthefollowingwilloccurifthereisanincreaseinautonomousinvestment?
A) Inventorieswillincreaseimmediatelyandproductionofgoodsandserviceswilldecrease
untilrealGDPcatchesupwithtotalplannedrealexpenditures.
B) Inventorieswilldecreaseimmediatelyandproductionofgoodsandserviceswillincrease
untilrealGDPcatchesupwithtotalplannedrealexpenditures.
C) Bothinventoriesandproductionofgoodsandserviceswillincrease.
D) Inventorieswillnotchangeandproductionofgoodsandserviceswillnotchangeeither.
Answer: B
Diff:2
Chapter13
FiscalPolicy
13.1DiscretionaryFiscalPolicy
1) Whenthegovernmentdeliberatelyaltersitslevelofspendingand/ortaxesinordertoachieve
specificnationaleconomicgoals,itisexercising
A) monetarypolicy. B) discretionaryfiscalpolicy.
C) aRicardianpolicy. D) alaissez-fairepolicy.
Answer: B
Diff:1
Topic: 13.1DiscretionaryFiscalPolicy
2) Whichofthefollowingisanexampleoffiscalpolicy?
A) areductioninthefederalfundsrate.
B) areductioninthemoneysupply.
C) areductioninlump-sumtaxes.
D) anincreaseinthephysicalstockofcapital.
Answer: C
Diff:1
3) Whichofthefollowingwouldshifttheaggregatedemandcurvetotheright?
A) Anincreaseingovernmentspending B) Anincreaseintaxes
C) Anincreaseininterestrates D) Anincreaseininputprices
Answer: A
Diff:1
4) Whichofthefollowingfiscalpolicyactionswouldbeappropriateiftheeconomyisexperiencing
aninflationarygap?
A) Anincreaseingovernmentspending B) Anincreaseintaxes
C) Adecreaseininterestrates D) Anincreaseinthemoneysupply
Answer: B
Diff:1
5) Anincreaseingovernmentspendingwouldcausewhichofthefollowingtohappen?
A) Theaggregatedemandcurvewouldshifttotheright.
B) Theaggregatedemandcurvewouldshifttotheleft.
C) Theaggregatesupplycurvewouldshifttotheright.
D) Theaggregatesupplycurvewouldshifttotheleft.
Answer: A
Diff:1
6) SupposetheeconomyisexperiencingarecessionarygapatthecurrentlevelofGDP.Whichof
thefollowingfiscalpolicyactionswouldbemostappropriategiventhisrecessionarygap?
A) decreasinginterestrates
B) increasingthemoneysupply
C) decreasingtaxes
D) asimultaneousandequalreductionintaxesandreductioningovernmentspending
Answer: C
Diff:1
7) Fiscalpolicyreferstothe
A) manipulationofthemoneysupplyinordertoincreasetheamountofpapercurrencyin
circulation.
B) adjustmentofgovernmentspendingandtaxesinordertoachievecertainnational
economicgoals.
C) adjustmentofnationalincomedatatoaccountforpricelevelchanges.
D) changingthewayunemploymentdataiscalculatedsoastomakeitappearthat
unemploymentislowerthanitactuallyis.
Answer: B
Diff:1
8) Fiscalpolicyinvolveswhichofthefollowing?
A) Taxpolicy
B) Interestrates
C) Buyingandsellinggovernment-agencybonds
D) Noneoftheabove
Answer: A
Diff:1
Chapter13FiscalPolicy549
9) Whentelevisioncommentatorsrefertotaxandspendpolicy,theyarereferringto
A) fiscalpolicy. B) monetarypolicy.
C) theFederalReservepolicy. D) automaticstabilizers.
Answer: A
Diff:1
10) WhichofthefollowingisNOTafiscalpolicyaction?
A) increasinggovernmentexpendituresonmilitaryhardware
B) decreasinggovernmentspendingonthearts
C) raisingthequantityofmoneyincirculation
D) loweringincometaxrates
Answer: C
Diff:1
11) Fiscalpolicyisdefinedas
A) thedesignofataxsystemtotransferincomefromtherichtothepoor.
B) theuseofCongressionalpowertopursuesocialandpoliticalgoals.
C) thediscretionarychangingofgovernmentexpendituresand/ortaxestoachievenational
economicgoals.
D) theuseofthetaxingpowerofthegovernmenttoredistributewealthinasocially
acceptablemanner.
Answer: C
Diff:1
12) Whichofthefollowingisanexampleofadiscretionaryfiscalpolicyaction?
A) increasinggovernmentspendingtodealwitharecession
B) adecreaseintaxrevenuesastaxpayersincomesdecrease
C) increasingtheminimumwagerate
D) raisingregulationsinthehealthcareindustry
Answer: A
Diff:2
13) Whichofthefollowingisadiscretionaryfiscalpolicyaction?
A) anincreaseintheamountofunemploymentcompensationbecausemorepeoplebecome
unemployed
B) aprogressivetaxsystemthatleadstoanincreaseinincometaxrevenuesduringan
economicboom
C) adeliberatetaxcutwhentheeconomyexperienceshighunemployment
D) anincreaseinSupplementalSecurityIncomepaymentswhenmorepeoplebecomeeligible
forthebenefits
Answer: C
Diff:2
14) Typicalgoalsforfiscalpolicyare
A) highemploymentandpricestability.
B) highpricesforconsumersandlowpricesforbusinesses.
C) runninghighdeficitsandraisingconsumerprices.
D) increasingthemoneysupplysothegovernmentcanspendmore.
Answer: A
Diff:2
15) Fiscalpolicytosolveshort-runeconomicproblemssupportstheKeynesiannotionof
A) therebeingnogovernmentroleintheeconomy.
B) anactivegovernmentroleintheeconomy.
C) theneedforautocraticrule.
D) thelong-runnatureoftheeconomy.
Answer: B
Diff:2
16) AccordingtotraditionalKeynesianeconomics,expansionaryfiscalpolicyinitiatedbythe
federalgovernment
A) isneverappropriate.
B) isanappropriatewaytopreventrecessionsanddepressions.
C) isanappropriatewaytoslowdownanover-heatedeconomy.
D) willalwaysfailduetocrowdingouteffects.
Answer: B
Diff:1
17) Discretionaryfiscalpolicyis
A) automaticchangesingovernmentexpendituresandinterestratesthatachievecertain
nationaleconomicgoals.
B) deliberatechangesingovernmentexpendituresortaxesinordertoachievecertain
nationaleconomicgoals.
C) usedtoachievefullemploymentbychangingmonetarygrowthtargets.
D) changesinsupportforresearchandeducationinordertoachievecertainnational
economicgoals.
Answer: B
Diff:1
18) AllthefollowingactionsrepresentfiscalpolicyEXCEPT
A) areductioninthemoneysupplybytheFederalReserve.
B) anincreaseingovernmentspending.
C) areductioninindividualincometaxrates.
D) anincreaseincorporateincometaxrates.
Answer: A
Diff:1
19) Fiscalpolicyisimplementedby
A) thecentralbank. B) privatebusinesses.
C) theInternalRevenueService. D) thefederalgovernment.
Answer: D
Diff:1
20) Whichofthefollowingrepresentexpansionaryfiscalpolicy?
A) areductioningovernmentspending
B) anincreaseinaverageindividualincometaxrates
C) acutincorporateincometaxrates
D) anincreaseinmarginalindividualincometaxrates
Answer: C
Diff:1
21) Thediscretionarychangeofgovernmentexpendituresortaxestoachievenationaleconomic
goalsis
A) arecessionarygap. B) Ricardian-equivalencetheorem.
C) supply-sideeconomics. D) fiscalpolicy.
Answer: D
Diff:1
22) Discretionaryfiscalpolicyisbestdescribedas
A) adeliberateattempttocausetheeconomytomovetofullemploymentandpricestability
morequicklythanitmightotherwise.
B) adeliberateattempttoimprovethefunctioningoffreemarkets.
C) anautomaticchangeinincometransferpaymentstokeeptheeconomyatfull
employment.
D) thedesignofataxsystemthatautomaticallystabilizeseconomicactivityovertime.
Answer: A
Diff:2
23) Keynesbelievedthatthewaytopreventrecessionsanddepressionswasto
A) reducespendingwhenthereisarecessionarygap.
B) onlychangetaxratesasameansofregulatingtheeconomy.
C) maximizethecrowdingouteffect.
D) increaseaggregatedemandthroughexpansionaryfiscalpolicy.
Answer: D
Diff:2
24) Fiscalpolicyinvolvesdiscretionarychangesin
A) interestrates.
B) exchangerates.
C) incometaxrates.
D) therateofgrowthofthequantityofmoneyincirculation.
Answer: C
Diff:1
25) AccordingtotraditionalKeynesiananalysis,fiscalpolicyoperatesby
A) informingconsumersandbusinesspeopleaboutitsplansfortheeconomysotheywill
knowhowtoadjusttheirbehavior.
B) indirectlyaffectingaggregatedemandthroughitseffectoninterestrates.
C) directlyaffectingaggregatedemand.
D) directlyaffectingaggregatesupply.
Answer: C
Diff:2
26) Toclosearecessionarygapthroughfiscalpolicy,thegovernmentshould
A) decreasegovernmentspendinginordertoincreaseaggregatesupply.
B) increasegovernmentspendinginordertoincreaseaggregatedemand.
C) reducetaxesinordertostimulateinvestment,andthusincreaseaggregatesupply.
D) increasegovernmentspendingandtaxesinordertobothincreaseaggregatedemandand
aggregatesupply.
Answer: B
Diff:2
27) Anexampleoffiscalpolicyis
A) areductioningovernmentspending.
B) areductionininvestmentspendingbytheprivatesector.
C) anincreaseinautonomousspendingbyconsumers.
D) anincreaseinSocialSecurityspendingbytheelderly.
Answer: A
Diff:1
28) FiscalpolicyincludesallofthefollowingEXCEPT
A) changingtaxes.
B) changinggovernmentspending.
C) policiesthatinfluenceaggregatedemand.
D) policiesthatinfluencetherateofgrowthofthequantityofmoneyincirculation.
Answer: D
Diff:1
29) Iftheeconomyisoperatingonthelong-runaggregatesupplycurve,thenexpansionaryfiscal
policywill
A) generatehigherpricesintheshortrun,butwillinduceaggregatesupplytoincreaseinthe
longrun.
B) generateanincreaseinrealGDPandhigherpricesinboththeshortrunandthelongrun.
C) generateanincreaseinrealGDPwithouthigherpricesintheshortrun,butthenrealGDP
willreturntoitslong-runlevel,andthepricelevelwillincrease.
D) generateanincreaseinrealGDPandhigherpricesintheshortrun,butthenrealGDPwill
decreasetoitslong-runlevel,andthepricelevelwillincreasesomemore.
Answer: D
Diff:3
30) Iftheeconomyisexperiencinganinflationarygapandthegovernmentwantstoacceleratethe
adjustmenttothelong-runequilibrium,itshould
A) reduceaggregatedemandbycuttinggovernmentspendingorraisingtaxes.
B) reduceaggregatedemandbyincreasinggovernmentspendingorcuttingtaxes.
C) increaseaggregatesupplybycuttinggovernmentspendingorraisingtaxes.
D) increaseaggregatesupplybyincreasinggovernmentspendingorloweringtaxes.
Answer: A
Diff:2
31) Supposethegovernmentincreaseslump-sumtaxes.Thiscauses
A) disposableincometodecrease,whichcausesconsumptionspendingtodecreaseand
aggregatedemandtodecrease.
B) governmentspendingtodecrease,whichcausesaggregatedemandtodecrease.
C) consumptionspendingtodecreaseandspendingonimportstoincrease.Theeffecton
aggregatedemanddependsonwhetherdomesticspendingorspendingonimports
decreasedthemost.
D) disposableincometodecrease,whichcausesaggregatesupplytodecrease.
Answer: A
Diff:2
32) Otherthingsbeingequal,areductionintaxeswill
A) leadtoareductioninthelongrunaggregatesupplycurveasbusinessesenjoygreater
profits.
B) influencetheshortrunaggregatesupplycurvebutnottheaggregatedemandcurve.
C) leadtoacorrespondingreductionininterestratesincreasingthecrowdingouteffect.
D) causeanincreaseinaggregatedemandduetoincreasesinconsumption,investment,or
netexports.
Answer: D
Diff:1
33) Whichofthefollowingactionscouldbeundertakenifthegovernmentwantstoreducean
inflationarygap?
A) Increasetaxesandreducegovernmentspending.
B) Reducetaxesandincreasegovernmentspending.
C) Increasetaxesandincreasegovernmentspending.
D) Reducetaxesandreducegovernmentspending.
Answer: A
Diff:2
34) Whichofthefollowingactionscouldbeundertakenifthegovernmentwantstoclosea
recessionarygap?
A) Increasetaxesandreducegovernmentspending.
B) Reducetaxesandincreasegovernmentspending.
C) Increasetaxesandincreasegovernmentspending.
D) Reducetaxesandreducegovernmentspending.
Answer: B
Diff:2
35) Refertotheabovefigure.SupposetheeconomyisoperatingatpointA.Thereisarecessionary
gapof________,whichcanbeclosedby________.
A) $3trillion;increasinggovernmentspendingby$1trillion
B) $1trillion;expansionaryfiscalpolicythatshiftstheshort-runaggregatesupplycurve
throughpointC
C) $2trillion;expansionaryfiscalpolicythatgeneratesanother$2trillionintotalspending
D) $2trillion;anincreaseingovernmentspendingof$14trillion
Answer: C
Diff:2
36) Refertotheabovefigure.SupposetheeconomyisatpointA.Bytheproperuseoffiscalpolicy,
thegovernmentcan
A) boosttaxestoshiftLRASthroughpointA.
B) increasegovernmentspendingtogettheeconomytopointB.
C) raiseincometaxratestogettheeconomytopointC.
D) reducegovernmentspendingtogettheeconomytopointD.
Answer: B
Diff:3
37) Refertotheabovefigure.IftheeconomyiscurrentlyoperatingatpointC,thenthereis
A) astablelong-runequilibriumsituation. B) arecessionarygap.
C) aninflationarygap. D) unemployment.
Answer: C
Diff:2
38) Refertotheabovefigure.SupposetheU.S.economyiscurrentlyoperatingatpointC.Whichof
thefollowingactionswouldyourecommendtothepresidentoftheUnitedStates?
A) Reducetaxestostimulateinvestment,consumptionandnetexports.
B) Increasegovernmentspendingwhileholdingtaxesconstant.
C) Engageincontractionaryfiscalpolicybyreducinggovernmentspending.
D) Reducetheinterestratetostimulateinvestmentminimizingthecrowdingouteffect.
Answer: C
Diff:3
39) Refertotheabovefigure.SupposethattheeconomywasoriginallyatpointA,andthenit
reachedpointCbymeansofafiscalpolicyaction.Whichofthefollowingiscorrect?
A) PointCisashort-runequilibriumthatcouldhavebeenattainedthroughataxcut,butin
thelongruntheeconomywillendupatpointB.
B) PointCisbothashort-runequilibriumandalong-runequilibriumthatcouldhavebeen
attainedthroughanincreaseingovernmentspending.
C) PointCisalong-runequilibriumthatcouldhavebeenattainedthroughataxincrease,
althoughreachingthispointfirstrequiredashort-runequilibriumatpointB.
D) PointCisashort-runequilibriumthatcouldhavebeenattainedthroughareductionin
governmentspending,butinthelongruntheeconomywillendupatpointB.
Answer: A
Diff:2
40) Refertotheabovefigure.IftheeconomyiscurrentlyatpointC,thenanincreaseintaxeswill
leadto
A) anincreaseinthepriceandanincreaseinrealGDP.
B) anincreaseinthepriceandadecreaseinrealGDP.
C) adecreaseinthepriceandadecreaseinrealGDP.
D) adecreaseinthepriceandanincreaseinrealGDP.
Answer: C
Diff:3
41) Supposetherecurrentlyisaninflationarygap.Whatcouldthegovernmentdotobringprices
down?
A) Nothing.
B) Reducegovernmentspending.
C) Increasegovernmentspending.
D) Shiftthelong-runaggregatesupplycurve.
Answer: B
Diff:1
42) Anexampleofexpansionaryfiscalpolicycouldbe
A) toincreasetaxes. B) toreducetaxes.
C) toreducegovernmentspending. D) toreduceinterestrates.
Answer: B
Diff:1
43) Intheshortrun,expansionaryfiscalpolicyusuallywill
A) increasethepricelevelandincreaserealGDP.
B) increasethepricelevelanddecreaserealGDP.
C) decreasethepricelevelandincreaserealGDP.
D) decreasethepricelevelanddecreaserealGDP.
Answer: A
Diff:1
44) Contractionaryfiscalpolicywillmostlikely
A) involvecuttingtaxes.
B) raiserealGDP.
C) reducethepricelevel.
D) involveincreasinggovernmentspending.
Answer: C
Diff:1
45) Intheshortrun,ifthegovernmentattemptstoincreaseaggregatedemand,itshould
A) increasegovernmentspendingandreducetaxes.
B) decreasegovernmentspendingandincreasetaxes.
C) shiftthelong-runaggregatesupplycurvetotheright.
D) shifttheshort-runaggregatesupplycurvetotheright.
Answer: A
Diff:1
46) Thegovernmentmightengageinexpansionaryfiscalpolicyifitwantedto
A) reducethepricelevel.
B) reducerealGDP.
C) shifttheaggregatedemandcurvetotheleft.
D) reducethelevelofunemployment.
Answer: D
Diff:2
47) Supposetheeconomyhasahighlevelofunemployment.Thiswouldimply
A) thatthegovernmentshouldengageinexpansionaryfiscalpolicyandincreasethetaxrate.
B) thattheeconomyisoperatingtotheleftoftheLRAScurveandthatgovernmentspending
couldbeincreasedtoreduceunemployment.
C) thatfiscalpolicyhasbeenineffectiveandshouldbeabandoned.
D) thattheeconomyisoperatingontheSRAScurveandthatgovernmentspendingcouldbe
decreasedtoreduceunemployment.
Answer: B
Diff:1
48) Fiscalpolicy
A) usesthetoolsoftaxationandspendinginanefforttoaddressinflationand
unemployment.
B) usesthetoolofbusinessregulationtoincreaseeconomicefficiency.
C) usesthetoolofinterestratestostimulateprivatesavings.
D) usesthetooloftheexchangeratetodiscourageimports.
Answer: A
Diff:1
49) Thechangingofgovernmentexpendituresortaxestoachievenationaleconomicgoalsis
A) discretionaryfiscalpolicy. B) automaticfiscalpolicy.
C) recessionaryfiscalpolicy. D) inflationaryfiscalpolicy.
Answer: A
Diff:1
50) Discretionaryfiscalpolicyissonamedbecauseit
A) isundertakenattheorderofthenationscentralbank.
B) occursautomaticallyasthenationslevelofGDPchanges.
C) involvesspecificchangesintaxesandgovernmentspendingundertakenbyCongressand
thepresident.
D) involvessecretadvicegivenbytheCouncilofEconomicAdviserstothepresident.
Answer: C
Diff:1
51) Ifthereisadeliberatechangeintaxesandspending,itiscalled
A) arecessionarygap. B) aninflationarygap.
C) discretionaryfiscalpolicy. D) discretionarymonetarypolicy.
Answer: C
Diff:1
52) Whichofthefollowingfiscalpolicyactionswoulddefinitelycausean increaseinthesizeofa

recessionarygap?
A) increasesintaxesandcutsingovernmentspending
B) cutsintaxes
C) increasesintaxesandincreasesingovernmentspending
D) cutsintaxesandincreasesingovernmentspending
Answer: A
Diff:1
53) Whichofthefollowingfiscalpolicyactionswoulddefinitelycauseareductioninthesizeofan
inflationarygap?
A) cutsintaxesandincreasesingovernmentspending
B) increasesingovernmentspending
C) increasesintaxes
D) cutsintaxes
Answer: C
Diff:1
54) Whenthegovernmentcutstaxesorincreasesgovernmentspending
A) thelong-runaggregatesupplycurveshiftstotheleft.
B) theshort-runaggregatesupplycurveshiftstotheleft.
C) theaggregatedemandcurveshiftstotheleft.
D) theaggregatedemandcurveshiftstotheright.
Answer: D
Diff:1
55) WhichofthefollowingisNOTrelatedtofiscalpolicy?
A) passageofnewsecuritieslaws B) decreasingmarginaltaxrates
C) reducingthebudgetdeficit D) increasinggovernmentexpenditures
Answer: A
Diff:1
56) Whichoneofthefollowingistrueabouttheeffectsoffiscalpolicy?
A) Adecreasegovernmentspendingwillincreaseaggregatesupply.
B) Ataxchangedoesnothaveanydirectorindirecteffectsonaggregatedemand.
C) Adecreaseingovernmentspendingwilldecreaseaggregatedemand.
D) Anincreaseingovernmentspendingwillreduceaggregatedemand.
Answer: C
Diff:2
57) Whichofthefollowingconditionsdescribesarecessionarygap?
A) Theshort-runequilibriumlevelofrealGDPisabovethelong-runlevelofrealGDP.
B) Theshort-runequilibriumlevelofrealGDPisbelowthelong-runlevelofrealGDP.
C) Theactualinterestrateisabovetheequilibriuminterestrate.
D) Theactualinterestrateisbelowtheequilibriuminterestrate.
Answer: B
Diff:2
58) Howmightfiscalpolicybeusedtocorrectaninflationarygap?
A) Theexchangeratewouldbeadjustedtoencourageimports.
B) Theexchangeratewouldbeadjustedtodiscourageimports.
C) Theinterestratewouldbeadjustedtoencouragesaving.
D) Taxeswouldbeincreasedtoreduceaggregatedemand.
Answer: D
Diff:2
59) Howmightfiscalpolicybeusedtocorrectarecessionarygap?
A) Theexchangeratewouldbeadjustedtoencourageimports.
B) Theexchangeratewouldbeadjustedtodiscourageimports.
C) Governmentspendingwouldbeadjustedtoincreaseaggregatedemand.
D) Businessoperationswouldberegulatedbythegovernmenttobecomemoreefficient.
Answer: C
Diff:2
60) Expansionaryfiscalpolicyisusedto
A) combatinflation. B) combatrecessions.
C) encourageprivatesaving. D) makebusinessesmoreefficient.
Answer: B
Diff:1
61) In2009,Congresspassedabillthatinvolvedgovernmentspendingincreasesandtaxcutswith
thepurposeofstimulatingtheU.S.economy.Thispolicyisanexampleof
A) anautomaticstabilizer. B) contractionaryfiscalpolicy.
C) expansionaryfiscalpolicy. D) expansionarymonetarypolicy.
Answer: C
Diff:2
62) Taxpolicyconductedforthepurposeofachievingfullemployment,pricestability,oreconomic
growthisanexampleof
A) monetarypolicy. B) interest-ratepolicy.
C) exchange-ratepolicy. D) discretionaryfiscalpolicy.
Answer: D
Diff:2
63) Governmentspendingconductedforthepurposeofachievingfullemployment,pricestability,
oreconomicgrowthisanexampleof
A) monetarypolicy. B) interest-ratepolicy.
C) exchange-ratepolicy. D) fiscalpolicy.
Answer: D
Diff:2
64) DiscretionaryFiscalpolicy
A) istheuseofgovernmentspendingandtaxpoliciestoinfluenceeconomicgrowthand
inflation.
B) istheuseofregulationtoinfluenceeconomicgrowthandinflation.
C) isthepurchaseandsaleofTreasurysecuritiestoinfluenceeconomicgrowthandinflation.
D) istheconversionofnominaldatatorealdata.
Answer: A
Diff:1
65) ThefiscalpolicyoftheUnitedStatesis
A) summarizedinthebudgetoftheU.S.federalgovernment.
B) thesumofthebudgetsofeachstateandmunicipality.
C) publishedintheFederalReserveBanksAnnualReport.
D) announcedbythePresidentinhisStateoftheUnionmessage.
Answer: A
Diff:1
66) Refertotheabovefigure.Iftherelevantaggregatedemandcurveis AD2 ,whatisthecurrent

economicsituation?
A) inflationarygap B) recessionarygap
C) equilibrium D) overemployment
Answer: B
Diff:2
67) Refertotheabovefigure.Supposetherelevantaggregatedemandcurveis AD2 .Ifthe

governmentwantstousediscretionaryfiscalpolicytoclosetheexistinggap,itshould
A) decreasetaxes. B) increasetaxes.
C) increasethemoneysupply. D) decreasegovernmentspending.
Answer: A
Diff:2
68) Refertotheabovefigure.Iftherelevantaggregatedemandcurvewas AD2 ,thegovernment

coulddoallofthefollowingtoclosetheexistinggapEXCEPT
A) increasegovernmentspendingonroads.
B) reducemarginaltaxrates.
C) reducecorporatetaxes.
D) reducedefensespending.
Answer: D
Diff:2
69) Refertotheabovefigure.Iftherelevantaggregatedemandcurveis AD2 ,whatisthecurrent

economicsituation?
A) inflationarygap B) recessionarygap
C) equilibrium D) overemployment
Answer: A
Diff:1
70) Refertotheabovefigure.Supposetherelevantaggregatedemandcurveis AD2 .Ifthe

governmentwantstousefiscalpolicytoclosetheexistinggap,itshould
A) increasetaxes. B) decreasetaxes.
C) increasethemoneysupply. D) increasegovernmentspending.
Answer: A
Diff:2
71) Refertotheabovefigure.Iftherelevantaggregatedemandcurveis AD1 ,thentheeconomyis

experiencing
C) adeflationarygap. D) fullemployment.
Answer: D
Diff:2
72) SupposethecurrentlevelofrealGDPisbelowthefull-employmentlevelofrealGDP.Which
ofthefollowingrepresentsafiscalpolicyactionthatcouldbeimplementedtoreducethesizeof
thisrecessionarygap?
A) Increasegovernmentspending. B) Decreaseinterestrates.
C) Increasethemoneysupply. D) alloftheabove
Answer: A
Diff:2
73) Whenthecurrentshort-runequilibriumistotherightofthelong-runaggregatesupply,
appropriatediscretionaryfiscalpolicyusedtoaddressthisproblemwouldbeto
A) increasetaxes. B) decreasetaxes.
C) increasegovernmentspending. D) decreasethediscountrate.
Answer: A
Diff:3
74) Whichofthefollowingstatementsaboutfiscalpolicyistrue?
A) RealGrossDomesticProduct(GDP)canbeincreasedaboveitslong-runequilibriumonly
intheshortrun.
B) RealGrossDomesticProduct(GDP)canneverbeincreasedaboveitslong -run
equilibrium,evenforabriefperiodoftime.
C) Governmentcanshifttheaggregatedemandcurveinwardbyincreasingspending.
D) Governmentcanshifttheaggregatedemandcurveoutwardbyreducingspending.
Answer: A
Diff:1
75) Whichoneofthefollowingisanexampleofdiscretionaryfiscalpolicyusedtocorrecta
recessionarygap?
A) ataxdecreasepassedintolawbyCongress
B) anincreaseinthemoneysupplybytheFederalReserve
C) adecreaseingovernmentexpendituresapprovedbyCongress
D) anagreementamongmajorbankstoraiseinterestrates
Answer: A
Diff:1
76) Whichoneofthefollowingisanexampleofdiscretionaryfiscalpolicyusedtocorrectan
inflationarygap?
A) ataxincreasepassedintolawbyCongress
B) decreaseinthemoneysupplybytheFederalReserve
C) anincreaseingovernmentexpendituresapprovedbyCongress
D) anagreementamongmajorbankstolowerinterestrates
Answer: A
Diff:1
77) Whatisdiscretionaryfiscalpolicyandwhatisitspurpose?
Answer: Discretionaryfiscalpolicyisthedeliberatechangingofgovernmentspendingand/or
taxes.Itspurposeistomovetheeconomytowardfullemploymentwithpricestability
morerapidlythanitwouldifleftonitsown.
Diff:1
78) Explainhowfiscalpolicycancorrectacontractionarygap.
Answer: Acontractionarygapcanbeclosedbyanincreaseinaggregatedemand.Byincreasing
governmentspendingorreducingtaxes,aggregatedemandincreases,therebyraisingthe
levelofrealGDP.
Diff:1
79) Supposethegovernmentbelievestheeconomyisoperatingbeyondthefull -employmentreal

GDP.Whatkindoffiscalpolicycoulditpursue?
Answer: Thegovernmentcouldinitiatecontractionaryfiscalpolicyandeitherreducegovernment
spendingorincreasetaxes.Theaggregatedemandcurveshiftstotheleft.Withan
upwardslopingshort-runaggregatesupplycurve,realGDPfallsandthepricelevelfalls.
Diff:3
13.2PossibleOffsetstoFiscalPolicy
1) WhatdoesresearchtellusabouttheimpactofRicardianequivalenceeffectsontheeconomy?
A) ThereisnoevidenceofanyimpactofRicardianequivalenceeffects.
B) Ricardianequivalenceeffectshaveahugeimpactonaggregatedemand.
C) Thereisaverysmallimpactonbothaggregatedemandandaggregatesupply.
D) Ricardianequivalenceeffectsmayexist,buttheirmagnitudesareunclear.
Answer: D
Diff:3
Topic: 13.2PossibleOffsetstoFiscalPolicy
2) TheRicardianequivalencetheoremstatesthat
A) anincreaseingovernmentspendinghasnoeffectonaggregatesupply.
B) increasesingovernmentspendinghavealargerimpactonrealGrossDomesticProduct
(GDP)thandecreasesintaxes.
C) anincreaseinthegovernmentbudgetdeficitcreatedbyacurrenttaxcuthasnoeffecton
aggregatedemand.
D) anincreaseinthegovernmentbudgetdeficithasnoeffectonrealGrossDomesticProduct
(GDP)becauseitonlyaffectsthepriceindex.
Answer: C
Diff:2
3) Theconceptthatincreasedgovernmentspendingwillleadtolowerinvestmentandconsumer
spendingisreferredtoasthe
A) inflationaryeffect. B) crowding-outeffect.
C) aggregatedemandeffect. D) Keynesianeffect.
Answer: B
Diff:2
4) TheLaffercurveshowsarelationshipbetween
A) inflationratesandunemploymentrates.
B) interestratesandinvestmentspending.
C) pricelevelandrealGrossDomesticProduct(GDP).
D) taxratesandtaxrevenues.
Answer: D
Diff:2
5) Bydefinition,adirectexpenditureoffsetwilloccurwhenever
A) thegovernmentincreasesspendinginanareathatcompeteswiththeprivatesector.
B) thegovernmentincreasesspendingforthemilitary.
C) theinterestraterises.
D) theinterestratefalls.
Answer: A
Diff:1
6) Ifthegovernmentbeganprovidingfreetextbookstocollegestudentswhowouldotherwise
haveboughttheirbooksfromtheprivatesector,thegovernmentsactionwouldresultin
A) anincreaseinrealGrossDomesticProduct(GDP).
B) adirectexpenditureoffset.
C) aRicardiandilemma.
D) areductionofthegovernmentdeficit.
Answer: B
Diff:1
7) Ifthegovernmentincreasesspendingandthereisacompletedirectexpenditureoffset,then
A) aggregatedemandandrealGrossDomesticProduct(GDP)willnotchange.
B) aggregatedemandandrealGrossDomesticProduct(GDP)willincreasebytheamountof
thespendingincrease.
C) thepricelevelwilldrop.
D) thegovernmentspendingmultiplierwillbegreaterthanzero.
Answer: A
Diff:1
8) Thegovernmentwantstoincreaseitsspendingby$1billiontostimulatetheeconomyandis
countingonthegovernmentspendingmultipliertohelp.Takingintoaccountdirectexpenditure
offseteffects,whatisitsbestspendingoption?
A) Anewcruisemissileforthemilitary
B) Expandingtheschoollunchprogram
C) Constructingmorelowincomehousing
D) Providingtextbooksforcollegestudents
Answer: A
Diff:2
9) Accordingtosupply-sideeconomics,changesinmarginaltaxrateswillhavewhichofthe
followingeffects?
A) changetheincentivetowork B) changetheincentivetosave
C) changetheincentivetoinvest D) alloftheabove
Answer: D
Diff:1
10) Onepartofthesupply-sideargumentisthat
A) lowermarginaltaxratesarerequiredtoinduceCongresstoreducegovernmentspending.
B) lowermarginaltaxratescanincreasetotaltaxrevenues.
C) themarginaltaxrateshouldbesetat50percent.
D) therelevantaggregatesupplycurveisclosetohorizontal.
Answer: B
Diff:2
11) Thesupportersofaproposaltoincreasemarginaltaxesonthoseearningover$200,000ayear
saythischangewouldgenerate$100billioninnewtaxrevenues.Asupply-sideeconomist
wouldarguethattheactualrevenueraisedwillbe
A) lessthan$100billionbecausesomepeoplewillrespondbyworkingless.
B) exactly$100billionbecausetherearenooffsettingfactorstoataxincrease.
C) morethan$100billion,becauselowerincomepeoplewillworkharderwhentheyperceive
thetaxsystemtobefairer.
D) morethan$100billionbecauseinterestrateswillalsobeaffected.
Answer: A
Diff:2
12) Supply-sideeconomistsarguethat
A) lowertaxratessometimesleadtoincreasedtaxrevenues.
B) highertaxratesleadtoincreasedproductivity.
C) lowertaxratesleadtoadropinrealGrossDomesticProduct(GDP).
D) lowertaxratesalwaysleadtolowertaxrevenues.
Answer: A
Diff:1
13) Accordingtosupply-sideeconomists,lowermarginaltaxrateswillnotnecessarilyleadto
lowertaxrevenuesbecause
A) thecrowdingouteffectdoesnotapplytotaxes.
B) lowertaxrateshavenoeffectontheopportunitycostoflabor.
C) theaggregatesupplycurvewillshiftinwardtotheleftifthetaxratesarelowered.
D) thelowermarginaltaxrateswillbeappliedtoagrowingtaxbaseduetoeconomicgrowth.
Answer: D
Diff:1
14) Supply-sideeconomicsfocusesontaxcutstostimulate
A) aggregatedemandbyreducingsaving.
B) aggregatesupplybyincreasingproduction.
C) governmentspending.
D) militaryresearch.
Answer: B
Diff:2
15) Whensupply-sidepolicyissuccessfulinpushingupequilibriumrealGrossDomesticProduct
(GDP),thereasonisthatthepolicygenerates
A) adecreaseinaggregatedemand. B) anincreaseinaggregatesupply.
C) adecreaseinemployment. D) adecreaseinsaving.
Answer: B
Diff:3
16) Ifthegovernmentincreasesspendingbutdoesnotraisetaxes,
A) aggregatedemandwillincreasewithoutanyeffectonthepricelevel.
B) borrowingbythegovernmentwilltakeplace.
C) thegovernmentwillhavetosellsomeassets,suchasoilandnationalparks.
D) thegovernmentwillhavetoeitherlowerexpendituresorraisetaxesthenextyear.
Answer: B
Diff:2
17) Thecrowding-outeffectis
A) thetendencyofcontractionaryfiscalpolicytocauseanincreaseinplannedinvestmentor
plannedconsumptionintheU.S.privatesector.
B) thetendencyofexpansionaryfiscalpolicytocauseanincreaseinplannedinvestmentbut
notinplannedconsumptionintheU.S.privatesector.
C) thetendencyofexpansionaryfiscalpolicytocauseadecreaseinplannedinvestmentor
plannedconsumptionintheU.S.privatesector.
D) thetendencyofcontractionaryfiscalpolicytocauseanincreaseinplannedinvestmentbut
adecreaseinplannedconsumptionintheU.S.privatesector.
Answer: C
Diff:2
18) AttaxrateshigherthanthetaxratethatmaximizestaxrevenuesalongaLaffercurve,
A) anincreaseintaxratesincreasestaxrevenues.
B) areductionintaxratesreducestaxrevenues.
C) areductionintaxratesincreasestaxrevenues.
D) anyvariationintaxrateshasnoeffectontaxrevenues.
Answer: C
Diff:2
19) Ifthegovernmentincreasesspendingwhileholdingtaxesconstant,weexpect
A) anincreaseininvestmentspendingbybusinessestoo,astheyanticipatefutureeconomic
growth.
B) adecreaseinrealsavingasconsumersfollowsuitandalsoincreaseborrowing.
C) plannedrealinvestmentspendingbybusinessestoincrease.
D) interestratestorise.
Answer: D
Diff:2
20) Thetendencyforexpansionaryfiscalpolicytocauseareductioninplannedrealinvestment
spendingbytheprivatesectoriscalled
A) theindirecteffect. B) theinterestrateeffect.
C) thecrowding-outeffect. D) theLaffereffect.
Answer: C
Diff:1
21) Thecrowding-outeffectis
A) duetotheupwardslopeoftheSRASwhentheeconomyisoperatingtotherightofthe
LRAScurve.
B) duetothegovernmentbeingmorepowerfulinthemarketswhenthereisanincreasein
governmentspending.
C) asituationinwhichexpansionaryfiscalpolicyleadstoadecreaseinplannedreal
investmentorplannedrealconsumptionintheprivatesector.
D) onlyrelevantwhenaninflationarygapispresent.
Answer: C
Diff:1
22) Ifthecrowding-outeffectiscompleteandthemarginalpropensitytosaveis0.25,thenan
increaseingovernmentspendingof$100billionwillgeneratehowmuchmorerealGDP?
A) $0 B) $25billion C) $100billion D) $400billion
Answer: A
Diff:2
23) Adirectexpenditureoffsetoccurswhenanincreaseingovernmentspending
A) resultsinanincreaseinhouseholdsavingforretirement.
B) isfollowedbyanincreaseinconsumerspending
C) resultsinadecreaseinprivatespending.
D) isfollowedbyanincreaseintaxes.
Answer: C
Diff:2
24) Refertotheabovefigure.Thegovernmenthasjustengagedinexpansionaryfiscalpolicy
shiftingtheaggregatedemandcurvefromAD1 toAD2 .Interestrateshavestartedtorise.
Whichofthefollowingstatementsistrueintheshortrun?
A) RealGDPwillbe$14trillionsincetheeffectofgovernmentspendingisnotinfluencedby
interestrates.
B) RealGDPwillfallbackto$11trillionsincetheeffectthatincreasedgovernmentspending
hasonrealGDPisshortlived.
C) RealGDPwillgobeyond$14trillionasbusinessesandconsumersreacttotheincreasein
interestrates.
D) RealGDPwillendupsomewherebetween$11and$14trillionasbusinessesand
consumersreducetheirspendinginresponsetotheincreaseininterestrates.
Answer: D
Diff:2
25) Totheextentthatadirectexpenditureoffsetresultsfromanexpansionaryfiscalpolicy,
A) thestimulativeeffectwillbelessthananticipated.
B) thestimulativeeffectwillbemorethananticipated.
C) thefiscalpolicywillnotbediscretionary.
D) thetimelagsassociatedwiththeimplementationoffiscalpolicywillshorten.
Answer: A
Diff:1
26) SupposethatrealGDPisinitially$14trillionandthegovernmentattemptstoincreaserealGDP
to$15trillion.Themarginalpropensitytoconsumeis0.8,andevery$1.00increaseinreal
governmentspendingcrowdsout$0.50inrealplannedinvestmentexpenditures.Which
increaseingovernmentspendingbelowcouldyieldthedesiredlevelofrealGDP?
A) $100billion B) $125billion C) $200billion D) $400billion
Answer: D
Diff:3
27) SupposethatrealGDPisinitially$13trillionandthegovernmentattemptstoincreaserealGDP
to$14trillion.Themarginalpropensitytoconsumeis0.75,andevery$1.00increaseinreal
governmentspendingcrowdsout$0.50inrealplannedinvestmentexpenditures.Howmuch
increaseinrealgovernmentspendingcouldleadtothedesiredlevelofrealGDP?
A) $200billion B) $250billion C) $500billion D) $1trillion
Answer: C
Diff:3
28) Refertotheabovefigure.IftheeconomyisatEandthegovernmentwantstoincreaseaggregate
demandtoAD3 ,buttheincreaseinspendingonlyshiftstheaggregatedemandcurvetoAD2 ,
then
A) completecrowdingouthasoccurred.
B) somecrowdingouthasoccurred.
C) theincreasedborrowingcausedinterestratestofall.
D) theshort-runaggregatesupplycurveissteeperthanthefigureindicates.
Answer: B
Diff:2
29) Refertotheabovefigure.SupposetheeconomyisatEandthegovernmentusesan
expansionaryfiscalpolicytomovetheaggregatedemandcurveto AD2 .Intheend,the
aggregatedemandcurveisstillAD1 .Apossiblereasonforthisisthat
A) theeconomyisalreadyatfullemployment.
B) theincreasedborrowingcauseshigherinterestrates,whichencouragepeopletosavemore
andincreaseinvestmentspendingduetotheextrasaving.
C) peopleincreasesavingbecausetheyanticipatehigherfuturetaxes,resultinginareduction
incurrentconsumptionspendingthatoffsetstheincreasedgovernmentspending.
D) someoftheincreasedgovernmentspendingisnotcountedinGDP.
Answer: C
Diff:3
30) TheRicardianequivalencetheoremstatesthat
A) anincreaseingovernmentspendingbythefederalgovernmentleadstooffsetting
reductionsinstategovernmentspending.
B) anincreaseingovernmentspendingfinancedbyhighertaxeshasnoeffectonaggregate
demand.
C) spendingonnationaldefenseisadirectexpenditureoffset.
D) governmentspendingfinancedbytaxesisequivalenttogovernmentspendingfinancedby
borrowing.
Answer: D
Diff:1
31) AccordingtotheRicardianequivalencetheorem,ataxcutthatincreasesthegovernmentbudget
deficitwillhave
A) noeffectonaggregatedemandbecausepeoplerealizethattherewillbeafuturetax
liabilitysothatthereisnoincreaseinconsumptionexpenditures.
B) noeffectonaggregatedemandbecausepeopleonlylookatchangesintaxesor
governmentspendinginthepresent.
C) apositiveeffectonaggregatedemandbecausepeoplelookatchangesintaxesor
governmentspendinginthepresent.
D) aneffectonaggregatedemand.Themagnitudetheeffectwillhavedependsuponwhether
theincreaseiscausedbyareductionintaxesoranincreaseingovernmentspending.
Answer: A
Diff:3
32) AdecreaseintaxeswillhavenoeffectonrealGDPif
A) peoplelookatchangesintaxesonlyinthepresent.
B) thereisnocrowdingout.
C) theRicardianequivalencetheoremholds.
D) thetaxdecreaseisoffsetbyanincreaseingovernmentspending.
Answer: C
Diff:1
33) Thepropositionthatdecreasesintaxesthatraisethegovernmentbudgetdeficithasnoeffecton
aggregatedemandiscalledthe
A) open-economyeffect. B) federalismeffect.
C) Ricardianequivalencetheorem. D) interest-rateeffect.
Answer: C
Diff:1
34) AccordingtotheRicardianequivalencetheorem,budgetdeficitsresultingfromtaxcuts
A) increaseaggregatedemand. B) decreaseaggregatedemand.
C) havenoeffectonaggregatedemand. D) affectonlyaggregatesupply.
Answer: C
Diff:1
35) Expansionaryfiscalpolicyfallsshortofitsgoal.Someeconomistsclaimitisduetoindirect
crowdingout.Whatevidencewouldbeconsistentwiththisclaim?
A) Anincreaseinconsumerspendingoccurred.
B) Theinterestrateincreased.
C) Savingdecreased.
D) Thepriceleveldecreased.
Answer: B
Diff:2
36) Threecandidatesforpoliticalofficedisagreeoverthebenefitsofenlargingthefederalbudget
deficit.CandidateCsaysthestimulationpackageisneededtoincreaseemploymentandreal
GDP;CandidateDsaysitwillonlycausehigherprices;andCandidateFsaysitwillhaveno
effectoneitherrealGDPorthepricelevel.Howdothethreecandidatesdifferwithrespectto
theconditionoftheeconomyandtheeffectsoffiscalpolicy?
A) CandidateCthinksthesimpleKeynesianmodelisapplicable,whileDthinksthe
expansionarypolicywillfullycrowdoutprivateinvestment.Fbelievestheeconomyis
experiencingarecessionarygap.
B) CandidateCthinksthesimpleKeynesianmodelisapplicable;Dthinkstheshort -run
aggregatesupplycurveishorizontal;andFthinkstheexpansionarypolicywillgenerate
lowerinterestrates.
C) CandidateCthinkstheeconomyisbelowthefull-employmentrealGDPandthatthe
short-runaggregatesupplycurveishorizontal.CandidateDbelievestheeconomyisat
fullemployment..CandidateFbelievestheexpansionarypolicywillresultonlyindirect
fiscaloffsets.
D) CandidateCthinkstheshort-runaggregatesupplycurveisupwardsloping;Dthinks
interestrateswillrise;andFthinkstheeconomyisatfullemployment.
Answer: C
Diff:3
37) Expansionaryfiscalpolicyisalways100percenteffectivewhentheshort -runaggregatesupply

curveishorizontal.Isthisstatementtrue?
A) Yes,becausetheoreticallynothingelsecanoffsettheeffectsoffiscalpolicy.
B) Yes,whenthelong-runaggregatesupplycurveishorizontaltoo.
C) No,becausecrowdingoutcouldtakeplace.
D) No,becausetheincreasedspendingmaycausethepriceleveltoincrease.
Answer: C
Diff:2
38) Directexpenditureoffsetsare
A) thediscretionarychangingofgovernmentexpenditurestoachieveahigheremployment
level.
B) thedecreaseinplannedinvestmentthatoccursastheresultofanincreaseininterestrates.
C) thesameastheRicardianequivalencetheorem.
D) thedecreaseinspendingintheprivatesectorinareasinwhichthegovernmentis
competing.
Answer: D
Diff:1
39) Whenevergovernmentspendingisasubstituteforprivatespending
A) interestrateswillrise.
B) theRicardianequivalencetheoremholds.
C) theeffectsofexpansionaryfiscalpolicyaredampened.
D) thereisadirectmultipliereffect.
Answer: C
Diff:1
40) ThegovernmenthasdecidedtogiveeverypersonintheU.S.a$5couponthattheycanuseat
thegrocerystoretopurchasetheirchoiceofcheese.Wewouldexpectthispolicytoleadto
A) anincreaseinaggregatedemandequivalenttothefullimpactofallofthecoupons
redeemable.
B) noincreaseinaggregatedemandduetotheRicardianequivalencetheorem.
C) noincreaseinaggregatedemandbecausetherewouldbenodirectexpenditureoffset.
D) anincreaseinaggregatedemandbutnotequivalenttothefullimpactofallofthecoupons
redeemedduetosomedirectexpenditureoffset.
Answer: D
Diff:2
41) TheLaffercurve
A) initiallyslopesupwardasincreasingtaxratesleadtoincreasingtaxrevenuebut
eventuallywillslopedownwardasincreasingtaxratesleadtodecreasingtaxrevenue.
B) slopesdownwardthroughoutitsrangesinceincreasingtaxrateswillalwaysleadto
decreasesintaxrevenue.
C) slopesupwardthroughoutitsrangesinceincreasingtaxrateswillalwaysleadtoincreases
intaxrevenue.
D) ishorizontalbecausetaxrevenueisindependentoftherateofinterest.
Answer: A
Diff:1
42) Supply-sideeconomicsfocusesattentiononhowfiscalpolicymightbeusedto
A) increaseaggregatedemandtothefull-employmentlevelofrealGDP.
B) shifttheaggregatesupplycurveout.
C) alignaggregatedemandandaggregatesupply.
D) increaseconsumption.
Answer: B
Diff:1
43) TheLaffercurveindicateswhichofthefollowing?
A) Thereisanidealinterestratethatwillmaximizeinvestmentspending.
B) Thereisanidealamountofgovernmentspendingthatwillleadtofullnational
employment.
C) Thereisanidealtax-revenue-maximizingtaxrateforgovernmenttaxes.
D) Thereisanidealtariffratethatwillmaximizeexportsandminimizeimports.
Answer: C
Diff:2
44) AccordingtotheLaffercurve,increasesinthetaxratewillleadtoa(n)
A) steadydecreaseintaxrevenues.
B) steadyincreaseintaxrevenues.
C) initialdecreaseintaxrevenuesandthenanincreaseintaxrevenues.
D) initialincreaseintaxrevenuesandthenadecreaseintaxrevenues.
Answer: D
Diff:2
45) Refertotheabovefigure.WhichpanelisconsistentwiththeLaffercurve?
A) PanelA B) PanelB C) PanelC D) PanelD
Answer: D
Diff:2
46) IfthegovernmentwishestopromoteahigherrateofgrowthofrealGDP,asupply-side
economistwouldarguetheappropriatepolicyis
A) engaginginexpansionaryfiscalpolicybyloweringmarginaltaxrates.
B) engaginginexpansionaryfiscalpolicyofincreasinggovernmentspending.
C) loweringmarginaltaxratesonpeopleandraisingthemoncorporations.
D) leavingtheeconomyaloneandlettingthenaturalforcesbringitintoalong-run
equilibrium.
Answer: A
Diff:2
47) Accordingtosupply-sideeconomics,lowertaxratesonwages
A) generatehigherrevenuesforthegovernmentandincreasedunemployment.
B) createincentivestoworkmore,whichincreasesrealGDP.
C) arelessproductivethanlowertaxratesonconsumers.
D) havelittleeffectontheeconomy.
Answer: B
Diff:2
48) Theideathatcreatingincentivesforindividualsandfirmstoincreaseproductivityleadingtoan
increaseinlong-runaggregatesupplyis
A) supply-sideeconomics. B) demand-sideeconomics.
C) theRicardianequivalencetheorem. D) consistentwithcrowdingout.
Answer: A
Diff:1
49) Supply-sideeconomics
A) promotesexpansionaryfiscalpolicybyincreasinggovernmentspending.
B) promotesreducingtaxestocreateincentivestoincreaseproductivity.
C) promotesincreasingtaxestocreateadditionalrevenueforgovernmentspending.
D) isbasedontheRicardianequivalencetheorem.
Answer: B
Diff:1
50) Agovernmentproposaltoincreasemarginaltaxratesonthewealthiest2percentofU.S.
residentsissupposedtogenerateanadditional$100billionintaxrevenues.Itislikelythat
A) theactualrevenueraisedwillexceedthe$100billion,becausetheother98percentofthe
populationwillincreasetheirworkeffortwithamorefairtaxsystem.
B) theactualrevenueraisedwillbemorethan$100billion,becausetheshort-runaggregate
supplycurveisupwardsloping.
C) theactualrevenueraisedwillbelessthan$100billion,becausesomeofthepeoplewill
respondbyworkinglessandearninglessincomethatcanbetaxed.
D) theactualrevenueraisedwillbecloseto$100billion,becausethewealthydontrespondto
workincentivesthewaypoorerworkersdo.
Answer: C
Diff:2
51) Anincreaseingovernmentspendingwithoutanaccompanyingincreaseintaxes
A) doesnotincreaseaggregatedemand.
B) wouldeffectivelyeliminateaninflationarygap.
C) causesinvestmentspendingtoincrease.
D) requiresadditionalgovernmentborrowing.
Answer: D
Diff:1
52) WhichoneofthefollowingstatementsisNOTtrue?
A) Expansionaryfiscalpolicyisemployedtooffsetrecessionarygaps.
B) Expansionaryfiscalpolicyhasaneffectoninterestrates.
C) Crowdingoutdilutestheeffectofexpansionaryfiscalpolicy.
D) Whencrowdingoutoccurs,fiscalpolicyismoreeffective.
Answer: D
Diff:3
53) Intheextremecaseofacompletecrowding-outeffect,
A) anincreaseininterestrateswillstimulateinvestmentspending.
B) anincreaseintaxrateswillstimulateworkeffort.
C) anincreaseingovernmentspendingwillnotincreaseaggregatedemand.
D) anincreaseingovernmentspendingwillstimulateinvestmentspending.
Answer: C
Diff:2
54) Becauseofcrowdingout,
A) expansionaryfiscalpolicyduringarecessionmustinvolveataxincrease.
B) expansionaryfiscalpolicyduringarecessionisreinforcedbyprivateinvestmentspending.
C) theeffectofexpansionaryfiscalpolicyispartiallyoffsetbythedeclineininvestment
spendingcausedbyhigherinterestrates.
D) expansionaryfiscalpolicyiscompletelyachievedevenwithadeclineininvestment
spending.
Answer: C
Diff:2
55) Ifanincreaseingovernmentspendingcausesanincreaseingovernmentborrowing,thiscould
induce
A) anincreaseininterestrates,whichwouldcauseprivatedomesticinvestmenttofall.
B) anincreaseininterestrates,whichwouldcauseprivatedomesticinvestmenttorise.
C) anincreaseininterestratesbutnoeffectonprivatedomesticinvestment.
D) adecreaseininterestrates,whichwouldcauseprivatedomesticinvestmenttorise.
Answer: A
Diff:2
56) Thecrowding-outeffectrefersto
A) anincreaseintheconsumptionofdomesticgoodsattheexpenseofimportedgoods.
B) anincreaseintheconsumptionofimportedgoodsattheexpenseofdomesticgoods.
C) adecreaseinconsumptionandinvestmentcausedbyanincreaseingovernment
borrowing.
D) adecreaseinconsumerspendingcausedbyadecreaseinconsumerconfidence.
Answer: C
Diff:1
57) Thepermanentincomehypothesisimpliesthattheeffectofatemporarytaxcutoneconomic
activity
A) isgreaterthantheeffectofapermanenttaxcut.
B) isthesameastheeffectofapermanenttaxcut.
C) canbegreaterthanorsmallerthantheeffectofapermanenttaxcut,dependingonhow
thetaxcutaffectsthegovernment.
D) issmallerthantheeffectofapermanenttaxcut.
Answer: D
Diff:2
QuestionStatus: New
58) Accordingtothepermanentincomehypothesis,taxpayersreacttoaone -timetaxrebate

A) byspendingallofthetaxrebate.
B) byspendingmorethantheamountofthetaxrebate.
C) bysavinghalfofthetaxrebateandspendingtherest.
D) bysavingallofthetaxrebate.
Answer: D
Diff:1
QuestionStatus: New
59) TotheextentthattheRicardianequivalencetheoremistrue,whichoftheconditionsbelowwill
hold?
A) Increasesinthegovernmentbudgetdeficitwillnotaffectaggregatedemand.
B) Exportswillnotbeconsideredpartofaggregatedemand.
C) Investmentspendingwillnotbeconsideredpartofaggregatedemand.
D) Thelong-runaggregatesupplycurvewillnotbevertical.
Answer: A
Diff:2
60) Whichofthefollowingbestexplainswhythefederaltaxrebatesin2008and2009hadalmostno
effectsonaggregatedemand?
A) Accordingtothepermanentincomehypothesis,thoseone -timetaxrebatesdidnotaffect
consumptionbecausetheydidnotchangetaxpayerspermanentincome.
B) Accordingtothepermanentincomehypothesis,thoseone -timetaxrebatesdidnotaffect
consumptionbecausetaxpayersdidnotbelievetherebateswouldoccur.
C) AccordingtoRicardianequivalencetheorem,thosetaxrebatesdidnotaffectaggregate
demandbecausetheywereaccompaniedbymoregovernmentspending.
D) AccordingtoRicardianequivalencetheorem,thosetaxrebatesdidnotaffectaggregate
demandbecausetherewerenodirectexpenditureoffsets.
Answer: A
Diff:2
QuestionStatus: New
61) Ifthereisadollar-for-dollardirectexpenditureoffset,then
A) increasesinaggregatedemandwillalsoincreaselong-runaggregatesupply.
B) increasesingovernmentspendingwillnotincreaseaggregatedemand.
C) increasesinaggregatedemandwillincreasethepricelevel,butleaverealoutput
unchanged.
D) increasesinaggregatedemandwillincreaserealoutput,butleavethepricelevel
unchanged.
Answer: B
Diff:3
62) Thetheorythatgovernmentborrowingmayfunctionlikeanincreaseintaxes,thatis,reducing
currentconsumptionandbusinessexpenditures,isknownas
A) themarginalpropensitytoconsume. B) theRicardianequivalencetheorem.
C) plannedtaxpolicy. D) CongressionalTaxpolicy.
Answer: B
Diff:2
63) Thetheorythatgovernmentborrowingmayfunctionlikeanincreaseintaxes,thatis,reducing
currentconsumptionandbusinessexpenditures,wasformulatedby
A) JohnMaynardKeynes B) JeanBaptisteSay.
C) DavidRicardo. D) AdamSmith.
Answer: C
Diff:1
64) Theideathatataxreductionfundedbygovernmentborrowinghasnoeffectonaggregate
demandisknownas
A) theexpenditure-offsettheorem. B) theKeynesianCross.
C) thebalancedbudgetmultiplier. D) theRicardianequivalencetheorem.
Answer: D
Diff:2
65) Supply-sideeconomistsarguethatchangesintaxratescausechangesin
A) thefull-employmentlevelofoutput. B) laborsupply.
C) saving. D) alloftheabove.
Answer: D
Diff:2
66) Supply-sidetheoryassertsthathighmarginaltaxrates
A) encourageprivatesaving. B) encouragebusinessinvestment.
C) discouragegovernmentexpenditures. D) discourageworkeffort.
Answer: D
Diff:1
67) Supply-sidetheorysuggeststhat
A) aggregatesupplydoesnotdependonlaborproductivity.
B) increasedgovernmentspendingdoesnotincreaseaggregatedemand.
C) lowertaxratesmaynotreduceoveralltaxrevenues.
D) increasedlaborproductivitymaynotincreaserealoutput.
Answer: C
Diff:2
68) Supply-sideeconomistsarguethatdecreasingmarginaltaxrates
A) increasesproductivityandshiftstheAScurvetotheright.
B) increasesproductivityandshiftstheAScurvetotheleft.
C) increasesproductivityandshiftstheADcurvetotheleft.
D) duetotheRicardianequivalence,hasnoimpactontheeconomy.
Answer: A
Diff:2
69) Supply-sideeconomistsarguecutsintaxrates
A) alwaysreducetaxrevenues. B) mayincreasetaxrevenues.
C) alwaysincreasebudgetdeficits. D) havenoeffectontaxrevenues.
Answer: B
Diff:1
70) Thenotionthatadeclineintaxratesandotherincentiveswillspurindividualsandfirmsto
increaseproductivityistypicallyreferredtoas
A) demand-sideeconomics. B) Ricardianequivalence.
C) supply-sideeconomics. D) Keynesianeconomics.
Answer: C
Diff:1
71) TheLaffercurveshowsthatastaxratesincrease
A) initiallytaxrevenuesincrease,thendecrease.
B) taxrevenuesdecreaseastheincidenceofcheatingontaxreturnsincreases.
C) taxrevenuesincreaseasmoreindividualsandbusinesseshavetopaytaxes.
D) taxrevenuesremainunchanged.
Answer: A
Diff:1
72) AccordingtotheLaffercurve,weknowwithcertaintythatanincreaseinthetaxratewill
A) causetaxrevenuetoincrease.
B) causetaxrevenuetodecrease.
C) havenoeffectontaxrevenue.
D) causetaxrevenuetoincrease,decrease,orremainunchanged.
Answer: D
Diff:2
73) Considertheabovefigure.Thecurveshownissometimesreferredtoas
A) theLaffercurve. B) theRicardiancurve.
C) theKeynesiancurve. D) thePhillipscurve.
Answer: A
Diff:2
74) Considertheabovefigure.Thiscurvesuggeststhatasthegovernmentraisesthetaxrate,apoint
willeventuallybereachedatwhichtherevenuesthatarecollectedwill
A) increase. B) decline.
C) approachinfinity. D) becomenegative.
Answer: B
Diff:1
75) Refertotheabovefigure.SupposethattheeconomyinitiallyisoperatingalongAD 1 .Ifthe

governmentseekstoclosetherecessionarygapbyraisinggovernmentspendingwithoutany
changeintaxation,whichmovestheaggregatedemandcurvefrom AD1 toAD2 ,thentoAD3 .
Whichofthefollowingscenariosistrue?
A) Interestratesfallandinvestmentrises. B) Bothinterestratesandinvestmentfall.
C) Bothinterestratesandinvestmentrise. D) Interestratesriseandinvestmentfalls.
Answer: D
Diff:3
76) Refertotheabovefigure.SupposethattheeconomystartsatAD1 .Ifthegovernmentreduces

taxes,thentheeconomygoestoAD2 ,butthenfallsbacktoAD3 .Thisisanexampleof
A) partialcrowding-outeffect. B) Ricardianequivalence.
C) laissez-faire. D) completecrowding-outeffect.
Answer: A
Diff:3
77) Refertotheabovefigure.SupposethattheeconomystartsatAD1 .Ifthegovernmentreduces

taxes,thentheeconomygoestoAD2 ,butthenfallsbacktoAD1 .Thisisanexampleof
A) partialcrowding-outeffect. B) thefreeriderproblem.
C) laissez-faire. D) completecrowding-outeffect.
Answer: D
Diff:2
78) Ifthefederalgovernmentborrowsfromtheprivatesectortopayforincreasedbudgetdeficits
andinterestratesincrease,thiswillcause
A) adecreaseinplannedinvestmentandplannedconsumption.
B) anincreaseinplannedinvestmentandplannedconsumption.
C) adecreaseinplannedinvestmentandanincreaseinplannedconsumption.
D) anincreaseinplannedinvestmentandadecreaseinplannedconsumption.
Answer: A
Diff:2
79) Thecrowdingouteffectofexpansionaryfiscalpolicyreferstowhichofthefollowing?
A) areductioninprivatesectorplannedinvestment
B) areductioninthestockofinventories
C) thereductioninthesizeofthebudgetdeficit
D) thereductioninthesizeoftherecessionarygap
Answer: A
Diff:1
80) Whenprivateexpendituresdecreaseasaresultofincreasedgovernmentspending,thisis
knownas
A) thestabilizereffect. B) thecrowdingouteffect.
C) themultipliereffect. D) governmentdeficitspending.
Answer: B
Diff:1
81) Thecrowdingouteffectisoftenassociatedwith
A) atemporaryincreaseintaxes.
B) anincreaseintheinterestratecausedbygovernmentborrowing.
C) thereinforcingimpactofstateandlocaltaxchangesonfederaltaxchanges.
D) theimpactofataxrateincreasewhentheaggregatesupplyfunctionishorizontal.
Answer: B
Diff:1
82) Supposepolicymakerspassabudgetthatresultsinareductioningovernmentspendingandno
changeintaxes.Thisreductioningovernmentspendingwilllikely
A) increasegovernmentborrowingandincreaseinterestrates.
B) generateextrataxrevenuestocovertheextraspending.
C) reduceinterestratesandincreaseplannedinvestment.
D) reduceinterestrates,increaseinplannedinvestment,andincreaserealGDP.
Answer: C
Diff:2
83) Anincreaseingovernmentspendingthatisnotfinancedbyanincreaseintaxeswillcause
whichofthefollowing?
A) anincreaseininterestratesandanincreaseinplannedinvestment
B) anincreaseininterestratesandareductioninplannedinvestment
C) areductionininterestratesandanincreaseinplannedinvestment
D) areductionininterestratesandareductioninplannedinvestment
Answer: B
Diff:2
84) Thecrowding-outeffectreferstothetendencyofexpansionaryfiscalpolicyto
A) causedecreasesinplannedinvestmentorplannedconsumption.
B) causehouseholdstosaveless.
C) replacelow-skilledlaborwithhigher-skilledlabor.
D) causefirmstoproducebeyondcapacity.
Answer: A
Diff:1
85) Tocompensateforthepossibilityofindirectcrowdingout,agovernmentengagingin
expansionarypolicyaimedateliminatingarecessionarygapcould
A) increasespendinglessthanthesimplestKeynesianmodelwouldpredict.
B) increasespendingmorethanthesimplestKeynesianmodelwouldpredict.
C) reducetaxesratherthanincreasegovernmentspending.
D) bothreducetaxesandreducespendingtobeabletoachievefullemployment.
Answer: B
Diff:3
86) Ifotherfactorsareheldconstant,whathappenswhenthefederalgovernmentfinancesa
growingbudgetdeficitbyincreasingtheamountitborrowsfromtheprivatesector?
A) Therewillbeanincreaseintheinterestrate.
B) Therewillbeadecreaseintheinterestrate.
C) Thecrowdingouteffectwillbecancelledout.
D) Therewillbeanincreaseinnetexports.
Answer: A
Diff:1
87) AccordingtoDavidRicardo,anincreaseingovernmentspendingwithoutanytaxincreasewill
notincreaseaggregatedemandbecause
A) consumerswillconsumelessandsavemoretoprepareforincreasedtaxesinthefuture.
B) theprivatesectorismorelikelythanthepublicsectortospendanyextraincomeon
nationaldefense.
C) consumerswillincreasetheirconsumptionproportionatelymorethanKeynesian
economistsbelievetheywill.
D) consumerswillsavelessthantheyotherwisewouldhave.
Answer: A
Diff:1
88) TheRicardianequivalencetheoremsuggeststhatanincreaseinthegovernmentbudgetdeficit
createdbyataxcutwill
A) increaserealGrossDomesticProduct(GDP)inboththeshortandlongrun.
B) decreaserealGrossDomesticProduct(GDP)inboththeshortandlongrun.
C) decreaserealGrossDomesticProduct(GDP)intheshortrun,butincreaseitinthelong
run.
D) havenoeffectonaggregatedemand.
Answer: D
Diff:1
89) WhichofthefollowingisabasicassumptionoftheRicardianequivalencetheorem?
A) Consumerspaynoattentiontogovernmentbudgetdeficits.
B) Consumersthinkonlyintermsofthepresent.
C) Ifcurrenttaxcutsresultinbudgetdeficitincreases,aggregatesupplyfalls.
D) Consumersconsiderfuturetaxpaymentswhendecidinghowmuchtospendandsave
today.
Answer: D
Diff:2
90) Thepropositionthatanincreaseinthefederalbudgetdeficitcausedentirelybyacurrenttaxcut
hasnoeffectonaggregatedemandiscalledthe
A) indirecteffect. B) interestrateeffect.
C) open-economyeffect. D) Ricardianequivalencetheorem.
Answer: D
Diff:1
91) Whatissupply-sideeconomics?
Answer: Supply-sideeconomicsistheideathatcreatingincentivesforindividualsandfirmsto
increaseproductivitywillcausetheaggregatesupplycurvetoshiftoutward.Itfocuses
onreducingmarginaltaxratestocreateincentivestoincreasedproductivity.
Diff:1
92) Usinggraphs,explainhowindirectcrowdingoutcanoccurwhenthegovernmentincreases
spendinginanattempttostimulatetheeconomy.
Answer:
Seetheabovefigure.TheoriginalequilibriumisE1 ,wherethereisacontractionarygap.
Thegovernmentpursuesexpansionaryfiscalpolicybyincreasingspending.Itsgoalisto
reachE2 .However,theincreasedborrowingcausestheinterestratetoincrease,so
privateinvestmentspendingfalls.Theaggregatedemandcurveshiftsbackto AD3 .
Diff:3
93) Whataredirectexpenditureoffsetsandhowdotheyinfluencetheeffectsoffiscalpolicy?
Answer: Whengovernmentspendingcompeteswiththeprivatesector,directexpenditureoffsets
mayoccur.Ifthegovernmentprovideslunchesforchildreninschool,familiescanreduce
theirexpendituresonfoodtosomeextent.Theimpactsoffiscalpolicyactionsonreal
GDParereduced.Intheextremecase,thegovernmentspendingmultipliermaybezero.
Diff:2
94) Supposethegovernmentpursuesexpansionaryfiscalpolicybyloweringtaxes.Whatarethe
expecteddemand-sideeffects?Whatarethepossibleoffsetstothedemand-sideeffect?How
mightsupply-sideeffectschangetheseresults?
Answer: Aggregatedemandincreasesasconsumptionspendingincreasesaftertheincreasein
disposableincome.CrowdingoutandtheeffectoftheRicardianequivalencetheoremcan
offsetthisifthegovernmentmustborrowmoreandinterestratesincreaseandifpeople
anticipatehigherfuturetaxestheymayincreasesaving.Thesupply-sideeffectmaybeto
generatemoreproductivityaspeoplehaveagreaterincentivetoworkwiththelowertax
rates.Taxrevenuesmaynotdecrease.Ifthegovernmentdoesnothavetoborrowmore,
interestratesdontchange,andthereisnocrowdingout.
Diff:3
95) Explainhowindirectcrowdingoutcanoffsetexpansionaryfiscalpolicy.
Answer: Ifthegovernmentincreasesspending,itmustpayforthemsomeway.Ifitincreases
borrowing,interestratesincrease.Firmswillissuefewerbondsbecauseofthehigher
interestrates,soprivateinvestmentspendingisreduced.Thisreductionininvestment
spendingpartiallyoffsetstheincreasedgovernmentspending.
Diff:2
96) ExplaintheRicardianequivalencetheorem.
Answer: TheRicardianequivalencetheoremisthepropositionthatanincreaseinthegovernment
budgetdeficithasnoeffectonaggregatedemand.Whengovernmentspendingincreases
withouttaxes,peopleexpectfuturetaxestoincreaseandsoincreasetheirsavingtobe
readytopaythehigherfuturetaxes.Thereductioninconsumptionspendingoffsetsthe
highergovernmentspending,sothataggregatedemanddoesnotchange.
Diff:2
97) Explainwhyproponentsofsupply-sideeffectsoftaxratevariationswhoalsobelievethat
tax-ratechangesinfluenceaggregatedemandmightclaimthatcutsinmarginalincometaxrates
canpotentiallypushuprealGrossDomesticProduct(GDP)withoutgeneratinginflation.
Answer: Accordingtosupply-sideeconomics,areductioninmarginalincometaxratescausesthe
aggregatesupplycurvetoshiftrightward.Ifsuchtax-ratereductionsalsocausetotal
plannedexpenditurestoriseandgenerateanequal-sizedrightwardshiftofthe
aggregatedemandcurve,thenequilibriumrealGrossDomesticProduct(GDP)rises,but
theequilibriumpricelevelremainsthesame.
Diff:2
13.3DiscretionaryFiscalPolicyinPractice:CopingwithTimeLags
1) Theperiodbetweentherecognitionofaproblemandtheimplementationofapolicytosolve
theproblemis
A) therecognitionlag. B) theactiontimelag.
C) theeffecttimelag. D) thefinetuninglag.
Answer: B
Diff:1
Topic: 13.3DiscretionaryFiscalPolicyinPractice:CopingwithTimeLags
2) Whichofthefollowingarelagsthatfiscalpolicymakersmustcopewith?
A) Recognitiontimelags. B) Actiontimelags.
C) Effecttimelags. D) Alloftheabovearecorrect.
Answer: D
Diff:1
3) Theeffecttimelagoffiscalpolicyrefersto
A) thetimeneededforCongresstoenactapolicy.
B) thedelayinrecognizinganeconomicproblem.
C) thetimebetweentheonsetofapolicyandwhenthepolicyhasimpactontheeconomy.
D) thedifficultyingettingthePresidentandtheCongresstoagreeonanappropriatepolicy.
Answer: C
Diff:1
4) Thetimerequiredtocollectinformationaboutthecurrentstateoftheeconomyisknownas
A) therecognitiontimelag. B) theactiontimelag.
C) theeffecttimelag. D) thefiscallag.
Answer: A
Diff:1
5) Fiscalpolicymayendupbeingdestabilizingtoaneconomybecause
A) thereisneveralongenoughtimelag.
B) theeconomyisalmostalwaysatfullemployment.
C) thePresidentmayhavedifferentgoalsthanCongress.
D) varioustimelagsassociatedwithfiscalpolicycausethepolicychangestotakeeffecttoo
latetosolvetheproblemitwassupposedtosolve.
Answer: D
Diff:2
6) Therecognitiontimelagrecognizesthatittakestime
A) tocollectinformationaboutthestateoftheeconomy.
B) togetpoliticianstoagreeonthebestpolicytoenact.
C) foranychangeinpolicytotakeeffectandforpeopletorecognizethatthepoliciesare
effective.
D) forthepoliticianstoenactthepolicyoncetheneedforchangehasbeenrecognized.
Answer: A
Diff:1
7) Theamountoftimethatittakestoidentifyanationaleconomicproblemis
A) fiscalpolicy. B) therecognitiontimelag.
C) theeffecttimelag. D) theactiontimelag.
Answer: B
Diff:1
8) Theamountoftimethatittakesbetweenrecognizinganeconomicproblemandimplementing
policytosolveitis
Answer: D
Diff:1
9) Theamountoftimethatelapsesbetweentheimplementationofapolicyandtheresultsofthat
policyis
Answer: C
Diff:1
10) Onceeitherexpansionaryorcontractionaryfiscalpolicyhasbeenundertaken,
A) aggregatedemandwillrespondquicklyandtheproblemsintheeconomywillbe
corrected.
B) aggregatedemandwillrespondquicklyintheshortrunbuttheeconomywillnotimprove
inthelong-run.
C) atimelagexistsbetweenimplementationandtheresultsofthepolicy.
D) taxeswillneedtobeadjustedbecauseoftherecognitiontimelag.
Answer: C
Diff:1
11) TheamountoftimeittakesCongresstodebatethesizeofataxcutisknownasthe
A) actiontimelag. B) effecttimelag.
C) recognitiontimelag. D) Ricardian-equivalencetimelag.
Answer: A
Diff:1
12) Thevarioustimelagsinvolvedwithfiscalpolicyimplythat
A) fiscalpolicyiseffectiveonlyslowly,buttheslownessensuresthatitiseffectiveinthelong
run.
B) fiscalpolicyismosteffectiveasashort-runmeasuretofinetunetheeconomysquarterly
upsanddowns.
C) fiscalpolicymayoftenbedestabilizingiftheeffectsofthepolicykickinaftertheneedis
over.
D) whenfiscalpolicyiscarefullycoordinated,itcanquicklymovetokeeptheeconomyatthe
full-employmentlevelofrealGDP.
Answer: C
Diff:2
13) InJanuary2009,thePresidentsubmittedabilltoCongressthatwasdesignedtostimulatethe
economyandincreaseemployment.ThelegislationwaspassedinMarch2009,andthe
spendingoccurredfromJune2009toSeptember2010.Consequently,
A) theeconomyshouldhavebeenatfullemploymentbyDecember2009.
B) thefullimpactofthebillwouldbefeltbyMarch2009becausepeopleanticipatedthe
effectsoftheincreasedspending.
C) thefullimpactofthebillwouldbefeltbytheendofSeptember2010.
D) thefulleffectofthespendingwouldbefeltsometimeafterSeptember2010becausethe
fullmultipliereffectscouldnotbefeltuntilalltheincreaseinspendingtookplace.
Answer: D
Diff:3
14) InJanuary2009,thePresidentsubmittedabilltoCongressinordertostimulatetheeconomy
andincreaseemployment.ThelegislationwaspassedinMarch2009,andthespendingoccurred
fromJune2009toMarch2011.Asaresult,
A) thefulleffectofthefiscalpolicychangewouldnotbefeltuntilafterMarch2011becauseof
theeffecttimelag.
B) thefulleffectofthefiscalpolicychangewouldnotbefeltuntilafterMarch2011becauseof
therecognitiontimelag.
C) thefulleffectofthefiscalpolicychangewouldbefeltbyMarch2011becausepeople
anticipatedthespendingandchangedtheirbehavioraccordingly.
D) thefulleffectofthefiscalpolicychangewouldbefeltwhenthelastofthefundswere
spentbythegovernment.
Answer: A
Diff:3
15) Discretionaryfiscalpolicy
A) maynothavedesiredeffectsonrealGDPbecauseofthetimelags.
B) maynothavedesiredeffectsonrealGDPbecauseitleadstoincreasesinaggregate
demand.
C) maynothavedesiredeffectsonrealGDPbecauseitleadstodecreasesinaggregate
demand.
D) wouldhavealargereffectonrealGDPifthemultiplierwassmaller.
Answer: A
Diff:1
16) TotheextentthatthepoliticalprocessofmovinglegislationthroughCongressisslow,
A) theeffecttimelagwillbelong.
B) therecognitiontimelagwillbelong.
C) theactiontimelagwillbelong.
D) automaticstabilizerswillnotbeeffective.
Answer: C
Diff:1
17) Thetimerequiredtoacquireinformationaboutthestateoftheeconomyisreferredtoas
A) theactiontimelag. B) therecognitiontimelag.
C) theeffecttimelag. D) thedatalag.
Answer: B
Diff:1
18) Thetimethatelapsesbetweentheimplementationofapolicyanditsintendedresultisreferred
toas
A) theactiontimelag. B) therecognitiontimelag.
C) theeffecttimelag. D) thedatalag.
Answer: C
Diff:1
19) Aproblemwithusingfiscalpolicytofine-tunetheeconomyisthat
A) agreeingontheappropriatefiscalpolicyistimeconsuming.
B) fiscalpolicyimpactstheeconomytoofast.
C) fiscalpolicyimpactsonlyurbanareasofthenation.
D) fiscalpolicyimpactsonlythelargeststatesinthenation.
Answer: A
Diff:1
20) Therecognitiontimelagisthetimethatelapsesbetween
A) whenaneconomicproblemmanifestsitselfanditisofficiallyacknowledged.
B) therecognitionofaneconomicproblemandimplementingpoliciestosolveit.
C) implementingpoliciestosolveaneconomicproblemandwhentheresultsofthatpolicy
canbemeasured.
D) thebeginningofthebudgetaryprocessandthefinalbudgetresolution.
Answer: A
Diff:1
21) Theactiontimelagisthetimeperiodthatelapses
A) betweenwhenaneconomicproblemmanifestsitselfanditisofficiallyacknowledged.
B) betweentherecognitionofaneconomicproblemandimplementingpoliciestosolveit.
C) betweenimplementingpoliciestosolveaneconomicproblemandwhentheresultsofthat
policycanbemeasured.
D) betweenthebeginningofthebudgetaryprocessandthefinalbudgetresolution.
Answer: B
Diff:1
22) Theeffecttimelagisthetimeperiodthatelapses
A) betweenwhenaneconomicproblemmanifestsitselfanditisofficiallyacknowledged.
B) betweentherecognitionofaneconomicproblemandimplementingpoliciestosolveit.
C) betweenimplementingpoliciestosolveaneconomicproblemandwhentheresultsofthat
policycanbemeasured.
D) betweenthebeginningofthebudgetaryprocessandthefinalbudgetresolution.
Answer: C
Diff:1
23) Whendataontheeconomyrequiressometimetogatherandinterpret,wehavea(n)
A) aggregatetimelag. B) actiontimelag.
C) recognitiontimelag. D) effecttimelag.
Answer: C
Diff:2
24) WhenittakestimeforthepresidentandCongresstochangefiscalpolicytoactoneconomic
data,wehavea(n)
Answer: B
Diff:2
25) Whenthereisanintervalbetweenwhenthefiscalpolicychangesandcorrespondingchangesin
aggregatespending,wehavea(n)
Answer: D
Diff:2
26) Whenfiscalpolicyisused,timelagsarevariableandlastanywherefrom
A) onetothreeweeks. B) onetothreemonths.
C) onetothreeyears. D) onetothreedecades.
Answer: C
Diff:2
27) Fiscalpolicytimelagstendtobe
A) constant,alwaysthirteenmonthslong.
B) variable,betweenoneandthreeyears.
C) variable,betweenoneandthreeweeks.
D) variable,betweenoneandthreemonths.
Answer: B
Diff:2
28) ArecessionbeginsinJulybutgovernmentpolicymakersdonotreachaconsensusthata
recessionhadinfactbegununtilOctober.Thisisanexampleofa(n)
A) recognitiontimelag. B) actiontimelag.
C) effecttimelag. D) quicktimelag.
Answer: A
Diff:2
29) Whatarethevarioustimelagsthataffectdiscretionaryfiscalpolicy,andwhataretheireffects?
Answer: Therecognitionlagreferstothetimeittakesbeforeeconomicproblemscanbeidentified;
theactiontimelagisthetimerequiredbetweenrecognizingtheproblemandputting
policyintoeffect;andtheeffecttimelagisthetimethatelapsesbetweentheonsetof
policyandtheresultsofthatpolicy.Theresultisthattheeffectsofachangeinfiscal
policymaytakeholdonlyaftertheproblemnolongerexists,andmayhaveunintended
effects.
Diff:1
13.4AutomaticStabilizers
1) Onecharacteristicofbuilt-inorautomaticstabilizersisthat
A) theyrequirenonewlegislativeactionbyCongresstohaveaneffect.
B) theyautomaticallyproducesurplusesduringrecessionsanddeficitsduringinflation.
C) theyhavenoeffectonthedistributionofincome.
D) theyreducethesizeofthepublicdebtduringtimesofrecession.
Answer: A
Diff:1
Topic: 13.4AutomaticStabilizers
2) Unemploymentcompensationprogramsarecalledautomaticstabilizersbecausepayments
increaseduring
A) expansionaryperiods. B) recessions.
C) bothrecessionsandexpansions. D) wartimeonly.
Answer: B
Diff:2
3) AllofthefollowingareautomaticfiscalstabilizersEXCEPT
A) acongressionallymandateddecreaseintaxratestostimulatetheeconomy.
B) adecreaseinunemploymentcompensationpaymentsduringanexpansion.
C) adecreaseinoveralltaxrevenuesduringarecession.
D) anincreaseinunemploymentexpendituresduringarecession.
Answer: A
Diff:1
4) WhenrealGrossDomesticProduct(GDP)falls,whichofthefollowingwillautomaticallyoccur?
A) Adecreaseinalltaxrates
B) Adecreaseinincometaxrevenues
C) Adecreaseinunemploymentcompensationexpenditures
D) Anincreaseinincometaxrevenues
Answer: B
Diff:1
5) Automaticstabilizersare
A) provisionsthatcausechangesingovernmentspendingandtaxeswithoutnewactionby
CongressorthePresident.
B) policiessetbycertaincommitteesinCongress.
C) toolsusedbythePresidentsCouncilofEconomicAdvisers.
D) provisionsthatcausetheaggregatesupplycurvetobeupwardsloping.
Answer: A
Diff:1
6) Anexampleofanautomaticstabilizeris
A) unemploymentcompensation.
B) anewlyenactedsurtaxtoslowdownanoverheatedeconomy.
C) ahorizontalaggregatesupplycurve.
D) achangeinthemarginaltaxrates.
Answer: A
Diff:1
7) Anadvantageofautomaticstabilizersoverdiscretionaryfiscalpolicyisthat
A) automaticstabilizersarenotsubjecttothesametimelagsasdiscretionaryfiscalpolicy.
B) automaticstabilizerscanbeeasilyfine-tunedtomovetheeconomytofullemployment.
C) onlythePresidentisinvolvedinimplementingautomaticstabilizers,insteadofboththe
PresidentandCongress.
D) theRicardianequivalencetheoremappliesmorereadilytoautomaticstabilizersthanto
discretionaryfiscalpolicy.
Answer: A
Diff:2
8) IntheUnitedStateseconomy,theprogressiveincometaxandunemploymentcompensationare
both
A) destabilizers. B) discretionarypresidentialeffectors.
C) automaticstabilizers. D) timelagfactors.
Answer: C
Diff:1
9) Refertotheabovefigure.AstherealnationalincomeexpandsfromY 2 toY 3 ,
A) abudgetsurplusoccurs. B) abudgetdeficitoccurs.
C) taxrevenuesfall. D) governmenttransfersrise.
Answer: A
Diff:1
10) Refertotheabovefigure.Abudgetdeficitoccurswhenrealnationalincomeis
A) Y1
B) Y2
C) Y3
D) Noneoftheabove:cannotbedeterminedgiventheinformation
Answer: A
Diff:1
11) Provisionsthatcausechangesingovernmentspendingandtaxesthatdonotrequireactionof
thePresidentorCongressarecalled
A) discretionaryfiscalpolicy. B) discretionarystabilizers.
C) automaticstabilizers. D) privatestabilizationeffects.
Answer: C
Diff:1
12) Manygovernmentprograms,suchasunemploymentcompensation,operateonadeficitduring
recessionsandasurplusduringperiodsofeconomicexpansion.Theprogramsarereferredto
as
A) discretionaryfiscalpolicy. B) automaticstabilizers.
C) Ricardianequivalence. D) Recognitiontimelag.
Answer: B
Diff:1
13) Theexistenceofautomaticstabilizerswill
A) reducetherecognitionlagofdiscretionaryfiscalpolicy.
B) eliminaterecessions.
C) reducethesizeofrecessionaryandinflationarygaps.
D) causetheeffectsofshockstoaggregatedemandtohavealargereffectonGDP.
Answer: C
Diff:1
14) Whichofthefollowingisanexampleofanautomaticstabilizer?
A) costoflivingadjustmentstoSocialSecuritypayments
B) unemploymentbenefits
C) atemporarytaxrebate
D) alloftheabove
Answer: B
Diff:1
15) AllofthefollowingareautomaticstabilizersEXCEPT
A) discretionaryincreasesingovernmentspending.
B) incometransferpayments.
C) progressiveincometaxsystem.
D) unemploymentcompensation.
Answer: A
Diff:1
16) Supposetherearetwoeconomiesthatareidenticalineverywaywiththefollowingexception.
EconomyAhasanunemploymentcompensationsystemwhileeconomyBdoesNOThavean
unemploymentcompensationsystem.Nowsupposebotheconomiesexperiencethesamedrop
inplannedinvestment.Whichofthefollowingiscorrect?
A) RealGDPwillfallmoreineconomyAthanineconomyB.
B) RealGDPwillfallmoreineconomyBthanineconomyA.
C) RealGDPwillfallthesameinbotheconomies.
D) TheeffectontherelativesizeofthereductioninrealGDPinthetwoeconomiesis
ambiguous.
Answer: B
Diff:1
17) Whatdoautomaticstabilizersattempttostabilize?
A) long-runaggregatesupply B) aggregatedemand
C) exports D) imports
Answer: B
Diff:2
18) Whichofthefollowingmightbeconsideredanautomaticfiscalstabilizer?
A) governmentspendingforthewareffort B) 401(k)retirementprogram
C) unemploymentcompensation D) governmentbudgetingforeducation
Answer: C
Diff:2
19) Government-providedunemploymentinsuranceisanexampleof
A) adiscretionaryfiscalstabilizer. B) anautomaticfiscalstabilizer.
C) amonetarystabilizer. D) anautomaticmonetarystabilizer.
Answer: B
Diff:1
20) Automaticstabilizershavetheeffectof
A) increasingaggregatedemandduringarecessionarygap.
B) increasingaggregatedemandduringaninflationarygap.
C) increasinglong-runaggregatesupplyduringarecessionarygap.
D) increasinglong-runaggregatesupplyduringaninflationarygap.
Answer: A
Diff:2
21) WhichoneofthefollowingisNOTanautomaticstabilizer?
A) theincometaxsystem
B) thesystemofnationaldefenseprocurement
C) thesystemofwelfarepayments
D) unemploymentcompensationprograms
Answer: B
Diff:1
22) Automaticstabilizersareso-named because

A) theyareautomaticallyundertakenbytheFederalReserveBanktoreducebudgetdeficits.
B) theyoccurautomaticallywhenrealGDPchanges.
C) thepolicysuggestionsoftheCouncilofEconomicAdvisorsareautomaticallyfollowed.
D) thepolicysuggestionsoftheOfficeofManagementandBudgetareautomatically
followed.
Answer: B
Diff:2
23) Anexampleofanautomaticstabilizeris
A) theprogressivetaxsystem.
B) thedecisionofthePresidenttocuttaxesinarecession.
C) theCongressionaldecisiontoincreaseunemploymentbenefitsinarecession.
D) theraisingoftaxesoncigarettestodiscouragesmokingtostabilizehealth -carecosts.
Answer: A
Diff:1
24) Theadvantageofautomaticstabilizersisthatthey
A) helptobalancethebudget.
B) reducethesizeofthenetpublicdebt.
C) reducethefluctuationsinthebusinesscycle.
D) helpreducetheinflationrate.
Answer: C
Diff:1
25) AllofthefollowingareautomaticstabilizersEXCEPT
A) thefederalincometaxsystem. B) welfarepayments.
C) discretionarytaxcuts. D) unemploymentcompensation.
Answer: C
Diff:2
26) Automaticstabilizersarefiscalpolicymeasuresthat
A) mustbedeterminedbytheCongressineachbudget.
B) donotrequirenewlegislation.
C) aredeterminedbytheFederalReserveSystem.
D) arepartofdiscretionaryfiscalpolicy.
Answer: B
Diff:1
27) Automaticstabilizers
A) workcounter-cyclicallytomoderatethebusinesscycle.
B) oftenmakeanydownturnintheeconomyworse.
C) mustbedeterminedbytheCongressineachbudget.
D) areneveraltered.
Answer: A
Diff:2
28) Automaticstabilizersaredesignedto
A) promoteglobaltrade.
B) simplifythetaxsystem.
C) moderatechangesindisposableincome.
D) stabilizethebi-partisanbudgetprocess.
Answer: C
Diff:2
29) WhataretheautomaticstabilizerstheUnitedStateshasinplace,andhowdotheyfunction
differentlyfromdiscretionaryfiscalpolicy?
Answer: Automaticstabilizersareprovisionsofthetaxlawthatcausechangesingovernment
spendingortaxeswithouttheactionofCongressorthePresident.Theprogressive
incometaxtakesmoremoneyoutofthehandsofpeopleduringinflationarytimesand
lessduringrecessions.Unemploymentcompensationgivesspendingpowertopeople
evenwhentheyarenotworkingduetoarecession.Thekeydifferenceisthatautomatic
stabilizersworkwithoutthelagsassociatedwithdiscretionaryfiscalpolicy.
Diff:2
13.5WhatDoWeReallyKnowAboutFiscalPolicy?
1) Ifthegovernmentincreasesaggregatedemandwhentheeconomyisatbothshort -runand
long-runequilibrium,thefulllong-runeffectofthisfiscalpolicywillbeto
A) increaserealGrossDomesticProduct(GDP).
B) increasethepricelevel.
C) increaseeithertherealGrossDomesticProduct(GDP)orthepricelevel,dependingonthe
lengthofthetimelag.
D) decreasebothrealGrossDomesticProduct(GDP)andthepricelevel.
Answer: B
Diff:1
Topic: 13.5WhatDoWeReallyKnowAboutFiscalPolicy?
2) Duringnormaltimes,discretionaryfiscalpolicy
A) ismoreeffectiveininfluencingrealGDPthanattimesofarecession.
B) isprobablynotveryeffectiveininfluencingrealGDPduetotimelags.
C) ismoreeffectiveininfluencingrealGDPthanautomaticstabilizers.
D) workswellbecausetherearenolagproblemsininfluencingrealGDP.
Answer: B
Diff:1
3) Discretionaryfiscalpolicy
A) isnotveryeffectiveininfluencingrealGDPduringnormaltimesbecauseoftimelags.
B) canbeveryeffectiveininfluencingrealGDPduringabnormaltimes,suchaswhena
nationisatwar.
C) mayreassureinvestorsandconsumersthatthefederalgovernmentwillbeabletoaverta
majoreconomicdownturn.
D) alloftheabove
Answer: D
Diff:2
4) Duringwhichtimewillfiscalpolicybethemosteffective?
A) Normaltimes B) Timesofwar
C) Inthemiddleofexpansions D) Timesofstagflation
Answer: B
Diff:1
5) Duringnormaltimes,
A) fiscalpolicyisveryeffectivebecauseittheeffectsoffiscalpolicywillswampautomatic
stabilizersandtimelagscanbe.
B) fiscalpolicycanimmediatelycorrectproblemsintheeconomy.
C) theRicardianequivalencetheoremmakesfiscalpolicyveryeffective.
D) fiscalpolicyisnoteffectivebecauseoftherecognitiontimelag.
Answer: D
Diff:1
6) Deficitfinancing
A) iswhenthegovernmentadjuststaxestoraisemoneytopayforgovernmentprojects.
B) isthemechanismbehindtheLaffercurve.
C) ishowtheautomaticstabilizerswork.
D) iswhendiscretionaryfiscalpolicyleadstospendingmorethaniscollectedintaxes.
Answer: D
Diff:1
7) ThetraditionalKeynesianapproachtofiscalpolicyassumes
A) thepricelevelisconstant.
B) governmentexpendituresareoftensubstitutesforprivateexpenditures.
C) theRicardianequivalencetheoremiscorrect.
D) thevalidityofsupply-sideeconomics.
Answer: A
Diff:1
8) ThetraditionalKeynesianapproachtofiscalpolicyassumes
A) currenttaxesaretheonlytaxestakenintoaccountbyfirmsandconsumers.
B) thefocusofattentionshouldbethelongrun.
C) pricesareflexiblewhileinterestratesarenot.
D) exchangeratesarefixed.
Answer: A
Diff:1
9) ThetraditionalKeynesianapproachtofiscalpolicyassumesthat
A) theeffectofunemploymentcompensationistodestabilizetheeconomy.
B) anequalincomedistributionensuresastableeconomy.
C) consumersspendmorewhentheirincomesarehigher.
D) cuttingtaxesisamoreeffectivewaytostimulatetheeconomythanisincreasing
governmentspending.
Answer: C
Diff:2
10) Fiscalpolicyduringperiodsofrelativelylowunemploymentandlowinflationhave
A) littleeffectduetotimelagsandthecrowding-outeffect.
B) significanteffectduetothetimelyinterventionofthepresidentandcongress.
C) significanteffectbecausethechangesinfiscalpolicygivesinvestorsconfidenceinthe
economy.
D) littleeffectbecausetheglobalmarketmakesupfiftypercentofaggregatespending.
Answer: A
Diff:2
11) Whataretheeffectsoffiscalpolicyduringnormaltimes?Whataretheeffectsoffiscalpolicy
duringabnormaltimes?
Answer: Duringnormaltimes,discretionaryfiscalpolicymaynothaveitsintendedeffectsand,
therefore,mayactuallycausemoreharmthangood.Thevarioustimelagsandthe
possibleoffsetsmakeitfairlyineffectiveasatool.Duringamajorrecession,fiscalpolicy
ismorelikelytobeeffective,sincetheoffsetsarelesslikely.
Diff:1
13.6AppendixD:ChangesinGovernmentSpending
1) InthetraditionalKeynesianmodel,ifthegovernmentincreasesspending,then
A) realGrossDomesticProduct(GDP)willriseandthepricelevelwillremainconstant.
B) realGrossDomesticProduct(GDP)willincreaseandthepricelevelwillfall.
C) bothrealGrossDomesticProduct(GDP)andthepricelevelwillrise.
D) realGrossDomesticProduct(GDP)willremainconstantandthepricelevelwillrise.
Answer: A
Diff:1
Topic: 13.6AppendixD:ChangesinGovernmentSpending
2) InthetraditionalKeynesianmodel,anincreaseingovernmentspending
A) causestheC+I+G+Xlinetoshiftupwardbythefullamountoftheincreasein
governmentspending.
B) causestheC+I+G+Xlinetoshiftupwardbyanamountlessthantheincreasein
governmentspending.
C) causestheC+I+G+Xlinetoshiftupwardbymorethantheincreaseingovernment
spending.
D) causesnochangeintheC+I+ G+ Xline.
Answer: A
Diff:2
3) InthetraditionalKeynesianmodel,ifthegovernmentincreasesspending,then
A) consumptionwillincrease,andsorealGrossDomesticProduct(GDP)willincreaseby
morethantheincreaseingovernmentspending.
B) consumptionwilldecrease,andsorealGrossDomesticProduct(GDP)willincreasebyless
thantheincreaseingovernmentspending.
C) consumptionwillremainthesame,andsorealGrossDomesticProduct(GDP)will
increasebythesameamountoftheincreaseingovernmentspending.
D) consumptionwillincreaseordecrease,andsorealGrossDomesticProduct(GDP)will
increaseordecreasedependingonthechangeinconsumption.
Answer: A
Diff:2
4) AccordingtothetraditionalKeynesiananalysis,ifthegovernmentincreasesspendingby$10
million,then
A) consumptionwillincrease,andsototalexpenditureswillincreasebymorethan$10
million.
B) consumptionwilldecrease,andsototalexpenditureswillincreasebylessthanthe$10
million.
C) consumptionwillremainthesame,andsototalexpenditureswillincreasebyexactly$10
million.
D) consumptionwillincreaseordecrease,andsototalexpenditureswillincreaseordecrease
dependingonthechangeinconsumption.
Answer: A
Diff:2
5) InthetraditionalKeynesianmodel,ifthegovernmentincreasesgovernmentspending,
A) theC+I+G+Xlinewillshiftdownbuttheaggregatedemandcurvewillnotshift.
B) theC+I+G+Xlinewillshiftdownandtheaggregatedemandcurvewillshifttotheleft.
C) theC+I+G+Xlinewillshiftupandtheaggregatedemandcurvewillshifttotheright.
D) theC+I+G+Xlinewillshiftupbuttheaggregatedemandcurvewillnotshift.
Answer: C
Diff:2
6) InthetraditionalKeynesianmodel,anincreaseingovernmentspendingraisestotalplanned
realexpendituresbymorethantheoriginalincreaseingovernmentspendingbecause
A) consumptionspendingdependsnegativelyonrealGDP.
B) consumptionspendingdependspositivelyonrealGDP.
C) consumptionspendingisnotrelatedtorealGDP.
D) ofthecrowding-outeffectonconsumptionspending.
Answer: B
Diff:2
7) InthetraditionalKeynesianmodel,anincreaseingovernmentspendingleadstoallofthe
followingEXCEPT
A) anincreaseinaggregatedemand. B) ahigherpricelevel.
C) anincreaseinconsumption. D) higherrealGDP.
Answer: B
Diff:2
8) ThetraditionalKeynesianapproachconcludesthatanincreaseingovernmentspending
A) generatesagreaterincreaseininvestmentspending.
B) generatesanequalincreaseintotalspendingbecausegovernmentspendingmakesuppart
oftotalspending.
C) generatesagreaterincreaseintotalspendingbecauseconsumptionspendingincreasesas
incomesincrease.
D) hasnoeffectontotalspendingbecauseconsumersincreasesavingbyanequalamount.
Answer: C
Diff:2
13.7AppendixD:ChangesinTaxes
1) AccordingtothetraditionalKeynesianapproach,ifthegovernmentincreasestaxes,then
A) realGrossDomesticProduct(GDP)willfallandthepricelevelwillremainconstant.
B) realGrossDomesticProduct(GDP)willfallbutthepricelevelwillrise.
C) bothrealGrossDomesticProduct(GDP)andthepricelevelwillfall.
D) realGrossDomesticProduct(GDP)willremainconstantbutthepricelevelwillrise.
Answer: A
Diff:1
Topic: 13.7AppendixD:ChangesinTaxes
2) InthetraditionalKeynesianmodel,ataxcut
A) causestheC+I+G+ Xlinetoshiftupward.
B) causestheC+I+G+ Xlinetoshiftdownward.
C) causesamovementalongtheC+ I+ G+ Xline.
D) doesnotaffecttheC+ I+ G+ Xline.
Answer: A
Diff:2
3) InthetraditionalKeynesianmodel,anincreaseincurrenttaxes
A) increasesdisposableincomebutdoesnotaffectconsumption.
B) decreasesbothdisposableincomeandconsumption.
C) decreasesdisposableincomebutincreasesconsumption.
D) hasnoeffectoneitherdisposableincomeorconsumption.
Answer: B
Diff:2
4) AccordingtothetraditionalKeynesianapproach,ataxcutraisesaggregatedemandbecause
A) taxesarepartoftheC+ I+ G+ Xline.
B) disposableincomeavailabletoconsumersincreases.
C) taxpayersanticipateataxincreaseinthefuture.
D) ataxcutalwaysresultsinabalancedbudget.
Answer: B
Diff:2
5) InthetraditionalKeynesianmodel,ifthegovernmentcutstaxes,then
A) bothconsumptionandrealGrossDomesticProduct(GDP)willincrease.
B) bothconsumptionandrealGrossDomesticProduct(GDP)willdecrease.
C) consumptionwillincreasebutGrossDomesticProduct(GDP)willdecrease.
D) consumptionwilldecreasebutGrossDomesticProduct(GDP)willincrease.
Answer: A
Diff:2
6) InthetraditionalKeynesianmodel,ifthegovernmentcutscurrenttaxes,
A) theC+I+G+Xlinewillshiftdownbuttheaggregatedemandcurvewillnotshift.
B) theC+I+G+Xlinewillshiftdownandtheaggregatedemandcurvewillshifttotheleft.
C) theC+I+G+Xlinewillshiftupandtheaggregatedemandcurvewillshifttotheright.
D) theC+I+G+Xlinewillshiftupbuttheaggregatedemandcurvewillnotshift.
Answer: C
Diff:2
7) InthetraditionalKeynesianmodel,anincometaxcutraisesrealGDPbecause
A) consumptionspendingdependsnegativelyonafter-taxincome.
B) consumptionspendingdependspositivelyonafter-taxincome.
C) consumptionspendingisnotrelatedtoafter-taxincome.
D) ofthecrowding-outeffectsoftaxes.
Answer: B
Diff:2
8) InthetraditionalKeynesianmodel,anincreaseintaxesleadstoallofthefollowingEXCEPT
A) adecreaseinaggregatedemand. B) alowerpricelevel.
C) adecreaseinconsumption. D) lowerrealGDP.
Answer: B
Diff:2
9) AccordingtotheKeynesianapproach,anincreaseintaxes
A) willreduceconsumptionexactlybytheamountofthetaxes.
B) willreduceconsumptionbyanamountlessthanthechangeintaxes.
C) willnotimpactconsumption,asmostconsumptionisautonomous.
D) willincreaseconsumption,asthegovernmentwillspendtheextrataxrevenueandthat
increasesconsumption.
Answer: B
Diff:1
10) AccordingtotheKeynesianapproach,adecreaseintaxes
A) willincreaseconsumptionexactlybytheamountofthetaxes.
B) willincreaseconsumptionbyanamountoflessthanthechangeintaxes.
C) willnotimpactconsumption,asmostconsumptionisautonomous.
D) willdecreaseconsumption,asthegovernmentwillhavetospendless.
Answer: B
Diff:1
11) TheKeynesianperspectiveontheeffectofanincreaseintaxesisthatthispolicyaction
A) generatesreductionsinconsumptionandinsaving.
B) generatesreductionsinconsumptionandanincreaseinsavingtopayforthenewtaxes.
C) hasnoimpactonconsumption.
D) increasescurrentconsumptionandreducesfutureconsumption.
Answer: A
Diff:2
12) SupposetherearetwopolicyoptionsfacingavoteintheSenate.Inthefirst,government
spendingwillincrease$50billion,whilethesecondoptionistocuttaxesby$50billion.A
Keynesianeconomistwouldarguefor
A) thetaxoptionbecauseitalsoaffectstheincentivesworkersface.Long-runaggregate
supplywillincreasewiththetaxcut,butnotwiththespendingincrease.
B) thetaxoptionbecauseitiseasiertopass.Theeffectsontotalspendingwouldbeidentical.
C) thespendingoptionbecauseitwontaffectthedeficitthewaythetaxcutwould.
D) thespendingoptionbecauseithasabiggerimpactontotalspending.Thespending
directlyraisestotalspendingplusitworksthroughthemultiplier,whilethetaxcutonly
worksthroughthemultiplier.
Answer: D
Diff:3
13.8AppendixD:TheBalanced-BudgetMultiplier
1) InCountryZ,thegovernmentsimultaneouslyincreasesitsexpendituresby$25billionand
increasestaxesby$25billion.IftheMPSisequalto0.2,thegovernmentsaction________real
GDPby________.
A) increases;$125billion B) increases;$25billion
C) increases;$100billion D) hasnoeffecton;$0
Answer: B
Diff:2
Topic: 13.8AppendixD:TheBalanced-BudgetMultiplier
2) InCountryZ,thegovernmentsimultaneouslydecreasesitsexpendituresby$20billionand
decreasestaxesby$20billion.IftheMPSisequalto0.2,thegovernmentsaction________real
GDPby________.
A) decreases;$100billion B) decreases;$20billion
C) decreases;$80billion D) hasnoeffecton;$0
Answer: B
Diff:2
3) Thebalanced-budgetmultiplierisequalto
A) thepercentageincreaseingovernmentexpenditures.
B) thereciprocaloftheincreaseingovernmentexpenditures.
C) thepercentageincreaseintaxes.
D) 1.
Answer: D
Diff:1
4) AccordingtothetraditionalKeynesiananalysis,ifthegovernmentincreasesspendingandpays
forallofitbyraisingcurrenttaxes,then
A) aggregatedemandwilldecrease. B) abudgetdeficitwilloccur.
C) abudgetsurpluswilloccur. D) aggregatedemandwillincrease.
Answer: D
Diff:1
5) AccordingtothetraditionalKeynesianapproach,ifthegovernmentincreasesspendingby$5
millionandraisescurrenttaxesby$5millionatthesametime,then
A) realGDPwillincreaseby$5million.
B) realGDPwilldecreaseby$5million.
C) realGDPwilldecreasebymorethan$5million.
D) realGDPwillremainthesame.
Answer: A
Diff:1
13.9AppendixD:TheFixedPriceLevelAssumption
1) TheKeynesianapproachassumesthat
A) thereisnounemploymentintheeconomy.
B) theeconomyisself-regulating.
C) thegovernmentbudgetisalwaysindeficit.
D) thepricelevelisfixed.
Answer: D
Diff:2
Topic: 13.9AppendixD:TheFixedPriceLevelAssumption
2) Ifthepricelevelisfixed,thenanincreaseingovernmentspendingwillleadto
A) alargerincreaseinnominalGDPthaninrealGDP.
B) asmallerincreaseinnominalGDPthaninrealGDP.
C) noincreaseineithernominalGDPorrealGDP.
D) anincreaseinnominalGDPbythesameamountasanincreaseinrealGDP.
Answer: D
Diff:2
3) AccordingthetraditionalKeynesianapproach,anincreaseingovernmentspendingiseffective
inloweringunemploymentif
A) thepricelevelisfixed.
B) thepricelevelisflexible.
C) thepriceleveldoesnotexist.
D) Ricardianequivalenceoccurs,regardlessofthepricelevel.
Answer: A
Diff:2
Chapter14
DeficitSpendingandthePublicDebt
14.1PublicDeficitsandDebts:FlowsversusStocks
1) Inthecurrentyear,anationsgovernmentspendingequals$1.5trillionanditsrevenuesare$1.9
trillion.Whichofthefollowingistrue?
A) Thenationsnationaldebtequals$0.4trillion.
B) Thisnationhasacurrentyearbudgetsurplusof$0.4trillion.
C) Thisnationiscurrentlyrunningabudgetdeficitof$0.4trillion.
D) Thenationhasacurrentyeartradesurplusof$0.4trillion.
Answer: B
Diff:2
Topic: 14.1PublicDeficitsandDebts:FlowsversusStocks
2) Whengovernmentrevenuesexceedgovernmentoutlaysinaparticularyear,thisiscalled
A) abudgetsurplus. B) abudgetdeficit.
C) thenationaldebt. D) fiscalpolicy.
Answer: A
Diff:2
3) SupposethatthegovernmentofSummerfieldspends$2trillionin2013andreceivestax
revenuesof$1.5trillion.Whichofthefollowingistrue?
A) Summerfieldhasabudgetsurplusof$0.5trillion.
B) Summerfieldhasabudgetdeficitof$0.5trillion.
C) Summerfieldhasatradedeficitof$0.5trillion.
D) Summerfieldhasatradesurplusof$0.5trillion.
Answer: B
Diff:2
4) Whengovernmentspendingexceedsgovernmentrevenuesduringagivenperiodoftime,
A) abudgetdeficitexists. B) abudgetsurplusexists.
C) thenationaldebtmustbedecreasing. D) Congressisobligedtoraisetaxes.
Answer: A
Diff:1
Chapter14DeficitSpendingandthePublicDebt 621
5) Howdoesagovernmentbudgetdeficitoccur?
A) Agovernmentstaxrevenuesexceeditsspending.
B) Agovernmentsspendingexceedsitstaxrevenues.
C) Ifanationcarriesapublicdebt,itmustberunningadeficiteveryyear.
D) Anationearnsmoreonexportsthanitspendsonimports.
Answer: B
Diff:1
6) Stockschange________whereasflowsrelateto________.
A) withinagivenperiodoftime;changesbetweenpointsintime
B) onlyattheendofeachyear;amountsatagivenpointintime
C) betweenpointsintime;changeswithinagiventimeperiod
D) andthatcausesflowstochange;changesthathavenoimpactonstocks
Answer: C
Diff:2
7) WhichofthefollowingisNOTanexampleofaflowvariable?
A) plannedinvestment B) capitalstock
C) Thefederaldeficit D) inventoryinvestment
Answer: B
Diff:2
8) Ifthegovernmentsspendingexactlyequalsitsrevenuesduringabudgetyear,thatgovernment
is
A) runningabudgetdeficit. B) experiencingabudgetsurplus.
C) balancingitsbudget. D) payingoffitspublicdebt.
Answer: C
Diff:1
9) Whichofthefollowingisastockvariable?
A) publicdebt B) wealth
C) moneysupply D) alloftheabove
Answer: D
Diff:2
10) Howdoesthefederalgovernmentfinanceabudgetdeficit?
A) ItredeemsitsIOUs.
B) ItpurchasesU.S.Treasurybonds.
C) Itcutsspendingonentitlementprograms.
D) ItborrowsfundsbysellingTreasurybonds.
Answer: D
Diff:1
11) Otherthingsbeingequal,duringaperiodwhenthefederalgovernmentissuesmoreTreasury
securitiestoborrowfunds,
A) theflowofgovernmentexpendituresduringthatperiodmustexceedtheflowoftax
revenues.
B) theflowofgovernmentexpendituresduringthatperiodmustexceedthestockoftax
collections.
C) thestockofgovernmentdeficitspendingduringthatperiodmustexceedtheflowoftax
revenues.
D) thestockofgovernmentdeficitspendingduringthatperiodmustexceedthestockoftax
collections.
Answer: A
Diff:2
12) Ifthepublicdebtincreasedbythesameamounteachyearduringthepastthreeyears,then
A) theU.S.governmentmusthaveoperatedwiththesamebudgetsurplusesduringthepast
threeyears.
B) theU.S.governmentmusthaveexperiencedbudgetsurplusesthatincreasedbythesame
amounteachofthepastthreeyears.
C) theU.S.Treasurymusthaveissuedsecuritiestofundaflowofgovernmentspendingthat
exceededaflowoftaxrevenuesbythesameamountduringeachofthepastthreeyears.
D) duringeachofthepastthreeyears,theU.S.Treasurymusthaveboughtbackthesame
amountofsecuritiesthathadpreviouslybeenissuedtocoverdeficitsexperiencedmore
thanthreeyearsago.
Answer: C
Diff:2
13) Thetotalvalueofalloutstandingfederalgovernmentsecuritiesis
A) aflowvariable. B) thebudgetdeficit.
C) totalpersonalwealth. D) noneoftheabove.
Answer: D
Diff:1
14) Agovernmentbudgetdeficitis
A) anexcessofgovernmentspendingovergovernmentrevenuesduringagiventimeperiod.
B) asituationinwhichthegovernmentsspendingisexactlyequaltothetotaltaxesandother
revenuesitcollectsduringagiventimeperiod.
C) thetotalvalueofalloutstandingfederalgovernmentsecurities.
D) allfederalgovernmentdebtirrespectiveofwhoownsit.
Answer: A
Diff:1
15) Ifthegovernmentspendsmorethanitreceivesintaxesduringagiveninterval,thentheresult
is
A) abalancedbudget. B) thegrosspublicdebt.
C) thenetpublicdebt. D) agovernmentbudgetdeficit.
Answer: D
Diff:1
16) Whichofthefollowingstatementsaboutthebudgetdeficitistrue?
A) Itisastockvariable. B) Itisaflowvariable.
C) Itisequaltothepublicdebt. D) Noneoftheabove.
Answer: B
Diff:1
17) Afederaldeficitof$300billionmeansthat
A) thegovernmenthasatotaldebtof$300billion.
B) governmentspendingis$300billionayear.
C) thegovernmentisspending$300billionayearmorethanitiscollectingintaxes.
D) thegovernmentplansoncollecting$300billionintaxesthisyear.
Answer: C
Diff:2
18) Agovernmentbalancedbudgetis
Answer: B
Diff:1
19) Ifthegovernmentspendsexactlywhatitreceivesintaxesduringagiveninterval,thenthe
resultis
A) abalancedbudget. B) thegrosspublicdebt.
C) thenetpublicdebt. D) agovernmentbudgetdeficit.
Answer: A
Diff:1
20) Ifthegovernmentspendslessthanwhatitreceivesintaxesduringagiveninterval,thenthe
resultis
A) abalancedbudget. B) anentitlement.
C) unrealizedpublicdebt. D) agovernmentbudgetsurplus.
Answer: D
Diff:1
21) Agovernmentbudgetsurplusis
A) asituationinwhichthesupplyofgoodsintheeconomyisgreaterthanthedemandfor
goods.
B) asituationinwhichtheamountspentbythegovernmentisgreaterthantheamount
collectedintaxes.
C) thepublicdebt.
D) anexcessofrevenuesovergovernmentspending.
Answer: D
Diff:1
22) Thepublicdebtis
Answer: C
Diff:1
23) Whichofthefollowingstatementsaboutthepublicdebtistrue?
A) Itisastockvariable.
B) Itisequaltothebudgetdeficit.
C) Itdecreaseswhenthegovernmentrunsabudgetdeficit..
D) Alloftheabove.
Answer: A
Diff:1
24) Thepublicdebtcanbethoughtofas
A) thetotalamountconsumersoweontheircreditcards.
B) thetotalamountintaxesconsumerspaytothegovernment.
C) accumulatedbudgetdeficitsandsurpluses.
D) thetotalamountthegovernmentspendsforgoodsandservices.
Answer: C
Diff:1
25) Whichofthefollowingstatementsistrueaboutthedifferencebetweenthepublicdebtandthe
governmentbudgetdeficit?
A) Thepublicdebtalwaysincreaseswhilethegovernmentbudgetdeficitmayincreaseor
decrease.
B) Thepublicdebtforthisyearwillincreaseordecreasedependinguponwhetherthereisa
governmentbudgetdeficitoragovernmentbudgetsurplus.
C) Thepublicdebtisaflowmeasureandthegovernmentbudgetdeficitisnotaflow
measure.
D) Thereisnorelationshipbetweenthepublicdebtandthegovernmentbudgetdeficitsince
oneisastockmeasureandtheotherisaflowmeasure.
Answer: B
Diff:2
26) WhichofthefollowingwillNOTcausethepublicdebttochange?
A) Collectionbythegovernmentof$200billionmoreintaxesthanitspends
B) Governmentbudgetdeficit
C) Governmentbudgetsurplus
D) Balancedbudget
Answer: D
Diff:1
27) Publicdebtisheldas
A) corporatebondsandcommonstocksofthelargestcompanies.
B) FederalReserveNotes.
C) U.S.Notes.
D) TreasuryBills,TreasuryNotes,TreasuryBonds,andU.S.SavingsBonds.
Answer: D
Diff:2
28) Whichofthefollowingistruewhenabudgetdeficitexists?
A) Governmentexpendituresexceedtaxrevenues.
B) Taxrevenuesexceedgovernmentexpenditures.
C) Atradesurplusexists.
D) Dissavingexists.
Answer: A
Diff:1
29) Agovernmentbudgetdeficitoccursduringabudgetyearwhen
A) taxrevenues>governmentspending.
B) taxrevenues=governmentspending.
C) taxrevenues<governmentspending.
D) taxrevenues+governmentspending= personalconsumption.
Answer: C
Diff:1
30) Agovernmentbudgetsurplusoccursduringabudgetyearwhen
A) taxrevenues>governmentspending.
B) taxrevenues=governmentspending.
C) taxrevenues<governmentspending.
D) taxrevenues+governmentspending= personalincome.
Answer: A
Diff:1
31) Ifthegovernmenthasaspendingflowthatexceedstherevenuesitcollects,thegovernmentwill
runa________thatyear.
A) debt B) deficit
C) debtandadeficit D) surplus
Answer: B
Diff:2
32) Whilethebudgetdeficitrepresentsa________,thepublicdebtrepresentsa________.
A) flow;flow B) flow;stock C) stock;stock D) stock;flow
Answer: B
Diff:2
33) Whengovernmentspendingexceedstaxrevenuesduringaspecifictimeperiod,thisisknown
asa
A) governmentbudgetdeficit. B) governmentbudgetsurplus.
C) balancedbudget. D) publicdebt.
Answer: A
Diff:1
34) Whengovernmentspendingislessthanthetaxrevenuesduringaspecifictimeperiod,thisis
knownasa
Answer: B
Diff:1
35) Whengovernmentspendingisequaltothetaxrevenuesduringaspecifictimeperiod,thisis
knownasa
Answer: C
Diff:1
36) Whengovernmentexpendituresaregreaterthantaxrevenues
A) therewillbebudgetdeficit. B) therewillbebudgetsurplus.
C) automaticstabilizersdonotkickin. D) thepublicdebtwillbereduced.
Answer: A
Diff:1
37) Supposethatthefederalgovernmenthadabudgetdeficitof$80billioninyear1and$90billion
inyear2,butthatitexperiencesbudgetsurplusesof$40billioninyear3and$20billioninyear
4.Alsoassumethatthegovernmentusesanybudgetsurplusestopaydownthepublicdebt.At
theendofthesefouryears,theFederalgovernmentspublicdebtwouldhave
A) decreasedby$110billion. B) increasedby$230billion.
C) increasedby$110billion. D) decreasedby$57.5billion.
Answer: C
Diff:2
38) Supposethatthefederalgovernmenthadabudgetdeficitof$80billioninyear1and$10billion
inyear2,butithadbudgetsurplusesof$140billioninyear3and$20billioninyear4.Also
assumethatthegovernmentusesanybudgetsurplusestopaydownthepublicdebt.Attheend
ofthesefouryears,theFederalgovernmentspublicdebtwouldhave
A) decreasedby$70billion. B) increasedby$250billion.
C) increasedby$70billion. D) decreasedby$62.5billion.
Answer: A
Diff:2
39) Ifthegovernmenthasnodebtinitially,butthenhasannualrevenuesof$10 billionperyearfor

4yearsandannualexpendituresof$10.5billionperyearfor4years,thenthegovernmenthas
A) abudgetsurplusof$0.5billionperyearandadebtof$2billionattheendofthe4years.
B) abudgetdeficitof$0.5billionperyearandabudgetsurplusof$2billionattheendofthe
4years.
C) abudgetdeficitof$0.5billionperyearandadebtof$2billionattheendofthe4years.
D) abudgetsurplusof$0.5billionperyearandasurplusof$2billionattheendofthe4
years.
Answer: C
Diff:2
40) Explainthedifferencesbetweenthepublicdebtandthegovernmentbudgetdeficit.
Answer: Thepublicdebtisastockmeasuredatapointintime,whilethegovernmentbudget
deficitisaflowmeasure.Thepublicdebtchangesasaresultofgovernmentbudget
deficitsorsurpluses.Thepublicdebtisthetotalvalueofalloutstandingfederal
governmentsecurities.
Diff:2
14.2GovernmentFinance:SpendingMoreThanTaxCollections
1) Since2001,theU.S.governmentbudgetdeficit
A) hasbeenapproximatelyequalto10%ofU.S.GDP.
B) asapercentageofU.S.GDPhasincreasedsteadilyeachyear.
C) asapercentageofU.S.GDPhasdecreasedsteadilyeachyear.
D) noneoftheabove.
Answer: D
Diff:1
Topic: 14.2GovernmentFinance:SpendingMoreThanTaxCollections
2) WhenwasthelastyeartheUnitedStateshadabudgetsurplus?
A) 2009 B) 1984 C) 1993 D) 2001
Answer: D
Diff:1
3) Since1940,theU.S.governmenthasexperienced
A) aboutthesamenumberofyearswithbudgetdeficitsaswithbudgetsurpluses.
B) twiceasmanyannualbudgetsurplusesasannualbudgetdeficits.
C) onlyoneyearwithabudgetsurplus.
D) manymorebudgetdeficitsthanbudgetsurpluses.
Answer: D
Diff:1
4) ExpressingtheU.S.federalbudgetdeficitasapercentageofGrossDomesticProduct(GDP)
A) resultsininflation-adjustedrevenueandexpenditurenumbers.
B) helpsusunderstandthesizeofthedeficitrelativetothesizeoftheeconomy.
C) wasusefulthroughthe1980s,butisnolongerhelpfulbecauseboththedeficitandreal
GrossDomesticProduct(GDP)havegrownsolarge.
D) isonlyusefulifthebudgetdeficitisrisingatanannualrateofmorethan4percent.
Answer: B
Diff:2
5) Whatistrueaboutgovernmentbudgetdeficitsandsurplusessince1940?
A) Balancedbudgetshavebeenmorecommonthangovernmentbudgetdeficitsor
governmentbudgetsurpluses.
B) Therehavebeenmoregovernmentbudgetsurplusesthangovernmentbudgetdeficits.
C) Therehavebeenmoregovernmentbudgetdeficitsthangovernmentbudgetsurpluses.
D) Thenumberofgovernmentbudgetdeficitsisaboutthesameasthenumberof
governmentbudgetsurpluses.
Answer: C
Diff:1
6) Betweentheyears1998and2001,theU.S.governmentexperienced
A) budgetsurpluses. B) balancedbudgets.
C) budgetdeficits. D) contractionarybudgetcycles.
Answer: A
Diff:2
7) AllofthefollowingarepossibleexplanationsfortheincreaseinU.S.governmentbudgetdeficits
asapercentageofGDPsincetheearly2001EXCEPT
A) increasesintaxrevenues. B) increasesinpaymentsforentitlements.
C) increasesingovernmentspending. D) decreasesintaxrates.
Answer: A
Diff:2
14.3EvaluatingtheRisingPublicDebt
1) Thedifferencebetweennetpublicdebtandgrosspublicdebtis
A) allgovernmentinteragencyborrowing.
B) theinterestpaidannuallyonthepublicdebt.
C) theamountowedtoindividualsandfirmsoutsidetheUnitedStates.
D) thecurrentyearsbudgetdeficitfromtheamountofpublicdebtatthestartoftheyear.
Answer: A
Diff:2
Topic: 14.3EvaluatingtheRisingPublicDebt
2) Thetotalvalueofalloutstandingfederalgovernmentsecuritiesiscalled
A) thebudgetdeficit. B) thepublicdebt.
C) thetradedeficit. D) crowdingout.
Answer: B
Diff:2
3) Accordingtothetext,approximatelywhatpercentageofU.S.netpublicdebtisheldbyforeign
residents?
A) 20% B) 50% C) 800% D) 90%
Answer: B
Diff:2
4) Accordingtothetext,thenetpublicdebttoGrossDomesticProduct(GDP)ratioiscurrently
about
A) 10%. B) 25%. C) 60%. D) 120%.
Answer: C
Diff:2
5) Netpublicdebtisthe
A) differencebetweentaxrevenuesandgovernmentexpenditureseachyear.
B) sumofaccumulatedgovernmentdeficitsandsurplusesheldbyindividualsand
businessesandforeigninstitutions.
C) sumofaccumulatedgovernmentdeficitsandsurplusesheldbyU.S.governmentagencies.
D) sumofaccumulatedgovernmentdeficitsandsurplusesheldbylargemoneycenterbanks.
Answer: B
Diff:1
6) TheamountoffundstheSocialSecuritysystemhasloanedthefederalgovernmentis
A) includedinthenetpublicdebt.
B) addedtothegrosspublicdebttocalculatethenetpublicdebt.
C) notincludedinthegrosspublicdebt.
D) excludedfromthenetpublicdebt.
Answer: D
Diff:2
7) Sincethelate1980s,theshareofthenetpublicdebtowedtoforeigninterestshas
A) remainedconstant.
B) decreased.
C) increased.
D) goneupandthendown,finallysettlingataround10percent.
Answer: C
Diff:1
8) Ifthegovernmentborrowstopurchasegoodsandservices,todaysconsumptionofgovernment
goodsandserviceswillbepaidforby
A) todaystaxpayers.
B) governmentemployees.
C) futuretaxpayers.
D) todaystaxpayersandtomorrowstaxpayersinevenshares.
Answer: C
Diff:1
9) Otherthingsbeingequal,whatistheeffectofdeficitspendingoncreditmarkets?
A) Boththedemandforcreditandthesupplyofcreditwillincrease.
B) Boththedemandforcreditandthesupplyofcreditwilldecrease.
C) Thedemandforcreditincreaseswhilethesupplyofcreditremainsconstant.
D) Thesupplyofcreditwillincreasewhilethedemandforcreditremainsthesame.
Answer: C
Diff:1
10) Otherthingsbeingequal,whatistheeffectofdeficitspendingoninterestrates?
A) Interestratesdecline.
B) Interestratesrise.
C) Interestratesholdconstantbecausethedemandforcreditdecreases.
D) ThereisnoimpactunlesstheFederalReservedecidestoalterthemoneysupply.
Answer: B
Diff:1
11) Ceterisparibus,deficitspendingresultsinhigherinterestrates,whichcan
A) accelerategrowthininvestmentspending.
B) ultimatelyhaveapositiveimpactonproductivitygainsandsocietysstandardofliving.
C) increasethewealthoffuturegenerations.
D) crowdoutprivateinvestment.
Answer: D
Diff:2
12) Grosspublicdebtis
C) thetotalvalueofbudgetdeficitsplusbudgetsurplusesoverthepastfiveyears.
Answer: D
Diff:1
13) Thedifferencebetweenthegrosspublicdebtandthenetpublicdebtis
A) thesumofallpreviouslyaccumulatedgovernmentbudgetdeficitsandsurpluses.
B) thesumofallpreviouslyissuedU.S.governmentsecuritiesthathavebeenpurchasedby
foreignresidents.
C) allprivate-sectorborrowingfromprivatesources.
D) allgovernmentinteragencyborrowing.
Answer: D
Diff:1
14) Netpublicdebtis
A) allfederalpublicdebtirrespectiveofwhoownsit.
B) grosspublicdebtminusallgovernmentinteragencyborrowing.
C) allpublicdebtminusallmoneyowedonthefederalincometax.
D) allpublicdebtplusallgovernmentinteragencyborrowing.
Answer: B
Diff:1
15) IfnoforeignresidentsownedanyoftheU.S.publicdebt,thenitwouldbetruethat
A) therewouldbenodistributionalconsequencesassociateswithhepublicdebt.
B) U.S.residentswouldessentiallyowethepublicdebttothemselves.
C) therewouldbenointerestpaymentsonthepublicdebt.
D) thepublicdebtwouldnaturallydisappearovertime.
Answer: B
Diff:1
16) Grosspublicdebtminusallgovernmentinteragencyborrowingis
A) governmentbudgetdeficit. B) netpublicdebt.
C) U.S.Treasurybonds. D) anentitlement.
Answer: B
Diff:1
17) WhentheSocialSecurityAdministrationholdsU.S.TreasuryBonds
A) interagencyborrowinghasoccurredandthegovernmentowesitself.
B) thereisabalancedbudget.
C) anentitlementhasoccurred.
D) thegrosspublicdebthasincreased.
Answer: A
Diff:1
18) Thedifferencebetweenthegrosspublicdebtandthenetpublicdebtisthatthe
A) grosspublicdebtincludesentitlementswhilethenetpublicdebtdoesnot.
B) grosspublicdebtisbasedonbudgetdeficitwhilethenetpublicdebtisnotbasedon
budgetdeficits.
C) grosspublicdebtincludesgovernmentinteragencyborrowingwhilethenetpublicdebt
doesnot.
D) thegrosspublicdebtisexpressedasapercentageofGDPwhilethenetpublicdebtisnot.
Answer: C
Diff:2
19) Whichofthefollowingisthebeststatementabouthowtheamountofthenetpublicdebtthata
typicalindividualowestotheholdersofthedebthasvariedintherecentpast?
A) Theamounthasnotvariedmuchovertime.
B) Theamounthasvariedalotovertime.
C) Theamounthassteadilyincreasedovertime.
D) Theamounthassteadilydecreasedovertime.
Answer: A
Diff:1
20) Someeconomistsbelievethatfinancingdeficitspendingbyincreasingtaxeswillleadtoalower
levelofnationalconsumptionandahigherlevelofnationalsavingsthandeficitspending.The
reasonis
A) peoplebelievethattheycanconsumethegovernmentprovidedgoodsandhavefuture
generationspaythebill.
B) thatpeopledonotrealizethattaxeshaveincreasedalso.
C) peoplewillforgoprivateconsumptionnowassocietysubstitutesgovernmentgoodsfor
privategoods.
D) theinterestrateonthedebtwillincrease.
Answer: C
Diff:2
21) Assumetheeconomyisclosedandthatitisoperatingatfullemployment.Whichstatementis
truewhenthesizeofthebudgetdeficitdecreases?
A) Theinterestratewilldecrease,leadingtoanincreaseininvestmentandcapitalformation.
B) Demandandsupplyofcreditwillincrease.
C) Areductioninthegrowthofproductivity,andareductioninsocietysstandardofliving
willoccur.
D) Theincreasedamountofpublicgoodswillcrowdoutprivatelyproducedgoods.
Answer: A
Diff:2
22) Someeconomistsbelievethatdeficitspendingcanimposeaburdenonfuturegenerations.
WhichofthefollowingdoesNOTexplaintheburden?
A) Investmentwillbecrowdedoutbyanincreaseincurrentconsumption.
B) Deficitspendingthatisallocatedtopurchasesleadstolong-termincreasesinrealGDP.
C) Futuregenerationswillhaveasmallercapitalstockthatwillreducetheirwealth.
D) Futuregenerationswillhavetobetaxedatahigherrate.
Answer: B
Diff:3
23) Whichofthefollowingstatementsistrueaboutthepublicdebtandfuturegenerations?
A) Futuregenerationswillalwaysbeworseoffbecausetheywillhavetopayoffthepublic
debt.
B) Increasedconsumptiontodaywillleadtoincreasesinthecapitalstockinthefuture.
C) Futuregenerationsmaybebetteroffiftherateofreturnontheborrowedfundsishigher
thantheinterestratepaidtoforeignresidents.
D) Thepublicdebtcannotbeheldbyforeignresidentsthereforewereallyowethedebtto
ourselves.
Answer: C
Diff:3
24) Thedifferencebetweengrosspublicdebtandnetpublicdebtisthat
A) netpublicdebtincludesinteragencyborrowingwhilethegrossdomesticproductdebt
doesnot.
B) netpublicdebtisexpressedinrealtermswhilegrosspublicdebtisexpressedinnominal
terms.
C) grosspublicdebtincludesinteragencyborrowingwhilenetpublicdebtdoesnot.
D) grosspublicdebtisheldbyindividualswhilenetpublicdebtisheldbythegovernment.
Answer: C
Diff:2
25) Anincreaseinthepublicdebtwouldmostlikelyindicatethat
A) thebudgetdeficithasincreased. B) thebudgetdeficithasdecreased.
C) thetradedeficithasdecreased. D) nationalsavinghasincreased.
Answer: A
Diff:2
26) Theshareofnetpublicdebtowedtoforeignresidentstodayiscloseto
Answer: C
Diff:1
27) Mediareportsoftensuggestthattheincreasingpublicdebtisaburdenonfuturegenerations.
Whattheymeanisthat
A) itreducesthecurrentlevelofinvestment.
B) itmakespredictingfutureunemploymentlevelsunpredictable.
C) itcausesdeflation.
D) itreducesbothnominalandrealinterestrates.
Answer: A
Diff:2
Year Expenditures TaxRevenues GDP

1 400 375 5,000
2 290 330 5,300
3 430 320 5,600
4 470 350 6,000
28) Supposethatinitiallythereisnopublicdebt.Usingtheabovetable,thepublicdebtoverthis
fouryearperiodwouldhave
A) increasedby$215. B) decreasedby$100.
C) increasedby$1,375. D) decreasedby$1,590.
Answer: A
Diff:2
29) Supposethatinitiallythereisnopublicdebt.Usingtheabovetable,whatisthepublicdebtasa
percentageofGDPinYear4?
Answer: C
Diff:2
30) Supposethatinitiallythereisnopublicdebt.Usingtheabovetable,whatisthepublicdebtasa
percentageofGDPinYear3?
Answer: A
Diff:2
31) Thegrosspublicdebtisthe
A) amountofU.S.papercurrencyandcoinsincirculation.
B) differencebetweencurrentgovernmentexpendituresandtaxrevenues.
C) ratioofpastdeficitstopastsurpluses.
D) totalofallaccumulateddeficitsandsurpluses.
Answer: D
Diff:1
32) Ifthenetpublicdebtexpandedlastyear,thenwhichofthefollowingmostlikelyoccurred
duringtheyear?
A) Thegovernmentsbudgetwasbalanced.
B) Thegovernmentexperiencedabudgetsurplus.
C) Thegovernmentexperiencedabudgetdeficit.
D) Thegovernmentstaxcollectionsexceededitsspending.
Answer: C
Diff:2
33) Onemechanismthroughwhichincreasingpublicdebtmayimpacttheeconomyisthatthe
resulting
A) increasedcompetitionforfundsincreasesinterestratesandcausesareductionin
investment.
B) increasedcompetitionforfundsdecreasesinterestratesandcausesanincreasein
investment.
C) decreasedcompetitionforfundsdecreasesinterestratesandcausesareductionin
investment.
D) decreasedcompetitionforfundsdecreasesinterestratesandcausesanincreasein
investment.
Answer: A
Diff:2
34) Ifthenetpublicdebtdeclinedlastyear,thenwhichofthefollowingmostlikelyoccurred
duringthatyear?
A) Thegovernmentsbudgetwasbalanced.
B) Thegovernmentexperiencedabudgetsurplus.
C) Thegovernmentexperiencedabudgetdeficit.
D) Theshareofforeignholdingsofthegovernmentsdebtincreased.
Answer: B
Diff:1
35) Toevaluaterelativechangesinthenetpublicdebt,wemust
A) lookattheabsoluteamountowedbythegovernment.
B) compareittothenationsrealGDP.
C) lookattheannualpercentagechangeinthepublicdebt.
D) compareittothedebtsofalldevelopedcountries.
Answer: B
Diff:2
36) Grosspublicdebtistheamountoffundsthat
A) U.S.residentsowetoforeignresidents.
B) statesowetothefederalgovernment.
C) thefederalgovernmentowestotaxpayers.
D) thefederalgovernmentowestoallholdersofU.S.securities.
Answer: D
Diff:1
37) Whichofthefollowingstatementsisfalse?
A) Thefederalbudgetdeficitin2004wasabout4percentoftheGDP.
B) Abudgetdeficitof$25billioninagivenyearincreasesthepublicdebtby$25billion.
C) Thepublicdebtof$25billionistheaccumulateddebtofallU.S.individuals,firms,and
institutions.
D) Duringthepastfiveyears,theU.S.publicdebthasbeenincreasing.
Answer: C
Diff:1
38) Netpublicdebtisequalto
A) thegrosspublicdebtminuscurrentyeartaxrevenuecollection.
B) thegrosspublicdebtminustaxespaidbyforeigncorporationsontheirprofitsmadeinthe
UnitedStates.
C) thegrosspublicdebtplusallgovernmentalinteragencyborrowing.
D) thegrosspublicdebtminusallgovernmentalinteragencyborrowing.
Answer: D
Diff:2
39) Borrowingtofinancetheincreasesingovernmentexpenditures
A) reducescurrentprivateinvestmentexpenditures.
B) increasesinterestrates.
C) reducesgrowthinthenationsprivatecapitalstock.
D) alloftheabove
Answer: D
Diff:1
40) Thetwowaysinwhichdeficitspendingcanimposeaburdenonfuturegenerationsare
A) byrequiringfuturegenerationstofacehighertaxesandtoworkwithaloweraccumulated
stockofcapitalgoods.
B) byrequiringfuturegenerationstofacelowergovernmentspendingandtoutilizeasmaller
stockofhumancapital.
C) bysubstitutingprivategoodsforpublicgoodsandtherebyshiftingresourcestoforeign
residents.
D) bysubstitutingprivategoodsforpublicgoodsandtherebybenefitingonlylarge
businesses.
Answer: A
Diff:2
41) Ifthenetpublicdebtremainsunchangedduringagivenperiod,butthegrosspublicdebt
increases,thenwhichofthefollowingstatementsmustbecorrect?
A) Governmentinteragencyborrowingmusthaveincreasedduringtheperiod.
B) Governmentinteragencyborrowingmusthavedecreasedduringtheperiod.
C) ForeignownershipofU.S.Treasurysecuritiesmusthaverisenduringtheperiod.
D) ForeignownershipofU.S.Treasurysecuritiesmusthavefallenduringtheperiod.
Answer: A
Diff:2
42) Whichofthefollowingisthebestmeasureofthetotalamountthatthefederalgovernmentowes
toprivateownersofU.S.Treasurysecurities?
A) Governmentinteragencyborrowing B) Thegovernmentbudgetdeficit
C) Thegrosspublicdebt D) Thenetpublicdebt
Answer: D
Diff:2
43) Whichofthefollowingcorrectlydescribesawayinwhichdeficitspendingcanimposeaburden
onfuturegenerations?
I. FailuretoallocatedeficitspendingtousesthatboostfuturerealGrossDomesticProduct
(GDP)willrequiretaxingfuturegenerationsatahigherratetorepaytheresultinghigherpublic
debt.
II. GovernmentdeficitsthatleadtohigheremploymentandrealGrossDomesticProduct
(GDP)inthefuturewillgenerateincreasedincometaxesforfuturegovernments,whichwill
respondbyspendingthehighertaxrevenues,creatinghigherfuturegovernmentbudget
deficits.
III. Otherthingsbeingequal,deficitspendingfuelsincreasedconsumptionofgoodsand
servicesbythecurrentgenerationthatcrowdsoutcapitalinvestment,therebyleavingfuture
generationswithasmallerstockofcapitalthanotherwisewouldhaveexisted.
A) Ionly B) IIonly C) IandIIIonly D) IIandIIIonly
Answer: C
Diff:3
44) Whichofthefollowingistrueoftheportionofthenetpublicdebtheldbyforeignresidents?
A) ItwilldefinitelybeabenefittocurrentandfuturegenerationsofU.Sresidents,because
foreignresidentshaveshownawillingnesstolendtotheU.S.governmentinexchangefor
ratesofreturnsignificantlylowerthantheycanreceiveelsewhereintheworld.
B) ItwilldefinitelybeaburdenoncurrentandfuturegenerationsofU.S.residentswhowill
havetopayinterestonthisportionofthedebt,therebytransferringaportionoffuture
U.S.incomesabroad.
C) ItwillbeaburdenonfuturegenerationsofU.S.residentsonlyiffundsthattheU.S.
governmentobtainsfromborrowingareexpendedonprojectswithratesofreturnlower
thantheratesofinterestthatthegovernmentpaysforeignresidents.
D) ItwillbeabenefittofuturegenerationsofU.S.residentsonlyiffundsthattheU.S.
governmentobtainsfromborrowingareexpendedonprojectswithratesofreturnlower
thantheratesofinterestthatthegovernmentpaysforeignresidents
Answer: C
Diff:2
45) Netpublicdebtis
A) theexcessofannualgovernmentspendingoverannualtaxrevenues.
B) theexcessofannualtaxrevenuesoverannualgovernmentspending.
C) theportionofgovernmentdebtheldbyprivateindividualsandfirms.
D) thesumowedbythepublictokeeptheSocialSecuritysystemafloat.
Answer: C
Diff:2
46) Tocomparethenetpublicdebtofvariouscountries,thedebthastobecomparedto
A) thecountrystradedeficit.
B) thecountryscurrentbudgetdeficitorsurplus.
C) thecountrysrealGDP.
D) thecountrysnationaldefenseexpenditure.
Answer: C
Diff:2
47) Explainhowdeficitspendingcouldbeaburdentofuturegenerations.
Answer: Deficitspendingcanleadtotwonegativeeffects.First,futuregenerationswillhave
highertaxestopayoffthedebt.Second,currentconsumptioncrowdsoutinvestment,
andreducesthegrowthofcapitalgoodsleavingfuturegenerationswithareduced
capitalstock.
Diff:2
48) Explainhowdeficitspendingcanbenefitfuturegenerations.
Answer: Iftherateofreturnonborrowedfundsishigherthantheinteresttobepaidtoforeign
residents,futuregenerationscanbemadebetteroff.
Diff:2
14.4FederalBudgetDeficitsinanOpenEconomy
1) InwhichdecadedidtheUnitedStatesbeginexperiencinglargetradedeficits?
A) 1960s B) 1970s C) 1980s D) 1990s
Answer: C
Diff:1
Topic: 14.4FederalBudgetDeficitsinanOpenEconomy
2) Arefederalbudgetdeficitsrelatedtotradedeficits?
A) Yes.IfU.S.consumersbuytoomanyimportedgoodstheydonthavemoneytosaveanda
budgetdeficitresults.
B) No.ThebudgetdeficitisentirelyadomesticmatterwhilethetradedeficitonlyaffectsU.S.
citizenswhotravelabroad.
C) Yes.Asdeficitspendinggoesup,itislikelygovernmentborrowingwill,too.Thenforeign
residentswholendfundstotheU.S.governmenthavelesstospendonourgoods,soU.S.
exportswillfall.
D) Yes,butonlyifthequalityofU.S.goodsandservicesisdeteriorating.
Answer: C
Diff:2
3) Whichofthefollowingstatementshasusuallyheldtrueabouttherelationshipbetweenthe
tradedeficitsandgovernmentbudgetdeficits?
A) Thereisnorelationshipbetweentradedeficitsandbudgetdeficits.
B) Thereisapositiverelationshipbetweentradedeficitsandbudgetdeficits.
C) Thereisanegativerelationshipbetweentradedeficitsandbudgetdeficits.
D) Arelationshipexistsonlywhenthereisabalancedbudget.
Answer: B
Diff:1
4) Historicdataindicatethatthereisusuallya________relationshipbetweentradedeficitsand
federalgovernmentbudgetdeficits.
A) positive B) zero C) negative D) fluctuating
Answer: A
Diff:1
5) Atradesurplusoccurswhen
A) thevalueofimportsisgreaterthanthevalueofexports.
B) governmentspendingislessthantotaltaxrevenue.
C) consumptionisgreaterthandisposableincome.
D) noneoftheabove.
Answer: D
Diff:1
6) Whichofthefollowingistrueabouthowtradedeficitsandgovernmentbudgetdeficitsare
related?
A) Thetradedeficitleadstoareductionininvestmentthatleadstoagovernmentbudget
deficit.
B) Thetradedeficitleadstoadeclineinimportsrelativetoexportsthatleadstoa
governmentbudgetdeficit.
C) Thegovernmentbudgetdeficitleadstohigherinterestratesthatwillleadtoatrade
deficit.
D) Thegovernmentbudgetdeficitleadstolowerinterestratesthatwillleadtoalowertrade
deficit.
Answer: C
Diff:2
7) WhenforeignresidentsbuyU.S.Treasurysecuritiestofinancethebudgetdeficit,
A) wecanalsoanticipateanincreaseinthetradedeficit.
B) wecanalsoanticipateadecreaseinthetradedeficit.
C) thetradedeficitwillnotbeaffected.
D) thepublicdebtwillbereduced.
Answer: A
Diff:2
8) Historicalevidenceseemstoindicatethat
A) budgetandtradedeficitsgenerallymoveinthesamedirection.
B) budgetandtradedeficitsgenerallymoveintheoppositedirection.
C) thereisnoconsistentrelationshipbetweentradeandbudgetdeficits.
D) tradeandbudgetdeficitsdecreasewhenthepresidentisaRepublican,andincreasewhen
thepresidentisaDemocrat.
Answer: A
Diff:2
9) WhichofthefollowingistrueoftherelationshipbetweenU.S.tradedeficitsandfederal
governmentbudgetdeficits?
A) Increasesinthebudgetdeficittendtobeassociatedwithincreasesinthetradedeficit.
B) Increasesinthebudgetdeficittendtobeassociatedwithreductionsinthetradedeficit.
C) Increasesinthebudgetdeficitarealwaysassociatedwithincreasesinthetradedeficit.
D) Increasesinthebudgetdeficitarealwaysassociatedwithreductionsinthetradedeficit.
Answer: A
Diff:2
10) WhichofthefollowingistrueoftheU.S.tradebalanceandthefederalgovernmentbudget?
A) Inmostyearssincethe1970s,bothhavebeeninsurplus.
B) Inmostyearssincethe1970s,bothhavebeenindeficit.
C) Bothexhibitedgreatervariabilitybeforethe1970sthantheyhavesince.
D) Thefederalgovernmentbudgetdeficitwasmorevariablebeforethe1970s,butthetrade
deficithasbeenmorevariablesince.
Answer: B
Diff:2
11) Arefederalbudgetdeficitsrelatedtotradedeficits?
A) Yes.IfU.S.consumersbuytoomanyimportedgoods,theydonothavefundstosave,and
abudgetdeficitresults.
B) No.Thebudgetdeficitisentirelyadomesticmatter,whilethetradedeficitonlyaffects
U.S.citizenswhotravelabroad.
C) Yes.Higherdeficitspendinggoesupresultsinmoregovernmentborrowing,andforeign
residentswholendfundstotheU.S.governmenthavefewerresourcestospendU.S.
exportgoods.
D) Yes,butonlyifthequalityofU.S.goodsandservicesisdeteriorating.
Answer: C
Diff:2
14.5GrowingU.S.GovernmentDeficits:ImplicationsforU.S.EconomicPerformance
1) Whatistheshort-runeffectofincreaseddeficitspendingonaneconomyexperiencinga
recessionarygap?
A) Aggregatedemandincreases,andthegapcloses.
B) Aggregatesupplyincreases,closingthegap.
C) Aggregatedemanddecreases,andthegapwidens.
D) Aggregatedemandwillincrease,creatinganinflationarygap.
Answer: A
Diff:2
Topic: 14.5GrowingU.S.GovernmentDeficits:ImplicationsforU.S.EconomicPerformance
2) Inthelongrun,whateffectdoesagovernmentsdeficitspendinghaveonequilibriumreal
A) ThegovernmentsdeficitspendingwillincreaseequilibriumrealGrossDomesticProduct
(GDP).
B) DeficitspendingwilldecreasethenationsequilibriumrealGrossDomesticProduct
(GDP).
C) HighergovernmentdeficitswillnotraiseequilibriumGrossDomesticProduct(GDP)
abovethefull-employmentlevel.
D) EquilibriumrealGrossDomesticProduct(GDP)willincreasebeyondthefull-employment
levelandtherewillalsobeaninflationaryeffect.
Answer: C
Diff:2
3) Oneofthelong-runeffectsofhighergovernmentbudgetdeficitsis
A) aredistributionofrealGrossDomesticProduct(GDP)awayfromgovernment -provided
goodsandtowardmoreprivatelyprovidedgoods.
B) anincreaseinthegovernmentsshareofthenationseconomicactivity.
C) growthintheeconomysprivatesectoratthesametimethegovernmentsectorshrinks.
D) afallintheequilibriumpricelevel.
Answer: B
Diff:2
4) WhyisitunlikelythattaxincreaseswillbethewaytoeliminatecurrentU.S.federalbudget
deficits?
A) Increasingeveryworkerstaxesbythesameamountcouldeliminatethedeficit,butitis
likelythisactionwouldbeviewedastooburdensomeforworkerswithmodestincomes.
B) Therevenuesgeneratedbyincreasingtaxesontherichwouldonlypayforasmallportion
ofthefederalbudgetdeficitinanyrecentyear.
C) SinceWorldWarII,onaveragewhentaxeswereincreasedbyadollar,federalgovernment
spendingincreasedbythatmuchandmore.
D) Alloftheabove.
Answer: D
Diff:2
5) Thelargestexpenditurecomponentofthefederalbudgetisspendingon
A) themilitary. B) entitlementprograms.
C) environmentalprotectionprograms. D) foreignaid.
Answer: B
Diff:1
6) GuaranteedbenefitsundergovernmentprogramssuchasSocialSecurityorMedicarearecalled
A) discretionaryspending. B) controllableexpenditures.
C) entitlements. D) automaticstabilizers.
Answer: C
Diff:1
7) Today,U.S.governmentspendingonentitlementsrepresents________ofthetotalfederal
budget.
A) about10percent B) lessthan25percent
C) nearly60percent D) nearly90percent
Answer: C
Diff:1
8) Whichisthefastestgrowingcomponentofthefederalgovernmentbudget?
A) Spendingonthemilitaryandthewaronterrorism
B) Spendingtoimprovethenationsschools
C) Spendingtoimproveandexpandthenationsinfrastructure
D) Spendingonentitlements
Answer: D
Diff:1
9) Inthelongrun,whateffectdoesagovernmentsdeficitspendinghaveonequilibriumreal
A) GovernmentdeficitspendingwillincreaseequilibriumrealGrossDomesticProduct
(GDP).
B) DeficitspendingwilldecreasethenationsequilibriumrealGrossDomesticProduct
(GDP).
C) HighergovernmentdeficitswillnotraiseequilibriumGrossDomesticProduct(GDP)
abovethefull-employmentlevel.
D) HighergovernmentdeficitswillraiseequilibriumGrossDomesticProduct(GDP)above
thefull-employmentlevelandalsohaveaninflationaryeffect.
Answer: C
Diff:2
10) Inthelongrun,ahighergovernmentdeficitdoesnotaffectequilibriumrealGrossDomestic
Product(GDP),sothatcontinuousincreasesinthegovernmentdeficitwill
A) leadtogreatertaxrevenues.
B) reducethepricelevel.
C) reducespendingonprivatelyprovidedgoodsandservices.
D) increasetheunemploymentrate.
Answer: C
Diff:2
11) Inthelongrun,ahighergovernmentbudgetdeficitcauses
A) adecreaseinbothprivatespendingandequilibriumrealGDP.
B) anincreaseinbothprivatespendingandequilibriumrealGDP.
C) adecreaseinprivatespendingwhileequilibriumrealGDPremainsunchanged.
D) nochangeinprivatespendingbutadecreaseinequilibriumrealGDP.
Answer: C
Diff:2
12) ThelargestcomponentofU.S.federalspendingthatcontributestotheU.S.governmentbudget
deficitis
A) entitlements. B) militaryspending.
C) interestexpenses. D) salariesofgovernmentemployees.
Answer: A
Diff:1
13) Whenanalyzingtheeffectsofthegovernmentbudgetdeficit,
A) nodistinctionmustbemadebetweenaneconomywherefullemploymentexistsandone
wheresubstantialunemploymentexists.
B) itisimportanttoexaminetheeffectsofthereportedcapitalbudgetandthereported
operatingbudgetseparately.
C) thereshouldbeacomparisonoftheeffectofthedeficittotheeffectsofhighertaxes
neededtoeliminateit.
D) thebaselinebudgetshouldbeusedsinceitisthemostaccurate.
Answer: C
Diff:1
14) Intheshortrun,afiscalpolicyactionthatresultsinareductioninthesizeofthebudgetdeficit
willcause
A) anincreaseinrealGDPwithstablepricesiftheeconomywasbelowfullemployment.
B) areductioninrealGDPwithfallingpricesiftheeconomywasbeloworatfull
employment.
C) aninflationarygapiftheeconomywasinitiallyoperatingatfullemployment.
D) aninflationarygapiftheeconomywasinitiallyoperatingbelowfullemployment.
Answer: B
Diff:1
15) Supposetheeconomyisinitiallyexperiencingashort-runrecessionarygap.Anincreaseinthe
sizeofthebudgetdeficitwill
A) increasethesizeoftherecessionarygap.
B) reducethesizeoftherecessionarygap.
C) leadtoanincreaseinpriceswithnoincreaseinrealGDP.
D) leadtoadecreaseinpriceswithanincreaseinrealGDP.
Answer: B
Diff:1
16) Supposetheeconomyisinitiallyoperatingatfullemployment.Areductioninthesizeofthe
budgetdeficitwillcausewhichofthefollowingintheshortrun?
A) arecessionarygap.
B) anincreasethepricelevelandareductioninrealGDP.
C) anincreaseinthepricelevelwithnochangeinrealGDP.
D) anincreaseinrealGDPandanincreaseinthepricelevel.
Answer: A
Diff:1
17) Supposetheeconomyisinitiallyoperatingatfullemployment.Afiscalpolicyactionthat
resultsinanincreaseinthesizeofthebudgetdeficitwillcausewhichofthefollowinginthe
longrun?
A) anincreaseinrealGDP.
B) havenoeffectonboththelevelandcompositionofrealGDP.
C) areductioninthepricelevel.
D) changethecompositionofrealGDP.
Answer: D
Diff:1
18) Inthelongrun,highergovernmentbudgetdeficitswill
A) leadtoaredistributionofrealGDPfromprivatelyproducedgoodsandservicesto
governmentproducedgoodsandservices.
B) leadtoaredistributionofrealGDPfromgovernmentproducedgoodsandservicesto
privatelyproducedgoodsandservices.
C) causethepriceleveltogodownongovernmentgoodsbutnotonprivategoods.
D) leadtoareductionintheamountofgoodsandservicesproducedbythegovernmentand
privatesector.
Answer: A
Diff:1
19) Whatisthedifferencebetweentheshortrunandthelongrunwhenthereisfullemployment
andthegovernmentengagesindeficitspending?
A) RealGDPwillincreaseinboththeshortrunandthelongrun.
B) RealGDPwillincreaseinthelongrunbutnottheshortrun.
C) RealGDPwillincreaseintheshortrunbutnotthelongrun.
D) RealGDPwillnotincreaseineitherthelongrunortheshortrun.
Answer: C
Diff:1
20) WhichofthefollowinghasNOTbeenproposedasapossibleeconomicsolutiontoreducingthe
governmentdeficit?
A) Reducingexpenditures B) Increasingtaxesfortherich
C) Increasingthenumberofentitlements D) Increasingtaxesforeveryone
Answer: C
Diff:1
21) Asapossibleapproachtoeliminatingthegovernmentbudgetdeficit,increasingtaxesfor
everyonewould
A) meanonlyasmallincreaseintaxes.
B) leadtoaninflationarygap.
C) transfermoregoodsandservicestothegovernmentsector.
D) leadtoalargeincreaseintaxesforeveryworker.
Answer: D
Diff:1
22) Asapossibleapproachtoeliminatingthegovernmentbudgetdeficit,increasingtaxesonthe
richonlywould
A) leadtoasignificantincreaseintaxrevenues.
B) notleadtoasignificantincreaseintaxrevenues.
C) leadtoagreaternumberofentitlements.
D) leadtoanincreaseinrealGDP.
Answer: B
Diff:1
23) Anentitlementis
A) governmentspendingonthingslikemilitarysalaries.
B) guaranteedbenefitsundersomegovernmentprograms.
C) anotherwordforagovernmentbudgetsurplus.
D) thepaymentstotheprivatesectorinexchangeforgoodsandservices.
Answer: B
Diff:1
24) Legislatedfederalgovernmentpaymentsthatanyonewhoqualifiescanreceivearecalled
A) controllableexpenditures. B) afiscalstabilizer.
C) balancedexpenditures. D) entitlements.
Answer: D
Diff:1
25) WhichofthefollowingisNOTanentitlement?
A) Medicaid B) SocialSecurity
C) Federalgovernmentsalaries D) Medicare
Answer: C
Diff:1
26) Amongeconomists,itisgenerallybelievedthat
A) thefederalbudgetdeficitwillbeeliminatedwithin10years.
B) thepublicdebtwillbepaidoffwithin10years.
C) entitlementspendingwillcontinuetodecline.
D) thefederalgovernmentwillfinditdifficulttocutentitlementprograms.
Answer: A
Diff:1
27) GovernmentspendingthatchangesautomaticallywithoutactionbyCongressis
A) anoncontrollableexpenditure.
B) nationaldefense.
C) paymentstocontractorsforroutingservicesperformed.
D) discretionarypayments.
Answer: A
Diff:1
28) Thefastest-growingpartofthefederalbudgetis
A) nationaldefense. B) paymentsforservicesrendered.
C) entitlements. D) governmentsalaries.
Answer: C
Diff:1
29) Supposetheeconomyisinitiallyexperiencingarecessionary gap.Areductioninthesizeofthe

budgetdeficitwillcausewhichofthefollowingintheshortrun?
A) areductioninthesizeoftherecessionarygapandincreaseinrealGDP.
B) anincreaseinthesizeoftherecessionarygapanddecreaseinrealGDP.
C) anincreaseininflationandincreaseinaggregatesupply.
D) aninflationarygap.
Answer: B
Diff:2
30) Iftheeconomyisexperiencinganinflationarygapintheshortrun,anincreaseinthebudget
surplus
A) willreducethesizeoftheinflationarygap.
B) willincreasethesizeoftheinflationarygap.
C) willcauseanincreaseininflationandincreaseaggregatesupply.
D) willincreaseaggregatedemandandwillincreasethepricelevel.
Answer: A
Diff:2
31) Supposetheeconomyisinitiallyoperatingatfullemployment.Areductioninthesizeofthe
budgetdeficitwillcausewhichofthefollowinginthelongrun?
A) arecessionarygap. B) areductioninrealGDP.
C) aninflationarygap. D) noneoftheabove.
Answer: D
Diff:2
32) Noncontrollableexpendituresarecallednoncontrollablebecause
A) theyincreaseatthesamerateasthepublicdebt.
B) theychangewithoutcongressionalaction.
C) onlythepresidentcanapprovetheseentitlementpayments.
D) thepoliticalprocessdeterminesthesizeofthepayments.
Answer: B
Diff:1
33) Politicianshavesuggestedthatthebudgetdeficitcouldbereducedby
A) increasingtaxesandreducingexpenditures.
B) loweringtheinterestrates.
C) imposinghighertariffsonimportedgoods.
D) forbiddinginterestpaymentsongovernmentbondsoutsourcing.
Answer: A
Diff:1
34) Whichgovernmentprogramwouldbeconsideredanentitlementprogram?
A) nationaldefense B) subsidiesformasstransportation
C) lawenforcementinmajorU.S.cities D) SocialSecurity
Answer: D
Diff:2
35) Thefastestgrowingcomponentoftheannualfederalbudgetssince2000is
A) theeducationbudget. B) entitlementpayments.
C) fundingforhealthresearch. D) fundingforNASA.
Answer: B
Diff:1
36) Thelong-runeffectofincreasinggovernmentbudgetdeficits
A) isaredistributionofrealGDPfromprivatelyprovidedgoodstogovernmentprovided
goods.
B) isnoimpactonequilibriumrealGDP.
C) istoincreaseofpricelevel.
D) alloftheabove
Answer: D
Diff:2
A) Sincethemid-1940s,expendituresonnationaldefensehaveincreasedconsiderablyasa
percentageoftotalfederalgovernmentspending.
B) Sincethemid-1940s,expendituresonincomesecurityandhealthprogramshaveincreased
considerablyasapercentageoftotalfederalgovernmentspending.
C) Takentogether,expendituresonnationaldefenseandonincomesecurityandhealth
programsnowaccountforlessthanhalfofallfederalgovernmentspending.
D) Expendituresonnationaldefensenowaccountformorethantwiceasmuchfederal
governmentspendingasexpendituresonincomesecurityandhealthprograms.
Answer: B
Diff:2
38) Byapproximatelyhowmuchwouldthefederalgovernmenthavetoraiseeachworkersannual
taxestoeliminatethecurrentfederalbudgetdeficit?
A) Between$50and$100peryear B) Between$500and$1,000peryear
C) Between$1,500and$2,500peryear D) Between$5,000and$7,000peryear
Answer: D
Diff:1
39) Whatarethemacroeconomicconsequencesofabudgetdeficitwhentheeconomyisoperating
atfullemployment?Besuretodiscusstheeffectsintheshort-runandinthelong-run.
Answer: Intheshortrun,abudgetdeficitwillcreateaninflationarygap.RealGDPandpriceswill
increase.Inthelongrun,abudgetdeficitwillbeinflationaryandhavenoeffectonthe
fullemploymentlevelofrealGDP.ThedeficitwillleadtoaredistributionofrealGDP
withalargersharegoingtogovernmentprovidedgoodsandservices.
Diff:2
Chapter15
Money,Banking,andCentralBanking
15.1TheFunctionsofMoney
1) Inabartersystem,wewouldexpecttosee
A) manydifferentunitsofmoney.
B) moneyandgoodsexchangedforeachother.
C) wide-spreadfinancialinstitutions.
D) goodstradeddirectlyforothergoodsandservices.
Answer: D
Diff:1
Topic: 15.1TheFunctionsofMoney
2) Moneyfunctionsasa(n)
A) storeofvalue. B) unitofaccount.
C) mediumofexchange. D) alloftheabove.
Answer: D
Diff:1
3) Abarterarrangementessentiallymeans
A) acashlesstransaction. B) acreditdeal.
C) buyingwithanI.O.U. D) swappinggoodsforcash.
Answer: A
Diff:1
4) Forbartertooccurtheremustbe
A) hyperinflation.
B) adoublecoincidenceofwantsforeachgoodtobeexchanged.
C) onepersonwhopayscash.
D) twopeoplewillingtopaywithcredit.
Answer: B
Diff:2
5) Abarterarrangementsimplymeans
A) adirectexchangeofgoodswithouttheuseofmoney.
B) apromisetopayinthefuture.
C) thatgoldmustbeofferedfromoneparty.
D) thegovernmenthaspaidforthegoods.
Answer: A
Diff:1
6) Thedirectexchangeofgoodsandservicesforothergoodsandservicesisknownas
A) barter. B) purchasingpower.
C) intermediation. D) wholesaletrade.
Answer: A
Diff:1
7) Withoutanacceptedmediumofexchange,people
A) havetospecializeinoneareaofproduction.
B) havetorelyongoldorsilverinordertoexchangegoodsandservices.
C) havetoresorttobarterinordertoexchangegoodsandservices.
D) canefficientlyobtaingoodsandservices.
Answer: C
Diff:2
8) Asaresultofmoneyinaneconomy,
A) peoplearegreedierthaninabartereconomy.
B) stealingexistsandpeoplehavetofindwaystopreventtheft.
C) transactioncostsarehigherthanwouldbethecaseinabartereconomy.
D) realGrossDomesticProduct(GDP)andeconomicgrowtharegreaterthantheywouldbe
inabartereconomy.
Answer: D
Diff:2
9) Whichofthefollowingrepresentsafunctionofmoney?
A) mediumofexchange B) unitofaccounting
C) standardofdeferredpayment D) alloftheabove
Answer: D
Diff:1
Chapter15Money,Banking,andCentralBanking 659
10) Moneyisdefinedas
A) apersonsnetworth.
B) anythingpeoplegenerallyacceptinexchangeforgoodsandservices.
C) abyproductofabartereconomy.
D) anyfinancialinstrumentthatisbackedbygold.
Answer: B
Diff:1
11) WhichofthefollowingstatementsdoesNOTdescribeafunctionofmoney?
A) Astoreofvalue B) Ahedgeagainstinflation
C) Astandardofdeferredpayment D) Aunitofaccounting
Answer: B
Diff:1
12) Whenyoubuyatacoforbreakfast,youareusingmoneyasa
A) storeofvalue. B) standardofdeferredpayment.
C) mediumofexchange. D) unitofaccounting.
Answer: C
Diff:1
13) Whenmoneyisacceptedaspaymentinamarkettransaction,itisfunctioningasa
A) storeofvalue. B) unitofaccounting.
C) mediumofexchange. D) unitofinvestment.
Answer: C
Diff:1
14) Moneyasamediumofexchange
I. Facilitatestheexchangeofgoods
II. Reducestheincentivetobarter
Answer: C
Diff:1
15) Theuseofmoneyasamediumofexchange
I. lowerstransactioncosts.
II. permitsmorespecialization.
A) Ionly B) IIonly C) NeitherInorII D) BothIandII
Answer: D
Diff:2
16) Apricetagof$400foratabletdeviceisanexampleofmoneyas
A) amediumofexchange. B) aunitofaccounting.
C) astoreofvalue. D) atimedeposit.
Answer: B
Diff:1
17) Whenmoneyprovidesayardstickthatallowsindividualstocomparetherelativevaluesof
goodsandservices,itisfunctioningasa
A) mediumofexchange. B) unitofaccounting.
C) storeofvalue. D) standardofdeferredpayment.
Answer: B
Diff:2
18) Whenmoneyservesasastandardforcomparingvaluesofdifferentthings,itisfunctioningasa
A) storeofvalue. B) hedgeagainstinflation.
C) standardofdeferredpayment. D) unitofaccounting.
Answer: D
Diff:1
19) Tofunctionasmoney,somethingmustholditspurchasingpowerovertime.Thatis,itmustbe
a
A) storeofvalue. B) standardofdeferredpayment.
C) unitofaccounting. D) mediumofexchange.
Answer: A
Diff:1
20) Ifyousave$2,500foradownpaymentonanewcar,youareusingmoneyas
A) astoreofvalue. B) aunitofaccount.
C) amediumofexchange. D) astandardofdeferredpayment.
Answer: A
Diff:1
21) Tobeacceptedasmoney,anitemmustperformallofthefollowingfunctionsEXCEPT
A) serveasastoreofvalue.
B) beeasilyreproduced.
C) beamediumofexchange.
D) serveasastandardofdeferredpayment.
Answer: B
Diff:1
22) Ineconomics,moneyis
A) anothertermforincome.
B) afinancialinstrumentbackedbysomepreciousmetalsuchasgoldorsilver.
C) anythingthatpeoplegenerallyacceptinexchangeforgoodsandservices.
D) whateverthegovernmentdefinesittobe.
Answer: C
Diff:1
23) Whenyousetasidethemoneyyouhavetodayinordertopurchasegoodsandserviceslateron,
youareusingmoneyasa
A) mediumofexchange. B) standardofdeferredpayment.
C) unitofaccounting. D) storeofvalue.
Answer: D
Diff:1
24) Themostimportantfunctionofmoneyiswhenmoneyisusedasa
A) mediumofexchange. B) standardofdeferredpayment.
C) unitofaccounting. D) storeofvalue.
Answer: A
Diff:1
25) Forsomethingtoserveasmoney,itmustbe
A) backedbytheauthorityofthegovernment.
B) generallyacceptedbybuyersandsellers.
C) light,durable,andcommon.
D) convertibletogold.
Answer: B
Diff:2
26) WhichofthefollowingisNOToneofthefunctionsofmoney?
A) Mediumofexchange B) Sourceofwealth
C) Unitofaccounting D) Storeofvalue
Answer: B
Diff:1
27) Thefunctionofmoneyasastoreofvaluediminishesif
A) pricesofgoodsandservicesincrease. B) interestratesincrease.
C) peoplebegintobarter. D) moneyisnolongerbackedbygold.
Answer: A
Diff:1
28) WhichofthefollowingstatementsisNOTtrueaboutmoney?
A) Anythingthatservesasamediumofexchange,asaunitofaccounting,asastoreofvalue,
andasastandardofdeferredpaymentcanbecalledmoney.
B) Moneyisanymediumthatisuniversallyacceptedbysellersandcreditors.
C) Moneyisastandardofdeferredpayment.
D) Moneycanonlybecoinsandpaper.
Answer: D
Diff:2
29) Amediumofexchangeis
A) anyassetthatsellerswillacceptaspayment.
B) ameasurebywhichpricesareexpressed.
C) anassetthatisusedtosettlefuturedebts.
D) thethingtradedwhenbartertakesplace.
Answer: A
Diff:1
30) Anyassetthatsellerswillacceptaspaymentisa(n)
Answer: A
Diff:1
31) Withoutanacceptedmediumofexchange
A) therewouldbenotrade.
B) peoplewouldhavetorelyongoldorsilverinordertoexchangegoodsandservices.
C) goodsandserviceswouldbeexchangedbybarter.
D) pricesareverydifficulttodetermine.
Answer: C
Diff:2
32) Oneofthebenefitsofmoneyasamediumofexchangeisthat
A) itallowsforprivatetransactionssuchastradingvegetablesformedicalservices.
B) itallowsindividualstocomparetherelativevalueofgoods.
C) overtimeitwillbecomemorevaluablesothatindividualscanpurchasemoregoodsand
services.
D) itallowsforspecializationthatleadstoeconomicefficiencies.
Answer: D
Diff:1
33) Thedirectexchangeofgoodsandservicesforothergoodsandservicesisknownas
A) primitivetrade. B) nonmarkettrade.
C) barter. D) purchasingpowerparity.
Answer: C
Diff:1
34) Thedirectexchangeofgoodsandservicesforothergoodsandserviceswithouttheuseof
moneyis
A) astandardofdeferredpayment. B) barter.
C) astoreofvalue. D) financialintermediaries.
Answer: B
Diff:1
35) Whichfunctionofmoneyallowspeopletospecializeinareasinwhichtheyhaveacomparative
advantage?
A) Mediumofexchange B) Unitofaccounting
C) Storeofvalue D) Standardofdeferredpayment
Answer: A
Diff:2
36) Comparedtoabartereconomy,aneconomythatusesmoneywill
A) begreedier. B) bepoorer.
C) havemorecorruption. D) havemoreoutput.
Answer: D
Diff:2
37) WhichofthefollowingisNOTabenefitofmoneywhenusedasamediumofexchange?
A) Allowingindividualstospecialize
B) Allowingindividualstopayoffdebts
C) Allowingforsomeeconomicefficiencies
D) Providingeconomicgrowth
Answer: B
Diff:1
38) Asaunitofaccount,moneyisused
A) todefinepricesofallothergoods. B) topayofffuturedebts.
C) toholdpurchasingpowerovertime. D) toexchangeforgoodsandservices.
Answer: A
Diff:1
39) Thefunctionofmoneythatallowsindividualsamethodtocomparetherelativevalueofgoods
andservicesis
C) storeofvalue. D) liquidity.
Answer: B
Diff:1
40) Ameasurebywhichpricesareexpressedisa(n)
Answer: B
Diff:1
41) Thefunctionofmoneythatprovidesforacommonlyrecognizedmeasureofvaluefortheprice
systemisa(n)
Answer: B
Diff:1
42) Camelshavebeenusedasmoney.Whichfunctionofmoneywouldthistypeofmoneyperform
leastwell?
Answer: B
Diff:2
43) Whichtermbelowfitsclosesttomoneyfunctioningasaunitofaccounting?
A) Exchange B) Specialization C) Yardstick D) Liquid
Answer: C
Diff:2
44) Whichfunctionofmoneyallowsforcomparisonshopping?
Answer: B
Diff:1
45) Moneyservesasastandardofvalue,whichisanotherwayofsayingthatmoneyfunctionsas
A) amediumofexchange. B) aunitofaccounting.
C) astoreofvalue. D) standardofdeferredpayment.
Answer: B
Diff:2
46) Cigarettesservedasmoneyinsomeprisonerofwar(POW)campsduringWorldWarII.Given
this,wewouldexpecttoobserve
A) nooneeversmokingacigarette.
B) peopleusuallyresortingtobarterratherthanusingcigarettesasmoney.
C) pricesofothergoodsexpressedintermsofcigarettes.
D) onlygovernment-issuedcigarettesbeingacceptedasmoney.
Answer: C
Diff:3
47) Ifsomethingservesasastoreofvalue,weexpectittobe
A) divisible. B) durable.
C) ofintrinsicvalue. D) light.
Answer: B
Diff:2
48) Theabilityofanassettoholditsvalueovertimeisa(n)
Answer: C
Diff:1
49) Ifsomethingistoserveasmoneyitmustbeastoreofvalue.Thismeansthatitmust
A) bedivisible.
B) bethestandardbywhichallgoodsarecomparedinsettingprices.
C) holditspurchasingpowerovertime.
D) beliquid.
Answer: C
Diff:1
50) Moneythatwehavetodaycanbesetasidetopurchasethingsinthefuture.Thisfunctionof
moneyisknownas
Answer: C
Diff:1
51) Moneyprovidesawaytotransferwealthintothefuture.Thisfunctionofmoneyisknownas
Answer: C
Diff:1
52) Iflendersrefusetostatethedebtintermsofdollars,thendollarsarenota
Answer: D
Diff:1
53) Thepropertyofmoneythatallowsforthesettlingofdebtsthatmatureinthefutureis
A) liquidity. B) acceptability.
Answer: D
Diff:1
54) Apropertyofanassetthatmakesitdesirableforuseasameansofsettlingdebtsmaturingin
thefutureisa(n)
Answer: D
Diff:1
55) Whatcharacteristicdefinessomethingasmoney?
A) assetsdeclaredbythegovernmenttobeofvalue
B) amediumofexchangeuniversallyacceptedinaneconomy
C) notesyoucandepositinasavingsaccount
D) anassetthatearnsinterest
Answer: B
Diff:1
56) Therequirementforadoublecoincidenceofwantsoccurswhen
A) thereisinflation. B) thereisdeflation.
C) asystemofbarterisused. D) themediumofexchangeisliquid.
Answer: C
Diff:1
57) Totheextentthatmoneyservesasastoreofvalue,itallowsyouto
A) transferwealthintothefuture. B) comparisonshop.
C) beaneffectivenegotiator. D) findgoodbargains.
Answer: A
Diff:2
58) Totheextentthatmoneyservesasamediumofexchange
A) itbenefitsbothbuyersandsellers. B) itreducestransactioncosts.
C) iteliminatestheneedforbarter. D) Alloftheabovearecorrect.
Answer: D
Diff:2
59) Theadvantageofholdingmoneyasanassetisthat
A) moneyearnsinterest.
B) moneyisliquid.
C) moneyissafefromthievery.
D) thevalueofmoneyappreciatesovertime.
Answer: B
Diff:2
60) Theexistenceofmoneyinaneconomypromotesefficiencyby
A) creatinganequaldistributionofincome.
B) creatingincentivestobeself-sufficient.
C) facilitatingtrade,therebyallowingforgreaterspecialization.
D) allowingfortheformationofcorporationsaslegalentities.
Answer: C
Diff:2
61) WhichofthefollowingisNOTafunctionofmoney?
A) mediumofexchange B) formofcredit
C) storeofvalue D) standardofdeferredpayment
Answer: B
Diff:1
62) WhencomparingthepriceofaplasmaTVwiththepriceofanLEDTV,Amandadiscoveredthe
LEDwasmoreexpensive.Thisisanexampleofusingmoneyas
A) astoreofvalue. B) amediumofexchange.
C) aunitofaccounting. D) astandardofdeferredpayment.
Answer: C
Diff:1
63) IfJoebuysaMochaatStarbucks,hismoneyisactingasa
A) unitofaccounting. B) standardofdeferredpayment.
C) storeofvalue. D) mediumofexchange.
Answer: D
Diff:2
64) WhenKateandSamusedollarstocomparethemarketvaluesoftheirautomobiles,moneyis
actingasa
Answer: A
Diff:2
65) WhenAnnieputshermoneyinhersockdrawerforpurchaseslateron,moneyisactingasa
Answer: C
Diff:2
66) Amonetarysystemispreferableoverthebartersystembecauseoftheproblemsassociatedwith
A) cashleakages. B) thedoublecoincidenceofwants.
C) thelawofdiminishingmarginalutility. D) thelawofincreasingrelativecosts.
Answer: B
Diff:1
67) Amonetarysystemispreferableoverthebartersystembecauseit
A) reducestransactioncosts. B) iseasiertotrackbythegovernment.
C) limitscashleakages. D) isdeterminedbytheCongress.
Answer: A
Diff:1
68) Thedirectexchangeofonegoodorserviceforanotheriscalled
A) atokenexchange. B) astandardofdeferredpayment.
C) theexchangeofpurchasingpower. D) barter.
Answer: D
Diff:1
69) Forbartertooccurtherehastobe
A) acommoditytoserveasamediumofexchange.
B) aformalmarketwherepricesarequoted.
C) adoublecoincidenceofwants.
D) asinglecoincidenceofwants.
Answer: C
Diff:1
70) A$20pricetagonasweaterinadepartmentstoreisanexampleofmoneyservingasa
C) storeofvalue. D) standardofdeferredvalue.
Answer: B
Diff:1
71) Givingthestoreclerka$20billforasweaterpricedat$20isanexampleofmoneyservingasa
Answer: A
Diff:1
72) Ifafriendofyourskeepscashhiddenunderthemattress,heisusingmoneyasa
Answer: C
Diff:1
73) Yougotoworktoday,butwillgetyourpaycheckattheendofthemonth.Thisisanexampleof
moneyservingasa
Answer: D
Diff:1
74) WhichofthefollowingisNOTafunctionofmoney?
A) mediumofstoredvalue B) standardofdeferredpayment
C) unitofaccounting D) storeofvalue
Answer: A
Diff:1
75) ThepricetagonapairofNikeshoesillustrateshowmoneyperformsthefunctionofa
Answer: B
Diff:1
76) Perishablegoodssuchasmilkorfruitareneverusedasmoney,becausetheycannotfunctionas
a
Answer: C
Diff:1
77) SupposeyouareofferedanewiPodinexchangeforthirtyhoursofyourworkinyourfriends
garden.Thisisanexampleof
A) moneyasamediumofexchange.
B) moneyasastoreofvalue.
C) barter.
D) moneyasastandardofdeferredpayment.
Answer: C
Diff:2
78) Supposeyoupay$490.00foranewiPad.Thisisanexampleof
A) moneyasamediumofexchange.
B) moneyasastoreofvalue.
C) barter.
D) moneyasastandardofdeferredpayment.
Answer: A
Diff:2
79) Whatismoney?
Answer: Moneyisanymediumthatisuniversallyacceptedinaneconomybysellersofgoodsand
servicesaspaymentsforthegoodsandservicesandbycreditorsaspaymentfordebts.
Diff:1
80) Whyismoneyasamediumofexchangeimportantinaneconomy?
Answer: Moneypermitsmorespecializationandreducesthetransactioncostsassociatedwith
means-of-paymentuncertainty.Underbarter,onemightbeuncertainastowhatthe
otherpartymightbewillingtoaccept.Withmoney,thisuncertaintyisgreatlyreduced.
Diff:2
81) Whatarethefunctionsofmoney?
Answer: Moneyservesasamediumofexchange,whichmeansitisacceptedaspayment.Itserves
asaunitofaccountinwhichpricesareexpressed.Italsoservesasastoreofvalueandas
astandardofdeferredpayment.
Diff:1
15.2PropertiesofMoney
1) Giventhelistofassetsbelow,whichisthemostliquid?
A) $500worthofGeneralMotorscommonstock
B) $500worthofGeneralMotorsbonds
C) A$500travelerscheck
D) Aone-ouncegoldcoin
Answer: C
Diff:1
Topic: 15.2PropertiesofMoney
2) Thedegreetowhichanassetcanbeacquiredordisposedofwithoutmuchlossofnominal
valueortransactioncostsisknownas
A) fiatmoney. B) liquidity. C) fiducia. D) credit.
Answer: B
Diff:1
3) Anindividualwhodesiresthemostliquidassetpossiblewillhold
A) currency. B) asavingsaccount.
C) checkabledepositsatabank. D) U.S.governmentbonds.
Answer: A
Diff:1
4) Theabilitytoquicklyconvertanassetintocashis
A) disintermediation. B) thestandardofdeferredpayment.
C) financialintermediation. D) liquidity.
Answer: D
Diff:1
5) Whenanassetisdescribedasbeinghighlyliquid,whichoneofthefollowingcharacteristics
doesitpossess?
A) Itearnsahighrateofinterest,soitspurchasingpowerismaintainedwhenpricesrise.
B) Itiseasilyandreadilyconvertedintomoneywithoutanylossinpurchasingpower.
C) Thefacevalueoftheassetissomewhatlessthanitsvaluewhenconvertedintocurrency.
D) Theassetholdsitsvalueovertime.
Answer: B
Diff:1
6) Liquidityrefersto
A) theeasewithwhichanassetcanbeacquiredordisposedofwithoutincurringhigh
transactioncosts.
B) theexpectedreturnfromanasset.
C) theamountofindebtednessheldagainstanasset.
D) thenetworthoftheindividualinquestion.
Answer: A
Diff:1
7) Whichofthefollowingisthemostliquidasset?
A) smalldenominationtimedeposits B) currency
C) short-termtreasurybonds D) sharesofstock
Answer: B
Diff:1
8) Ahighlyliquidasset
A) hashightransactioncostsassociatedwithitssale.
B) mustbeheldforasubstantialperiodoftime.
C) generallyhasaverylimitedmarketforitsresale.
D) canbedisposedofeasilywithoutlossofvalue.
Answer: D
Diff:1
9) Thecostofholdingmoneyisbestdescribedas
A) thecostofprintingmoney.
B) thecostwhichpricedecreasesimposeonmoneyholders.
C) theyieldwhichispaidtomoneyholdersbytheU.S.government.
D) theyieldthatcouldhavebeenearnedhadtheassetbeenheldinanotherform.
Answer: D
Diff:1
10) Acorporatebondisnotasliquidascashbecausethebond
A) cannotbeconvertedtospendabledollarseitheruntilitmaturesorissoldtoanother
investor.
B) canbeexchangedonlyforthegoodsorservicesproducedbythecompanythatissuedthe
bond.
C) mustbeexchangedforastockcertificatebeforeitcanbeconvertedtospendablefunds.
D) representsanexchangeforgoldonly.
Answer: A
Diff:2
11) Ifanassetcanbeobtainedordisposedofwithoutmuchriskoflosingitsnominalvalue,itis
saidtobe
A) fiduciary. B) liquid. C) wealth. D) valuable.
Answer: B
Diff:1
12) Theopportunitycostofholdingmoneyismeasuredby
A) adollar.
B) thepriceofgovernmentbonds.
C) theinterestyieldthatcouldhavebeenearnedbyholdingsomeotherasset.
D) theliquidityofinterest-bearingassets.
Answer: C
Diff:1
13) Themostliquidassetis
A) gold. B) silver.
C) money. D) blue-chipstocks.
Answer: C
Diff:1
14) Thereasonwearewillingtoacceptmoneywithnointrinsicvalueisthat
A) papercurrencymaybeexchangedforfull-bodiedmoney.
B) themoneysupplyisbackedbyanequalamountofgoldandsilver.
C) wehaveafiduciarymonetarysysteminwhichcurrencyhasbothacceptabilityand
predictabilityofvalue.
D) thevalueofthemoneyvariesdirectlywithchangesinthepricelevel.
Answer: C
Diff:2
15) Inafiduciarymonetarysystem,thevalueofthemoneyissuedbyagovernmentisbasedon
A) thegoldheldinthatgovernmentsvaults.
B) publicconfidenceinthatcurrencysacceptabilityandpredictabilityofvalue.
C) theabilitytoconvertittosomeassetofvalue,likesilver.
D) itsbeingmadeoutofsomematerialwithamarketvalueequaltoabillsfacevalue.
Answer: B
Diff:2
16) Checkableanddebitableaccountsincommercialbanksandotherfinancialinstitutionsare
classifiedasmoneybecause
A) theyarenotliabilitiesofthebanks.
B) theysometimesearnaninterestincomeforthedepositor.
C) theyaregenerallyacceptableinthepaymentofdebt.
D) banksholdcurrencyintheirvaultsequaltothevalueofdemanddeposits.
Answer: C
Diff:1
17) Afiduciarymonetarystandardexistswhenthevalueofacurrency
A) isdeterminedbylaw.
B) isconvertibletoafixedquantityofgold.
C) dependsuponthepublicsconfidencethatthecurrencycanbeexchangedforgoodsand
services.
D) increaseswithinflation.
Answer: C
Diff:1
18) WhichofthefollowingisacorrectreasonforstatingthattheUnitedStateshasafiduciary
monetarysystem?
I. Ourmoneyisconvertibletoafixedamountofsilverorgold.
II. Ourmoneyhasapredictablevalue.
Answer: B
Diff:1
19) Asysteminwhichthevalueofcurrencyissuedbythegovernmentisbasedentirelyonpublic
faiththatthecurrencywillbeacceptableintradeis
A) afiduciarysystem. B) aprivatepropertysystem.
C) aGreshamsystem. D) asocialisticsystem.
Answer: A
Diff:1
20) Acheckableanddebitableaccount
A) isaveryilliquidasset.
B) isoneonwhichtheholdercanwritechecks.
C) mustbetradedonthestockexchange.
D) cannotserveasastoreofvalue.
Answer: B
Diff:1
21) Whichofthefollowingisacheckableanddebitableaccount?
A) Abrokerageaccountwithyourstockbroker
B) Asavingsaccount
C) Acheckingaccount
D) Alloftheabovearecheckableanddebitableaccounts.
Answer: C
Diff:1
22) Afiduciarymonetarysystemis
A) fullybackedbygold.
B) dependentonbarterforexchangesofgoodsandservices.
C) onewhichcannothaveanyinflation.
D) dependentonthepublicsfaithtoacceptthecurrency.
Answer: D
Diff:1
23) Transactionsdepositsinclude
A) creditcards. B) certificatesofdeposit.
C) linesofcredit. D) checkableanddebitableaccounts.
Answer: D
Diff:1
24) Moneyinafiduciarymonetarysystemisbackedby
A) gold.
B) thepublicsconfidencethattheassetswillcontinuetoserveasmoney.
C) theintrinsicvalueofthematerialsusedtomaketheassetsthatserveasmoney.
D) assetsownedbythegovernmentthatareintrinsicallyvaluable.
Answer: B
Diff:2
25) Thepurchasingpowerorvalueofmoney
A) isdeterminedbylaw. B) variesinverselywiththepricelevel.
C) dependsonthevalueofgold. D) variesinverselywiththeinterestrate.
Answer: B
Diff:2
26) Thepurchasingpowerofthedollar
A) variesdirectlywiththepriceofgold.
B) variesdirectlywiththepurchasingpowerofothermajorcurrenciessuchastheeuroand
theJapaneseyen.
C) variesdirectlywiththepricelevel.
D) variesinverselywiththepricelevel.
Answer: D
Diff:3
27) Whenthepricelevelgoesup,thepurchasingpowerofthedollar
A) alsoincreases.
B) falls.
C) remainsconstant.
D) variesdirectlywiththevalueoftheeuro.
Answer: B
Diff:2
28) Moneyisstillusefulduringtimesofinflationbecause
A) itstillretainsthecharacteristicofpredictabilityofvalue.
B) moremoneycanbemadesopeoplecanstillpurchasethegoodsandservicestheywant.
C) itisnotaliquidasset.
D) itsopportunitycostfallsasinflationrises.
Answer: A
Diff:2
29) Anassetisliquidifit
A) isofintrinsicvalue.
B) canbeexchangedforothergoodsandservices.
C) isastoreofvalue.
D) canbeobtainedordisposedofwithoutlosingmuchofitsnominalvalue.
Answer: D
Diff:2
30) Whichofthefollowingisthemostliquid?
A) certificateofdeposit B) cash
C) checkableanddebitableaccount D) stocksandbonds
Answer: B
Diff:2
31) Theliquidityofmoneyrefersto
A) theamountofgolditisbackedby.
B) thestandardofdeferredpaymentsandhowquicklythosepaymentscanbemade.
C) howquicklyitcanbedisposedofwithouthightransactioncosts.
D) asymmetricinformation.
Answer: C
Diff:1
32) Theopportunitycostofholdingmoney
A) ismeasuredbythealternativeinterestyieldobtainablebyholdingsomeotherasset.
B) isbasedonthefiduciarymonetarysystem.
C) referstotheamountofpapercurrencyheldbytheFed.
D) referstotheFedsroleasthelenderoflastresort.
Answer: A
Diff:1
33) Thecostofholdingmoneyis
A) transactionsaccounts. B) theopportunitycost.
C) theliquidityapproach. D) capitalcontrols.
Answer: B
Diff:1
34) Theopportunitycostofholdingadollaris
A) adollar.
B) thepriceofagovernmentbond.
C) lessthanadollar.
D) theinterestyieldthatcouldhavebeenearnedbyholdingsomeotherasset.
Answer: D
Diff:1
35) Anincreaseintheinterestratewouldinducepeopleto
A) sellsharesofstockandbuybonds,butwouldhavenoeffectontheirdesiretoholdmoney.
B) getridofalltheirmoneyandbuystockswithit.
C) selltheirleastliquidassetsandholdmoremoneyincaseinterestratesgoupagain.
D) holdasmallerfractionoftheirwealthintheformofmoney.
Answer: D
Diff:3
36) Thedegreetowhichanassetcanbeacquiredordisposedofwithoutmuchdangerofany
interveninglossinnominalvalueisknownas
A) transactiondeposits. B) atimedeposit.
C) liquidity. D) M2.
Answer: C
Diff:1
37) Anassetthatcanbeeasilydisposedofwithouthightransactionscostsandwithrelative
certaintyastoitsvalueis
A) solid. B) liquid. C) M1. D) M2.
Answer: B
Diff:1
38) Inafiduciarymonetarysystem,moneyisbackedby
A) thepublicsconfidencethattheassetswillcontinuetobeacceptedasmoney.
B) theintrinsicvalueofthematerialsusedtomaketheassets.
C) theassetsoftheinstitutionsthatissuethevariousassetsusedasmoney.
D) gold.
Answer: A
Diff:2
39) Asysteminwhichmoneyisissuedbythegovernmentanditsvalueisbaseduniquelyonthe
publicsfaiththatthecurrencyrepresentscommandovergoodsandservicesisthe
A) transactionsapproach. B) liquidityapproach.
C) fiduciarymonetarysystem. D) transactiondeposits.
Answer: C
Diff:1
40) TheU.S.fiduciarymonetarysystem
A) istheoneagencyresponsibleforprovidingcoinsandpapercurrency.
B) isonewheremoneyisnotconvertibletoafixedquantityofgold.
C) putscapitalcontrolsinplace.
D) controlstheprivatebankingsystem.
Answer: B
Diff:1
41) Theessentialdifferencebetweenpapermoneyandcoinsasformsofmoneyisthat
A) themetalliccontentofcoinsmakesthemmoreacceptableasmoney.
B) papermoneyissuedbytheFederalReserveBoardisbackedbygoldwhilecoinsarenot.
C) papermoneyservesasaunitofaccountwhilecoinsdonot.
D) paperispaperandnotmetal.Themetalismoredurable.
Answer: D
Diff:3
42) Evenwhenaparticularmonetaryassetisnotperformingoneofthefunctionsofmoneywell,
peoplestillusetheassetbecause
A) itisstilleasierthanrelyingonbarter.
B) theyhavenochoice.
C) onceanassetisdefinedasmoneyitisalwaysmoney.
D) peopleexpectmoneywillcomebackatalaterdate.
Answer: A
Diff:2
43) Afiduciarymonetarysystemultimatelyrestson
A) thevalueofthemetalbackingupthesystem.
B) thepublicsconfidenceinthesystem.
C) thevalueoftheassetsbackingupthesystem.
D) thedifficultyofcounterfeitingthecurrency.
Answer: B
Diff:2
44) Thevalueofadollarvaries
A) inverselywiththepriceofgold.
B) inverselywiththepricelevel.
C) directlywiththepricelevel.
D) directlywiththepurchasingpowerofothermajorcurrencies.
Answer: B
Diff:2
45) Evenwhenpeopleknowthepurchasingpowerofthecurrencyisdeclining,theycontinuetouse
thecurrencybecause
A) theyhavenootherchoice.
B) itsvalueisholdingbetterthananyotherasset.
C) itsvalueisstillpredictable.
D) itstillhassomeintrinsicvalue.
Answer: C
Diff:3
46) Whichofthefollowingwouldbeconsideredtheleast liquidasset?

A) currency B) checkabledeposits
C) travelerschecks D) sharesofstock
Answer: D
Diff:1
47) WhichofthefollowingassetsisthemostliquidintheUnitedStates?
A) U.S.TreasuryBonds B) U.S.currency
C) corporatebonds D) anantiquecar
Answer: B
Diff:1
48) Whichofthefollowingisthemostliquid?
A) realestate B) currency.
C) U.S.treasurybonds. D) sharesofstock.
Answer: B
Diff:1
49) Anassetisliquidif
A) itearnsinterest.
B) itisbackedbyagovernmentguarantee.
C) itcanbeexchangedforotheritemsofvaluewithouthightransactioncosts.
Answer: C
Diff:2
50) Oftheitemsinthefollowinglists,whichgofrommostliquidtoleastliquid?
A) acheckingaccount,ahouse,asix-monthcertificateofdeposit,sharesofstock
B) asix-monthcertificateofdeposit,sharesofstock,ahouse,acheckingaccount
C) acheckingaccount,acertificateofdeposit,sharesofstock,ahouse
D) ahouse,asix-monthcertificateofdeposit,sharesofstock,acheckingaccount
Answer: C
Diff:3
51) Inafiduciarymonetarysystem,
A) coinsgettheirvaluefromthepreciousmetalsofwhichtheyaremade.
B) moneygetsitsvaluefromtheconfidencethatthepublichasinitsacceptability.
C) papercurrencydoesnothavevalue,butbalancesincheckingaccountsdo.
D) checkingaccountbalancesdonothavevalue,butpapercurrencydoes.
Answer: B
Diff:2
52) ThetermfiduciarycomesfromtheLatinfiducia,whichmeans
A) value. B) gold.
C) money. D) trustorconfidence.
Answer: D
Diff:1
53) Afiduciarymonetarysystemmeans
A) thatthevalueofeachcurrencyisdeterminedbytheamountofgoldheldbyeachnation.
B) thatthecurrencyisbackedbyimplicitfaithingovernment.
C) thatmoneyislegaltender.
D) thatmoneyhascommodityvalue.
Answer: B
Diff:1
54) AfiduciarymonetarysystemhastohaveallofthefollowingEXCEPT
A) trust. B) theFederalReserveSystem.
C) acceptability. D) predictabilityofvalue.
Answer: B
Diff:1
A) Notallformsofcurrencyareacceptedequallywellbythepublicasamediumof
exchange.
B) Checkableanddebitableaccountbalancesarenotmoney,butcurrencyis.
C) Checkableanddebitableaccountsareconsideredmoneybylawinonly15states.
D) Thevalueofthedollarrisesalongwiththeincreasesintheconsumerpriceindex.
Answer: A
Diff:2
56) Totheextentthatthevalueofmoneyislesspredictable,itbecomes
A) moreacceptableasastandardofdeferredpayment.
B) moreacceptableasaunitofaccount.
C) moreacceptableasastoreofvalue.
D) lessacceptableasamediumofexchange.
Answer: D
Diff:3
57) Whichofthefollowingwouldbeconsideredatransactiondeposit?
A) passbooksavingsaccount B) checkingaccount
C) creditcardaccount D) 401(k)retirementaccount
Answer: B
Diff:2
58) WhattypeofintrinsicvalueorbackingdoesU.S.currencyhavetoday?
A) gold B) governmentbonds
C) none D) silver
Answer: C
Diff:2
59) ThemoneysupplyintheUnitedStatesisbackedby
A) faith. B) gold. C) silver. D) platinum.
Answer: A
Diff:1
60) UnitedStatescoinsandcurrencyarebackedby
A) silver.
B) gold.
C) reservesofforeigncurrencies.
D) confidencethattheywillretaintheirvalue.
Answer: D
Diff:1
61) Stockmarketpricequotationsareanexampleofmoneyservingasa
A) storeofvalue. B) mediumofexchange.
C) unitofaccounting. D) economicvalue.
Answer: C
Diff:1
62) Afiduciarymonetarysystemisdependenton
A) acceptabilityandpredictabilityofvalue. B) preciousmetalsbackingfiatmoney.
C) Congressionalmonetarysupport. D) anegativeinflationrate.
Answer: A
Diff:2
63) Whatisliquidity?Whyismoneythemostliquidofallassets?Whatisthecostofthisliquidity?
Answer: Liquidityisthedegreetowhichanassetcanbeacquiredordisposedofwithoutmuch
dangerofanylossinnominalvalueandwithsmalltransactioncosts.Moneyisthemost
widelyandreadilyacceptedassetthatcanbeexchangedforothergoodsandservices,so
itisthemostliquidasset.Thecostofthisliquidityistheinterestyieldgivenupthatwas
availablebyholdinganotherasset.
Diff:2
64) Whatisafiduciarymonetarysystem?
Answer: Afiduciarymonetarysystemisasysteminwhichcurrencyisissuedbythegovernment
anditsvalueisbasedonthepublicsconfidencethatthecurrencyrepresentscommand
overgoodsandservices.Thecurrencyusedinthesystemhasnointrinsicvalue.
Diff:1
65) Savingsaccounts,certificatesofdeposit,andbondspayinterestandstockspaydividends.Why
doesanyoneholdontocurrencyorotherformsofmoneyandlosethisextraincome?
Answer: Moneyismoreliquidthantheseotherassetsandthisliquidityisoftenvaluable.Ifone
wantstopurchasesomething,stockscannotbeused.Thestockmustbesoldand
paymenttothebrokermustbepaid.Thetransactioncostswillbegreaterthanthecostsof
holdingthemoneybalances.
Diff:2
66) Whymightpeopleinacountryrefusetoacceptthefiduciarymoneyinthecountry?
Answer: Ifpeoplebelievedthegovernmentwasabouttofailorbelievedthecurrencywas
becomingworthlessbecauseofinflation,theymaydecidetouseotherthingsasmoney.
Thesemightincludegoldorcurrenciesfromothercountriesthatareseenasmorestable.
Diff:3
15.3DefiningMoney
1) Thetwobasicwaystodefinemoneyare
A) thetransactionsapproachandthefiduciaryapproach.
B) thetransactionsapproachandtheM1approach.
C) thetransactionsapproachandtheliquidityapproach.
D) theliquidityapproachandthestoreofvalueapproach.
Answer: C
Diff:2
Topic: 15.3DefiningMoney
2) Whichofthefollowinginstitutionshasresponsibilityfordistributingcurrencyandcoinstothe
U.S.bankingsystem?
A) TheOfficeoftheComptrolleroftheCurrency
B) TheFederalReserveSystem
C) TheU.SBureauofEngravingandPrinting
D) TheU.S.Mint
Answer: B
Diff:2
3) Whichofthefollowinginstitutionshasresponsibilityforproducingthecoinsthatare
distributedintheUnitedStates?
A) TheOfficeoftheComptrolleroftheCurrency
B) TheFederalReserveSystem
C) TheU.SBureauofEngravingandPrinting
D) TheU.S.Mint
Answer: D
Diff:2
4) Whichapproachtomeasuringmoneyfocusesonthevalueofcurrency,transactiondeposits,
andtravelerschecks?
A) Thetransactionsapproach B) Theliquidityapproach
C) Nearmoneys D) M2
Answer: A
Diff:1
5) Thetransactionsapproachtomeasuringmoneystressestheroleofmoneyasa
Answer: A
Diff:2
6) WhichofthefollowingisNOTincludedusingthetransactionsapproachtomeasuringthe
moneysupply(M1)?
A) Currency B) Certificatesofdeposit
C) Transactiondeposits D) Travelerschecks
Answer: B
Diff:1
7) ThedesignateM1measureofmoneyconsistsof
A) themostliquidtypesofmoneyintheU.S.system.
B) smalltimedepositsonly.
C) creditcardsandATMcards.
D) goldandgoldcoins.
Answer: A
Diff:1
8) Checkabledepositaccountbalancesare
A) countedinthecalculationofthemoneysupply.
B) partofM2butnotpartofM1.
C) consideredcredit,butnotmoney.
D) onlyasmallcomponentofthemoneysupply.
Answer: A
Diff:1
9) WhichofthefollowingisNOTpartofM1?
A) Creditcards B) Checkingaccounts
C) Currency D) Travelerschecks
Answer: A
Diff:1
10) WhichoneofthefollowingisNOTapartoftheM1definitionofmoney?
A) Papercurrency(i.e.,FederalReservenotes)
B) Coins
C) Savingsaccounts
D) Checkableanddebitableaccounts
Answer: C
Diff:1
11) WhenweexaminetheU.S.moneysupply,thesmallestcomponentofM1is
A) currencyandcoins. B) transactiondeposits.
C) certificatesofdeposit. D) travelerschecks.
Answer: D
Diff:1
12) Thetransactionsapproachtomeasuringmoneyincludes
A) governmentbonds.
B) thevalueofsharesofstockincommercialbanks.
C) travelerschecks.
D) allofthese.
Answer: C
Diff:1
13) Thetransactionsapproachtomeasuringmoney(M1)includesallofthefollowingEXCEPT
A) travelerschecks. B) certificatesofdeposit.
C) checkingaccounts. D) currency.
Answer: B
Diff:1
14) AllofthefollowingareincludedinM1EXCEPT
A) coinandcurrency. B) moneymarketmutualfundshares.
C) travelerschecks. D) checkingaccountbalances.
Answer: B
Diff:1
15) WhichofthefollowingisNOTpartofM1?
A) Moneymarketdepositaccounts B) Coinandcurrency
C) Checkingdeposits D) Travelerschecks
Answer: A
Diff:1
16) Thriftinstitutions
A) receivemostoftheirfundsfromthepublicssavingsdeposits.
B) includecommercialbanksandinvestmentfirms.
C) includecreditunionsbutnotsavingsandloanassociations.
D) donotoffertransactiondeposits.
Answer: A
Diff:1
17) Atimedepositwithafixedmaturitydateofferedbybanksiscalleda
A) checkingaccount.
B) savingsdeposit.
C) small-denominationcertificateofdeposit.
D) corporatebond.
Answer: C
Diff:1
18) WhichofthefollowingisNOTpartofM1butisincludedinM2?
A) Currency
B) Small-denominationcertificatesofdeposits
C) Travelerschecks
D) Cash
Answer: B
Diff:1
19) Assetsthatcanbeeasilyconvertedintomoneywithoutsignificantlossofvalueare
A) transactionsbalances. B) nearmonies.
C) currencies. D) liabilities.
Answer: B
Diff:1
20) Small-denominationtimedepositsare
A) consideredpartofnearmoney.
B) includedinthedefinitionofbothM1andM2.
C) includedinthedefinitionofM1,butnotinM2.
D) thesameastransactiondeposits.
Answer: A
Diff:1
21) WhichofthefollowingisincludedinM2?
I. moneymarketmutualfunds
II. small-denominationcertificatesofdeposit
Answer: C
Diff:1
22) Whichofthefollowingcouldleastreasonablybeincludedintheliquidityapproachtodefining
themoneysupply?
A) Savingsdeposits B) Moneymarketmutualfundaccounts
C) Corporatebonds D) Travelerschecks
Answer: C
Diff:1
23) WhichofthefollowingistrueofM2?
A) ItislargerthanM1.
B) Itexcludessavingsdeposits.
C) Itdoesnotincludehighlyliquidcomponentsofthemoneysupply.
D) ItislessthanM1.
Answer: A
Diff:1
24) Theliquidityapproachtomeasuringmoneystressestheroleofmoneyasa
C) temporarystoreofvalue. D) standardofdeferredpayment.
Answer: C
Diff:2
25) Since1982,banksandthriftinstitutionshaveofferedatypeofsavingsaccountthatyieldsa
marketrateofinterestwithaminimumbalanceandalimitontransactions.Theseaccounts,
whichhavenominimummaturity,areknownas
A) certificatesofdeposit. B) moneymarketmutualfunds.
C) mutualfunds. D) repurchaseagreements.
Answer: B
Diff:1
26) Whatdifferentiatesasavingsdepositfromasmall-denominationcertificateofdeposit(CD)?
A) ACDhasafixedmaturitydate;asavingsdepositcanbewithdrawnatanytime.
B) Asavingsdepositcannotbewithdrawnbeforeitsmaturitydatewithoutincurringa
penalty;fundsinaCDareavailableatanytimewithnointerestpenalty.
C) Onlyasavingsdepositisatimedeposit.
D) Alldepositoryinstitutionsacceptsavingsdeposits,whereasonlyathriftinstitutioncan
issueaCD.
Answer: A
Diff:2
27) Alltransactiondepositsareincludedin
A) M1only. B) M2only.
C) bothM1andM2. D) savingsbalancesonly.
Answer: C
Diff:1
28) WhichofthefollowingisNOTincludedintheMZMdefinitionofmoney?
A) currency. B) moneymarketfunds.
C) travelerschecks. D) small-denominationtimedeposits.
Answer: D
Diff:2
Amount
Component (Billionsofdollars)
Currency $600
Coins 35
TransactionDeposits 570
SavingDeposits 450
TravelersChecks 8
SmallDenominationTimeDeposits 2,144
MoneyMarketMutualFundShares 1,430
OvernightEurodollars 16
AvailableCreditonCreditCards 1,000
29) Accordingtotheabovetable,thevalueofM1is
Answer: C
Diff:2
30) Accordingtotheabovetable,thevalueofM2is
Answer: B
Diff:2
31) Themoneysupplyis
A) therateatwhichtheFederalReserveBoardprintscurrency.
B) limitedtocurrencyandcoins.
C) theamountofmoneyincirculation.
D) therateatwhichtheFederalReserveBoardcreatesmoney.
Answer: C
Diff:1
32) ThelargestcomponentofM1is
A) currencyandcoins. B) travelerschecks.
C) transactiondeposits. D) timedeposit.
Answer: A
Diff:1
33) Thebestmeasureofmoneyis
A) coinsandcurrency.
B) theonebasedonthetransactionsapproach.
C) theonebasedontheliquidityapproach.
D) somethingeconomistshaveneveragreedon.
Answer: D
Diff:1
34) Thetransactionsapproachtomeasuringmoneyreliesontheroleofmoneyprimarilyasa
A) mediumofexchange. B) unitofaccount.
Answer: A
Diff:2
35) Amethodofmeasuringthemoneysupplybylookingatmoneyasamediumofexchangeisthe
A) fiduciarymonetarysystem. B) capitalcontrol.
C) transactionsapproach. D) liquidityapproach.
Answer: C
Diff:1
36) Amethodofmeasuringthemoneysupplybylookingatmoneyasatemporarystoreofvalueis
the
A) fiduciarymonetarysystem. B) capitalcontrol.
C) transactionsapproach. D) liquidityapproach.
Answer: D
Diff:1
37) Theliquidityapproachtomeasuringmoneystressestheroleofmoneyasa
Answer: C
Diff:2
38) Thekeyofficialdefinitionofthemoneysupplyis
A) onlycoinsandpapercurrencyincirculation.
B) onlytransactionsdepositsatbanks.
C) MZM.
D) M2.
Answer: D
Diff:1
39) Themoneysupplythatconsistsofcurrency,transactiondeposits,andtravelerschecksis
A) M1. B) M2.
C) thefiduciarymonetarysystem. D) theliquidityapproach.
Answer: A
Diff:1
40) Transactiondeposits
A) aredepositsinathriftinstitutionoracommercialbankonwhichacheckmaybewritten.
B) areonlydepositsthatyoucancheckonthroughtheInternet.
C) includesavingsaccounts.
D) areaccountsthatpayinteresttothedepositor.
Answer: A
Diff:1
41) Travelerscheckare
A) partofM1only. B) partofM2only.
C) partofM1andM2. D) notpartofM1orM2.
Answer: C
Diff:1
42) Ifthetransactionsapproachtomeasuringmoneyisused,thenthemoneysupplyconsistsof
A) currencyonly.
B) transactiondepositsonly.
C) currencyandtransactiondepositsonly.
D) currency,checkableanddebitabledeposits,andtravelerschecks.
Answer: D
Diff:1
43) WhichofthefollowingisNOTincludedinthemoneysupplywhenthetransactionsapproachis
used?
A) Moneymarketdepositaccounts. B) Travelerschecks.
C) Transactiondeposits. D) Currency.
Answer: A
Diff:1
44) WhichofthefollowingisNOTincludedinM1?
A) Currency. B) Transactiondeposits.
C) Savingdeposits. D) Travelerschecks.
Answer: C
Diff:1
45) Currencyconsistsof
A) onlycoinsmintedbytheU.S.Treasury.
B) onlyFederalReservenotes.
C) coinsmintedbytheU.S.TreasuryandFederalReservenotes.
D) coins,FederalReserveNotesandtravelerschecks.
Answer: C
Diff:1
Amount
Component (BillionsofDollars)
Currency $250
Coins 50
TransactionDeposits 600
SavingsDeposits 450
TravelersChecks 10
SmallDenominationTimeDeposits 1,200
MoneyMktMutualFundShares 500
OverNightEurodollars 20
OverNightRepurchase
AgreementsatCommercialBanks 65
AvailableCreditonCreditCards 900
LargeTimeDeposits 2,500
46) Refertotheabovetable.ThevalueofM1is
A) $860billion. B) $910billion. C) $1,360billion. D) $2,560billion.
Answer: B
Diff:2
47) Theliquidityapproachtomeasuringthemoneysupplyuses
A) M1only. B) nearmoneysonly.
C) M1plussomehighlyliquidassets. D) M2plussomehighlyliquidassets.
Answer: C
Diff:1
48) Aninterest-earningaccountthatcanbewithdrawnatanytimewithoutpaymentofapenaltyis
a
A) savingsdeposit. B) moneymarketdepositaccount.
C) timedeposit. D) certificateofdeposit.
Answer: A
Diff:1
49) Anaccountissuedbybanksyieldingamarketrateofinterestwithaminimumbalance
requirementandalimitontransactionsisa
Answer: B
Diff:1
50) Adepositinafinancialinstitutionthatrequiresnoticeofintenttowithdrawisa
Answer: C
Diff:1
51) Whichofthefollowingisatimedepositwithafixedmaturitydateofferedbybanksandother
financialinstitutions?
A) Savingsdeposit
B) Moneymarketdepositaccount
C) Timedeposit
D) Small-denominationcertificateofdeposit
Answer: D
Diff:1
52) Small-denominationtimedepositsarelessthan
A) $1million. B) $100,000. C) $10,000. D) $1,000.
Answer: B
Diff:1
53) U.S.papercurrencyisissuedbythe
A) UnitedStatesMint. B) FederalReserveSystem.
C) U.S.Treasury. D) largestcommercialbanks.
Answer: B
Diff:1
OutstandingU.S.TreasuryBills $900
CurrencyinCirculation $500
MoneyMarketDepositsAccounts $300
SmallDenominationTimeDeposits $700
TransactionDeposits $1,000
StockMarketShares $1,500
MoneyMarketMutualFundsBalances $500
SavingsDeposits $400
TravelersChecks $200
54) Basedontheinformationintheabovetable,thevalueofM1is
A) $2,100. B) $1,700. C) $3,000. D) $3,100.
Answer: B
Diff:2
55) Usingtheinformationintheabovetable,thevalueofM2is
A) $3,500. B) $3,600. C) $4,500. D) $5,500.
Answer: B
Diff:2
56) TheM1definitionofthemoneysupplyincludesallofthefollowingEXCEPT
A) currency. B) transactiondeposits.
C) savingsaccounts. D) travelerschecks.
Answer: C
Diff:1
57) IndefiningmoneyasM1,economistsexcludetimedepositsbecause
A) theyhavenointrinsicvalue.
B) theydonotdirectlyserveasamediumofexchange.
C) theyarenotrecognizedaslegaltender.
D) theyearnaninterestfortheirholders.
Answer: B
Diff:1
58) Ifpeoplewithdraw$10millionfromthenationsmoneymarketmutualfundsandredepositthe
fundsinvariouscheckableanddebitableaccounts,then
A) M1andM2willremainunchanged.
B) M1willincrease,M2willremainunchanged.
C) M1willincrease,M2willdecrease.
D) M1andM2willincrease.
Answer: B
Diff:2
59) Indefiningmoneyaccordingtothetransactionsapproach,youwouldwanttoinclude
A) thoseassetsthatareusedasastoreofvalue.
B) thoseassetsthatareusedasamediumofexchange.
C) thoseassetsthatareusedasaunitofaccount.
D) thoseassetsthatareusedasastandardofdeferredpayment.
Answer: B
Diff:2
A) TransactiondepositsarecountedinM2butarenotincludedinM1.
B) MostoftheU.S.currencyinexistencecirculatesoutsideU.S.borders.
C) Travelerschecksarenotconsideredtobemoneybecausetheyarenotvalidunlesssigned.
D) BalancesinmoneymarketdepositaccountsarecountedinM1butarenotincludedinM2.
Answer: B
Diff:3
61) TheM1measureofmoneyissuggestedbythe________approachtomeasuringmoney.
A) investment B) liquidity C) transactions D) security
Answer: C
Diff:1
62) TheM2measureofmoneyissuggestedbythe________approachtomeasuringmoney.
A) investment B) liquidity C) transactions D) security
Answer: B
Diff:1
63) WhichoneofthefollowingisincludedinM2butNOTinM1?
A) coinsandcurrency B) transactiondeposits
C) asavingsdepositwithoutasetmaturity D) large-denominationtimedeposits
Answer: C
Diff:2
64) WhichofthefollowingisNOTincludedintheM1moneysupply?
A) currency B) passbooksavingsaccounts
C) checkableanddebitableaccounts D) travelerschecks
Answer: B
Diff:1
65) WhichofthefollowingisincludedinM2butNOTinM1?
A) small-denominationtimedeposits B) transactiondeposits
C) currency D) travelerschecks
Answer: A
Diff:1
66) TheM2moneysupplyisequaltotheM1moneysupplyplus
A) smalltimedeposits,savingsdeposits,andretailmoneymarketmutualfundshares.
B) allcreditcardbalancesandretailmoneymarketmutualfundshares.
C) largetimedepositsandretailmoneymarketmutualfundshares.
D) everyaccountheldbycommercialbanks.
Answer: A
Diff:2
67) Small-denominationcertificatesofdepositsare
A) includedinM1butnotM2. B) includedinM1andM2.
C) includedonlyinM1. D) includedinM2butnotM1.
Answer: D
Diff:1
68) Thenarrowestdefinitionofthemoneysupplyis
A) M1. B) M2.
C) thedifferencebetweenM2andM1. D) thesumofM1andM2.
Answer: A
Diff:2
69) Moneymarketmutualfundsarefundspooledby
A) agroupofpeopletobuysharesofstocks.
B) agroupofpeopletobuystockmarketfunds.
C) agroupofpeopletobuyshortmaturitycreditinstruments.
D) agroupofpeopletobuyU.S.Treasurybonds.
Answer: C
Diff:2
70) Forasmall-denominationcertificateofdeposittobeincludedinM2itmustbeadenomination
oflessthan
A) $1,000,000. B) $100,000. C) $10,000. D) $1,000.
Answer: B
Diff:1
71) WhichofthefollowingassetsarecountedinM1?
A) transactiondeposits B) mutualfundsaccounts
C) bonds D) lineofcredit
Answer: A
Diff:1
72) WhichofthefollowingassetsarecountedinM2?
A) gold
B) balancesinretailmutualfundsaccounts
C) valueofoutstandingbonds
D) linesofcreditofferedbycommercialbanks
Answer: B
Diff:1
73) Supposeyour$50,000certificateofdepositmaturesandyoutransferthefundstoyourchecking
account.Thiscauses
A) M1todecreaseby$50,000andM2toincreaseby$50,000.
B) M1toincreaseby$50,000andM2toremainthesame.
C) bothM1andM2toincreaseby$50,000.
D) nochangetoeitherM1orM2.
Answer: B
Diff:2
74) WhichofthefollowingisNOTincludedinM1?
A) transactiondeposits B) currency
C) smalltimedeposits D) travelerschecks
Answer: C
Diff:1
75) ThelargestcomponentofM1is
A) transactiondeposits. B) currencyandcoins.
C) travelerschecks. D) savingsaccounts.
Answer: B
Diff:2
76) Checkingaccountsareincludedin
A) certificatesofdeposit. B) currency.
C) linesofcredit. D) M1.
Answer: D
Diff:1
77) Acheckingaccountbalanceinacommercialbankis
A) partofthecurrencysupply.
B) atimedeposit.
C) notliquidenoughtobeconsideredmoney.
D) anassetreadilyusableformosttransactions.
Answer: D
Diff:1
78) Atransactiondepositis
A) afiduciarymonetarysystem. B) acheckableanddebitableaccount.
C) opportunitycost. D) theliquidityapproach.
Answer: B
Diff:1
79) FederalReservenotesare
A) papercurrency. B) savingsbonds.
C) checksissuedbytheU.S.government. D) travelerschecks.
Answer: A
Diff:1
80) FortheUnitedStates,whatismoneybasedonthetransactionsapproachtomeasuringmoney?
Answer: Thetransactionsapproachlooksatwhatisusedasamediumofexchange.Forthe
UnitedStates,thisincludescurrency,transactiondeposits,andtravelerschecks.
Diff:1
81) Howdoestheliquidityapproachtomeasuringthemoneysupplydifferfromthetransaction
approach?
Answer: Theliquidityapproachfocusesonassetsthatcanbeconvertedintomoneyquicklyand
withoutlossofnominalvaluewhilethetransactionapproachonlylooksatassetsthatare
usedasamediumofexchange.Peoplecanearnsomeinterestwiththeseassetsandstill
convertthemtomoneyeasilyandcheaply.
Diff:2
15.4FinancialIntermediationandBanks
1) Thefinancialinstitutionsinourbankingsystemareallinthebusinessoftransferringfunds
fromsaverstoinvestors.Thisprocessisknownas
A) lobbying. B) parachuting.
C) moneylaundering. D) financialintermediation.
Answer: D
Diff:1
Topic: 15.4FinancialIntermediationandBanks
2) Supposeyouplaceyoursavingsinatimedepositatthebank,andthatbanklendssomeofthose
fundstoabusinessthatdesiresaloan.Thisisanexampleof
A) directfinance. B) indirectfinance.
C) asymmetricinformation. D) adverseselection.
Answer: B
Diff:1
3) Anitemtowhichabusinessholdslegalclaimiscalleda(n)
A) asset. B) liability. C) loan. D) timedeposit.
Answer: A
Diff:1
4) Acheckableanddebitableaccountis
A) aliabilitytoacommercialbank.
B) anassettoacommercialbank.
C) aliabilitytothehouseholdorfirmthathastheaccount.
D) anassetfortheFederalReserveSystem.
Answer: A
Diff:2
5) Financialinstitutionsparticipateinwhichofthefollowingactivities?
A) financialintermediation B) indirectfinance
C) theissuanceofloans D) alloftheabove
Answer: D
Diff:1
6) Financialintermediationisbestdefinedastheprocessbywhich
A) inflationiscontrolled.
B) corporationsissuenewstock.
C) liabilitiesareliquidated.
D) financialinstitutionsacceptsavingsfromsaversandmakeloanstoinvestors.
Answer: D
Diff:1
7) Financialintermediariesareinstitutionsthat
A) producemoneyforthefederalgovernment.
B) regulatetheactivitiesofstockandbondmarkets.
C) actasmiddlemenintheprocessofdirectingfundsfromsaverstoinvestors.
D) overseetheactivitiesofgovernmentinstitutionssuchastheFederalReserve.
Answer: C
Diff:1
8) Financialintermediariesareimportantbecause
A) theybringlendersandborrowerstogetherinawaythatlowerstransactioncosts.
B) theyprovidelargefundstothestockmarket.
C) theyemploylargenumbersofpeople.
D) theyincreasecostsforbanks.
Answer: A
Diff:2
9) Supposethatanewcustomeropensacheckingaccountandasavingaccount,placing$50,000in
each.Later,thebankmakesaloanof$100,000toabusinessfirm.Forthisbank,
A) assetsincreasedby$50,000becausethesavingaccountisanasset,whileliabilities
increasedby$50,000becausethecheckingaccountisaliability.
B) assetsincreasedby$100,000becausethecheckingandsavingaccountsareassets,and
liabilitiesincreasedby$100,000becausetheloanisaliability.
C) assetsincreasedby$100,000becausetheloanisanasset,andliabilitiesincreasedby
$100,000becausethecheckingandsavingaccountsareliabilities.
D) assetsremainedunchangedbutliabilitiesincreasedby$100,000becauseoftheloan.
Answer: C
Diff:2
10) WhichofthefollowingisNOTanexampleofafinancialintermediary?
A) Acreditunion B) Apensionfund
C) TheInternalRevenueService D) Aninsurancecompany
Answer: C
Diff:2
11) Thetermdepositoryinstitutionrefersto
A) commercialbanksonly.
B) creditunionsonly.
C) savingsandloanassociationsonly.
D) commercialbanks,creditunions,andsavingsandloanassociations.
Answer: D
Diff:1
12) Abusinessownerappliesforabankloantolaunchafairlylow -riskproject.Afterreceivingthe

loan,shecancelsthelow-riskprojectandinsteadusestheborrowedfundsforahigh -risk
venture.Thisisanexampleof
A) financialintermediation. B) thetransactionsapproach.
C) moralhazard. D) capitalcontrols.
Answer: C
Diff:2
13) Ifknowledgepossessedbyonepartyinafinancialtransactionisnotknowntotheotherparty,
________exists.
A) disintermediation B) asymmetricinformation
C) fraud D) nofinancialintermediation
Answer: B
Diff:1
14) Whobenefitsfromtheprocessoffinancialintermediation?
A) Saversonly.
B) Borrowersonly.
C) Bothsaversandborrowers.
D) Thereisnobenefit,becausemoneydoesnotcreatewealth.
Answer: C
Diff:1
15) Asymmetricinformationisasituationinwhich
A) informationpossessedbyonepartyinatransactionisnotknownbyanotherparty.
B) informationpossessedbyonepartyinatransactionisalsoknownbyanotherparty.
C) thegovernmenthasinformationthatitchoosestopassalongtoprivatefirms.
D) privatefirmshaveinformationthattheychoosetopassalongtothegovernment.
Answer: A
Diff:1
16) Theprocessinwhichfinancialinstitutionsacceptsavingsfrombusinesses,households,and
governmentsandlendthefundstootherbusinesses,households,andgovernmentsiscalled
A) centralbankingsystem. B) financialintermediation.
C) moralhazard. D) adverseselection.
Answer: B
Diff:1
17) Acentralbankis
A) thelargestbankinthecountry. B) thelargestbankinthecountryscapital.
C) abankersbank. D) aninternationalbank.
Answer: C
Diff:1
18) Financialintermediariesareinstitutionsthat
A) createmoney.
B) providecheckingaccounts.
C) setinterestrates.
D) transferfundsintheformofloansfromsaverstoinvestors.
Answer: D
Diff:1
19) AllofthefollowingareexamplesoffinancialintermediariesEXCEPT
A) creditunions. B) insurancecompanies.
C) retirementfunds. D) stockexchanges.
Answer: D
Diff:2
20) Possessionofinformationbyonepartyinafinancialtransactionbutnotbytheotherpartyis
A) asymmetricinformation. B) symmetricinformation.
C) informationalhazard. D) financialintermediation.
Answer: A
Diff:1
21) Twopeopleareinvolvedinaborrower/lendersituation,andonepersonhassuperior
knowledgeofitsowncurrentandfutureprospectsovertheotherperson.Thisisknownas
A) preventableinformation. B) symmetricinformation.
C) asymmetricinformation. D) deceptiveknowledge.
Answer: C
Diff:2
22) Thelikelihoodthatindividualswhoseektoborrowmoneymayusethefundsforunworthy,
high-riskprojectsis
A) asymmetricinformation. B) adverseselection.
C) moralhazard. D) financialintermediation.
Answer: B
Diff:1
23) Thepossibilitythataborrowermightengageinriskierbehaviorafteraloanhasbeenobtained
is
Answer: C
Diff:1
24) RussiaborrowedfundsfromtheInternationalMonetaryFundin1989inexchangeforagreeing
toundertakecertainchanges.However,afterreceivingthefunds,Russiaspentthefundson
otherthings,makingtheloanrepaymentmoreunlikelytooccur.Thissituationisreferredtoas
A) adverseselection. B) moralhazard.
C) asymmetricinformation. D) deceptiveknowledge.
Answer: B
Diff:2
25) Theprocessbywhichfinancialinstitutionsacceptsavingsfrombusinesses,householdsand
governmentsandlendthesavingstootherbusinesses,householdsandgovernmentsis
Answer: D
Diff:1
26) Whenyoudepositfundsinabankandthenthebanklendsthesefundstoaborrower,thebank
isengagedin
A) fiduciaryinvestment. B) fraudulentbehavior.
C) universalbanking. D) financialintermediation.
Answer: D
Diff:2
27) WhichofthefollowingisNOTanassetofcommercialbanks?
A) consumerloans B) businessloans
C) savingsdeposits D) homemortgages
Answer: C
Diff:2
28) Peoplewithsavingsoftendeposittheirfundsinacommercialbank,ratherthaninvestingthem
directlywithbusinessenterprises,inorderto
A) avoidtheproblemsassociatedwithfinancialintermediation.
B) avoidtheproblemsassociatedwithasymmetricinformation.
C) earnthehighestpossiblereturnfortakingontheriskiestinvestments.
Answer: B
Diff:2
29) Fromanaccountingpointofview,acheckingaccountshouldbeconsideredpartofabanks
A) assets. B) liabilities. C) profits. D) reserves.
Answer: B
Diff:2
30) WhichofthefollowingisNOTadescriptionofindirectfinance?
A) Youtakeoutastudentloanfromyourbank.
B) AninsurancecompanylendsfundstoIBM.
C) Youborrow$500fromyourbestfriend.
D) Youbuysharesinamutualfund.
Answer: C
Diff:1
31) Whichofthefollowingisafinancialintermediary?
A) theRedCross B) theInternalRevenueService
C) ashareofcorporatestock D) aninsurancecompany
Answer: D
Diff:1
32) WhichofthefollowingisNOTafinancialintermediary?
A) commercialbanks B) asavingsandloanassociation
C) theFederalReserveBankofNewYork D) theInternalRevenueService
Answer: D
Diff:1
33) Letussupposethatyouapplyforaloanwithabank.Youtellthebankthatyouaregoingto
remodelyourkitchen,butafteryougettheloanyougotoLasVegastogamblewiththemoney.
Yourbehaviorisanexampleof
A) adverseselection. B) directcreditallocation.
C) moralhazard. D) indirectcreditallocation.
Answer: C
Diff:3
34) Thefunctionthatbanksperformbyobtainingfundsfromhouseholds,businesses,and
governmentsandlendingthesefundstootherhouseholds,businesses,andgovernmentsis
knownas
A) financialintermediation. B) lendingintermediation.
C) fiscalintermediation. D) liquidityintermediation.
Answer: A
Diff:1
35) WhichofthefollowingisNOTareasonthatpeopletendtodeposittheirfundswithbanks
ratherthanlendtheirfundsdirectlytootherindividuals?
A) adverseselectionproblems B) asymmetricinformationproblems
C) moralhazardproblems D) liquidityproblems
Answer: D
Diff:3
36) Adverseselectionreferstothe
A) possibilitythattheborrowermayengageinriskierbehavioraftertheloanisobtained.
B) likelihoodthatapotentialborrowermayusethefundsthathereceivesforunworthy,high
riskprojects.
C) possessionofinformationbyonepartyinafinancialtransactionnotknownbytheother
party.
D) useofstatisticaldiscriminationinmakingloans.
Answer: B
Diff:2
37) Thepossibilitythataborrowermightengageinriskierbehaviorafteraloanismadeiscalled
A) adverseselection. B) liabilityaversion.
C) moralhazard. D) theriskofdefault.
Answer: C
Diff:1
38) Whichofthefollowingdescribesamoralhazardproblem?
A) aprocessbywhichindividualshavesubstantialresourcesdevotedtotheexchangeprocess
andneedtomakeaprofitortheywillbeadverselyaffected
B) apost-contractualproblemthatmayresultbecauseparticipantstotheexchangeprocess
haveinformationthatallowsthemtoactinanopportunisticmanner
C) aprocessbywhichindividualbuyersorsellerswithbetterinformationaremorelikelyto
participateinvoluntaryexchange
D) acontractualproblemthatresultsbecausemonopoliesexistinalleconomies
Answer: B
Diff:3
39) Supposeyouandafriendareshoppingataswapmeetandyouborrow$500fromyourfriend
topayforaguitarthatyouseethere.Thisisanexampleof
A) directfinancing. B) indirectfinancing.
C) moralhazard. D) transactioncosts.
Answer: A
Diff:2
40) Supposeyouborrow$500fromyourbanktopayforaguitar.Thisisanexampleof
A) directfinancing. B) indirectfinancing.
C) moralhazard. D) transactioncosts.
Answer: B
Diff:2
41) Financialinstitutionsthatreceivemostoftheirfundsfromthesavingsofthepublicare
A) thefiduciarymonetarysystem. B) theworldindexfund.
C) universalbanking. D) thriftinstitutions.
Answer: D
Diff:1
42) Whenyouuseadebitcardtopurchaseapairofjeans,youare
A) creatinga30-dayloanfromyourbanktotheseller.
B) creatinga30-dayloanfromthesellertoyourbank.
C) givingyourbankaninstructiontotransferfundsdirectlyfromyourbankaccounttothe
storesbankaccount.
D) creatinganovernightrepurchaseagreementbetweenyourbankandthestore.
Answer: C
Diff:1
43) Whenyoumakeapurchaseataretailstorebygivingyourbankaninstructiontotransferfunds
directlyfromyourbankaccounttothestoresbankaccount,youhavemostlikelymadethe
purchaseusing
A) cash. B) aloan. C) adebitcard. D) credit.
Answer: C
Diff:1
44) Explaintheroleoffinancialintermediation.
Answer: Financialintermediationistheprocessbywhichfinancialinstitutionsacceptsavingsfrom
householdsandlendthesavingstohouseholds,businesses,andthegovernment.Itisa
middlemanrolethatbringssaversandborrowerstogether.
Diff:2
15.5TheFederalReserveSystem:TheU.S.CentralBank
1) ThecentralbankfortheUnitedStatesis
A) ChaseManhattanBank. B) theCongressionalBank.
C) theFederalReserveSystem. D) FirstNationalBankofNewYork.
Answer: C
Diff:1
Topic: 15.5TheFederalReserveSystem:TheU.S.CentralBank
2) ThecurrentchairoftheBoardofGovernorsoftheFederalReserveis
A) AlanGreenspan. B) JohnSnow.
C) BenBernanke. D) HenryPaulson.
Answer: C
Diff:1
3) WhichofthefollowingistrueoftheFederalReserveSystem?
I. Itwasestablishedintheearly1980s.
II. ItservesasthecentralbankoftheUnitedStates.
Answer: B
Diff:1
4) TheFederalOpenMarketCommittee(FOMC)
A) determinesthetaxpolicyofthegovernment.
B) influencesthefuturegrowthofthemoneysupply.
C) overseesalltransactionsonthestockmarket.
D) lendstotheleastcredit-worthycustomers.
Answer: B
Diff:1
5) ThepartoftheFederalReserveSystemthatdeterminesmonetarypolicyactionsisthe
A) DistrictBankBoard.
B) FederalDepositInsuranceCorporation(FDIC).
C) FederalOpenMarketCommittee.
D) ComptrollersOffice.
Answer: C
Diff:1
6) TheBoardofGovernorsoftheFederalReserveSystemis
A) electedbythegeneralpublic.
B) composedofsevenmemberswhoareappointedbythePresidentandapprovedbythe
Senate.
C) composedofrepresentativesfromthecountrys12largestcommercialbanks.
D) composedof12membersoftheSenateandtheU.S.HouseofRepresentatives.
Answer: B
Diff:1
7) Monetarypolicyactionsaredeterminedbythe
A) FederalOpenMarketCommittee. B) NewYorkFederalReserveBank.
C) PresidentoftheUnitedStates. D) U.S.Congress.
Answer: A
Diff:2
8) WhoappointstheFederalReserveSystemsBoardofGovernors?
A) TheSecretaryoftheTreasury
B) ThePresidentoftheUnitedStates
C) TheSpeakeroftheHouseofRepresentatives
D) TheAmericanBankingAssociation
Answer: B
Diff:1
9) WhichofthefollowingisNOTapartoftheFederalReserveSystem?
A) TheTwelveDistrictFederalReservebanks
B) TheFederalOpenMarketCommittee
C) TheFederalDepositInsuranceCorporation
D) TheBoardofGovernors
Answer: C
Diff:1
10) TheBoardofGovernorsoftheFederalReserveSystemis
A) appointedbytheCongress.
B) electedbythepublic.
C) appointedbythePresidentwithapprovaloftheU.S.Senate.
D) electedbymembersoftheAmericanBankingAssociation.
Answer: C
Diff:1
11) WhichofthefollowingisNOTafunctionoftheFederalReserveSystem?
A) TheFedholdsreservesofdepositoryinstitutions.
B) TheFedsuppliestheeconomywithfiduciarycurrency.
C) TheFeddeterminesgovernmentspendingandtaxationpolicies.
D) TheFedactsasfiscalagentfortheUnitedStatesDepartmentoftheTreasury.
Answer: C
Diff:2
12) WhichofthefollowingisNOTafunctionoftheFed?
A) Regulatingthemoneysupplyintheeconomy
B) OfferingcheckingaccountstotheU.S.public
C) Actingasgovernmentsfiscalagent
D) Providingasystemofcheckcollectionandclearingfordepositoryinstitutions
Answer: B
Diff:1
13) WhichofthefollowingisNOTafunctionoftheFed?
A) Holdingreservesfordepositoryinstitutions
B) Supervisingmemberbanks
C) Regulatingthemoneysupply
D) Lendingfundstocredit-worthyprivatefirms
Answer: D
Diff:1
A) Providingforcheckcollectionandclearing
B) Holdingdepositsofmemberbanks
C) Supervisingmemberbanks
D) Makingloanstocollegestudents
Answer: D
Diff:1
15) Regardingthenationsmoneysupply,theFederalReserve
A) hasnoabilitytoinfluenceitsmagnitudeoritsrateofgrowth.
B) preciselysetstheamountofmoneyincirculationinconsultationwiththeCongress.
C) caninfluenceitsfuturegrowth.
D) givestheU.S.Treasurytheauthoritytoprintasmuchasitwishes.
Answer: C
Diff:1
I. TheFedcanperiodicallyandwithoutwarningexaminemembercommercialbanksto
ensurethattheyareconformingtocurrentbankingstandards.
II. TheFedhelpsthegovernmentcollectcertaintaxrevenuesandaidsinthepurchaseand
saleofgovernmentsecurities.
Answer: C
Diff:1
17) TheFedissaidtobethelenderoflastresortinthat
A) itstandsreadytolendtoanydepositoryinstitutionthatithasdecidedshouldnotfail.
B) itmakesloanstoindividualswhomcommercialbanksdonotbelievearecredit -worthy.
C) itchargesahigherinterestratetoborrowersthandoesanyotherbank.
D) itfunctionsasthegovernmentsbankonlywhencommercialbanksfailtodoso.
Answer: A
Diff:1
18) AllofthefollowingarefunctionsoftheFederalReserveSystemEXCEPT
A) supplyingtheeconomywithfiduciarycurrency.
B) providingasystemofcheckcollectionandclearing.
C) actingasthegovernmentsfiscalagent.
D) lendingfundstoriskycustomersdeniedcreditbycommercialbanks.
Answer: D
Diff:1
19) ItiswidelybelievedthattheFederalReservesmostimportantfunctionis
A) toprovideloanstothefederalgovernment.
B) toregulatethemoneysupply.
C) tosetthelegal,controlledconsumerinterestrates.
D) tolendtoriskycustomers.
Answer: B
Diff:1
A) Regulatingthemoneysupply
B) Makingloanstohouseholdsandbusinesses
C) Actingasthefiscalagentofthefederalgovernment
D) Supervisingmemberbanks
Answer: B
Diff:2
21) TheFederalReserveSystemactsasthegovernmentsfiscalagentby
A) auditingtaxpayers.
B) providingcheckingaccountservicesforthegovernment.
C) preparingthebudgetthePresidentpresentstoCongresseveryyear.
D) determininghowtofinanceadeficit.
Answer: B
Diff:1
22) WhichofthefollowingisNOTacorrectstatementabouttheFederalReservebanks?
A) TheysupervisememberbankswithintheFederalReserveSystem.
B) Theyprovideasystemofcheckcollectionandclearing.
C) Theyprovidetheeconomywithgoldbackedcurrency.
D) TheyactasbankerandfiscalagentfortheU.S.government.
Answer: C
Diff:1
23) Abankersbankisanothernamefor
A) afinancialintermediary.
B) agovernmentbank.
C) acentralbank.
D) theFederalDepositoryInsuranceAgency.
Answer: C
Diff:1
24) WhichofthefollowingisthecentralbankfortheUnitedStates?
A) theFederalDepositInsuranceCorporation(FDIC)
B) theUnitedStatesTreasury
C) theComptrolleroftheCurrency
D) noneoftheabove
Answer: D
Diff:1
25) TheU.S.centralbankperformsallthefollowingrolesforthenationEXCEPT
A) performingbankingfunctionsfortheirnationsgovernments.
B) lendingfundsdirectlytothepublic.
C) providingfinancialservicesforprivatebanks.
D) conductingtheirnationsmonetarypolicies.
Answer: B
Diff:1
26) TheFederalReserveSystemwasestablishedinwhichyear?
A) 1865. B) 1913. C) 1929. D) 1941.
Answer: B
Diff:1
27) TheBoardofGovernorsoftheFederalReserveSystemhashowmanygovernors?
A) 1. B) 5. C) 7. D) 12.
Answer: C
Diff:1
28) AllofthefollowingarefunctionsoftheFederalReserveSystemEXCEPT
A) toprovideloanstodevelopingcountries.
B) tosupplytheeconomywithfiduciarycurrency.
C) toholddepositoryinstitutionsreserves.
D) toactasthegovernmentsfiscalagent.
Answer: A
Diff:1
29) Byservingasthelenderoflastresort,
A) theFedprovidescheckclearingservices.
B) theFedsupervisesdepositoryinstitutions.
C) theFedcanpreventbankfailures.
D) theFedaidsinthesaleofgovernmentsecurities.
Answer: C
Diff:1
30) TheFederalReserveSystemisdividedintohowmanydistricts?
A) 1 B) 5 C) 7 D) 12
Answer: D
Diff:1
31) Controlofthemoneysupplyishandledby
A) Congress.
B) theFederalReserveSystem.
C) allcommercialbanks.
D) Congressandallmembercommercialbanks.
Answer: B
Diff:2
32) Depositoryinstitutionsmust
A) useandpayfortheservicesoftheFederalReserveSystem.
B) settheirinterestratesaccordingtoschedulesestablishedbytheFederalReserveSystem.
C) keepacertainpercentageoftheirdepositsasreserves.
D) turnoverapercentageoftheirprofitstotheFederalReserveSystemaspaymentfor
servicesprovidedbytheFed.
Answer: C
Diff:2
33) TheFed
A) isresponsibleformintingcoins.
B) distributesFederalReservenotes,whicharepapercurrency.
C) isresponsibleforconductingU.S.fiscalpolicy.
D) has15FederalReservebanksandgoverningboardsinNewYorkandChicago.
Answer: B
Diff:1
34) WhichofthefollowingisresponsibleforthedistributionofpapercurrencyintheUnitedStates?
A) theU.S.Treasury
B) theOfficeoftheComptrollerofthecurrency
C) theFederalReserve
D) alloftheabove
Answer: C
Diff:1
35) Checkcollectionandclearinghappen
A) atthebankwherethecheckwaswritten.
B) onlyatprivateclearingcenters.
C) attheFedandatprivateclearingcenters.
D) onlyattheFed.
Answer: C
Diff:1
36) WhichofthefollowingisNOTtrueaboutthedutiestheFedperformsforthefederal
government?
A) TheFederalReserveisthebankerandfiscalagentofthefederalgovernment.
B) TheU.S.TreasurycontrolstheFed.
C) TheFederalReserveaidsinthepurchaseandsaleofcertaingovernmentsecurities.
D) TheU.S.TreasuryhasacheckingaccountattheFed.
Answer: B
Diff:2
37) Asalenderoflastresort,theFed
A) isobligatedtobailoutanydepositoryinstitutioninthecountrythatisinfinancial
difficulty.
B) protectsthedepositsof$100,000orlessinallcommercialbanksinthecountry.
C) providesloanstobanksexperiencingtemporaryliquidityproblems.
D) bailsoutanycorporationthegovernmenthasdecidedshouldnotfail.
Answer: C
Diff:2
38) ThemostimportantfunctionoftheFedisto
A) provideasystemforcollectingandclearingchecks.
B) collecttaxes.
C) supportthefederalgovernmentsdeficitspendingbybuyinggovernmentsecurities.
D) regulatethemoneysupply.
Answer: D
Diff:2
39) AllofthefollowingarefunctionsoftheFedEXCEPT
A) providingpapercurrency.
B) enforcinginternationaltradeagreements.
C) servingasamechanismforclearingchecks.
D) thebankerandfiscalagentforthegovernment.
Answer: B
Diff:1
40) WhichofthefollowingdepositoryinstitutionsisNOTregulatedbyagovernmentagency?
A) Savingsandloanassociations
B) Creditunions
C) CommercialbanksthatarenotpartoftheFederalReserveSystem
D) Noneoftheabove:Alldepositoryinstitutionsareregulatedbysomegovernmentagency
Answer: D
Diff:2
41) Whichofthefollowingissolelyresponsiblefordeterminingchangesinthemoneysupplyinthe
UnitedStates?
A) theU.S.Treasury B) theComptrolleroftheCurrency
C) theFederalOpenMarketCommittee D) thechairmanoftheFederalReserve
Answer: C
Diff:2
42) WhichoneofthefollowingisafunctionoftheFederalReserveSystem?
A) providingtheeconomywithcurrency B) providingasystemforcheckclearing
C) servingasalenderoflastresort D) alloftheabove
Answer: D
Diff:3
43) WhymighttheFederalReserveinterveneinforeigncurrencymarkets?
A) toensurethesafetyofoverseasinvestmentsforbanks
B) toensurethesafetyofoverseasinvestmentsforprivateinvestors
C) toensurethesafetyofoverseasinvestmentsforpensionfunds
D) tomaintainadesiredexchangerateforthedollar
Answer: D
Diff:2
44) TheFederalReserveBankwasfirstestablishedintheU.S.byanActofCongresspassedin
A) 1789. B) 1861. C) 1913. D) 1947.
Answer: C
Diff:1
45) TheBoardofGovernorsoftheFederalReserveSystemhas
A) 7membersserving14yearterms. B) 7membersserving4yearterms.
C) 12membersserving14yearterms. D) 12membersserving4yearterms.
Answer: A
Diff:2
46) TheFederalReserveSystemhas
A) 7districtbanks. B) 12districtbanks.
C) 24districtbanks. D) 50districtbanks.
Answer: B
Diff:1
47) HowmanyFederalReservedistrictbanksarethereintheUnitedStates?
A) 1 B) 5
C) 7 D) noneoftheabove.
Answer: D
Diff:1
48) Thefiscalagentforthefederalgovernmentis
A) theUnitedStatesTreasury. B) theUnitedStatesTreasurer.
C) theComptrollerofCurrency. D) theFederalReserveSystem.
Answer: D
Diff:1
49) AmajorfunctionoftheFederalReserveSystemis
A) theimplementationoffiscalpolicyforthefederalgovernment.
B) thecontrolofthemoneysupply.
C) thecontrolofgovernmentspending.
D) thecontroloftaxingpolicy.
Answer: B
Diff:2
A) supplyfiduciarycurrencytotheeconomy
B) provideasystemforcheckcollectionandclearing
C) implementfiscalpolicy
D) regulatethemoneysupply
Answer: C
Diff:2
51) WhoappointsthechairoftheFederalReserveSystem?
A) theSenateandCongress
B) memberbanksoftheFederalReserveSystem
C) thePresidentoftheUnitedStates
D) theFederalOpenMarketCommittee(FOMC)
Answer: C
Diff:2
52) ThepartoftheFederalReserveSystem(theFed)thatsetsreserverequirementsis
A) theFederalOpenMarketCommittee. B) theFederalAdvisoryCommittee.
C) theFederalReservedistrictbanks. D) theBoardofGovernors.
Answer: D
Diff:2
53) ThepartoftheFederalReserveSystem(theFed)that holdsthereservebalancesofdepository

institutionsis
Answer: C
Diff:2
54) ThepartoftheFederalReserveSystem(theFed)thatdirectsthebuyingandsellingofU.S.
governmentsecuritiesis
Answer: A
Diff:2
55) ThepartoftheFederalReserveSystem(theFed)thatsupervisesandregulatesmemberbanksis
Answer: D
Diff:2
56) AllofthefollowingarefunctionsoftheFederalReserveSystem(theFed)EXCEPT
A) supplyingcurrency. B) checkclearing.
C) regulationofthemoneysupply. D) lenderoflastresortforconsumers.
Answer: D
Diff:2
57) FederalReservenotesare
A) aliabilityoftheFederalReserveSystem.
B) anassettotheFederalReserveSystem.
C) bothanassetandaliabilitytotheFederalReserveSystem.
D) aliabilitytotheUnitedStatesTreasury.
Answer: A
Diff:2
58) Thepotentialforafinancialbreakdownatlargeinstitutionstospreadthroughoutthefinancial
systemiscalled
A) asystemicrisk. B) atoo-large-to-failproblem.
C) anaverseselectionproblem. D) amoralhazard.
Answer: A
Diff:1
59) Afterthefinancialcrisisofthelate2000s,PresidentObamaandCongressconsideredaddingto
theFederalReservesfunctionsbymakingitthenationsprimaryregulatorof
A) systemicrisk. B) defaultrisk.
C) creditrisk. D) investmentrisk.
Answer: A
Diff:1
60) Whatisthetypicalroleofacentralbank?
A) Itservesasabankforthenationaltreasury.
B) Itregulatesdepositoryinstitutions.
C) Itservesasalenderoflastresort.
D) Alloftheabove.
Answer: D
Diff:1
61) Thepotentialforafinancialbreakdownatonefinancialinstitutiontospreadthroughoutthe
financialsystemisknownasa
A) lendingrisk. B) moralhazard. C) liquidityrisk. D) systemicrisk.
Answer: D
Diff:1
62) In2010,PresidentObamasignedintolawthatmadetheFederalReserveasthenations
A) largestprivatebank. B) federalincometaxcollector.
C) fiscalpolicymakingunit. D) regulatorofsystemicfinancialrisk.
Answer: D
Diff:1
63) ThemembersoftheFederalOpenMarketCommitteeare
A) theTreasurysecretary,theheadoftheFederalDepositInsuranceCorporation,andthe
ComptrolleroftheCurrency.
B) thesevenmembersoftheFedsBoardofGovernorsandfiveoftheFederalReservebank
presidents.
C) thePresident,theSpeakeroftheHouseofRepresentatives,andtheSenateMajority
Leader.
D) thefivetopofficialsattheFederalReserveBankofNewYorksTradingDesk.
Answer: B
Diff:2
64) TheFedisthebankersbank.WhatfunctionsoftheFedareinvolvedinthisrole?Whatarethe
otherimportantfunctionsoftheFed?
Answer: TheFedholdsreservesofbanks,lendstobankswhentheirreservesarelow,and
providesasystemforcheckcollectingandclearing.Otherimportantfunctionsinclude
providingfiduciarycurrency,actingasthegovernmentsfiscalagent,supervising
memberbanks,andregulatingthemoneysupply.
Diff:2
65) IntheUnitedStates,whodeterminesmonetarypolicy?Whatisthemajortoolusedtodetermine
monetarypolicy?
Answer: TheFederalReserveBanksFederalOpenMarketCommitteedeterminesmonetary
policy.ThecommitteeismadeupoftheBoardofGovernorsand5reservebank
presidents.TheirmaintoolisbuyingandsellingexistingU.S.governmentsecuritiesin
openmarkets.
Diff:2
15.6FractionalReserveBanking,theFederalReserve,andtheMoneySupply
1) Goldsmithswereabletopracticeanearlyformoffractionalreservebankingbecausetheyknew
that
A) peoplewererelativelyunsophisticatedintheirfinancialtransactions.
B) goldwasthemajorformofmoney.
C) notalldepositorswouldclaimtheirgoldatthesametime.
D) golddidnotserveasaunitofaccount.
Answer: C
Diff:1
Topic: 15.6FractionalReserveBanking,theFederalReserve,andtheMoneySupply
2) Asysteminwhichdepositoryinstitutionsholdreservesthatarelessthantheamountoftotal
depositsiscalled
A) fiatmoneybanking. B) fractionalreservebanking.
C) centralbankingsystem. D) requiredreservebanking.
Answer: B
Diff:1
3) Fractionalreservebankingreferstoabankingsysteminwhich
A) bankdepositsarelessthanbankreserves.
B) bankreservesareonlyafractionoftotaldeposits.
C) bankreservesareonlyafractionofrequiredreserves.
D) bankloansarelessthanbankreserves.
Answer: B
Diff:1
4) Ifbanksengageinfractionalreservebanking,itmeansthat
A) theyneverrunshortofcurrency.
B) theyholdlessthan100percentoftheirdepositsasreserves.
C) afractionoftheirlegalreservesareheldastop-gradegovernmentsecurities.
D) theydonotholdanyexcessreserves.
Answer: B
Diff:1
5) Fractionalreservebankingcanbethoughtofasabank
A) withholdingaportionofitstotaldepositsthatarenotloanedout.
B) holdingdepositsequaltoitsnetworth.
C) payingafractionofitsprofittodepositors.
D) loaningoutallofitsreserves.
Answer: A
Diff:2
6) IntheUnitedStates,wheredodepositoryinstitutionsholdtheirreserves?
A) Intheirownvaultsintheformofpreciousmetalssuchasgoldandsilver
B) InaccountswiththeU.S.DepartmentoftheTreasury
C) EitherasvaultcashoronreservewithFederalReservedistrictbanks
D) AllreservesmustbeheldataFederalReservedistrictbank
Answer: C
Diff:2
7) Afractionalreservebankingsystemisasystemwhereby
A) bankskeepatleast100percentoftheirdepositsonhandasreserves.
B) bankskeeponlyafractionoftheirdepositsonhandasreserves.
C) acentralbanktellsallbankswhatfractionofthepopulationtheycanserve.
D) banksspecializesothatonetypeofbankhandlesonekindofdepositandanothertypeof
bankhandlesanothertypeofdeposit.
Answer: B
Diff:1
8) Withfractionalreservebanking,
A) bankscannotgenerateprofits.
B) monetarypolicywillbeineffective.
C) banksretainonlyaportionoftheirdepositsintheirvaultsoratFederalReservebanks.
D) bankscanactassecuritiesbrokers.
Answer: C
Diff:1
9) Abankwith$200millionintransactiondepositskeeps$20millionincashinthebankvault,$10
millionindepositsattheFed,and$5millioningovernmentsecuritiesinthebankvault.Itstotal
reservesequal
Answer: C
Diff:2
10) Banksdonotneedtokeepalloftheirdepositsonhandasreservesbecause
A) onlyafractionofdepositsarewithdrawnatanyonetime.
B) FDICprotectsbanksfromexcessivewithdrawaldemands.
C) thereistoomuchriskofbankrobberies.
D) theycanalwaysgeneratenewreservesthroughthemoneycreationprocess.
Answer: A
Diff:2
11) Totalreservesare
A) depositsheldbyFederalReservedistrictbanksfordepositoryinstitutions,plusdepository
institutionsvaultcash.
B) reservesthatadepositoryinstitutionmustholdintheformofvaultcash.
C) reservesthatdepositoryinstitutionsareallowedtoclaimasreserves.
D) anyitemthatlegallyfunctionsasmoney.
Answer: C
Diff:2
12) DepositsheldbyFederalReservedistrictbanksfordepositoryinstitutions,plusdepository
institutionsvaultcashareknownas
A) reserves. B) asweepaccount.
C) adverseselection. D) thediscountrate.
Answer: A
Diff:1
13) Totalreservesofprivatebanksare
A) allcustomerdeposits.
B) depositsheldattheFedandvaultcash.
C) theminimumamountbanksneedtoholdagainsttimedeposits.
D) federalreservenotes.
Answer: B
Diff:1
14) Totalreservesare
A) requiredreservesplusvaultcash. B) requiredreservesplusexcessreserves.
C) requiredreserves. D) excessreserves.
Answer: B
Diff:1
15) Thereserveratiois10%andabankhas$600,000in transaction deposits.Theamountofreserves

equals
A) $6,000.
B) $60,000.
C) $600,000.
D) undeterminablewithoutinformationoncashreserves.
Answer: B
Diff:1
16) Abankwith$100millionindepositshas$15millionofcashinthebank,$10millionindeposits
withtheFed,and$15millioningovernmentsecuritiesinitsvault.Itstotalreservesequal
Answer: C
Diff:2
17) Underafractionalreservebankingsystem,
A) bankskeepafractionoftheirdepositsonhandasreserves.
B) bankskeepafractionoftheirreservesonhandasdeposits.
C) bankskeepalloftheirdepositsonhandasreserves.
D) bankskeepalloftheirreservesonhandasdeposits.
Answer: A
Diff:1
depositsis
A) theFederalReserveSystem. B) thefederalfundsmarket.
C) sweepaccounts. D) fractionalreservebanking.
Answer: D
Diff:1
19) Janehasjustdeposited$2,000inhercheckingaccount.Sheknowsthatthebankwillkeeppart
ofthesefundsonhandandloanouttherest.Thisisanexampleof
A) theFederalReserveSystem. B) asweepaccount.
C) fractionalreservebanking. D) excessreserves.
Answer: C
Diff:2
20) Inafractionalreservebankingsystem,
A) banksarerequiredtokeepalldepositsonhandsothattheycanpaytheirdepositorswhen
theydesiretowithdrawfunds.
B) banksarerequiredtokeepafractionofdepositsinbonds.
C) banksarerequiredtokeepafractionofalldepositsonhandandsendtheresttotheFed.
D) banksdonotkeepsufficientreservesonhandtocover100percentoftheirdepositors
accounts.
Answer: D
Diff:1
21) Fractionalreservebankingbegan
A) intheearlytwentiethcentury. B) intheearlynineteenthcentury.
C) intheMiddleAges. D) inancientGreece.
Answer: D
Diff:2
depositsis
A) afractionalreservebankingsystem. B) apercentagereservebankingsystem.
C) aratioreservebankingsystem. D) alegalreservebankingsystem.
Answer: A
Diff:2
23) Theconceptofholdingreserves,suchasgold,thatarelessthanthevalueofthetotaldeposits
A) isknownasfractionalreservebanking.
B) hasbeenillegalsincethepassageoftheFinancialServicesModernizationActof1999.
C) isknownasnon-creditbanking.
D) Noneoftheabovearecorrect.
Answer: A
Diff:2
24) Fractionalreservebankingisasysteminwhich
A) depositoryinstitutionspayafractionofadvertisedinterestrates.
B) afractionofbankingservicesmustbeprovidedbydepositoryinstitutions.
C) depositoryinstitutionsholdafractionoftotaldepositsinreserve.
D) themoneysupplyisasetfractionoftheU.S.goldreserves.
Answer: C
Diff:2
25) Fractionalreservebankingreferstoasysteminwhichthedepositoryinstitution
A) holdsreservesequaltoitsdeposits. B) holdsreservesgreaterthanitsdeposits.
C) holdsreserveslessthanitsdeposits. D) holdszeroreserves.
Answer: C
Diff:2
26) Astatementofassetsandliabilitiesofanybusinessentityiscalled
A) anincomestatement. B) acashflowstatement.
C) abalancesheet. D) astatementofnetworth.
Answer: C
Diff:3
27) WhichofthefollowingwouldNOTbeanassetonabanksbalancesheet?
A) Loansoutstanding B) Bankbuilding
C) Cashinthevault D) Transactionsdeposits
Answer: D
Diff:3
28) Whichofthefollowingactionshasno effectonthetotalmoneysupply?

A) TheFederalOpenMarketCommitteebuysgovernmentsecurities.
B) TheFederalOpenMarketCommitteesellsgovernmentsecurities.
C) Thereisatransferofdepositsfromonebanktoanotherbank.
D) Thereischangeinthemoneymultiplier.
Answer: C
Diff:1
29) Givenarequiredreserveratioof20percent,acommercialbankthathasreceivedanewdeposit
of$100canmakeadditionalloansof
A) $0. B) $20. C) $80. D) $400.
Answer: C
Diff:1
30) Followinganewdepositof$500,theloansofacommercialbankincreaseby$400.Inthis
situation,thereserveratioismostlikely
Answer: B
Diff:1
31) Thereserveratiois10percent.Ifthebankreceivesacustomerdepositof$100,000,thenan
immediateeffectis
A) areductioninthebankstotalassetsofexactly$10,000.
B) areductioninthebankstotalliabilitiesofexactly$10,000.
C) nochangeinthebankstotalassetsortotalliabilities.
D) anincreaseinthebanksreservesofexactly$10,000.
Answer: D
Diff:2
32) Otherthingsbeingequal,ifthereserveratioisraisedfrom10percentto20percent,
A) minimumpotentialvalueofthemoneymultiplierrisesfrom0.10to0.20.
B) minimumpotentialvalueofthemoneymultiplierfallsfrom100to50.
C) maximumpotentialvalueofthemoneymultiplierrisesfrom10to20.
D) maximumpotentialvalueofthemoneymultiplierfallsfrom10to5.
Answer: D
Diff:3
33) Toreachthemaximummoneymultiplier,itisassumedthat
A) commercialbankskeeptheamountofreserves.equaltototalbankdeposits.
B) allloansgetredepositedinacheckableaccount.
C) thereisinsufficientloandemand.
D) loansaredivertedintocirculatingcurrency.
Answer: B
Diff:1
34) Whichofthefollowingwilllimittheexpansionofthemoneysupplyfollowinganewdeposit?
A) Failureofbankstovoluntarilyholdexcessreserves
B) Astrongdemandfornewloans
C) Are-depositingofallloanproceeds
D) Astrongdemandforholdingcurrencyoutsideofcommercialbanks
Answer: D
Diff:1
35) Astatementofassetsandliabilitiesofanybusinessentityis
A) asweepaccount. B) abalancesheet.
C) networth. D) legalreserves.
Answer: B
Diff:1
36) Thedifferencebetweenassetsandliabilitiesis
A) asweepaccount. B) abalancesheet.
C) networth. D) legalreserves.
Answer: C
Diff:1
37) Abankcurrentlyhas$50millionindeposits,$6millionincashinthevault,$4millionon
depositwiththeFed,and$5millioningovernmentsecurities.Thereserveratiois20percent.A
newdepositismadeof$1million.Whatisthemaximumsizeloanthebankcanmakeoncethe
checkclears?
A) 0 B) $800,000 C) $1million D) $5.8million
Answer: B
Diff:3
38) Thereserveratiois20percent.Acheckfor$1millionisdepositedinBankA,writtenonan
accountfromBankB.AfterthecheckclearswhatarethenewexcessreservesatBankA,andby
howmuchdoesthemoneysupplychangeifallbanksmakeloanssothattheyhavezeroexcess
reserves?
A) $200,000;$800,000 B) $800,000;$1million
C) $800,000;$800,000 D) $800,000;0
Answer: D
Diff:2
39) Ifallofabanksdepositorsshowedupononedayrequestingcashwithdrawalsofalltheir
depositedfunds,
A) thebankwouldpaythemall,althoughreluctantly.
B) thebankwouldlikelyfailtohavesufficientreservestohonortheirrequests.
C) thebankcouldlawfullyrefusetheirdemands.
D) thebankwouldimmediatelycallalloutstandingloans.
Answer: B
Diff:2
40) Amongtheliabilitiesofabankareits
A) transactiondeposits. B) totalreserves.
C) excessreserves. D) loans.
Answer: A
Diff:2
41) Thebalancesheetofabankshowsits
A) profitsandlosses. B) assetsandliabilities.
C) earningsandexpenses. D) revenuesandcosts.
Answer: B
Diff:2
42) Ifabankreceivesanewtransactiondepositof$10,000andthereserveratiois15percent,then
thebankcouldexpanditsloansbyasmuchas
A) $1,500. B) $8,500. C) $15,000. D) $66,700.
Answer: B
Diff:2
43) Ifacheckwrittenononebankisdepositedinanotherbank
A) themoneysupplyincreases.
B) themoneysupplyremainsunchanged.
C) themoneysupplydecreases.
D) newreservesarecreatedforthebankingsystem.
Answer: B
Diff:2
44) Whichofthefollowingisaliabilitytoabank?
A) totalreserves B) transactiondeposits
C) governmentsecurities D) loans
Answer: B
Diff:2
45) IfacheckwaswrittenonBankAfor$100andBankBpresentedthechecktoBankAfor
payment,whatwillhappentotherequiredreservesforeachrespectivebankafterpaymentis
made?
A) BankAsrequiredreservesincrease;BankBsdecrease.
B) BankBsrequiredreservesincrease;BankAsdecrease.
C) Bothbankswillseeanincreaseintheirrequiredreserves.
D) Bothbankswillseeadecreaseintheirrequiredreserves.
Answer: B
Diff:2
46) WhichofthefollowingisNOTanassetofabank?
A) cash B) loans
C) totalreserves D) transactiondeposits
Answer: D
Diff:2
Assets Liabilities
Reserves $200,000 TransactionDeposits$2,000,000
Securities $200,000
Loans $1,600,000
TotalAssets $2,000,000 TotalLiabilities $2,000,000
47) Basedontheabovetable,thereserveratioforthebankingsystemis
Answer: B
Diff:1
48) Basedontheabovetable,anopenmarketoperationinwhichtheFedpurchased$100,000of
governmentsecuritieswould
A) createareservedeficiencyforthebankingsystem.
B) leadtoamaximumpotentialexpansionofthemoneysupplyof$100,000.
C) leadtoamaximumpotentialexpansionofthemoneysupplyof$1million.
D) causedemanddepositstofallby$100,000.
Answer: C
Diff:1
49) Thepotentialmoneymultiplierforthebankingsystemintheabovetableis
A) 5. B) 9. C) 1. D) 10.
Answer: D
Diff:1
50) WhentheFederalReservesellsagovernmentsecuritytoacommercialbank,
A) thecashreservesofthecommercialbankdecrease.
B) thenetworthofthecommercialbankincreases.
C) theloansofthecommercialbankwillincrease.
D) thebalancesheetofthecommercialbankisthrownoffbalance.
Answer: A
Diff:1
51) Ifa$1millionopenmarketpurchasebytheFedgeneratesanewdepositatabankthat
immediatelycausesthebanksreservesheldattheFedtoincreaseby$1million,thenthe
T-accounteffectsarethatthebanksassetsandliabilities________by$1millionandthatthe
Fedsassetsandliabilities________by$1million.
A) decline;decline B) increase;decline
C) decline;increase D) increase;increase
Answer: D
Diff:2
52) TheFedsellsaU.S.governmentsecurityandabankdealerwritesacheckfortheamount.When
thecheckclears,
A) reservesremainunchangedbecausethedecreaseofreservesatthedealersbankisoffset
byanincreaseinthereservesattheFed.
B) reserveshavefallenbytheamountofthecheckbecausetheFedclearsthecheckby
reducingthebanksdepositsattheFed.
C) reservesincreasebytheamountofthecheckbecausetheFedclearsthecheckby
increasingtheamountofthebanksdepositswiththeFed.
D) reserveshavefallenbytheamountofthereservestimesthereserveratio,andthemoney
supplyfallsbythedifferencebetweentheamountofthecheckandthefallinthereserves.
Answer: B
Diff:3
53) Thereserveratiois10percentandallloanproceedsaredepositedintransactionsaccounts.A
bonddealerhas$100millionindeposits,$8millioninvaultcash,and$7millionindepositsat
theFed.TheFedsells$1millioninsecuritiestothebonddealer.Asaresult,ofthistransaction
alone,
A) themoneysupplyfallsby$1millionandtotalreservesfallby$1million.
B) themoneysupplyfallsby$1millionandtotalreservesriseby$1million.
C) themoneysupplyrisesby$1million,totalreservesfallby$900,000.
D) themoneysupplyrisesby$1million,butreservesdonotchange.
Answer: A
Diff:2
54) Supposethattheactualmoneymultiplierequalsthemaximumpotentialmoneymultiplier.If
thereserveratiois10percent,inorderforthebankingsystemtoincreasedepositsby$2.5
million,theFedmust
A) permitthesystemtohaveprolongedreservedeficiencies.
B) sell$2.5millionofgovernmentsecuritiestothegeneralpublic.
C) sell$250,000ofgovernmentsecuritiestothegeneralpublic.
D) buy$250,000ofgovernmentsecuritiesfromthepublic.
Answer: D
Diff:1
55) TheFederalOpenMarketCommitteehasresponsibilityfor
A) appointingmemberstotheBoardofGovernorsoftheFederalReservesystem.
B) printingmoney.
C) issuingorderstobuyorsellgovernmentsecuritiesfortheFed.
D) advisingtheTreasuryDepartmentonmonetarypolicy.
Answer: C
Diff:1
56) WhentheFedwantstoundertakeopenmarketoperations,it
A) canrequireallcommercialbankstobuyfromorselltoit.
B) canrequireallmemberbankstobuyfromorselltoit.
C) buysorsellssecuritiesthroughthetradingdeskattheNewYorkFederalReserveBank.
D) buysfromorsellstotheU.S.Treasury.
Answer: C
Diff:1
57) Openmarketoperationsare
A) thebuyingofexistingcorporatesecuritiesinsecondarymarketsbyprivatecitizens,banks
andtheFed.
B) thebuyingandsellingofexistingU.S.governmentsecuritiesinopenprivatemarketsby
theFed.
C) theactionsoftheFedthatareusedtofinancedeficitfinancingbythegovernment.
D) thesellingofnewgovernmentsecuritiesinordertoincreasethemoneysupply.
Answer: B
Diff:1
58) Thelevelofreservesinthebankingsystemisdeterminedby
A) theAmericanBankingAssociation. B) theFederalOpenMarketCommittee.
C) bonddealers. D) theTreasuryDepartment.
Answer: B
Diff:1
59) WhentheFedbuysaU.S.bondintheopenmarket
A) itsactionhasnoeffectonthetotalreservesorthemoneysupplybecausethecheckit
writesincreasesreservesatonebankbuttheyfallatanother.
B) totalreservesincreasebytheamountofthepurchasebutthemoneysupplystaysthe
same.
C) itsactionexpandstotalreservesandthemoneysupply.
D) itsactioncontractstotalreservesandthemoneysupply.
Answer: C
Diff:2
60) OpenmarketoperationsareconductedbytheFed
A) intheprivatesecondaryU.S.securitiesmarket.
B) intheNewYorkStockExchange.
C) throughtheBureauofEngraving.
D) throughtheWashingtonlocationoftheFederalReservesBankofGovernors.
Answer: A
Diff:2
61) TheinitialimpactoftheFedsopenmarketsaleofgovernmentsecuritiesbytheFederalReserve
is
A) anincreaseinthemoneysupplybysomemultipleofthedollarvolumeofthesale.
B) anincreaseincommercialbankdepositsattheFed.
C) afallinthemoneysupplybysomemultipleofthedollarvolumeofthesale.
D) areductionofthecommercialbankingsystemsreservedepositsattheFed.
Answer: D
Diff:1
62) AsaleofsecuritiesbytheFedcauses
A) acontractionofthemoneysupplyequaltotheamountofthesecuritiessold.
B) anexpansionofthemoneysupplyequaltotheamountofthesecuritiessold.
C) amultipleexpansionofthemoneysupplygreaterthantheamountofthesecuritiessold.
D) amultiplecontractionofthemoneysupplygreaterthantheamountofthesecuritiessold.
Answer: D
Diff:2
63) IftheactualmoneymultiplierequalsthepotentialmoneymultiplierandiftheFederalReserve
wishestoincreasethemoneysupplyby$500whenthereserveratiois10percent,itshould
A) sell$50ofgovernmentbonds. B) buy$50ofgovernmentbonds.
C) sell$5000ofgovernmentbonds. D) buy$5000ofgovernmentbonds.
Answer: B
Diff:2
64) IftheactualmoneymultiplierequalsthepotentialmoneymultiplierandiftheFedwishesto
reducethemoneysupplyby$1millionwhenthereserveratiois20percent,thentheFedshould
A) sell$200,000ofgovernmentsecurities. B) buy$200,000ofgovernmentsecurities.
C) sell$500,000ofgovernmentsecurities. D) buy$500,000ofgovernmentsecurities.
Answer: A
Diff:2
65) WhentheFedbuysU.S.governmentsecurities,themoneysupply
A) increasesbecausethereisanincreaseintransaction depositsatthebankofthebonddealer
butthereisnodecreaseintransactiondepositsatanyotherbank.
B) decreasesbecausethereisanincreaseinthereservesofthebonddealersbank.
C) remainsunchangedbecausetheincreaseintransaction depositsatthebonddealersbank
isoffsetbyareductionintransactiondepositsattheFed.
D) remainsunchangedbecausetheincreaseintransaction depositsatthebonddealersbank
isoffsetbyafallintransactiondepositsatanotherbank.
Answer: A
Diff:2
A) thebuyingandsellingofexistingU.S.governmentsecuritiesinopenprivatemarketsby
theFedinordertochangethemoneysupply.
B) thebuyingandsellingofexistingU.S.governmentsecuritiesinopenprivatemarketsby
citizens.
C) thesellingofnewgovernmentsecuritiesbybanksinordertoincreasethemoneysupply.
D) thesellingofnewgovernmentsecuritiesinopenprivatemarketsbybanksinorderto
financethedeficit.
Answer: A
Diff:1
67) Assumingareserveratioof10percent,ifabanksells$100,000insecuritieshowmuchcanthe
bankloanout?
A) $90,000 B) $100,000 C) $110,000 D) $10,000
Answer: B
Diff:1
68) Assumingareserveratioof10percent,ifabankreceives$100,000indepositshowmuchcanthe
bankloanout?
A) $90,000 B) $100,000 C) $110,000 D) $10,000
Answer: A
Diff:1
69) TheFederalReservewillengageinopenmarketoperationswhen
A) itwantstopunishprivatebanksbecausetheyarenotkeepingtherequiredlevelof
reserves.
B) itwantstochangethemoneysupply.
C) itwantstochangethereserveratio.
D) itwantstoincreasethetotalamountofreservessincegovernmentsecuritiesare
consideredareserve.
Answer: B
Diff:1
70) Thelevelofreservesinthemonetarysystemisdeterminedby
A) theFederalOpenMarketCommittee. B) theTreasuryDepartment.
C) Congress. D) thePresidentoftheUnitedStates.
Answer: A
Diff:1
71) WhentheFedsellsaU.S.bondintheopenmarket
A) totalreserveswillincrease.
B) totalreserveswilldecrease.
C) totalreservesdonotchangebutthemoneysupplyincreases.
D) totalreservesdonotchangebutthemoneysupplydecreases.
Answer: B
Diff:2
72) WhentheFedbuysaU.S.bondintheopenmarket
A) totalreserveswillincrease.
B) totalreserveswilldecrease.
C) totalreservesdonotchangebutthemoneysupplyincreases.
D) totalreservesdonotchangebutthemoneysupplydecreases.
Answer: A
Diff:2
73) TheFedsells$1millioninbondstoabonddealer.Thebonddealersbankexperiences
A) adecreaseinassetsof$1millionasitsreservesdecreaseandanincreaseinliabilitiesof$1
millionasitsdepositsrise.
B) adecreaseinassetsof$1millionasitsreservesdecreaseandadecreaseinliabilitiesof$1
millionasitsdepositsfall.
C) anincreaseinassetsof$1millionasitsdepositsfellby$1million,andadecreasein
liabilitiesasitsreservesfellby$1million.
D) nochangeinassetsorliabilities.
Answer: B
Diff:2
74) IfabanksdepositsattheFedincreaseby$10million,then
A) boththebanksassetsandtheFedsassetsincreaseby$10million.
B) boththebanksliabilitiesandtheFedsliabilitiesincreaseby$10million.
C) thebanksassetsincreaseby$10millionandtheFedsliabilitiesincreaseby$10million.
D) thebanksassetsincreaseby$10million,butthereisnochangeattheFedsinceitdoesnot
reallyhaveassetsorliabilities.
Answer: C
Diff:2
75) TheFedbuyssecuritiesandgivesabonddealeracheckfortheamount.Afterthecheckhas
cleared,
A) reservesremainunchangedbecausetheincreaseofreservesatthedealersbankareoffset
byanincreaseinreservesattheFed.
B) reserveshavefallenbytheamountofthecheckbecausetheFedclearsthecheckby
reducingthebanksdepositsattheFed.
C) reserveshaverisenbytheamountofthecheckbecausetheFedclearsthecheckby
increasingtheamountofthebanksdepositswiththeFed.
D) reserveshavefallenbytheamountofthereservestimesthereserveratioandthemoney
supplyincreasesbythedifferencebetweentheamountofthecheckandtheincreaseinthe
reserves.
Answer: C
Diff:3
76) WhentheFedsellsgovernmentsecurities,
A) reservesincrease,leadingtoadecreaseinthemoneysupplybyanamountmorethanthe
saleofthegovernmentsecurities.
B) reservesdecrease,leadingtoaincreaseinthemoneysupplybyanamountmorethanthe
C) reservesincrease,leadingtoaincreaseinthemoneysupplybyanamountmorethanthe
D) reservesdecrease,leadingtoadecreaseinthemoneysupplybyanamountmorethanthe
Answer: D
Diff:1
77) WhentheFedbuysgovernmentsecurities,
A) reservesincrease,leadingtoadecreaseinthemoneysupplybyanamountmorethanthe
purchaseofthegovernmentsecurities.
B) reservesdecrease,leadingtoaincreaseinthemoneysupplybyanamountmorethanthe
C) reservesincrease,leadingtoaincreaseinthemoneysupplybyanamountmorethanthe
D) reservesdecrease,leadingtoadecreaseinthemoneysupplybyanamountmorethanthe
Answer: C
Diff:1
78) MarydecidestobuyabondfromJoefor$100.Themoneysupplywill
A) neitherincreasenordecrease. B) increaseby$100.
C) increasebymorethan$100. D) decreaseby$100.
Answer: A
Diff:2
79) Thereserveratiois20percent.IftheFedbuys$1millionofU.S.governmentsecuritiesandthe
checkisdepositedinBankA,butBankAincreasesitsvaultcashbytheentireamount,thenthe
moneysupply
A) doesnotincrease. B) increasesby$800,000.
C) increasesby$1million. D) increasesbymorethan$1million.
Answer: C
Diff:2
80) ApurchaseofU.S.governmentsecuritiesbytheFedcauses
A) anexpansionofthemoneysupplyequaltotheamountofthesecuritiespurchased.
B) acontractionofthemoneysupplyequaltotheamountofthesecuritiespurchased.
C) anexpansionofthemoneysupplyofmorethantheamountofthesecuritiespurchased.
D) acontractionofthemoneysupplyofmorethantheamountofthesecuritiespurchased.
Answer: C
Diff:2
81) AsaleofU.S.governmentsecuritiesbytheFedcausesa(n)
A) expansionofthemoneysupplyequaltotheamountofthesecuritiessold.
B) contractionofthemoneysupplyequaltotheamountofthesecuritiessold.
C) expansionofthemoneysupplyofmorethantheamountofthesecuritiessold.
D) contractionofthemoneysupplyofmorethantheamountofthesecuritiessold.
Answer: D
Diff:2
82) Thereserveratiois20percent.IftheFedbuys$1millionofU.S.governmentsecuritiesfroma
bonddealerbytransmittingthefundstothedealersdepositaccountatBankABC,then
A) BankABCcanmakenoadditionalloans.
B) BankABCcanmakeadditionalloansupto$800,000.
C) BankABCcanmakeadditionalloansupto$1million.
D) BankABCcannotmakeanyadditionalloans,butthesystemasawholecanmake
additionalloansupto$1million.
Answer: B
Diff:2
83) Thereserveratiois20percent.AftertheFedbuys$1millioninU.S.governmentsecuritiesfrom
abonddealerbytransmittingthefundstothedealersdepositaccountatBankA,BankAlends
aconstructioncompanyanamountequaltoitsexcessreserves.Theconstructioncompany
spendstheentireamountonlumberfromalumberyard,whichdepositstheconstruction
companyscheckinitsdepositaccountwithBankA.ThemaximumloanBankAcannowmake
is
A) $0. B) $640,000. C) $800,000. D) $1million.
Answer: B
Diff:3
84) Thereserveratiois20percent.TheFedbuys$1millioningovernmentsecuritiesfromabond
dealerbytransmittingthefundstothedealersdepositaccountatBankA.BankAloansthe
maximumamountpossibletoaconstructioncompany,whichbuysmaterialsfromalumber
yard.ThelumberyarddepositstheconstructioncompanyscheckinBankB.Whatisthe
maximumloanBankAcannowmakeandthemaximumloanBankBcannowmake?
A) BankA:0;BankB:$640,000 B) BankA:0;BankB:$800,000
C) BankA:$800,000;BankB:$640,000 D) BankA:$800,000;BankB:0
Answer: A
Diff:3
85) Thereserveratiois20percent.TheFedbuys$1millioningovernmentsecuritiesfromabond
dealerbytransmittingthefundstothedealersdepositaccountatBankA.BankAmakesthe
maximumloanpossibletoaconstructioncompany,whichbuysmaterialswiththeloan.The
checkisdepositedinBankB,whichloansoutallitcantoacardealership.Tothispoint,the
moneysupplyhasincreasedby
A) $1million. B) $1.8million. C) $2.44million. D) $3million.
Answer: C
Diff:3
86) Supposethatthereserveratiois20percent.Abankscustomerdepositsintoheraccount
$100,000infundsfromacheckwrittenonanaccountatanotherbank.Themaximumpotential
increaseinthemoneysupplyresultingfromthistransactionisequalto
A) $0. B) $20,000. C) $200,000. D) $500,000.
Answer: A
Diff:2
87) WhentheFedbuysa$10,000bondfromabonddealer,
A) reservesofthebankingsystemincreaseby$10,000,butthemoneysupplywillonlybeable
toincreasebysomethinglessthanthisamount.
B) reservesofthebankingsystemincreaseby$10,000,butthemoneysupplycanincreaseby
morethan$10,000.
C) reservesofthebankingsystemremainunchanged,butthemoneysupplyincreasesby
$10,000.
D) reservesofthebankingsystemremainunchanged,butthemoneysupplydecreasesby
$10,000.
Answer: B
Diff:2
88) IfabonddealersellsagovernmentbondtotheFedfor$100,000,andthereserveratiois10
percent,thenthebankthatreceivesa$100,000depositfromthedealercanexpanditsloansby
________,andthemoneysupplycanincreasebyasmuchas________.
A) $80,000;$800,000 B) $10,000;$100,000
C) $90,000;$1,000,000 D) $90,000;$900,000
Answer: C
Diff:2
89) Forthemoneyexpansionprocesstoproducethemaximumpotentialmultipliereffect,
A) allloansofagivenbankhavetobedepositedinthatbank.
B) therequiredreserveratiohastobe100percent.
C) theFedhastosellgovernmentbondstobackuptheloans.
D) allloansfrombankshavetoberedepositedthroughoutthebankingsystem.
Answer: D
Diff:2
A) theproceduresforapprovingloansatcommercialbanks.
B) theproceduresofapplyingforloansatcommercialbanks.
C) theFederalReservespurchaseandsaleofexistingU.S.governmentsecurities.
D) stepsabankmustcompletebeforeitcaninvestinstocksontheopenmarket.
Answer: C
Diff:2
91) WhentheFedbuysU.S.governmentsecuritiesontheopenmarket,
A) thereservesofthebankingsystemexpand.
B) thereservesofthebankingsystemcontract.
C) themoneysupplycontracts.
D) thetotalreservesofthebankingsystemwillfallbelowrequiredreserves.
Answer: A
Diff:2
92) Whichoneofthefollowingwouldincreasereservesforthebankingsystem?
A) TheFedsellsgovernmentsecuritiesontheopenmarket.
B) TheFedbuysgovernmentsecuritiesontheopenmarket.
C) Youpurchaseanewly-issuedU.S.Treasurybond.
D) YoupurchaseaU.S.Treasurybondfromabonddealer.
Answer: B
Diff:2
93) Openmarketoperationsinvolve
A) thebuyingandsellingofexistingcorporatebonds.
B) thebuyingandsellingofexistingcorporatestocks.
C) thebuyingandsellingofexistingfederalgovernmentbonds.
D) thebuyingandsellingofFederalReservebonds.
Answer: C
Diff:2
94) IftheFedpurchases$100,000ingovernmentbondsfromabank,thenthe
A) liabilitiesofthebankriseby$100,000. B) reservesofthebankfallby$100,000.
C) assetsofthebankriseby$100,000. D) reservesofthebankriseby$100,000.
Answer: D
Diff:2
95) IftheFOMCdecidestoengageinthesellingofgovernmentbonds,whatistheeffectonthe
moneysupply?
A) adecrease
B) anincrease
C) nochange
D) aninitialincreasefollowedbyanadditionalrisewhenthebondsmature
Answer: A
Diff:2
96) TheFedsbuyingandsellingofexistinggovernmentsecuritiesiscalled
A) marketinterventions.
B) openmarketoperations.
C) changesinthereserverequirementratio.
D) changesinthedifferencebetweenthediscountrateandthefederalfundsrate.
Answer: B
Diff:2
97) WhenabanksellsabondtotheFed,
A) itsliabilitiesdecrease. B) itsliabilitiesincrease.
C) itsreservesinitiallydecrease. D) itsreservesinitiallyincrease.
Answer: D
Diff:2
98) WhenabankbuysabondfromtheFed,
A) itsliabilitiesdecrease. B) itsliabilitiesincrease.
C) itsreservesinitiallydecrease. D) itsreservesinitiallyincrease.
Answer: C
Diff:2
99) IftheFOMCdecidesthattheFedshouldbuybondsit
A) instructstheNewYorkFederalReserveBankstradingdesktobuythem.
B) askstheCongressforpermissiontobuythem.
C) requiresthePresidentssignatureonthebuyorder.
D) requiresthepermissionoftheFinancialOversightCommittee.
Answer: A
Diff:2
100) Ifthemoneymultiplieris2.4andtheFedbuys$8millioninsecuritiesontheopenmarket,
transactiondepositscouldpotentially
A) increaseby$19.2million. B) increaseby$8million.
C) decreaseby$19.2million. D) decreaseby$16.5million.
Answer: A
Diff:1
101) Supposethatthereserveratiois5%.Whatisthevalueofthepotentialmoneymultiplier?
A) 2 B) 5 C) 10 D) 20
Answer: D
Diff:1
102) TheFedbuys$1millioninbondsfromabonddealer.Thebonddealersbankexperiences
A) anincreaseinassetsof$1millionasitsreservesincreaseandadecreaseinliabilitiesasits
transactionsdepositsfall.
B) nochangeinassetsorliabilities.Assetsbothincreasedanddecreasedbytheamountofthe
check.
C) adecreaseinassetsof$1millionasthecheckingaccountofthebonddealerincreased,and
adecreaseinliabilitiesasthebanksdepositswiththeFedincreasedby$1million.
D) anincreaseinassetsof$1millionasitsreservesincreaseandanincreaseinliabilitiesof$1
millionasthedepositsinthebonddealerstransactionsaccountincreasesby$1million.
Answer: D
Diff:2
103) Otherthingsbeingequal,whentheFedbuysU.S.governmentsecurities,
A) theU.S.Treasurymustimmediatelyissuenewsecuritiestoreplacethesecuritiesthatthe
Fedhasremovedfromthemarket.
B) theFedstotalassetsandtotalliabilitiesimmediatelyexpandbyexactlytheamountofthe
Fedspurchase.
C) thequantityofdepositsintheU.S.bankingsystemexpandsbylessthantheamountofthe
Fedspurchase.
D) thequantityofpapercurrencyandcoinsincirculationexpandsbymorethantheamount
oftheFedspurchase.
Answer: B
Diff:2
104) ApurchaseofU.S.governmentsecuritiesbytheFedcauses
A) amultiplecontractionofthemoneysupplybecausedepositsfallbymorethantheamount
ofthesecuritiespurchased.
B) acontractionofthemoneysupplyequaltotheamountofthesecuritiesbecauseallother
transactionsoccurwithinthebankingsystem.
C) amultipleexpansionofthemoneysupplybecausethereserveratioislessthanone.
D) anexpansionofthemoneysupplyequaltotheamountofthesecuritiesbecauseallother
transactionsoccurwithinthebankingsystem.
Answer: C
Diff:2
105) Thereserveratiois10percent.Depositorsregularlykeep10percentoftheirdepositsascash.If
theFedbuys$1millionofU.S.governmentsecurities,excessreserves
A) increaseby$800,000. B) increaseby$810,000.
C) increaseby$900,000. D) increaseby$1million.
Answer: B
Diff:3
106) Toexpandthemoneysupply,theFedshould
A) buyU.S.governmentsecurities. B) sellU.S.governmentsecurities.
C) raisetherequiredreserveration. D) cuttaxes.
Answer: A
Diff:1
107) Tocontractthemoneysupply,theFedshould
A) reducethedifferentialbetweenthediscountrateandthefederalfundsrate.
B) increasegovernmentspendingandcuttaxes.
C) lowertherequiredreserveratio.
D) sellU.S.governmentsecurities.
Answer: D
Diff:2
108) Thereserveratioequals20percent.TheFedbuys$1millioninU.S.governmentsecurities.The
mostthemoneysupplycanincreaseis
Answer: C
Diff:2
109) Toincreasethemoneysupply,
A) theFederalReserveshouldsellgovernmentsecurities.
B) thecommercialbanksshouldreducetheirloans.
C) theFederalReserveshouldbuygovernmentsecurities.
D) theFederalReserveshouldreduceitsloanstobanks.
Answer: C
Diff:1
110) Adecreaseinthereserveratiowill
A) causethemoneysupplytodecrease. B) causethemoneysupplytoincrease.
C) notaffectthemoneysupply. D) decreasethemoneymultiplier.
Answer: B
Diff:1
111) Thereasonthatthecommercialbankingsystemcangenerateamultipleexpansionor
contractionofthemoneysupplyisthat
A) banksarerequiredtoholdonlyafractionoftheirdepositliabilitiesasreserves.
B) mostbanksmaintainarelativelylargestockofreserves.
C) banksholdreservesequaltotheirnetworth.
D) banksgenerallyarerequiredtoholdsurplusfundsondepositwithotherbanks.
Answer: A
Diff:1
112) Ifthereserveratioisraised,themoneymultiplier
A) islowered. B) isincreased. C) staysthesame. D) isdoubled.
Answer: A
Diff:2
113) Themaximumpotentialmoneymultiplierisequalto
A) thereserveratio. B) theinverseoftherequiredreserveratio.
C) oneminusthereserveratio D) thenumberofdollarsonreserve.
Answer: B
Diff:1
114) Ifthereserveratiois25percent,themaximumpotentialmoneymultiplieris
A) 1. B) 4. C) 8. D) 25.
Answer: B
Diff:1
115) Withareserveratioof10percent,themaximumpotentialmoneymultiplieris
A) 1. B) 5. C) 10. D) 100.
Answer: C
Diff:1
116) Forthepastseveraldecades,theU.S.M1multiplierhasbeenbetween________.
A) 1.0and2.0. B) 2.5and3.0. C) 3.0and6.0. D) 6.5and10.0.
Answer: B
Diff:1
117) Thelargeristhereserveratio,
A) thegreateristheincreaseinthemoneysupplyforanincreaseinbankdeposits.
B) themorelikelyitistherewillbecurrencydrains.
C) thesmalleristhemaximumpotentialmoneymultiplier.
D) themoredifficultitisfortheFederalReservetocontrolthemoneysupply.
Answer: C
Diff:1
118) Byaffectingtheamountofreservesinthebankingsystem,theFedcan
A) affectthesizeofthemoneysupply. B) changethemarginaltaxrates.
C) increasegovernmentpurchases. D) reducegovernmentpurchases.
Answer: A
Diff:2
119) Initially,thereserveratiois10percent.Nowbanksdecidetheywantanadditional10percentof
depositsasreserves.Therearenocurrencydrains.IftheFedbuys$1millionofU.S.government
securities,themoneysupplywill
A) notchangebecauseoftheexcessreservesbankskeeponhand.
B) increaseby$1million.
C) increaseby$5million.
D) increaseby$10million.
Answer: C
Diff:2
120) Followinganewdepositof$50atabank,drawnonfundspreviouslyheldondepositatanother
bank,whenthereserveratiois10percent,themaximumpotentialincreaseinthemoneysupply
willbe
A) $0. B) $50. C) $400. D) $500.
Answer: A
Diff:1
121) Ifthereserveratiois10percentandreservesinthecommercialbankingsystemincreaseby
$10,000,themaximumpossibleexpansionofdemanddepositsis
A) $10,000. B) $90,000. C) $100,000. D) $1,000,000.
Answer: C
Diff:1
122) WhentheFederalReservesellsagovernmentsecuritytoabonddealer,whichtransmits
paymentfromatransactionsdepositaccountatabank,
A) thecashoftheFederalReservewilldecrease.
B) thenetworthofthecommercialbankwilldecrease.
C) theloansofthecommercialbankwillincrease.
D) themoneysupplywilldecrease.
Answer: D
Diff:1
123) IftheFederalReservesells$100ofsecuritiesthroughacommercialbankwhenthereserve
requirementis10percent,themaximumpotentialchangeinthemoneysupplyis
A) a$100increase. B) a$1,000increase.
C) a$100decrease. D) a$1,000decrease.
Answer: D
Diff:1
124) IftheFederalReservebuys$500ofgovernmentsecuritieswhentherequiredreserveratiois20
percent,themaximumpotentialchangeinthemoneysupplyisa(n)
A) increaseby$100. B) increaseby$2,500.
C) decreaseby$100. D) decreaseby$2,500.
Answer: B
Diff:1
125) Whichofthefollowingwouldreducethemoneymultiplier?
A) Reducingthereserveratio
B) BondpurchasesbytheFed
C) Cashdrainsfrombanks
D) Bankreductionsindesiredreserveholdings
Answer: C
Diff:1
126) Whichofthefollowingwouldreducethemoneymultiplier?
A) ThepurchaseofbondsbytheFed
B) Loweringthereserveratio
C) Increasesinthereserveratio
D) Aflowofcurrencyintothebankingsystem
Answer: C
Diff:1
127) Accordingtothetext,theactualM1multiplierintheU.S.todayis
A) between0and1. B) between1.5and2.0.
C) negative. D) over10.
Answer: B
Diff:1
128) Accordingtothetext,theactualM2multiplierintheUnitedStatestodayis
A) about5. B) between1.0and2.0.
C) negative. D) over10.
Answer: B
Diff:1
1
129) Theformula isthe
requiredreserveratio
A) federalfundsrate. B) discountrate.
C) potentialmoneymultiplier. D) actualchangeinthemoneysupply.
Answer: C
Diff:1
130) Theactualmoneymultipliermultipliedbythechangeintotalreservesisthe
A) federalfundsrate. B) discountrate.
C) potentialmoneymultiplier. D) actualchangeinthemoneysupply.
Answer: D
Diff:1
131) Thepotentialmoneymultipliergivesus
A) thegrowthinrealnationalincomewhenthemoneysupplyincreases.
B) thegrowthinthemoneysupplywhenincomeincreases.
C) themaximumpotentialchangeinthemoneysupplyduetoachangeinreserves.
D) themaximumpotentialchangeinthemoneysupplyduetoachangeinincome.
Answer: C
Diff:1
132) Whenpeopledecidetoincreasetheamountofcurrencytheyarecurrentlyholding
A) thepotentialmoneymultiplierwillincrease.
B) thepotentialmoneymultiplierwilldecrease.
C) theactualmoneymultiplierwillincrease.
D) theactualmoneymultiplierwilldecrease.
Answer: D
Diff:1
133) Whenbanksreducethereserveratio,thepotentialmoneymultiplier
A) increases.
B) decreases.
C) remainsunchanged.
D) sometimesincreases,andsometimesdecreasesdependingontherateofinflation.
Answer: A
Diff:2
134) IfproceedsfromloansareNOTdepositedbackinthebankingsystem,then
A) themagnitudeofthemultiplierprocessisreduced.
B) thereisnoeffectonthemagnitudeofthemultiplierprocess.
C) themagnitudeofthemultiplierprocessisincreased.
D) theFedintervenesbysellingmoreFederalgovernmentbonds.
Answer: A
Diff:2
135) Thevalueofthemoneymultiplierdependson
A) thereserveratio.
B) theratiooftotalassetstototalliabilitiesforthebankingsystemasawhole.
C) theinterestrateofferedonbondscurrentlybeingsoldbytheFed.
D) theinterestrateofferedonbondscurrentlybeingpurchasedbytheFed.
Answer: A
Diff:2
136) Ifthereserveratiodecreasesfrom20percentto10percent,thenthepotentialmoneymultiplier
A) increasesfrom5to10. B) decreasesfrom10to5.
C) doesnotchange. D) decreasesfrom20to10.
Answer: A
Diff:2
137) Anincreaseinthereserveratio
A) hasanexpansionaryeffectonthemoneysupply.
B) hasacontractionaryeffectonthemoneysupply.
C) increasesthemoneymultiplier.
D) willcausebankstomakemoreloans.
Answer: B
Diff:2
138) SupposethattheFedpurchases$1,000,000worthofbondsandthatthereserveratiois25
percent.Then,themaximumpotentialexpansionofdepositsis
A) $4,000,000. B) $10,000,000. C) $400,000. D) $25,000,000.
Answer: A
Diff:2
139) Whatisafractionalreservebankingsystem?Howlonghasthefractionalreservebanking
systembeeninexistence?
Answer: Afractionalreservebankingsystemisasysteminwhichdepositoryinstitutionshold
reservesthatarelessthantheamountoftotaldeposits.Theyhavebeeninexistenceat
least2,500years.
Diff:1
140) Whatarereserves?DiscussthevarioustypesofreservesusedintheU.S.bankingsystem.
Answer: Reservesareassetsheldbyadepositoryinstitutionthatareusedtomeetwithdrawal
demands.IntheU.S.FederalReserveSystem,reservesincludedepositsheldbyFederal
Reservedistrictbanksfordepositoryinstitutionsplusthevaultcashinthedepository
institution.Totalreservesareanythingthatthelawallowsbankstoclaimasreserves.
Requiredreservesarethevalueofreservesthedepositoryinstitutionmustholdand
excessreservesarethereservestheinstitutionholdsinexcessoftherequiredreserves.
Diff:1
141) Asfarasreservesanddepositsareconcerned,describetheassetsandliabilitiesofabank.
Answer: Themajorliabilitiesofabankarethedepositstheyhold. Transaction depositsaredrawn
downeverytimeadepositorwritesacheck.Theassetsarethereservesthebankhasand
anyloanstheyhavemade.
Diff:1
142) ExplainwhathappenstothemoneysupplywhentheFedsellsbondsontheopenmarket.What
happenstotheassetsandliabilitiesoftheFed?
Answer: ThemoneysupplyfallswhentheFedsellsbondsontheopenmarket,becausethe
purchaserpaysforthebondsbytransmittingfundsfromatransactionsdeposit.The
reservesofthebankfallbytheamountofthefundstransfer.TheassetsoftheFedfall,
becausethebondssoldhadbeenassetsandtheliabilitiesoftheFed.Theliabilitiesofthe
Feddecrease,becausethepurchasersbanksreservesdeclinedbytheamountofthe
transfer.
Diff:3
143) SupposetheFedpurchases$1millioninbondsintheopenmarket.Explainhowthemoney
supplycanincreasebymorethan$1million.
Answer: Transactiondepositsandreservesincreaseby$1millionasaresultofthepurchase.Since
thereserveratioislessthanone,thebanknowcanloansomeofthereservestosomeone.
Ifitdoes,thenthetransactiondepositsoftheborrowerincreasebytheamountofthe
loan,sothemoneysupplyhasincreasedfurther.
Diff:2
144) WhydoesthemoneysupplyincreasewhentheFedbuysabondbutdoesnotchangewhena
businessbuysabond?
Answer: ThereservesinthebankingsystemincreasewhentheFedbuysbondsbutremain
unchangedwhenabusinessbuysbonds.Whenabusinessbuysbonds,acheckiswritten
ononebankanddepositedinanother.Thereservesofonebankincreasebutfallinthe
other,sothereisnonetchange.WhentheFedbuysbonds,reservesincreaseinabankbut
dontdecreaseanywhereelsesincetheFedcanaddtothereservesofamemberbank.
Diff:3
145) ExplainhowtheFedincreasesthemoneysupplywhenitbuysbondsintheopenmarket.
Answer: TheFedbuysbondsintheopenmarketandpaysforthebondsbytransmittingfundsto
thebonddealersdepositaccountinabank,atwhichpointitbecomespartofthemoney
supply.TheFedhasjustcreatedmoney,becauseithasaddedtothereserveaccountof
thebonddealersbank,andthemoneysupplyincreasesbytheamountofthepurchase.
Diff:2
146) Howaretheassetsandliabilitieschangedforabonddealer,thebonddealersbank,andtheFed
whentheFedbuys$100,000inbonds?
Answer: Thebonddealertradesabondforatransactionsdepositof$100,000.Thatis,theformof
theassetschangebutnotthetotalvalue.Assetsandliabilitiesofthebankincreaseby
$100,000sincetransactiondepositsincreasewhentheFeddepositsthefunds,andthe
banksreservesincreasebythesameamount.TheassetsoftheFedincreaseby$100,000
whenitbuysthebondanditsliabilitiesincreaseby$100,000becausereservesofthebank
ondepositwiththeFedincrease.Themoneysupplyincreasesasthebondisconverted
intomoney.
Diff:3
147) Supposeapersondepositsapaycheckinabank.Thetransactiondepositsaremoney,sohasthe
moneysupplyincreased?Explain.
Answer: No.Thecheckwasdrawnontheemployersaccount.Transactiondepositsfellinthat
bankbythesameamounttransactiondepositsincreasedinthisbank,sothetotalmoney
supplyhasnotchanged.
Diff:2
15.7FederalDepositInsurance
1) TheFederalDepositInsuranceCorporationinsures
A) banksagainstlawsuits. B) thefederalfundsmarket.
C) thedepositsheldinmemberbanks. D) thedepositsheldintheFed.
Answer: C
Diff:1
Topic: 15.7FederalDepositInsurance
2) TheFDICwascreatedbecause
A) banksfailedtocreatemoneythewaytheFedwantedthemto.
B) peopleworriedaboutbankfailuresafterWorldWarI,eventhoughveryfewbanks
actuallyfailed.
C) thereweresomanybankfailuresinthe1930s.
D) theFedkepttherequiredreserveratiotoolow.
Answer: C
Diff:1
3) WhichofthefollowinghasbeenaproblemfacedbytheFDICinitsprovisionoffederaldeposit
insurance?
A) Moralhazardarisingfromthetendencyforthehighest-riskbankstobethosemost
interestedinobtainingdepositinsuranceinthefirstplace
B) Adverseselectionarisingfromthetendencyforbankstotakeonmoreriskafterthey
receivedepositinsurance
C) Moralhazardarisingfromthetendencyforbankstotakeonmoreriskaftertheyreceive
depositinsurance
D) Arelativelylownumberofbankfailureseachyear,whichhasreducedtheneedfor
depositinsurance
Answer: C
Diff:2
4) WhichofthefollowingstatementsabouttheFDICiscorrect?
I. ThedepositinsurancepremiumschargedbytheFDICtoamemberbankfullyreflectthe
riskinessofthatbanksassets
II. ThemannerinwhichtheFDICissetuphelpsprotectdepositoryinstitutionsfromthe
rigorsoftruemarketcompetition
Answer: B
Diff:1
5) Bankrunsareapossibilitybecause
A) theFDICisinefficient.
B) bankersareoftenpoorbusinesspeople.
C) indifficulttimespeoplewantcurrencyinsteadofdemanddeposits.
D) banksdonotkeepenoughreservestocoveralltheirdepositoryliabilities.
Answer: D
Diff:2
6) ThemannerinwhichFDICdepositinsuranceissetupintheUnitedStatesencouragesbanksto
A) betooconservativeintheirlendingpractices.
B) maintainexcessreservesthataretoogreat.
C) makeriskierloansthantheyotherwisewould.
D) rejectsomeloansthatprobablywouldbeprofitable.
Answer: C
Diff:2
7) IftheFDICeliminateditsinsuranceprogramfordeposits,then
A) thebankingsystemwouldprobablyfail.
B) individualdepositorswouldhavemoreincentivetoascertainthesoundnessandsolvency
ofthebank.
C) bankswouldprobablyholdfewerreserves.
D) moralhazardwouldbeincreased.
Answer: B
Diff:1
8) Asymmetricinformationbeforeatransactiontakesplacegeneratestheproblemof
A) flawedbankregulation. B) intermediation.
C) adverseselection. D) bankruns.
Answer: C
Diff:1
9) Depositinsuranceshieldsdepositorsfromtheadverseeffectsofriskydecisionsandthereby
A) encouragesriskierbehavioronthepartofmanagersofdepositoryinstitutions.
B) encouragesdepositorstomonitorthemanagersofdepositoryinstitutionsmoreclosely.
C) encouragesmoralhazardonthepartofdepositors.
D) generatesamoreefficientbankingsystem.
Answer: A
Diff:2
10) Thefactthatindividualswhosecreditworthinessislessthanitappearstobearethosewhoare
mostwillingtoborrowfundsatanygiveninterestrateisanexampleof
A) adverseselection. B) symmetricinformation.
C) moralbonuses. D) diverseorigins.
Answer: A
Diff:1
11) Whichofthefollowingstatementsis/arecorrect?
I. Depositoryinstitutionmanagersundertakeriskieractionsthantheyotherwisewould
becauseoftheexistenceofdepositinsurance
II. Becauseoftheexistenceofdepositinsurance,depositorsinsavingsandloansandother
bankshavelittleincentivetoinvestigatethefinancialstabilityoftheseinstitutions
Answer: C
Diff:1
12) Lendersgenerallywantborrowerstoagreetoinvestprudently,yetoncealoanismade
borrowersmayusethefundsinahighlyriskyfashion.Thisleadstotheproblemof
A) criticalmass. B) depositinsurance.
C) investorselection. D) moralhazard.
Answer: D
Diff:1
13) TheFederalDepositInsuranceCorporation
A) insuresthedepositsheldbytheFed.
B) insuresthedepositsheldinbanks.
C) insuresbanksagainstlawsuitsbydepositors.
D) insurestheopenmarketoperationsoftheFed.
Answer: B
Diff:1
14) Asof2010,theFDICinsureddepositaccountsuptowhichofthefollowingamounts?
A) $10,000. B) $25,000. C) $100,000. D) $250,000.
Answer: D
Diff:1
15) TheFDIChelpsprevent
A) riskybehavioronthepartofbankers. B) inflation.
C) bankruns. D) riskybehavioronthepartofdepositors.
Answer: C
Diff:2
16) TheFDICfeesystemencouragesdepositoryinstitutionsto
A) makeriskierloansthantheywouldotherwise.
B) rejectloansthatprobablywouldhavebeenprofitable.
C) seekonlyamodestrateofreturn.
D) operatetheirinstitutionsintooconservativeafashion.
Answer: A
Diff:2
17) Asymmetricinformationbeforeatransactiontakesplacegeneratestheproblemof
A) bankruns. B) irrationalbehavior.
Answer: D
Diff:1
18) Ifdepositoryinsuranceexists,bankmanagersmaymakeriskierloansthantheywouldhave
otherwise,whichisanexampleof
A) regulatorylag. B) irrationalbehavior.
Answer: C
Diff:2
19) WhichofthefollowingisNOTapotentialproblemduetofederaldepositoryinsurance?
A) Bankshaveanincentivetomakeriskierloansthantheywouldotherwise.
B) Depositorshavelittleincentivetomonitorthebehaviorofthemanagersofthedepository
institutions.
C) Depositorsdemandgreaterinterestratesontheirdepositstocompensatethemforthe
riskierbehaviorofthemanagersofthedepositoryinstitutions.
D) Lendershavelessincentivetoinvestigatethecredit-worthinessofborrowers.
Answer: C
Diff:3
20) BankexaminationsbytheFDIChelpreducethe________problem,bypreventing bank

managersfromallocatingfundsalreadyobtainedfromdepositorstonon -creditworthyloans.
A) moralhazard B) principledhazard
C) adverseselection D) contraryselection
Answer: A
Diff:2
21) Inadditiontoinsuringaccounts,theFDICtodayhastheadditionalpowerof
A) settingreserverequirements.
B) establishingFOMCgoals.
C) establishingthediscountrate.
D) establishinghighercapitalrequirementsforbanks.
Answer: D
Diff:2
22) TheFederalDepositInsuranceCorporation
A) increasesthestabilityofthebankingsystembyreducingthelikelihoodofbankruns.
B) discouragesbanksfromengaginginexcessiverisktaking.
C) onlyinsuresdepositsinmoney-centerbanks.
D) wasestablishedafterthePanicof1907.
Answer: A
Diff:2
23) BecausedepositsareinsuredbytheFDIC,mostofusdonotlookatthelendingbehaviorofour
banks.Thiscreatesa(n)________problem.
A) moralhazard B) principledhazard
C) adverseselection D) contraryselection
Answer: A
Diff:2
24) BankXhadareputationforaskingfewquestionswhenitprovidedloans.Fiveyearslater,the
majorityoftheloanswerenotrepaid.Thisisbecausethebankhadfailedtoaddressthe
A) adverseselectionproblem. B) moralhazardproblem.
C) contraryselectionproblem. D) free-riderproblem.
Answer: A
Diff:2
25) Whichofthefollowingrepresentsapreventativemeasureagainstbankruns?
A) ThePresidentoftheUnitedStatescanorderbankstopaydepositors.
B) TheFederalReservecanlowerreserverequirementstoensurethatbankshavesufficient
funds.
C) TheFDICprovidesdepositinsurance.
Answer: C
Diff:2
26) Whatwouldcauseabankrun?
A) Depositorsfeelthatthebankdoesnothavesufficientassetstocovertheirdeposits.
B) Depositorsfeelthattheyareearningtoolowofareturnontheirdeposits.
C) Borrowersfeelthattheyarebeingchargedtoohighofaninterestrateontheirloans.
D) Bankmanagerschoosetoholdmoreexcessreserves.
Answer: A
Diff:2
27) Whateffecthasthepresenceoffederaldepositinsurancehadonthebankingindustry?
A) Banksnowholdmoreexcessreserves.
B) Bankshavemadeitmoredifficultforcustomerstoqualifyforloans.
C) Bankshavemaderiskierloans.
D) Depositorshavebecomemorevigilantinmonitoringthedecisionsmadebymanagersof
theirbanks.
Answer: C
Diff:2
28) ThegovernmentagencythatinsuresdepositsheldinbanksintheUnitedStatesis
A) theFederalReserveSystem.
B) theFederalBankInsuranceCorporation.
C) theFederalAssetInsuranceCorporation.
D) theFederalDepositInsuranceCorporation.
Answer: D
Diff:2
29) DuetotheexistenceoftheFDIC,banks
A) maymakeriskierloansknowingthattheirdepositorsareinsured.
B) havenotchangedtheirbehaviorevenwiththeexistenceofinsurance.
C) becomemorecautiousinmakingloans.
D) arenolongerconcernedaboutnetworth.
Answer: A
Diff:2
30) InwhichyearwastheFederalDepositInsuranceCorporation(FDIC)established?
A) 1913 B) 1929 C) 1933 D) 1951
Answer: C
Diff:2
31) TheprimarypurposeoftheFDICistoreducethepotentialfor
A) governmentregulations. B) reservecheating.
C) bankruns. D) excessiveinterestrates.
Answer: C
Diff:2
32) Beginninginlate2010,theFDICsoughttoincreasethepublicsconfidenceindepository
institutionsby
A) loweringinsurancepremiumsforbankdeposits.
B) eliminatinginsurancepremiumsforbankdeposits.
C) assessinginsurancepremiumsonbankstotalliabilities.
D) changingthescopeofinsurancetobanksassets.
Answer: C
Diff:2
QuestionStatus: New
33) Explaintheforcesthatcausedthesavingsandloandebacleinthelatterhalfofthe1980s.
Answer: Depositinsurancecreatedamoralhazardprobleminwhichsavingsinstitutionshadan
incentivetomakeriskierloansthantheywouldhavemadeintheabsenceofdeposit
insurance.Inaddition,becausetheirdepositswerefederallyinsured,depositorsof
savingsinstitutionshadlessincentivetomonitortherisksincurredbythemanagers.Asa
result,theinstitutionsextendedlargeamountsofhigh -riskloans,manyofwhich
generatedlossesthatresultedinfailuresbynumerousinstitutions.
Diff:2
Chapter16
DomesticandInternationalDimensionsofMonetaryPolicy
16.1TheDemandforMoney
1) Whatarethetwofeaturesofmoneythatdistinguishitfromallothergoodsintheeconomy?
A) Moneyisgovernmentissuedanditisredeemableforgoldorsilver.
B) Moneyisacceptedasamediumofexchangeanditisthecommonunitofaccountusedto
expressprices.
C) Moneyispartofeverybartertransactionanditisdivisible.
D) Moneyisacommonunitofaccountanditisalsocanbetradedforothercurrenciesata
guaranteedexchangerate.
Answer: B
Diff:1
Topic: 16.1TheDemandforMoney
2) Whichofthefollowingisafactorinfluencingthedemandformoney?
A) Transactionsdemand B) Precautionarydemand
C) Assetdemand D) Alloftheabovearecorrect
Answer: D
Diff:1
3) Holdingmoneytomeetunplannedexpendituresandemergenciesisknownas
A) transactionsdemand. B) precautionarydemand.
C) assetdemand. D) aggregatedemand.
Answer: B
Diff:1
4) Moneyisa________andatransactionisa________.
A) stock;stock B) flow;flow C) flow;stock D) stock;flow
Answer: D
Diff:2
Chapter16DomesticandInternationalDimensionsofMonetaryPolicy 773
5) Accordingtothetext,themainreasonforpeopletoholdmoneyis
A) toenjoylookingatthepicturesofpastleaders.
B) totellotherpeoplehowrichtheyare.
C) becausetheyareirrational.
D) touseitfordifferentreasons.
Answer: D
Diff:1
6) Whatisthemostcommonreasonpeopledemandmoney?
A) Eachbillandcoinisareflectionofimportantpeopleandeventsinanationshistory.
B) Peopledesiretousemoneyasamediumofexchangewhentheybuygoodsandservices.
C) Sinceveryfewofusengageinaflowoftransactions,moneyisourfinancialsafetynet.
D) Theydemandmoneytoensurethatthenationsgovernmentwillnotspendtoomuch.
Answer: B
Diff:1
7) Whenhouseholdsholdmoneyforunplannedexpendituresandemergencies,itiscalled
A) thespeculativedemandformoney. B) thetransactionsdemandformoney.
C) theirrationaldemandformoney. D) theprecautionarydemandformoney.
Answer: D
Diff:1
8) Apersonputsa$100billintheglovecompartmentofhiscarincaseofanemergency.Thisisan
exampleof
A) theprecautionarydemandformoney.
B) thetransactiondemandformoney.
C) theemergencyinvestmentdemandformoney.
D) theassetdemandformoney.
Answer: A
Diff:2
9) Thedemandformoneytocoverunexpectedexpendituresandtomeetemergenciesisknownas
A) thetransactionsdemandformoney. B) theprecautionarydemandformoney.
C) theassetdemandformoney. D) theterminaldemandformoney.
Answer: B
Diff:1
10) Precautionarydemandformoneywillfallwhen
A) theinterestraterises. B) theinterestratefalls.
C) themoneysupplyincreases. D) governmentspendingfalls.
Answer: A
Diff:2
11) Theprecautionarydemandforholdingmoneyarisesbecause
A) peoplewantbeabletomakeunexpectedpurchasesortomeetemergencies.
B) creditcardschargelowinterestrates,whichmakesmoneymoreattractivethancredit.
C) peoplewouldratherholdmoneyintheformoftimedepositsthanintheformofhard
currency.
D) expectedtransactionsarecompletedmoreeasilywithdebitcardsthanwithcreditcards.
Answer: A
Diff:1
12) Thetransactionsdemandformoneyexistsbecausehouseholds
A) areinsensitivetointerestratechanges.
B) mustsaveforunexpectedemergencies.
C) donotlikethefactthatmoneyisaliquidasset.
D) donotreceivetheirincomesatthesametimetheywishtomakepurchases.
Answer: D
Diff:1
13) Whenpeoplewanttoholdmoneytomakeregularplannedexpenditures,thisis
A) thetransactiondemandformoney. B) theassetdemandformoney.
C) theprecautionarydemandformoney. D) thespendingdemandformoney.
Answer: A
Diff:1
14) AsnominalGrossDomesticProduct(GDP)rises,peoplewillwishto
A) holdlessmoneyfortransactions. B) holdmoremoneyfortransactions.
C) spendless. D) investonlyinstocks.
Answer: B
Diff:2
15) Thetransactionsdemandformoney
A) variesnegativelywithnominalGrossDomesticProduct(GDP).
B) variesinverselywithnominalGrossDomesticProduct(GDP).
C) variesdirectlywithnominalGrossDomesticProduct(GDP).
D) isunrelatedtonominalGrossDomesticProduct(GDP).
Answer: C
Diff:1
16) Wheninterestratesrise,thetransactionsdemandformoneyusually
A) decreases.
B) increases.
C) decreasesinitiallyandthenincreasestotheoriginalposition.
D) doesnotchange.
Answer: A
Diff:1
17) AsnominalGrossDomesticProduct(GDP)rises,thetransactionsdemandformoney
A) increases,andthemoneydemandcurveshiftstotheleft.
B) decreases,andthemoneydemandcurveshiftstotheleft.
C) increases,andthemoneydemandcurveshiftstotheright.
D) remainsconstant,andthemoneydemandcurveremainsthesame.
Answer: C
Diff:1
A) variesinverselywiththeprecautionarydemandformoney.
B) variesdirectlywiththerateofinterest.
C) isafunctionofnominalGrossDomesticProduct(GDP).
D) isdeterminedbytheFederalReserveSystem.
Answer: C
Diff:1
19) Thetransactionsdemandformoneywillincreasewhen
A) therateofinterestincreases.
B) thepricelevelfalls.
C) nominalGrossDomesticProduct(GDP)increases.
D) nominalGrossDomesticProduct(GDP)decreases.
Answer: C
Diff:1
A) variesdirectlywithnominalGrossDomesticProduct(GDP).
B) variesinverselywithnominalGrossDomesticProduct(GDP).
C) variesnegativelywithrealnominalGrossDomesticProduct(GDP).
D) hasnorelationshipwithnominalGrossDomesticProduct(GDP).
Answer: A
Diff:2
21) Thetransactionsdemandformoneyrefersto
A) thedesireforwealth.
B) thedemandtoholdmoneyforuseinplannedpurchases.
C) thedesireforincome.
D) thedemandtoholdmoneyasalong-termstoreofvalue.
Answer: B
Diff:2
22) Theassetdemandformoneyisrelatedtowhichfunctionofmoney?
Answer: C
Diff:1
23) Whenhouseholdschoosetoholdmoneyasastoreofvalue,ratherthanholdingassetssuchas
certificatesofdeposit,stocks,andbonds,________demandformoneyresults.
A) liquidity B) transactions C) precautionary D) asset
Answer: D
Diff:1
24) Supposethetypicalhouseholdholds$1,000whentheinterestrateis5percent.Whenthe
interestraterisesto6percent,thetypicalhouseholdwouldmostlikelyhold
A) moremoneybecausetheopportunitycostofholdingmoneyislower.
B) lessmoneybecausetheopportunitycostofholdingmoneyislower.
C) moremoneybecausetheopportunitycostofholdingmoneyishigher.
D) lessmoneybecausetheopportunitycostofholdingmoneyishigher.
Answer: D
Diff:1
25) Whatisaprimarydeterminantoftheassetdemandformoney?
I. theinterestrate
II. theopportunitycostofholdingmoney
III. thesupplyofmoney
A) Ionly B) IIIonly C) bothIandII D) bothIIandIII
Answer: C
Diff:1
26) Oneoftheeconomiccostsofholdingcurrencyisthat
A) itfulfillsnoprecautionaryrole. B) itfulfillsnotransactionsrole.
C) itearnsnointerestincome. D) itsrealvaluealwaysincreases.
Answer: C
Diff:1
27) Themoneydemandfunctionimpliesthatmoneydemandis
A) positivelyrelatedtointerestrates.
B) negativelyrelatedtobondprices.
C) negativelyrelatedtointerestrates.
D) negativelyrelatedtotransactionsintheeconomy.
Answer: C
Diff:1
28) Boththeprecautionaryandassetdemandformoneyareinfluencedby
A) theU.S.Treasury. B) theinterestrate.
C) goldprices. D) noneoftheabove.
Answer: B
Diff:2
29) Usingtheinterestrateasameasureoftheopportunitycostofholdingmoney,thedemandfor
moneycurve
A) slopesupwardwithrespecttotherateofinterest.
B) isnotaffectedbythepricelevel.
C) slopesdownwardwithrespecttotherateofinterest.
D) isvertical.
Answer: C
Diff:1
30) Whentherateofinterestintheeconomyincreases,
A) themarketpriceofexistingbondswillfall.
B) thetransactiondemandformoneywillincrease.
C) realGrossDomesticProduct(GDP)willincrease.
D) theassetdemandformoneywillincrease.
Answer: A
Diff:1
31) Whentherateofinterestintheeconomyfalls,therewillbe
A) anincreaseinthemarketpriceofexistingbonds.
B) adecreaseinthetransactiondemandformoney.
C) lessinvestmentbybusinesses.
D) anincreaseinnominalGrossDomesticProduct(GDP).
Answer: A
Diff:1
32) Theopportunitycostofholdingmoneyrefersto
A) theservicefeesassociatedwithcheckingaccounts.
B) theservicefeesassociatedwithcheckingaccountsplusthecostsundertakentoprevent
theft.
C) theinterestthatcouldhavebeenearnedifthemoneybalanceshadbeentransferredtoan
interest-bearingasset.
D) thepleasurethatwouldhavebeenreceivedifthemoneybalanceshadbeenusedtobuya
goodorservice.
Answer: C
Diff:2
33) Thedemandformoneycurveisdrawnwith
A) theinterestrateontheverticalaxisandthecurveslopingdown.
B) theinterestrateontheverticalaxisandthecurveslopingup.
C) nominalGrossDomesticProduct(GDP)ontheverticalaxisandthecurveslopingup.
D) nominalGrossDomesticProduct(GDP)onthehorizontalaxisandthecurvesloping
down.
Answer: A
Diff:2
34) Moneysuseinnon-bartertransactionsrelatestoitsroleasa
A) storeofvalue. B) mediumofexchange.
C) unitofaccounting. D) standardofdeferredpayment.
Answer: B
Diff:1
35) Assetdemandformoneyisholdingmoney
A) tomeetunplannedexpendituresandemergencies.
B) asamediumofexchangetomakepayments.
C) asastoreofvalueinsteadofotherassets.
D) tospeculateonthestockmarketandbonds.
Answer: C
Diff:1
36) Somethingthataffectstheamountofmoneyinexistencewill
A) havenoparticulareffect.
B) notaffecttheeconomyasawholebutmayaffectcertainkeymarketssuchasthemarket
forloans.
C) haveaneffectonlyifthechangeinmoneyislarge.
D) affectallmarkets.
Answer: D
Diff:1
A) Todemandmoneyistodemandwealth.
B) Todemandmoneyistodemandahigherincome.
C) Tousemoney,onemustholdmoney.
D) Togetmoremoney,onemustearninterestonmoney.
Answer: C
Diff:1
38) Thedemandformoneyreferstothedesireto
A) holdagoodthatyieldsutilitywhenitisconsumed.
B) ahighincome.
C) spendmoneybecausemoneyisusedinalltransactions.
D) holdmoneybecausemoneyisusedinallnon-bartertransactions.
Answer: D
Diff:1
39) Themainreasonpeopleholdmoneyisthat
A) moneyprovidesastandardofvalue.
B) moneyisusedtobuygoodsandservices.
C) moneyisintrinsicallyvaluable.
D) moneyispower.
Answer: B
Diff:1
40) WhichofthefollowingisNOTareasonwhypeoplearemotivatedtoholdmoney?
A) Assetdemand. B) Precautionarydemand.
C) Liabilitydemand. D) Transactionsdemand.
Answer: C
Diff:1
41) PeopledemandmoneyforallofthefollowingreasonsEXCEPT
A) itisamediumofexchangetomakepayments.
B) itgeneratesarateofreturn.
C) itcanmeetunplannedexpenditures.
D) itisastoreofvalue.
Answer: B
Diff:1
42) Thetransactionsdemandformoneyisthedemandtoholdmoneyto
A) makeregular,expectedpurchases.
B) meetunplannedexpenditures.
C) storeoneswealth.
D) purchasebondswheninterestratesincrease.
Answer: A
Diff:1
43) Whenapersonholdsmoney,theygiveup
A) thepleasureassociatedwithspendingmoney.
B) thepleasureassociatedwithsavingmoney.
C) theinterestthatcouldhavebeenearnedifthemoneyhadbeenchangedintoan
interest-bearingasset.
D) nothing,sincethepersoncanalwaysusethemoneytobuygoodsorservicesor
interest-bearingassets.
Answer: C
Diff:2
44) Thetransactiondemandformoneyvaries
A) directlywiththeinterestrate.
B) directlywithnominalGDP.
C) inverselywithnominalGDPandrealGDP.
D) inverselywithnominalGDPonly.
Answer: B
Diff:2
45) AsrealGDPincreases,peoplehold
A) lessmoneybecausetheywillwanttoincreasetheamountofsavings.
B) lessmoneybecausetheywillwanttocollectinterest.
C) aboutthesameamountofmoneysincethathasbeenenoughinthepast.
D) moremoneysincetheywillincreasetheirpurchases.
Answer: D
Diff:1
46) Amajordifferencebetweenthetransactionsdemandformoneyandtheprecautionarydemand
isthatthe
A) transactionsdemandmeansthatpeopleareforegoinginterestbuttheyarenotforegoing
interestintheprecautionarydemand.
B) transactionsdemandleadstothepurchaseofassetswhiletheprecautionarydemanddoes
not.
C) transactionsdemandinvolvesexpectedexpenditureswhiletheprecautionarydemand
involvesunexpectedexpenditures.
D) transactionsdemandisforemergencieswhiletheprecautionarydemandisforeveryday
expenditures.
Answer: C
Diff:1
47) Holdingmoneyasamediumofexchangetomakepaymentsis
A) thetransactionsdemandformoney. B) thecapitaldemandformoney.
C) theprecautionarydemandformoney. D) theassetdemandformoney.
Answer: A
Diff:1
48) Albertopurchasestencupsofcoffeeaweek.Theamountofmoneythatheholdstopurchase
tencupsofcoffeeisthe
A) precautionarydemandformoney. B) transactionsdemandformoney.
C) assetdemandformoney. D) moneybalancedemandformoney.
Answer: B
Diff:2
49) Holdingmoneytomeetunplannedexpendituresis
Answer: C
Diff:1
50) Whentheinterestrateincreases,peoplewilladjusttheirprecautionarydemandformoney
A) upward.
B) downward.
C) notatall.
D) downwardorupwarddependingupontheactualsupplyofmoney.
Answer: B
Diff:1
51) Theprecautionarydemandformoneyiswhenpeopleholdmoney
A) fortheinterestityields. B) asastoreofvalue.
C) asamediumofexchange. D) tomeetunplannedexpenditures.
Answer: D
Diff:1
52) Therelationshipbetweentheinterestrateandtheprecautionarydemandformoneyis
A) positive.
B) inverse.
C) positivesometimesandinverseothertimes.
D) nonexistent.
Answer: B
Diff:1
53) Apersonispreparingforalongautomobiletripandcashesinacertificateofdepositforcashin
caseofemergenciesalongtheway.Thisisanexampleofthe
A) transactionsdemandformoney. B) precautionarydemandformoney.
C) wealthdemandformoney. D) assetdemandformoney.
Answer: B
Diff:2
54) Holdingmoneyasastoreofvalueinsteadofotherassetsis
Answer: D
Diff:1
55) Theassetdemandformoneyisrelatedtothefunctionofmoneycalled
Answer: C
Diff:2
56) Peopleholdmoneyasanassetratherthanotherassetsbecause
A) itishighlyliquid.
B) itholdsitsvalue.
C) itgrowsinvalue.
D) thereisnocosttoholdingmoneyasanasset.
Answer: A
Diff:2
57) Javierhasbeenthinkingaboutpurchasingabondbutisafraidthatthebondwilllosevalue.He
hasdecidedtoholdmoneyinstead.Thisisknownasthe
A) precautionarydemandformoney. B) transactionsdemandformoney.
C) assetdemandformoney. D) moneybalancedemandformoney.
Answer: C
Diff:2
58) Peopleholdmoneybecauseitisliquidandlacksriskunderthe
A) moneybalancedemandformoney. B) assetdemandformoney.
C) precautionarydemandformoney. D) transactionsdemandformoney.
Answer: B
Diff:1
59) Therelationshipbetweentheinterestrateandtheassetdemandformoneyis
A) positive.
B) inverse.
C) positivesometimesandinverseothertimes.
D) nonexistent.
Answer: B
Diff:1
60) Johngetspaidmonthlyandpaysforeverythingwithcash.Whenhecasheshischeckhekeeps
$200forfood,$100forutilities,$900forrent,$50fortransportation,$100forentertainmentand
$300forunexpectedexpenditures.Whichofthefollowingstatementsistrue?
A) Thetransactionsdemandformoneyis$1,350,theprecautionarydemandis$300andthe
assetdemandis$0.
B) Thetransactionsdemandformoneyis$450,theprecautionarydemandis$300andthe
assetdemandis$900.
C) Thetransactionsdemandformoneyis$350,theprecautionarydemandis$1,150andthe
assetdemandis$150.
D) Thetransactionsdemandformoneyis$350,theprecautionarydemandis$950andthe
assetdemandis$0.
Answer: A
Diff:1
61) Georgemakes$250aweekworkingasastudentaid.Whenhecasheshischeckhetakes$100to
thecashiersofficetopaypartofhistuition.$25goestopayingoffhisbooks,$75goesfor
entertainmentand$50hekeepsforunexpectedexpenditures.Whichofthefollowingstatements
istrue?
A) Thetransactionsdemandformoneyis$125,theprecautionarydemandis$75andthe
assetdemandis$50.
B) Thetransactionsdemandformoneyis$0,theprecautionarydemandis$250andtheasset
demandis$0.
C) Thetransactionsdemandformoneyis$250,theprecautionarydemandis$0andtheasset
demandis$0.
D) Thetransactionsdemandformoneyis$200,theprecautionarydemandis$50andthe
assetdemandis$0.
Answer: D
Diff:1
62) Samiamakes$8,000amonth.Samiaspends$2,500onrentandrelatedhouseholdexpenses,
$500onfood,$200onclothes,$500onentertainmentand$600ontransportation.Shealways
keeps$200forthingslikethecarbreakingdown.$3,500isinvestedinthestockmarket.Which
ofthefollowingstatementsistrue?
A) Thetransactionsdemandformoneyis$4,300,theprecautionarydemandis$200andthe
assetdemandis$3,500.
B) Thetransactionsdemandformoneyis$4,300,theprecautionarydemandis$3,500andthe
assetdemandis$200.
C) Thetransactionsdemandformoneyis$4,300,theprecautionarydemandis$200andthe
assetdemandis$0.
D) Thetransactionsdemandformoneyis$3,500,theprecautionarydemandis$200andthe
assetdemandis$4,300.
Answer: C
Diff:1
63) Supposeafamilyisholding$1000initscheckingaccountfornormaltransactions,$500incash
foremergencies,and$1500asastoreofvaluewhentheinterestrateis4percent.Iftheinterest
raterisesto10percent,whichofthefollowingpatternsofholdingmoneywouldbemostlikely
andwhy?
A) Transactionsdemand$1000;Precautionarydemand$350;Assetdemand$500,because
theopportunitycostofholdingmoneyhasincreased.Thereductionmoneybalancesheld
asanassetisgreatestbecauseinterest-bearingassetsaremuchmoreattractivewhen
interestratesarehigher.
B) Transactionsdemand$500;Precautionarydemand$500;Assetdemand$1400,because
theopportunitycostofholdingmoneybalanceshasrisen.Thereductioninmoney
balancesheldfortransactionpurposesfallsthemostbecausepeoplestartusingcredit
cardsmorewhentheopportunitycostofholdingmoneyincreases.
C) Transactionsdemand$1000;Precautionarydemand$500;Assetdemand$500,because
onlytheassetdemandisresponsivetochangesintheinterestrate.
D) Transactionsdemand$800;Precautionarydemand$600;Assetdemand$1500,because
peoplecaneconomizeontheirmoneybalancesformakingtransactions,butthepossibility
ofanemergencyincreaseswiththeinterestrate.Peoplewillalsoexpectratestogohigher,
sotheywillholdmoneyasanassetuntiltheratesincreasefurther.
Answer: A
Diff:3
64) Thedemandformoneycurveisdrawn
A) holdingseveralthingsconstant,includingGDPandinterestrates.
B) holdingseveralthingsconstant,includingthepricelevelandinterestrates.
C) withinterestratesonthehorizontalaxis,andthecurveslopingupsincethepriceof
holdingmoneyvariesdirectlywiththeinterestrate.
D) withinterestratesontheverticalaxisandthecurveslopingdownsincelowerinterest
ratesmeanthepriceofholdingmoneyhasfallen.
Answer: D
Diff:2
65) Whenconsideringthedemandformoneycurve,theinterestrate
A) willhaveapositiverelationshipwiththequantityofmoneydemanded.
B) variesnegativelywiththetransactionsdemandformoney.
C) isthepriceofholdingmoney.
D) isindependentoftheopportunitycostofmoney.
Answer: C
Diff:1
66) Theopportunitycostofholdingmoneyis
A) theinterestincomeforegone. B) thetransactionsdemandformoney.
C) contractionarymonetarypolicy. D) themonetaryrule.
Answer: A
Diff:1
67) Therelationshipbetweenthequantityofmoneybalancesdemandedandtheinterestrateis
A) determinedbyopenmarketoperations. B) negative.
C) contractionarymonetarypolicy. D) thereserverequirements.
Answer: B
Diff:1
68) Thedemandformoneycurve
A) showstherelationshipbetweenmoneydemandedandopenmarketoperations.
B) showstherelationshipbetweenthequantityofmoneybalancesdemandedandtheinterest
rate.
C) ispositivelyrelatedtotheinterestrate.
D) variesinverselywiththesupplyofmoney.
Answer: B
Diff:1
69) Thereasonthatpeoplemaynotwanttoholdmoneyis
A) theprecautionarydemandformoneyandtheriskofbeingrobbed.
B) theopportunitycost.
C) thetransactionsdemandmakesitunnecessary.
D) duetothedirectrelationshipbetweenmoneydemandandtheinterestrate.
Answer: B
Diff:1
70) Thedemandformoneyforwhichthepurposeismakingunexpectedpurchasesormeeting
emergenciesisconsideredtobepartof
A) precautionarydemand. B) transactionsdemand.
C) assetdemand. D) savingsdemand.
Answer: A
Diff:1
71) Ineconomics,thedemandformoneyasbasicallyademandfor
A) bonds. B) status. C) liquidity. D) investment.
Answer: C
Diff:1
72) Holdingmoneyasamediumofexchangetopurchasegoodsandservicesandmakepayments
isknownasthe
A) spendingdemandformoney. B) transactionsdemandformoney.
C) precautionarydemandformoney. D) assetdemandformoney.
Answer: B
Diff:1
73) Thedemandformoneycurvedepicts
A) aninverserelationshipbetweenthequantityofmoneydemandedandthequantityof
bondsdemanded.
B) adirectrelationshipbetweenthequantityofmoneydemandedandthequantityofbonds
demanded.
C) aninverserelationshipbetweenthequantityofmoneydemandedandtheinterestrate.
D) adirectrelationshipbetweenthequantityofmoneydemandedandtheinterestrate.
Answer: C
Diff:1
74) Whichofthefollowingwilltendtooccurwhentheinterestrateincreases?
A) Thedemandformoneycurveshiftsleftward.
B) Thedemandformoneycurveshiftsrightward.
C) Thereisarightwardmovementalongthedemandformoneycurve.
D) Thereisaleftwardmovementalongthedemandformoneycurve.
Answer: D
Diff:1
75) Whichofthefollowingwillcauseareductionintheamountofmoneyindividualswishtohold?
A) anincreaseintheinterestrate B) anincreaseinincome
C) anincreaseinthepricelevel D) alloftheabove
Answer: A
Diff:1
76) Theamountofmoneypeoplewishtoholdshowsaninverserelationshipto
A) theirplannednear-termpurchases. B) themoneysupply.
C) theincometaxrate. D) theinterestrate.
Answer: D
Diff:2
77) Theamountofmoneythatpeoplewishtoholdtouseintransactionsvariesdirectlywith
A) theirplannednear-termpurchases. B) themoneysupply.
C) theincometaxrate. D) theinterestrate.
Answer: A
Diff:2
78) Thedownwardslopeofthedemandformoneycurvereflectsthefactthat
A) peopleholdmoreoftheirwealthintheformofmoneyasthepricelevelrises.
B) peopleholdmoreoftheirwealthintheformofmoneyasthepricelevelfalls.
C) peopleholdmoreoftheirwealthintheformofmoneyastheinterestraterises.
D) peopleholdmoreoftheirwealthintheformofmoneyastheinterestratefalls.
Answer: D
Diff:2
79) WhichofthefollowingisNOTatypeofdemandforholdingmoney?
A) transactionsdemand B) precautionarydemand
C) assetdemand D) qualitativedemand
Answer: D
Diff:1
80) Whichofthefollowingrepresentstheopportunitycostofholdingmoney?
A) liquidity B) theinterestrate
C) therateofinflation D) noneoftheabove
Answer: B
Diff:2
81) Thetransactionsdemandformoneyisrelatedtomoneyfunctioningasa
A) unitofaccounting. B) mediumofexchange.
C) storeofvalue. D) mediumofdeferredpayment.
Answer: B
Diff:1
82) Thedemandformoneyisbasedon
A) thetransactionsdemand,assetdemand,andprecautionarydemand.
B) thedemandforcash,demandforsecurities,andthedemandforrealestate.
C) thedemandforconsumption,demandforinvestment,anddemandbygovernment.
D) ademandforliquidityandwealth.
Answer: A
Diff:1
83) Apersonkeeps$500inhishomeinordertobepreparedforsomeunforeseenfutureevent.This
reflectshis
A) speculativedemandformoney. B) assetdemandformoney.
C) precautionarydemandformoney. D) liquiditydemandformoney.
Answer: C
Diff:1
84) Assetdemandformoneyisrelatedtomoneyfunctioningasa
A) unitofaccounting. B) mediumofexchange.
C) storeofvalue. D) mediumofdeferredpayment.
Answer: C
Diff:1
85) Theinterestrateistheopportunitycost
A) ofinvestinginstocks. B) ofinvestinginTreasurysecurities.
C) ofusingcreditcards. D) ofholdingmoney.
Answer: D
Diff:1
86) Iftheinterestrateincreases,the
A) quantityofmoneydemandedwillremainunchanged.
B) moneydemandcurvewillshifttotheright.
C) moneydemandcurvewillshifttotheleft.
D) quantityofmoneydemandedwillfall.
Answer: D
Diff:2
87) Warrenalwayscarriesaonehundreddollarbillincaseofemergencies.Thisisanexampleof
the
A) precautionarydemandformoney. B) assetdemandformoney.
C) transactionsdemandformoney. D) wealthdemandformoney.
Answer: A
Diff:1
88) Travisalwayscarries$100inhiswallettopayforgroceries.Thisisanexampleofthe
Answer: C
Diff:1
89) Berthaholdssomeofhersavingsascurrencyandcoinsplacedinhersewingbasket.Thisisan
exampleof
Answer: B
Diff:1
90) Thedemandformoneyisdownwardsloping,becauseathigherinterestrates,
A) theopportunitycostofholdingcashislower.
B) theopportunitycostofholdingmoneyishigher.
C) theopportunitycostofholdingmoneyisdecreasing.
D) theopportunitycostofholdingmoneyisconstant.
Answer: B
Diff:2
91) Iftheinterestrateincreases,thereisa(n)
A) increaseinthedemandformoney.
B) decreaseinthedemandformoney.
C) increaseinthequantityofmoneydemanded.
D) decreaseinthequantityofmoneydemanded.
Answer: D
Diff:2
92) SupposeTimhas$1,000incashonhandtobuycollectablebaseballcardsataswapmeet.Tim
oftensellsthesecardsataprofit.Thisisanexampleofthe
A) assetdemandformoney. B) transactiondemandformoney
C) precautionarydemandformoney. D) wealthdemandformoney.
Answer: A
Diff:1
93) Theassetdemandformoneyis
A) greaterathighinterestratesasinvestorscanearnmoreontheirinvestments.
B) greateratlowinterestrates,becausetheopportunitycostofholdingmoneyislow.
C) greateratlowinterestrates,becausetheopportunitycostofholdingmoneyishigh.
D) loweratlowinterestrates,becausetheopportunitycostofholdingmoneyishigh.
Answer: B
Diff:2
94) Asinterestratesrise,thequantityofmoneydemanded
A) falls. B) rises.
C) staysthesame. D) doesnotreacttointerestratechanges.
Answer: A
Diff:2
95) Whatismeantbythedemandformoney?
Answer: Moneyisusedtobuygoodsandservices.So,ifwewanttopurchasesomething,wemust
havesomemoney.Thedemandformoneyisamountofdesiredmoneyholdings,given
factorssuchasincomeandtheinterestrate.
Diff:1
96) Thedemandformoneyisinfinitesinceeveryonewantsmoremoney.Doyouagreeor
disagreewiththisstatement?Why?
Answer: Disagree.Thedemandformoneydoesnotrefertothedesiretohavemorewealthor
income.Itisademandtoholdmoneybalancessothatonecanpurchasegoodsand
services.Therefore,thedemandformoneyisnotinfinite,butisdownwardslopingwith
respecttothecostofholdingmoneybalances theinterestrate.
Diff:3
97) Whatarethreereasonspeoplewanttoholdmoneybalances?
Answer: Therearethreereasonspeopleholdmoneybalances.Thetransactionsdemandformoney
isthedemandtoholdmoneytomakeregular,expectedexpenditures.Theprecautionary
demandisthemoneyheldtomeetunplannedexpendituresandemergencies.Theasset
demandformoneyistoholdmoneyasanassetthatisastoreofvalue.
Diff:2
98) Whatdoesthedemandcurveformoneylooklike?Why?
Answer: Ifthequantityofmoneyisonthehorizontalaxisandtheinterestrateontheverticalaxis,
thedemandcurveformoneyisadownwardslopingcurveorline.Peopleholdmoney
becauseofmoneysroleasamediumofexchangeandastoreofvalue.Thelowerthe
interestratethelowerthecosttoholdmoneybalancessincetheforgoneinterestislower.
Peoplewillholdmorebalanceswhenthepriceofdoingsoisless,sothedemandcurve
formoneyslopesdown.
Diff:2
16.2HowtheFedInfluencesInterestRates
1) WhichofthefollowingactionsbytheFedwouldleadtoanincreaseinthemoneysupply?
A) Anincreaseintherequiredreserveratio
B) Anincreaseinthedifferentialbetweenthediscountrateandthefederalfundsrate
C) Anincreaseintaxrates
D) Thepurchaseofgovernmentsecurities
Answer: D
Diff:2
Topic: 16.2HowtheFedInfluencesInterestRates
2) Anincreaseinbondpriceswillmostlikelyresultin
A) anincreaseininterestrates.
B) adecreaseinthequantitydemandedofmoney.
C) anincreaseinthequantitydemandedofmoney.
D) anincreaseintheopportunitycostofholdingmoney.
Answer: C
Diff:2
3) Ifabondsellsfor$2,000andpays$200peryearininterest,theinterestrateonthebondis
Answer: B
Diff:1
4) Ifyouinitiallypay$1,000forabondwithanannualinterestrateof5percent,butthenthe
marketinterestraterisesto6percent,
A) themarketpriceofthebondisstill$1,000.
B) thebondsannualinterestpaymentremainsequalto$50.
C) themarketpriceofthebondhasincreased.
D) themarketpriceofthebondhasdecreased.
Answer: D
Diff:1
5) Thepriceofbondsandtheinterestrateare
A) inverselyrelated. B) positivelyrelated.
C) unrelated. D) related,butwearenotsurehow.
Answer: A
Diff:1
6) Anexcessquantityofmoneydemandedwillleadtoarisein
A) theinterestrate. B) investment.
C) income. D) bondprices.
Answer: A
Diff:1
7) Whichofthefollowingwillleadtoadecreaseinthepriceofexistingbonds?
A) Adecreaseintherateofinterest
B) Aninwardshiftinmoneydemand
C) Adecreaseinplannedinvestmentspending
D) Areductioninthemoneysupply
Answer: D
Diff:1
8) Anincreaseinthemoneysupplytypicallyleadsto
A) areductionintherateofinterest. B) adecreaseinthepricelevel.
C) areductioninthevelocityofmoney. D) aninwardshiftinmoneydemand.
Answer: A
Diff:1
9) IftheFedpurchasesU.S.governmentsecuritiesintheopenmarket,allofthefollowingwould
occurEXCEPT
A) anexpansionofthemoneysupply.
B) anincreaseininvestment.
C) afallinbondprices.
D) anincreaseinrealGrossDomesticProduct(GDP).
Answer: C
Diff:1
10) IftheFedsellsbondsthroughitsopenmarketoperations,thenthereis
A) anincreaseinthedemandforbondsandariseinthepriceofexistingbonds.
B) anincreaseinthesupplyofbondsandafallinthepriceofexistingbonds.
C) adecreaseininterestratesbecauseoftheincreaseinthesupplyofbonds.
D) adecreaseininterestratesbecauseofthedecreaseinthedemandforbonds.
Answer: B
Diff:2
11) IftheFeddecidestobuybonds,theresultwillbe
A) lowerbondpricesandlowerinterestrates.
B) lowerbondpricesandhigherinterestrates.
C) higherbondpricesandlowerinterestrates.
D) higherbondpricesandhigherinterestrates.
Answer: C
Diff:2
12) Themarketpricesofexistingbondsare
A) notrelatedtotheinterestrate. B) directlyrelatedtotheinterestrate.
C) inverselyrelatedtotheinterestrate. D) statedintermsoftheinterestrate.
Answer: C
Diff:1
13) Interestratestypicallyrisewhen
A) bondpricesincrease.
B) bondpricesdecrease.
C) thecouponpayoutonexistingbondsincrease.
D) thematuritydateonexistingbondsextendsfartherintothefuture.
Answer: B
Diff:2
14) WhichofthefollowingisNOTareasontheFedchangestherateofgrowthofthemoney
supply?
A) Toinfluenceaggregatedemand
B) Toshiftthedemandformoneycurve
C) Toinfluencetheamountofconsumption
D) Toinfluencetheamountofinvestment
Answer: B
Diff:1
15) Themarketpriceofexistingbondsis________totherateofinterestprevailingintheeconomy.
A) inverselyrelated B) directlyrelated
C) totallyunrelated D) synonymous
Answer: A
Diff:1
16) OpenmarketoperationsbytheFedcause
A) changesinthedifferencebetweenthediscountrate.andthefederalfundsrate.
B) aggregatesupplytochange.
C) thepricesofbondstochange.
D) changesintherequiredreserveratio.
Answer: C
Diff:1
17) WhentheFedconductsopenmarketoperations,it
A) purchasesorsellsgovernmentbondsissuedbytheU.S.Treasury.
B) isengaginginfiscalpolicy.
C) alsoraisestaxesatthesametime.
D) shiftsthedemandformoneycurve.
Answer: A
Diff:1
18) AsaleofbondsbytheFedgenerates
A) anincreaseinthedemandformoneybalances.
B) adecreaseinthedemandformoneybalances.
C) anincreaseinthedemandforbondsandariseinbondprices.
D) anincreaseinthesupplyofbondsandafallinbondprices.
Answer: D
Diff:2
19) ThepurchaseofgovernmentbondsbytheFedleadstoa(n)
A) increaseinthesupplyofbondsandadecreaseinbondprices.
B) decreaseinthesupplyofbondsandanincreaseinbondprices.
C) increaseinthedemandofbondsandadecreaseinthepriceofbonds.
D) decreaseinthedemandofbondsandanincreaseinthepriceofbonds.
Answer: B
Diff:1
20) Anincreaseintheinterestratewill
A) decreasethepriceofbonds.
B) increasethepriceofbonds.
C) increaseordecreasethepriceofbondsdependinguponwhetherthemoneysupplyhas
increasedordecreased.
D) leavethepriceofbondsunchanged.
Answer: A
Diff:1
21) Refertotheabovefigure.WhichpanelisconsistentwiththeFedsellingbonds?
Answer: A
Diff:2
22) Refertotheabovefigure.WhichpanelisconsistentwiththeFedbuyingbonds?
Answer: B
Diff:2
23) Refertotheabovefigure.WhichpanelscouldrepresentthesituationiftheFedhadengagedin
openmarketoperations?
A) PanelsAandB B) PanelsAandC
C) PanelsBandC D) PanelsCandD
Answer: A
Diff:2
24) Abondthatpaysayearlyinterestrateof$100isforsale.Theinterestratewas10percentand
nowis5percent.Thepriceofthebondwas
A) $1000andnowis$500. B) $1000andnowis$2000.
C) $500andnowis$2000. D) $2000andnowis$1000.
Answer: B
Diff:2
25) Abondissellingfor$1000anditpays$150ininterestayear.Iftheinterestratechangesto20
percent,then
A) theinterestpaymentrisesto$200. B) theinterestpaymentfallsto$75.
C) thepriceofthebondfallsto$750. D) thepriceofthebondrisesto$1500.
Answer: C
Diff:3
26) Whichofthefollowingisatruestatementabouttherelationshipbetweenthepriceofbondsand
theinterestrate?
A) Thepricesofbondsaredirectlyrelatedtotheinterestrate.
B) Thepricesofbondsincreasewhentheinterestratesrise.
C) Thepricesofbondsareunrelatedtotheinterestrate.
D) Thepricesofbondsareinverselyrelatedtotheinterestrate.
Answer: D
Diff:2
27) TheFedengagesinopenmarketoperationsandsellsgovernmentsecurities.Theresultis
A) lowerinterestrates.
B) higherinterestrates.
C) interestratesremainunchangedsincethereisnoreasontothinkbondpriceschanged.
D) uncertainsincemoreinformationisneeded.
Answer: B
Diff:2
28) Whichofthefollowingisassociatedwithacontractionarymonetarypolicy?
A) Loweringthedifferentialbetweenthediscountrateandthefederalfundsrate
B) Sellingbonds
C) Loweringtherequiredreserveratio
D) Raisingbondprices
Answer: B
Diff:1
29) TheFedwouldbepursuingacontractionarymonetarypolicyifitwas
A) loweringthedifferentialbetweenthediscountrateandthefederalfundsrate.
B) loweringthereserverequirement.
C) sellingdollarsinforeignexchangemarkets.
D) sellingbondsintheopenmarket.
Answer: D
Diff:2
30) HowdoestheFedincreasethelevelofreservesinthebankingsystem?
A) byloweringinterestrates B) byraisinginterestrates
C) bysellingbonds D) bybuyingbonds
Answer: D
Diff:2
31) WhentheFedpurchasesfederalgovernmentbondsintheopenmarket,
A) thereisnochangeinthemoneysupply. B) themoneysupplyexpands.
C) themoneysupplycontracts. D) thedemandformoneyexpands.
Answer: B
Diff:2
32) Wheninterestratesinthebondmarketgoup,
A) thereisnoimpactonthepriceofexistingbonds.
B) thepriceofexistingbondsgoesup.
C) thepriceofstocksgoesup.
D) thepriceofexistingbondsgoesdown.
Answer: D
Diff:2
33) Thepricesofallfixed-incomeassets(bonds)
A) varydirectlywiththeinterestrate. B) areindependentoftheinterestrate.
C) varyinverselywiththeinterestrate. D) aredeterminedbytheU.S.Treasury.
Answer: C
Diff:2
34) Theassetdemandformoneyis
A) greaterathighinterestratesasinvestorscanearnmoreontheirinvestments.
B) greateratlowinterestrates,becausetheopportunitycostofholdingmoneyislow.
C) greateratlowinterestrates,becausetheopportunitycostofholdingmoneyishigh.
D) loweratlowinterestrates,becausetheopportunitycostofholdingmoneyishigh.
Answer: B
Diff:2
35) Intheabovefigure,ifwebeginatS1 andtheFedsellsbonds,

A) thepriceofbondsfalls,andtheinterestraterises.
B) thepriceofbondsfalls,andsodoestheinterestrate.
C) thepriceofbondsrises,andsodoestheinterestrate.
D) thepriceofbondsrises,andtheinterestratefalls.
Answer: A
Diff:3
36) Intheabovefigure,ifwebeginatS2 andtheFedbuysbonds,

A) thepriceofbondsfalls,andtheinterestraterises.
B) thepriceofbondsfalls,andsodoestheinterestrate.
C) thepriceofbondsrises,andsodoestheinterestrate.
D) thepriceofbondsrises,andtheinterestratefalls.
Answer: D
Diff:3
37) SupposetheFedconductsanopenmarketsaleofbonds.Thismonetarypolicyactionwilltend
tocause
A) thepriceofbondstoincreaseandtheinterestratetoincrease.
B) thepriceofbondstoincreaseandtheinterestratetodecrease.
C) thepriceofbondstodecreaseandtheinterestratetoincrease.
D) thepriceofbondstodecreaseandtheinterestratetodecrease.
Answer: C
Diff:1
38) IftheFedsellsU.S.governmentsecurities,the
A) moneysupplyincreases,andthemoneysupplycurveshiftstotheright.
B) moneysupplyincreases,andthemoneysupplycurveshiftstotheleft.
C) moneysupplydecreases,andthemoneysupplycurveshiftstotheright.
D) moneysupplydecreases,andthemoneysupplycurveshiftstotheleft.
Answer: D
Diff:2
39) SupposetheFedconductsanopenmarketpurchaseofbonds.Thismonetarypolicyactionwill
tendtocause
A) thepriceofbondstoincrease,andtheinterestratetoincrease.
B) thepriceofbondstoincrease,andtheinterestratetodecrease.
C) thepriceofbondstodecrease,andtheinterestratetoincrease.
D) thepriceofbondstodecrease,andtheinterestratetodecrease.
Answer: B
Diff:1
40) TheFederalOpenMarketCommitteeengagesincontractionarymonetarypolicyby
A) loweringinterestrates. B) creatingexcessreserves.
C) sellingbonds. D) buyingbonds.
Answer: C
Diff:1
41) WhathappenstothepriceofbondswhentheFedissellingbonds?Whathappenstotheinterest
rate?Whathappenstothemoneysupply?
Answer: IftheFedsellsbonds,thesupplyofbondsinthemarketincreases,causingthepriceof
bondstofall.Sincethepriceofbondsisinverselyrelatedtotheinterestrate,theinterest
rateincreases.TheFedsellsbondstoreducethemoneysupply.
Diff:2
42) Describeandexplaintherelationshipbetweenthepriceofbondsandtheinterestrate.
Answer: Thereisaninverserelationshipbetweenthepriceofabondandtheinterestrate.Ifa
bondpaysinterestof$100ayearandthepriceofthebondis$1000,theinterestrateis10
percent.Iftheinterestratefallsto5percent,thenthepriceofabondpaying$100ayear
interestwouldriseto$2000.Theinterestrateistheamountofinterestpaidperyear
dividedbythepriceofthebond,sotheinterestrateandthepriceofthebondare
inverselyrelated.
Diff:3
16.3EffectsofanIncreaseintheMoneySupply
1) Otherthingsbeingequal,anincreaseinthesupplyofmoney
A) reducestheamountofmoneybalances.
B) increasesthepricelevel.
C) reducesaggregatedemand.
D) generatessignificantchangesinrelativeprices.
Answer: B
Diff:2
Topic: 16.3EffectsofanIncreaseintheMoneySupply
2) Thedirecteffectofanincreaseinthemoneysupplyisto
A) raiseinterestratesaspeopleincreasetheirsaving.
B) increaseinterestratesaspeopleanticipatehigherinflationinthefuture.
C) increaseaggregatedemandaspeopletrytospendtheirexcessmoneybalances.
D) decreaseaggregatedemandaspeopleanticipatefutureeconomicproblems.
Answer: C
Diff:2
3) Theshort-runeffectofanincreaseinthesupplyofmoneyis
A) anincreaseinbothrealGrossDomesticProduct(GDP)andthepricelevel.
B) anincreaseinthepricelevelbutnotinrealGrossDomesticProduct(GDP).
C) anincreaseinrealGrossDomesticProduct(GDP)butnotinthepricelevel.
D) anincreaseinthepricelevel,adecreaseinrealGrossDomesticProduct(GDP),butan
increaseinnominalnationalincome.
Answer: A
Diff:2
4) Theindirecteffectofanincreaseinthemoneysupplyisto
A) raiseinterestratessopeoplewillsavemore.
B) lowerinterestrates,whichstimulatesbothinvestmentandconsumptionspending.
C) putmorecashinpeoplespockets,therebyincreasingaggregatedemand.
D) payoffaportionofthepublicdebt.
Answer: B
Diff:2
5) Lookattheabovefigure.SupposetheeconomywasinitiallyinequilibriumatpointA.What
pointwouldrepresenttheshort-runequilibriumiftheFedmakesanopenmarketpurchaseof
bonds?
A) A B) B C) C D) D
Answer: B
Diff:1
6) Inthelongrun,theeffectofareductioninthemoneysupplyisto
A) decreasethepricelevelonly.
B) decreaserealGrossDomesticProduct(GDP)only.
C) decreaseboththepricelevelandrealGrossDomesticProduct(GDP).
D) decreasethepricelevelandincreaserealGrossDomesticProduct(GDP).
Answer: A
Diff:2
7) Toclosearecessionarygap,theFedwould
A) decreasethemoneysupply. B) increaseinterestrates.
C) sellbonds. D) increasethemoneysupply.
Answer: D
Diff:2
8) Expansionarymonetarypolicyduringperiodsofunderutilizedresourcescancause
A) realGrossDomesticProduct(GDP)toincreasewithoutanincreaseinthepricelevel.
B) realGrossDomesticProduct(GDP)toincreasewithadecreaseinthepricelevel.
C) realGrossDomesticProduct(GDP)toincreasewithanincreaseinthepricelevel.
D) nominalGrossDomesticProduct(GDP)toincreasebutcannotaffectrealGrossDomestic
Product(GDP).
Answer: C
Diff:2
9) Iftheeconomyisunderutilizingitseconomicresources,theFedshould
A) discourageinvestmentspending.
B) expandthemoneysupplytoincreaseaggregatedemand.
C) decreaseaggregatesupply.
D) contractthemoneysupplytodecreaseaggregatedemand.
Answer: B
Diff:3
10) Intheabovefigure,assumetheeconomystartsoutinequilibriumatpointd.IftheFedincreases
themoneysupplysothatthenewaggregatedemandcurveisAD 3 ,thenthenewshort-run
equilibriumwillbeatpoint
A) a. B) b. C) c. D) i.
Answer: C
Diff:1
11) Intheabovefigure,assumetheeconomystartsoutinequilibriumatpointd.IftheFedincreases
themoneysupplysothatthenewaggregatedemandcurveisAD 3 ,thenthelong-run
equilibriumwillbeatpoint
A) a. B) b. C) c. D) i.
Answer: A
Diff:1
12) Intheabovefigure,assumetheaggregatedemandoftheeconomyisAD 2 andtheFedactions

moveaggregatedemandtoAD 1 .Inthissituation,theFedhaspracticed
A) contractionarymonetarypolicy. B) expansionarymonetarypolicy.
C) irresponsiblefiscalpolicy. D) Keynesianfiscalpolicy.
Answer: A
Diff:1
13) Intheabovefigure,assumetheeconomyisinequilibriumatpointd.ThentheFeddecreasesthe
moneysupplysothatthenewaggregatedemandcurveisAD 1 .Inthelongrun,thenewprice
levelwillbe
A) 100. B) 120. C) 130. D) 110.
Answer: A
Diff:1
14) Intheabovefigure,iftheeconomyisinequilibriumatE 1 ,then

A) theeconomyisproducingbelowitspotentiallong-runequilibriumatfullemployment.
B) theeconomyisproducingaboveitspotentiallong-runequilibriumatfullemployment.
C) thereisaninflationarygapintheeconomy.
D) theeconomyisinaperiodofhighinflation.
Answer: A
Diff:1
15) Intheabovefigure,iftheeconomyisatequilibriumatE 1 ,theFedwouldmostlikely

A) adoptacontractionarymonetarypolicy.
B) adoptanexpansionarymonetarypolicy.
C) attempttolowertheaggregatedemandintheeconomy.
D) attempttolowerthepricelevelbelow120.
Answer: B
Diff:1
16) Inthelongrun,adecreaseinthemoneysupplywill
A) decreaserealGrossDomesticProduct(GDP).
B) increaserealGrossDomesticProduct(GDP).
C) increasethepricelevel.
D) decreasethepricelevel.
Answer: D
Diff:1
17) Oneresultofacontractionarymonetarypolicywouldbe
A) adeclineinthepricelevel. B) anincreaseinthemoneysupply.
C) anincreaseinbusinessinvestment. D) lowerinterestrates.
Answer: A
Diff:2
18) Thedirecteffectofanincreaseinthemoneysupplyisto
A) increaseaggregatedemandaspeoplespendtheirexcessmoneybalances.
B) increaseaggregatedemandasinterestratesfallandinvestmentspendingincreases.
C) increaseaggregatesupplyasproducersanticipatehigherfutureprofits.
D) decreasetherateofinflation.
Answer: A
Diff:1
19) Theindirecteffectofanincreaseinthemoneysupplyisto
A) increaseaggregatedemandaspeopletrytospendtheirexcessmoneybalances.
B) increaseaggregatedemandasinterestratesfallandinvestmentspendingincreases.
C) increaseaggregatesupplyasfirmsanticipatefutureprofits.
D) decreasethepricelevel.
Answer: B
Diff:1
20) WhichofthefollowingwillNOToccurintheshortrunwhenthemoneysupplydecreases?
A) Peoplewillbuyfewergoodsandservices.
B) Theinterestratewillincrease.
C) Aggregatesupplydecreases.
D) Thepriceleveldecreases.
Answer: C
Diff:2
21) Anincreaseinthemoneysupplywill
A) increaseaggregatesupply. B) decreaseaggregatesupply.
C) increaseaggregatedemand. D) decreaseaggregatedemand.
Answer: C
Diff:1
22) Theshort-runeffectofanincreaseinthemoneysupplyisto
A) increaserealGDPonly.
B) increasethepricelevelonly.
C) increasebothrealGDPandthepricelevel.
D) increasenominalGDPbutdecreasethepricelevel.
Answer: C
Diff:2
23) Refertotheabovefigure.SupposepointAistheoriginalequilibrium.Ifthereisanincreasein
themoneysupply,thenewshort-runequilibriumisgivenbypoint
A) A. B) B. C) C. D) D.
Answer: B
Diff:2
24) Refertotheabovefigure.SupposepointAistheoriginalequilibrium.Ifthereisanincreasein
themoneysupply,thenewlong-runequilibriumisgivenbypoint
A) A. B) B. C) C. D) D.
Answer: C
Diff:2
25) Thelong-runeffectofanincreaseinthemoneysupplywhenstartingfromfullemploymentisto
A) increaserealGDPonly.
B) increasethepricelevelonly.
C) increasebothrealGDPandthepricelevel.
D) increaserealGDPasthepricelevelincreasestoo.
Answer: B
Diff:2
26) Anexpansionarymonetarypolicyisonethat
A) stimulatesaggregatesupply.
B) reducesaggregatesupplyandaggregatedemand.
C) stimulatesaggregatedemand.
D) reducesaggregatedemandwhilestimulatingaggregatesupply.
Answer: C
Diff:1
27) Supposetheeconomycurrentlyhassomeunderutilizedresources.TheFedengagesin
expansionarymonetarypolicy.Theimpactofexpansionarymonetarypolicywillbeto
A) increaseaggregatedemand,increasepricesandincreaserealGDP.
B) increaseaggregatedemand,increasepricesanddecreaserealGDP.
C) increaseshort-runaggregatesupply,decreaseinpricesanddecreaseinrealGDP.
D) increaseshort-runaggregatesupply,decreasepricesandincreaserealGDP.
Answer: A
Diff:1
28) Supposetheeconomycurrentlyhasaninflationarygap.TheFedengagesincontractionary
monetarypolicy.Theimpactofcontractionarymonetarypolicywillbeto
A) increaseshort-runaggregatesupply,decreaseinpricesanddecreaseinrealGDP.
B) increaseshort-runaggregatesupply,decreasepricesandincreaserealGDP.
C) decreaseaggregatedemand,decreaseprices,andincreaserealGDP.
D) decreaseaggregatedemand,decreaseprices,anddecreaserealGDP.
Answer: D
Diff:1
29) WhentheFederalReserveconductsopenmarketpurchasestoincreasebankreserveswithout
tryingtoaltertheinterestratethatisalreadyclosetozero,thepolicyactioniscalled
A) qualitativeeasing. B) quantitativeeasing.
C) qualitativetightening. D) quantitativetightening.
Answer: B
Diff:2
QuestionStatus: New
30) Iftheeconomyisoperatingbelowitsfullemploymentlevel,theFedcan
A) increaseaggregatedemandbyincreasingtherateofgrowthofthemoneysupply.
B) increaseaggregatedemandbystimulatingthedemandformoney.
C) increaseaggregatedemandbysellingbondsandraisinginterestrates.
D) increaseaggregatesupplybyraisingthepricelevel.
Answer: A
Diff:2
31) Supposetheeconomyhasarecessionarygap.Byusinganexpansionarymonetarypolicy,the
Fedcan
A) raiserealGDPwithoutincreasingthepricelevel.
B) raiserealGDPandthepricelevel.
C) raiserealGDPanddecreasethepricelevel.
D) raisethepricelevelalone,butcannotincreaserealGDP.
Answer: B
Diff:2
32) Supposetheeconomyisoperatingbelowitsfullemploymentlevel.TheFed
A) ispowerlesstoaffecteitheraggregatedemandoraggregatesupply.Fiscalpolicyis
needed.
B) canmovetheeconomytowardthefullemploymentlevelbyexpandingthemoneysupply
toincreaseaggregatesupply.
C) canmovetheeconomytowardthefullemploymentlevelbyexpandingthemoneysupply
toincreaseaggregatedemandandtoholdpricesconstant.
D) canmovetheeconomytowardthefullemploymentlevelbyexpandingthemoneysupply
toincreaseaggregatedemandthroughbothitsdirectanditsindirecteffects.
Answer: D
Diff:3
33) Quantitativeeasingreferstoapolicyactioninwhichacentralbank
A) sellsgovernmentsecuritiestodirectlydecreasebankreserves.
B) buysgovernmentsecuritiestodirectlyincreasebankreserves.
C) increasesinterestratesdirectlywithoutalteringbankreserves.
D) decreasesinterestratesdirectlywithoutalteringbankreserves.
Answer: B
Diff:1
QuestionStatus: New
34) TheFederalReserveconductedthepolicyofquantitativeeasingprimarilywhen
A) theinterestratewasclosetozero.
B) theinterestratewasrelativelyhigh.
C) theinterestratewastooerratictobecontrolled.
D) theinterestratewasverysensitivetothechangeinthemoneysupply.
Answer: A
Diff:2
QuestionStatus: New
35) Duringaperiodofcontractionarymonetarypolicy,
A) thepricelevelisincreased,whichleadstoanincreaseinthemoneysupply.
B) thepricelevelisdecreased,whichleadstoadecreaseinthemoneysupply.
C) therateofgrowthofthemoneysupplyisincreased,leadingtoanincreaseintheprice
level.
D) therateofgrowthofthemoneysupplyisreduced,leadingtoadecreaseinthepricelevel.
Answer: D
Diff:1
36) Duringaperiodofexpansionarymonetarypolicy,
A) thepricelevelisincreased,whichleadstoanincreaseinthemoneysupply.
B) thepricelevelisdecreased,whichleadstoadecreaseinthemoneysupply.
C) therateofgrowthofthemoneysupplyisincreased,leadingtoanincreaseintheprice
level.
D) therateofgrowthofthemoneysupplyisreduced,leadingtoadecreaseinthepricelevel.
Answer: C
Diff:1
37) Asaresultofanincreaseinthemoneysupply,somebanksmayendupwithexcessreserves.
Whatisthelikelyresult?
A) Bankswillmakemoreloans,therebycontributingtoanincreaseinaggregatedemand.
B) Bankswillmakemoreloans,therebycontributingtoadecreaseinaggregatedemand.
C) Bankswillraiseinterestrates.
D) Bankswillspendtheexcessreservesbypayingtheiremployeesmore.
Answer: A
Diff:2
38) Howistheeffectofexpansionarymonetarypolicydepictedinanaggregatesupply -aggregate

demandgraph?
A) Theaggregatesupplycurveshiftsleftward.
B) Theaggregatesupplycurveshiftsrightward.
C) Theaggregatedemandcurveshiftsrightward.
D) Theequilibriumlevelofincomeincreases,butneithercurveshifts.
Answer: C
Diff:2
39) Intherealworld,contractionarymonetarypolicywouldbeusedto
A) combatarecession. B) reducetherateofinflation.
C) increasenominalGDP. D) increaselong-runaggregatesupply.
Answer: B
Diff:3
40) HowwouldexpansionarymonetarypolicyaffecttheADcurve?
A) Itwouldshifttotheright. B) Itwouldshifttotheleft.
C) Itwouldbecomemorestatic. D) Itwouldfall.
Answer: A
Diff:2
41) Theappropriatemonetarypolicyintheeventofarecessionarygapwouldbeto
A) increasethedifferencebetweenthediscountrateandthefederalfundsrate.
B) engageinanopenmarketpurchaseofU.S.governmentsecurities.
C) increasethedifferencebetweenthefederalfundsrateandtherequiredreserveratio.
D) raisetherequiredreserveratio.
Answer: B
Diff:2
42) Thedirecteffectofanincreaseinthemoneysupplyis
A) peoplewillspendtheextramoney,causingtheaggregatedemandcurvetoshifttothe
rightandpricestorise,andcausingtheeconomytogointorecession.
B) peoplewillsavethemoney,causinganincreaseinbankdeposits,causinginterestratesto
fall,andloanstoexpand.
C) peoplewillsavemoremoney,causingadecreaseineconomicactivityandafallinprices.
D) peoplewillspendtheextramoney,causingtheaggregatedemandcurvetoshifttothe
right,creatinganincreaseineconomicactivity.
Answer: D
Diff:2
43) Anindirecteffectofmonetarypolicyisthatasthemoneysupply
A) increases,interestratesfall,andborrowingandspendingincrease.
B) increases,interestratesrise,andborrowingandspendingdecrease.
C) decreases,interestratesfall,andborrowingandspendingincrease.
D) decreases,interestratesrise,andborrowingandspendingincrease.
Answer: A
Diff:2
44) SupposetheFedincreasesthemoneysupply.Asaresultofthis,peoplegooutandspendmore
moneyonconsumergoods,increasingaggregatespending.Thisisknownasa(n)
A) directeffectofmonetarypolicy. B) indirecteffectofmonetarypolicy.
C) directeffectoffiscalpolicy. D) indirecteffectoffiscalpolicy.
Answer: A
Diff:2
45) SupposetheFedincreasesthemoneysupply.Asaresultofthis,peopledepositexcessfunds
intotheirbankaccounts,causingbankstohaveexcessreserves.Asaresult,thebankslowerthe
interestratesthattheychargeonloans,andinvestmentrises,causinganincreaseinaggregate
spending.Thisisknownasa(n)
A) directeffectofmonetarypolicy. B) indirecteffectofmonetarypolicy.
C) directeffectoffiscalpolicy. D) indirecteffectoffiscalpolicy.
Answer: B
Diff:2
46) Whatarethedirectandindirecteffectsofanincreaseinthemoneysupply?
Answer: Thedirecteffectofmoremoneyintheeconomyistoinducepeopletobuymoregoods
andservices,causingconsumptionexpenditurestoincreaseandaggregatedemandto
increase.Theindirecteffectistoincreasereservesaspeopleputsomeoftheextrafunds
intotransactionsaccounts.Bankswanttomakemoreloans,causinginterestratestofall.
Consumerexpendituresandbusinessinvestmentspendingincreaseindirectlyastherise
inreservesraisesthemoneysupplyandpushesdowntheinterestrate.Eitherway,the
aggregatedemandcurvewouldshiftout.
Diff:1
47) Usingagraphabove,showtheshort -runandlong-runeffectsofanexpansionarymonetary

policy.
Answer: Intheabovefigure,E1 istheoriginalequilibrium.Theincreaseinthemoneysupply
causestheaggregatedemandtoincreaseduetothedirectandindirecteffects.RealGDP
increasesintheshortrunto$15trillionandthepricelevelincreasesto120.Onceinput
ownersrevisetheirexpectationsaboutprices,theshort-runaggregatesupplycurveshifts
toSRAS2 ,realGDPreturnsto$14trillion,andthepricelevelincreasesto140.The
long-runeffectoftheexpansionarymonetarypolicyistoincreasethepricelevel.
Diff:3
16.4OpenEconomyTransmissionofMonetaryPolicy
1) Anexpansionarymonetarypolicyresultsinlowerinterestrates,whichinturn
A) increasesforeigndemandforU.S.financialinstruments,raisingtheinternationalpriceof
thedollarandreducingnetexports.
B) increasestheforeigndemandforU.S.financialinstruments,loweringtheinternational
priceofthedollaranddecreasingnetexports.
C) reducestheinternationalpriceofthedollarandincreasesnetexports.
D) reducestheforeigndemandforU.S.financialinstrumentsandreducenetexports.
Answer: C
Diff:2
Topic: 16.4OpenEconomyTransmissionofMonetaryPolicy
2) AnappreciationoftheU.S.dollarismostlikelyaresultthat
A) theFedhaspursuedanexpansionarymonetarypolicy.
B) U.S.interestrateshaveincreased.
C) U.S.bondpriceshaveincreased.
D) moredollarsarerequiredtoobtainforeigncurrencies.
Answer: B
Diff:3
3) Astheworldeconomybecomesmoreintegratedthroughglobalization,
A) theFedwillfinditeasiertoconductmonetarypolicy.
B) theFedwillhaveamoredifficulttimereachingitsmoneysupplygrowthratetargets.
C) theFedwillrelylessonopenmarketoperationsandmoreonchangingtherequired
reserveratiowhenconductingmonetarypolicy.
D) U.S.interestrateswilldetermineworldinterestrates.
Answer: B
Diff:2
4) Acontractionarymonetarypolicycauses
A) higherinterestrates,whichincreasestheinternationalpriceofthedollaranddecreasesnet
exports.
B) higherinterestrates,whichdecreasestheforeigndemandforU.S.financialinstruments,
raisingtheinternationalpriceofthedollarandincreasingnetexports.
C) lowerinterestrates,whichdecreasestheforeigndemandforU.S.financialinstruments,
raisingtheinternationalpriceofthedollarandincreasingnetexports.
D) higherinterestrates,whichincreasestheforeigndemandforU.S.financialinstruments,
whichcausesinterestratestodecrease.Thereisnoeffectonnetexports.
Answer: A
Diff:3
5) IthasbeenobservedthatachangeinmonetarypolicyintheUnitedStates
A) impactsnetexports.
B) haslittleornoeffectonforeignmarkets.
C) leadstocorrespondingchangesinothercountries.
D) hasonlyshortruninfluences.
Answer: A
Diff:1
6) AnappreciationoftheU.S.dollaroccurswhen
A) theinternationalpriceofthedollarfalls.
B) theinternationalpriceofthedollarrises.
C) theU.S.demandforforeigncurrenciesincreases.
D) thesupplyofdollarsininternationalmarketsincreases.
Answer: B
Diff:1
7) WhentheU.S.dollarappreciates,
A) foreignresidentsdemandmoreofU.S.goods,andU.S.residentsdesiretopurchasemore
foreigngoods.
B) foreignresidentsdemandmoreofU.S.goods,andU.S.residentsdesiretopurchasefewer
foreigngoods.
C) foreignresidentsdemandfewerofU.S.goods,andU.S.residentsdesiretopurchasemore
foreigngoods.
D) foreignresidentsdemandfewerofU.S.goods,andU.S.residentsdesiretopurchasefewer
foreigngoods.
Answer: C
Diff:1
8) AnappreciationoftheU.S.dollar
A) makesourexportsmoreexpensiveintermsofforeigncurrencyandimportscheaperin
termsofthedollar,increasingnetexports.
B) makesourexportslessexpensiveintermsofforeigncurrencyandimportscheaperin
termsofthedollar,increasingnetexports.
C) makesourexportslessexpensiveintermsofforeigncurrencyandimportscheaperin
termsofthedollar,decreasingnetexports.
D) makesourexportsmoreexpensiveintermsofforeigncurrencyandimportscheaperin
termsofthedollar,decreasingnetexports.
Answer: D
Diff:3
9) AdepreciationoftheU.S.dollar
A) makesU.S.exportsmoreexpensiveintermsofforeigncurrencyandimportsless
expensiveintermsofthedollar,increasingnetexports.
B) makesU.S.exportslessexpensiveintermsofforeigncurrencyandimportsmore
expensiveintermsofthedollar,increasingnetexports.
C) makesU.S.exportslessexpensiveintermsofforeigncurrencyandimportsmore
expensiveintermsofthedollar,decreasingnetexports.
D) makesU.S.exportsmoreexpensiveintermsofforeigncurrencyandimportsless
expensiveintermsofthedollar,decreasingnetexports.
Answer: B
Diff:1
10) Asaresultofcontractionarymonetarypolicy,
A) interestratesfall,thedollardepreciates,anddomesticgoodsbecomecheaper,thereby
reducingnetexports.
B) interestratesrise,thedollarappreciates,anddomesticgoodsbecomemoreexpensive,
therebyreducingnetexports.
C) interestratesrise,thedollarappreciates,anddomesticgoodsbecomecheaper,thereby
reducingnetexports.
D) interestratesrise,thedollarappreciates,anddomesticgoodsbecomecheaper,thereby
increasingnetexports.
Answer: B
Diff:1
11) Thenet-exporteffectofcontractionarymonetarypolicyis
A) thedepreciationofthevalueofthedollarandaresultingincreaseofU.S.netexports.
B) thedepreciationofthevalueofthedollarandaresultingdecreaseofU.S.netexports.
C) theappreciationofthevalueofthedollarandaresultingincreaseofU.S.netexports.
D) theappreciationofthevalueofthedollarandaresultingdecreaseofU.S.netexports.
Answer: D
Diff:2
12) WhateffectdoesacontractionarymonetarypolicyintheU.S.haveontheforeigntradesector?
A) Thelowervalueofthedollarwilldecreaseexportsandincreaseimports.
B) Thelowervalueofthedollarwilldecreaseimportsandincreaseexports.
C) Thehighervalueofthedollarwilldecreaseexportsandincreaseimports.
D) Thehighervalueofthedollarwilldecreaseimportsandincreaseexports.
Answer: C
Diff:3
13) WhateffectdoesanexpansionarymonetarypolicyintheU.S.haveontheforeigntradesector?
A) Thelowervalueofthedollarwilldecreaseexportsandincreaseimports.
B) Thelowervalueofthedollarwilldecreaseimportsandincreaseexports.
C) Thehighervalueofthedollarwilldecreaseexportsandincreaseimports.
D) Thehighervalueofthedollarwilldecreaseimportsandincreaseexports.
Answer: B
Diff:3
14) WhichofthefollowingwouldNOTbearesultofacontractionarymonetarypolicy?
A) Interestrateswouldrise.
B) ForeigngoodswouldbecomemoreexpensivetoU.S.residents.
C) Netexportswoulddecline.
D) Importswouldrise.
Answer: B
Diff:3
15) Thenet-exporteffectofexpansionarymonetarypolicyisa(n)
A) depreciationofthevalueofthedollarandtheincreaseofU.S.netexports.
B) depreciationofthevalueofthedollarandthedecreaseofU.S.netexports.
C) appreciationofthevalueofthedollarandtheincreaseofU.S.netexports.
D) appreciationofthevalueofthedollarandthedecreaseofU.S.netexports.
Answer: A
Diff:2
16) Thenet-exporteffectofcontractionarymonetarypolicyisa(n)
A) depreciationofthevalueofthedollarandtheincreaseofU.S.netexports.
B) depreciationofthevalueofthedollarandthedecreaseofU.S.netexports.
C) appreciationofthevalueofthedollarandtheincreaseofU.S.netexports.
D) appreciationofthevalueofthedollarandthedecreaseofU.S.netexports.
Answer: D
Diff:2
17) Asglobalfinancialmarketsbecomemoreintertwined,theFedhas
A) lesscontrolovermonetarypolicy. B) morecontrolovermonetarypolicy.
C) morecontroloverfiscalpolicy. D) lesscontroloverfiscalpolicy.
Answer: A
Diff:2
18) WhyisitmoredifficultfortheFedtocontrolthemoneysupplytodaythanitwasfiftyyears
ago?
Answer: Theinternationalfinancialmarketsaremoreglobaltoday.IftheFeddecidestoreduce
themoneysupply,peoplecanobtaindollarsininternationalmarkets,offsettingthe
actionsoftheFed.Peoplecanborrowinothercurrenciesiftheywantmoreliquidity.The
globalizationofinternationalmoneymarketsmakesitmoredifficultfortheFedto
controltherateofgrowthofthemoneysupplyintheUnitedStates.
Diff:2
19) Whateffectsdoesanexpansionarymonetarypolicyhaveonthetradebalance?Why?
Answer: Anexpansionarymonetarypolicymaycauseinterestratestofall,whichwouldleadto
outflowsoffinancialcapitalandadepreciationofthedollar.Thiswouldcausenet
exportstoincrease,sothenetexporteffectisinthesamedirectionasthemonetarypolicy
effect.
Diff:2
16.5MonetaryPolicyandInflation
1) Accordingtotheequationofexchange,ifM= $400,P= 8,andY= $200,then
A) netdomesticproductis$800. B) Vis4.
C) thepricelevelmustfall. D) Vcannotbedetermined.
Answer: B
Diff:2
Topic: 16.5MonetaryPolicyandInflation
2) Whichofthefollowingbestrepresentstheequationofexchange?
A) M*P=V*Y B) M*V= P*Y C) M*Y= P*V D) M*Y*V=P
Answer: B
Diff:2
3) Thehypothesisthatchangesinthemoneysupplyleadtoanequiproportionalchangeinthe
priceleveliscalled
A) thequantitytheoryofmoney. B) theclassicaltheoryofmoney.
C) theKeynesiantheoryofmoney. D) thefractionaltheoryofmoney.
Answer: A
Diff:2
4) Accordingtothequantitytheoryofmoney,thepriceleveldecreasesinequalproportionto
A) anincreaseintheincomevelocityofmoney.
B) adecreaseinthenominalinterestrate.
C) anincreaseintherealinterestrate.
D) adecreaseinthemoneysupply.
Answer: D
Diff:1
5) Otherthingsbeingequal,thequantitytheoryofmoneysuggeststhatanyincreaseinthemoney
supply
A) causesareductioninthedemandformoney.
B) resultsinadecreaseintheaggregatepricelevel.
C) causestheaggregatelevelofnominalGrossDomesticProduct(GDP)tofall.
D) resultsinaproportionateincreaseinthepricelevel.
Answer: D
Diff:1
6) Accordingtothequantitytheoryofmoney,increasesinthemoneysupplyleadto
A) decreasesinnominalGrossDomesticProduct(GDP).
B) increasesinthepricelevel.
C) decreasesinthepricelevel.
D) increasesintaxes.
Answer: B
Diff:1
7) Accordingtothequantitytheoryofmoney,
A) achangeinthemoneysupplycanleadonlytoaproportionatechangeinthepricelevel.
B) thevelocityofmoneyistheleaststablefactorinmonetaryanalysis.
C) therateofinflationisnotrelatedtochangesinthemoneysupply.
D) pricelevelchangescanbestbeexplainedbyKeynesiananalysis.
Answer: A
Diff:1
8) Theformulaoftheequationofexchangeis
A) MS=Y. B) MS=VPY. C) MSV= PY. D) MS/P=Y.
Answer: C
Diff:2
9) Accordingtoboththeequationofexchangeandthequantitytheoryofmoney,
A) anincreaseinthemoneysupplywillincreaserealGrossDomesticProduct(GDP).
B) anincreaseinthemoneysupplywilldecreaserealGrossDomesticProduct(GDP).
C) adecreaseinthemoneysupplywilldecreasethevelocityofmoney.
D) adecreaseinthemoneysupplywilldecreasethepricelevel.
Answer: D
Diff:1
10) Thevelocityofmoney
A) is,accordingtotheequationofexchange,equaltoP/M.
B) indicatesthenumberoftimesperyearadollarisspentonfinalgoodsandservices.
C) is,accordingtotheequationofexchange,equaltoM/Y.
D) indicatesthespeedwithwhichtheU.S.Treasurycanmintnewcoins.
Answer: B
Diff:1
11) Accordingtotheequationofexchange,ifV= 5,P= 3,andY= $50,thenthemoneysupply

equals
A) $10. B) $30. C) $150. D) $300.
Answer: B
Diff:2
12) Accordingtothequantitytheoryofmoney,anexcessquantityofmoneysuppliedwillleadto
A) areductioninspendingandhigherinterestrates.
B) areducedlevelofrealGrossDomesticProduct(GDP).
C) ahigherlevelofemployment.
D) ahigherpricelevel.
Answer: D
Diff:1
13) Adecreaseinthesupplyofmoneywill,accordingtothequantitytheoryofmoney,leadto
A) ahigherpricelevel.
B) ahighernominalGrossDomesticProduct(GDP).
C) alowerrealGrossDomesticProduct(GDP).
D) alowerpricelevel.
Answer: D
Diff:1
14) Theincomevelocityofmoneyis
A) thetimeittakestoproducemoney.
B) thetimelagfromwhentheFeddecidestoincreasethemoneysupplyuntiltheeffecttakes
place.
C) thenumberoftimesperyearadollarisspentonfinalgoodsandservices.
D) thetimeittakesformonetarypolicytohaveaneffectonworldfinancialmarkets.
Answer: C
Diff:1
15) Accordingtotheequationofexchange,ifrealGrossDomesticProduct(GDP),inbaseyear
dollars,is$25billion,themoneysupplyis$1billion,andthepriceindexequals2,thenthe
incomevelocityofmoneyis
A) 5. B) 10. C) 25. D) 50.
Answer: D
Diff:2
16) Theequationofexchangeis
A) anassumptionthatisnotalwaystrue.
B) trueintheshortrunbutnotalwaysinthelongrun.
C) anaccountingidentityandthereforeisalwaystrue.
D) atheorydevelopedattheFederalReserve.
Answer: C
Diff:1
17) Anassumptionusedinthequantitytheoryofmoneyisthat
A) thepricelevelisconstant.
B) velocityisconstant.
C) nominalGrossDomesticProduct(GDP)isconstant.
D) themoneysupplyisconstant.
Answer: B
Diff:1
18) Accordingtothequantitytheoryofmoney,
A) realGrossDomesticProduct(GDP)isdirectlyrelatedtochangesinthemoneysupplyin
thelongrun.
B) velocityvariesindirectlywiththerateofgrowthofthemoneysupply.
C) aproportionateincreaseinthemoneysupplyleadstoalessthanproportionateincreasein
realGrossDomesticProduct(GDP),atleastinthelongrun.
D) agivenproportionateincreaseinthemoneysupplyleadstoanequalproportionate
increaseinthepricelevel.
Answer: D
Diff:1
19) Anincreaseinthemoneysupply,otherthingsbeingconstant,
A) causesinterestratestorise.
B) generatesanincreaseinthedemandformoney.
C) causesthepriceleveltoincrease.
D) causesthepurchasingpowerofmoneytoincrease.
Answer: C
Diff:1
20) Theincomevelocityofmoneyistheabsolutenumberoftimes,onaverage,that
A) peoplepurchasegoodsandservicesduringayear.
B) eachmonetaryunitisspentonfinalgoodsandservices.
C) eachunitofrealGDPisproducedbybusinessfirms.
D) eachone-unitincreaseinthepriceleveloccurs.
Answer: B
Diff:1
21) Empiricalevidenceacrossnumerouscountriesindicatesthatchangesinthe________are
associatedwithnearlyequiproportionalchangesin________.
A) moneysupply,realGDPperyear
B) moneysupply,pricelevel
C) pricelevel,moneysupply
D) realGDPperyear,incomevelocityofmoney
Answer: B
Diff:1
22) Thenumberoftimesperyear,onaverage,thatadollarisspentonfinalgoodsandservicesis
knownas
A) themoneysupply. B) theequationofexchange.
C) thepriceofmoney. D) theincomevelocityofmoney.
Answer: D
Diff:1
23) Accordingtotheequationofexchange,nominalGDPequals
A) theamountofactualmoneybalancestimestheincomevelocityofmoney.
B) theamountofactualmoneybalancesdividedbytheincomevelocityofmoney.
C) thepriceleveldividedbytheincomevelocityofmoney.
D) thepriceleveltimestheincomevelocityofmoney.
Answer: A
Diff:2
24) Theequationofexchangeisaformulaindicatingthatthenumberofmonetaryunitstimes
A) thenumberoftimeseachmonetaryunitisspentonfinalgoodsandservicesisidenticalto
thepriceleveltimesrealGDP.
B) thepricelevelisidenticaltothenumberoftimeseachmonetaryunitisspentonfinal
goodsandservicestimesrealGDP.
C) realGDPisidenticaltothepriceleveltimesthenumberoftimeseachmonetaryunitis
spentonfinalgoodsandservices.
D) nominalGDPisidenticaltothepriceleveltimesthenumberoftimeseachmonetaryunit
isspentonfinalgoodsandservices.
Answer: A
Diff:1
25) Theidentitystatingthatthetotalamountspentonfinaloutputequalstheamountreceivedfor
finaloutputisknownasthe
A) fundamentallawofeconomics. B) circularflowidentity.
C) equationofexchange. D) identityequation.
Answer: C
Diff:1
26) Inwords,theequationofexchangesaysthat
A) thetotalamountspentonfinaloutputequalstheamountreceivedforfinaloutput.
B) theamountofmoneyincirculationequalsthevelocityofthepricelevel.
C) changesinthemoneysupplywillhavenoimpactontheamountspentonfinaloutput.
D) whenvelocityequals1,nominalGDPequalsthepricelevel.
Answer: A
Diff:1
27) Ifthetotalmoneysupplyis$3trillion,realGDPis$8trillionandthepricelevelis1.5,thenthe
equationofexchangetellsusthatvelocityequals
A) 0.25 B) 3 C) 4 D) 16
Answer: C
Diff:1
28) Ifvelocityisequalto4,thismeansthat
A) therateofgrowthofthemoneysupplyis4.
B) eachdollarofthemoneysupplyisspentontheaverage4timesperyear.
C) forevery4dollarsofthemoneysupply,nominalGDPwillincreaseby4.
D) anincreaseinthemoneysupplywillleadtoanincreaseinaggregatesupplyof4.
Answer: B
Diff:1
29) IfnominalGDPis$5trillionandvelocityis20,then
A) actualmoneybalancesheldbythenonbankingpublicare$250billion.
B) actualmoneybalancesheldbythenonbankingpublicare$100trillion.
C) realGDPequals$100trillion.
D) realGDPequals$400trillion.
Answer: A
Diff:3
30) Theequationofexchangeisan________whilethequantitytheoryofmoneyisatheorythat
________.
A) accountingidentity;assumesthemoneysupplyisconstant
B) accountingidentity;assumesvelocityisheldconstant
C) accountingtheory;assumesthepricelevelisconstant
D) accountingtheory;economistsusetoexplainchangesinrealGDP
Answer: B
Diff:2
31) Thequantitytheoryofmoneyisbasedontheformulathat
A) V=PYMs. B) Y= PV/Ms. C) Ms = PV/Y. D) P= MsV/Y.
Answer: D
Diff:2
32) Thequantitytheoryofmoneyandpricesassumes
A) velocityisconstant.
B) realoutputisconstant.
C) thepricelevelisconstant.
D) thepricelevelisincreasingataconstantrate.
Answer: A
Diff:1
33) Thequantitytheoryofmoneyandprices
A) isderivedfromtheequationofexchangeassumingthatpricesremainconstant.
B) showshowachangeinthepricelevelleadstoachangeinthemoneysupply.
C) showshowthedemandformoneyisinverselyrelatedtothepricelevel.
D) isthehypothesisthatchangesinthemoneysupplyleadstoproportionalchangesinthe
pricelevel.
Answer: D
Diff:1
34) Accordingtothequantitytheoryofmoneyandprices,a10percentincreaseinthemoney
supplyultimatelyleadsto
A) a10percentincreaseinrealGDP.
B) a10percentincreaseinrealnationaloutput.
C) a10percentincreaseinthepricelevel.
D) a10percentincreaseinvelocity.
Answer: C
Diff:2
35) Anincreaseinthepricelevelmeansthat
A) long-runaggregatesupplyhasincreased.
B) monetarypolicyhasbeencontractionary.
C) thevalueofthedollarhasincreased.
D) thepurchasingpowerofmoneyhasfallen.
Answer: D
Diff:1
36) Whichofthefollowingisavariableintheequationofexchange?
A) thepricelevel.
B) themoneysupply.
C) thevelocityofmoney.
D) realGDP.
E) alloftheabove.
Answer: E
Diff:2
37) Theequationofexchangecanbewrittenas
A) MsP=VY. B) MsV= PY.
C) MsY=VP. D) Noneoftheabovearecorrect.
Answer: B
Diff:1
38) TheVintheequationofexchangeMsV= PYrefersto

A) avariable. B) incomevelocityofmoney.
C) thevelocityofinflation. D) avectorthatlinksPtoY.
Answer: B
Diff:1
39) IfVisconstantandYisfixed,anychangeinM
A) leadstoasmallerchangeinP. B) leadstoalargerchangeinP.
C) leadstoaproportionatechangeinP. D) doesnotleadtochangeinP.
Answer: C
Diff:2
40) Bysayingthattheequationofexchangeisanaccountingidentity,wemeanthat
A) itisusefulforaccountants,butnotforeconomists.
B) itidentifiesthekeynationalincomeaccounts.
C) itisalwaystrue.
D) itexplainstheeffectofquestionableaccountingpracticesonmacroeconomicperformance.
Answer: C
Diff:1
41) Thequantitytheoryofmoneyandpricesassertsthat
A) increasesinthemoneysupplyleadtoinflation.
B) increasesinthemoneysupplyleadtoanincreaseinthevelocityofmoney.
C) increasesinthemoneysupplyleadtoadecreaseinthevelocityofmoney.
D) increasesinthemoneysupplywillincreaserealGDP.
Answer: A
Diff:2
42) Thequantitytheoryofmoneyandpricesrestsontheassumptionthat
A) thevelocityofmoneyisconstant. B) theminimumwageisconstant.
C) thenominalinterestrateisconstant. D) theforeignexchangerateisconstant.
Answer: A
Diff:2
43) Thenumberoftimesperyearthatadollarisspentonfinalgoodsandservicesdefines
A) themoneysupply. B) theincomevelocityofmoney.
C) thepriceindex. D) GDP.
Answer: B
Diff:2
44) Whichofthefollowingbestdescribestheincomevelocityofmoney?
A) V=PMs B) V=Y C) V= PY/Ms D) V=Ms/PY
Answer: C
Diff:2
45) Accordingtothesimplequantitytheoryofmoney,whichofthefollowingvariablesare
consideredeitherconstantorrelativelystable?
A) VandY B) YandMs C) PandMs D) PandY
Answer: A
Diff:2
46) Thehypothesisthatchangesinthemoneysupplyleadtoproportionalchangesinthepricelevel
iscalled
A) theequationofexchange.
B) theKeynesianmultiplier.
C) thetheoryofempiricalrelativity.
D) thequantitytheoryofmoneyandprices.
Answer: D
Diff:2
47) Theequationofexchangespecifiesthat
A) MsV=PY.
B) velocityandmoneysupplyaredirectlyrelated.
C) MsP=VY.
D) Ms=PVY.
Answer: A
Diff:1
48) Inaneconomythatisatfullemployment,anincreaseinmoneysupplywillresultininflation,
unless
A) velocityincreases.
B) velocitydecreases.
C) realGDPfalls.
D) taxreductionisproportionaltoincreasesinthemoneysupply.
Answer: B
Diff:2
49) Intheequationofexchange,ifthemoneysupplyis$6trillion,thepricelevelis1.5,andthereal
GDPis$12trillion,thevelocityis
A) 3.0. B) 9.3. C) 6.0. D) 2.0.
Answer: A
Diff:2
50) Ifweassumethatvelocityisconstant,andifthemoneysupplyincreasesby6percent,wewould
expect,ceterisparibus,thatthepricelevelwould
A) increaseby3percent. B) increaseby6percent.
C) decreaseby3percent. D) decreaseby6percent.
Answer: B
Diff:2
51) IfbothnominalandrealGDPareincreasingwhenthemoneysupplyisconstant,thanwecan
concludethat
A) velocityhasincreased. B) velocityhasdecreased.
C) interestratehasfallen. D) interestratehasincreased.
Answer: A
Diff:3
52) IfanationsnominalGDPis$40billion,itsmoneysupplyis$8billion,anditspricelevelis1.25,
thenthevelocityofmoneyis
A) 0.2. B) 2.0. C) 5.0. D) 6.25.
Answer: D
Diff:2
53) Whatistheequationofexchange?Howcantheequationofexchangebeconvertedintothe
quantitytheoryofmoney?
Answer: TheequationofexchangeisMSV= PY,whereMS isthemoneysupply,Visthevelocity
ofmoney,andPYisthenominalGDP.Itisanaccountingidentity,soisnotatheory.The
equationofexchangebecomesthequantitytheoryofmoneyandpricesbyassumingthat
velocityisconstantandthatrealGDP(Y)isstable.ThenwehaveP=(MS)V/Yorthata
changeinthemoneysupplywillleadonlytoaproportionatechangeinthepricelevel.
Diff:3
16.6MonetaryPolicyinAction:TheTransmissionMechanism
1) Intheinterest-rate-basedtransmissionmechanism,adecreaseinthemoneysupplywill
A) increasethepricelevel.
B) reducetherateofinterestandthelevelofinvestment.
C) reduceinvestment,shifttheaggregatedemandfunctioninward,andlowerrealGross
D) shifttheaggregatesupplyfunctioninwardandincreaserealGrossDomesticProduct
(GDP).
Answer: C
Diff:1
Topic: 16.6MonetaryPolicyinAction:TheTransmissionMechanism
2) Themonetarytransmissionmechanismthatassumesthatmoneysupplygrowthstimulatesthe
economyprimarilybyencouraginginvestmentis
A) theinterest-rate-basedtransmissionmechanism.
B) theclassicaltransmissionmechanism.
C) thepost-Keynesiantransmissionmechanism.
D) pre-Keynesiantransmissionmechanism.
Answer: A
Diff:1
3) Thelinkagesoftheinterest-rate-basedtransmissionmechanismofmonetarypolicyare
summarizedasfollows:
A) changeinthemoneysupply changeinspeculativebalanceschangeintransactions
balanceschangeinplannedinvestmentchangeinaggregatedemand.
B) changeinthemoneysupply changeinplannedinvestmentchangeingovernment
spendingchangeinaggregatedemand.
C) changeinthemoneysupply changeininterestrates changeinplannedinvestment
changeinaggregatedemand.
D) changeinthemoneysupply changeininterestrates changeintransactionsbalances
changeingovernmentspendingchangeinaggregatedemand.
Answer: C
Diff:1
4) Assume(otherthingsconstant)thattheFedincreasesthemoneysupply.Themechanism
throughwhichaggregatedemandincreasesis,accordingtointerest -rate-basedtransmission
mechanism,summarizedasfollows:
A) themoneysupplyincreases thereisadropinmoneybalancesheldinterestrates
increaseplannedinvestmentspendingdecreasesaggregatedemandincreases.
B) increaseinmoneysupply increaseinmoneybalanceshelddecreaseininterestrates
decreaseinplannedinvestmentspendingincreaseinaggregatedemand.
C) increaseinmoneysupply decreaseinmoneybalanceshelddecreaseininterestrates
increaseinplannedinvestmentspendingincreaseinaggregatedemand.
D) increaseinmoneysupply decreaseininterestrates increaseinplannedinvestment
spendingincreaseinaggregatedemand.
Answer: D
Diff:1
5) Accordingtotheinterest-rate-basedmonetarypolicytransmissionmechanism,
A) anincreaseinmoneysupplywillincreaseinterestrates.
B) anincreaseinmoneysupplywilldecreaseinterestrates.
C) adecreaseinmoneysupplywilldecreaseinterestrates.
D) adecreaseinmoneysupplywillnotchangeinterestrates.
Answer: B
Diff:1
6) Accordingtotheinterest-rate-basedmonetarypolicytransmissionmechanism,
A) anincreaseintherequiredreserveratiowilllowerinterestrates.
B) adecreaseintherequiredreserveratiowilllowerinterestrates.
C) adecreaseintherequiredreserveratiowillnotaffectinterestrates.
D) anincreaseintherequiredreserveratiowillnotaffectinterestrates.
Answer: B
Diff:1
7) Theinterest-rate-basedtransmissionmechanismassumesthattheFedcanstimulateinvestment
by
A) sellingbonds.
B) buyingbonds.
C) raisingthediscountraterelativetothefederalfundsrate.
D) raisingtherequiredreserveratio.
Answer: B
Diff:1
8) Intheabovefigure,supposetheeconomyisinshort-runequilibriumatpointD.Whichofthe
followingisthebestpolicyoptionfortheFed?
A) Increasetherequiredreserveratio
B) Increasegovernmentspending
C) Increasetaxes
D) Openmarketpurchaseofgovernmentsecurities
Answer: D
Diff:1
9) Intheabovefigure,supposetheeconomyisatashort-runequilibriumatpointBandthe
interestrateisr2 .WhichofthefollowingpolicyoptionsfortheFedwillhelpsolvethe
short-runsituation?
A) Loweringthedifferentialbetweenthediscountrateandthefederalfundsrate
B) Openmarketpurchaseofgovernmentsecurities
C) Loweringtherequiredreserveratio
D) Openmarketsaleofgovernmentsecurities
Answer: D
Diff:1
10) Intheabovefigure,iftheeconomyisinitiallyatanequilibriumoutputatpointAandthe
interestrateisr1 ,thenanopenmarketpurchaseofbondsbytheFedwill
A) causeinterestratestoincreaseandoutputtodecline.
B) causeinterestratestodeclinetor2 ,investmenttoincreasetoI 2 ,andtheADcurvetoshift
upwardtotheright.
C) causeinterestratestodeclinetor2 ,investmenttodecline,andaggregatedemandtoshift
inwardtotheleft.
D) nothaveanyimpactonshort-orlong-runequilibriumrealGrossDomesticProduct
(GDP).
Answer: B
Diff:1
11) Accordingtoproponentsoftheinterest-rate-basedmonetarypolicytransmissionmechanism,
anyincreaseinthemoneysupply
A) iseffectiveinincreasingGrossDomesticProduct(GDP)onlyifitcausesanoutwardshift
oftheaggregatesupplycurve.
B) willincreaseGrossDomesticProduct(GDP)onlyifinterestratesfallandinvestmentis
sensitivetodecreasinginterestrates.
C) causesvelocitytoincrease,andsointheshortrunnominalGrossDomesticProduct(GDP)
mustincrease.
D) willmovetheeconomyfromtheliquiditytrapduringtimesofrecessionifinterestrates
fallenoughtostimulateprivateinvestment.
Answer: B
Diff:1
12) Proponentsoftheinterest-rate-basedmonetarypolicytransmissionmechanismarguethat
whentheFederalReservebuysbonds,therewillbe
A) anincreaseininvestmentspending.
B) adecreaseinthemoneysupply.
C) adecreaseinnominalGrossDomesticProduct(GDP),butnotinrealincome.
D) adecreaseinthepriceofoutstandingbonds.
Answer: A
Diff:1
13) Theinterest-rate-basedmonetarypolicytransmissionmechanismarguesthatanincreaseinthe
moneysupply
A) hasnoeffectonaggregatedemandbutreduceslong-runaggregatesupply.
B) hasnoeffectonaggregatedemandbutincreasesshort-runaggregatesupply.
C) causesinterestratestofall,whichcausesanincreaseinplannedinvestment,andan
increaseinaggregatedemand.
D) causestheinflationratetodecline,whichcausesanincreaseinhouseholdconsumption
spendingandanincreaseinaggregatedemand.
Answer: C
Diff:2
14) Theinterest-rate-basedmonetarypolicytransmissionmechanismemphasizesthe
A) indirecteffectofachangeinthemoneysupplythatoperatesviaachangeintotalplanned
expendituresgeneratedbyachangeintheinterestrate.
B) directeffectofachangeinthemoneysupplythatoperatesviaachangeintotalplanned
productiongeneratedbyachangeinthepricelevel.
C) directeffectofachangeinthemoneysupplythatoperatesviaachangeintotalplanned
expendituresgeneratedbyachangeintheinterestrate.
D) indirecteffectofachangeinthemoneysupplythatoperatesviaachangeintotalplanned
productiongeneratedbyachangeinthepricelevel.
Answer: A
Diff:1
A) Bothmonetaryandinterestratetargetscannotbepursuedsimultaneously.
B) Areductionintherequiredreserveratioincreasesthemoneysupplyandpushesdownthe
equilibriuminterestrate.
C) Anopenmarketpurchasereducesthemoneysupplyandpushesdowntheequilibrium
interestrate.
D) anopenmarketsaledecreasesthemoneysupplyandpushesuptheequilibriuminterest
rate.
Answer: C
Diff:1
16) Akeycausallinkintheinterest-rate-basedtransmissionmechanismformonetarypolicyis
from
A) investmenttotheinterestrate.
B) themoneysupplytoexcessreserves.
C) amonetarypolicyactiontoexcessreserves.
D) realGDPtoinvestment.
Answer: C
Diff:1
17) Ifthesourceofeconomicinstabilityisgenerallyvariationsinspending,thentheFedshould
A) setmoneysupplytargets. B) printmoremoney.
C) buygold. D) raisetaxes.
Answer: A
Diff:3
18) Accordingtotheinterest-rate-basedmonetarypolicytransmissionmechanism,anincreasein
themoneysupplygenerates
A) lowerinterestrates,whichcausesanincreaseinplannedrealinvestmentspendingandan
B) increasedspendingonconsumergoodsandservicesdirectly,whichcausesanincreasein
aggregatedemand.
C) anincreaseinnominalGDPandachangeinthepricelevel,butnochangeinrealGDP.
D) anincreaseinaggregatesupplysincethesupplyofmoneyispartofaggregatesupply.
Answer: A
Diff:2
19) WhichofthefollowingisNOTareasontheFedalterstherateofgrowthofthemoneysupply?
A) Toinfluenceaggregatedemand
B) Toshiftthedemandformoneycurve
C) Toinfluencetheamountofconsumption
D) Toinfluencetheamountofinvestment
Answer: B
Diff:1
20) Theinterest-rate-basedapproachtothemonetarypolicytransmissionmechanismsaysthata
changeinthemoneysupplyinfluencesaggregatedemandby
A) achangeininterestrates,whichchangesinvestment.
B) achangeininterestrates,whichchangesthemoneysupply.
C) changingconsumerconsumptionbehaviorastheyadjusttoachangeinthenumberof
dollarsavailable.
D) leadingtoshiftsoftheshort-runaggregatesupplycurve.
Answer: A
Diff:1
themoneysupplywill
A) leadtoadecreaseininvestmentspendingandanincreaseinrealGDPthatisequaltothe
decreaseininvestmentspending.
B) leadtoadecreaseininvestmentspendingandanincreaseinrealGDPwhichisgreater
thanthedecreaseininvestmentspending.
C) leadtoanincreaseininvestmentspendingandadecreaseinrealGDPthatisequaltothe
increaseininvestmentspending.
D) leadtoanincreaseininvestmentspendingandanincreaseinrealGDPwhichisgreater
thantheincreaseininvestmentspending.
Answer: D
Diff:1
22) Accordingtotheinterest-rate-basedtransmissionmechanism,adecreaseinthemoneysupply
will
B) leadtoadecreaseininvestmentspendingandadecreaseinrealGDPwhichisgreater
D) leadtoanincreaseininvestmentspendingandadecreaseinrealGDPwhichisgreater
Answer: B
Diff:1
23) Anincreaseinthemoneysupplywillaffectaggregatedemand
A) onlyiftheincreaseinthemoneysupplycausesinterestratestorise.
B) onlyiftheincreaseinthemoneysupplycausespeopletobuylessgoodsandservices.
C) onlyiftheincreaseinthemoneysupplycausespeopletoincreasetheirsaving.
D) iftheincreaseinthemoneysupplycausesinterestratestofalland/orcausespeopletobuy
moregoodsandservices.
Answer: D
Diff:2
24) Accordingtotheinterest-rate-basedperspectiveonthemonetarypolicytransmission
mechanism,
A) keychannelsofmonetarypolicyindirectlyultimatelyrelatemoneysupplychangestototal
plannedspendingthroughindirecteffectsonplannedinvestment.
B) changesinthemoneysupplyhavelittleinfluenceonmacroeconomicvariables.
C) monetarypolicyleadstoincreasesinthepricelevelbutwillhavenoeffectontherateof
output.
D) inflationisalwayscausedbyexcessivemonetarygrowthandchangesinthemoney
supplyoffsetaggregatedemandonlydirectly.
Answer: A
Diff:1
25) Theinterest-rate-basedapproachtomonetarypolicysaysthatachangeinthemoneysupply
influencesaggregatedemandby
A) achangeininterestrateswhichchangesinvestment.
B) followingthemonetaryrule.
C) changingconsumerconsumptionbehaviorastheyadjusttoachangeinthenumberof
dollarsavailable.
D) leadingtoshiftsoftheshort-runaggregatesupplycurve.
Answer: A
Diff:1
themoneysupplywill
B) leadtoadecreaseininvestmentspendingandanincreaseinrealGDPwhichisgreater
D) leadtoanincreaseininvestmentspendingandanincreaseinrealGDPwhichisgreater
Answer: D
Diff:1
27) Accordingtotheinterest-rate-basedmonetarypolicytransmissionmechanism,adecreasein
themoneysupplywill
B) leadtoadecreaseininvestmentspendingandadecreaseinrealGDPwhichisgreater
D) leadtoanincreaseininvestmentspendingandadecreaseinrealGDPwhichisgreater
Answer: B
Diff:1
28) IftheFedhasannouncedthatitplansonloweringtheinterestrateitwill
A) engageinexpansionaryopenmarketoperations,therebydecreasingthemoneysupply.
B) engageinexpansionaryopenmarketoperations,therebyincreasingthemoneysupply.
C) engageincontractionaryopenmarketoperations,therebydecreasingthemoneysupply.
D) engageincontractionaryopenmarketoperations,therebyincreasingthemoneysupply.
Answer: B
Diff:1
29) IftheFedhasannouncedthatitplansonincreasingtheinterestrateitwill
A) engageinexpansionaryopenmarketoperations,therebydecreasingthemoneysupply.
B) engageinexpansionaryopenmarketoperations,therebyincreasingthemoneysupply.
C) engageincontractionaryopenmarketoperations,therebydecreasingthemoneysupply.
D) engageincontractionaryopenmarketoperations,therebyincreasingthemoneysupply.
Answer: C
Diff:1
30) Accordingtotheinterest-rate-basedtransmissionmechanismformonetarypolicy,anincrease
inthemoneysupplywillcausethe
A) interestratetofall,causingplannedrealinvestmentspendingtoriseandleadingtoa
decreaseinaggregatedemand.
B) interestratetorise,causingplannedrealinvestmentspendingtoriseandleadingtoa
C) interestratetofall,causingplannedrealinvestmentspendingtoriseandleadingtoan
D) interestratetofall,causingplannedrealinvestmentspendingtofallandleadingtoan
Answer: C
Diff:2
31) Accordingtotheinterest-rate-basedtransmissionmechanismformonetarypolicy,adecrease
inthemoneysupplywillcausethe
A) interestratetofall,causingplannedrealinvestmentspendingtoriseandleadingtoa
B) interestratetorise,causingplannedrealinvestmentspendingtoriseandleadingtoa
C) interestratetofall,causingplannedrealinvestmentspendingtoriseandleadingtoan
D) interestratetorise,causingplannedrealinvestmentspendingtofallandleadingtoa
Answer: D
Diff:2
32) Theinterest-rate-basedtransmissionmechanismformonetarypolicyintheKeynesiansystem
indicatesthat
A) increasesinthemoneysupplyleadtodecreasesintheinterestrate,whichdecreases
investment,whichdecreasesthelevelofrealGDP.
B) decreasesinthemoneysupplyleadtoincreasesintheinterestrate,whichincreases
investment,whichincreasesthelevelofrealGDP.
C) increasesinthemoneysupplycausepeopletospendmore,leadingtoincreasesinreal
GDP.
D) increasesinthemoneysupplyleadtodecreasesintheinterestrate,whichincreases
investment,whichincreasesthelevelofrealGDP.
Answer: D
Diff:2
33) Accordingtotheinterest-rate-basedmonetarypolicytransmissionmechanism,whichofthe
followingmonetarypolicieswouldresultinanincreaseinthelevelofplannedrealinvestment
spending?
A) contractionary
B) expansionary
C) reactionary
D) Monetarypolicyhasnoeffectoninvestment.
Answer: B
Diff:1
34) Theinterest-rate-basedmonetarypolicytransmissionmechanismsuggeststhatthechangesin
themoneysupplyaffectaggregatespending
A) indirectlythroughinterestratesandplannedinvestmentspending.
B) directlythroughinterestratesandplannedconsumptionspending.
C) indirectlythroughtaxratesandplannedconsumptionspending.
D) directlythroughinterestratesandplannedgovernmentspending.
Answer: A
Diff:2
35) Supposetheeconomyisinitiallyinlong-runandshort-runequilibrium.IftheFeddecidesto
pursueacontractionarymonetarypolicy,wewillsee
A) bondpricesfall,interestratesfall,aggregatedemandremainsunchangedasconsumption
spendingdecreases,butinvestmentspendingincreases.GDPremainsconstantinboththe
shortrunandthelongrun,butthepricelevelfallsinboth.
B) bondpricesfall,interestratesrise,aggregatedemandfallsasinvestmentandconsumption
spendingdecrease,andrealGDPandthepriceleveldecreasingintheshort-run,butonly
thepriceleveldecreasinginthelongrun.
C) bondpricesfall,interestratesrise,aggregatedemandfallsasinvestmentspending
decreasesandconsumptionspendingremainsunchanged,andrealGDPandtheprice
leveldecreaseintheshortrun,butonlythepricelevelfallsintheshortrun.
D) interestratesrisebutnochangeinbondprices.Aggregatedemandfallsasconsumption
spendingandinvestmentspendingdecrease,andthepricelevelandrealGDPfallinboth
theshortrunandthelongrun.
Answer: B
Diff:3
36) Supposethereisanincreaseinthemoneysupply,butthatpeoplesdemandformoneybalances
increasesbyagreateramountatthesametime.Theneteffectwouldbe
A) alowerpricelevelinthelongrun.
B) nochangeinaggregatedemandoraggregatesupply.
C) anincreaseinaggregatedemandduetotheincreaseinthemoneysupply,butadecrease
inaggregatesupplyduetotheincreaseinthedemandformoney.
D) lowerinterestrates,greaterrealGDP,andahigherpricelevelasaggregatedemand
increasesbecauseoftheindirecteffectoftheincreaseinthemoneysupply.
Answer: A
Diff:3
37) BrieflydescribetheeffectsofanopenmarketsalebytheFederalReserve,accordingtothe
interest-rate-basedapproachtothemonetarypolicytransmissionmechanism.
Answer: IftheFeddecreasesthemoneysupplythroughanopenmarketsale,thenthemoney
supplywilldecrease.Peoplewillthenfindthemselveswithtoolittlecash,andsothey
willsellbonds.Asaresult,thepricesofbondswilldecrease,therebyraisingtheinterest
rate.Ahigherinterestratewilldecreaseplannedinvestmentandthusaggregatedemand.
AdecreaseinaggregatedemandwillreduceequilibriumrealGDPviathemultiplier
effect.
Diff:2
QuestionStatus: New
38) TheinterestratethattheFedchargesbankstoborrowfundsfromtheFedisthe
A) discountrate. B) federalfundsrate.
C) moneymarketrate. D) nominalinterestrate.
Answer: A
Diff:1
39) Oneofthetoolsofmonetarypolicyistochangethediscountrate.Since2003
A) theFedhasnotchangedthediscountrate.
B) theFedhaspeggedthediscountratetothereserverequirement.
C) theFedhaskeptthediscountrateafixedamountabovethefederalfundsrate.
D) theFedhaskeptthefederalfundsrateonepercentagepointabovethediscountrate.
Answer: C
Diff:1
40) Thetoolsofmonetarypolicyare
A) openmarketoperations,differentialbetweenthediscountrateandthefederalfundsrate,
andtaxrates.
B) openmarketoperations,governmentspending,andtherequiredreserveratio.
C) openmarketoperations,differentialbetweenthediscountrateandthefederalfundsrate,
andtherequiredreserveratio.
D) governmentspending,taxrates,andtherequiredreserveratio.
Answer: C
Diff:2
41) Tochangetherateofgrowthofthemoneysupply,theFedcandoallbutwhichoneofthe
following?
A) Engageinopenmarketoperations
B) Changethediscountrate
C) Shiftthedemandformoneycurvebychangingtheinterestrate
D) Changetherequiredreserveratio.
Answer: C
Diff:1
42) Typically,increasingthedifferencebetweenthediscountandfederalfundsratescauses
A) anincreaseinmarketinterestrates. B) nochangeininterestrates.
C) aboomintheeconomy. D) highcorporateprofits.
Answer: A
Diff:3
43) Changesinwhichofthefollowingwillcausechangesintheequilibriumfederalfundsrate?
A) thedemandforexcessreservesbybanks
B) thedemandforrequiredreservesbybanks
C) thesupplyofreservescreatedthroughpastopenmarketoperations
D) alloftheabove
Answer: D
Diff:2
44) AopenmarketpurchaseofgovernmentsecuritiesbytheFedwillcausewhichofthefollowing?
A) areductioninthefederalfundsrate
B) anincreaseintheamountofexcessreservesthatbankswillwishtohold
C) anincreaseintheequilibriumquantityofreserves
D) alloftheabove
Answer: D
Diff:2
45) Inthemarketforbankreserves,thesupplyofreservesis
A) anupwardslopingcurve. B) adownwardslopingcurve.
C) ahorizontalcurve. D) noneoftheabove.
Answer: D
Diff:2
46) IftheFedraisestheinterestratepaidonexcessreserveswhileholdingthefederalfundsrate
unchanged,thenbankswill
A) lendmorereservesinthefederalfundsmarketandkeepmoreexcessreserves.
B) lendfewerreservesinthefederalfundsmarketandkeepmoreexcessreserves.
C) notkeepexcessreservesorlendreservesinthefederalfundsmarket.
D) notreacttoit.
Answer: B
Diff:2
47) Otherthingsbeingequal,iftheFedraisestheinterestratepaidonexcessreserves,
A) thesupplyofreservesinthefederalfundsmarketwillincrease.
B) thesupplyofreservesinthefederalfundsmarketwilldecrease.
C) boththedemandforreservesandthesupplyofreservesinthefederalfundsmarketwill
increase.
D) boththedemandforreservesandthesupplyofreservesinthefederalfundsmarketwill
decrease.
Answer: B
Diff:2
48) SinceOctober2008,CongresshasgrantedtheFedanauthorityto
A) chargebanksinterestonbothrequiredreservesandexcessreserves.
B) paybanksinterestonbothrequiredreservesandexcessreserves.
C) chargebanksinterestonrequiredreservesbutpaytheminterestonexcessreserves.
D) chargebanksinterestonexcessreservesbutpaytheminterestonrequiredreserves.
Answer: B
Diff:2
49) Inthemarketforbankreserves,areductionintherequiredreserveratiowillcause
A) areductioninthefederalfundsrate.
B) anincreaseintheequilibriumquantityofreserves.
C) areductioninthedemandforreserves.
D) alloftheabove.
Answer: D
Diff:2
50) Theopportunitycostofholdingexcessreservesisequalto
A) thediscountrate.
B) thefederalfundsrate.
C) thefederalfundsrateminusthediscountrate.
D) noneoftheabove.
Answer: D
Diff:2
51) AnopenmarketsaleofgovernmentsecuritiesbytheFedwillcausewhichofthefollowing?
A) anincreaseinthefederalfundsrate
B) anincreaseintheequilibriumquantityofreserves
C) alloftheabove
D) noneoftheabove
Answer: A
Diff:2
52) AnopenmarketsaleofgovernmentsecuritiesbytheFedwillcausewhichofthefollowing?
A) anexcessquantityofreservessuppliedandanincreaseinthefederalfundsrate
B) anexcessquantityofreservessuppliedandareductioninthefederalfundsrate
C) anexcessquantityofreservesdemandedandanincreaseinthefederalfundsrate
D) anexcessquantityofreservesdemandedandareductioninthefederalfundsrate
Answer: C
Diff:2
53) AnopenmarketpurchaseofgovernmentsecuritiesbytheFedwillcausewhichofthe
following?
A) anexcessquantityofreservessuppliedandanincreaseinthefederalfundsrate
B) anexcessquantityofreservessuppliedandareductioninthefederalfundsrate
C) anexcessquantityofreservesdemandedandanincreaseinthefederalfundsrate
D) anexcessquantityofreservesdemandedandareductioninthefederalfundsrate
Answer: B
Diff:2
54) Therateatwhichbankscanborrowexcessreservesfromotherbanksisequalto
A) thediscountrate.
B) therequiredreserveratio.
C) theinterestratepaidonreservesheldwiththeFed.
D) noneoftheabove.
Answer: D
Diff:2
55) Inthemarketforbankreserves,thesupplyofreservesis
C) averticalcurve. D) noneoftheabove.
Answer: C
Diff:2
56) WhathappenswhentheFedaimstochangeinterestrates?
A) ItasksCongresstolegislatenewinterestrates.
B) Itbuysorsellsgovernmentbondsontheopenmarkettoachievethedesiredrate.
C) Itbuysorsellsdollarsontheforeignexchangemarkettoachievethedesiredrate.
D) Itannouncesanewdiscountinterestrate.
Answer: B
Diff:2
57) Thefederalfundsrateis
A) theinterestratepaidonreservesheldwiththeFed.
B) theinterestrateatwhichbankscanborrowexcessreservesfromotherbanks.
C) theinterestrateonbondsissuedbythefederalgovernment.
D) noneoftheabove.
Answer: B
Diff:2
58) Theincentiveofholdingexcessreservesisequalto
A) thediscountrate.
C) theinterestrateearnedonexcessreserves.
D) noneoftheabove.
Answer: C
Diff:2
59) Therateatwhichbankscanborrowexcessreservesfromotherbanksisequalto
A) thediscountrate.
C) theinterestratepaidonreservesheldwiththeFed.
D) thetreasurybillrate.
Answer: B
Diff:2
60) TheinterestratethattheFedchargesbankstoborrowfundsfromtheFedisthe
A) discountrate. B) federalfundsrate.
C) moneymarketrate. D) nominalinterestrate.
Answer: A
Diff:1
61) WhichofthefollowingisNOTpartoftheFOMCdirective?
A) ItlaysouttheFOMCsgeneraleconomicobjectives.
B) Itestablishesshort-termfederalfundsrateobjectives.
C) Itspecifiestargetrangesformoneysupplygrowth.
D) ItspecifieswhothechairoftheFedis.
Answer: D
Diff:2
62) WhatisthemaximumnumberofvotingmembersoftheFOMC?
A) 4 B) 7 C) 11 D) 12
Answer: D
Diff:2
63) TheTradingDesksopenmarketoperations
A) areconfinedwithinaone-hourintervaleachweekdaymorning.
B) areconfinedwithinasix-hourintervaleachweekdaymorning.
C) occurthroughouteachday.
D) occuronceaweek.
Answer: A
Diff:2
64) TheofficialFederalReservestrategyforimplementingitsmonetarypolicyobjectivesisspelled
outinthe
A) FederalReserveBoard(FRB)Decree.
B) FederalReserveBankCooperative(FRBC)Proposal.
C) FederalAdvisoryCommittee(FAC)Statement.
D) FederalOpenMarketCommittee(FOMC)Directive.
Answer: D
Diff:2
65) TheofficeoftheFederalReserveBankofNewYorkchargedwithimplementingFederal
Reserveopenmarketpolicyactionsisknownasthe
A) OpenMarketCoordinationOffice. B) OpenMarketCooperationOffice.
C) ResponseDesk. D) TradingDesk.
Answer: D
Diff:1
66) WhichofthefollowinginstitutionswithintheFederalReserveSystemdetermineshowmany
governmentsecuritiestheFedshouldbuyorsellonagivenday?
A) theBoardofGovernors.
B) FederalAdvisoryCommittee.
C) theFederalReserveBankofChicagosBoardofTrade.
D) theFederalReserveBankofNewYorksTradingDesk.
Answer: D
Diff:2
67) WhichofthefollowingpolicytoolsisdirectlycontrolledbytheTradingDeskattheFederal
ReserveBankofNewYork?
A) thespreadbetweenthediscountrateandthefederalfundsrate
B) thespreadbetweenthefederalfundsrateandtheinterestrateonbanksrequiredreserves
C) therequiredreserveratio
D) openmarketsalesandpurchases
Answer: D
Diff:2
68) UndertheFedscurrentinterest-rate-targetingapproachtomonetarypolicy,ifthedemandfor
federalfundsbydepositoryinstitutionsincreasestoday,then,otherthingsbeingequal,
A) themarketfederalfundsratedecreases,andtheFedsTradingDeskrespondsbyselling
bonds.
B) themarketfederalfundsrateincreases,andtheFedsTradingDeskrespondsbybuying
bonds.
C) themarketfederalfundsratedecreases,andtheFedsTradingDeskrespondsbybuying
bonds.
D) themarketfederalfundsrateincreases,andtheFedsTradingDeskrespondsbyselling
bonds.
Answer: B
Diff:3
69) ItistheresponsibilityoftheTradingDeskattheFederalReserveBankofNewYorkto
implementpoliciesintheformof
A) changesinthespreadbetweenthefederalfundsrateandthediscountratethatare
consistentwithrulesestablishedbythetwelveFederalReservebankpresidents.
B) variationsinreserverequirementsthatareconsistentwiththeannouncementsbythe
ChairoftheFedsBoardofGovernors.
C) changesinforeignexchangeratesthatareconsistentwithpoliciesestablishedbythe
SecretaryoftheTreasury.
D) buyingorsellinggovernmentsecuritiesthatareconsistentwiththeFOMCDirective.
Answer: D
Diff:2
70) OperationsoftheTradingDeskoftheFederalReserveBankofNewYorkaretypically
conducted
A) nomoreoftenthanoncepermonth.
B) onceayear.
C) nomoreoftenthanonceperweek.
D) withinaone-hourperiodduringeachday.
Answer: D
Diff:2
71) Inadditiontoopenmarketoperationsandtherequiredreserveratio,anothertoolofmonetary
policyavailabletotheFedis
A) fiscalpolicy.
B) taxratesandtheprogressivityoftheincome-taxsystem.
C) governmentspendingandvarioustransfer-paymentprograms.
D) thedifferencebetweenthediscountrateandthefederalfundsrate.
Answer: D
Diff:1
72) IftheFedthoughttheeconomywasexperiencingarecessionarygap,anditwantedtocorrect
thisgap,itwould
A) sellbonds.
B) lowerthedifferentialbetweenthediscountrateandthefederalfundsrate.
C) raisethereserverequirement.
D) increaseaggregatesupply.
Answer: B
Diff:2
73) Supposetheeconomyisinlong-runandshort-runequilibrium.TheFedchangesitspolicyby
raisingthedifferencebetweenthediscountrateandthefederalfundsrate.Inthelongrunwe
wouldexpecttoobserve
A) alowerpricelevel. B) ahigherpricelevel.
C) alowerrealnationalincome. D) ahigherrealnationalincome.
Answer: A
Diff:2
74) WhichofthefollowingisNOTabasisfortheTaylor-ruleguidelineforhowtheFederalReserve
shouldsetitstargetvalueforthefederalfundsrate?
A) anestimatedlong-runrealinterestrate
B) thecurrentdeviationoftheactualinflationratefromtheFedsinflationobjective
C) thepresentdeviationoftheactualunemploymentratefromtheFedsunemployment
objective
D) thegapbetweenactualrealGDPandameasureofpotentialrealGDP
Answer: C
Diff:1
75) SupposethattheFedhasdecidedtoutilizetheTaylorruletoimplementmonetarypolicy.Ifthe
actualfederalfundsratetargetispresentlybelowthelevelspecifiedbytheTaylorruleandhas
beenlowerthenthislevelforseveralweeks,thenthiswouldbeasignalthat
A) monetarypolicyisveryexpansionary.
B) monetarypolicyisverycontractionary.
C) theFedshouldhalteffortstotargetthemoneysupply.
D) theFedshouldswitchtotargetingthemoneysupplyinsteadofthefederalfundsrate.
Answer: A
Diff:2
76) Supposetheactualequilibriumfederalfundsrateisabovetherateimpliedbyaparticular
inflationgoal.Inthissituation,theTaylorruleimpliesthat
A) fiscalpolicyiscontractionary. B) fiscalpolicyisexpansionary.
C) monetarypolicyisexpansionary. D) monetarypolicyiscontractionary.
Answer: D
Diff:2
77) AccordingtotheTaylorrule,theFedwillsetthefederalfundsratetargetbasedonwhichofthe
following?
C) theproportionategapbetweenactualrealGDPandameasureofpotentialrealGDP
D) alloftheabove
Answer: D
Diff:2
78) WhichFederalReserveBanknowregularlytrackstargetlevelsforthefederalfundsrate
predictedbyabasicTaylor-ruleequation?
A) Boston B) Chicago C) NewYork D) St.Louis
Answer: D
Diff:2
79) Supposetheactualequilibriumfederalfundsrateisbelowtherateimpliedbyaparticular
inflationgoal.Inthissituation,theTaylorruleimpliesthat
A) fiscalpolicyiscontractionary. B) fiscalpolicyisexpansionary.
C) monetarypolicyisexpansionary. D) monetarypolicyiscontractionary.
Answer: C
Diff:2
80) Between2003and2008,theactualfederalfundsrate
A) tendedtobelowerthantheratespredictedbytheTaylorrule.
B) tendedtohigherthantheratespredictedbytheTaylorrule.
C) followedcloselytheratespredictedbytheTaylorrule.
D) movedindirectionsoppositetotheratespredictedbytheTaylorrule.
Answer: A
Diff:2
81) Supposetheactualfederalfundsrateisbelowtherateimpliedbyaparticularinflationgoal.In
thissituation,theTaylorruleimpliesthat
A) monetarypolicyisexpansionary.
B) monetarypolicyiscontractionary.
C) monetarypolicyisneitherexpansionaryorcontractionary.
D) fiscalpolicyiscontractionary.
Answer: A
Diff:2
82) Supposetheactualfederalfundsrateisabovetherateimpliedbyaparticularinflationgoal.In
thissituation,theTaylorruleimpliesthat
A) monetarypolicyisexpansionary.
C) monetarypolicyisneitherexpansionaryorcontractionary.
D) fiscalpolicyisexpansionary.
Answer: B
Diff:2
83) Supposetheactualfederalfundsrateisequaltotherateimpliedbyaparticularinflationgoal.
Inthissituation,theTaylorruleimpliesthat
A) monetarypolicywilltendtoproducethatinflationrate.
C) monetarypolicyisexpansionary.
D) fiscalpolicywillresultinabalancedbudget.
Answer: A
Diff:1
84) TheTaylorruleimpliesthattheFedshouldsetthefederalfundstargetbasedonwhichofthe
following?
C) theproportionategapbetweenactualrealGDPandameasureofpotentialrealGDP
D) alloftheabove
Answer: D
Diff:2
16.7CreditPolicyatTodaysFed
1) TheFederalReservescreditpolicyrefersto
A) adirectcreditonbankdepositorssavingandcheckingaccounts.
B) regulationsontermsoncreditcardsthatbanksissue.
C) theFedsdirectlendingtohomeownersandstudents.
D) theFedsdirectlendingtofinancialandnonfinancialfirms.
Answer: D
Diff:2
Topic: 16.7CreditPolicyatTodaysFed
QuestionStatus: New
2) Since2008,theFedhasconductedapolicythatinvolvesdirectlendingtoprivatefirms.Those
actionsoftheFedarecalled
A) openmarketoperations. B) federalfundsratetargeting.
C) quantitativeeasing. D) creditpolicies.
Answer: D
Diff:1
QuestionStatus: New
3) TheFederalReservefinancesitscreditpolicywith
A) reservedepositsthatprivatebanksholdwiththeFed.
B) borrowingfromthefederalgovernment.
C) theinsurancepremiumscollectedbytheFDIC.
D) fundingfromtheU.S.TreasuryDepartment.
Answer: A
Diff:2
QuestionStatus: New
4) IftheFedscreditpoliciesinducesbankstoholdsubstantialexcessreservesattheFed,then
A) financialmarketswillbecomemoreilliquid.
B) themoneymultiplierwillfall.
C) themoneysupplywillrise.
D) thescopeofasymmetric-informationproblemforbankswillimprove.
Answer: B
Diff:3
QuestionStatus: New
5) WhichofthefollowingistrueoftheFedscreditpolicy?
A) TheFedhasimplementedacreditpolicysince1914.
B) Todayabout40percentoftheFedsassetholdingsarerelatedtoitsconductofcredit
policy.
C) TheFedscreditpolicyisextendedonlytoU.S.financialinstitutions.
D) TheFedsobjectiveforitscreditpolicyistoreducethefederalfundsrate.
Answer: B
Diff:3
QuestionStatus: New
6) WhichofthefollowinghasbeenthemostlikelyeffectoftheFedscreditpolicy?
A) Banksandotherfinancialinstitutionshavetakenmoretimetorecoverfromthe2008 -2009
financialmeltdown.
B) Thefederalfundsrateandthediscountratehavedroppedtonegativelevels.
C) Themoneymultiplierandthelinkbetweenthemoneysupplyandtheeconomyhave
becomeunstable.
D) Thescopeofasymmetricinformationproblemsinthebankingindustryhasreduced.
Answer: C
Diff:3
QuestionStatus: New
16.8AppendixE:IncreasingtheMoneySupply
1) AccordingtoKeynes,theimpactofanincrease inthemoneysupplyis
A) alowerinterestrateandalargergrowthinrealGDP.
B) alowerinterestrateandasmallergrowthinrealGDP.
C) ahigherinterestrateandalargergrowthinrealGDP.
D) ahigherinterestrateandasmallergrowthinrealGDP.
Answer: A
Diff:2
Topic: 16.8AppendixE:IncreasingMoneySupply
2) AccordingtoKeynes,theeffectonplannedrealinvestmentspendingresultingfromthe
interest-rateimpactofanincreaseinthemoneysupply
A) impactstheeconomythroughthemultiplier.
B) impactstheeconomybyincreasingthevalueoftheU.S.dollar.
C) impactstheeconomybyreducingthedeficit.
D) doesnotimpacttheeconomy.
Answer: A
Diff:1
Topic: 16.8AppendixE:IncreasingMoneySupply
16.9AppendixE:DecreasingtheMoneySupply
1) AccordingtoKeynes,theimpactofadecrease inthemoneysupplyisa
A) lowerinterestrateandlargergrowthinrealGDP.
B) lowerinterestrateandsmallergrowthinrealGDP.
C) higherinterestrateandlargergrowthinrealGDP.
D) higherinterestrateandsmallergrowthinrealGDP.
Answer: D
Diff:2
Topic: 16.9AppendixE:DecreasingMoneySupply
2) AccordingtoKeynes,contractionarymonetarypolicy
A) impactstheeconomybyanamountsmallerthanthechangeininvestment.
B) impactstheeconomybyanamountlargerthanthechangeininvestment.
C) willhavenoimpactontheequilibriumnominalGDP.
D) willhavenoimpactontheequilibriumrealGDP.
Answer: B
Diff:2
3) AccordingtoKeynes,theeffectonplannedrealinvestmentspendingresultingfromthe
interest-rateimpactofadecreaseinthemoneysupply
A) impactstheeconomythroughthemultiplier.
B) impactstheeconomybyreducingthevalueoftheU.S.dollar.
C) impactstheeconomybyincreasingthedeficit.
D) doesnotimpacttheeconomy.
Answer: A
Diff:2
16.10AppendixE:ArgumentsAgainstMonetaryPolicy
1) AccordingtotraditionalKeynesians,monetarypolicyisineffectiveinaffectingtheeconomy
duringarecessionbecause
A) anincreaseinthemoneysupplywillhavelittleimpactoninterestrates.
B) anincreaseinthemoneysupplywillonlyleadtohigherinterestrates.
C) anincreaseinthemoneysupplywillonlyleadtolowerinvestmentspending.
D) anincreaseinthemoneysupplywillraisetheamountofgovernmentdebt.
Answer: A
Diff:2
Topic: 16.10AppendixE:ArgumentsAgainstMonetaryPolicy
2) AccordingtotraditionalKeynesians,whenthecentralbankincreasesthemoneysupplyduring
arecession
A) peoplewillspendallofthemoneyongoodsandservices.
B) peoplewillborrowmorefrombanks.
C) peoplewillkeepmostofitintheirbankaccounts.
D) peoplewillrefusetousethemoney.
Answer: C
Diff:2
3) AccordingtotraditionalKeynesians,monetarypolicyasatooltofightarecession
A) hasanuncertaineffectontheeconomy,dependingonthedirectionoffiscalpolicy.
B) isveryeffectivebecauseinterestrateswillfallimmediately.
C) isineffectivebecauseinterestrateswillnotfall.
D) cannotbedeterminedbecausetraditionalKeynesiansdonotconsidermonetarypolicyat
all.
Answer: C
Diff:2
Chapter17
StabilizationinanIntegratedWorldEconomy
17.1ActiveversusPassivePolicymaking
1) Activepolicymakingrefersto
A) actionstakenbypolicymakersinresponsetoorinanticipationofsomechangeinthe
overalleconomy.
B) policymakingthatiscarriedoutinresponsetoarule.
C) relyingonpoliciesthatactasautomaticstabilizers.
D) nondiscretionarypolicymaking.
Answer: A
Diff:1
Topic: 17.1ActiveversusPassivePolicymaking
2) ActivepolicymakingwouldincludeallofthefollowingEXCEPT
A) interestratechangesbytheFed.
B) taxincreases.
C) unemploymentinsurancebenefits.
D) increasedgovernmentspendingbytheCongress.
Answer: C
Diff:2
3) Whichofthefollowingwouldbeanexampleofpassivepolicymaking?
A) Establishingasystemofautomatictaxstabilizers
B) MarginalratetaxcutsintendedtoincreaserealGrossDomesticProduct(GDP)
C) GovernmentspendingdecreasesintendedtodecreaserealGrossDomesticProduct(GDP)
D) Noneoftheabove
Answer: A
Diff:2
4) Monetaryandfiscalpolicymakingthatiscarriedoutinresponsetoapre -setruleanddoesnot
respondtochangesineconomicactivityisknownas
A) activepolicymaking. B) discretionarypolicymaking.
C) nondiscretionarypolicymaking. D) Keynesianpolicymaking.
Answer: C
Diff:1
Chapter17StabilizationinanIntegratedWorldEconomy 865
5) Withdiscretionarypolicymaking,fiscalandmonetarypoliciesareusually
A) undertakeninresponsetooranticipationofsomechangeintheoveralleconomy.
B) setaccordingtopre-establishedstandardsthatdonottakeintoaccountanychangesinthe
economy.
C) immunetoanypoliticalovertones.
D) immunetoanylagtimesthatmightcountertheireffectiveness.
Answer: A
Diff:1
6) Ifapolicymakerisconvincedthattimelagsfrequentlynegatetheimpactofshort-run
stabilizationefforts,itislikelyshewouldfavor________policymaking.
A) nondiscretionary B) discretionary
C) active D) aggressive
Answer: A
Diff:2
7) Whenpolicymakerstakeactionsinresponsetoorinanticipationofsomechangeintheoverall
economy,thereis
A) activepolicymaking. B) passivepolicymaking.
C) rationalizationpolicymaking. D) rationalexpectationspolicymaking.
Answer: A
Diff:1
8) Proponentsofpassivepolicymakingbelievethat
A) theexistenceoftimelagsmakesactivepolicyineffectiveorevenprocyclical.
B) timelagsdonotexistsotheeconomywilladjusttoorapidlywithactivepolicy.
C) governmentshouldnotfollowanyparticularpolicy.
D) fiscalpolicyisalwaysbetterthanmonetarypolicyinstabilizingtheeconomy.
Answer: A
Diff:2
9) Whichofthefollowingscenarioscanbeclassifiedaspassivepolicymaking?
A) TheFederalReservecutsthefederalfundsrateinordertoincreaseeconomicactivity.
B) Thefederalgovernmentincreasesspendinginordertocreatejobs.
C) TheFederalReserveadjuststhemoneysupplyasappropriatetoattainatargetrateof
inflation.
D) Congressincreasesexpendituresinanefforttostimulateeconomicactivity.
Answer: C
Diff:1
10) Actionsonthepartofmonetaryandfiscalpolicymakersthatareundertakeninresponseto
somechangeintheoveralleconomyareknownas
A) nondiscretionarypolicymaking. B) passivepolicymaking.
C) creativepolicymaking. D) activepolicymaking.
Answer: D
Diff:1
11) Whenpolicymakersbasetheiractionsonarulethereis
C) rationalizationpolicymaking. D) rationalexpectationspolicymaking.
Answer: B
Diff:1
12) Anexampleofnondiscretionarypolicymakingis
A) aruleunderwhichtheFedtargetstheinflationrate.
B) expansionaryfiscalpolicy.
C) changesintheinterestrateinitiatedbytheFed.
D) aCongressionaltax-ratecutaimedatboostingrealGDP.
Answer: A
Diff:1
13) Ifapolicyiscarriedoutbyarule,thenwehaveanexampleof
C) nondiscretionarypolicymaking. D) naturalpolicymaking.
Answer: C
Diff:1
14) Supposeaconstitutionalamendmentispassedthatmandatesabalancedfederalbudgetevery
yearandthePresidentandCongressconsistentlycarrythismandateout.Thiswouldbean
exampleof
A) activepolicymaking. B) decisivepolicymaking.
C) nondiscretionarypolicymaking. D) cooperativepolicymaking.
Answer: C
Diff:2
15) TheFederalReserveisanticipatingacontractionaryperiodintheeconomy.TheFeddecidesto
engageinopenmarketoperationstostimulatetheeconomy.Thisactionis
C) themonetaryrule. D) Phillipspolicymaking.
Answer: A
Diff:3
16) Whichofthefollowingstatementshasbeenproposedasabenefitofpassivepolicymaking?
A) Passivepolicymakingallowsformakingimmediatechangesinresponsetoananticipated
changeineconomicperformance.
B) Passivepolicymakingutilizestherationalexpectationshypothesis.
C) Whenusingpassivepolicymakingthereisnotradeoffbetweenpricestabilityand
unemployment.
D) Passivepolicymakingdoesnotwaitforthetimelagbetweenrecognitionofaproblemand
policyactionbeforeengagingineconomicpoliciestostabilizetheeconomy.
Answer: D
Diff:1
17) Whichoneofthefollowingisanexampleofpassivepolicymaking?
A) introducingexpansionarymonetarypolicytocombatarecession
B) introducingexpansionarymonetarypolicytocombatinflation
C) introducingexpansionaryfiscalpolicytocombatarecession
D) followingapredeterminedmonetarypolicyrule
Answer: D
Diff:1
18) Whatbestdefinesactivepolicymaking?
A) takingactiontooffsetachangeineconomicperformance
B) takingactiontoincreaselong-termeconomicgrowth
C) takingactiontomakemarketsmorecompetitivesoastoimproveefficiency
D) takingactiontomakemarketslesscompetitivesoastoimproveequity
Answer: A
Diff:2
19) Policymakingthatiscarriedoutinresponsetoaruleis
C) restrictivepolicymaking. D) determinedpolicymaking.
Answer: B
Diff:1
20) Theideaofpolicymakingtakingplaceinresponsetoapredeterminedsetofrulesisreferredto
as
C) passivepolicymaking. D) Keynesianism.
Answer: C
Diff:1
21) Theideaofpolicymakingbeingundertakenasaresponsetoachangeintheeconomyis
referredtoas
A) activepolicymaking. B) non-discretionarypolicymaking.
C) passivepolicymaking. D) Keynesianism.
Answer: A
Diff:2
22) Iftherateofgrowthinthemoneysupplyispredeterminedonthebasisofamonetaryrule,this
isknownas
A) directpolicymaking. B) activepolicymaking.
C) passivepolicymaking. D) fiscalpolicymaking.
Answer: C
Diff:1
23) IftheFedengagesinopenmarketsalesindirectresponsetoanincreaseintherateofinflation,
thisisknownas
A) directpolicymaking. B) activepolicymaking.
C) passivepolicymaking. D) fiscalpolicymaking.
Answer: B
Diff:1
24) Explainthedifferencebetweenactiveandpassivepolicymaking.
Answer: Activepolicymaking,ordiscretionarypolicymaking,isasituationwhenfiscaland
monetarypolicymakersactinresponsetoorinanticipationofsomechangeintheoverall
economy.Theyactsoastomovetheeconomymorequicklytowardfullemploymentand
greaterpricestability.Passive,ornondiscretionary,policymakingispolicymakingthat
followssomeruleratherthanonethattriestorespondoranticipatesomechangein
economicactivity.
Diff:1
17.2TheNaturalRateofUnemployment
1) Structuralunemploymentislikelytobeaffectedby
A) recessionsandexpansions.
B) thereservationwagecurvesofpeople.
C) minimumwagelawsandotherrigiditiesintheeconomy.
D) theamountofthemoneysupply.
Answer: C
Diff:2
Topic: 17.2TheNaturalRateofUnemployment
2) Whichofthefollowingistherateofunemploymentthatoccursafteralladjustmentsinthelabor
markethaveoccurred?
A) thefrictionalrateofunemployment. B) thenaturalrateofunemployment.
C) thecyclicalrateofunemployment. D) thestructuralrateofunemployment.
Answer: B
Diff:2
3) Whattypesofunemploymentwillstillexistwhentheeconomyisatthenaturalrateof
unemployment?
A) frictionalandcyclicalunemploymentonly
B) frictionalandstructuralunemploymentonly
C) structuralandcyclicalunemploymentonly
D) frictional,structural,andcyclicalunemployment
Answer: B
Diff:2
4) ThePhillipscurveshowstherelationshipbetween
A) thepricelevelandrealGrossDomesticProduct(GDP).
B) thetaxrateandtaxrevenues.
C) theunemploymentrateandinflationrate.
D) theinterestrateandexchangerate.
Answer: C
Diff:2
5) StructuralunemploymentmayresultfromallofthefollowingfactorsEXCEPT
A) unionwagecontracts.
B) government-imposedlicensingarrangementsthatrestrictentryintocertainprofessions.
C) improvedelementaryandsecondaryeducation.
D) welfareandunemploymentbenefits.
Answer: C
Diff:1
6) Yourfriendrecentlygraduatedfromcollegeandisactivelylookingforemployment.The
economyhascompletelyrecoveredfromthelastrecessionandyourfriendistakinghertime,
lookingfortheperfectjob.Inthemeantime,theunemploymentsheisexperiencingis
categorizedas
A) cyclical. B) structural. C) seasonal. D) frictional.
Answer: D
Diff:2
7) Thenaturalrateofunemploymentis
A) zero.
B) theunemploymentratewhenthereisnostructuralunemployment.
C) theunemploymentratewhenthereisnostructuralorcyclicalunemployment.
D) theunemploymentratethatexistsinlong-runequilibrium,afteradjustmentstoall
changeshaveoccurred.
Answer: D
Diff:1
8) Thenaturalrateofunemploymentisdefinedastherateofunemploymentthat
A) prevailsinlong-runmacroeconomicequilibrium,whenallworkersandemployershave
fullyadjustedtoanychangesintheeconomy.
B) prevailsintheshort-runmacroeconomicequilibrium,beforeworkersandemployershave
hadachancetoadjusttoaneconomicshock.
C) existsduetowelfareandunemploymentbenefitsthatreducepotentialworkersincentives
tofindwork.
D) existsonlyduringperiodsofrecessionordepressionintheeconomy.
Answer: A
Diff:1
9) Thenaturalrateofunemploymentincludes
A) frictionalandcyclicalunemployment.
B) onlycyclicalunemployment.
C) onlyunemploymentduetolayoffsandcorporatedownsizing.
D) frictionalunemploymentandstructuralunemployment.
Answer: D
Diff:1
10) Accordingtothetext,theprobabilityofanunemployedpersonfindingajobdoubleswhen
A) hisunemploymentbenefitsexpire.
B) hisunemploymentbenefitsareextended.
C) theeconomyentersarecessionaryphase.
D) heisthreatenedwitharrest.
Answer: A
Diff:2
11) Accordingtothetext,minimum-wagelawscauseincreasesin
A) employmentpossibilities. B) structuralunemployment.
C) poverty. D) productivity.
Answer: B
Diff:2
12) Frictionalandstructuralunemploymentbothexistwhen
A) theeconomyisinanexpansionaryphase.
B) theeconomyisinlong-runequilibrium.
C) theeconomyisatthepeakofthebusinesscycle.
D) theeconomyisinshort-runequilibrium.
Answer: B
Diff:1
13) Anincreaseinunemploymentinsuranceandothertransferpaymentsmay
A) increasethenaturalrateofunemployment.
B) increasethenumberofdiscouragedworkers.
C) reducetherateofinflationateverylevelofunemployment.
D) leadtolessunanticipatedinflation.
Answer: A
Diff:1
14) From1950untilthelate1980s,thenaturalrateofunemploymentintheUnitedStates
A) fellsharplyasgovernmentretrainingprogramshelpedputtheunemployedbacktowork.
B) cycledupanddownintandemwiththeactualrateofunemployment.
C) rosesharply,alwaysexceedingtheactualrateofunemployment.
D) trendedupward.
Answer: D
Diff:2
15) Fromthelate1980sto2000,thenaturalrateofunemployment
A) climbedsharply.
B) heldconstant.
C) fluctuatedupanddown,followingthepathoftheactualrateofunemployment.
D) graduallydeclined.
Answer: D
Diff:2
16) Duringarecession,theoverallunemploymentrate
A) fallsrapidly.
B) exceedsthenaturalrateofunemployment.
C) fallsbelowthenaturalrateofunemployment.
D) equalstheinflationrate.
Answer: B
Diff:2
17) Cyclicalunemploymentis
A) thedifferencebetweentheunemploymentratewhentheeconomyisinarecessionandthe
unemploymentratewhentheeconomyisatthepeakofanexpansion.
B) thedifferencebetweentheactualunemploymentrateandthenaturalrateof
unemployment.
C) theunemploymentduetounionactivitiesandgovernment-imposedrestrictionstoentry
intospecificoccupations.
D) theunemploymentduetotheunemploymentbenefitsandwelfareprogramsofthe
government.
Answer: B
Diff:2
18) Ifcyclicalunemploymentisnegative,then
A) theactualunemploymentrateisbelowthenaturalrateofunemployment.
B) thenaturalrateofunemploymentisgettingsmaller.
C) therehavebeensomeerrorsinclassifyingthetypeofunemploymentexperiencedbysome
people.
D) structuralunemploymentmustbeincreasing.
Answer: A
Diff:2
19) Whichofthefollowingunemploymentratescanbenegative?
A) thecyclicalunemploymentrate
B) thenaturalunemploymentrate
C) theseasonalunemploymentrate
D) theofficialunemploymentratereportedbytheBureauofLaborStatistics
Answer: A
Diff:2
20) Whichtypeofunemploymentisassociatedwiththeslumpinaggregatedemandthat
accompaniesarecession?
A) Expansionaryunemployment B) Cyclicalunemployment
C) Frictionalunemployment D) Structuralunemployment
Answer: B
Diff:1
21) Anunexpectedincreaseinaggregatedemandtypicallycauses
A) frictionalunemploymenttoincreasebutstructuralunemploymenttodecrease.
B) thepriceleveltoincreasebuthasnoeffectontheunemploymentrate.
C) thepriceleveltoincreaseandtheunemploymentratetofall.
D) thepriceleveltoincreaseandtheunemploymentratetoincrease.
Answer: C
Diff:2
22) Intheabovefigure,startwiththeeconomyinequilibriumatpointA.Thenanunanticipated
reductioninaggregatedemandtriggersashiftfromAD 1 toAD2 .Intheshortrun,thiswould
cause
A) thepriceleveltofallfromP 1 toP2 ,realGrossDomesticProduct(GDP)tofallfromY 1 to
Y2 ,andtherateofunemploymenttoincrease.
B) thepriceleveltomovefromP1 toP2 ,butrealGrossDomesticProduct(GDP)wouldstay
atY1 .
C) thepriceleveltofallbysomeamountlessthanP 1 butgreaterthanP2 ,andtherateof
unemploymentwoulddecrease.
D) nochangeineitherthepricelevelorrealGrossDomesticProduct(GDP),butadecreasein
unemployment.
Answer: A
Diff:1
23) SupposetheeconomyisinitiallyoperatingatpointAintheabovefigure.Whichofthe
followingstatementsistrue?
A) Anunexpectedreductioninaggregatedemandwillcausetheeconomytomovefrom
pointAtopointBinthelongrun.
B) Anunexpectedreductioninaggregatedemandwillcausetheeconomytomovefrom
pointAtopointBintheshortrun.
C) Anunexpectedreductioninaggregatedemandwillcausetheeconomytomovefrom
pointAtopointCintheshortrun.
D) noneoftheabove
Answer: B
Diff:1
24) Oneresultofanunanticipatedreductioninaggregatedemandwouldbethat
A) fewerfirmswouldbehiring. B) morefirmswouldbehiring.
C) therewouldbenochangeinhiring. D) thepricelevelwouldrise.
Answer: A
Diff:2
25) Onaverage,thegreatertheunexpecteddeclineinaggregatedemand,
A) theweakeristheresultingdeflation. B) thegreateristheresultingdeflation.
C) thegreateristheresultinginflation. D) thegreateristheriseinthepricelevel.
Answer: B
Diff:2
26) Intheabovefigure,ifAistheinitialequilibriumpointandthereisanunanticipatedrisein
aggregatedemandfromAD 1 toAD2 ,then
A) thenewshort-runequilibriumwillbeatpointB.
B) thenewlong-runequilibriumwillbeatpointB.
C) thenewshort-runequilibriumwillbeatpointD.
D) realGrossDomesticProduct(GDP)peryearwillfallbelowY 1 .
Answer: A
Diff:1
27) Intheabovefigure,ifinitialequilibriumisatpointAandifthereisanunanticipatedincreasein
aggregatedemandfromAD 1 toAD2 ,then
A) intheshortrunrealoutputwillremainatY1 .
B) intheshortrunrealoutputwillincreaseaboveY 1 ,butinthelongrunitwillreturntoY 1 .
C) inthelongrunrealoutputwillincreaseaboveY 1 .
D) realoutputwillincreaseaboveY1 inboththeshortrunandinthelongrun.
Answer: B
Diff:1
28) Intheabovefigure,ifinitialequilibriumisatpointAandthereisafullyanticipatedincreasein
aggregatedemandfromAD 1 toAD2 duetoananticipatedincreaseinthemoneysupply,then
A) theeconomywillmovedirectlyfrompointAtopointCwithoutpassingthroughpointB.
B) theeconomywillmovedirectlyfrompointAtopointB,andwillremainatpointBinthe
longrun.
C) thepricelevelwillshifttoP 2 intheshortrun.
D) thepricelevelwillshifttoP 2 inthelongrun.
Answer: A
Diff:1
29) ThePhillipsCurvewillshiftwhen
A) theexpectedinflationratechanges.
B) thepricelevelfalls.
C) theoverallemploymentrateremainsunchanged.
D) noneoftheabove.
Answer: A
Diff:2
30) BasedontheworkofeconomistA.W.Phillips,economistsconcludedthat
A) thereisnotrade-offbetweeninflationandunemployment.
B) highinflationratesareassociatedwithlowunemploymentrates.
C) unemploymentcanbeeffectivelycombatedbyraisingwages.
D) higherratesofinflationareassociatedwithhigherratesofunemployment.
Answer: B
Diff:1
31) ThePhillipscurveshows
A) apositiverelationshipinthelongrunbetweentherateofinflationandtherateof
unemployment.
B) anegativerelationshipbetweentheinflationrateandtheunemploymentrate,atleastin
theshortrun.
C) apositiverelationshipbetweencontractionarymonetarypolicyandhigherpricelevels.
D) apositiverelationshipbetweenpricestabilityandconstant,small -incrementchangesin
thefiscalpolicyonthepartoftheFed.
Answer: B
Diff:1
32) WhathappenstothePhillipscurvewhentheexpectedrateofinflationrises?
A) Thecurveshiftstotheright B) Thecurveshiftstotheleft
C) Thecurvebecomeshorizontal D) ThePhillipscurveisunaffected
Answer: A
Diff:1
33) Theshort-runPhillipscurvesuggestswhatpolicymakingimplications?
A) Activepolicymakingdoesnotyieldanypredictableresults.
B) Passivepolicymakingismoreeffectivethanactivepolicymaking.
C) Usingdiscretionarypolicies,itmaybepossibletoachievejusttherightunemployment
andinflationmix.
D) Maintainingboththeinflationandunemploymentratesatlowlevelsispossibleifpolicy
makerswillrelysolelyonnondiscretionarypolicymaking.
Answer: C
Diff:1
34) CriticsofthePhillipscurvearguethatinthelongrun,
A) thereisatrade-offbetweenunemploymentandinflation.
B) foranygivenunemploymentlevelthereisacorrespondinginflationratetowhichthe
economywillautomaticallyrevert.
C) employeesarenotabletoanticipatefutureratesofinflation,andthereforeunemployment
canalwaysbereducedbyinflatingtheeconomy.
D) thereisnotrade-offbetweeninflationandunemploymentbecauseworkersexpectations
adjusttoanysystematicattemptstoreduceunemploymentbelowthenaturalrate.
Answer: D
Diff:1
35) ThePhillipscurveshows
A) therelationshipbetweentherateofinterestandplannedinvestment.
B) therelationshipbetweenthemoneysupplyandthepricelevel.
C) thatanincreaseingovernmentspendingwilldecreaserealnationalincome.
D) thatanincreaseininflationmaybeassociatedwithadecreaseintherateof
unemployment.
Answer: D
Diff:1
36) ThePhillipscurvetrade-offrelationshipimpliesthat
A) thegovernmentcanfine-tunetheeconomyandgenerateboththenaturalrateof
unemploymentandzeroinflation.
B) thegovernmentcanfine-tunetheeconomyandpickthemostpreferredcombinationof
unemploymentandinflation.
C) lowunemploymentcanbeobtainedonlybygeneratingrapidlyincreasinginflation.
D) thereisnorelationshipbetweeninflationandunemployment,atleastinthelongrun.
Answer: B
Diff:2
37) Supposethattheinflationratehasbeen3percentperyearforseveralyears,andthe
unemploymentratehasbeenstableat5percent.Unanticipatedchangesingovernmentpolicy
causetheinflationratetoincreaseto6percent.Intheshortrun,wewouldexpectthe
unemploymentrateto
A) remainconstant.
B) increaseto10percent.
C) increase,buttheexactamountcannotbeknownforsure.
D) decrease.
Answer: D
Diff:2
38) Intheshortrun,unanticipatedinflationtypicallyleadsto
A) higherratesofunemployment.
B) decreasesinaggregatedemand.
C) lowerratesofunemployment.
D) workersthinkingtherealwagehasbeenreduced.
Answer: C
Diff:1
39) WhentheactualunemploymentrateisgreaterthantheNAIRU,theinflationrate
A) tendstoincrease. B) tendstodecrease.
C) remainsunchanged. D) fallstozero.
Answer: B
Diff:2
40) Assumethatthegovernmentdecidestousefiscalormonetarypolicytostimulatetheeconomy
andthatthisactioncomesasasurprisetomostindividualsandbusinesses.Intheshortrun,the
resultwillbe
A) adecreaseintheaveragedurationofunemploymentandadecreaseintheunemployment
rate.
B) anincreaseintheaveragedurationofunemploymentandanincreaseinthe
unemploymentrate.
C) adecreaseinaggregateddemandandariseinthepricelevel.
D) anincreaseinaggregatedemandandafallinthepricelevel.
Answer: A
Diff:1
41) Animportantsourceofstructuralunemploymentis
A) seasonalvariationsinaggregatedemand.
B) unemploymentinsurancebenefits.
C) peoplelookingfortherightjobdecidetochangejobs.
D) recessions.
Answer: B
Diff:2
42) WhichofthefollowingisNOTapossiblecauseofstructuralunemployment?
A) individualstakethetimetosearchforthebestjobopportunities
B) amismatchofworkertrainingandskillswithrequirementsofemployers
C) government-imposedminimumwagelaws
D) unionactivitythatsetswagesabovetheequilibriumlevel
Answer: A
Diff:2
43) Thenaturalrateofunemploymentis
A) theunemploymentratewhencyclicalunemploymentistheonlytypeofunemployment.
B) theunemploymentratewhenthereisnofrictionalunemployment.
C) therateofunemploymentassociatedwithlong-runequilibrium.
D) zero.
Answer: C
Diff:1
44) Atrade-offbetweenunemploymentandinflationisreflectedinthe
A) naturalrateofunemployment.
B) PhillipsCurve.
C) economicstability.
D) nonacceleratinginflationrateofunemployment(NAIRU).
Answer: B
Diff:1
45) Thenaturalrateofunemploymentconsistsof
A) noworkerslookingforemployment. B) onlyseasonalunemployment.
C) onlystructuralunemployment. D) structuralandfrictionalunemployment.
Answer: D
Diff:1
46) Whentheeconomyisinlong-runequilibrium,therewillbe
A) nounemployment. B) frictionalandstructuralunemployment.
C) cyclicalunemploymentonly. D) cyclicalandseasonalunemployment.
Answer: B
Diff:1
47) Empiricalevidencesuggeststhat,whenunemploymentbenefitsrunout,theprobabilitythatan
unemployedpersonwillfindajob
A) remainsconstant. B) goesdownby20percent.
C) aboutdoubles. D) abouttriples.
Answer: C
Diff:2
48) Deviationsoftheactualunemploymentratefromthenaturalrateofunemploymentarecalled
C) seasonalunemployment. D) underemployment.
Answer: B
Diff:1
49) WhentheeconomyisoperatingatalevelofrealGDPthatisgreaterthanitspotentiallevel,we
knowthat
A) theactualunemploymentrateisgreaterthanthenaturalrateofunemployment.
B) thestructuralrateofunemploymentisnegative.
C) thefrictionalunemploymentiszero.
D) thecyclicalrateofunemploymentisnegative.
Answer: D
Diff:2
50) Duringarecession,the
A) naturalrateofunemploymenthasfallen.
B) cyclicalrateofunemploymentispositive.
C) cyclicalrateofunemploymentiszero.
D) cyclicalrateofunemploymentisnegative.
Answer: B
Diff:2
51) Deviationsoftheactualunemploymentrateawayfromthenaturalrateare
C) structuralunemployment. D) themonetaryrule.
Answer: A
Diff:1
52) Supposethenaturalrateofunemploymentis5percent.Iftheactualunemploymentrateis7
percent,thenthecyclicalunemploymentrate
A) is2percent.
B) is-2percent.
C) is12percent.
D) cannotbedeterminedgiventheinformation.
Answer: A
Diff:2
53) Supposethenaturalrateofunemploymentis5percent.Iftheactualunemploymentrateis4
percent,thenthecyclicalunemploymentrateis
A) 9percent.
B) 1percent.
C) -1percent.
D) 0percentascyclicalunemploymentcannotbelessthanzero.
Answer: C
Diff:2
54) Weobservethedurationofunemploymentfallingandwageratesrising.Itislikelythat
A) thegovernmenthasinitiatedexpansionaryfiscalpolicybutthepolicieshaventtaken
effectyet.
B) summerhasarrived.
C) aggregatedemandhasincreased.
D) aggregatesupplyhasincreased.
Answer: C
Diff:2
55) Supposethegovernmentabolishedtheminimumwagelawandthelawthatrequiresunion
wageratestobepaidonallgovernmentcontractjobs.Wewouldexpecttosee
A) adeclineinthenaturalrateofunemployment.
B) anincreaseinclaimsforunemploymentbenefits.
C) thedurationofunemploymenttoincrease.
D) arecession.
Answer: A
Diff:3
56) Supposetherewasanunexpectedincreaseinaggregatedemand.Wewouldexpecttoobserve
A) frictionalunemploymenttoincrease.
B) thedurationofunemploymentandtheamountofunemploymenttodecrease.
C) higherwages,withthedurationofunemploymentandtheamountofunemployment
unchanged.
D) adecreaseinaggregatedemand.
Answer: B
Diff:3
57) Anunexpectedincreaseinaggregatedemandcauses
A) theunemploymentratetofall,withnochangeinthepricelevel.
B) thepriceleveltorise,butthedurationofunemploymentwillremainconstant,sothe
unemploymentrateremainsconstant.
C) simultaneouslythepriceleveltoriseandtheunemploymentratetofall.
D) simultaneouslythepriceleveltofallandtheunemploymentratetofall.
Answer: C
Diff:2
58) Refertotheabovefigure.Unexpectedexpansionarymonetarypolicyhascausedtheaggregate
demandcurvetoshifttoAD2 .Intheshortrun,
A) realGDPwillbeY1 ,andthepricelevelwillbeP1 .
B) realGDPwillbeY2 ,andthepricelevelwillbeP2 .
C) realGDPwillbeY1 ,andthepricelevelwillbeaboveP2 .
D) realGDPwillbebetweenY1 andY2 ,andthepricelevelwillbebetweenP1 andP2 .
Answer: B
Diff:3
demandcurvetoshifttoAD2 .Inthelongrun,
C) realGDPwillbeY1 ,andthepricelevelwillbeaboveP2 .
D) realGDPwillbebetweenY1 andY2 ,andthepricelevelwillbebetweenP1 andP2 .
Answer: C
Diff:3
A) theunemploymentratewillbethesamerateasbeforetheexpansionarymonetarypolicy.
B) theunemploymentratewillbelargerthantheratebeforetheexpansionarymonetary
policy.
C) theunemploymentratewillbesmallerthantheratebeforetheexpansionarymonetary
policy.
D) theunemploymentratecanincreaseordecreasedependinguponhowmuchtheLRAS
willshift.
Answer: C
Diff:3
policy.
policy.
willshift.
Answer: A
Diff:3
62) Refertotheabovefigure.Unexpectedcontractionarymonetarypolicyhascausedtheaggregate
C) realGDPwillbebetweenY1 andY2 ,andthepricelevelwillbeaboveP1 .
D) realGDPwillbebetweenY1 ,andthepricelevelwillbebelowP2 .
Answer: B
Diff:3
C) realGDPwillbebetweenY1 andY2 ,andthepricelevelwillbeaboveP1 .
D) realGDPwillbebetweenY1 ,andthepricelevelwillbebelowP2 .
Answer: D
Diff:3
demandcurvetoshifttoAD 2 .Intheshortrun,
policy.
policy.
willshift.
Answer: B
Diff:3
policy.
policy.
willshift.
Answer: A
Diff:3
66) Theinflationratehasbeenconstantforseveralyearsat4percent,andtheunemploymentrate
hasbeenstableat6percentoverthesametimeperiod.Changesingovernmentpolicythatcause
theinflationratetoriseto6percentwill
A) havenoeffectontheunemploymentrate.
B) causetheunemploymentratetofallintheshortrun.
C) causetheunemploymentratetoriseto9percentintheshortrun.
D) causetheunemploymentratetoriseintheshortrun,butwecannottellbyhowmuch.
Answer: B
Diff:2
67) Thetrade-offbetweenunemploymentandinflationisknownas
A) theKeynesianmechanism. B) thePhillipscurve.
C) anexpansionarygap. D) passivepolicymaking.
Answer: B
Diff:1
68) ThePhillipscurveisthoughttoreflecttherelationshipbetween
A) unemploymentandrealGDP. B) unemploymentandinflation.
C) inflationandrealGDP. D) thepricelevelandinflation.
Answer: B
Diff:1
69) Atonetime,manyeconomistsbelievedthat
A) thegovernmentcoulddeterminewhatthePhillipscurveshouldbe.
B) thegovernmentcoulddeterminetheslopeofthePhillipscurve.
C) thegovernmentcouldmakethePhillipscurvevertical.
D) thegovernmentcoulddecideatwhichpointonthePhillipscurvetheeconomyshouldbe.
Answer: D
Diff:2
70) Refertotheabovefigure.LineABCDisa(n)
A) aggregatedemandcurve. B) Phillipscurve.
C) discretionary-policycurve. D) naturalrateofunemploymentcurve.
Answer: B
Diff:1
71) Refertotheabovefigure.GovernmentpolicythatmovedtheeconomyfromAtoBwouldbe
accomplishedby
A) anexpansionaryfiscalpolicycombinedwithacontractionarymonetarypolicy.
B) acontractionaryfiscalpolicycombinedwithanexpansionarymonetarypolicy.
C) acontractionarypolicythatwouldreducetherateofinflationandwouldcauseworkersto
remainunemployedlongerthantheywerebefore.
D) raisingtheminimumwage.
Answer: C
Diff:2
72) Refertotheabovefigure.SupposetheeconomyisatC.Ifthegovernmenttriedtoreducethe
unemploymentrateto3percent,thenewlong-runoutcomewillbeatpoint
A) A. B) C. C) D. D) H.
Answer: D
Diff:3
73) Refertotheabovefigure.Supposethenaturalrateofunemploymentis5percent.Ifthe
governmenttriedtoreduceunemploymentto4percentandkeepitthere,itmust
A) raiseunemploymentbenefits.
B) acceptapermanentinflationrateof1percent.
C) generatehigherandhigherinflationratesorelsepeoplewilladjusttheirbehaviorandthe
unemploymentratewillreturnto5percent.
D) usecontractionaryfiscalandexpansionarymonetarypolicy.
Answer: C
Diff:3
74) PolicymakersattemptstousethePhillipscurvetoreducetheunemploymentratebelowthe
naturalrate
A) willbesuccessfulsincethePhillipscurveshowstherelationshipbetweentheinflationrate
andtheunemploymentrate.
B) willbesuccessfulifmonetarypolicyisused.
C) willbeunsuccessfulifmonetarypolicyisusedsincemonetarypolicyleadstohigher
prices.
D) willbeunsuccessfulsinceworkersexpectationsadjusttoattemptstoreduce
unemploymentbelowthenaturalrate.
Answer: D
Diff:1
75) Refertotheabovefigure.TheeconomyinitiallyisatpointA.TheFedunexpectedlyincreases
themoneysupply.Whichofthefollowingstatementsaretrue?
A) Intheshortrun,theeconomywillmovefrompointAtopointC.Inthelongrun,the
economywillmovetopointB.
B) Intheshortrun,theeconomywillmovefrompointAtopointC.Inthelongrun,the
economywillmovebacktopointA.
C) Intheshortrun,theeconomywillmovefrompointAtopointB.Inthelongrun,the
economywillstayatpointB.
D) Intheshortrun,theeconomywillmovefrompointAtopointB.Inthelongrun,the
economywillmovebacktopointA.
Answer: D
Diff:2
76) Ifeveryoneintheeconomycorrectlyanticipatestheinflationrate,theunemploymentrate
A) willbethenaturalrateofunemployment.
B) willbethecyclicalrateofunemployment.
C) willbeinverselyrelatedtotheexpectedinflationrate.
D) willbepositivelyrelatedtotheexpectedinflationrate.
Answer: A
Diff:2
77) Unemploymentthatdeviatesfromthenaturalrateofunemploymentisreferredtoas
Answer: B
Diff:2
78) SupposetheFedpermanentlyincreasesthemoneysupplybyagivenamount.Whichofthe
followingis(are)mostlikelytooccurinthelongrunasaresultofthismonetarypolicyaction?
A) anincreaseinemployment
B) areductionintherealinterestrate
C) adecreaseinunemployment
D) alloftheabove
E) noneoftheabove
Answer: E
Diff:2
79) Whentheeconomyisatitsnaturalrateofunemployment,
A) itisstillexperiencingfrictionalandcyclicalunemployment.
B) itisstillexperiencingstructuralandcyclicalunemployment.
C) itisstillexperiencingfrictional,seasonal,andstructuralunemployment.
D) itisstillexperiencingfrictional,structural,andcyclicalunemployment.
Answer: C
Diff:2
80) AllofthefollowingwouldincreasethenaturalrateofunemploymentEXCEPT
A) unionactivityrestrictsthemobilityoflabor.
B) governmentlicensingofteachersrestrictsemployment.
C) amismatchofskillsandjobs.
D) adownturnintheeconomy.
Answer: D
Diff:2
81) Intheabovefigure,whatdoesthelineUrepresent?
A) thePhillipscurve B) thenaturalrateofUnemployment
C) potentialunemployment D) fullinflationrateofunemployment
Answer: B
Diff:2
82) Usetheabovefigure.Assumingthatpolicyactionsareunanticipated,iftheeconomyisatpoint
AandthepolicymakerswanttogettopointB,theycould
A) increasethemoneysupply. B) decreasetaxation.
C) decreasethemoneysupply. D) increasegovernmentspending.
Answer: C
Diff:2
83) AccordingtoA.W.Phillips,aninverserelationshiphasexistedbetween
A) unemploymentandinterestrates.
B) therateofgrowthofthemoneysupplyandtheunemploymentrate.
C) theinflationrateandunemploymentrate.
D) theinflationrateandthemoneysupply.
Answer: C
Diff:2
84) Whichofthefollowingcurvesshowstherelationshipbetweentheunemploymentrateandthe
rateofchangeinthepricelevel?
A) thenewKeynesianaggregatesupplycurve
B) therealbusinesscyclecurve
C) theaggregatedemandcurve
D) noneoftheabove
Answer: D
Diff:1
85) AccordingtothePhillipscurve,
A) thereisadirectrelationshipbetweenprice-levelchangesandthelevelofunemployment
rate.
B) theunemploymentrateisnotaffectedbychangesinthepricelevel.
C) price-levelchangesarenotaffectedbychangesintheunemploymentrate.
D) thereisaninverserelationshipbetweenprice-levelchangesandtheunemploymentrate.
Answer: D
Diff:1
86) ThePhillipscurveshowstherelationshipbetween
A) therateofgrowthinrealGDPandtheunemploymentrate.
B) theinflationrateandtheunemploymentrate.
C) aggregatedemandandtheunemploymentrate.
D) aggregatesupplyandtheunemploymentrate.
Answer: B
Diff:1
87) ThedownwardslopeofthePhillipscurvesuggeststhat
A) anincreaseinthepricelevelwilldepressnominalwages.
B) anincreaseinthepricelevelwillincreasethemoneysupply.
C) adecreaseinthemoneysupplywillstimulateaggregatedemand.
D) policymakersfaceatrade-offbetweeninflationandunemployment.
Answer: D
Diff:2
88) Usetheabovefigure.Thisgraphisknownas
A) theLaffercurve. B) theshort-runPhillipscurve.
C) theNAIRUrelationship. D) theKeynesiancurve.
Answer: B
Diff:1
89) Usetheabovefigure.Graph________correctlydepictstheshort -runPhillipsCurve.

A) A B) B C) C D) D
Answer: D
Diff:1
90) Usetheabovefigure.Thelong-runPhillipscurveisbestdepictedbygraph
A) A. B) B. C) C. D) D.
Answer: C
Diff:2
91) Whichoneofthefollowingwouldlikelyreducethelevelofstructuralunemployment?
A) increasingtheminimumwagetoencouragemorepeopletowork
B) increasingthelevelofunionbargainingpower
C) limitingunemploymentinsurancebenefits
D) strengtheningrestrictionsonwhocanbelicensedtoentercertainprofessions
Answer: C
Diff:2
92) Accordingtoeconomistswhosupportpassivepolicymaking,
A) thereisnodifferencebetweentheeffectofananticipatedchangeinaggregatedemandand
theeffectofanunanticipatedchangeinaggregatedemandofanidenticalamount.
B) workersalwaysconsiderachangeinnominalwagestobeachangeinrealwages.
C) expansionarypoliciescanreduceunemploymentwithoutincreasingthepricelevel.
D) policiesthatattempttoexploitthePhillipscurvetrade-offwilleventuallybecome
ineffectiveforreducingunemployment.
Answer: D
Diff:3
93) Thehistoricalrecordsuggeststhat
A) thePhillipscurveishorizontal.
B) oncepolicymakersattemptedtoexploitashort-runPhillipscurvetrade-off,it
disappeared.
C) shiftsinlong-runaggregatesupplydonotaffectrealoutput.
D) inflationratesarelowestwhenunemploymentratesarealsolow.
Answer: B
Diff:2
94) Cyclicalunemploymentispositivewhen
A) theinflationrateispositive.
B) theeconomyisatthepeakofabusinessexpansion.
C) thenaturalrateofunemploymentexceedstheactualrate.
D) theactualunemploymentrateexceedsthenaturalrate.
Answer: D
Diff:2
95) Expansionaryfiscalpolicycanbeusedtoreduceunemploymentby
A) increasinglong-runaggregatesupplysoastoraiserealGDP.
B) increasingaggregatedemandsoastoraiserealGDP.
C) reducingnominalwagessoastoencouragefirmstohiremoreworkers.
D) eliminatinginefficienciesfromlabormarkets.
Answer: B
Diff:3
96) Anunexpectedincreaseinaggregatedemand
A) causesthepriceleveltofallandtheunemploymentratetorise.
B) causesthepriceleveltofallandtheunemploymentratetofall.
C) causesthepriceleveltoriseandtheunemploymentratetorise.
D) causesthepriceleveltoriseandtheunemploymentratetofall.
Answer: D
Diff:2
97) Anunexpecteddecreaseinaggregatedemand
A) causesthepriceleveltofallandtheunemploymentratetorise.
B) causesthepriceleveltofallandtheunemploymentratetofall.
C) causesthepriceleveltoriseandtheunemploymentratetorise.
D) causesthepriceleveltoriseandtheunemploymentratetofall.
Answer: A
Diff:2
98) Anunexpecteddecreaseinaggregatedemand
A) willdecreaselong-runaggregatesupply.
B) willdecreasetheaveragedurationofunemployment.
C) willdecreasethepricelevel.
D) willdecreaserealGDP,butwillnotaffecttherateanddurationofunemployment.
Answer: C
Diff:2
99) Refertotheabovefigure.SupposetheeconomyisatpointBandthecentralbankadopts
expansionarymonetarypolicy.Intheshortrun,thiswillresultin
A) theeconomymovingtowardspointA.
B) theeconomystayingatpointB.
C) theeconomymovingtowardspointC.
D) anoutcomethatcannotbepredicted,asnotenoughinformationisgiven.
Answer: A
Diff:2
100) Refertotheabovefigure.SupposetheeconomyisatpointBandthecentralbankadopts
contractionarymonetarypolicy.Intheshortrun,thiswillresultin
A) theeconomymovingtowardspointA.
B) theeconomystayingatpointB.
C) theeconomymovingtowardspointC.
D) anoutcomethatcannotbepredicted,becausenotenoughinformationisgiven.
Answer: C
Diff:2
101) Theshort-runPhillipscurveandthelong-runPhillipscurvearedifferentbecause
A) theexpectedrateofinflationisalwayszerointhelongrun,whileitisapositivenumberin
theshortrun.
B) theexpectedrateofinflationisalwayszerointheshortrun,whileitisapositivenumber
inthelongrun.
C) theactualandexpectedrateofinflationareequalintheshortrun.
D) theactualandexpectedrateofinflationareequalinthelongrun.
Answer: D
Diff:2
102) Whatkindsofunemploymentareassociatedwiththenaturalrateofunemployment?
Answer: Thenaturalrateofunemploymentisassociatedwithunemploymentthatwouldexist
eveninlong-runequilibrium.Frictionalunemploymentandstructuralunemployment
bothexistevenwhentheeconomyisinlong-runequilibrium,soispartofthenatural
rateofunemployment.
Diff:1
103) WhatisthePhillipscurve?WhatdoesthePhillipscurvesuggestaboutoptimalpolicy?
Answer: ThePhillipscurveshowsatrade-offbetweenunemploymentandinflation.Withthe
unemploymentrateonthehorizontalaxisandinflationonthevertical,thePhillipscurve
ispicturedasadownwardslopingcurve.Ifthecurveisasuitablerepresentationofthe
economy,intheshortrunpolicymakerscanchoosethecombinationofinflationand
unemploymentthattheywant.
Diff:2
104) Supposetheeconomyhasbeenexperiencingzeroinflationand5percentunemploymentfor
severalyears.Thegovernmentdecidestolowertheunemploymentbygeneratingsome
inflation.Usingagraph,showwhattheshort -runeffectswouldbeandwhatwouldhappenin
thelongrun.Whatwouldthegovernmenthavetodotokeeptheunemploymentrateat3
percent?
Answer:
Seeabovefigure.Thenaturalrateofunemploymentis5percent.Thegovernmentinflates
bypursuingexpansionarymonetarypolicyandtheeconomymovestoB,withan
unemploymentrateof3percentandinflationrateof5percent.Inthelongrun,the
Phillipscurveshiftstotherightandtheunemploymentrategoesbackto5percent.For
thegovernmenttomaintain3percentunemployment,itwouldhavetokeepincreasing
theinflationrate(pointD).
Diff:3
105) Whatismeantbythenaturalrateofunemployment?
Answer: Thenaturalrateofunemploymenttherateofunemploymentestimatedtoprevailin
long-runmacroeconomicequilibrium,whenallworkersandemployershavefully
adjustedtoanychangesintheeconomy.
Diff:1
106) ThenaturalrateofunemploymenthasincreasedintheUnitedStatesandEuropeoverthelast
twentyyears.Whatarethingsthatcouldaccountforthis?
Answer: Thenaturalrateofunemploymentisaffectedbyvariousrigidities.Theserigidities
includeunions,government-imposedlicenses,andotherrestrictionsinlabormarkets,
minimumwagelaws,andwelfare,andunemploymentinsurance.Iftheserigiditieshave
becomemoreimportant,thenthelabormarketsarelikelytosufferfromgreaterstructural
unemploymentandthenaturalrateofunemploymentwouldbegreater.
Diff:3
17.3RationalExpectations,thePolicyIrrelevanceProposition,andRealBusinessCycles
1) Whenapersonbasesherfutureexpectationsfortheeconomyonallavailablecurrentdataand
herownjudgmentaboutfuturepolicyeffects,thisisknownas
A) thepolicyirrelevanceproposition. B) rationalexpectations.
C) irrationalexpectations. D) thenewclassicaltheory.
Answer: B
Diff:2
Topic: 17.3RationalExpectations,thePolicyIrrelevanceProposition,andRealBusinessCycles
2) Thehypothesisstatingthatpeoplecombinetheeffectsofpastpolicychangesonimportant
economicvariableswiththeirownjudgmentaboutthefutureeffectsoffutureandcurrent
policychangesisknownas
A) policyirrelevancehypothesis. B) rationalexpectationshypothesis.
C) lifecyclehypothesis. D) realbusinesscyclehypothesis.
Answer: B
Diff:2
3) Accordingtotherationalexpectationshypothesis,monetarypolicycanhaverealeffectsonsuch
variablesasrealGrossDomesticProduct(GDP)intheshortrun
A) onlywhenthepolicyisanticipated.
B) onlywhenthepolicyisunsystematicandunanticipated.
C) regardlessofwhetherthepolicyisanticipatedorunanticipated.
D) whentheFederalReservesopenmarketcommitteeoperatesasexpectedineitherbuying
orsellingbonds.
Answer: B
Diff:1
4) Therationalexpectationshypothesisisatheorythatstatesthat
A) individualscanpredictthefutureperfectly,atleastwithrespecttomacroeconomic
variablesliketheinterestrateandinflation.
B) peoplemaketheireconomicplansbyusingallavailablepastandpresentinformationand
theirunderstandingabouthowtheeconomyoperates.
C) peoplemaketheireconomicplansinanirrational,intuitivemanner.
D) peoplemaketheireconomicplansbyrelyingonthepolicystatementsmadebythe
PresidentandbyleadersinCongress.
Answer: B
Diff:1
5) Accordingtotherationalexpectationshypothesis,anindividualsassessmentoffuture
economicperformance
A) doesnotconsiderpastperformance.
B) doesnotconsidertheimpactofinflation.
C) onlyconsiderspastperformance.
D) considersbothpastperformanceandcurrentmonetaryandfiscalpolicy.
Answer: D
Diff:1
6) Oneeconomichypothesisstatesthatpeopleformexpectationsbycombiningtheeffectsofpast
policychangesonimportanteconomicvariableswiththeirownjudgmentaboutthefuture
effectsofcurrentandfuturepolicychanges,andthenreactaccordingly.Thisisknownasthe
A) relevancehypothesis. B) contraryopinionhypothesis.
C) rationalexpectationshypothesis. D) structuralhypothesis.
Answer: C
Diff:1
7) Thehypothesisthatpeoplecombinetheeffectsofpastpolicychangesonimportanteconomic
variableswiththeirownjudgmentaboutthefutureeffectsofcurrentandfuturepolicychanges
isthebasisofthe
A) adaptivehypothesis. B) short-runPhillipscurvehypothesis.
C) rationalexpectationshypothesis. D) demand-pullinflationhypothesis.
Answer: C
Diff:1
8) Rationalexpectationstheorysuggeststhatshort-runstabilizationpolicy
A) isbestachievedwithmonetarypolicy.
B) isbestachievedwithfiscalpolicy.
C) isequallyeasytoachievewithmonetaryorfiscalpolicy.
D) shouldnotbeattempted.
Answer: D
Diff:1
9) Ifyouaccepttherationalexpectationshypothesisasaccurate,whatwouldyoutellmonetary
policymakerswhoaskyouhowtomoreeffectivelymanagetheeconomy?
A) Consumersdonotunderstandtheworkingsofmonetarypolicy,sodiscretionaryand
nondiscretionarypoliciesareequallyeffective.
B) Individualsdounderstandhowmonetarypolicyworks,soconsistencyandpredictability
arethekeystoeffectivepolicymaking.
C) Individualsbasetheireconomicexpectationssolelyoncurrentinformation,sorepeating
policydecisionsthathaveworkedinthepastisthemosteffectivepathtotake.
D) Onlyunanticipatedpolicieswillbeeffectiveonceindividualsunderstandhowmonetary
policyworks.
Answer: D
Diff:2
10) AssumetheFedinitiatesanexpansionarymonetarypolicythatiscorrectlyanticipatedby
economicagentsintheeconomy.Accordingtotherationalexpectationhypothesis,theresultis
A) anincreasedpricelevelintheshortrun,butnoeffectonpricelevelinthelongrun.
B) decreasedrealGrossDomesticProduct(GDP)intheshortrun,butincreasedrealGross
DomesticProduct(GDP)inthelongrun.
C) increasedrealGrossDomesticProduct(GDP)andincreasedemploymentinthelongrun.
D) anincreasedpricelevel,butnochangeinrealGrossDomesticProduct(GDP)inthelong
run.
Answer: D
Diff:2
11) Intheabovefigure,supposetheeconomyisinitiallyatashort-runequilibriumatpointDand
thereisanunanticipatedincreaseinthemoneysupply.Whichpointrepresentsthenew
short-runequilibrium?
A) A B) B C) C D) D
Answer: C
Diff:1
12) Intheabovefigure,supposetheeconomyisinequilibriumatpointA.TheFedengagesinan
expansionarymonetarypolicythatisfullyanticipatedbythepublic.Otherthingsbeingequal,
whatpointrepresentsthenewequilibriumaccordingtotherationalexpectationstheory?
A) A B) B C) C D) D
Answer: C
Diff:2
13) Intheabovefigure,supposetheeconomyiscurrentlyinequilibriumatpointC.Applying
rationalexpectationstheory,whathappensiftheFedannouncesthatitisdecreasingthemoney
supplyandfollowsthroughonitsstatement?
A) Thepricelevelwillincrease.
B) RealGrossDomesticProduct(GDP)peryearwillincrease.
C) RealGrossDomesticProduct(GDP)peryearwilldecrease.
D) Thepricelevelwilldecrease.
Answer: D
Diff:2
14) Proponentsofthepolicyirrelevancepropositionbelievethat,undertheassumptionofrational
expectations,theunemploymentratewill
A) goupwhenevertheFedannouncesananticipatedmonetarypolicychange.
B) godownwhenevertheFedannouncesananticipatedfiscalpolicychange.
C) equalthenaturalrateofunemploymentinthelongrun,regardlessofanymonetarypolicy
actions.
D) alwaysbehigherinthelongrunthanthenaturalrateofemployment.
Answer: C
Diff:1
15) TheideathatanticipatedmonetarypolicycannotaffectrealvariablessuchasrealGross
DomesticProduct(GDP)oremploymentisknownas
A) theKeynesianhypothesis. B) thepolicyirrelevanceproposition.
C) thejobsearchmodel. D) themonetaryvelocitytheory.
Answer: B
Diff:1
16) Accordingtothepolicyirrelevanceproposition,monetarypolicycanaffectrealvariables
A) inboththeshortrunandthelongrun.
B) inthelongrunonly.
C) intheshortrunonly,andthenonlyifthepolicywasunanticipated.
D) intheshortrunonly,andthenonlyifthepolicywasfullyanticipated.
Answer: C
Diff:2
17) Onekeyimplicationofrationalexpectationsisthat
A) anticipatedmonetarypolicyhasnoeffectontherateofunemploymentorthelevelofreal
GDP.
B) anticipatedmonetarypolicycanaffecttherateofunemploymentbutnotthelevelofreal
GDP.
C) unanticipatedmonetarypolicyhasnoeffectontheeconomybutanticipatedmonetary
policydoeshaveaneffectontheeconomy.
D) bothunanticipatedmonetarypolicyandanticipatedmonetarypolicyhaveaneffectonthe
economy.
Answer: B
Diff:2
QuestionStatus: New
18) Whenworkersandemployerscorrectlyanticipatetherateofinflation,
A) therewillbenounemployment.
B) therewillbeonlyinvoluntaryunemployment.
C) unemploymentwillbeatthenaturalrate.
D) workerswillunderestimatetherealwage.
Answer: C
Diff:1
19) Intheaggregatesupply-aggregatedemandmodel,ifeverypersonintheeconomycorrectly
anticipatestheinflationrate,theunemploymentratewill
A) belessthanthenaturalrateofunemployment.
B) bemorethanthenaturalrateofunemployment.
C) equalthenaturalrateofunemployment.
D) equalzero.
Answer: C
Diff:2
20) AssumingthattherationalexpectationshypothesisisNOTineffect,intheshortrunan
expansionarymonetarypolicyshould
A) shifttheaggregatesupplyfunction.
B) increaserealGrossDomesticProduct(GDP)andthepricelevel.
C) increasetherateofunemployment.
D) generatestagflation.
Answer: B
Diff:1
21) Intheshortrun,anunanticipatedcutintherateofinflationwould
A) increasetheunemploymentrate.
B) decreasetheunemploymentrate.
C) unambiguouslyimprovethemiseryindex.
D) lowerthenaturalrateofunemployment.
Answer: A
Diff:1
22) Ifalltheassumptionsunderpinningthepolicyirrelevancepropositionareinplace,fully
anticipatedmonetarypolicywill
A) affecttheunemploymentratebuthavenoimpactonthelevelofrealGrossDomestic
Product(GDP).
B) haveanimpactonrealGrossDomesticProduct(GDP)butcannotalterthelevelof
unemployment.
C) effectivelyalterboththerateofunemploymentandthelevelofrealGrossDomestic
Product(GDP).
D) notchangeeitherthelevelofrealGrossDomesticProduct(GDP)ortheunemployment
rate.
Answer: D
Diff:2
23) Accordingtothepolicyirrelevanceproposition,
A) monetarypolicycaneffectivelyreducetherateofunemploymentintheshortrun.
B) workersarenotrationalinthelongrun.
C) thePhillipscurveslopesupward,notdownwardastraditionallyassumed.
D) expansionarymonetarypolicywillonlyleadtoahigherrateofinflationinthelongrun.
Answer: D
Diff:1
24) Accordingtothepolicyirrelevanceproposition,theimpactofananticipatedexpansionary
monetarypolicywillbeto
A) increasethepricelevelinthelongrun.
B) increasetherealGrossDomesticProduct(GDP)inthelongrun.
C) decreasethenaturalrateofunemployment.
D) decreasethepricelevelandtheunemploymentrate.
Answer: A
Diff:1
25) Accordingtothepolicyirrelevanceproposition,realGrossDomesticProduct(GDP)is
determinedby
A) theeconomysaggregatedemandcurve.
B) theeconomyslong-runaggregatesupplycurve.
C) therateofinflationonly.
D) acombinationoffiscalpolicyandmonetarypolicy.
Answer: B
Diff:2
26) Onekeyassumptionlyingbehindthepolicyirrelevancepropositionisthat
A) wagesarestickydownward.
B) pricesarestickyupward.
C) therationalexpectationshypothesisiscorrect.
D) marketsarenotpurelycompetitive.
Answer: C
Diff:1
27) Therationalexpectationshypothesisindicatesthatamonetarypolicydesignedtoalterreal
GrossDomesticProduct(GDP)willfailunless
A) changesinthemoneysupplyareunexpected.
B) thegovernmentsbudgetisnotindeficit.
C) laborunionshavelong-termcontracts.
D) changesinthemoneysupplyarecompletelyanticipated.
Answer: A
Diff:1
28) Akeyimplicationofthepolicyirrelevancepropositionisthat
A) onlyfullyanticipatedpolicyactionscaninfluencerealGrossDomesticProduct(GDP).
B) onlyunanticipatedpolicyactionscaninfluencerealGrossDomesticProduct(GDP).
C) therationalexpectationshypothesisisincorrect.
D) noneoftheabove.
Answer: B
Diff:2
29) Undertherationalexpectationshypothesis,ifwagesadjustrapidlytonewinformationabout
intendedpolicyactions,monetarypolicycanhaveaneffect
A) inboththeshortandthelongrun.
B) inthelongrun,butnottheshortrun.
C) onlyintheshortrunandonlyifthepolicyisunanticipated.
D) onlyinthelongrunandonlyifthepolicyisfullyanticipated.
Answer: C
Diff:1
30) Undertherationalexpectationshypothesis,ifwagesadjustrapidlytonewinformationabout
intendedpolicyactions,theonlytimethatchangesingovernmentpolicieshaverealeffectsis
when
A) thechangesareunanticipated. B) thechangesinvolvefiscalpolicy.
C) thechangesinvolvemonetarypolicy. D) thechangesaffectaggregatedemand.
Answer: A
Diff:1
31) SupposethereisanoilsupplyshocktotheU.S.economyduetoanembargobymajoroil
producingnations.Accordingtotherealbusinesscycletheory,thesupplyshockwill,other
thingsbeingequal,
A) pushrealGrossDomesticProduct(GDP)upwardintheshortrunbutdownwardinthe
longrun.
B) pushtheeconomyintoanexpansionaryphaseofthebusinesscycle.
C) causerealGrossDomesticProduct(GDP)todeclinebothintheshortrunandinthelong
run.
D) causeeconomy-widedeflation.
Answer: C
Diff:1
32) Theshortrunaggregatesupply(SRAS)curveshiftsleftwhenoilsupplyshocksoccurbecause
A) fewergoodsareproducedatanygivenpricelevelduetohigheroilprices.
B) oil-basedproductionhasincreasedatanygivenpricelevel.
C) averagetotalcostwillfallatanygivenoutputlevel.
D) thepricelevelwillfallatanygivenoutputlevel.
Answer: A
Diff:2
33) Areductioninworldoilsuppliesislikelytocause
A) anincreaseinaggregatedemandandadecreaseintheequilibriumpricelevel.
B) adecreaseinequilibriumpricelevelandanincreaseinrealGrossDomesticProduct
(GDP).
C) anincreaseinequilibriumpricelevelandanincreaseinrealGrossDomesticProduct
(GDP).
D) areductioninaggregatesupply,ariseintheequilibriumpricelevel,andafallinreal
Answer: D
Diff:1
34) Accordingtotherealbusinesscycletheory,anincreaseinaninputprice,suchasoil,will
A) increasebothrealGrossDomesticProduct(GDP)andthepricelevel.
B) increaserealGrossDomesticProduct(GDP)butnotchangethepricelevel.
C) decreaserealGrossDomesticProduct(GDP)butincreasethepricelevel.
D) decreasebothrealGrossDomesticProduct(GDP)andthepricelevel.
Answer: C
Diff:1
35) Realbusinesscycletheoryexplainsvariationsinprices,employment,andrealGrossDomestic
Product(GDP)byfocusingon
A) changesinrealvariablessuchassupplyshocks,technologicalchanges,andshiftsinthe
compositionofthelaborforce.
B) anticipatedmonetarypoliciesenactedbytheFed.
C) theeffectsofthePhillipscurve.
D) anticipatedchangesinfiscalpolicyenactedbythegovernment.
Answer: A
Diff:1
36) Therationalexpectationshypothesisstatesthat
A) thegovernmentcombinestheeffectsofpastpolicychangesonimportanteconomic
variableswithacceptedviewsabouttheeffectsofcurrentandfuturepolicychanges.
B) peoplecombinetheeffectofpastpolicychangesonimportanteconomicvariableswith
unpredictableviewsonwhatpolicymakerswilldotodeterminewhattheeconomywill
dointhefuture.
C) peoplecombinetheeffectsofpastpolicychangesonimportanteconomicvariableswith
theirownjudgmentsaboutthefutureeffectsofcurrentandfuturepolicychanges.
D) peopleunderstandhowtheeconomyoperatesandusetheirknowledgeinmaking
expectationsaboutthefuture,butareuninformedabouthowfiscalandmonetarypolicies
aremadeandcarriedout.
Answer: C
Diff:2
37) Whichofthefollowingstatementsisconsistentwiththerationalexpectationshypothesis?
A) Whenitcomestomakingpersonaleconomicdecisions,peoplerarelybehaveinarational
manner.
B) Peoplecombinetheeffectsofpastpolicychangesonimportanteconomicvariableswith
theirownjudgmentaboutthefutureeffectsofcurrentandfuturepolicychanges.
C) Whenitcomestomakingpersonaleconomicdecisions,peoplealwaysbehaveinarational
manner.
D) Everypersonintheeconomyisalwayscorrectinherpredictionsaboutcurrentandfuture
policychanges.
Answer: B
Diff:2
38) Accordingtotherationalexpectationshypothesis,individualsformtheirexpectationsabout
futurevaluesofeconomicvariablesbyallofthefollowingEXCEPT
A) pastinformation.
B) currentinformation.
C) theirunderstandingofhowtheeconomyoperates.
D) formalmodelsofmacroeconomics.
Answer: D
Diff:1
39) Peoplecombiningtheeffectsofpastpolicychangesonimportanteconomicvariableswiththeir
ownjudgmentaboutthefutureeffectsofcurrentandfuturepolicychangesisconsistentwith
A) frictionalunemployment. B) therationalexpectationshypothesis.
C) activepolicymaking. D) passivepolicymaking.
Answer: B
Diff:1
40) Accordingtotherationalexpectationshypothesis,theattemptbythegovernmenttoreduce
unemploymentbelowitsnaturalratethroughexpansionarypolicieswill
A) succeedintheshortrunandcansucceedinthelongrunaslongasthegovernmentmakes
itclearwhatitsgoalsare.
B) succeedbecausethegovernmentknowshowpeoplewillreacttotheirpoliciesandwill
adjusttheirpoliciesaccordingly.
C) failbecausepeoplewillfigureoutwhatthegovernmentisdoingandaltertheir
expectationsandtheirbehaviorinwaysthatcounteractthegovernmentpolicy.
D) failbecausetheeconomycanneverachieveanunemploymentratebelowthenaturallevel.
Answer: C
Diff:3
41) Refertotheabovefigure.SupposetheeconomyisinequilibriumatpointA.IftheFedtriesto
stimulatetheeconomybyundertakinganexpansionarymonetarypolicyactionandthisisnot
expectedbythepeopleintheeconomy,wewouldexpecttosee
A) aggregatedemandincreases,realGDPincreases,andthepricelevelincreases.Inthelong
run,aggregatesupplywouldincreaseandthenewlong-runequilibriumwouldbepoint
B.
B) aggregatedemandincreases,realGDPincreases,andthepricelevelincreasesintheshort
run.Inthelongrun,peoplerealizetherealsituation,causingtheshort -runaggregate
supplycurvetoshiftup.RealGDPreturnsto$14trillion,andthepricelevelincreasesto
150.
C) aggregatedemandincreasesbutpeoplewouldanticipatethis,causingtheshort -run
aggregatesupplycurvetoshiftupatthesametime,withthenewequilibriumof$14
trillionofrealGDPandapricelevelof100.
D) aggregatesupplyshiftsupaspeopleanticipatetheeffectsoftheexpansionarymonetary
system.Intheshortrun,realGDPfallsto$13trillionandthepricelevelrisesto120.Inthe
longrun,realGDPreturnsto$14trillion,andthepricelevelincreasesfurther,to150.
Answer: B
Diff:3
42) Refertotheabovefigure.SupposetheeconomyisinequilibriumatpointA.Ifrational
expectationsexist,anincreaseinaggregatedemandcausedbyananticipatedincreaseinthe
moneysupplywillcausetheeconomyto
A) stayatpointA. B) movetopointB.
C) movetopointC. D) movetopointD.
Answer: C
Diff:2
43) Refertotheabovefigure.Supposetheeconomyisinlong -runequilibriumatpointA,andthe

governmentinitiatesanexpansionarymonetarypolicytoincreaseaggregatedemand.Whichof
thefollowingisatruestatementconcerningthedifferencesbetweenwhathappenswhenthe
governmentalactionisunanticipatedandwhenitisanticipated?
A) Thenewlong-runequilibriumwhentheincreaseinaggregatedemandisunanticipatedis
pointBwhilethenewlong-runequilibriumwhentheincreaseinaggregatedemandis
anticipatedispointC.
B) Thenewlong-runequilibriumwhentheincreaseinaggregatedemandisunanticipatedis
pointBwhilethenewlong-runequilibriumwhentheincreaseinaggregatedemandis
anticipatedispointA.
C) Thenewlong-runequilibriumwillbepointCineithercase.Whentheincreasein
aggregatedemandisunanticipated,theeconomymovestoBintheshortrun,butwhen
theincreaseinaggregatedemandisanticipated,short -runaggregatesupplyshiftswhen
theaggregatedemandcurveshifts,andtheeconomymovesimmediatelytopointC.
D) Thenewlong-runequilibriumispointCineithercase.Whentheincreaseinaggregate
demandisunanticipated,thenewshort-runequilibriumispointB,butwhentheincrease
inaggregatedemandisanticipatedthenewshort-runequilibriumispointD.
Answer: C
Diff:3
44) Supposethattheeconomyisinlong-runequilibriumandthegovernmentdecidedtoengagein
unexpectedexpansionarypolicybyincreasingthemoneysupply.Ifweassumerational
expectations,whichofthefollowingstatementsiscorrectabouttheeffectofexpansionarypolicy
inthelongrun?
A) Theunemploymentratewillincrease,realGDPwillincreaseandthepricelevelwill
increase.
B) Theunemploymentratewilldecrease,realGDPwilldecreaseandthepricelevelwill
decrease.
C) Theunemploymentratewillremainunchanged,realGDPwillremainunchangedandthe
pricelevelwillincrease.
D) Theunemploymentratewillremainunchanged,realGDPwillremainunchangedandthe
pricelevelwilldecrease.
Answer: C
Diff:3
unexpectedcontractionarypolicybydecreasingthemoneysupply.Ifweassumerational
expectations,whichofthefollowingstatementsiscorrectabouttheeffectofcontractionary
policyinthelongrun?
increase.
decrease.
Answer: D
Diff:3
expectedexpansionarypolicybyincreasingthemoneysupply.Ifweassumerational
expectations,whichofthefollowingstatementsiscorrectabouttheeffectofexpansionary
policyinthelongrun?
increase.
decrease.
Answer: C
Diff:3
47) Undertheassumptionofrationalexpectations,governmentfiscalandmonetarypolicychanges
areeffectiveintheshortrun
A) allofthetime.
B) onlywhentheshort-runaggregatesupplycurveisthesameasthelong-runaggregate
supplycurve.
C) onlywhenthepolicychangesleavethepositionoftheaggregatedemandcurve
unaffected.
D) onlywhenthepolicychangesareunanticipated.
Answer: D
Diff:2
48) TheFedinitiatesacontractionarymonetarypolicythatiscorrectlyanticipatedbyeconomic
agentsintheeconomy.Theresultis
A) decreasedprices,butnochangeinrealGDP.
B) decreasedpricesanddecreasedrealGDPintheshortrun,butonlydecreasedpricesinthe
longrun.
C) decreasedrealGDPintheshortrunanddecreasedpricesinthelongrun.
D) decreasedrealGDPandpricesinboththeshortrunandthelongrun.
Answer: A
Diff:2
49) Whichstatementistruewhenrationalexpectationsexistandthereisachangeinmonetary
policywhichisexpected?
A) Thechangeinmonetarypolicyleadstoachangeinaggregatedemandthatleadstoa
temporaryshort-runequilibriumthatisdifferentfromthelong-runequilibrium.
B) Thechangeinmonetarypolicyleadstoasimultaneousshiftoftheshort -runaggregate
supplycurve.
C) Thechangeinmonetarypolicyleadtoasimultaneousshiftinthelong-runaggregate
supplycurve.
D) Thechangeinmonetarypolicydoesnotchangeequilibriumineithertheshort -runor
long-run.
Answer: B
Diff:2
50) Whichstatementistruewhenrationalexpectationsexistandthereisachangeinmonetary
policywhichisunexpected?
A) Thechangeinmonetarypolicyleadstoachangeinaggregatedemandthatleadstoa
temporaryshort-runequilibriumthatisdifferentfromthelong-runequilibrium.
B) Thechangeinmonetarypolicyleadstoasimultaneousshiftoftheshort -runaggregate
supplycurve.
C) Thechangeinmonetarypolicyleadtoasimultaneousshiftinthelong-runaggregate
supplycurve.
D) Thechangeinmonetarypolicydoesnotchangeequilibriumineithertheshort -runor
long-run.
Answer: A
Diff:2
51) Undertheassumptionofrationalexpectations,expectationspeoplehaveformedarean
importantdeterminantof
A) theshort-runaggregatesupplycurve. B) thelong-runaggregatesupplycurve.
C) theshort-runaggregatedemandcurve. D) thelong-runaggregatedemandcurve.
Answer: A
Diff:2
52) TheideathatanticipatedmonetarypolicychangescannotaffectrealGDPoremploymentis
knownas
A) thesystematicpolicyhypothesis. B) thepolicyirrelevancetheorem.
C) thepolicyrelevancetheorem. D) theKeynesianhypothesis.
Answer: B
Diff:1
53) Fullyanticipatedmonetarypolicyactionscannotaltereithertherateofunemploymentorthe
levelofrealGDP.Thisstatementis
A) thepolicyirrelevanceproposition.
B) thenonacceleratinginflationrateofunemploymenttheory.
C) thePhillipscurve.
D) discretionarypolicymaking.
Answer: A
Diff:1
54) WhichofthefollowingisNOTaninferenceoftherationalexpectationshypothesis?
A) Governmentpolicyactionshavenorealeffectsintheshortrununlesstheactionsare
unanticipated.
B) Governmentpolicyactionshavenorealeffectsinthelongrun.
C) Governmentpolicyactionsthatareanticipatedhavenorealeffectsintheshortrun.
D) Governmentpolicyactionsthatareunanticipatedhavenomonetaryeffectsintheshort
run.
Answer: D
Diff:2
55) Ifpeopledonotalwaysmakethesamemistakeswhenforecastingthefuture,then
A) rationalexpectationsareirrational.
B) theFedcancontrolmonetarypolicyanddeterminerealvariablessuchasrealGDP.
C) thepolicyirrelevancetheoremholds.
D) fiscalpolicyismoreeffectivethanmonetarypolicyatfine-tuningtheeconomy.
Answer: C
Diff:2
56) Undertheassumptionofrationalexpectations,realGDPisdeterminedby
A) theeconomysaggregatedemandcurve.
B) theFed.
C) acombinationofmonetaryandfiscalpolicy.
D) thenationslong-runaggregatesupplycurve.
Answer: D
Diff:1
57) Realbusinesscycletheoryexplainschangesinemploymentandoutputbyfocusingon
A) realsupply-sidefactors.
B) changesinmonetarypolicy.
C) changesinfiscalpolicy.
D) theinteractionoffiscalandmonetarypolicies.
Answer: A
Diff:1
58) Accordingtotherealbusinesscycletheory,whichofthefollowingwouldbearealdisturbance
totheeconomy?
A) Changeintherequiredreserveratio
B) Reductioninthemoneysupply
C) Increaseintherateatwhichmarriedwomenparticipateinthelaborforce
D) Increaseinthepricelevel
Answer: C
Diff:2
59) Supposetheeconomyisinequilibriumwhenthereisachangeinenvironmentalpolicythat
bansallpesticidesandherbicidesonfarmland.Wewouldexpecttoobserve
A) adecreaseinaggregatesupplyandanincreaseinaggregatedemand.
B) adecreaseinbothrealoutputandthenaturalrateofunemployment.
C) adecreaseinrealoutputandanincreaseinthenaturalrateofunemployment.
D) adecreaseinrealoutputandanincreaseinthepricelevel.
Answer: D
Diff:3
60) Accordingtotherealbusinesscycletheory,whichofthefollowingisatruestatementaboutthe
effectsofanoilshockinthe1970s?
A) Theshockaffectedrealvariablesonlyanddidnotaffectnominalvariables.
B) Theshockshiftedtheshort-runaggregatesupplycurvebutnotthelong-runaggregate
supplycurve.
C) Thenaturalrateofunemploymentremainedunchanged,butemploymentlevelsdid
decline.
D) Relativepriceschangedbuttherewasnoimpactonthepricelevelingeneral.
Answer: C
Diff:2
61) Accordingtothereal-business-cycleperspective,
A) theeconomycannotbestabilizedbypolicyactivism.
B) thePhillipscurveisveryimportant.
C) activepolicymakingisimportant.
D) passivepolicymakingisimportant.
Answer: A
Diff:1
62) Therationalexpectationshypothesissuggeststhat
A) unanticipatedfiscalpolicyactionsaremorepowerfulthanmonetarypolicyactions.
B) anticipatedmonetarypolicyactionsaremorepowerfulthanfiscalpolicyactions.
C) fiscalpolicyactionsonlyworkwhenaccompaniedbychangesinthemoneysupply.
D) anticipatedfiscalandmonetarypolicyactionsarenotlikelytoachievetheirstatedaims.
Answer: D
Diff:2
63) Therationalexpectationshypothesisstatesthat
A) individualsalwaysbehaverationally.
B) pricesdonotadjustinadownwarddirection.
C) pastandpresenteconomicinformationisincorporatedintodecisionmaking.
D) consumersdonotunderstandtheeffectsofmonetaryandfiscalpolicy.
Answer: C
Diff:2
64) Thepolicyirrelevancepropositionimpliesthat
A) unanticipatedmonetarypolicyactionsareequallyeffectiveinstimulatingbothaggregate
demandandaggregatesupply.
B) anticipatedmonetarypolicyactionsareeffectiveinstimulatingaggregatesupply,butthey
arenoteffectiveinstimulatingaggregatedemand.
C) anticipatedmonetarypolicyactionsareeffectiveinincreasingrealGDP,buttheydonot
reduceunemployment.
D) anticipatedmonetarypolicyactionsareineffectiveingeneratingchangesinrealGDP.
Answer: D
Diff:2
65) Ahypothesisthatassumesthatpeoplecombinetheeffectsofpastpolicychangesoneconomic
eventsandtheirownjudgmentaboutfutureeffectsofcurrentandfuturepolicychangesis
knownas
A) adaptiveexpectations. B) modernexpectations.
C) rationalexpectations. D) activeexpectations.
Answer: C
Diff:1
66) Whichofthefollowingholdsthateconomicdecisionmakingonalllevelsisunbiasedandis
basedonallavailableinformation?
A) Keynesiancycletheory B) rationalexpectationsbasedtheory
C) adaptiveexpectationsbasedtheory D) noneoftheabove
Answer: B
Diff:1
67) Addingtheassumptionofpurecompetitionandcompleteflexibilityofallpricesandwagesto
therationalexpectationshypothesisyieldsatheorythatprovidessupportfor
A) passivepolicymaking.
B) activepolicymaking.
C) discretionarypolicymaking.
D) unemploymentreducingpolicymaking.
Answer: A
Diff:2
68) Thepropositionthatpolicyactionshavenorealeffectsintheshortrunifthepolicyactionsare
anticipatedisknownas
A) theunemploymentstabilizationproposition.
B) thepolicyirrelevanceproposition.
C) theinflationstabilizationproposition.
D) theKeynesianproposition.
Answer: B
Diff:2
69) Thosewhoacceptboththerationalexpectationshypothesisandtheassumptionofflexibilityof
wagesandpricewouldlikelyarguethat
A) savingandinvestmentdonotcontributetoeconomicgrowth.
B) activepolicymakingdoesnotcontributetoeconomicstability.
C) ifpolicymakersarewillingtoacceptahighinflationrate,theycanreduceunemployment
toapointbelowthenaturalrate.
D) policymakerscaneliminatefluctuationsinthelevelofbusinessactivitywithcareful
planningofawidelypublicizedmonetarypolicy.
Answer: B
Diff:3
70) Accordingtoatheorythatreliesontherationalexpectationshypothesisandtheassumption
thatwagesandpricesareflexible,whydoanticipatedexpansionarymonetaryactionsNOT
boostrealGDP?
A) Anticipatedexpansionarymonetarypolicyactionsdonotincreaseaggregatedemand.
B) Theshort-runaggregatesupplycurveshiftsupwardsimultaneouslywiththerightward
shiftofaggregatedemand.
C) Theshort-runaggregatesupplycurveshiftsdownwardsimultaneouslywiththeupward
shiftofaggregatedemand.
D) Thehigherinterestratesassociated withanticipatedexpansionarymonetarypolicyactions
willdampeninvestmentspending.
Answer: B
Diff:3
71) Oneimplicationofcouplingtherationalexpectationshypothesiswiththeassumptionofflexible
wagesandpricesisthat
A) expansionarymonetarypolicywillbeeffectiveincombatingrecessions.
B) contractionarymonetarypolicywillbeeffectiveincombatinginflation.
C) onlypredictablepolicyactionsbytheFedwillhaveaneffectontherealeconomy.
D) onlyunpredictablepolicyactionsbytheFedwillhaveaneffectontherealeconomy.
Answer: D
Diff:2
72) Therationalexpectationshypothesissuggeststhatifwagesandpricesareflexible,
A) unanticipatedmonetarypolicyactionscanshiftthelong-runaggregatesupplycurvebut
cannotshifttheaggregatedemandcurve.
B) anticipatedmonetarypolicyactionscanaffectnominalvariables,butnotrealvariables.
C) unanticipatedmonetarypolicyactionscanaffectrealvariables,butnotnominalvariables.
D) growthinthemoneysupplycanalterrealvariablesonlyifthegrowthisanticipated.
Answer: B
Diff:2
73) Thehypothesissuggestingthatpeoplecombinetheeffectsofpastpolicychangesoneconomic
variableswiththeirownjudgmentaboutthefutureeffectsofcurrentandfutureeconomic
policyisreferredtoasthe
A) activeexpectationshypothesis. B) passiveexpectationshypothesis
C) rationalexpectationshypothesis. D) adaptiveexpectationshypothesis.
Answer: C
Diff:2
74) Theideathatpolicyactionshavenorealeffectsintheshortruniftheyareanticipatedand no
realeffectsinthelongruniscalledthe
A) Keynesianproposition. B) policyirrelevanceproposition.
C) adaptiveproposition. D) activismproposition.
Answer: B
Diff:2
75) Therationalexpectationshypothesisisbasedontheassumptionthat
A) individualscombineeffectsofpastpolicyactionswiththeirownjudgmentaboutfuture
policyeffectsandchangeswhenformingtheirexpectations.
B) individualsadaptinresponsetopastpolicyactionsandchangeswithoutlookingahead
whenformingtheirexpectations.
C) firmspayaboveequilibriumwagestotheiremployees.
D) mostfirmsoperateinalessthancompetitiveenvironment.
Answer: A
Diff:1
76) Thepolicyirrelevancepropositionsuggeststhatthepolicyeffectsontheeconomyprimarilyoccur
asaresultof
A) fiscalpolicymeasures.
B) policymistakesormisjudgmentofpolicies.
C) nondiscretionaryfiscalpolicy,notdiscretionaryfiscalpolicy.
D) fluctuationsinthevalueoftheU.S.dollar.
Answer: B
Diff:2
77) Refertotheabovefigure.Therationalexpectationshypothesisimpliesthatananticipated
increaseinaggregatedemandfromAD1 toAD2 will
A) movetheeconomyfromctob.
B) movetheeconomyfromatob.
C) movetheeconomyfromatoc.
D) willshifttheaggregatesupply(AS)curvetotheright.
Answer: B
Diff:2
78) Refertotheabovefigure.Therationalexpectationshypothesisimpliesthatananticipated
decreaseinaggregatedemandfromAD2 toAD1 will
A) movetheeconomyfrombtoc.
B) movetheeconomyfrombtoa.
C) movetheeconomyfromctoa.
D) shifttheaggregatesupply(AS)curvetotheleft.
Answer: B
Diff:2
79) Accordingtothetheorybasedonrationalexpectationsandflexiblewagesandprices,
A) fiscalpolicyhaslesseffectonrealGDPthanmonetarypolicyinthelongrun.
B) monetarypolicyhaslesseffectonrealGDPthanfiscalpolicyinthelongrun.
C) neitherfiscalnormonetarypolicyinfluencerealGDPinthelongrun.
D) onlythecombinationofdiscretionaryfiscalpolicyandconservativemonetarypolicy can
affectrealGDPinthelongrun.
Answer: C
Diff:2
80) TherationalexpectationshypothesisisbasedonallthefollowingassumptionsEXCEPT
A) useofjudgmentabouteffectsoffuturepolicyactions.
B) useofknowledgeofeffectsofpastpolicyactions.
C) understandingofhowtheeconomyoperates.
D) understandingthatpricesaresticky.
Answer: D
Diff:1
81) Intheabovefigure,ifwestartatAD1 andSRAS1 ,andthemoneysupplyincreases

unexpectedly,whatwouldbetheshort-runequilibriumevenwithrationalexpectations?
A) E1 B) E2 C) E3 D) P1
Answer: B
Diff:2

unexpectedly,whatwouldbethelong-runequilibrium?
A) E1 B) E2 C) E3 D) P1
Answer: C
Diff:3

unexpectedly,whatcausestheeconomytogettothelong-runequilibrium?
A) Peoplesexpectationswillreviseafterashort-rungaininoutput,wageswillfall,and
SRASwillshiftleftward.
B) Peoplesexpectationswillreviseafterashort-rungaininoutput,wageswillrise,and
SRASwillshiftrightward.
C) Peoplesexpectationswillreviseafterashort-runlossinoutput,wageswillfall,andSRAS
willshiftleftward.
D) Peoplesexpectationswillreviseafterashort-rungaininoutput,wageswillrise,and
SRASwillshiftleftward.
Answer: D
Diff:3
84) Thepolicyirrelevancepropositionstatesthat
A) onlyrelativelylargeexpectedchangesinmonetarypolicyimpacttheeconomy.
B) anticipatedchangesinmonetarypolicyareineffectiveinchangingrealGDP.
C) onlystatementsfromtheWhiteHousehaveimpactontheeconomy.
D) intheshortrununanticipatedchangesinmonetarypolicyareineffectiveinchangingreal
GDP.
Answer: B
Diff:2
85) Realbusinesscycletheoryemphasizestheeffectof________oneconomicperformance.
A) governmentspending B) themoneysupply
C) aggregatesupplyshocks D) taxrates
Answer: C
Diff:1
86) Whenstagflationoccurs,
A) theeconomyexperienceshigherinflationratesandlowerunemploymentratesatthesame
time.
B) theeconomyexperienceslowerinflationratesandhigherunemploymentratesatthesame
time.
C) theeconomyexperienceslowerinflationratesandlowerunemploymentratesatthesame
time.
D) theeconomyexperienceshigherinflationratesandhigherunemploymentratesatthe
sametime.
Answer: D
Diff:2
87) Therealbusinesscycletheory
A) indicatesthatsupplysideshockscausemostbusinesscycles.
B) indicatesthatdemandsideshockscausemostbusinesscycles.
C) indicatesthatrapidchangesinthemoneysupplycausemostbusinesscycles.
D) indicatesthatfaultyfiscalpolicycreatesmostbusinesscycles.
Answer: A
Diff:2
88) TherealbusinesscycletheoryisbasedonalloftheassumptionsbelowEXCEPT
A) smallmenucosts. B) flexiblewages.
C) purecompetition. D) flexibleprices.
Answer: A
Diff:1
89) Whichofthefollowingholdsthatbusinesscyclesareprimarilyduetochangesintechnology
anddoesnotinvokeanymonetaryordemand -sideforces?
A) therealbusinesscycletheory B) theefficiencywagetheory
C) rationalexpectationshypothesis D) Keynesianeconomics
Answer: A
Diff:1
90) Realbusinesscyclescouldbearesultof
A) discretionaryfiscalpolicy.
B) abruptchangesinmonetarypolicy.
C) increasesinthebudgetdeficitandnationaldebt.
D) shockstotheaggregatesupplysideoftheeconomy.
Answer: D
Diff:2
91) WhichofthefollowingwouldNOTcausearealbusinesscycle?
A) achangeintechnology
B) achangeinthecompositionofthelaborforce
C) achangeinthemoneysupply
D) asustainedchangeinthepriceofoil
Answer: C
Diff:2
92) Duringthe1970s,theshockstotheUnitedStateseconomyresultedin
A) anincreaseintheunemploymentrate,butadecreaseintheinflationrate.
B) adecreaseintheunemploymentrate,butanincreaseintheinflationrate.
C) anincreaseinboththeunemploymentrateandtheinflationrate.
D) adecreaseinboththeunemploymentrateandtheinflationrate.
Answer: C
Diff:2
93) Therealbusinesscycletheory
A) isanextensionoftheKeynesianviewofbusinesscycles.
B) isanextensionoftheadaptiveexpectationstheoryofbusinesscycles.
C) suggeststhatinstabilityiscausedbyshiftsinthelong-runaggregatesupplycurve.
D) suggeststhatinstabilityiscausedbyshiftsintheaggregatedemandcurvecausedby
changingconsumerconfidenceintheeconomy.
Answer: C
Diff:2
94) Stagflationmeansa
A) highrateofinflationcoupledwithahighrateofunemployment.
B) highrateofinflationcoupledwithaverylowrateofunemployment.
C) lowrateofinflationcoupledwithaveryhighrateofunemployment.
D) lowrateofinflationcoupledwitharateofunemploymentbelowthenaturalrate.
Answer: A
Diff:1
95) Intheabovefigure,startingatE1 ,ifthereisasupplyshockthatispermanent,the

A) aggregatesupplywouldshifttoSRAS1 andLRAS1 wouldshifttoLRAS0 .
B) aggregatesupplywouldshifttoSRAS1 andLRAS0 wouldshifttoLRAS1 .
C) aggregatesupplywouldshifttoSRAS2 andLRAS0 wouldshifttoLRAS1 .
D) aggregatesupplywouldshifttoSRAS1 andthenreturntoSRAS0 .
Answer: C
Diff:3
96) Intheabovefigure,startingatE1 ,ifthereisasupplyshockthatistemporary,the

Answer: D
Diff:3
97) Intheabovefigure,startingatE3 ,ifthereisanincreaseintechnologythatcausesapermanent

increaseinproductioncapabilities
Answer: A
Diff:3
98) Intheabovefigure,startingatE3 ,ifthereisanincreaseintechnologythatcausesatemporary

increaseinproductioncapabilities
Answer: D
Diff:3
99) Whenasupplyshockispermanent
A) onlythelong-runaggregatesupplycurveshiftsleftward.
B) onlytheshort-runaggregatesupplycurveshiftsleftward.
C) boththelong-runandshort-runaggregatesupplycurvesshiftleftward.
D) therearenoshiftsineitherthelong-runorshort-runaggregatesupplycurve.
Answer: C
Diff:2
100) Usingagraph,showandexplainthedifferencebetweenananticipatedandanunanticipated
Answer:
Intheabovefigure,anunanticipatedincreaseinaggregatedemandisshownbymoving
fromAtoB,alongtheshort-runaggregatesupplycurve.Ananticipatedincreasein
aggregatedemandimpliesthatonlythepricelevelincreases,andtheeconomymoves
fromAtoCastheshort-runsupplycurveshiftstoSRAS2 .
Diff:3
101) Describeandexplaintherealbusinesscycletheory.
Answer: Therealbusinesscycletheoryisamodificationofthenewclassicaltheorythatstatesthat
moneyisneutralinitsimpactontheeconomyandonlyrealsupply-sidefactorsmatterin
influencingemploymentandrealoutput.RealGrossDomesticProduct(GDP)is
determinedbyrealvariablessuchasthesupplyofinputsandtechnologyandmonetary
policyonlyaffectsthepricelevel.
Diff:1
102) Explaintherationalexpectationshypothesis.
Answer: Therationalexpectationshypothesisassumesthatpeoplebasetheirforecastsaboutthe
futurevaluesofeconomicvariablesonallavailablepastandcurrentinformation,and
thattheseexpectationsincorporatetheirunderstandingabouthowtheeconomyoperates,
includingtheoperationofmonetaryandfiscalpolicy.Ifthereispurecompetitioninall
marketsandallprices,includingwages,areflexible,thenthegovernmentcannotaffect
realGDPexceptbyfoolingpeopleandfoolingpeoplecannotworkforlong.
Diff:1
103) Describeandexplainthepolicyirrelevanceproposition.
Answer: Thepolicyirrelevancepropositionistheconclusionthatpolicyactionshavenoreal
effectsintheshortrunifthepolicyactionswereanticipatedandnoneinthelongrun
evenifthepolicyactionswereunanticipated.Theconclusioncomesfromrational
expectationshypothesis.Pricesandwagesareassumedtobeflexibleandpeopleform
theirexpectationsonarationalbasis.
Diff:2
17.4ModernApproachestoJustifyingActivePolicymaking
1) Accordingtoeconomistswhopromotesticky-pricetheories,
A) onlyfiscalpolicyisaneffectivestabilizationpolicy.
B) onlymonetarypolicyisaneffectivestabilizationpolicy.
C) bothfiscalandmonetarypolicycanbeeffectivestabilizationpolicies.
D) neitherfiscalnormonetarypolicyisaneffectivestabilizationpolicy.
Answer: C
Diff:1
Topic: 17.4ModernApproachestoJustifyingActivePolicymaking
2) Coststhatdeterfirmsfromchangingpricesinresponsetodemandchangesareknownas
A) stickycosts. B) menucosts.
C) policycosts. D) productioncosts.
Answer: B
Diff:1
3) Duringthe1960s,manyKeynesianeconomistsfeltthatbystudyingthePhillipscurve,
A) policymakerscoulddispensewiththeFederalReservesopen-marketoperations.
B) policymakerscouldfine-tunetheeconomybyselectingpoliciesthatwouldproducethe
exactmixofunemploymentandinflationthatsuitedcurrentgovernmentobjectives.
C) thePresidentandCongressdidnotneedtoattempttobalancethebudget.
D) policymakerscouldeliminateevenfrictionalunemploymentintheeconomy.
Answer: B
Diff:1
4) Whichofthefollowingcanhelpexplainwhypricesmightbesticky?
A) Therationalexpectationshypothesis B) Thepolicyirrelevanceproposition
C) Realbusinesscycles D) Smallmenucosts
Answer: D
Diff:1
5) Themenucosttheorystatesthat
A) pricesarenotfullyflexiblebecauseitiscostlyforfirmstochangepriceseverytimethereis
ademandchange.
B) economicagentsquicklylearnthelikelyresponsesoftheFedtochangesin
unemployment.
C) wagesdependontheproductivityofworkers.
D) theeconomyischaracterizedbyperfectcompetition.
Answer: A
Diff:2
6) Someeconomistssuggestthatbecauseofthecostsofnegotiatingcontracts,printingpricelists,
etc.,itiscostlyforfirmstochangepricesinresponsetodemandchanges.Thishypothesisis
knownasthe
A) stickywagetheory. B) menucosttheory.
C) Phillipstheory. D) Freidmantheory.
Answer: B
Diff:1
7) Themenucosttheorysuggeststhat
A) therewillbenounemployment.
B) wagesandpricesmovefreelyandquickly.
C) firmsfindfrequentpricechangestobecostly.
D) theeconomyischaracterizedonlybyperfectcompetition.
Answer: C
Diff:1
8) InnewKeynesiantheory,thepatternofinflationexhibitedbyaneconomywithgrowing
aggregatedemandknownasinflationdynamicsis
A) initiallysluggishupwardadjustmentofthepricelevelandinflationinresponsetohigher
aggregatedemandfollowedbyhigherinflationinthefuture.
B) initiallyspeedyupwardadjustmentofthepricelevelandinflationinresponsetohigher
aggregatedemandfollowedbylowerinflationinthefuture.
C) initiallysluggishdownwardadjustmentofthepricelevelandinflationinresponseto
higheraggregatedemandfollowedbylowerinflationinthefuture.
D) initiallyspeedyupwardadjustmentofthepricelevelandinflationinresponsetohigher
aggregatedemandfollowedbyhigherinflationinthefuture.
Answer: A
Diff:1
9) Thetermforapatternofinitiallysluggishadjustmentoftheequilibriumpriceleveltoachange
inaggregatedemandfollowedbyagreateradjustmentinthefutureis
A) real-business-cycleinflationdynamics. B) NewKeynesianinflationdynamics.
C) passivepricedynamics. D) activepricedynamics.
Answer: B
Diff:1
10) AccordingtothenewKeynesiansticky-pricetheory,ariseinaggregatedemandresultsin
________pricelevelintheneartermandin________pricelevelinthelongerterm.
A) ahigher;anunchanged B) anunchanged;ahigher
C) alower;anunchanged D) alower;ahigher
Answer: B
Diff:2
11) ThemostimportantnewKeynesianassumptionthatdistinguishesthistheorydiffersfromthe
real-business-cycletheoryisthenewKeynesianassumption
A) ofahorizontalaggregatedemandcurve.
B) ofpriceflexibility.
C) abouttheimportanceofinterestratesindetermininginvestmentspending.
D) ofahorizontalshort-runaggregatecurve.
Answer: D
Diff:1
12) WhichofthefollowingisNOTassociatedwiththenewKeynesianeconomics?
A) Inflationdynamics
B) Small-menucosttheory
C) Market-clearingmodelstoexplainbusinesscycles
D) Sticky-pricetheoriesofrealGDPdetermination
Answer: C
Diff:1
13) Thecostsassociatedwithchangingpricesarecalled
A) pricecosts. B) changecosts.
C) menucosts. D) inflation-dynamicscosts.
Answer: C
Diff:1
14) Whichofthefollowingstatementsconcerningpricerigidityistrue?
A) Sincetheeconomyexperiencescontinuedinflationpricesarenotrigid.
B) Priceswillberigidwhenthereisunanticipatedmonetarypolicybutnotwhenthereis
anticipatedmonetarypolicy.
C) Datahasclearlydemonstratedthatthelongrunaggregatesupplycurveishorizontal.
D) Whentherearedemandchanges,firmswillnotchangetheirpricebecauseofthecosts
associatedwithrenegotiatingcontractsandinformingcustomersofpricechanges.
Answer: D
Diff:1
15) Atheorysuggestingthatpricestickinessleadstosluggishshort-runadjustmentoftheprice
leveltovariationsinaggregatedemandisknownas
A) newKeynesianflexible-pricebusinesscycles.
B) newKeynesianinflationdynamics.
C) real-business-cyclefixed-pricebusinesscycles.
D) real-business-cycleinflationdynamics.
Answer: B
Diff:1
16) ThetheoryofnewKeynesianinflationdynamicssuggeststhatafallinaggregatedemand
would
A) immediatelyreducethepricelevel,followedbyamoresluggishdeclineinrealGDP.
B) immediatelyraisethepricelevel,followedbyamoresluggishdeclineinrealGDP.
C) immediatelyreducerealGDP,followedbyamoresluggishdeclineinthepricelevel.
D) immediatelyraiserealGDP,followedbyamoresluggishincreaseinthepricelevel.
Answer: C
Diff:2
17) AccordingtothenewKeynesiantheory,thewidespreadimportanceofsmallmenucostsresults
invariationsinaggregatedemandcausingboth
A) greatershort-runadjustmentsinrealGDPanddelayedadjustmentinthepricelevel.
B) greatershort-runadjustmentsintherealGDPandimmediateadjustmentintheprice
level.
C) smallershort-runadjustmentsinrealGDPanddelayedadjustmentinthepricelevel.
D) smallershort-runadjustmentsinrealGDPandimmediateadjustmentinthepricelevel.
Answer: A
Diff:2
18) NewKeynesianinflationdynamicscanaccountforsluggishresponsesof
A) realGDPtovariationsinaggregatesupply.
B) realGDPtovariationsinaggregatedemand.
C) inflationtovariationsinaggregatesupply.
D) inflationtovariationsinaggregatedemand.
Answer: D
Diff:1
19) Ifthepriceofbubblegumchangedinthemarketfrom1centto1.5centsandJoesMarketdidnt
changethepriceitchargesforthebubblegum,thisbehaviorislikelydueto
A) discretionarypolicy. B) economiclaziness.
C) largemenucosts. D) smallmenucosts.
Answer: D
Diff:3
20) Coststhattendtodeterfirmsfromchangingtheirpricesinresponsetochangesinthemarket
equilibriumpricearereferredtoas
A) largemenucosts. B) smallmenucosts.
C) realmenucosts. D) burdencosts.
Answer: B
Diff:2
21) Whichofthefollowingfactorsstrengthensthecaseforpolicyactivism?
A) stickyprices B) flexiblewages
C) flexibleprices D) lackofreal-business-cycles
Answer: A
Diff:3
22) Menucostsareapossiblereasonfor
A) aggregatesupplyshocks.
B) lowlevelsofconsumerconfidenceinresponsetoaggregatesupplyshocks.
C) stickyproductprices.
D) swingsinthelaborforceparticipationrate.
Answer: C
Diff:1
23) Costsofrenewingcontractsorprintingnewpricelistsareknownas
A) smallbusinesscosts. B) smallmenucosts.
C) smalloperatingcosts. D) smallproductioncosts.
Answer: B
Diff:2
24) Smallmenucostsareacommonreasonofferedfortheexistenceof
A) stickywages. B) stickyresourceprices.
C) stickyprices. D) stickyproductadjustments.
Answer: C
Diff:2
25) EconomistswhofavorpolicyactivismarguethattheUnitedStateseconomyisNOTalwaysin
equilibriumbecause
A) thenationaldebtistoolarge.
B) theFederalReservesmonetarypolicyistoorestrictive.
C) themarketsareoverregulated.
D) wageandpricerigiditiesexist.
Answer: D
Diff:1
26) Menucostsare
A) theconstantlychangingresourcepricesthatmakeplanningforfirmsdifficult.
B) theadvertisedpricesforfinalproductsthatfirmsguaranteeforacertainperiodoftime.
C) thecostofcompliancewithgovernmentregulations.
D) thecoststhatdeterfirmsfromchangingpricesinreactiontodemandchanges.
Answer: D
Diff:1
27) Ifasignificantportionoffirmsintheeconomydoesnotimmediatelyadjustproductprices,then
theshort-runaggregatesupplycurve
A) slopesupward. B) slopesdownward.
C) ishorizontal. D) isvertical.
Answer: C
Diff:1
28) ThenewKeynesiansticky-pricetheoryindicatesthatanincreaseinaggregatedemand
generates
A) aspeedyriseinrealGDPbutasluggishincreaseinthepricelevel.
B) aspeedyriseinthepricelevelbutasluggishincreaseinrealGDP.
C) sluggishincreasesinbothrealGDPandthepricelevel.
D) rapidincreasesinbothrealGDPandthepricelevel.
Answer: A
Diff:1
29) Ifasignificantportionoffirmsintheeconomydoesnotadjustproductprices,apredictedresult
accordingtonewKeynesiantheoryis
A) realbusinesscycles. B) realinflationcycles.
C) inflationdynamics. D) outputdynamics.
Answer: C
Diff:1
30) NewKeynesianinflationdynamicspredictsthatanincreaseinaggregatedemandwillgenerate,
inchronologicalorder,
A) aleftwardmovementalongahorizontalshort-runaggregatesupplycurve,ashort-run
declineinrealGDP,adownwardshiftintheshort-runaggregatesupplycurve,anda
decreaseinthepricelevel.
B) arightwardmovementalongahorizontalshort -runaggregatesupplycurve,ashort-run
increaseinrealGDP,anupwardshiftintheshort-runaggregatesupplycurve,andan
C) anleftwardshiftinaverticalshort-runaggregatesupplycurve,ashort-rundeclineinreal
GDP,anupwardmovementalongtheshort-runaggregatesupplycurve,andanincrease
inthepricelevel.
D) arightwardshiftinaverticalshort-runaggregatesupplycurve,ashort-runincreasein
realGDP,anupwardmovementalongtheshort-runaggregatesupplycurve,andan
Answer: B
Diff:2
31) AccordingtothehypothesisofNewKeynesianinflationdynamics,anincreaseinaggregate
demandbringsabout
A) initialsluggishadjustmentofthepricelevelfollowedbyhigherinflationlateron.
B) initialrapidadjustmentofthepricelevelfollowedbylowerinflationlateron.
C) initialsluggishadjustmentofrealGDPfollowedbymorerapidrealGDPgrowthlateron.
D) sluggishgrowthinrealGDPbothinitiallyandlateron.
Answer: A
Diff:1
32) AccordingtosomeNewKeynesiantheories,onepossiblerationaleforactivepolicymakingis
A) flexibleprices.
B) sluggishadjustmentofthepricelevelinresponsetochangesinaggregatedemand
C) peoplearenotrationalandsodonotreacttoincentives.
D) growingcompetitioninU.S.productmarkets.
Answer: B
Diff:1
33) NewKeynesiantheoryimpliesthatwhichofthefollowingreducesfirmsincentivetoadjust
theirprices?
A) adownwardslopingaggregatedemandcurve
B) therequiredreserveratio
C) menucosts
D) noneoftheabove
Answer: C
Diff:2
34) DescribenewKeynesianeconomicsandtheargumentsusedtosupporttheideas.
Answer: NewKeynesianeconomicsaremodelsbasedontheideathatdemand -sidefactorsare
mostimportantandthattheeconomyhasrigiditiesthatmakefiscalandmonetarypolicy
useful.Theyrejectflexiblewagesandpricesandarguethesearesticky,especially
downward.Theyarguethatitiscostlytochangepricesandrenegotiatecontracts
constantly,sopricesarelessflexible.
Diff:2
17.5IsThereaNewKeynesianPhillipsCurve?
1) NewKeynesianshypothesizethat
A) therelationshipbetweeninflationandunemploymentisexploitableinthelongrun.
B) therelationshipbetweeninflationandunemploymentisexploitableintheshortrun.
C) thereisnorelationshipbetweeninflationandunemployment.
D) fluctuationsinoutputarelargelycausedbysupplyshocks.
Answer: B
Diff:1
Topic: 17.5IsThereaNewKeynesianPhillipsCurve?
2) WhatdidMiltonFriedmanandE.S.PhelpsarguewithrespecttothePhillipsCurve?
A) ThePhillipsCurvecouldaccuratelyguideactivistpolicymakersoverthelongrun.
B) Theinverserelationshipbetweenunemploymentandinflationonlyholdsinthelongrun.
Intheshortrun,unemploymentandinflationarepositivelyrelated.
C) Economicparticipantswouldsoonunderstandactivistpolicymakersstrategyandrevise
theirexpectations,makingdiscretionaryeffortstofine-tunetheeconomyineffective.
D) Theinflationratewillconsistentlybe2percentagepointsbelowtheunemploymentrate.
Answer: C
Diff:2
3) ThestagflationexperiencedintheU.S.duringthelate1960sandthe1970sshowedusthat
A) thePhillipscurveaccuratelyrepresentsthetrade-offbetweenunemploymentand
inflation.
B) bothinflationandeconomicexpansioncouldexistsimultaneously.
C) therelationshipbetweenunemploymentandinflationwasnotasclear-cutaspresented
onthePhillipscurve.
D) itispossibletoalleviateeconomicstagflationthroughthegovernmentdiscretionaryfiscal
policy.
Answer: C
Diff:1
4) EconomistsMiltonFriedmanandE.S.Phelpssuggestedthattheapparenttrade -offsuggested
bythePhillipscurvecouldnotbeexploitedbypolicymakers,because
A) economicparticipantsroutinelyincorporatechangesintheinflationrateintotheir
expectations.
B) economicparticipantsarenotrational,andthereforeactunpredictablytoanypolicy
change.
C) unemploymentlevelsandtheinflationratehaveaclear,positiverelationship.
D) unemploymentlevelsandtheinflationratehaveanegative(inverse)relationship.
Answer: A
Diff:1
5) AccordingtoNewKeynesians,whichofthefollowingisoneofthetwokeyfactorsthat
determinestheinflationrate?
A) anticipatedfutureinflation B) fiscalpolicy
C) oilprices D) stockprices
Answer: A
Diff:1
6) AccordingtoNewKeynesians,whichofthefollowingisoneofthetwokeyfactorsthat
determinestheinflationrate?
A) fiscalpolicy
B) firmsaverageinflationadjustedper-unitcostsofproduction
C) oilprices
D) stockprices
Answer: B
Diff:1
7) Thelongeristheintervalbetweenfirmspriceadjustments,
A) thelongertheintervalthatthehorizontalnewKeynesianaggregatesupplycurvewill
remaininposition.
B) theshortertheintervalthehorizontalnewKeynesianaggregatesupplycurvewillremain
inposition.
C) thenewKeynesianaggregatesupplycurvewillbecomesteeper.
D) thesmallertheoutputeffectofagivenchangeinthemoneysupply.
Answer: A
Diff:2
8) NewKeynesiansconcludethat
A) appropriateactivistpoliciescandampencyclicalfluctuations.
B) appropriateactivistpolicieswillincreasethelengthofcyclicalfluctuations.
C) appropriateactivistpolicieswillhaveanknowneffectonthelengthofcyclical
fluctuations.
D) noneoftheabove.
Answer: A
Diff:2
9) AccordingtoNewKeynesians,anincreaseinwhichofthefollowingwilltendtocausethe
inflationratetoincrease?
A) anticipatedfutureinflation
C) anunexpectedincreaseinaggregatedemand
D) alloftheabove
Answer: D
Diff:1
10) Theshorteristheintervalbetweenfirmspriceadjustments,
A) thegreateristhescopeforactivistpoliciestostabilizetheeconomy.
B) thesmalleristhescopeforactivistpoliciestostabilizetheeconomy.
C) agivenunexpectedincreaseinaggregatedemandwillcausealargerincreaseinoutput.
D) agivenunexpectedincreaseinaggregatedemandwillcauseasmallerincreaseintheprice
levelintheshortrun.
Answer: B
Diff:1
11) InitialstudiesofnewKeynesianinflationdynamicsindicatedthattheaverageprice -adjustment

intervalsintheUnitedStateswasaslongas
A) 6months. B) 12months. C) 2years. D) 4years.
Answer: C
Diff:1
12) MorerecentstudiesofnewKeynesianinflationdynamicsindicatedthattheaverage
price-adjustmentintervalsintheUnitedStatesare
A) areoneyearorless. B) twoyearsorless.
C) fouryearsorless. D) morethanfouryears.
Answer: A
Diff:1
13) AccordingtoFriedmanandPhelps,whichofthefollowingstatementsisacorrect
characterizationofunemploymentandinflationintheUnitedStatessincethe1950s?
A) Atrade-offbetweeninflationandunemploymentaspicturedinthePhillipscurveexisted
overtheentiretimeperiod.
B) Atrade-offbetweeninflationandunemploymentaspicturedinthePhillipscurveexisted
inthe1970sand1980s,butnotovertheentireperiod.
C) TherelationshipbetweeninflationandunemploymentisverydifferentfromthePhillips
curve.Apositiverelationshipisevidentratherthananinverserelationship.
D) Thereisnoclearrelationshipbetweenunemploymentandinflation.
Answer: D
Diff:2
14) AplotofpointsrepresentingtherateofinflationandtheunemploymentfortheUnitedStates
since1953revealsthat
A) thereisaninverserelationshipbetweenthetwovariables.
B) theredoesnotappeartobeanytrade-offbetweenthetwovariables.
C) thereisapositiverelationshipbetweenthetwovariables.
D) noneoftheabove
Answer: B
Diff:1
15) AccordingtoNewKeynesianeconomists,
A) activistpolicyhaslittleeffectonrealGDP.
B) activistpolicycanbeusedtominimizevariationsinrealGDP.
C) fluctuationsinoutputareprimarilycausedbysupplyshocks.
D) theamountoftimeittakesfirmstoadjustpricesislessthansixmonths.
Answer: B
Diff:1
16) AccordingtoNewKeynesians,areductioninwhichofthefollowingwilltendtocausethe
inflationratetodecrease?
A) anticipatedfutureinflation
C) anunexpectedreductioninaggregatedemand
D) alloftheabove
Answer: D
Diff:2
17) NewKeynesianeconomistsgenerallyarguethat
A) thereisanexploitabletradeoffbetweenunemploymentandinflation.
B) changesinaggregatedemandwillhaverelativelygreatereffectsonrealGDPwhenfirms
changepriceslessfrequently.
C) activistpolicycanbeusedtoreducethefluctuationsinrealGDP.
D) alloftheabove
Answer: D
Diff:1
18) Iftheaverageintervalbetweenfirmspriceadjustmentsisrelativelylong,
A) anincreaseinaggregatedemandwillcausearelativelyshort-livedincreaseinrealGDP.
B) anincreaseinaggregatedemandwillcausearelativelylong-livedincreaseinrealGDP.
C) areductioninaggregatedemandwillcausearelativelyshort-livedreductioninrealGDP.
D) noneoftheabove
Answer: B
Diff:2
19) Iftheaverageintervalbetweenfirmspriceadjustmentsisrelativelyshort,
A) anincreaseinaggregatedemandwillcausearelativelyshort-livedincreaseinrealGDP.
B) anincreaseinaggregatedemandwillcausearelativelylong-livedincreaseinrealGDP.
C) areductioninaggregatedemandwillcausearelativelylong -livedreductioninrealGDP.
D) bothBandC
Answer: A
Diff:2
20) AccordingtoFriedmanandPhelps,whichofthefollowingstatementsisacorrect
characterizationofunemploymentandinflationintheUnitedStatessincethe1950s?
A) Atrade-offbetweeninflationandunemploymentaspicturedinthePhillipscurveexisted
overtheentiretimeperiod.
B) Atrade-offbetweeninflationandunemploymentaspicturedinthePhillipscurveexisted
inthe1970sand1980s,butnotovertheentireperiod.
C) TherelationshipbetweeninflationandunemploymentisverydifferentfromthePhillips
curve.Apositiverelationshipisevidentratherthananinverserelationship.
D) Thereisnoclearrelationshipbetweenunemploymentandinflation.
Answer: D
Diff:2
21) Whatkindofrelationshipappearstoactuallyexist,ifoneexaminestheactualdataregarding
theinflationrateandtheunemploymentrateforallyearssince1953?
A) adirectrelationship B) aone-to-onerelationship
C) aninverserelationship D) norelationshipinthelongrun
Answer: D
Diff:2
22) Examinationofdatasince1953indicatesthatduringthisperiodstretchingmorethanhalfa
century,thePhillipscurve
A) failstoexist.
B) issmoothlyupwardsloping.
C) issmoothlydownwardsloping.
D) slopessmoothlyupwardatfirstbutthenslopessmoothlydownward.
Answer: A
Diff:2
23) TheU.S.economicdataforthelast50yearsindicatesthat
A) thereisaninverserelationshipbetweenunemploymentrateandinflationrate.
B) thereisadirectrelationshipbetweenunemploymentrateandinflationrate.
C) duringrecessionstheunemploymentratewasalwaystwiceashighastheinflationrate.
D) therehasbeennolong-runrelationshipbetweenunemploymentandinflationrates.
Answer: D
Diff:2
24) AvailableevidenceaboutpriceadjustmentsacrossU.S.industriesindicatesthat
A) pricesareveryflexibleinallindustries.
B) pricesareverystickyinallindustries.
C) pricesareequallyflexibleinallindustries.
D) thereisconsiderablevariationinpriceflexibilityacrossindustries.
Answer: D
Diff:1
25) WhatisthemodernviewofthePhillipscurve?
Answer: Themodernviewisthatthereisnotrade-offbetweeninflationandunemployment
exceptintheshortrun.Peoplecanbesurprisedandunemploymentcangodownifthe
governmentpursuesexpansionarymonetaryorfiscalpolicy.However,oncepeoplelearn
thetruestateofaffairs,theywilladjusttheirbehaviorandthenaturalrateof
unemploymentwillprevail.Thepricelevelwillbehigherthough.
Diff:3
17.6SummingUp:EconomicFactorsFavoringActiveversusPassivePolicymaking
1) Ifagroupofeconomistsbelievesthefollowingpointsaretrue,whichislikelytobetheirpolicy
makingstance?
AggregatedemandshockshavenolongruneffectonrealGrossDomesticProduct(GDP)or
unemployment.
Purecompetitioniswidespreadthroughouttheeconomy.
Realwagesareflexible.
ThePhillipsCurvetrade-offdoesnotexistinthelongrun.
A) Theywillsupportactivepolicymaking.
B) Theywillsupportpassivepolicymaking.
C) Theywillsupportdiscretionarypolicymaking.
D) Theywillarguethatanyattemptateconomicpolicymakingisfutile.
Answer: B
Diff:3
Topic: 17.6SummingUp:EconomicFactorsFavoringActiveversusPassivePolicymaking
2) Aneconomistwhowouldmostlikelyuseactivepolicymakingwouldsupportwhichofthe
followingconclusions?
A) Purecompetitionisnottypicalinmostmarkets.
B) Priceflexibilityiscommoninmostmarkets.
C) Demandshockshavelittleornoshort-runeffectsonrealGrossDomesticProduct(GDP)
andunemployment.
D) Supplyshocksexplainmostbusinesscycles.
Answer: A
Diff:3
3) Mosteconomistsagreewithwhichofthefollowing?
A) Activepolicymakingislikelytoexertsizablelong-runeffectsonrealGDP.
B) Activepolicymakingisunlikelytoexertsizablelong-runeffectsonrealGDP.
C) Passivepolicymakingislikelytoexertsizablelong-runeffectsonrealGDP.
D) noneoftheabove
Answer: B
Diff:2
4) Thestickinessofwagesandpriceswillcause
A) changesinaggregatedemandtohavenoshort-runeffectsonrealGDP.
B) changesinaggregatedemandtohavelong-runeffectsonrealGDP.
C) changesinaggregatedemandtohavebothshort-runandlong-runeffectsonrealGDP.
D) changesinaggregatedemandtohaveshort-runeffectsonrealGDP.
Answer: D
Diff:2
5) Thereisgreatersupportforpassivepolicymakingwhen
A) purecompetitioniswidespread. B) priceflexibilityiscommon.
C) wageflexibilityiscommon. D) alloftheabove
Answer: D
Diff:2
6) Whenitcomestoactivepolicymakingmosteconomistsagreethat
A) activepolicymakingshouldbeusedoverpassivepolicymaking.
B) itisunlikelythatactivepolicymakingwillhaveanylongtermeffectsontheeconomy.
C) itislikelythatactivepolicymakingwillhavelongtermeffectsontheeconomy.
D) itwillleadtolongtermshocksinthesystem.
Answer: B
Diff:1
7) Thosewhofavorpassivepolicymakingdosobecausetheyconcludethat
A) priceandwageflexibilityisacommonandspeedyoccurrence.
B) priceandwageflexibilityisanuncommonoccurrence.
C) purecompetitionisnottypicalinmostmarkets.
D) thereisastabletrade-offbetweeninflationandunemploymentintheshortrun.
Answer: A
Diff:2
8) ThosewhofavoractivepolicymakingarguethatallofthefollowingexistEXCEPT
A) perfectlyflexiblewagesandprices.
B) inflationandunemploymentarestableintheshortrunandpredictableinthelongrun.
C) purecompetitionisnottypical.
D) aggregatedemandshockscaninfluencerealGDPandunemployment.
Answer: A
Diff:2
9) ThosewhofavorpassivepolicymakingarguethatallofthefollowingexistEXCEPT
A) perfectlyflexiblewagesandprices.
B) thetradeoffbetweeninflationandunemploymentisnotstableintheshortrunandis
non-existentinthelongrun.
C) purecompetitionistypical.
D) aggregatedemandshockscaninfluencerealGDPandunemployment.
Answer: D
Diff:2
10) Theconclusionthattheeconomyhaspriceflexibility,wageflexibility,andperfectlycompetitive
marketsjustifies
A) activepolicymaking. B) rationalpolicymaking.
C) passivepolicymaking. D) noneoftheabove.
Answer: C
Diff:2
11) Economistswhobelieveinactivistpolicymakingarguethat
A) decreasesinaggregatedemandimpacttheeconomyonlyintheshortrun.
B) decreasesinaggregatedemanddefinitelyimpacttheeconomyintheshortrun.
C) onlyplannedchangesinthemoneysupplyimpacttheeconomy.
D) onlyincreasesintheminimumwagelevelsimproveeconomicwell-being.
Answer: B
Diff:2
12) Thereisgreatersupportforactivepolicymakingwhen
A) purecompetitioniswidespread. B) priceflexibilityiscommon.
C) wageflexibilityiscommon. D) noneoftheabove
Answer: D
Diff:2
13) Compareandcontrasttheargumentsfavoringactiveversuspassivepolicymaking.
Answer: Themodelsthatstresswageandpriceflexibilityandrationalityonthepartofeconomic
agentstendtofavorpassivepolicymaking.Ifpeoplecananticipatepolicyactionsandif
wagesandpricesareflexible,theeconomywilltendtowardlong -runequilibrium.
Discretionarypoliciesconductedbygovernmentalpolicymakerswillnotbeeffective
meansofinfluencingrealGrossDomesticProduct(GDP).Incontrast,economistswho
concludethatsmallmenucostsareimportantelementsofreal-worldeconomiesconclude
thatactivepolicymakingcaninfluencerealGDPandmovetheeconomytowardfull
employment.
Diff:3
14) Howdorationalexpectationsmodelsdifferfromtraditionalclassicaleconomics?Howdoesthe
newKeynesianmodeldifferfromthetraditionalKeynesianview?
Answer: Arationalexpectationsmodelseesnorealeffectofmonetarypolicywhiletheclassical
economicshadchangesinthemoneysupplyaffectingaggregatedemand.Theclassical
viewwasthatstabilizationpolicywasunnecessaryandthenewerviewisthatitistoo
difficulttoconduct.ThetraditionalKeynesianviewfocusedentirelyonaggregate
demandandemphasizedfiscalpolicywhilethenewKeynesianviewsupportstheroleof
monetarypolicyaswell.
Diff:2
Chapter18
PoliciesandProspectsforGlobalEconomicGrowth
18.1LaborResourcesandEconomicGrowth
1) Accordingtothetext,populationgrowthinmanypoorcountriesdoesnotgenerallyresultin
increasedlaborresourcesbecause
A) manypeopledonotjointhelaborforce. B) manypeoplejointhelaborforce.
C) manypeopleworktwojobs. D) mostjobsareformiddle-ageworkers.
Answer: A
Diff:2
Topic: 18.1LaborResourcesandEconomicGrowth
2) SupposethattherealGrossDomesticProduct(GDP)growthrateforacountrywas4percent
andthepopulationgrowthratewas7percent.WhatwouldthepercapitalrealGrossDomestic
Product(GDP)growthratebeforthiscountry?
A) -3percent B) -4percent C) 3percent D) 4percent
Answer: A
Diff:2
3) Ifpopulationgrowthoccurswhilejobsaredifficulttoobtainorlaborforceparticipationdoes
notincrease,
A) theremaybelittleornoincreaseinanationslaborresources.
B) anationslaborresourceswillstillcontinuetoincreaseinbothqualityandquantity.
C) economicgrowthwillberobustbecauseanypopulationgainisaplus.
D) percapitaGDPislikelytoincreasesharply.
Answer: A
Diff:1
4) IfthelevelofaggregaterealGrossDomesticProduct(GDP)remainsconstant,areductioninthe
population
A) directlyincreasespercapitarealGDP.
B) directlyreducespercapitarealGDP.
C) indirectlyreducespercapitarealGDP.
D) hasnoeffectonrealpercapitarealGDP.
Answer: A
Diff:2
5) IfrealpercapitaGrossDomesticProduct(GDP)growsataconstantannualrateof4percent
andtheannualpopulationgrowthrateincreasesfrom1percentto2percent,theannualrateof
growthofpercapitarealGDPwill
A) increase. B) decrease.
C) remainunchanged. D) increaseordecreasedepending.
Answer: B
Diff:2
6) SupposeanationsrateofgrowthofpercapitarealGrossDomesticProduct(GDP)is3percent
anditsrateofgrowthinrealGDPis4percent.Giventhisinformation,thenationspopulation
growthrateisapproximatelyequalto
Answer: A
Diff:2
7) SupposeanationsrealGrossDomesticProduct(GDP)growsataconstantrateof5percentper
yearwhileitspopulationgrows2percentannually.Giventhisinformation,thisnationsannual
rateofpercapitarealGDPgrowthisapproximatelyequalto
Answer: C
Diff:2
8) Overthepastdecade,anationsrealGrossDomesticProduct(GDP)grewataconstantrateof10
percentperyearwhileitspopulationgrew8percentannually.Forecasterspredictthatduring
thecomingdecade,realGDPwillcontinuetogrow10percentannually,butthepopulation
growthrateisexpectedtodropto6percentannually.Iftheforecastersarecorrect,whichofthe
followingwillbetrue?
A) TheannualrateofgrowthofpercapitarealGDPwilldeclinefrom4percentto2percent.
B) TheannualrateofgrowthofpercapitarealGDPwilldeclinefrom2percentto1percent.
C) TheannualrateofgrowthofpercapitarealGDPwillincreasefrom2percentto4percent.
D) TheannualrateofgrowthofpercapitarealGDPwillincreasefrom2percentto6percent.
Answer: C
Diff:2
Chapter18PoliciesandProspectsforGlobalEconomicGrowth955
9) Thetermeconomicfreedommeans
A) therighttoownprivateproperty. B) therighttotradegoodsandservices.
C) therighttoownfinancialassets. D) alltheabove.
Answer: D
Diff:1
10) Accordingtothetext,the17countrieswithhighdegreesofeconomicfreedom
A) accountfor81percentoftotalworldoutput.
B) accountforlessthan25percentoftotalworldoutput.
C) havetheweakesteconomies.
D) havelowproductivity.
Answer: A
Diff:2
11) Withrespecttoeconomicfreedom,whichistrue?
A) Threeoutoffourpeopleliveinnationswithgovernmentsthatgrantresidentshigh
degreesofeconomicfreedom.
B) Wheregovernmentsdonotgrantresidentsahighdegreeofeconomicfreedom,economic
growthratestendtobeabovetheannualaveragefortheworldsnations.
C) Aboutthreedozennationswithgovernmentsunwillingtograntmuchinthewayof
economicfreedomarehometotwo-thirdsoftheworldspopulation.Evenso,these
countriesproduceover50percentoftheworldsoutput.
D) Aseconomicfreedomincreases,sodoesanationsprospectsforeconomicgrowth.
Answer: D
Diff:2
12) Inthedeterminationofeconomicgrowth,politicalfreedom
A) ismoreimportantthaneconomicfreedom.
B) appearstobelessimportantthaneconomicfreedom.
C) contributeslittletojobgrowth.
D) isequallyasimportantaseconomicfreedom.
Answer: B
Diff:1
13) Politicalfreedomcansometimesmoderatelyreduceeconomicgrowthbecause
A) specialinterestgroupsmaygainattheexpenseoftheoveralleconomy.
B) campaigncontributionsrobtheeconomyofinvestment.
C) mostjobsareinunionsthatarepoliticallyconnected.
D) noneoftheabove.
Answer: A
Diff:2
14) Innondemocraticcountriesthathaveexperiencedconsistenteconomicgrowthand
improvementsintheirstandardsofliving,
A) thereisnotendencytobecomemoredemocraticovertimebecausethecurrentpolitical
situationiseconomicallysuccessful.
B) politicalfreedomisapttodecreaseovertimeasgovernmentsbecomemorecontrolling.
C) theriseofspecial-interestgroupsusuallypromotescompetitionandgrowth.
D) thereisatendencytobecomedemocraticovertime.
Answer: D
Diff:2
15) CountryXhasexperiencedGDPgrowthof6percentandapopulationgrowthof4percent.
WhatisthiscountrysgrowthofpercapitarealGDP?
A) 2percent B) 10percent C) 6percent D) -2percent
Answer: A
Diff:1
16) AssumethatacountryhashadarelativelysteadygrowthofaggregaterealGDP.Ahigher
populationgrowthtendsto
A) reducethegrowthofpercapitarealGDP.
B) increasethegrowthofpercapitarealGDP.
C) increasethelevelofeconomicfreedom.
D) increasethelevelofdeadcapital.
Answer: A
Diff:1
17) TherateofgrowthinrealGDPminustherateofgrowthofthepopulationisthe
A) rateofgrowthofnominalGDP. B) unemploymentrate.
C) populationgrowthrate. D) rateofgrowthofpercapitarealGDP.
Answer: D
Diff:1
18) WhatistheannualrateofgrowthofpercapitarealGDPifrealGDPgrowsataconstantrateof
5percentperyearandtheannualrateofpopulationgrowthis3percent?
A) 1.7percent B) 2percent C) 5percent D) 8percent
Answer: B
Diff:2
19) WhatistheannualrateofgrowthofpercapitarealGDPifrealGDPgrowsataconstantrateof
4percentperyearandtheannualrateofpopulationgrowthis3percent?
Answer: A
Diff:2
20) WhatwillhappentotheannualrateofgrowthofpercapitarealGDPifrealGDPgrowsata
constantrateof4.5percentandtheannualrateofpopulationgrowthgoesfrom3percentto3.5
percent?
A) TheannualrateofgrowthofpercapitarealGDPwillincreasefrom7.5percentto8
percent.
B) TheannualrateofgrowthofpercapitarealGDPwillincreasefrom-1.5percentto-1
percent.
C) TheannualrateofgrowthofpercapitarealGDPwillremainunchanged.
D) TheannualrateofgrowthofpercapitarealGDPwilldecreasefrom1.5percentto1
percent.
Answer: D
Diff:2
21) AssumethatintheeconomyrealGDPgrowsataconstantrate.Therehasjustbeenadecreasein
therateofgrowthofthepopulation.Thisimpliesthatthe
A) rateofgrowthofpercapitarealGDPwilldecrease.
B) rateofgrowthofpercapitarealGDPwillincrease.
C) rateofgrowthofcapitalaccumulationwilldecrease.
D) rateofgrowthofcapitalaccumulationwillincrease.
Answer: B
Diff:1
22) WhatwillhappentotheannualrateofgrowthofpercapitarealGDPiftheannualrateof
populationgrowthincreasesandtheannualrateofgrowthofrealGDPgoesdown?
A) Itwillincreasesinceanincreaseinpopulationmeansanincreaseinlaborthattranslates
intoanincreaseinrealGDP.
B) ItwillincreasesincetheannualrateofgrowthofrealGDPdoesnotinfluencethegrowth
rateofpercapitarealGDP.
C) Itwilldecreasesinceanincreaseinthegrowthrateofpopulationandadecreaseinthe
growthrateofrealGDPbothworktodecreasethegrowthofpercapitarealGDP.
D) Theeffectwilldependuponwhethertherateofpopulationgrowthisgreaterthanorless
thantherateofgrowthofrealGDP.
Answer: C
Diff:2
23) Ahigherpopulationgrowthratecanpotentiallyleadtoahigherrateofgrowthinpercapita
realGDPif
A) itleadstoanincreaseintheamountofdeadcapital.
B) itleadstogreaterdemocracyinanation.
C) youngworkersreplaceolderworkers.
D) thereisagreaterlaborforceparticipationrate.
Answer: D
Diff:1
24) Whichofthefollowingequationsiscorrect?
A) RateofgrowthofpercapitarealGDP= rateofgrowthinrealGDP-rateofgrowthof
population
B) RateofgrowthofpercapitarealGDP= rateofgrowthinrealGDP+rateofgrowthof
population
C) RateofgrowthinrealGDP= rateofgrowthofpercapitarealGDP-rateofgrowthof
population
D) RateofgrowthinrealGDP= rateofgrowthofpercapitarealGDP+rateofgrowthof
population
Answer: A
Diff:1
25) Therightstoownprivatepropertyandtoexchangegoodswithminimalgovernment
interferenceis
A) capitalfreedom. B) populationfreedom.
C) economicfreedom. D) politicalfreedom.
Answer: C
Diff:1
26) Economicfreedomis
A) therighttovoteinanelectionforapoliticalleader.
B) therighttoownprivatepropertyandtoexchangegoodswithminimalgovernment
interference.
C) theamountofcontrolthatthegovernmenthasinamarket.
D) presentaslongasprivateindividualsownbusinesses.
Answer: B
Diff:1
27) Economicfreedomis
A) importantinleadingtopositiveeconomicgrowth.
B) notanimportantfactorinleadingtopositiveeconomicgrowth.
C) aconfusingconceptsincethemoreeconomicfreedomresidentsinacountryhavethe
lowerthelevelofeconomicgrowth.
D) aconceptintheorysincenocountryhaspureeconomicfreedomandthereforecannotbe
analyzedwithrespecttoeconomicgrowth.
Answer: A
Diff:1
28) Ithasbeennotedthatacountrythatgrantsaconsiderableamountofeconomicfreedomwill
experience
A) positiveratesofpercapitaincomegrowth.
B) negativeratesofpercapitaincomegrowth.
C) lowlevelsofpoliticalfreedom.
D) deadcapital.
Answer: A
Diff:1
29) Therighttoopenlysupportanddemocraticallyselectnationalleadersis
A) capitalfreedom. B) populationfreedom.
C) economicfreedom. D) politicalfreedom.
Answer: D
Diff:1
30) Whichstatementistrueaboutacomparisonofeconomicfreedomwithpoliticalfreedom?
A) Economicfreedomcannotexistwithoutpoliticalfreedom.
B) Economicfreedomleadstopositiveeconomicgrowthwhilepoliticalfreedomleadsto
negativeeconomicgrowth.
C) Politicalfreedomismoreimportantthaneconomicfreedomwhenconsideringpositive
economicgrowth.
D) Economicfreedomismoreimportantthanpoliticalfreedomwhenconsideringpositive
economicgrowth.
Answer: D
Diff:1
31) Whichofthefollowingstatementsistrueabouttherelationshipbetweenhighbirthratesand
realGDPgrowth?
A) Highbirthratesincountrieswithlittleeconomicfreedomwillleadtohigherlaborforce
participationratesthatinturnleadtohighergrowthofrealGDP.
B) Highbirthratesreducepercapitaincomes,andalackofeconomicfreedominhibitsreal
GDPgrowth.
C) ThereisnorelationshipbetweenbirthratesandrealGDPgrowth.
D) TheinfluencethatbirthrateshaveonrealGDPgrowthisthesameincountrieswhetheror
noteconomicfreedomexits.
Answer: B
Diff:1
32) Populationgrowthismorelikelytocontributetoeconomicgrowthwhen
A) economicfreedomispresent.
B) capitalaccumulationislimited.
C) technologicalprogressislimited.
D) thelaborforceparticipationratedoesnotincrease.
Answer: A
Diff:2
33) AmajorcontributortoacountrysrealrateofeconomicgrowthisitsrealGDPgrowthrelative
toits
A) inflation. B) unemploymentrate.
C) moneygrowth. D) noneoftheabove.
Answer: D
Diff:1
34) Economicfreedombyitsnaturesuggests
A) minimalgovernmentinterference. B) zerogovernment.
C) alackoflawsandregulations. D) economicanarchy.
Answer: A
Diff:1
35) Politicalfreedomseemstobe________importanttogrowththaneconomicfreedom.
A) less B) more C) equally D) critically
Answer: A
Diff:2
36) Whichofthefollowingbestrepresentseconomicgrowth?
A) anincreaseinnominalGDP
B) anincreaseinrealGDP
C) anincreaseinthepercapitanominalGDP
D) anincreaseinthepercapitarealGDP
Answer: D
Diff:1
37) Economicgrowthismeasuredby
A) theannualpercentagechangeinnominalGDP.
B) theannualpercentagechangeintheunemploymentrate.
C) theannualpercentagechangeinpercapitanominalGDP.
D) theannualpercentagechangeinpercapitarealGDP.
Answer: D
Diff:1
38) IftheaverageannualgrowthrateinrealGDPforanationduringthelastdecadewas4percent
peryearandtheaverageannualpopulationgrowthratewas3percentperyearduringthesame
period,thentheaverageannualgrowthrateofpercapitaGDPwas
A) 1.00percent. B) -1.00percent. C) 0.75percent. D) 1.33percent.
Answer: A
Diff:1
39) ThepercentagechangeinpercapitarealGDPmeasureseconomicgrowthbecauseittakesinto
accountallofthefollowingvariablesEXCEPT
A) thepercentagechangeinpopulation.
B) thepercentagechangeintheinflationrates.
C) thepercentagechangeinnominalGDP.
D) thepercentagechangeinthequalityoflife.
Answer: D
Diff:2
40) Whichofthefollowingisabarriertoeconomicgrowthinmanydevelopingnations?
A) theshortageoflabor
B) thelackofnaturalresources
C) thelackofeconomicfreedom
D) thelowlevelofrestrictionsinthelabormarket
Answer: C
Diff:2
41) Areductionintherateofpopulationgrowth
A) alwayscausesanincreaseineconomicgrowth.
B) nevercausesanincreaseineconomicgrowth.
C) mayormaynotcauseanincreaseineconomicgrowth.
D) willcauseareductionineconomicgrowthifaccompaniedbyanincreaseintherateof
growthofrealGDP.
Answer: C
Diff:1
42) Therighttoprivatepropertyandabilitytoexchangegoodsandservicesfreelyisknownas
A) politicalfreedom. B) economicfreedom.
C) constitutionalfreedom. D) externalfreedom.
Answer: B
Diff:1
43) ThepercapitarealGDPisthe
A) rateofgrowthinrealGDPplusthepopulationgrowthrate.
B) realGDPdividedbythepopulation.
C) rateofgrowthinrealGDPtimesthepopulationgrowthrate.
D) rateofgrowthinrealGDPminusthepopulationgrowthrate.
Answer: B
Diff:1
44) Whichofthefollowingisthetermusedtodescribetheexpansionofacountrys percapitareal

GDP?
A) economicgrowth B) technologicalchange
C) changeinthelaborforce D) changeinfactorincomes
Answer: A
Diff:1
45) Thegeneralsetofrightstoownprivatepropertyandexchangegoods,services,andfinancial
assetswithminimalgovernmentinterferenceisdefinedas
A) capitalism. B) marketsocialism.
C) economicfreedom. D) economicprivilege.
Answer: C
Diff:1
46) Therighttoopenlysupportandtoelectleadersinademocraticwayisknownas
A) politicalfreedom. B) economicfreedom.
C) constitutionalfreedom. D) externalfreedom.
Answer: A
Diff:1
47) Lawsthatmakeitdifficulttostartanewbusinessleadtoa
A) highrateofeconomicgrowth. B) lowrateofeconomicgrowth.
C) morepoliticalfreedom. D) laissez-faire.
Answer: B
Diff:1
48) Ifacountryhasa4percentannualgrowthinrealGDPandaonepercentgrowthinpopulation,
itspercapitagrowthofrealGDPis
A) fivepercent. B) fourpercent.
C) threepercent. D) 1/4= 0.25percent.
Answer: C
Diff:2
49) Ingeneral,acountrythatadherestotheruleoflawhas
A) ahigherlevelofrealGDPpercapita.
B) alowerlevelofrealGDPpercapita.
C) norelationshiptothelevelofrealGDPpercapita.
D) aninverserelationshiptothelevelofrealGDPpercapita.
Answer: A
Diff:2
50) Anincreaseinpopulationgrowthinacountry
A) alwayscausesanincreaseinlaborresources.
B) maynotnecessarilycauseanincreaseinpercapitarealGDP.
C) maynotcauseanincreaseinlaborresourcesinrichcountriesbecauseemployerswillcut
downonthenumberofhoursrequiredofworkers.
D) willalwayscauseanincreaseinpercapitarealGDP.
Answer: B
Diff:1
51) Explaintheroleofeconomicfreedomineconomicdevelopment.
Answer: Economicfreedomisameasurementoftheextenttowhichonecanpursueeconomic
activitywithoutinterferencefromgovernment.Economicfreedomisbasedupon
personalchoice,voluntaryexchange,andthesecurityofpropertyrights.Economic
freedomstimulateseconomicgrowthwhenthemarketsarecompetitive.Greater
economicfreedomencouragesinvestment,whichinturn,createsjobsandeconomic
growth.
Diff:2
18.2CapitalGoodsandEconomicGrowth
1) Deadcapitalis
A) machinerythatfailstooperateproperly.
B) machinerythatrequiresconstantmaintenance.
C) anycapitalresourcethatlackscleartitleofownership.
D) acapitalresourcethatdepreciatesrapidly.
Answer: C
Diff:1
Topic: 18.2CapitalGoodsandEconomicGrowth
2) Thesignificanceofdeadcapitalisthat
A) itisdifficulttoallocatetoitsmostefficientuse.
B) itsfixedcostistoohigh.
C) itisbeingremovedfromitsmostefficientuse.
D) itreplacestoomanyworkers.
Answer: A
Diff:2
3) Developingcountriesaredamagedbydeadcapitalbecause
A) itreplacestoomanyworkers,creatingunemployment.
B) resultinginefficienciesgreatlyreducetherateofreturnoninvestment.
C) itmustbesoldasscrap.
D) noneoftheabove.
Answer: B
Diff:2
4) Whichofthefollowinghascontributedtodevelopingcountriespooreconomicperformance?
A) Lowpopulationgrowth B) Corruption
C) Highcapitalinvestment D) Foreigndirectinvestment
Answer: B
Diff:2
5) Accordingtoyourtext,isthereanyrelationshipbetweenbureaucraticinefficiencyand
economicgrowth?
A) Yesthetwoarepositivelyrelated.
B) Yes,butonlyinthemosteconomicallydevelopednations.
C) Yesthetwoareinverselyrelated.
D) No.Somenationseconomiesthriveinspiteoftheirinefficientgovernmentswhileothers
collapseundertheweightofstiflingbureaucracies.
Answer: C
Diff:2
6) Whichofthefollowingrepresentsdeadcapital?
A) capitalthathaswornoutovertime B) capitalthathasbecomeobsolete
C) capitalthatlackscleartitleofownership D) noneoftheabove
Answer: C
Diff:1
7) Deadcapitalrefersto
A) acapitalresourcethatlackscleartitleownership.
B) acapitalresourcewhoseownerisdeceased.
C) acapitalresourcejointlyownedbymorethanoneperson.
D) acapitalresourcethathasnomoreusefullife.
Answer: A
Diff:1
8) Thereisa(n)________relationshipbetweenanationsrateofgrowthinrealGDPpercapitaand
bureaucraticinefficiency.
A) direct B) inverse C) proportional D) undefined
Answer: B
Diff:1
9) Anycapitalresourcethatlackscleartitleownershipis
A) theresultofforeigndirectinvestment. B) deadcapital.
C) capitaldestruction. D) freecapital.
Answer: B
Diff:1
10) Therolethatdeadcapitalplaysinacountryseconomicgrowthisthat
A) growthincreasesbecausethedeadcapitalisreplacedwithmoretechnologicallyefficient
capital.
B) growthincreasessincethefirmsusingthedeadcapitalareusingitforfree.
C) growthneitherincreasesnorisimpairedbydeadcapital.
D) growthisimpairedsincethecapitalcannotbeallocatedtoitsmostefficientuse.
Answer: D
Diff:1
11) Therelationshipofdeadcapitaltoinefficientproductionis
A) withoutclearownershipitisnotpossibletosellortransferaresourcesothatitcanbeused
efficiently.
B) thatoutdatedequipmentwillleadtoinefficientproduction.
C) nonexistentsincethecapitalisalreadydead.
D) thatwhenthedeadcapitalisreplacedbymoretechnologicallyadvancedcapital,economic
growthoccurs.
Answer: A
Diff:1
12) ThefollowingareimpedimentstoeconomicgrowthEXCEPT
A) deadcapital. B) increasededucation.
C) lackofeconomicfreedom. D) bureaucraticinefficiency.
Answer: B
Diff:1
13) Whenacountryhasalargeamountofdeadcapital,
A) thereistoomuchpoliticalfreedom.
B) thereisalargeamountofeconomicgrowth.
C) largeamountsofcapitalwillbeinefficientlyemployed.
D) acountrysexportsincrease.
Answer: C
Diff:1
14) Oneofthemostsignificantbarrierstoeconomicgrowthintheworldspoorestnationsis
A) environmentalissues. B) politicalfreedom.
C) deadcapital. D) U.S.governmentinterference.
Answer: C
Diff:1
15) Theinefficienciesassociatedwithdeadcapitalcan
A) leadtoincreasedconsumption.
B) reducetherateofreturnoninvestment.
C) increasetheamountofinvestmentasbusinesseslookformoretechnologicallyadvanced
capital.
D) leadtomoreeconomicfreedomasfirmstrytogetridoftheinefficientcapital.
Answer: B
Diff:1
16) Whengovernmentinefficienciesexist,
A) acountrytendstogrowataslowerrate.
B) acountrytendstogrowatafasterrate.
C) economicgrowthisnotinfluenced.
D) deadcapitalisusuallynotaproblem.
Answer: A
Diff:1
17) Whengovernmentinefficienciesexistandgovernmentofficialscanbebribed,then
A) deadcapitalwillnotexist.
B) thecountrywillhavepositiveeconomicgrowth.
C) abribewillincreasethecostofinvestingincapital.
D) propertyrightswillbemoresecuresinceanofficialhasbeenbribedtograntownershipto
thebusiness.
Answer: C
Diff:1
18) WhichofthefollowingisNOTtrueaboutdeadcapital?
A) Deadcapitalcanleadtoasituationwhereresourcesarenotefficientlyemployed.
B) Deadcapitalcaninhibiteconomicgrowth.
C) Companieswillbelesslikelytowanttoinvestwhenacountryhasalotofdeadcapital.
D) Deadcapitalwillleadtohigherinvestmentreturns.
Answer: D
Diff:1
19) Deadcapitalis
A) unlikelytohaveanyproductiveuse.
B) unlikelytobeappliedtoitsmostefficientuse.
C) usefulonlyifemployedinalabor-intensiveproductionprocess.
D) usefulonlyifemployedinacapital-intensiveproductionprocess.
Answer: B
Diff:2
A) Deadcapitalismostfrequentlyfoundincountrieswithwell-definedpropertyrights.
B) Deadcapitalismostfrequentlyfoundinthemostprosperouscountries.
C) Itiseasyfordeadcapitalresourcestobeallocatedtotheirbestpossibleuse.
D) Itisdifficultfordeadcapitalresourcestobeinsuredortraded.
Answer: D
Diff:1
21) Deadcapitalismostlikelytoexistwhen
A) therearerestrictionsonimports.
B) therearerestrictionsonexports.
C) propertyrightsarewell-defined.
D) residentsofacountryfacebarrierstoestablishinglegalownershipofresources.
Answer: D
Diff:2
22) Extensivegovernmentrestrictionsontheuseofcapitalarelikelyto
A) createdeadcapital.
B) enhanceeconomicgrowth.
C) enhanceeconomicfreedom.
D) resultincapitalresourcesbeingdevotedtotheirmostefficientuses.
Answer: A
Diff:1
23) Economicgrowthisenhancedwhen
A) specialinterestgroupsacquirethepoliticalpowertorestrictcompetition.
B) capitalresourcesaredevotedtotheirmostefficientuse.
C) therearebarrierstoestablishinglegalownershipofcapitalresources.
D) scarceresourcesaremadeavailableforallcitizensfreeofcharge.
Answer: B
Diff:2
24) Theproblemofdeadcapitalcanbeeliminatedby
A) changingthestructureofimporttariffs.
B) increasingthelaborforceparticipationrate.
C) makingiteasierforpeopletoestablishlegalownershipofproductivecapital.
D) restrictingpopulationgrowth.
Answer: C
Diff:1
25) Countrieswiththehighestdegreesofgovernmentalbureaucraticinefficiencyindex
A) typicallyarenationswiththehighestrealGDPpercapita.
B) typicallyarenationswiththelowestrealGDPpercapita.
C) normallyhavethelowestmeasuredlevelsofdeadcapital.
D) normallyhavethehighestmeasuredlevelsofeconomicfreedom.
Answer: B
Diff:1
26) Deadcapitalis
A) acapitalresourcethatlacksacleartitleofownership.
B) acapitalresourcethatisobsolete.
C) acapitalresourcethatisusedtoproducenon-competitiveproducts.
D) acapitalresourceassociatedwiththedefenseindustry.
Answer: A
Diff:1
27) Whenthereisabuildingthatisusedforproduction,butnoonehasclearpropertyrightstoit,
A) resourcesareguidedtotheirbestusebytheinvisiblehand.
B) thisisknownasdeadcapitalandcausesefficientproduction.
C) thisisknownasdeadcapitalandcausesnoproduction.
D) thisisknownasdeadcapitalandcausesinefficientproduction.
Answer: D
Diff:2
28) Allofthefollowingaremajorfactorslimitingeconomicgrowthindevelopingcountries
EXCEPT
A) deadcapital. B) deregulation.
C) inefficientgovernmentregulation. D) corruption.
Answer: B
Diff:2
29) CountrieswithahighlevelofbureaucraticinefficiencytendtohavelowratesofrealGDP
growthbecause
A) ofcomplicationsthatkeepcapitalgoodsfromflowingtotheirmostefficientuse.
B) ofpooraccountingpracticeswhendeterminingrealGDP.
C) ofpoormanagementskilldevelopmentincompanies.
D) theyfacilitatecapitalgoodsdevelopment.
Answer: A
Diff:2
30) Thetoleranceofbribe-takingbygovernmentofficials
A) reduceseconomicuncertaintybecauseallinvestorsareawareofthepractice.
B) reduceseconomicefficiencybecauserulesgoverningpropertyrightsarenotregularly
enforced.
C) reducesgovernmentexpendituresbecausepublicemployeescanbepaidless.
D) reducestheneedforgovernmenttoimposetaxesonpoorpeople.
Answer: B
Diff:1
31) Asproductivecapitalgoodsareestablishedindevelopingnations,
A) developednationswillbecomelessprosperous.
B) theywillbelesslikelytoengageininternationaltrade.
C) thesecountrieswillexperiencehigherratesofeconomicgrowth.
D) portfolioinvestmentwillbereplacedbyloansfrominternationalaidagencies.
Answer: C
Diff:2
32) AllofthefollowingareexamplesofinstitutionsthatpromoterealeconomicgrowthEXCEPT
A) anefficientjudicialsystemusedtoenforcecontracts.
B) patentlawsthatprotectinnovation.
C) complexrulesassociatedwithbusinesslicensingusedtopromotecarefulbusinessgrowth.
D) stronglawenforcementusedtoprotectbusinessinterests.
Answer: C
Diff:3
33) Explainthemeaningofthetermdeadcapital,anddiscusswhyitsexistenceretardseconomic
growth.
Answer: Deadcapitalmeansacapitalresourcewithoutaclearlydefinedowner.Althoughdead
capitalisoftenusedinproductionthelackofclearlydefinedtitleofownershiptypically
leadstoinefficientuseoftheresource.Theinefficientuseofdeadcapitalreducestherate
ofreturnoninvestmentsandthustheincentivetoincreaseinvestmentincapitalgoods
arereduced.Lowerlevelsofcapitalinvestmentdiminishtherateofeconomicgrowth.
Diff:2
34) Definewhatdeadcapitalisandwhyeconomistsareconcernedwithitsexistence.
Answer: Deadcapitaliswhencapitalresourceslackacleartitleofownership.Deadcapitalisa
concernbecauseitcanleadtoareductionininvestmentandeconomicgrowthin
developingnations.Deadcapitalwillleadtoareductionininvestmentiftheinvestors
cannotcountonhavingclearownershipoftheircapital.Deadcapitalwillleadtoa
reductionineconomicgrowthbecauseresourcescannotbeputtotheirmostefficientuse.
Diff:1
35) Howhavegovernmentinefficienciescontributedtothecreationofdeadcapitalintheworlds
developingnations?
Answer: Governmentsindevelopingnationsplaceobstaclesinthewayofentrepreneurs
interestedinowningcapitalgoodsanddirectingthemtoprofitableopportunities.Poorly
administeredgovernmentregulationsreduceinvestmentinnewcapitalgoods.Becauseof
thepooradministrationinvestorsareunwillingtoriskhavingtheirinvestmentturninto
deadcapital.
Diff:1
18.3PrivateInternationalFinancialFlowsasaSourceofGlobalGrowth
1) Foreigndirectinvestmentisdefinedas
A) theacquisitionofmorethan10percentofthesharesofownershipinacompanyinanother
nation.
B) fundsallocatedintoaforeignstockmarketthatrepresentanownershipshareoffirmsless
than5percent.
C) purchasingbothcapitalequipmentandgovernmentbondsabroad.
D) purchasinggovernmentbonds.
Answer: A
Diff:2
Topic: 18.3PrivateInternationalFinancialFlowsasaSourceofGlobalGrowth
2) Theacquisitionofmorethan10percentofthesharesofownershipinacompanyinanother
nationiscalled
A) portfolioinvestment. B) grossprivateinternationalinvestment.
C) foreigndirectinvestment. D) majorityinvestment.
Answer: C
Diff:2
3) Anexampleofforeigndirectinvestmentisthe
A) domesticacquisitionoflessthan10percentofaforeigncompany.
B) foreignpurchaseofmorethan10percentofstockinadomesticcompany.
C) purchaseoflivestockfromabroad.
D) saleofinsuranceinaforeignnation.
Answer: B
Diff:2
4) Mostinternationalinvestmentfinancetodaycomesfrom
A) portfolioandforeigndirectinvestment. B) thesaleofantiques.
C) governmentfinancing. D) taxcollections.
Answer: A
Diff:2
5) Portfolioinvestmentmeansbuying
A) lessthan10percentownershipinaforeigncompany.
B) morethan50percentownershipinaforeigncompany.
C) alifeinsurancepolicywhentravelingabroad.
D) livestock.
Answer: A
Diff:1
6) Thethreesourcesofprivatedirectinvestmentindevelopingnationsare
A) bankloans,governmentloans,andEurobondissues.
B) bankloans,portfolioinvestments,andforeigndirectinvestments.
C) portfolioloans,IMFloans,andgovernmentloans.
D) foreigndirectinvestment,governmentloans,andEurobondissues.
Answer: B
Diff:1
7) WhichofthefollowingisNOToneofthethreeprimarysourcesofprivateinvestmentfunds
flowingintodevelopingnations?
A) Bankloans B) Foreigndirectinvestment
C) WorldBankandIMFloans D) Portfolioinvestment
Answer: C
Diff:1
8) Theprimarymotivationforprivateforeigninvestmentindevelopingnationsis
A) toimprovethestandardoflivingforworkers.
B) todoresearchincountrieswithfewersocialregulations.
C) toeradicatepoverty.
D) thepotentialforhighratesofreturn.
Answer: D
Diff:1
9) TheWorldBankhasextendedaloantoCountryXtobuildanewtollroadandcountsonthe
repaymentoftheloanfromthecollectedtolls.Afterthefundshavebeentransferredtothe
country,thegovernmentdecidestospendthemoneytobuildanewpresidentialpalace.Thisis
anexampleof
A) hostileselection. B) adverseselection.
C) moralhazard. D) governmentrisk.
Answer: C
Diff:2
10) Aninternationalfinancialcrisisismostoftencausedby
A) anationscentralbankloweringdomesticinterestrates.
B) agovernmentrefusingtopayitsduestotheUnitedNations.
C) foreigninvestmentsandloansbeingwithdrawnfromanation.
D) adropinthevalueoftheU.S.dollar.
Answer: C
Diff:1
11) WhichofthefollowingisNOTamethodforpromotingglobaleconomicgrowth?
A) Relianceonprivatemarketstodirectcapitalgoodstowardtheirbestuse.
B) Countontheworldsgovernmentstodeveloppoliciesthatpromoteeconomicgrowthin
developingnations.
C) Encouragepopulationgrowthsothatdevelopingnationslaborsupplyincreases.
D) Marketbasedapproach.
Answer: C
Diff:1
12) AllofthefollowingaresourcesoffundingforcapitalgoodsindevelopingcountriesEXCEPT
A) loansfrombanks. B) foreigndirectinvestment.
C) taxation. D) portfolioinvestment.
Answer: C
Diff:1
13) Portfolioinvestmentisdefinedas
A) thepurchaseoflessthan40percentofthesharesofownershipinacompanyinanother
country.
B) theacquisitionofmorethan40percentofthesharesofownershipinacompanyinanother
country.
C) thediversificationofpurchasingsharesinmanycompaniesinonecountrysothatriskis
kepttoaminimum.
D) noneoftheabove
Answer: D
Diff:1
14) Foreigndirectinvestmentis
A) thepurchaseoflessthan10percentofthesharesofownershipinacompanyinanother
country.
B) theacquisitionofmorethan10percentofthesharesofownershipinacompanyinanother
country.
C) thediversificationofpurchasingsharesinmanycompaniesinonecountrysothatriskis
kepttoaminimum.
D) thediversificationofpurchasingsharesinmanycompaniesindifferentcountriessothat
riskiskepttoaminimum.
Answer: B
Diff:1
15) Theacquisitionofmorethan10percentofthesharesofownershipinacompanyinanother
countryisknownas
A) netexports. B) netnationalinvestment.
C) portfolioinvestment D) noneoftheabove
Answer: D
Diff:1
16) Thepurchaseoflessthan10percentofthesharesofownershipinacompanyinanothercountry
isknownas
A) ahostiletakeover.
B) anineffectivemethodforencouragingeconomicgrowth.
C) foreigndirectinvestment.
D) portfolioinvestment.
Answer: D
Diff:1
17) Whyareinternationalinvestorswhohaveinvestedindevelopingnationsfavoringforeign
directinvestmentandportfolioinvestmentoverloans?
A) Theprocessofmakingloansisusuallymoredifficultforinvestorstodothanforeigndirect
andportfolioinvestment.
B) TheinterestratechargedontheloansisusuallylowerthanwhatcanbeearnedintheU.S.
C) Itisillegalforbankstomakeloanstoforeignfirms.
D) Investorshaveanaversiontoowningdeadcapitalandwanttomakesurethatthe
resourcestheyowndonotbecomedeadcapital.
Answer: D
Diff:1
18) Wheninvestmentoccursindevelopingnations
A) investorshopetogainsignificantreturnsontheirinvestmentandresidentsgainhigher
ratesofeconomicgrowth.
B) higherratesofeconomicgrowthareusuallynotachieved.
C) significantlevelsofpollutionusuallyoccur.
D) governmentpoliticiansusuallybenefitfromtheillegalpaymentsmadetosecurethe
investment.
Answer: A
Diff:1
19) Adverseselectionisabarriertofinancingglobalgrowthbecause
A) firmssometimeshavetroubledeterminingwhethertheyneedfundsornot.
B) ifinvestorshavetroubleidentifyinghigh-riskfirmstheymaybeunwillingtolendfunds
tocreditworthyfirms.
C) thereisthepossibilitythatthefundsareusedforriskierbehaviorthanthelenderagreed
to.
D) ofthedifferencesbetweenfinancingusingloans,portfolioinvestmentandforeigndirect
investment.
Answer: B
Diff:1
20) Moralhazardisabarriertofinancingglobalgrowthbecause
A) firmssometimeshavetroubledeterminingwhethertheyneedfundsornot.
B) ifinvestorshavetroubleidentifyinghigh-riskfirmstheymaybeunwillingtogivemoney
tocreditworthyfirms.
C) thereisthepossibilitythatthefundsareusedforriskierbehaviorthanthelenderagreed
to.
D) ofthedifferencesbetweenfinancingusingloans,portfolioinvestmentandforeigndirect
investment.
Answer: C
Diff:1
21) Aninternationalfinancialcrisisis
A) whenatleastonedevelopingcountrydefaultsonitsloans.
B) whenamajorbankdefaults.
C) whenaworldleaderisdeposedfromoffice.
D) therapidwithdrawalofforeigninvestmentsandloansfromanation.
Answer: D
Diff:1
22) Arapidwithdrawalofforeigninvestmentsandloansfromanationis
A) deadcapital. B) aninternationalfinancialcrisis.
C) foreigndirectcapital. D) portfolioinvestment.
Answer: B
Diff:1
23) Whenaninternationalfinancialcrisisoccurs
A) financiallendersprotecttheirinvestmentsbypouringmoneyintotheailingcountry.
B) investorsselloffbondsandrestrictloansasamechanismtohelpthecountryrecover.
C) financialflowscanslowtoatrickle,influencingeconomicgrowth.
D) therearenoseriousfinancialeffectsthatlastmorethanafewmonths.
Answer: C
Diff:1
24) Internationalinvestorsaremorelikelytoinvestincountries
A) whereitisrelativelyeasiertoestablishpropertyrightstocapitalgoods.
B) wherethereisasignificantamountofdeadcapital.
C) whichhaveahighamountofgovernmentinefficiency.
D) wheretherearebarrierstotheownershipofcapitalgoods.
Answer: A
Diff:1
25) Foreigndirectinvestmentrefersto
A) theacquisitionofmorethan10percentofthesharesofownershipinacompanyinanother
nation.
B) theacquisitionoflessthan10percentofthesharesofownershipinacompanyinanother
nation.
C) thegrantingofaloantoacompanylocatedinaforeigncountry.
D) adirectmonetarygranttoaforeigncompanyorgovernment.
Answer: A
Diff:1
26) Foreigndirectinvestmentimpliesthattheinvestorobtainsmorethana________shareina
foreigncompanysownership.
A) 30percent B) 40percent
C) 50percent D) noneoftheabove
Answer: D
Diff:1
27) Thepurchaseoflessthan10percentofthesharesofownershipinaforeigncompanyisreferred
toasa
A) portfolioinvestment. B) foreigndirectinvestment.
C) foreignindirectinvestment. D) negligibleinvestment.
Answer: A
Diff:1
28) Portfolioinvestmentmeansthe
A) purchaseoflessthan20percentofthesharesofownershipinacompanyinanother
country.
B) purchaseoflessthan50percentofthesharesofownershipinacompanyinanother
country.
C) purchaseoflessthan80percentofthesharesofownershipinacompanyinanother
country.
D) purchaseoflessthan10percentofthesharesofownershipinacompanyinanother
country.
Answer: D
Diff:2
29) Theacquisitionofmorethan10percentoftheoutstandingsharesinacompanyinanother
countryis
A) foreigndirectinvestment. B) foreigndirectacquisition.
C) portfolioinvestment. D) portfolioacquisition.
Answer: A
Diff:1
30) Forforeigndirectinvestmenttooccur,thepurchasehastobemorethan
A) 2percentbutlessthan5percentofsharesinabusinesslocatedabroad.
B) 5percentbutlessthan10percentofsharesinabusinesslocatedabroad.
C) 8percentbutlessthan10percentofsharesinabusinesslocatedabroad.
D) 10percentofsharesinabusinesslocatedabroad.
Answer: D
Diff:2
31) Ifyouinvestinaforeigncompanybybuying8percentofitssharesofstock,youhaveengaged
in
A) portfolioinvestment. B) moralhazard.
C) foreigndirectinvestment. D) adverseselection.
Answer: A
Diff:2
32) Ifyouinvestinaforeigncompanybybuying28percentofitssharesofstock,youhaveengaged
in
Answer: C
Diff:2
33) Portfolioinvestmentandforeigndirectinvestmentaremethodsthroughwhich
A) ownershipinassetsareacquiredincountriesotherthanoneshomecountry.
B) U.S.residentsinvestfundsincompaniesthatexportgoods.
C) U.S.residentsinvestfundsincompaniesthatimportgoods.
D) short-terminvestmentsareconvertedtolong-termones.
Answer: A
Diff:1
34) Thepossibilityforrecipientsoffundsinforeigncountriestoengageinriskierbehaviorafter
receivingfinancingiscalled
A) inequitablefinancing. B) moralhazard.
C) adverseselection. D) asymmetricinformation.
Answer: B
Diff:2
35) Theadverseselectionproblemininternationalinvestmentmeans
A) thatthoseseekingfundsfortheriskiestprojectsarethosemostactivelyseekingthefunds.
B) thattherecipientsofthefundsmayusethefundsforotherthantheapprovedprojects.
C) thatgovernmentofficialsmaydemandhigherthantheusualamountofbribes.
D) thoseinthehighestlevelsofgovernmentarethemostdishonest.
Answer: A
Diff:2
36) Anexampleofthemoralhazardproblemininternationalinvestmentwouldbethat
A) thoseseekingfundsfortheriskiestprojectsareamongstthosemostactivelyseekingthe
funds.
B) therecipientsofthefundsmayusethefundsforriskierprojectsthantheapprovedproject.
C) governmentofficialsmaydemandhigherthantheusualamountofbribes.
D) thoseseekingthefundsaredishonest.
Answer: B
Diff:2
37) Thepurchaseofmorethantenpercentofthesharesofaforeigncompanyisknownasa(n)
A) foreigndirectinvestment.
B) InternationalMonetaryFund(IMF)investment.
C) portfolioinvestment.
D) WorldBankinvestment.
Answer: A
Diff:1
38) Investorsareoftenwillingtotaketherisksassociatedwithinvestingincapitalgoodsin
developingnationsbecausedevelopingnations
A) alwaysinsuretheinvestments.
B) insureasmallreturnoninvestment.
C) gettheInternationalMonetaryFund(IMF)tobackinvestmentsthroughaseriesofloan
guarantees.
D) havealargeportionoftheworldsunutilizedorunderutilizedresourcesandhenceprofit
potential.
Answer: D
Diff:2
39) Whenlendersareunabletogetgoodinformationabouttheworthinessofaprojectthelender
hastheproblemof
A) adverseselection. B) adversehazard.
C) moralhazard. D) moralselection.
Answer: A
Diff:1
40) Thepotentialforrecipientsofaloantoengageinriskierbehaviorafterreceivingthefinancingis
called
A) adverseselection. B) moralhazard.
C) moralselection. D) adversehazard.
Answer: B
Diff:1
41) Ifhighlevelofcorruptioninacountrydetersforeigninvestmentinworthyprojects,thisis
knownas
Answer: D
Diff:2
42) Whenaforeigncompanyengagesinriskierbehaviorafterithasreceivedinternational
investmentfunds,itisknownas
Answer: B
Diff:2
43) Ifthereisamajorprobleminacountrythatleadstotherapidwithdrawalofforeigninvestment,
thisisknownas
A) moralhazard. B) adverseselectioncrisis.
C) portfolioinvestmentcrisis. D) internationalfinancialcrisis.
Answer: D
Diff:2
44) Recentlythelargestformofinternationalinvestmentfundsfordevelopingcountrieshasbeen
A) bankloans. B) portfolioinvestments.
C) foreigndirectinvestments. D) WorldBankloans.
Answer: B
Diff:2
45) Twotypesofasymmetricinformationthatcreateproblemsforinternationalinvestmentare
A) adversehazardandmoralselection. B) adversehazardandmoralhazard.
C) adverseselectionandmoralhazard. D) adverseselectionandmoralselection.
Answer: C
Diff:1
46) Therapidwithdrawalofforeigninvestmentfundsfromanationcreates
A) aninternationalfinancialcrisis. B) aninternationalfundingcrisis.
C) aninternationalfiscalcrisis. D) aninternationalfiduciarycrisis.
Answer: A
Diff:2
47) Adverseselectionandmoralhazardproblemsarisewhenthereis
A) completeinformation B) asymmetricinformation.
C) toomuchinformation. D) symmetricinformation.
Answer: B
Diff:2
48) Totheextentthatthereareconcernsaboutmoralhazardandadverseselectioninacountry,
A) economicgrowthwillbehindered.
B) therewillbemoreportfolioinvestment.
C) therewillbemoreforeigndirectinvestment.
D) itwillbeeasiertoarrangefinancingfornewdevelopmentprojects.
Answer: A
Diff:2
49) Aninternationalfinancialcrisiscanbeprecipitatedwhen
A) therateofmoneysupplygrowthisnotthesameinallnations.
B) manyinternationalinvestorslookatthebehaviorofafewlargeinvestorstodetermine
whenfundsshouldbewithdrawnfromaparticularcountry.
C) newly-acquiredpoliticalfreedominacountryleadssomeinterestgroupstoforma
coalitionlimitingcompetition.
D) thereisanincreaseinportfolioinvestment.
Answer: B
Diff:1
50) Acountryexperiencinganinternationalfinancialcrisiswilllikely
A) seeanincreaseinportfolioinvestment.
B) seeanincreaseinforeigndirectinvestment.
C) encounterdifficultyinsustainingitseconomicgrowthrate.
D) beabletomaintaingrowthandprosperityinitsdomesticeconomy,butitsexportsector
willsuffer.
Answer: C
Diff:2
51) AllofthefollowingarebarrierstointernationalinvestmentEXCEPT
A) symmetricinformation. B) adverseselection.
C) incompleteinformation. D) moralhazard.
Answer: A
Diff:2
52) ThefollowingareobstaclestointernationalinvestmentEXCEPT
A) populationgrowth. B) asymmetricinformation.
C) adverseselection. D) moralhazard.
Answer: A
Diff:1
53) Discusstherationalesforforeignfinancingofinvestmentindevelopingactionsandexplain
howdevelopingcountriesbenefitfrominternationalcapitalinvestment.
Answer: Theprimarymotivationforforeigninvestmentindevelopingnationsisthepotentialfor
highratesofreturnonlargeamountsofuntappedresources.Developingcountries
benefitfrominternationalcapitalinvestmentbecausetheydonothavetheinternalfunds
tobeabletosupportprojectsthatwillleadtoeconomicgrowth.
Diff:1
54) Whatarethesourcesofprivateinvestmentsinforeignnations?
Answer: Thethreesourcesofprivateinvestmentfundsarebankloans,portfolioinvestmentsand
foreigndirectinvestment.Portfolioinvestmentisapurchaseoflessthan10percentofthe
sharesinacorporationinanothercountry.Foreigndirectinvestmentisapurchaseof
morethan10percentofownershipshareinaforeigncorporation.
Diff:1
18.4InternationalInstitutionsandPoliciesforGlobalGrowth
1) WhichofthefollowingistrueabouttheWorldBank?
A) Itisamultinationalagencythatspecializesindevelopmentloans.
B) ItisaU.S.agencythatspecializesindevelopmentloans.
C) ItisaU.N.sponsoredagencythatspecializesindevelopmentloans.
D) Itismadeupofallcentralbanksintheworld.
Answer: A
Diff:2
Topic: 18.4InternationalInstitutionsandPoliciesforGlobalGrowth
2) Themultinationalagencythatspecializesinmakingloanstodevelopingnationsinaneffortto
promotelong-termdevelopmentandgrowthisthe
A) InternationalMonetaryFund. B) WorldTradeOrganization.
C) UnitedNationsDevelopmentProgram. D) WorldBank.
Answer: D
Diff:2
3) ApproximatelywhatpercentageoftheWorldBanksloansgotodevelopingnationsintheEast
Asia/PacificandSouthAsiaregionscombined?
A) 10% B) 40% C) 70% D) 100%
Answer: B
Diff:2
4) TheWorldBankmakesloansprimarilyto
A) nationswithoutfreemarkets,suchasNorthKorea.
B) developingnations.
C) theUnitedStates.
D) highlydevelopednations.
Answer: B
Diff:2
5) Themultinationalorganizationthataimstopromoteworldeconomicgrowthbyfostering
financialstabilityisthe
A) InternationalMonetaryFund. B) WorldTradeOrganization.
C) UnitedNations. D) WorldBank.
Answer: A
Diff:2
6) AnationsaccountwiththeIMFiscalledits
A) depositsurplus. B) currentaccount.
C) quotasubscription. D) capitalaccount.
Answer: C
Diff:2
7) TheWorldBankwasformedin
A) 1930. B) 1960. C) 1945. D) 1918.
Answer: C
Diff:1
8) TheWorldBankis
A) madeupofthecentralbanksoftheleadingindustrialnationsoftheworld.
B) madeupoffiveseparateinstitutions.
C) theBankoftheUnitedNations.
D) theEuropeanUnion.
Answer: B
Diff:1
9) TheInternationalMonetaryFund(IMF)isaninternationalorganizationdesignedto
A) promoteworldeconomicgrowthbymeansofgreaterfinancialstability.
B) promoteworldeconomicgrowthvialoanstodevelopednations.
C) circulateasinglecurrencyworldwide.
D) actastheworldscentralbank.
Answer: A
Diff:2
10) TheinternationalunitofaccountingusedbytheInternationalMonetaryFund(IMF)iscalled
A) theEurodollar. B) theIMFdollar.
C) thequotasubscription. D) specialdrawingrights.
Answer: D
Diff:1
11) ThelargestquotasubscriberoftheInternationalMonetaryFund(IMF)is
A) Japan. B) Germany.
C) theUnitedStates. D) China.
Answer: C
Diff:1
12) TheInternationalMonetaryFund(IMF)wascreatedtoachieveeachofthefollowinggoals
EXCEPT
A) tosuperviseexchange-ratepracticesofmembercountries.
B) tohelpfinanceeconomicdevelopmentinpoorcountries.
C) toencourageconvertibilityofmembercountriescurrencies.
D) tolendfundstocountrieshavingdifficultiesmeetingtheirinternationalpayment
obligations.
Answer: B
Diff:1
13) WhichofthefollowingstatementsabouttheInternationalMonetaryFund(IMF)isTRUE?
A) TheIMFwascreatedtofinancelong-termeconomicdevelopmentprojectsinpoor
countries.
B) TheIMFwascreatedtoreducetariffbarriersbetweennations.
C) TheIMFfunctionsasacentralbankthatconductsmonetarypolicyfortheworldeconomy.
D) TheIMFobtainsfundsfromquotasubscriptionschargedtomembercountries.
Answer: D
Diff:1
14) EachnationsInternationalMonetaryFund(IMF)quotasubscriptionisbasedon
A) itsnationalincome. B) itsshareinworldtrade.
C) itspublicdebt. D) itstradesurplus.
Answer: A
Diff:1
15) WhichofthefollowingisNOTacriticismthathasbeenleveledattheWorldBank?
A) Toomanyloansgotonationscapableofprivatelyfinancingtheirprojects.
B) Since1990,theWorldBankhasloanedmostlytoAfricancountries,tothedetrimentof
nationsinotherpartsoftheworld.
C) SomecountriesreceivingWorldBankloansarenetlendersoffundstoothernationsand
soshouldnotbereceivingWorldBankfunds.
D) DespitereceivingloansfromtheWorldBank,economicgrowthinmanyclientnationshas
beendisappointing.
Answer: B
Diff:2
16) TheWorldBankspecializesinmakingloanstopromote
A) short-termassistancewhenanationexperiencesafinancialcrisis.
B) so-calledstand-byarrangementsandcredits.
C) financialstability.
D) long-termdevelopmentandgrowth.
Answer: D
Diff:2
17) TheWorldBank
A) isacentralbankliketheFederalReserveSystem.
B) isthebankthatcausesinternationalfinancialcrisiswhenthereservesaretoohigh.
C) isamultinationalagencythatspecializesinmakingloanstopromotelong-term
developmentandgrowthindevelopingcountries.
D) isamultinationalorganizationthataimstopromoteworldeconomicgrowththrough
morefinancialstability.
Answer: C
Diff:1
18) Whichofthefollowingworldregionshasreceivedthelargestpercentageoflendingfromthe
WorldBanksince1990?
A) LatinAmerica/Caribbean B) SouthAsia
C) Africa D) Middleeast
Answer: C
Diff:1
19) TheInternationalMonetaryFund
A) isacentralbankliketheFederalReserveSystem.
B) isthebankthatcausesinternationalfinancialcrisiswhenthereservesaretoohigh.
C) isamultinationalagencythatspecializesinmakingloanstopromotelong-term
developmentandgrowthindevelopingcountries.
D) isamultinationalorganizationthataimstopromoteworldeconomicgrowththrough
morefinancialstability.
Answer: D
Diff:1
20) ThelargestInternationalMonetaryFundquotasubscription,denominatedinSpecialDrawing
Rights,isheldby
A) theUnitedStates. B) Japan.
C) China. D) Russia.
Answer: A
Diff:1
21) Amultinationalagencythatspecializessolelyinmakingloanstopromotelong-term
developmentandgrowthindevelopingcountriesisthe
A) FederalReserveSystem. B) WorldBank.
C) InternationalMonetaryFund. D) InternationalWorldFund.
Answer: B
Diff:1
22) Amultinationalorganizationthataimstopromoteworldeconomicgrowththroughmore
financialstabilityisthe
A) FederalReserveSystem. B) WorldBank.
C) InternationalMonetaryFund. D) InternationalWorldFund.
Answer: C
Diff:1
23) TheWorldBankwillprimarilymake
A) short-termloansforinvestmentprojectsthatarerelativelysafe.
B) short-termloansforinvestmentprojectswhichmightnotreceiveprivatefinancial
support.
C) long-termloansforinvestmentprojectsthatarerelativelyrisky.
D) long-terminnatureforinvestmentprojectswhichmightnotreceiveprivatefinancial
support.
Answer: D
Diff:1
24) Theinternationalorganizationwiththesolegoalofpromotingglobalantipovertyeffortsisthe
A) WorldBank.
B) InternationalMonetaryFund.
C) BoardofGovernorsoftheFederalReserveSystem.
D) GAE.
Answer: A
Diff:1
25) WhichofthefollowingareNOTpartoftheWorldBank?
A) InternationalDevelopmentAssociation
B) FederalReserveBankofNewYork
C) InternationalCenterforSettlementofInvestmentDisputes
D) MultinationalInvestmentGuaranteeAgency
Answer: B
Diff:1
26) TheprimarysourceoffundsfortheWorldBankis
A) quotasubscriptions. B) privatefinancialmarkets.
C) theworldswealthiestcountries. D) theNewYorkStockExchange.
Answer: C
Diff:1
27) Aquotasubscriptionis
A) themaximumamountoffundsthatcanbedrawnattheWorldBankwithoutaformal
proposal.
B) themaximumamountthataprivateinvestorcaninvestinforeignfirms.
C) anationsaccountattheInternationalMonetaryFund.
D) whenaninvestorsetslimitsontheproportionoftheirportfoliothatwillcontainforeign
investments.
Answer: C
Diff:1
28) AnationsaccountwiththeInternationalMonetaryFunddenominatedinspecialdrawingrights
is
A) thequotasubscription. B) theaccountattheWorldBank.
C) portfolioinvestment. D) theaccountattheFed.
Answer: A
Diff:1
29) ThefundsthatnationshaveonaccountattheInternationalMonetaryFundismeasuredin
A) U.S.dollars.
B) thecurrencyofthenationthathasdepositedthefunds.
C) aquotasubscription.
D) aninternationalunitofaccountingcalledspecialdrawingrights.
Answer: D
Diff:1
30) TobeamemberoftheInternalMonetaryFundanationmustdepositfundsbasedon
A) itsnationalincome.
B) theamountoffundsitwantstodeposit.
C) theneedtoloanmoneytodevelopingnations.
D) rulessetupbytheWorldBank.
Answer: A
Diff:1
A) AllnationsthatbelongtotheInternationalMonetaryFundhaveequalvotingpower.
B) ThevotingpowerofanationintheInternationalMonetaryFundisdeterminedbyits
quotasubscription.
C) ThevotingpowerofanationintheInternationalMonetaryFundiscalledspecialdrawing
rights.
D) ThevotingprocedureintheInternationalFundisdeterminedbytheWorldBank.
Answer: B
Diff:1
32) TheamountoffundsthatanationcanwithdrawfromtheInternationalMonetaryFund
dependsupon
A) itsquotasubscription.
B) whetheritisadevelopingnationoradevelopednation.
C) whetheritisseekingalong-termorshort-termloan.
D) therulessetupbytheWorldBank.
Answer: A
Diff:1
33) TheprimaryfunctionoftheInternationalMonetaryFundis
A) toprovideloansonlytoprivatefirmsindevelopingcountries.
B) tomakedirect,irrevocabletransfersoffundsfromwealthynationstopoornations.
C) tolendsolelyonthebasisofanationsrelativepoverty.
D) tomakeloansaimedatpromotingglobalstabilityandhencegrowth.
Answer: D
Diff:1
34) AllthefollowingwouldbeapossibleloanthattheInternationalMonetaryFundmightmake
EXCEPT
A) aloantoaprivatefirm.
B) long-termloanstoanationsgovernmentwhichsupportgrowthpromotingprojects.
C) short-termloanstoanationsgovernment.
D) long-termloanstocountrieswhicharehavingproblemsinrepayingexistingdebts.
Answer: A
Diff:1
35) WhichofthefollowingstatementsistrueaboutthesuccessoftheWorldBank?
A) TheWorldBankhasbeenverysuccessfulinpromotingeconomicgrowthbecauseloans
havebeenprimarilymadetocountriesthathavetroubleattractingprivatefunds.
B) TheWorldBankhasnotbeensuccessfulbecausemanyloanshavebeenmadetocountries
thatcanattractprivatefunds.
C) TheWorldBankhasbeensuccessfulbecauseithasfocusedonitsprimaryfunctionof
makingloanstogovernments.
D) TheWorldBankhasnotbeensuccessfulbecauseithasfocusedonmakingloansto
governmentswheretherehasbeenalossofconfidenceinanationsfinancialsystem.
Answer: B
Diff:1
36) IftheWorldBankmakesloanstonationsthatcanattractprivatefunds,
A) theincreaseingrowthinthatnationwillspillovertoothernationsthataredeveloping.
B) theseloanswillinterfereintheprivatemarketforcapitalgoodsandcanleadtoinefficient
investment.
C) theWorldBanksloanswillcrowdouttheprivatefundsmadetodevelopingnationsto
encourageeconomicgrowth.
D) thepresenceoftheWorldBanksloanswillleadtoevenmoreprivatefundsbeing
attractedtothatcountry.
Answer: B
Diff:1
37) Itisbelievedthatinordertopromotegrowth,atoppriorityoftheWorldBankandthe
InternationalMonetaryFundisto
A) promotetheincreaseofdeadcapital.
B) makemoreloans.
C) focusonbasicmarketfoundationsofguaranteeingpropertyandcontractrights.
D) joinforcesandmergeintooneunit.
Answer: C
Diff:1
38) Becauseoftheproblemsofadverseselectionandmoralhazard,ithasbeensuggestedthatthe
WorldBankandInternationalMonetaryFund
A) makeloanstotheriskiestnationssothatprivateinvestorswillnotbetemptedtotakea
risk.
B) loanonlytocountriesthathavefreeelections.
C) notmakeloanstoriskynationsbecausethereisahighdemandforfundsfromsafer
nations.
D) imposetougherpreconditionsonborrowers.
Answer: D
Diff:1
39) TheWorldBank
A) determinesthepricelevelineachofitsmembernations.
B) determinesthelaborforceparticipationrateineachofitsmembernations.
C) mediatescontractsregardingminimumpricesforvariousglobally-tradedcommodities.
D) extendslong-termloansforcapitalinvestmentprojectstodevelopingnations.
Answer: D
Diff:2
40) WheredoestheWorldBankgetitsfunds?
A) fromsellinginternalreportstothepublic
B) fromtariffscollectedongoodstradedinternationally
C) fromgovernmentsofthewealthiestnationsandfromprivatefinancialmarkets
D) fromseizingdeadcapitalindevelopingnationsandsellingitatauction
Answer: C
Diff:1
41) TheWorldBankis
A) composedoffiveseparateinstitutions.
B) thecentralbankoftheU.S.government.
C) theofficialnameoftheInternationalMonetaryFund.
D) thecentralbankoftheUnitedNations.
Answer: A
Diff:1
42) Specialdrawingrightsare
A) thereservesheldbymembersoftheEuropeanUniontobacktheiraccountswiththe
EuropeanCentralBank.
B) creditaccountsheldbyindividualstockholderswithportfolioinvestmentsinother
countries.
C) internationalunitsofaccountheldbytheInternationalMonetaryFundformember
countries.
D) theestimatedlevelofoilreservesremaininginOPECcountries.
Answer: C
Diff:2
43) HowdidtheoriginalfocusoftheIMFdifferfromthatoftheWorldBank?
A) TheIMFprovidedshort-termloansandtheWorldBankprovidedlong -termloans.
B) TheIMFassistedwealthynationsandtheWorldBankassisteddevelopingnations.
C) TheIMFgavegrantstodevelopingcountriesandtheWorldBankmadeloans.
D) TheIMFdealtinNorthandSouthAmericaonly,andtheWorldBankdealtwiththerestof
theworld.
Answer: A
Diff:2
44) TheofficialmissionoftheWorldBankisto
A) fightglobalinflation.
B) advisemembernationsontheappropriatelevelsoftaxation.
C) establishexchangeratesbetweenthecurrenciesofmembernations.
D) providefundingforneededdevelopmentprojectsthatwouldhavedifficultyattracting
privateinvestment.
Answer: D
Diff:1
45) ThosewhoadvocatearolefortheWorldBankinestablishingsystemsofwell -definedproperty

andcontractrightsindevelopingnationswouldarguethat
A) suchchangeswouldeliminatetheneedforlong-termcapitalfunding.
B) suchchangeswouldeliminatetheneedforshort-termloans.
C) suchchangeswouldmaketheseeconomiesmoreproductive.
D) asymmetricinformationiscurrentlynotaprobleminthesecountries.
Answer: C
Diff:2
46) TheWorldBankwasformedin
A) 1919. B) 1945. C) 1960. D) 1980.
Answer: B
Diff:2
47) TheWorldBankspecializesinmakingloansto
A) industrializednations. B) communistnations.
C) developingnations. D) Africannations.
Answer: C
Diff:2
48) MostoftheloanablefundsavailabletotheWorldBanktolendtodevelopingnationscomefrom
A) thesaleofoil.
B) developingnations.
C) theworldswealthiestnations.
D) thesaleofinternationalbondsthatareissuedbytheWorldBank.
Answer: C
Diff:2
49) OneofthemajorcriticismsoftheWorldBankisthatitlendsfunds
A) toimpoverishednations.
B) tocountrieswhichcouldeasilyborrowfundsfromothersources.
C) toindustrializednations.
D) toterroristgroupsnotaffiliatedwithanycountry.
Answer: B
Diff:2
50) TheWorldBankprimarilyengagesin
A) short-termlendingaimedathelpingdevelopingnationsrepaydebtaccumulatedinpast
years.
B) short-termlendingaimedathelpingdevelopingnationsrepayloansfromthe
InternationalMonetaryFund.
C) long-termlendingaimedathelpingdevelopingnationsgovernmentsandcentralbanks
keepexchangeratesfromvarying.
D) long-termlendingaimedathelpingdevelopingnationsgovernmentsandbusinesses
makeinvestmentsthatwillcontributetoeconomicgrowth.
Answer: D
Diff:1
51) ThegoaloftheWorldBankisto
A) superviseexchangeratestability.
B) supervisetheactivitiesofthecentralbanksofmembernations.
C) sellthegovernmentsecuritiesofmembernationsontheopenmarket.
D) helpfinanceeconomicdevelopment.
Answer: D
Diff:1
52) The________specializesinmakinglong-termloansforcapitalinvestmentprojectsthatdonot
haveprivatefinancialsupport.
A) InternationalMonetaryFund B) EuropeanCentralBank
C) WorldBank D) FederalReserveBank
Answer: C
Diff:1
53) Amultinationalagencythatspecializesinmakingloanstoalargernumberofdeveloping
nationstopromotelong-termdevelopmentandgrowthis
A) theInternationalBank. B) theWorldBank.
C) theInternationalMonetaryFund. D) theWorldMonetaryFund.
Answer: B
Diff:1
54) Ifthegovernmentofadevelopingcountryishavingdifficultysellingbondstobuildan
irrigationsystem,itcouldgotothe
A) WorldBank. B) FederalReserveBank.
C) UnitedNationsInternationalBank. D) InternationalMonetaryOrganization.
Answer: A
Diff:2
55) Aninternationalorganizationformedwiththeaimofpromotingworldeconomicgrowth
throughfinancialstabilityiscalled
A) theWorldBank.
B) theInternationalDevelopmentAssociation.
C) theInternationalFinanceCorporation.
D) theInternationalMonetaryFund(IMF).
Answer: D
Diff:2
56) WhichofthefollowingcountrieshasthelargestquotasubscriptionattheIMF?
A) Japan B) Russia C) UnitedStates D) India
Answer: C
Diff:2
57) TheInternationalMonetaryFundwascreatedtoachieveeachofthefollowinggoalsEXCEPT
A) lendfundstocountrieswithinternationalpaymentproblems.
B) lendfundstolargegovernmentinfrastructureprojects.
C) monitorandofferadviceontheexchangeratepoliciesofmembernations.
D) encouragefreeconvertibilityofthecurrenciesofmembernations.
Answer: B
Diff:1
58) Whenanationscurrencysuddenlylosesvalue,the________maystepintobuytheafflicted
currency.
A) WorldBank B) InternationalMonetaryFund
C) FederalReserveBank D) UnitedNations
Answer: B
Diff:2
59) AnationsaccountwiththeInternationalMonetaryFundismeasuredinaninternationalunit
knownas
A) internationalreserves. B) specialdrawingrights.
C) monetaryrights. D) monetarydeposits.
Answer: B
Diff:2
60) AnationsaccountwiththeInternationalMonetaryFundisknownas
A) aquotasubscription. B) monetarydeposits.
C) monetaryrights. D) internationalreserves.
Answer: A
Diff:1
61) Amultinationalorganizationthataimstopromoteworldeconomicgrowththroughmore
financialstabilityis
A) theWorldMonetaryFund. B) theInternationalBank.
C) theInternationalMonetaryFund. D) theInternationalMonetaryBank.
Answer: C
Diff:1
62) TheinternationalunitofaccountingusedbytheIMFisthe
A) euro. B) specialfinancialright.
C) specialdrawingright. D) dollar.
Answer: C
Diff:1
63) BoththeInternationalMonetaryFundandtheWorldBankwereestablished
A) attheendofWorldWarI. B) attheendofWorldWarII.
C) inthe1960s. D) inthe1970s.
Answer: B
Diff:1
64) VotingpowerintheIMFisdeterminedby
A) thepopulationsizeofmemberstates.
B) thequotasubscriptionsize.
C) thelengthofmembership.
D) thesizeofthemembernationstradesurplus.
Answer: B
Diff:1
65) BoththeWorldBankandtheIMFtypically
A) makeloansforlessthan5yearsonly.
B) imposestringentpreconditionsthattheborrowersmustmeet.
C) chargelowerthanaverageloanratestoensurerepayment.
D) chargehigherthanaverageloanrates.
Answer: B
Diff:2
66) ThecurrencyoftheIMFisthe
A) InternationalCurrencyUnit. B) SpecialDrawingRight.
C) IMFDollar. D) U.S.dollar.
Answer: B
Diff:2
67) EachcountrysIMFquotasubscriptionisdeterminedby
A) therelativesizeofitsnationalincome.
B) thesizeofitspopulation.
C) thesizeofworldtrade.
D) howmuchacountrywantstocontribute.
Answer: A
Diff:2
68) Afterthefinancialcrisisinthe1990smanyeconomistscriticizedtheIMFandtheWorldBank.
Somesuggestionsforreformareto
A) createaboardofdirectorsmadeupoffinanceministersfortheIMF.
B) eliminateboththeinstitutions.
C) increaseprivate-sectorlendingbygovernmentsprovidingtaxbreakstolenders.
D) alloftheabove
Answer: D
Diff:1
69) WhenanationjoinstheIMF,itdepositsfundsintoanaccount.Thesefundshaveavaluebased
onaweightedaverageof
A) theeuro,theBritishpoundsterling,theJapaneseyen,andtheU.S.dollar.
B) theeuro,theBritishpoundsterling,theChineseyuan,andtheU.S.dollar.
C) theRussianruble,theBritishpoundsterling,theJapaneseyen,andtheU.S.dollar.
D) theRussianruble,theBritishpoundsterling,theChineseyuan,andtheU.S.dollar.
Answer: A
Diff:3
70) Whichorganizationfunctionsasalenderoflastresortfornationalgovernments?
A) TheWorldBank B) TheU.S.Treasury
C) TheFederalReserveBank D) TheInternationalMonetaryFund
Answer: D
Diff:2
71) WhichofthefollowingisNOTafunctionoftheInternationalMonetaryFund?
A) serveaslenderoflastresortfornationalgovernments
B) administeraninternationalforeignexchangesystem
C) establishtheSDRsystemnationsutilizetosettleinternationalpaymentobligations
D) establishandadministereachnationsfiscalandmonetarypolicies
Answer: D
Diff:2
72) WhatisthemissionoftheWorldBank?
Answer: TheWorldBank,whichwasestablishedafterWorldWarII,ischargedwiththemission
ofprovidinglong-termloansforspecificcapitalinvestmentprojects.Inthepastthirty
yearsthebankisincreasinglyinvolvedinfinancingprojectsthataimtoreducepoverty.
Diff:1
73) WhatisthemissionoftheInternationalMonetaryFund(IMF)?
Answer: TheIMFwasestablishedafterWorldWarIItohelpmaintaininternationalfinancial
stability.WhennationsjointheIMF,theyallmustdepositfundscalledquota
subscriptions,measuredinanaccountingunitcalledspecialdrawingrights.Quotasare
basedoneachnationsnationalincome.TheIMFcanlendthesefundsinanefforttosolve
financialproblemsarisingfromfluctuationsintrade,investorlossofconfidenceina
nationsfinancialsystem,orspillovereffectsfromfinancialproblemsoriginating
elsewhere.
Diff:1
74) Namethetwointernationalinstitutionsthathavebeenformedtoattainhigherratesofglobal
economicgrowthandbrieflydiscusswhateachoftheagenciesdoes.
Answer: Therearetwoagencies,theWorldBankandtheInternationalMonetaryFund.TheWorld
Bankspecializesinmakinglong-termloansforcapitalinvestmentprojectsindeveloping
countriesthatotherwisemightnotreceiveprivatefinancialsupport.TheInternational
MonetaryFundpromotesglobaleconomicgrowthbyfosteringfinancialstabilityin
developingcountries.
Diff:2
75) DiscusswhytheWorldBankhasbeencriticizedformakingloanstonationsthatcanattract
privatefunds.
Answer: Loansgiventonationsthatcanattractprivatefundsinterferewiththeprivatemarketfor
capitalgoods.Thiscanencourageinefficientinvestmentinprojectsthatshouldnotbe
undertaken.
Diff:2
76) WhataresomeofthecriticismsthathavebeenleviedontheWorldBankandtheInternational
MonetaryFundconcerningadverseselectionandmoralhazard?
Answer: TheWorldBankandInternationalMonetaryFundusuallyplaceverylooseconditionson
loansandthisincreasesadverseselectionproblems.Someeconomistsarguethatthe
privatelendersandinvestorsassumethattheWorldBankandInternationalMonetary
Fundwillbackupnationsandwillthereforelowertheirstandardsandmakeloanstoless
creditworthynations.Thiscontributestointernationalfinancialcrises.
Diff:2
Contents
Chapter19 DemandandSupplyElasticity.......................................................................................1
Chapter20 ConsumerChoice...........................................................................................................98
Chapter21 Rents,Profits,andtheFinancialEnvironmentofBusiness....................................219
Chapter22 TheFirm:CostandOutputDetermination..............................................................320
Chapter23 PerfectCompetition.....................................................................................................412
Chapter24 Monopoly......................................................................................................................524
Chapter25 MonopolisticCompetition..........................................................................................625
Chapter26 OligopolyandStrategicBehavior..............................................................................702
Chapter27 RegulationandAntitrustPolicyinaGlobalizedEconomy...................................774
Chapter28 TheLaborMarket:Demand,SupplyandOutsourcing..........................................850
Chapter29 UnionsandLaborMarketMonopolyPower...........................................................946
Chapter30 Income,Poverty,andHealthCare...........................................................................1024
Chapter31 EnvironmentalEconomics........................................................................................1098
Chapter19
DemandandSupplyElasticity
19.1PriceElasticity
1) Thepriceelasticityofdemandisameasureof
A) theresponsivenessofthequantitydemandedofagoodtoachangesinthepriceofthe
good.
B) thequantitydemandedofagoodatagivenprice.
C) thedemandforaproductholdingpricesconstant.
D) thehorizontalshiftinthedemandcurvewhenthepriceofagoodchanges.
Answer: A
Diff:1
Topic: 19.1PriceElasticity
2) Supposethatwhenthepriceofmilkrises20%,thequantitydemandedofmilkfalls10%.Based
onthisinformation,whatistheapproximateabsolutepriceelasticityofdemandformilk?
A) 0.05 B) 0.2 C) 0.5 D) 2.0
Answer: C
Diff:1
3) Thepriceelasticityofdemandmeasures
A) theconsumerssensitivitytoapricechange.
B) theproducerssensitivitytoapricechange.
C) howmuchthemarketpricechangesinresponsetoachangeindemand.
D) howmuchthedemandchangesinresponsetoachangeinincome.
Answer: A
Diff:1
4) Agoodspriceelasticityofdemandcanbecalculatedbyusingtheformulaof
A) percentagechangeinpricedividedbypercentagechangeinquantitydemanded.
B) percentagechangeinquantitydemandeddividedbypercentagechangeinprice.
C) percentagechangeinpricedividedbypercentagechangeinincome.
D) absolutechangeinquantitydemandeddividedbyabsolutechangeinprice.
Answer: B
Diff:1
5) WhichofthefollowingstatementsaboutdemandandpriceelasticityofdemandisTRUE?
A) Asthedemandcurvehasapositiveslope,thepriceelasticityofdemandispositive.
B) Asthedemandcurvehasanegativeslope,thepriceelasticityofdemandisnegative.
C) Asthedemandcurvehasapositiveslope,thepriceelasticityofdemandisnegative.
D) Asthedemandcurvehasanegativeslope,thepriceelasticityofdemandispositive.
Answer: B
Diff:1
6) Thepriceelasticityofdemandshows
A) therelationshipbetweenmarketpriceandhouseholdincome.
B) theproportionateamountbywhichthequantitydemandedchangesinresponsetoa
proportionatechangeinprice.
C) thequantitydemandedatagivenprice.
D) theproportionateamountbywhichthepricechangesinresponsetoaproportionate
changeinquantitydemanded.
Answer: B
Diff:2
7) Thepriceelasticityofdemandis
A) alwayspositive,sothereisnoreasontoconsidertheabsolutevalueofthepriceelasticity
ofdemand.
B) alwaysnegative,butbyconvention,economiststypicallyexpressthepriceelasticityof
demandasanabsolutevalue.
C) alwaysequalto-1,whichbyconventioneconomiststypicallyexpressasanabsolute
value,or1.
D) alwaysequaltozero,sothereisnoreasontoconsidertheabsolutevalueoftheprice
elasticityofdemand.
Answer: B
Diff:1
8) IftheabsolutepriceelasticityofdemandforgoodYis0.75,whenthereisa30percentincrease
inprice,wecanconcludethatquantitydemanded
A) hasfallenby35.0percent. B) hasfallenby10.4percent.
C) hasfallenby22.5percent. D) hasfallenby40.0percent.
Answer: C
Diff:1
Chapter19DemandandSupplyElasticity3
9) Wheneconomistswanttoobtainameasureoftheresponsivenessofquantitydemandedto
changesinprice,theyuse
A) theslopeofthedemandcurve.
B) thepriceelasticityofdemand.
C) onlythepercentagechangeinquantitydemanded.
D) thecross-priceelasticityofdemand.
Answer: B
Diff:1
10) IfthepriceelasticityofdemandforgoodAis-1,thena1%increasein
A) consumerincomewillresultina1%decreaseinthedemandforgoodA.
B) consumerincomewillresultina1%increaseinthedemandforgoodA.
C) themarketpriceofgoodAwillresultina1%increaseinthequantitydemandedofgood
A.
D) themarketpriceofgoodAwillresultina1%decreaseinthequantitydemandedofgood
A.
Answer: D
Diff:1
11) Theformaldefinitionofpriceelasticityofdemandis
A) changeinquantitydemandeddividedbychangeinprice.
B) quantitydemandeddividedbyprice.
C) percentagechangeinquantitydemandeddividedbypercentagechangeinprice.
D) quantitydemandedmultipliedbypriceanddividedby100.
Answer: C
Diff:1
12) Ifpricedecreasesby10percentandquantitydemandedincreasesby30percent,theprice
elasticityofdemandwillbe
A) 0.333. B) 3. C) 30. D) 300.
Answer: B
Diff:1
13) Iftheabsolutepriceelasticityofdemandis2.0,a5percentdecreaseinpricewillincrease
quantitydemandedby
Answer: A
Diff:1
14) A2percentriseinthepriceofagoodleadstoa2percentdecreaseinquantitydemanded.The
absolutepriceelasticityofdemandis
A) 5. B) 10. C) 0.1. D) 1.0.
Answer: D
Diff:2
15) Anabsolutepriceelasticityofdemandequalto0.4indicatesthata
A) 4percentincreaseinpriceleadstoa10percentdecreaseinquantitydemanded.
B) 1percentincreaseinpriceleadstoa4percentdecreaseinquantitydemanded.
C) 0.4percentdecreaseinpriceleadstoa1percentincreaseinquantitydemanded.
D) 10percentdecreaseinpriceleadstoa4percentincreaseinquantitydemanded.
Answer: D
Diff:2
16) Eventhoughpriceelasticityofdemandisalways________,byconventionitsabsolutevalueis
alwaysdiscussedasa________.
A) negative;primenumber B) positive;negativenumber
C) afraction;wholenumber D) negative;positivenumber
Answer: D
Diff:2
17) Whenthepriceofasoftdrinkfromthecampusvendingmachinewas$0.60percan,100cans
weresoldeachday.Afterthepriceincreasedto$0.75percan,salesdroppedto85cansperday.
Overthisrange,theabsolutepriceelasticityofdemandforsoftdrinkswasapproximatelyequal
to
A) 0.15. B) 0.60. C) 0.73. D) 1.67.
Answer: C
Diff:2
18) Sixmonthsago,thepriceofgasolinewas$2.20pergallon.Now,thepriceis$2.40pergallon.In
responsetothispriceincrease,thenumberofgallonsofgasolinepurchasedhasdeclinedby2
percent.Basedonthisinformation,whatistheabsolutepriceelasticityofdemandforgasoline?
A) 4.35 B) 1.20 C) 0.23 D) 0.10
Answer: C
Diff:2
19) Thelocalbaseballstadiumsconcessionstandspreviouslysoldhotdogsfor80centsapiece.At
thatprice,whenabaseballfanwenttowatchabaseballgame,hebought2hotdogs.Butnow
thatthestadiumhasadime-a-dognight,hehaspurchased6hotdogs.Whatisthe
approximatevalueofthisindividualsabsolutepriceelasticityofdemandforhotdogs?
A) 0.64 B) 0.80 C) 1.00 D) 1.56
Answer: A
Diff:2
20) Supposethequantitydemandedoficecreamconesincreasesfrom400to425conesadaywhen
thepriceisreducedfrom$1.50to$1.25.Inthissituation,theelasticityofdemand,calculated
usingtheaveragemethod,is
A) 3. B) 1. C) 0.33. D) 1.33.
Answer: C
Diff:1
21) Thequantityofraspberriessoldatalocalstoreincreasesfrom100pintsto1,500pintswhenthe
priceisreducedfrom$4.00to$1.00.Inthissituation,theabsolutepriceelasticityofdemandfor
raspberriesisapproximately
A) 0.69. B) 6.7. C) 1.46. D) 4.3.
Answer: C
Diff:1
22) Supposethatthepriceofeggsincreasesfrom75centsto$1.00perdozenandasaresulta
typicalfarmerexperiencesadecreaseineggsalesfrom300to200dozenperweek.Usingthe
methodofaveragevalues,theabsolutepriceelasticityofdemandis
A) 1.4. B) 0.8. C) 3.0. D) 1.75.
Answer: A
Diff:1
23) IfthepriceofgoodAincreasesfrom$15to$20perunitandquantitydemandedfallsfrom1500
to1000units,thenbyusingthemethodofaveragevalues,wecancalculatetheabsoluteprice
elasticityofdemandtobe
A) 2.6. B) 0.75. C) 1.4. D) 2.4.
Answer: C
Diff:1
24) Whenpriceis$5perunit,quantitydemandedis12units.Whenpriceis$6perunit,quantity
demandedis8units.Thevalueoftheabsolutepriceelasticityofdemandisapproximately
A) 2.20. B) 4.00. C) 1.82. D) 0.36.
Answer: A
Diff:1
Price QuantityDemanded
PerUnit PerWeek
$5.5 20
$6.0 18
$6.5 16
$7.0 14
$7.5 12
$8.0 10
25) Accordingtotheabovetable,whatistheabsolutepriceelasticityofdemandifpricefallsfrom
$8.00to$7.50?
A) 4.00 B) 2.82 C) 1.80 D) 1.21
Answer: B
Diff:2
26) Accordingtotheabovetable,whatistheabsolutepriceelasticityofdemandwhenpricerises
from$5.50to$6?
A) 4.00 B) 2.23 C) 1.21 D) 0.50
Answer: C
Diff:2
A) theresponsivenessofquantitydemandedtoachangeinprice.
B) theresponsivenessofpricetoachangeincompetition.
C) thechangeinquantitydemandedduetoachangeinpriceofasubstitutegood.
D) thechangeinpriceduetoachangeindemand.
Answer: A
Diff:1
28) Theresponsivenessofquantitydemandedofagoodtochangesinitspriceisthe
A) crosselasticityofdemand. B) priceelasticityofsupply.
C) incomeelasticity. D) priceelasticityofdemand.
Answer: D
Diff:1
29) Thewordbestassociatedwithpriceelasticityofdemandis
A) relative. B) total. C) absolute. D) cumulative.
Answer: A
Diff:1
30) Thepriceelasticityofdemandismeasuredbythe
A) percentagechangeinquantitydemandeddividedbythepercentagechangeinprice.
B) percentagechangeinpricedividedbythepercentagechangeinquantitydemanded.
C) changeinquantitydemandeddividedbythechangeinprice.
D) changeinpricedividedbythechangeinquantitydemanded.
Answer: A
Diff:1
31) Theactualvalueofthepriceelasticityofdemandisalways
A) positivebecauseofthelawofdemand.
B) negativebecauseofthelawofdemand.
C) positivebecauseofdiminishingmarginalutility.
D) negativebecausepercentagescanonlybenegative.
Answer: B
Diff:1
32) A10percentincreaseinthepriceofsmartphonesleadstoa10percentdecreaseinthequantity
demandedofsmartphones.Theabsolutepriceelasticityofdemandis
A) 3. B) 0.3. C) 1.0. D) 0.01.
Answer: C
Diff:2
33) A10percentincreaseinthepriceofnecktiesleadstoa5percentdecreaseinthequantity
demandedofneckties.Theabsolutepriceelasticityofdemandis
A) 3. B) 0.33. C) 0.5. D) 2.
Answer: C
Diff:2
34) A3percentincreaseinthepriceofcottonleadstoa6percentdecreaseinthequantity
demandedofcotton.Theabsolutepriceelasticityofdemandis
A) 3. B) 2. C) 0.5. D) 0.33.
Answer: B
Diff:2
35) A2percentincreaseinthepriceofnecktiesleadstoa5percentdecreaseinthequantity
demandedofneckties.Theabsolutepriceelasticityofdemandis
A) 2.5. B) 1. C) 0.4. D) 0.2.
Answer: A
Diff:2
36) Avalueoftheabsolutepriceelasticityofdemandequalto0.6indicatesthat
A) a6percentincreaseinpriceleadstoa10percentdecreaseinquantitydemanded.
B) a10percentincreaseinpriceleadstoa6percentdecreaseinquantitydemanded.
C) a0.6percentincreaseinpriceleadstoa1percentdecreaseinquantitydemanded.
D) a1percentincreaseinpriceleadstoa6percentdecreaseinquantitydemanded.
Answer: B
Diff:2
A) a5%decreaseinpriceleadstoa2%increaseinquantitydemanded.
B) a2%decreaseinpriceleadstoa25%increaseinquantitydemanded.
C) a1%decreaseinpriceleadstoa2.5%increaseinquantitydemanded.
D) a0.25%decreaseinpriceleadstoa1%increaseinquantity.
Answer: C
Diff:2
A) a0.5%decreaseinpriceleadstoa1%increaseinquantitydemanded.
B) a2%decreaseinpriceleadstoa25%increaseinquantitydemanded.
C) a1%increaseinpriceleadstoa5%decreaseinquantitydemanded.
D) a1%increaseinpriceleadstoa0.5%decreaseinquantitydemanded.
Answer: D
Diff:2
39) Absolutepriceelasticitiesarecalculatedforfourcommodities,andthevaluesare:0.009;1.0;3.3;
and4.1.Whichindicatesthemostprice-responsivesituation?
A) 0.009 B) 1.0 C) 3.3 D) 4.1
Answer: D
Diff:1
40) ThevalueoftheabsolutepriceelasticityofdemandforgoodXis4.Theabsolutepriceelasticity
forgoodYis1.Whichgoodsquantitydemandedismoreresponsivetoachangeinprice?
A) GoodX. B) GoodY.
C) Theyareequallyresponsive. D) Notenoughinformationisgiven.
Answer: A
Diff:2
41) ThevalueoftheabsolutepriceelasticityofdemandforgoodXis3.Theabsolutepriceelasticity
forgoodYis2.Whichgoodsquantitydemandedislessresponsivetoachangeinprice?
A) GoodX. B) GoodY.
C) Theyareequallyresponsive. D) Notenoughinformationisgiven.
Answer: B
Diff:2
42) Thelesssensitivequantitydemandedistoachangeinprice,the
A) smallerachangeinpricemustbetoinduceacertainchangeinquantitydemanded.
B) greatertheabsolutepriceelasticityofdemand.
C) smallertheabsolutepriceelasticityofdemand.
D) closertheabsolutepriceelasticityofdemandistoone.
Answer: C
Diff:2
43) Wheatissoldinworldmarkets,usuallypricedintermsofbushels.Inthemarketforwheat,the
priceelasticityofdemandforwheatwouldbeexpressedas
A) thenumberofbushelsofwheatsold.
B) thenumberofwhatevercurrencyisusedinpurchasingthewheat.
C) thenumberofdollarsspentonwheat.
D) aunitlessnumber.
Answer: D
Diff:2
44) Relativepercentagechangesareusedinmeasuringpriceelasticityofdemand,sothat
A) itdoesnotmatterwhetherpriceincreasesordecreaseswhencalculatingtheelasticity.
B) itdoesnotmatterwhatunitsareusedtomeasurepricesorquantities.
C) wealwaysobtainapositivenumber.
D) largernumbersindicategreaterresponsiveness.
Answer: B
Diff:2
45) Theactualvalueofpriceelasticityofdemand
A) measurestherelativechangeinquantitydemandedwhenthereisachangeinprice.
B) willchangewhentheunitsgoodismeasuredinchanges.
C) varieswithchangesinsupply.
D) isalwaysnegative.
Answer: D
Diff:1
46) TheabsolutepriceelasticityofdemandforgoodXis1.2whenpriceismeasuredindollars.If
priceweremeasuredincents,thepriceelasticityelasticityofdemandwouldequal
A) 1200 B) 12 C) 1.2 D) 0.012
Answer: C
Diff:1
47) Thepriceelasticityofdemandcanbecomputedas
A) changeintotalutility/changeinquantity.
B) changeinprice/changeinquantitydemanded.
C) percentagechangeinquantitydemanded/percentagechangeinprice.
D) changeinquantitydemanded/changeinprice.
Answer: C
Diff:1
PerUnit PerWeek
$10.00 25
9.50 30
9.00 35
8.50 40
8.00 45
7.50 50
7.00 55
6.50 60
6.00 65
5.50 70
5.00 75
48) Refertotheabovetable.Whatistheabsolutepriceelasticityofdemandifapricefallsfrom$7to
$6.50?
A) 0.85 B) 1.08 C) 1.17 D) 0.92
Answer: C
Diff:2
49) Refertotheabovetable.Whatistheabsolutepriceelasticityofdemandifapricefallsfrom$7.50
to$7?
A) 10 B) 1.38 C) 0.724 D) 0.1
Answer: B
Diff:2
50) Refertotheabovetable.Whatistheabsolutepriceelasticityofdemandwhenapricerisesfrom
$9to$9.50?
A) 0.35 B) 0.55 C) 2.57 D) 2.85
Answer: D
Diff:2
51) Refertotheabovetable.Whatistheabsolutepriceelasticityofdemandwhenapricerisesfrom
$8to$8.50?
A) 5.15 B) 1.94 C) 0.515 D) 0.194
Answer: B
Diff:2
52) Refertotheabovetable.Whatistheabsolutepriceelasticityofdemandwhenpricechanges
from$5.50to$5.00?
A) 0.72 B) 0.79 C) 1.38 D) 5.0
Answer: A
Diff:2
53) Refertotheabovetable.Demandisleastpriceelasticatapriceof
A) $10.00. B) $7.50. C) $7.00. D) $5.00.
Answer: D
Diff:2
54) Refertotheabovetable.Demandisunitelasticbetweenthepricesof
A) $5.00&$10.00. B) $6.00&$7.00. C) $6.00&$6.50. D) $7.00&$7.50
Answer: C
Diff:2
55) Refertotheabovetable.Whatistheabsolutepriceelasticityofdemandwhenpricechanges
from$6.00to$6.50?
A) 1.60 B) 1.00 C) 0.65 D) 0.60
Answer: A
Diff:3
56) Priceelasticityofdemandistheresponsivenessof
A) thequantitydemandedtoachangeinprice.
B) demandtoachangeinsupply.
C) demandtoachangeinincome.
D) demandforagoodtoachangeinthedemandforanothergood.
Answer: A
Diff:1
57) Thepriceelasticityofdemandisthe
A) percentagechangeinquantitydemandeddividedbythepercentagechangeinprice.
B) changeinquantitydemandeddividedbythechangeinprice.
C) percentagechangeinpricedividedbythepercentagechangeinquantitydemanded.
D) changeinpricedividedbythechangeinquantitydemanded.
Answer: A
Diff:1
58) Theresultofthecalculationofthepriceelasticityofdemandis
A) alwayspositive.
B) alwaysnegative.
C) sometimespositive,sometimesnegative.
D) alwaysgreaterthanone.
Answer: B
Diff:1
59) Priceelasticityofdemandbasicallymeasures
A) thereliabilityofaproduct.
B) theresponsivenessofconsumerstopricechanges.
C) thevariabilityofpricechanges.
D) thepercentagechangeinmarketpriceasaresultofachangeindemand.
Answer: B
Diff:1
60) Ifthepriceofgasolineincreasedby5%andconsumersrespondedbypurchasing1%less
gasoline,theabsolutevalueofpriceelasticityofdemandforgasolinewouldequal
A) 0.1. B) 0.5. C) 1.5. D) 0.2.
Answer: D
Diff:1
61) Ifthepriceofacolaincreasedby12%andconsumersrespondedbypurchasing20%lesscola,
theabsolutevalueofpriceelasticityofdemandforcolawouldbe
A) 0.20. B) 0.80. C) 1.67. D) 1.80.
Answer: C
Diff:1
62) Whendiscussingthepriceelasticityofdemandwegenerallyrefertotheabsolutepriceelasticity
ofdemandbyconsumers.Thismeansthatwewill
A) disregardthelawofdemand.
B) ignoreitsrelationshiptodemand.
C) disregardtheminussign.
D) considerabsoluteratherthanrelativechanges.
Answer: C
Diff:2
A) changesindemand.
B) howresponsiveproducersaretoachangeindemand.
C) howresponsiveconsumersaretoachangeinprice.
D) howresponsiveconsumersaretoachangeinincome.
Answer: C
Diff:1
64) Iftheabsolutepriceelasticityofdemandis2,a10percentincreaseinthepricewillcause
A) thequantitydemandedtodecreaseby2percent.
B) thequantitydemandedtodecreaseby20percent.
C) thequantitydemandedtodecreaseby5percent.
D) thequantitydemandedtodecreaseby0.2percent.
Answer: B
Diff:2
65) Iftheabsolutepriceelasticityofdemandis0.2,a10percentincreaseinthepricewillcause
A) thequantitydemandedtodecreaseby2percent.
B) thequantitydemandedtodecreaseby20percent.
C) thequantitydemandedtodecreaseby5percent.
D) thequantitydemandedtodecreaseby0.2percent.
Answer: A
Diff:2
66) Considerthefollowingdata:
PriceofA QuantityDemandedofA
$5 6
$4 10
TheabsolutevalueofthepriceelasticityofdemandforproductAis
A) 0.44. B) 1.80. C) 0.56. D) 2.25.
Answer: D
Diff:2
67) Ifthepriceofoilgoesupby50%andthequantitydemandedgoesdownby25%,theabsolute
valueofthepriceelasticityofdemandis
A) 0.25. B) 0.50. C) 0.75. D) 1.00.
Answer: B
Diff:2
68) Thepriceelasticityofdemandis
A) alwaysnegative. B) sometimespositive.
C) alwayspositive. D) constantalongthedemandcurve.
Answer: A
Diff:1
69) Ownersofacoffeeshopfindsthattheycansell150donutsadaywhenthepriceofadonutis
$1.20.Whentheypricedonutsat$1,theysell170donuts.Theabsolutevalueoftheprice
elasticityofdemandfordonutsis
A) 0.69. B) 1.45. C) 1.00. D) infinity.
Answer: A
Diff:2
70) Iftheabsolutepriceelasticityofdemandforaproductisgreaterthan1,then
A) consumersarerelativelyinsensitivetopricechanges.
B) consumersarerelativelysensitivetopricechanges.
C) thereisapositiverelationshipbetweenpricechangesandtotalrevenue.
D) producersarerelativelyinsensitivetopricechanges.
Answer: B
Diff:2
71) Iftheabsolutepriceelasticityofdemandforaproductislessthan1,then
A) consumersarerelativelyinsensitivetopricechanges.
B) consumersarerelativelysensitivetopricechanges.
C) thereisapositiverelationshipbetweenpricechangesandtotalrevenue.
D) producersarerelativelyinsensitivetopricechanges.
Answer: A
Diff:2
72) Ifthepriceofgasolineincreasesfrom$2.50pergallonto$3.00pergallonandthequantity
demandedgoesdownfrom120milliongallonsperweekto115milliongallonsperweek,the
absolutevalueofpriceelasticityofdemandinthatpricerangeisapproximately
A) 0.23. B) 4.35. C) 0.93. D) 2.34.
Answer: A
Diff:3
73) Ifthepriceofcornchipsincreasesfrom$2.00perbagto$3.00perbagandthequantity
demandedgoesdownfrom100millionbagsperweekto50millionbagsperweek,theabsolute
valueofpriceelasticityofdemandinthatpricerangeis
A) 0.50. B) 1.67. C) 0.93. D) 2.33.
Answer: B
Diff:3
74) Atapriceof$10,quantitydemandedis30units.Whenthepricerisesto$11,quantity
demandedis24units.Whatistheabsolutepriceelasticityofdemand?
A) 0.5 B) 0.43 C) 2.33 D) 6.0
Answer: C
Diff:2
75) Iftheabsolutevalueofthepriceelasticityofdemandforaproductis1.5,andthepriceofa
productincreased30percent,thenthequantitydemandedwilldeclineby
Answer: A
Diff:2
76) Whatisthepriceelasticityofdemand?Howisthepriceelasticityofdemandcalculated?
Answer: Thepriceelasticityofdemandistheresponsivenessofthequantitydemandedofagood
tochangesinthepriceofthegood.Priceelasticityofdemandiscalculatedasthe
percentagechangeinquantitydemandeddividedbythepercentagechangeinprice.That
is:
Ep=[(changeinQ)/(Q1 +Q 2 )/2]/[(changeinP)/(P1 +P2 )/2].
Diff:2
77) Priceelasticityofdemandismeasuredusingpercentagechanges.Why?
Answer: Byusingpercentagechanges,wearefocusingonrelativechangesandnotabsolute
changes.Thismeanswedonthavetoworryabouttheunitsweusetomeasureeither
quantityorprice.Ifsomeonebuys12eggsaweekat$1adozenand8eggsat75centsa
dozen,wewillgetthesamevalueforelasticitywhetherweuseeggs,dozensofeggs,
dollar,orcentsasthemeasures.Percentagechangeisindependentoftheunitschosen.
Diff:2
78) Theslopeofthedemandcurvegivestheelasticityofdemand.Doyouagreeordisagree?
Why?
Answer: Disagree.Theslopegivesabsolutechangeinpricedividedbytheabsolutechangein
quantitydemanded.Priceelasticityofdemandismeasuredusingrelativechanges.
Diff:1
79) Priceelasticitymeasureshowmanymoreunitsofagoodthatconsumerswillbuygivena
decreaseinprice.Doyouagreeordisagree?Explain.
Answer: Disagree.Priceelasticitymeasuresthepercentagechangeinquantitydemandedin
responsetoapercentagechangeinprice.Assuch,thestatementisnotvalidasthe
elasticitymeasureisunitfree.
Diff:2
19.2PriceElasticityRanges
1) Thegreateristheabsolutepriceelasticityofdemand,the
A) largeristheresponsivenessofquantitydemandedtothepricechange.
B) smalleristheresponsivenesstoapricechange.
C) largeristheincomeofthebuyer.
D) higheristhechangeindemandtoanincomechange.
Answer: A
Diff:2
Topic: 19.2PriceElasticityRanges
2) Supposethattheabsolutepriceelasticityforcookiesequals0.9.Wecouldthensaythatthe
demandforcookiesis
A) elastic. B) inelastic.
C) unit-elastic. D) perfectlyelastic.
Answer: B
Diff:2
3) Whendemandisperfectlyinelastic,thedemandcurveis
Answer: B
Diff:2
4) Iftheabsolutevalueofthepriceelasticityofdemandforaproductisgreaterthan1,then
A) quantitydemandedisnotverysensitivetopricechanges.
B) demandiselastic.
C) demandisunit-elastic.
D) demandisinelastic.
Answer: B
Diff:1
5) Iftheabsolutepriceelasticityofdemandforautomobilesisequalto0.75,wesay
A) thatdemandisinelastic.
B) thatdemandiselastic.
C) thatthereisastrongresponsivenessofquantitydemandedtoautomobilespricecuts.
Answer: A
Diff:2
6) Inelasticdemandimplies
A) thataonepercentincreaseinpriceresultsinasmallerthanonepercentdecreasein
quantitydemanded.
B) thataonepercentincreaseinpriceresultsinalargerthanonepercentdecreaseinquantity
demanded.
C) thataonepercentcutinpriceresultsinalargerthanonepercentincreaseinquantity
demanded.
D) thataonepercentdecreaseorincreaseinpriceinducesnochangeintotalrevenue.
Answer: A
Diff:1
7) Elasticdemandimplies
A) thataonepercentincreaseinpriceresultsinasmallerthanonepercentdecreasein
quantitydemanded.
B) thataonepercentincreaseinpriceresultsinalargerthanonepercentdecreaseinquantity
demanded.
C) thataonepercentcutinpriceresultsinalargerthanonepercentincreaseinquantity
demanded.
D) thataonepercentdecreaseorincreaseinpriceinducesnochangeintotalrevenue.
Answer: B
Diff:1
8) Ifthecalculatedpriceelasticityofdemandbetweentwopointsis-4,demandis
A) inelastic. B) elastic.
C) unresponsivetoprice. D) unit-elastic.
Answer: B
Diff:1
9) Whenthecalculatedpriceelasticityofdemandis-0.45,demandis
A) perfectlyinelastic. B) elastic.
C) unit-elastic. D) inelastic.
Answer: D
Diff:1
10) Whentheabsolutepercentagechangeinquantitydemandedisjustequaltothepercentage
changeinprice,demandis
A) elastic. B) perfectlyinelastic.
C) unit-elastic. D) relativelyinelastic.
Answer: C
Diff:1
11) Priceelasticitiesarecalculatedforfourgoods,andthevaluesare:4.1;3.7;1.0;0.002.Whichprice
elasticityismostelastic?
A) 4.1 B) 3.7 C) 1.0 D) 0.002
Answer: A
Diff:1
12) Themoresensitivepeoplearetoachangeinprice,the
A) greaterachangeinpricemustbetoinduceacertainchangeinquantitydemanded.
B) greateristhepriceelasticityofdemand.
C) smallerthepriceelasticityofdemand.
D) closerthepriceelasticityofdemandistoone.
Answer: B
Diff:2
13) Aninelasticdemandindicatesthat
A) quantitydemandeddoesnotvarywithchangesintheprice.
B) relativelysmallchangesinpriceleadtorelativelylargechangesinquantitydemanded.
C) relativelylargechangesinpricearerequiredtoobtainarelativelysmallchangeinquantity
demanded.
D) relativelylargechangesinquantitydemandedleadtorelativelylargechangesinprice.
Answer: C
Diff:2
14) Ifaonepercentincreaseinthepriceofbananasleadstoaonepercentdecreaseinthequantity
ofbananasdemanded,thenthedemandforbananasis
C) unit-elastic. D) perfectlyinelastic.
Answer: C
Diff:2
15) Aperfectlyhorizontaldemandcurvehas
A) zeroelasticity. B) somepositivefiniteelasticity.
C) negativeelasticity. D) perfectelasticity.
Answer: D
Diff:1
16) Ifthedemandcurveforaproductishorizontal,then
A) thedemandfortheproductisperfectlyinelastic.
B) thedemandfortheproductisperfectlyelastic.
C) onlyacertainamountoftheproductwillbeconsumedregardlessofprice.
D) thepriceelasticityoftheproductapproacheszero.
Answer: B
Diff:1
17) Averticaldemandcurvehas
A) infiniteelasticity. B) positiveelasticity.
C) zeroelasticity. D) negativeelasticity.
Answer: C
Diff:1
18) Ifthedemandcurveforaproductisvertical,then
A) thedemandforthegoodisperfectlyelastic.
B) consumersarehighlyresponsivetopricechanges.
C) itspriceelasticityofdemandisequaltozero.
D) consumersmaypurchasealltheywanttoattheestablishedmarketprice.
Answer: C
Diff:1
19) Ifthequantitydemandedofaproductisthesameforeachpossibleprice,demandis
A) unit-elastic. B) elastic.
C) perfectlyelastic. D) perfectlyinelastic.
Answer: D
Diff:1
20) Ifthereisnoresponseinquantitydemandedtoachangeinprice,demandis
A) perfectlyinelastic. B) perfectlyelastic.
C) elastic. D) unit-elastic.
Answer: A
Diff:1
21) Aperfectlyelasticdemandcurve
A) showsthataslightchangeinincomewillleadtoalargereductioninprice.
B) isahorizontallinedrawnacrossfromthequantityaxis.
C) showsthataslightincreaseinpricewillreducequantitydemandedtozero.
D) hasaslopeof-1.
Answer: C
Diff:1
22) Ademandrelationshipthatisaverticallineupfromthequantityaxisis
A) perfectlyelastic. B) unit-elastic.
C) perfectlyinelastic. D) somewhatelastic.
Answer: C
Diff:1
23) Thepriceelasticityofdemandalongaverticaldemandcurveis
A) elasticathighpricesandinelasticatlowprices.
B) infinite.
C) one.
D) zero.
Answer: D
Diff:1
24) Aperfectlyelasticdemandcurveis
A) vertical. B) horizontal.
C) arectangularhyperbola. D) adownwardslopingstraightline.
Answer: B
Diff:1
25) Aconsumeriswillingandabletobuy1,000unitsofagoodat$10,buttheconsumersquantity
demandedfallstozeroifthepricerisesevenafractionofacent.Theconsumersdemandcurve
is
A) horizontalandisperfectlyinelastic.
B) horizontalandisperfectlyelastic.
C) verticalandisperfectlyelastic.
D) downwardslopingfromhigherpricesdownto$10andthenhorizontal.
Answer: B
Diff:2
PerUnit PerWeek
$10.00 25
9.50 30
9.00 35
8.50 40
8.00 45
7.50 50
7.00 55
6.50 60
6.00 65
5.50 70
5.00 75
26) Refertotheabovetable.Forwhichpricesisdemandelastic?
A) Inarangeofpricesbelow$6.50 B) Inarangeofpricesabove$6.50
C) Inarangeofpricesbetween$5and$10 D) Inarangeofpricesabove$9.00
Answer: B
Diff:2
27) Refertotheabovetable.Forwhichpricesisdemandinelastic?
A) Inarangeofpricesbelow$6.00 B) Inarangeofpricesabove$6.00
C) Inarangeofpricesbetween$5and$1 D) Inarangeofpricesabove$9.00
Answer: A
Diff:2
28) Refertotheabovetable.Forwhichpricesisdemandunit -elastic?

A) Inarangeofpricesbelow$6.50
B) Inarangeofpricesabove$6.50
C) Inarangeofpricesbetween$5and$10
D) Inarangeofpricesbetween$6and$6.50
Answer: D
Diff:2
29) Refertotheabovetable.Atapricebelow$5,theabsolutepriceelasticityofdemandis
A) 1.0. B) below1.
C) between0.8and1.0. D) greaterthan1.
Answer: B
Diff:3
30) Tosaythatdemandisinelasticmeansthat
A) peopledonotlikethegoodverymuch.
B) quantitydemandednotveryresponsivetopricechanges.
C) relativelysmallchangesinpriceleadtorelativelylargechangesinquantitydemanded.
D) relativelysmallchangesinquantitydemandedleadtorelativelysmallchangesinprice.
Answer: B
Diff:1
31) Ademandrelationshipinwhichagivenpercentagechangeinpricewillresultinalarger
percentagechangeinquantitydemandedis
A) elastic. B) unit-elastic.
C) inelastic. D) consistentwithzeroelasticity.
Answer: A
Diff:1
32) Ademandrelationshipinwhichthequantitydemandedchangesexactlyinproportiontothe
changeinpriceis
Answer: B
Diff:1
33) Ademandrelationshipinwhichagivenpercentagechangeinpricewillresultinalessthan
proportionatepercentagechangeinquantitydemandedis
Answer: C
Diff:1
34) Whendemandiselastic,
A) aproportionatelysmallchangeinpriceleadstoaproportionatelylargechangeinquantity
supplied.
B) aproportionatelysmallchangeinpriceleadstoaproportionatelysmallchangeinquantity
supplied.
C) aproportionatelysmallchangeinpriceleadstoaproportionatelylargechangeinquantity
demanded.
D) aproportionatelysmallchangeinpriceleadstoaproportionatelysmallchangeinquantity
demanded.
Answer: C
Diff:1
A) quantitydemandedisveryresponsivetoachangeinprice.
B) quantitydemandedisnotveryresponsivetoachangeinprice.
C) theproportionalchangeinquantitydemandedisequaltotheproportionalchangein
price.
D) producersreactquicklytopricechanges.
Answer: A
Diff:1
36) Whendemandisinelastic,
A) quantitydemandedisveryresponsivetoachangeinprice.
B) quantitydemandedisnotveryresponsivetoachangeinprice.
C) theproportionalchangeinquantitydemandedisequaltotheproportionalchangein
price.
D) producersreactquicklytopricechanges.
Answer: B
Diff:1
37) Ifdemandisunitelastic,then
A) atenpercentincreaseinpriceleadstoaonepercentdecreaseinquantitydemanded.
B) thepercentagechangeinquantitydemandedequalsthepercentagechangeinprice.
C) atwopercentincreaseinpriceleadstoatwopercentdecreaseinquantitydemanded.
D) anincreaseinpriceofanyamountleadstoquantitydemandedfallingtozero.
Answer: C
Diff:2
38) Theabsolutepriceelasticityofdemandforaverticaldemandcurve
A) isinfinite.
B) is1.0.
C) is0.
D) dependsonwhereoneisonthedemandcurve.
Answer: C
Diff:2
39) Refertotheabovefigure.Demandis
A) perfectlyelastic.
B) unitaryelastic.
C) perfectlyinelastic.
D) undeterminedwithoutmoreinformation.
Answer: A
Diff:1
40) Refertotheabovefigure.Demandis
B) unitaryelastic.
Answer: C
Diff:1
41) Whentheabsolutepriceelasticityofdemandequals1,demandis
A) elastic.
B) unit-elastic.
C) inelastic.
Answer: B
Diff:1
42) Whentheabsolutepriceelasticityofdemandisgreaterthan1,demandis
A) elastic.
B) unit-elastic.
C) inelastic.
Answer: A
Diff:1
43) Whentheabsolutepriceelasticityofdemandislessthan1,demandis
A) elastic.
B) unit-elastic.
C) inelastic.
Answer: C
Diff:1
44) Whentheabsolutepriceelasticityofdemandequals2.5,demandis
A) elastic.
B) unit-elastic.
C) inelastic.
Answer: A
Diff:1
45) Whentheabsolutepriceelasticityofdemandequals0.67,demandis
A) elastic.
B) unit-elastic.
C) inelastic.
Answer: C
Diff:1
46) Movingdownastraight-linedemandcurve,theabsolutepriceelasticityofdemand
A) increases. B) isconstant.
C) decreases. D) variesinuncertainways.
Answer: C
Diff:2
47) Iftheabsolutepriceelasticityofdemandforaproductislessthan1,then
A) theabsolutepriceelasticityofdemandisinelasticandconsumersarerelativelyinsensitive
topricechanges.
B) theabsolutepriceelasticityofdemandisinelasticandconsumersarerelativelysensitiveto
pricechanges.
C) theabsolutepriceelasticityofdemandiselasticandconsumersarerelativelyinsensitiveto
pricechanges.
D) theabsolutepriceelasticityofdemandiselasticandconsumersarerelativelysensitiveto
pricechanges.
Answer: A
Diff:2
48) Iftheabsolutepriceelasticityofdemandforaproductisgreaterthan1,then
A) theabsolutepriceelasticityofdemandisinelasticandconsumersarerelativelyinsensitive
topricechanges.
B) theabsolutepriceelasticityofdemandisinelasticandconsumersarerelativelysensitiveto
pricechanges.
C) theabsolutepriceelasticityofdemandiselasticandconsumersarerelativelyinsensitiveto
pricechanges.
D) theabsolutepriceelasticityofdemandiselasticandconsumersarerelativelysensitiveto
pricechanges.
Answer: D
Diff:2
49) Inanextremehypotheticalinstanceinwhichthepricechangeofagoodelicitednochangein
quantitydemanded,wewouldsaythattheitemis
A) perfectlyelastic. B) perfectlyinelastic.
C) infinitelyelastic. D) unitaryelastic.
Answer: B
Diff:2
50) Ifdemandiselasticandthepriceofaproductdecreasesby10percent,then
A) thechangeinquantitydemandedislessthan10percent.
B) thechangeinquantitydemandedisequalto10percent.
C) thechangeinquantitydemandedisgreaterthan10percent.
D) thedecreaseinquantitydemandedisgreaterthan0percent.
Answer: C
Diff:2
51) Ifdemandisinelasticandthepriceofaproductdecreasesby10percent,then
A) thechangeinquantitydemandedislessthan10percent.
B) thechangeinquantitydemandedisequalto10percent.
C) thechangeinquantitydemandedisgreaterthan10percent.
D) thedecreaseinquantitydemandedisgreaterthan0percent.
Answer: A
Diff:2
52) Whenevertheabsolutevalueofthepriceelasticityofdemandisgreaterthan1,butlessthan
infinite,
A) demandisinelastic. B) demandisunitelastic.
C) demandiselastic. D) demandisperfectlyelastic.
Answer: C
Diff:1
53) Aperfectlyinelasticdemandcurveis
A) ahorizontalstraightline.
B) averticalstraightline.
C) adownwardslopingstraightlinethatintersectsthehorizontalaxisattheorigin.
D) anupwardslopingstraightlinethatcrossestheverticalaxis.
Answer: B
Diff:2
54) Ifa5percentchangeinthepriceofagoodeliciteda5percentchangeinthequantitydemanded
ofthegood,wewouldsaythatoverthisrangeofpricesthegoodhasa(n)
A) elasticdemand. B) inelasticdemand.
C) perfectlyelasticdemand. D) unitelasticityofdemand.
Answer: D
Diff:2
55) Whendemandisunitelastic,a10percentchangeinthepriceofthegood
A) willcauseachangeinquantitydemandedoflessthan10percent.
B) willcauseachangeinquantitydemandedequalto10percent.
C) willcauseachangeinquantitydemandedgreaterthan10percent.
D) willnotcauseanychangeinquantitydemanded.
Answer: B
Diff:2
56) Wesaythatagoodhaselasticdemandwhenevertheabsolutevalueofthepriceelasticityof
demandisgreaterthan1.A1percentchangeinpricethereforecauses
A) exactlya1percentchangeinthequantitydemanded.
B) achangeoflessthan1percentinthequantitydemanded.
C) agreaterthan1percentchangeinquantitydemanded.
D) achangethatcannotbedeterminedbasedon1percent.
Answer: C
Diff:1
57) Demandissaidtobeinelasticwhen
A) agivenpercentagechangeinpricewillresultinalessthanproportionatepercentage
changeinthequantitydemanded.
B) demandexhibitszeroresponsivenesstopricechanges.
C) smallpriceincreaseswillleadtozeroquantitydemanded.
D) agivenpercentagechangeinpricewillresultinagreaterthanproportionatepercentage
changeinthequantitydemanded.
Answer: A
Diff:1
58) Aperfectlyelasticdemandwouldimplywhatkindofdemandcurve?
A) horizontal B) vertical
C) upwardsloping D) downwardsloping
Answer: A
Diff:2
59) Ifanitemhasanabsolutepriceelasticityofdemandthatisgreaterthan1,wesaythedemand
fortheitemis
C) perfectlyinelastic. D) unitelastic.
Answer: A
Diff:1
60) Theslopeoftheperfectlyinelasticdemandcurveis________,theslopeoftheperfectlyelastic
demandcurveis________.
A) undefined,zero B) one,one
C) zero,undefined D) one,zero
Answer: A
Diff:3
61) Ifagoodhasanabsolutepriceelasticityof2,thedemandforthegoodis
A) unitelastic. B) inelastic.
C) perfectlyelastic. D) elastic.
Answer: D
Diff:1
C) perfectlyelastic. D) elastic.
Answer: A
Diff:2
C) perfectlyinelastic. D) elastic.
Answer: C
Diff:1
64) Aperfectlyinelasticdemandcurveexhibits
A) zeroresponsivenesstochangesinprice.
B) zeroquantitydemandedwhenthereisaslightchangeinprice.
C) achangeinquantitydemandedthatisproportionaltothechangeinprice.
D) achangeinquantitydemandedthatisalwaystwentypercentofthechangeinprice.
Answer: A
Diff:2
65) Aperfectlyelasticdemandcurveexhibits
A) zeroresponsivenesstochangesinprice.
B) thatquantitydemandedwilldecreasetozerowhenthereisaslightincreaseintheprice
level.
C) achangeinquantitydemandedthatisproportionaltothechangeinprice.
D) achangeinquantitydemandedthatisalwaystwentypercentofthechangeinprice.
Answer: B
Diff:2
66) Whenthepriceofatextbookis$100,60copiesaredemanded;andwhenthepriceofthat
textbookgoesupto$120,30copiesaredemanded.Inthepricerangebetween$100and$120,
thedemandforthetextbookis
C) unitelastic. D) perfectlyelastic.
Answer: A
Diff:2
67) Explainthethreepossiblerangesforpriceelasticityofdemand.
Answer: Ifthepercentagechangeinquantitydemandedisgreaterthanthepercentagechangein
price,thenquantitydemandedisveryresponsivetochangesinprice,anddemandis
elastic(Ep>1).Ifthepercentagechangeinquantitydemandedislessthanthepercentage
changeinprice,thenquantitydemandedisnotveryresponsivetoapricechangeand
demandisinelastic(E p<1).Demandisunitelastic(E p=1)ifthepercentagechangein
quantitydemandedequalsthepercentagechangeinprice.
Diff:1
68) Whatdoesaperfectlyelasticdemandcurvelooklike?Aperfectlyinelasticdemandcurve?
Explain.
Answer: Aperfectlyelasticdemandcurveishorizontalandaperfectlyinelasticdemandcurveis
vertical.Ifthedemandcurveisvertical,thenquantitydemandeddoesnotchangewhen
pricechanges,ortheelasticityequals0.Quantitydemandediscompletelyunresponsive
tochangesinprice.Ifthedemandcurveishorizontal,atinyincreaseinpricecauses
quantitydemandedtogotozero.Asthepercentagechangeinpriceapproacheszero,
elasticityofdemandapproachesinfinity.Quantitydemandedisextremelyresponsiveto
evenverysmallchangesinprice.
Diff:2
69) Unitelasticityofdemandcanbefoundeverywherealongastraight -linedemandcurvewitha

slopeof-1.Doyouagreeordisagree?Explain.
Answer: Disagree.Averticaldemandcurveimpliesperfectlyinelasticdemandandahorizontal
demandcurveimpliesperfectlyelasticdemand.However,unitelasticityofdemandcan
onlybecanfoundinthemid-rangeofastraight-linedemandcurvewithaslopeof-1,
butnotanywhereelsealongit.
Diff:2
19.3ElasticityandTotalRevenues
1) Whentotalrevenueandpriceareinverselyrelated,demandis
A) unit-elastic. B) inelastic. C) elastic. D) notrelated.
Answer: C
Diff:1
Topic: 19.3ElasticityandTotalRevenues
2) Whentotalrevenueandpricearedirectlyrelated,demandis
Answer: B
Diff:1
3) Whentotalrevenueremainunchangedwhenthereisachangeinprice,demandis
Answer: A
Diff:1
4) Nomatterwhatthepriceofcoffeeisinthecafeteria,Jackspends$20aweekoncoffee.Wecan
concludethattheabsolutevalueofthepriceelasticityofdemandforcoffeeforJackis
A) greaterthan1. B) equalto1. C) lessthan1. D) equalto0.
Answer: B
Diff:3
5) Afirmcouldlowerpricesandstillincreaserevenueif
A) demandiselastic. B) elasticityofdemandisequaltounity.
C) demandisinelastic. D) elasticityofdemandisequaltozero.
Answer: A
Diff:1
6) Supposethatthedemandforpizzaisinelastic.Ifapizzeriadecidedtolowerthepriceofpizza,
totalrevenuewould
A) increase. B) decrease. C) staythesame. D) bemaximized.
Answer: B
Diff:1
7) Ifthepriceelasticityofdemandforapplesisgreaterthan1,anincreaseinapplepriceswill
A) raisetotalrevenue.
B) lowertotalrevenue.
C) notaffecttotalrevenue.
D) eitherraiseorlowertotalrevenue,butitisimpossibletodeterminewhich.
Answer: B
Diff:1
8) Ifasellerlowersthepriceofaproductwhendemandispriceinelastic,thesellercanexpect
revenuesto
A) rise.
B) fall.
C) staythesame.
D) eitherriseorfall,butitisimpossibletodeterminewhich.
Answer: B
Diff:1
9) WhichofthefollowingisNOTcharacteristicofagoodwithelasticdemand?
A) Theabsolutepriceelasticityofdemandislessthan1.
B) Totalrevenuedecreasesifpriceisincreased.
C) Buyersarerelativelysensitivetopricechanges.
D) Thepercentagechangeinquantitydemandedisgreaterthanthepercentagechangein
price.
Answer: A
Diff:1
10) Ifdemandforagoodisperfectlyinelastic,then
A) apriceincreasewouldcauseafallinquantitydemanded.
B) apriceincreasewouldcausenochangeinquantitydemanded.
C) apriceincreasewouldcauseanincreaseinquantitydemanded.
D) apriceincreasewouldcauseafallintotalrevenue.
Answer: B
Diff:2
11) Ifthemarketpriceofaproductfallsandasaresulttotalrevenueoffirmsfalls,wecanconclude
that
A) demandiselasticinthispricerange.
B) theproductspriceisabovethemidpointofitsdemandcurve.
C) demandisinelasticinthispricerange.
D) thedemandcurveishorizontal.
Answer: C
Diff:1
12) Iftheabsolutepriceelasticityofdemandforconcertticketsis0.75,anincreaseinticketprices
will
A) increasetotalrevenue. B) decreasetotalrevenue.
C) notchangetheelasticityofdemand. D) notchangetotalrevenue.
Answer: A
Diff:1
13) Supposetheabsolutepriceelasticityofdemandfornewslettersubscriptionsis1.3.Inorderto
increasethetotalrevenuesfromsubscriptions,thepublishersshould
A) increasethepriceofthenewsletters.
B) reducethepriceofthenewsletters.
C) sellthenewslettersontheinelasticportionofitsdemandcurve.
D) keepthepricethesame.
Answer: B
Diff:1
14) Anincreaseintotalrevenuewillresultif
A) demandisinelasticandpriceincreases.
B) demandiselasticandpriceincreases.
C) demandisinelasticandpricedecreases.
D) demandisunitaryelasticandpricedecreases.
Answer: A
Diff:1
15) Anincreaseintotalrevenuewillresultif
A) demandisinelasticandpricedecreases.
B) demandiselasticandpricedecreases.
C) demandiselasticandpriceincreases.
D) demandisunitaryelasticandpriceincreases.
Answer: B
Diff:1
16) Adecreaseintotalrevenuewillresultif
A) demandisinelasticandpriceincreases.
B) demandiselasticandpricedecreases.
C) demandisinelasticandpricedecreases.
Answer: C
Diff:1
17) Adecreaseintotalrevenuewillresultif
A) demandisinelasticandpricedecreases.
B) demandiselasticandpriceincreases.
C) demandiselasticandpricedecreases.
Answer: B
Diff:1
18) Whendemandisperfectlyinelastic,anincreaseinpricewill
A) leavetotalrevenueunchanged.
B) increasetotalrevenue.
C) decreasetotalrevenue.
D) eitherincreasetotalrevenueordecreasetotalrevenue,butitisimpossibletotellwhich.
Answer: B
Diff:1
19) Whendemandiselastic,adecreaseinpricewill
A) decreasetotalrevenue. B) notchangetotalrevenue.
C) increasetotalrevenue. D) reducequantitydemanded.
Answer: C
Diff:1
20) Givenapriceelasticityofdemandof-0.33,adecreaseinpricewill
A) reducetotalrevenue. B) increasetotalrevenue.
C) leavetotalrevenueunchanged. D) decreasequantity.
Answer: A
Diff:1
21) Iftheabsolutepriceelasticityofdemandofagoodis1.46,thenthetotalrevenueswillincreaseif
itsmarketprice
A) increases.
B) decreases.
C) staysthesame.
D) changes,butwecanttellwithoutmoreinformationifthepriceincreasesordecreases.
Answer: B
Diff:2
22) Ifapricedecreaseofaproductsignificantlyraisesitsrevenues,thentheabsolutepriceelasticity
ofdemandforthatproductmustbe
A) lessthanone. B) equaltoone.
C) greaterthanone. D) anexampleofunitelasticity.
Answer: C
Diff:2
23) Therangetotheleftofthemidpointonalineardemandcurveis
A) elastic. B) infinite. C) one. D) inelastic.
Answer: A
Diff:2
24) Therangetotherightofthemidpointonalineardemandcurveis
A) elastic. B) infinite. C) one. D) inelastic.
Answer: D
Diff:2
25) Thepriceelasticityofdemandalongalineardemandcurveis
A) moreelasticathigherpricesthanatlowprices.
B) infinite.
C) one.
D) constant.
Answer: A
Diff:1
26) Intheabovefigure,overthepricerangeP 1 P2 ,demandis

A) unitelastic. B) elastic.
C) inelastic. D) perfectlyelastic.
Answer: B
Diff:1
27) Intheabovefigure,overthepricerangeP 5 P6 ,demandis

A) unitelastic. B) elastic.
C) perfectlyinelastic. D) inelastic.
Answer: D
Diff:1
28) Intheabovefigure,throughwhichrangewouldthedemandforthisgoodbemostinelastic?
A) A-B B) B-E C) E-F D) G-H
Answer: D
Diff:1
29) Intheabovefigure,alongthesectionofthedemandcurvebetweenpointaandpointb,demand
is
A) elastic. B) inelastic. C) unitelastic. D) unitinelastic.
Answer: A
Diff:1
30) Intheabovefigure,therangeofunitelasticityoccurs
A) ontheverticalaxis. B) onthehorizontalaxis.
C) betweenpointcandpointd. D) belowpointe.
Answer: C
Diff:1
31) Intheabovefigure,alongwhichrangewouldthedemandforthisgoodbemostelastic?
A) Betweenpointaandpointb B) Betweenpointcandpointd
C) Betweenpointdandpointe D) Atpointe
Answer: A
Diff:1
32) Intheabovefigure,alongwhichrangewouldtotalrevenuerisebyloweringprices?
C) Betweenpointdandpointe D) Belowpointe
Answer: A
Diff:2
33) Intheabovefigure,alongwhichrangewouldtotalrevenuerisebyraisingprices?
C) Betweenpointdandpointe D) Abovepointa
Answer: C
Diff:2
34) Intheabovefigure,alongwhichrangewouldtotalrevenueremainunchangedbyraising
prices?
C) Betweenpointdandpointe D) Belowpointeandabovepointa.
Answer: A
Diff:1
35) Overtheinelasticrangeofademandcurve,thereis
A) apositiverelationshipbetweenagivenpercentagechangeinpriceandachangeintotal
revenues.
B) anegativerelationshipbetweenagivenpercentagechangeinpriceandachangeintotal
revenues.
C) anincreaseintotalrevenuesregardlessofanincreaseordecreaseinprice.
D) norelationshipbetweenchangesinpriceandchangesintotalrevenues.
Answer: A
Diff:2
36) Iftotalrevenuesdeclinewhenthemarketclearingpriceincreases,thenweknowthat
A) demandisinelastic. B) demandiselastic.
C) demandisunit-elastic. D) demandhaszeroelasticity.
Answer: B
Diff:2
37) Iftotalrevenuesrisewhenthemarketpriceincreases,thenweknowthat
A) demandisinelastic. B) demandiselastic.
C) demandisunit-elastic. D) itsdemandhaszeroelasticity.
Answer: A
Diff:2
38) Ifthebusfareofacityincreasesfrom$1.00to$1.25perrideandasaresulttotalrevenue
increases,thenweknowthat
A) percentagechangeinfareislessthanpercentagechangeinnumberofrides.
B) percentagechangeinfareisgreaterthanpercentagechangeinnumberofrides.
C) percentagechangeinfareisequaltothepercentagechangeinnumberofrides.
D) itisimpossibletotell.
Answer: B
Diff:2
39) Totalrevenuesreachamaximumwhen
A) demandiselastic. B) demandisinelastic.
C) demandisunit-elastic. D) priceelasticityisataminimum.
Answer: C
Diff:2
40) Ifdemandisunit-elasticthroughoutthedemandcurve,thentotalrevenuesare
A) greaterthehighertheprice.
B) lowerthehighertheprice.
C) maximizedatthemidpointofthedemandcurve.
D) thesameforanypricethefirmcharges.
Answer: D
Diff:3
41) Withintherangeofpricesaroundthemidpointonastraight-linedemandcurve,demandis
A) elastic. B) inelastic. C) unit-elastic. D) zero.
Answer: C
Diff:1
42) Iftheslopeofademandcurveisconstant,thenweknowthat
A) elasticityofdemandisalsoelasticeverywhere.
B) elasticityofdemandisconstantandelastic.
C) elasticityofdemandisinelasticeverywhere.
D) elasticityofdemandvariesalongthedemandcurve.
Answer: D
Diff:3
43) Ifdemandisperfectlyelasticeverywherealongthedemandcurve,then
A) peoplemustbeirrational.
B) thedemandcurveisvertical.
C) thedemandcurveisarectangularhyperbola.
D) thedemandcurveishorizontal.
Answer: D
Diff:2
44) Suppose1000unitsofagoodaresoldat$10aunit.Ifpriceincreasesto$15andtotalrevenue
increasesto$15,000andincreasesby$1000foreverydollarincreaseinpriceafterthat,weknow
that
A) demandisperfectlyelastic.
B) thedemandcurveisvertical.
C) thedemandcurveisdownwardslopingandthefirmisontheinelasticportionofthe
demandcurve.
D) thedemandcurveisarectangularhyperbola.
Answer: B
Diff:3
45) Alocaltransitauthoritycharges$1forabusride.Aneconomicsstudysuggeststhatintheprice
rangefrom$0.50to$1.50,theelasticityofdemandforbustripsis1.1.Toincreaseitsrevenue,
thetransitauthorityshould
A) leavethefareasitis. B) raisethefare.
C) lowerthefare. D) charge$1.10.
Answer: C
Diff:2
46) Movingupwardalongadownwardslopingstraight -linedemandcurve,asthepriceofthe

productgoesup,
A) thepriceelasticityofdemanddoesnotchange.
B) thepriceelasticityofdemandgoesfrombeinginelastictobeingelastic.
C) thepriceelasticityofdemandgoesfrombeingelastictobeinginelastic.
D) thepriceelasticityofdemandgoesfromnegativetopositive.
Answer: B
Diff:2
47) Movingdownwardonadownwardslopinglineardemandcurve,theabsolutevalueofthe
priceelasticityofdemand
A) isconstant. B) increasescontinuously.
C) decreasescontinuously. D) mayeitherincreaseordecrease.
Answer: C
Diff:1
48) Considertheabovefigure.Whichofthefollowingstatementsiscorrect?
A) Inanyrangeofpricesencompassingthecrossingpointofthetwodemandcurves,the
priceelasticityofdemandassociatedwithdemandcurveD 1 isequaltothepriceelasticity
ofdemandassociatedwithdemandcurveD 2 .
B) Inanyrangeofpricesencompassingthecrossingpointofthetwodemandcurves,the
priceelasticityofdemandassociatedwithdemandcurveD 1 islessthanthepriceelasticity
ofdemandassociatedwithdemandcurveD 2 .
C) Inanyrangeofpricesencompassingthecrossingpointofthetwodemandcurves,the
priceelasticityofdemandassociatedwithdemandcurveD 1 isgreaterthantheprice
elasticityofdemandassociatedwithdemandcurveD 2 .
D) Inanyrangeofpricesencompassingthecrossingpointofthetwodemandcurves,the
priceelasticityofdemandisinfinite.
Answer: C
Diff:3
49) Supposethatthedemandformenstiesispriceinelasticfortherangeofpricesbetween$10and
$12.IfJoeraisesthepriceofthetiesinhisshopfrom$10to$12,whatwillhappentoJoestotal
revenues?
A) Totalrevenueswilldecrease.
B) Totalrevenueswillincrease.
C) Totalrevenueswillnotchange.
D) Totalrevenueswillhavenorelationshiptothequantityoftiesdemanded.
Answer: B
Diff:1
50) Auniversityraisesannualtuitionby10percent.Noothereventshaveoccurred,andthe
universitysrevenueshaveincreased.Itmustbetruethat
A) theassociatedchangeinquantitydemandedwassmallerthan10percent.
B) theassociatedchangeinquantitydemandedwasequalto10percent.
C) theassociatedchangeinquantitydemandedwasgreaterthan10percent.
D) therewasnoassociatedchangeinquantitydemanded.
Answer: A
Diff:2
51) Ifthepriceofagoodincreasesandthetotalrevenuealsoincreases,thegoodhasa(n)
C) unitelasticdemand. D) perfectlyelasticdemand.
Answer: B
Diff:2
52) Amovietheatreraisesticketpricesfrom$8to$10inordertoraiserevenues.Thetheatres
managementisassumingtheabsolutevalueofthepriceelasticityofdemandforticketsis
A) lessthan1. B) greaterthan1. C) equalto1. D) infinity.
Answer: A
Diff:2
53) WhichofthefollowingisFALSEregardinginelasticdemand?
A) Priceelasticityofdemandislessthan1(Ep < 1).
B) Ifafirmraisesprice,totalrevenueswillgoup.
C) Priceelasticityofdemandisgreaterthan1(Ep > 1).
D) Ifafirmlowersprice,totalrevenueswillfall.
Answer: C
Diff:2
54) Ifthegovernmentplacesa$0.50taxonanitemforwhichdemandisperfectlyelastic
A) theentiretaxwillbepaidbytheconsumer.
B) thetaxwillbesplitequallybetweentheconsumerandproducer,witheachpayingexactly
$0.25.
C) mostofthetaxwillbepaidbytheconsumer.
D) theentiretaxwillbepaidbytheproducer.
Answer: D
Diff:3
A) changesinpriceandchangesintotalrevenuemoveinthesamedirection.
B) thereisnorelationshipbetweenchangesinpriceandchangesintotalrevenue.
C) changesinpriceandchangesintotalrevenuemoveinoppositedirections.
D) foranychangeinprice,totalrevenuewillnotchange.
Answer: C
Diff:2
56) Totalrevenueis
A) pricequantity. B) changeinprice changeinquantity.
C) changeinpricequantity. D) price changeinquantity.
Answer: A
Diff:1
57) Allofthefollowingaretrueregardingtherelationshipbetweenpriceelasticityofdemandand
totalrevenuesEXCEPT
A) whenmarketdemandiselastic,ifthemarketpricedeclines,thentotalrevenueswillrise.
B) whenmarketdemandisunitelastic,ifthemarketpricerises,thentotalrevenueswillnot
change.
C) whenmarketdemandisinelastic,ifthemarketpricefalls,thentotalrevenueswill
decrease.
D) whenmarketdemandisinelastic,ifthemarketpricerises,thentotalrevenueswill
decrease.
Answer: D
Diff:2
58) Whendemandisunitelastic,achangeinpricewillcause
A) achangeintotalrevenueinthesamedirection.
B) achangeintotalrevenueintheoppositedirection.
C) nochangeintotalrevenue.
D) achangeintotalrevenueineitherdirectiondependingonwhetherthepriceisincreasing
ordecreasing.
Answer: C
Diff:2
59) Ifthepriceofagoodincreasesandthetotalrevenueremainsthesame,thedemandforthegood
is
Answer: C
Diff:2
60) Whenthepriceofgasolineis$2.20pergallon,11milliongallonsaredemanded,andwhenthe
priceofgasolinegoesupto$2.60pergallon,10milliongallonsaredemanded.Thegasolinein
thisrangehasa(n)
C) unitelasticdemand. D) perfectlyelasticdemand.
Answer: B
Diff:3
61) Usetheabovefigure.Whenthepriceincreasesfrom$2to$10,totalrevenue
A) increasesfromareasA+BtoareasB+ Canddemandisinelastic.
B) increasesfromareasB+CtoareasA+ Banddemandisinelastic.
C) increasesfromareasB+CtoareasA+ Danddemandiselastic.
D) increasesfromareasC+DtoareasB+ Aanddemandiselastic.
Answer: B
Diff:3
62) Usetheabovefigure.Whenthepriceincreasesfrom$2to$10,theabsolutepriceelasticityof
demandis
A) 0.67. B) 1.50. C) 0.25. D) 1.00.
Answer: C
Diff:3
63) Whenthepriceofapoundofapplesis$1.00,7500poundsofapplesaredemanded.Whenthe
priceofapoundofapplesdecreasesto$0.80,10,000poundsofapplesaredemanded.Inthis
pricerangethedemandforapplesis
Answer: A
Diff:2
64) Refertotheabovefigure.Demandwillbeelasticwhenquantityisbetween
A) 0andA. B) 0andB. C) AandB. D) BandC.
Answer: A
Diff:3
65) Refertotheabovefigure.Demandwillbeunit-elasticwhenquantityisbetween
Answer: C
Diff:3
66) Refertotheabovefigure.Demandwillbeinelasticwhenquantityisbetween
Answer: D
Diff:3
67) Foralineardemandcurve,whereistheamountoftotalexpendituresonagoodmaximized?
Answer: Foralineardemandcurve,totalexpendituresaremaximizedatthemidpointofthe
demandcurve.Atthispoint,priceelasticityofdemandequalsone.Abovethispoint,
demandiselastic,whichmeanstotalexpendituresincreasewhenpricefalls.Belowthis
points,demandisinelasticandtotalexpendituresincreasewhenpriceincreases.Hence,
expendituresaremaximizedwhenelasticityisone.
Diff:2
68) Higherpricesalwaysyieldhigherrevenues.Doyouagreeordisagree?Why?
Answer: Disagree.Higherpricesgeneratehigherrevenuesifdemandisinelasticbutgenerate
lowerrevenuesifdemandiselastic.Theeffectofapricechangeonrevenuesdependson
whetherdemandiselasticorinelastic.
Diff:2
69) Explainwhyanincreaseinpricecanraisetotalrevenuesifthepriceelasticityofdemandis
inelastic.
Answer: Totalrevenuesequalpricetimesquantitydemanded,sothatthechangeintotalrevenues
equalsthechangeinpriceplusthechangeinquantitydemanded.Ifthepriceelasticityof
demandisinelastic,thentheeffectofanincreaseinpriceontotalrevenuesisgreaterthan
theeffectofthecorrespondingdecreaseinquantitydemandedontotalrevenues.Asa
result,totalrevenuesincreaseaspriceincreases.
Diff:2
19.4DeterminantsofthePriceElasticityofDemand
1) Anelasticresponseinthequantityofagooddemandedwouldbecausedby
A) theavailabilityofmanysubstitutes.
B) alackofsubstitutes.
C) alackofsensitivitytothegoodsprice.
D) thegoodrepresentingasmallportionofapersonsbudget.
Answer: A
Diff:2
Topic: 19.4DeterminantsofthePriceElasticityofDemand
2) Whichofthefollowingisadeterminantofthepriceelasticityofdemandforanitem?
A) Theavailabilityofaclosesubstitutefortheitem
B) Thepercentageofaconsumersbudgetallocatedtoexpendituresontheitem
C) Theamountoftimeavailabletoadjusttoachangeinthepriceoftheitem
D) Alloftheabovearecorrect
Answer: D
Diff:2
3) Whichofthefollowingisadeterminantofthepriceelasticityofdemandforaproduct?
I. Theexistenceofsubstitutegoods
II. Thepercentageofaconsumerstotalbudgetdevotedtopurchasesofthatcommodity
Answer: C
Diff:1
4) Oneofthemostimportantdeterminantsofagoodspriceelasticityofdemandis
A) theprofitsofsuppliers.
B) thenumbersofbuyersinthemarket.
C) theeasewithwhichconsumerscansubstituteothergoodsforthatproduct.
D) thecostofproducingthegood.
Answer: C
Diff:1
5) WhichofthefollowingwouldNOTaffectagoodspriceelasticityofdemand?
A) Theeaseofsubstitutionbetweengoods
B) Thecostofproducingthegood
C) Thenumberofsubstitutegoodsavailable
D) Theproportionofonesbudgetspentonanitem
Answer: B
Diff:1
6) Thepriceelasticityofdemandwouldmostlikelybethelowestfor
A) aMcDonaldshamburger. B) salt.
C) aToyotasportutilityvehicle. D) Shellgasoline.
Answer: B
Diff:2
7) Whichofthefollowinggoodsismostlikelytohavethelowestpriceelasticity?
A) Movietickets B) DVDrentals C) Gasoline D) Pasta
Answer: C
Diff:1
8) Thedemandfordietsoftdrinks(asagroup)isrelativelyinelasticbecause
A) therearemanyofthemonthemarket.
B) therearefewsubstitutes.
C) thepurchaseofasoftdrinkrepresentsalargeportionofapersonsbudget.
D) noneoftheabove.
Answer: B
Diff:2
9) Whichofthefollowingwouldmostlikelyexhibitthehighestpriceelasticityofdemand?
A) Gasoline B) Oneparticularbrandoftoothpaste
C) Motoroil D) Salt
Answer: B
Diff:1
10) Otherthingsbeingequal,demandislesselastic
A) themoreexpensivethegoodis.
B) thesmallerthepercentageofatotalbudgetthatafamilyspendsonagood.
C) thelongeristhetimeperiodforadjustment.
D) themoresubstitutesagoodhas.
Answer: B
Diff:1
11) Thedemandcurveforpetroleumshouldbe
A) moreelasticinthelongrunthanintheshortrun.
B) lesselasticinthelongrunthanintheshortrun.
C) aselasticinthelongrunasitisintheshortrun.
D) moreorlesselasticinthelongrunversustheshortrundependinguponsupply
conditions.
Answer: A
Diff:1
12) Thelongerthetimeframeinvolved,themorelikelyitisthatthedemandwillberelatively
A) elastic. B) inelastic. C) steep. D) flat.
Answer: A
Diff:1
13) Comparedtotheshort-runpriceelasticityofdemand,thelong-runpriceelasticityofdemand
is
A) smaller.
B) thesame.
C) greater.
D) eithergreaterthanorless,dependingonthenumberofsubstitutesthegoodhas.
Answer: C
Diff:2
14) Ifthepriceelasticityofdemand(Ep)equalsoneintheshortrun,then,otherthingsbeingequal,
inthelongrunEpwillbe
A) one.
B) lessthanone.
C) greaterthanone.
D) indeterminatewithoutmoreinformation.
Answer: C
Diff:3
15) Thelongeranypricechangepersists,the
A) moredifficultitistoalterquantitydemanded.
B) greateristhepriceelasticityofdemand.
C) loweristhepriceelasticityofdemand.
D) morelikelypricewillreturntoitsoriginallevel.
Answer: B
Diff:2
16) Thegovernmentraisesgasolinetaxesaspartofthepriceofgasolineandreceivesmoretax
revenues.However,afterfiveyears,thegovernmentdiscoversthatrevenuesfromthegasoline
taxhavedeclined.Thissituationwouldbemostlikelytooccurif
A) thelong-runelasticityofsupplywasmuchgreaterthanthelong-runelasticityofdemand.
B) thedemandforgasolinewasinelasticintheshortrun,butelasticinthelongrun.
C) thelong-runelasticityofdemandwasgreaterthanthelong-runelasticityofsupply.
D) thedemandforgasolinewasperfectlyinelasticinboththeshortrunandthelongrun.
Answer: B
Diff:2
17) WhichofthefollowingisNOTadeterminantofthepriceelasticityofdemand?
A) Existenceofsubstitutes
B) Expendituresonthegoodasashareofaconsumersbudget
C) Theamountoftimeallowedforadjustmenttochangesinthepriceofthecommodity
D) Thepricelevelinacountry
Answer: D
Diff:1
18) Whenmanysubstitutesexistforagood,demandwillbe
C) inelastic. D) perfectlyunit-elastic.
Answer: A
Diff:1
19) Whenveryfewsubstitutesforagoodexist,demandwillbe
C) inelastic. D) perfectlyelastic.
Answer: C
Diff:1
20) Supposetwogoodsareperfectsubstitutes.Thepriceelasticityofdemandofoneofthegoodsis
A) 0. B) 1. C) 1000. D) infinity.
Answer: D
Diff:1
21) WhichofthefollowingisNOTafactorthatdeterminesthepriceelasticityofdemand?
A) Theamountthatsuppliershavemadeavailable
B) Thepercentageofaconsumerstotalbudgetspentonthegood
C) Theexistenceofsubstitutes
D) Thelengthoftimeallowedforadjustmentstochangeinthepriceofthecommodities
Answer: A
Diff:1
22) Whennumerousbutimperfectsubstitutesexistforagood,thedemandforthegoodwilltendto
be
C) unitary. D) perfectlyelastic.
Answer: B
Diff:1
23) Whenthereareveryfewsubstitutesforagood,thedemandforthegoodwilltendtobe
C) unitary. D) perfectlyelastic.
Answer: A
Diff:1
24) Forwhichofthefollowingwouldtheabsolutepriceelasticityofdemandbegreatest?
A) Salt B) TicketstotheSuperBowl
C) PepsiCola D) Gasoline
Answer: C
Diff:2
25) Forwhichofthefollowingpurchaseswouldtheabsolutepriceelasticityofdemandbegreatest?
A) Asportscar B) Utilities C) Chewinggum D) Acellphone
Answer: A
Diff:2
26) Forwhichofthefollowingpurchaseswouldtheabsolutepriceelasticityofdemandbesmallest?
A) Asportscar B) Utilities C) Chewinggum D) Acellphone
Answer: C
Diff:2
27) Otherthingsbeingequal,demandismoreelasticthe
A) lessexpensivethegood.
B) shorterthetimeperiodforadjustment.
C) largerthepercentageofatotalbudgetthatafamilyspendsonthegood.
D) moreuniquethegoodis.
Answer: C
Diff:1
28) Whentheconsumerspendsalargeportionofherincomeonagood,demandwillbe
A) elastic.
B) unit-elastic.
C) inelastic.
D) elastic,unit-elasticorinelasticdependinguponsupply.
Answer: A
Diff:1
29) Whentheconsumerspendsover50%ofherincomeonagood,demandwillbe
A) elastic.
B) unit-elastic.
C) inelastic.
Answer: A
Diff:1
30) Whentheconsumerspendsasmallportionofhisincomeonagood,demandwillbe
A) elastic.
B) unit-elastic.
C) inelastic.
Answer: C
Diff:1
31) Whentheconsumerspendslessthan3%ofhisincomeonagood,demandwillbe
A) elastic.
B) unit-elastic.
C) inelastic.
Answer: C
Diff:1
32) Theabsolutepriceelasticityofdemandwouldbethelowestfor
A) automobiles. B) PizzaHutpizza.
C) salt. D) movietickets.
Answer: C
Diff:2
33) Supposethatthevalueoftheshort-runabsoluteelasticityofdemandforagoodis0.38.Then,
weknowthelong-runabsolutepriceelasticityofdemandwillbe
A) 0. B) greaterthan0.38.
C) elastic. D) lessthan0.38.
Answer: B
Diff:2
34) Supposethatthevalueofthelong-runabsoluteelasticityofdemandforagoodis1.21.Then,
weknowtheshort-runabsolutepriceelasticityofdemandwillbe
A) inelastic. B) greaterthan1.21.
C) elastic. D) lessthan1.21.
Answer: D
Diff:2
35) Comparedtothelong-runabsoluteelasticityofdemand,theshort-runabsoluteelasticityof
demandis
A) smaller.
B) thesame.
C) larger.
D) eithersmallerorlarger,dependingonotherfactors.
Answer: A
Diff:2
36) Supposethattheabsolutepriceelasticityofdemandforhamburgeris1.15andthattheabsolute
priceelasticityofdemandforsteakis2.4.Thentheabsolutepriceelasticityofdemandforbeef
willbe
A) lessthan1.15. B) morethan2.4.
C) between1.15and2.4. D) equalto1.15.
Answer: A
Diff:3
37) Thelongeranypricechangelastsovertime,the
A) moredifficultitistoalterquantitydemanded.
B) themorequicklyquantitydemandedwillreturntoitsoriginallevel.
C) thelongertheshort-runequilibriumwillcontinuetobetheshort-runequilibrium.
D) morequantitydemandedwillchange.
Answer: D
Diff:2
38) Foranaddictivedrugsuchasheroin,ifthepriceofheroinincreases,then
A) thequantitydemandedneverchanges.
B) thequantitydemandedwilldecreasebyarelativelylargeamount.
C) thequantitydemandedwillactuallyincrease.
D) thequantitydemandedwilldecreasebyarelativelysmallamount.
Answer: D
Diff:2
A) theavailabilityofpotentialsubstitutes
B) theshareofthebudgetspentontheitem
C) thetimetheconsumerhastoadjusttothepricechange
D) thecosttoproducetheproduct
Answer: D
Diff:1
A) thenumberofproducersofthegood
B) thenumberofsubstitutesavailabletobuyers
C) thetimeconsumershavetoadjusttoapricechange
D) expendituresontheitemasapercentageofaconsumerstotalbudget
Answer: A
Diff:2
41) Theabsolutepriceelasticityofdemandforaproductforwhichannualexpendituresmakeupa
verysmallshareofatypicalconsumersbudgetisprobably
A) lessthan1. B) equalto1. C) greaterthan1. D) infinity.
Answer: A
Diff:2
42) Theabsolutepriceelasticityofdemandforaproductthathasmanygoodsubstitutesisprobably
A) lessthan1. B) greaterthan1. C) equalto1. D) infinity.
Answer: B
Diff:1
43) Otherthingsbeingequal,thelongerapricechangepersists,
A) thelessistheelasticityofdemand.
B) thelesschanceaconsumerwillbeabletoadjust.
C) themoretheconsumerwillbewillingtopay.
D) thegreateristheelasticityofdemand.
Answer: D
Diff:2
44) Iftheabsolutepriceelasticityofdemandisequalto1intheshortrun,theninthelongrun,
otherthingsbeingequal,theabsolutepriceelasticityofdemandwillbe
A) lessthanone. B) lessthanzero.
C) greaterthanone. D) equaltozero.
Answer: C
Diff:2
45) Inwhichofthefollowingsituationsistheabsolutepriceelasticityofdemandforanitemmost
likelytoexceedavalueof1?
A) whenthereareveryfewclosesubstitutesfortheitem
B) whenthereareveryfewproducersoftheitem
C) whentheitemsshareofexpensesinconsumersbudgetsisverysmall
D) whenthereisconsiderabletimetoadjusttoachangeinthepriceoftheitem
Answer: D
Diff:2
46) Generally,expensesontoothpasteareasmallpartofaconsumersbudget,sothedemandfor
toothpasteismorelikelytobe
Answer: B
Diff:2
47) Whichofthefollowingismorelikelytohaveperfectlyelasticornearlyperfectlyelastic
demand?
A) atextbookrequiredforaneconomicscourse
B) theguitarproducedbyamastercraftsman
C) milkproducedbyaWisconsindairyfarmer
D) theservicesofferedbytheonlyallergistinthecommunity
Answer: C
Diff:1
48) Afterfulladjustmenttoapricechangehasoccurred,theabsolutepriceelasticityofdemandfor
anitemisequalto1.Intheshortrun,theabsolutepriceelasticityofdemandfortheitemwas
probably
A) lessthan0. B) greaterthan0. C) lessthan1. D) greaterthan1.
Answer: C
Diff:2
49) Generally,expensesonasportutilityvehiclearealargepartofaconsumersbudget,sothe
demandforsportutilityvehiclesismorelikelytobe
Answer: A
Diff:2
50) AproductthathasanelasticdemandcurvehasallofthefollowingcharacteristicsEXCEPT
A) ithasmanysubstitutes.
B) aconsumercanwaittobuytheproduct.
C) ithasfewornosubstitutes.
D) itisalargepartofaconsumersincome.
Answer: C
Diff:2
51) Whyiselasticityofdemandgreaterforgoodsthatarealargeshareofaconsumersbudget?
Answer: Thegreatertheshareofaconsumersbudgetaccountedforbyagood,thegreaterthe
elasticityofdemandbecausetherealincomeeffectisgreater.Anincreaseinthepriceofa
goodthataccountsforarelativelylargeshareofthebudgetmeansthattheconsumer
wouldhavetosignificantlyreducespendingonothergoods.Itisalsomorelikelythe
consumerwillalsocutbackonconsumptionofthegooditselftoo.
Diff:2
52) Whichhasamoreelasticdemand:hamburgerorbeef?
Answer: Hamburgerhasthemoreelasticdemandbecausetherearemoresubstitutesfor
hamburgerthanthereareforbeef.Anythingthatisasubstituteforhamburgerisalsoa
substituteforbeef.Plus,anyotherkindofbeefisasubstituteforhamburger.
Diff:2
53) Thepriceelasticityofdemandforaparticulargoodissmallerinthelongrunbecause
consumersadapttohigherpricesovertime.Doyouagreeordisagree?Explain.
Answer: Disagree.Priceelasticityofdemandisrelatedtoaparticulargoodratherthanallthe
goodsthatindividualsmayconsume.Inthelongrun,consumerscanfindmore
substitutes.Thus,thepriceelasticityofdemandofaparticulargoodisactuallygreaterin
thelongrunthanintheshortrun.
Diff:3
19.5CrossPriceElasticityofDemand
1) SupposethatthenumberofunitsofgoodXconsumedfalls12percentwhenthepriceofgoodY
falls8percent.ThecrosspriceelasticityofdemandbetweengoodsXandYis
A) 0.66. B) 1.75. C) 2.0. D) 1.5.
Answer: D
Diff:1
Topic: 19.5CrossPriceElasticityofDemand
2) SupposethatthecrosspriceelasticityofdemandbetweengoodsAandBequals1.5.Whichof
thefollowingisTRUE?
A) AandBarecomplementsbecausethecrosspriceelasticityisgreaterthanone.
B) AandBarecomplementsbecausethecrosspriceelasticityispositive.
C) AandBaresubstitutesbecausethecrosspriceelasticityisgreaterthanone.
D) AandBaresubstitutesbecausethecrosspriceelasticityispositive.
Answer: D
Diff:1
3) Supposethatwhenthepriceofrootbeerrises10%,thequantityofpizzademandedfalls20%.
Thiswouldmeanthatpizzaandrootbeerare
A) substitutes,withacrosspriceelasticityof0.5.
B) complements,withacrosspriceelasticityof-0.5.
C) substitutes,withacrosspriceelasticityof-2.0.
D) complements,withacrosspriceelasticityof-2.0.
Answer: D
Diff:1
4) Supposethattheamountofcomputerprintersdemandedincreasesby20percentwhenthe
priceofpersonalcomputersfallsby10percent.Thecrosspriceelasticityofdemandbetween
computerprintersandpersonalcomputersis
A) 0.5. B) -2.0. C) -0.5. D) 2.0.
Answer: B
Diff:1
5) IfgoodsXandYarecomplements,thenthecrosspriceelasticityofdemandwillbe
A) elastic. B) greaterthanzerobutlessthan1.
C) negative. D) positive.
Answer: C
Diff:1
6) Whentwogoodsaresubstitutesforeachother,thecrosspriceelasticityofdemand
A) willbenegative. B) willbezero.
C) maybeeitherpositiveornegative. D) willbepositive.
Answer: D
Diff:1
7) IfthecrosspriceelasticityofdemandbetweenLosAngelesLakersprofessionalbasketball
ticketsandLosAngelesDodgersprofessionalbaseballticketsispositive,thenthetwogoodsare
A) substitutes. B) unrelated. C) complements. D) notrelated.
Answer: A
Diff:1
8) SupposethatthecrosspriceelasticityofdemandbetweengoodXandgoodYis -1.55.This
indicatesthatthetwogoodsare
A) substitutes.
B) complements.
C) bothinferior.
D) completelyunrelatedinthemindsofconsumers.
Answer: B
Diff:1
9) SupposethatwhenthepriceofgoodXchanges,thequantityofgoodYdemandedremainsthe
same.Thecrosspriceelasticityofdemandis
A) zero. B) positive.
C) negative. D) eitherpositiveornegative.
Answer: A
Diff:1
10) Ifthecrosspriceelasticityofdemandbetweentwogoodsisnegative,thenthetwogoodsare
A) substitutes. B) complements. C) unrelated. D) independent.
Answer: B
Diff:1
11) Ifthecrosspriceelasticityofdemandbetweentwogoodsispositive,thenthetwogoodsare
A) substitutes. B) complements. C) independent. D) unrelated.
Answer: A
Diff:1
12) Apositivecrosspriceelasticityofdemandbetweentwogoodssuggeststhatthegoodsare
A) notrelated. B) complements.
C) substitutes. D) bothofunitaryelasticity.
Answer: C
Diff:1
13) Ifgoodsarecompletelyunrelated,theircrosspriceelasticitywill
A) begreaterthanone. B) belessthanone.
C) beequaltozero. D) benegative.
Answer: C
Diff:2
14) Ifthepricesofcomputertabletsrise,wewouldexpectthenumberoftabletcoverspurchasedto
C) beequaltoten. D) beequaltoone.
Answer: B
Diff:2
15) Whenthepriceofsausagesis$2.00perpound,consumersbuy50poundsofhamburger.When
thepriceofsausagesrisesto$3.00perpound,60poundsofhamburgerarepurchased.Thecross
priceelasticityofdemandbetweensausagesandhamburgerisapproximatelyequalto
A) +0.04. B) -0.45. C) +2.20. D) +0.45.
Answer: D
Diff:2
16) Thecrosspriceelasticityofdemandismeasuredbythe
A) percentagechangeinthequantitydemandedofonegooddividedbythepercentage
changeinquantitydemandedofanothergood.
B) percentagechangeinthepriceofonegooddividedbythepercentagechangeinpriceof
anothergood.
C) percentagechangeinthedemandforonegooddividedbythepercentagechangeinprice
ofanothergood.
D) percentagechangeinthepriceofonegooddividedbythepercentagechangeinthe
demandforanothergood.
Answer: C
Diff:1
Month PX QX PY QY PZ QZ
Jan $10 100 $20 50 $25 200
Feb 10 90 18 60 25 225
Mar 10 70 15 90 25 275
Apr 12 50 15 100 25 290
May 15 25 15 120 25 320
17) Intheabovetable,thecrosspriceelasticityofdemandforgoodXwithgoodYwhenP Y falls

from$20to$18is
A) -2. B) 0. C) +1. D) -1.
Answer: C
Diff:2
18) Intheabovetable,thecrosspriceelasticityofdemandforgoodYwithgoodXwhenP X rises

from$10to$12is
A) +0.29. B) +1.83. C) +0.58. D) -0.58.
Answer: C
Diff:2
19) Intheabovetable,thecrosspriceelasticityofdemandforgoodZwithgoodYwhenP Yrises

from$15to$18is
A) -2.20. B) +2.20. C) +1.10. D) -1.10.
Answer: D
Diff:2
20) Intheabovetable,thecrosspriceelasticityofdemand(usingaverages)forZwithgoodX,when
PXincreasesfrom$12to$15,isapproximatelyequalto
A) +1.03 B) +2.26. C) +0.44. D) -0.44.
Answer: C
Diff:2
21) Whenthepriceofavideorentalwas$2.00,ticketsalesatthelocalmovietheatreaveraged180
admissionspernight.Thenthevideostorereducedthepriceofavideorentalto$1,andthe
theatremanagerreportedthatticketsaleshadfallento126pernight.Whatistheapproximate
valueofthecrosspriceelasticityofdemandbetweenvideorentalsandtheatretickets?
A) -0.53 B) +0.30 C) +0.53 D) +1.67
Answer: C
Diff:2
22) Thecrosselasticityofdemandis
A) thepercentagechangeinthedemanddividedbythepercentagechangeinpriceofanother
good.
B) thechangeinthepriceofonegooddividedbythechangeofquantitydemandedof
anothergood.
C) thepercentagechangeinthequantitydemandedofonegooddividedbythepercentage
changeinthequantitydemandedofanothergood.
D) thepercentagechangeinthepriceofonegooddividedbythepercentagechangeinthe
priceofanothergood.
Answer: A
Diff:1
23) Thepercentagechangeinthedemandforonegooddividedbythepercentagechangeinthe
priceofarelatedgoodisthe
A) priceelasticityofdemand. B) priceelasticityofsupply.
C) crosspriceelasticityofdemand. D) incomeelasticity.
Answer: C
Diff:1
24) Whentwogoodsaresubstitutes,
A) thedemandsforbothgoodswillbeinelastic.
B) crosspriceelasticityofdemandwillbe0.
C) crosspriceelasticityofdemandwillbenegative.
D) crosspriceelasticityofdemandwillbepositive.
Answer: D
Diff:1
25) Whentwogoodsarecomplements,
A) thedemandsforbothgoodswillbeelastic.
Answer: C
Diff:1
26) Whentwogoodsareunrelated,
A) thedemandsforbothgoodswillbeinelastic.
Answer: B
Diff:1
27) Robertmustalwayshavecreaminhiscoffee.ForRobert,thecrosspriceelasticityofdemandfor
coffeeandcreamis
A) equalto0.
B) negative.
C) positive.
D) impossibletodeterminewithoutmoreinformation.
Answer: B
Diff:3
28) Juliealwayspurchasesthesodawiththelowestprice.ForJulie,thecrosspriceelasticityof
demandforbrandXandbrandYwillbe
A) equalto0.
B) negative.
C) positive.
D) impossibletodeterminewithoutmoreinformation.
Answer: C
Diff:1
Px Qx Py Qy Pz Qz
$10 100 $20 50 $25 200
10 90 18 60 25 225
10 70 15 90 25 275
12 50 15 100 25 290
15 25 15 120 25 320
29) Refertotheabovetable.Basedontheinformationinthetable,wecansaythat
A) allthreegoodsaresubstitutesforeachother.
B) allthreegoodsarecomplements.
C) XandYaresubstitutes,YandZarecomplements,andXandZaresubstitutes.
D) XandYarecomplements,YandZaresubstitutes,andXandZarecomplements.
Answer: C
Diff:2
30) Refertotheabovetable.SupposethepriceofYrisesfrom$18to$20.Whatisthecrossprice
elasticityofdemandbetweenXandY?
A) -2 B) -1 C) 0 D) +1
Answer: D
Diff:2
31) Refertotheabovetable.SupposethepriceofYrisesfrom$18to$20.Whatisthecrossprice
elasticityofdemandbetweenYandZ?
A) -1.7273 B) -1.1176 C) -0.8947 D) +1.7273
Answer: B
Diff:2
32) Refertotheabovetable.SupposethepriceofXincreasesfrom$10to$12.Whatisthecrossprice
elasticityofdemandbetweenXandZ?
A) +0.292 B) +7.06 C) -7.06 D) -0.292
Answer: A
Diff:2
33) Refertotheabovetable.SupposethepriceofXincreasesfrom$10to$12.Whatisthecrossprice
elasticityofdemandbetweenXandY?
A) -1.833 B) +0.545 C) +0.579 D) +1.833
Answer: C
Diff:2
34) Refertotheabovetable.ThepriceofYdecreasesfrom$18to$15.Whatisthecrossprice
elasticityofdemandbetweenYandX?
A) -0.73 B) -1.0 C) +1.38 D) +1.83
Answer: C
Diff:2
35) Ameasureoftheresponsivenessofthedemandforonegoodtothepercentagechangeinthe
priceofanothergoodis
A) priceelasticityofdemand. B) priceelasticityofsupply.
C) crosspriceelasticityofdemand. D) incomeelasticity.
Answer: C
Diff:1
36) SupposethepriceofXincreasesby20percentwhilethequantitydemandedofYdoesnot
change.Wewouldconcludethat
A) thetwogoodsaresubstitutes,butthecrosselasticityofdemandisnotlarge.
B) thetwogoodsarecomplements,butthecrosselasticityofdemandisnotlarge.
C) thetwogoodsareperfectsubstitutes.
D) thetwogoodsarenotrelated.
Answer: D
Diff:2
37) ThecrosspriceelasticitybetweenXandYis-1.8.Wecanconcludethat
A) goodsXandYaresubstitutes. B) goodsXandYarecomplements.
C) goodsXandYareunrelated. D) perfectsubstitutes
Answer: B
Diff:2
38) ThepriceofXfallsbytenpercent,andthequantitydemandedofXincreasesbytenpercent.
Meanwhile,thequantitydemandedofYincreasesbytenpercenttoo.Wewouldconcludethat
A) demandforXiselastic,andXandYaresubstitutes.
B) demandforXiselastic,andXandYarecomplements.
C) demandforXisunit-elastic,andXandYarecomplements.
D) demandforXisinelastic,andXandYareunrelated.
Answer: C
Diff:2
39) Thecrosspriceelasticityofdemandbetweentwogoodsis50.Wemayconcludethat
A) thetwogoodsareverycomplementaryandprobablyaresoldtogether.
B) thetwogoodsarepoorsubstitutesforeachother.
C) thedemandforoneofthegoodsislikelytobefairlyelasticandthedemandfortheother
goodislikelytobefairlyinelastic.
D) thedemandforeachofthegoodsislikelytobeveryelastic.
Answer: D
Diff:3
40) Thecross-priceelasticityofdemandofproductsMandNiszero.ThisimpliesthatMand
Nare
A) substituteproducts.
B) complementaryproducts.
C) independentproducts.
D) uniquegoods,asthepriceelasticityofdemandforoneofthemiszero.
Answer: C
Diff:2
41) Ifthepriceofonegoodincreases,andasaresultthedemandforanotherrelatedgoodfalls,the
goodsare
A) substitutes. B) normalgoods. C) complements. D) inferiorgoods.
Answer: C
Diff:1
42) Twoitemswhichhaveapositivecrosspriceelasticityofdemandarereferredtoas
A) luxurygoods. B) inferiorgoods. C) substitutes. D) complements.
Answer: C
Diff:1
43) Twoitemswhichhaveanegativecrosspriceelasticityofdemandarereferredtoas
A) luxurygoods. B) inferiorgoods. C) substitutes. D) complements.
Answer: D
Diff:1
44) Ifthevalueofthecrosselasticityofdemandisnegative,thetwogoodsare
A) complementarygoods. B) substitutegoods.
C) normalgoods. D) inferiorgoods.
Answer: A
Diff:1
45) Thecrosspriceelasticityofdemandisdefinedas
A) thepercentagechangeinthesupplyforonegood(ashiftinthesupplycurve)dividedby
thepercentagechangeinpriceofarelatedgood.
B) thepercentagechangeindemandfortwodifferentcommodities.
C) thepercentagechangeinthedemandforonegood(ashiftinthedemandcurve)divided
bythepercentagechangeinpriceofarelatedgood.
D) thepercentagechangeinpricefortwodifferentcommodities.
Answer: C
Diff:1
46) Ifthepriceofonegoodincreases,andasaresultthedemandforanothergoodincreases,the
goodsare
A) substitutes. B) normalgoods. C) complements. D) inferiorgoods.
Answer: A
Diff:1
47) Ifthecrosspriceelasticityofdemandbetweentwocommoditiesispositive,thenthese
commoditiesare
A) aresuperior. B) arecomplements.
C) aresubstitutes. D) areinferior.
Answer: C
Diff:1
48) Ifthepriceofappleswentupby25percent,whichofthefollowingvaluesofthecrossprice
elasticityfororangeswouldbemostreasonabletoanticipate?
A) 0.0 B) 1.2 C) -2.5 D) -1.0
Answer: B
Diff:3
49) Ifthepriceofappleswentupby25percent,whichofthefollowingvaluesofthecrossprice
elasticityforcarswouldbemostreasonabletoanticipate?
A) 0.0 B) 1.2 C) -2.5 D) -1.0
Answer: A
Diff:3
50) Usetheabovefigure.Whichgraphdepictscomplementarygoods?
A) A B) B C) C D) D
Answer: C
Diff:3
51) Usetheabovefigure.Whichgraphdepictssubstitutegoods?
A) A B) B C) C D) D
Answer: D
Diff:3
52) Ifthepriceofwirelessphoneservicedecreasesandthedemandforwiredphoneservices
decreases,thenwiredandwirelessphoneservicesare
A) substitutes. B) complements. C) inferiorgoods. D) elasticgoods.
Answer: A
Diff:1
53) WhatwouldyouexpectthecrosspriceelasticityofiPodsandonlinemusicdownloads?Explain
youranswer.
Answer: ThecrosspriceelasticityofiPodsandmusicdownloadsshouldbenegativebecausethey
arelikelytobecomplements.Thus,anincreaseinthepriceofiPodswilldecreasethe
demandformusicdownloads.
Diff:1
54) Howdoesthecrosselasticityofdemanddifferfromthepriceelasticityofdemand?Howare
theyrelated?
Answer: Thecrosselasticityofdemandistheresponsivenessofdemandforonegoodtoa
percentagechangeinthepriceofanothergood.Insteadoflookingattheeffectofthe
changeinthegooditself,welookattheeffectontheamountdemandedofanothergood.
Ifthegoodsaresubstitutes,thecrosselasticityofdemandispositive,butthecrossprice
elasticityofdemandisnegativewhentheyarecomplements.Ahighpositivecross
elasticityofdemandmeansthegoodsareclosesubstitutes,whichimpliestheprice
elasticityofdemandwillberelativelyelasticbecauseelasticityisafunctionofthe
closenessofsubstitutes.
Diff:3
55) Whycancrosspriceelasticityofdemandbepositiveornegative,unlikethepriceelasticityof
demandwithrespecttotheitemsownprice?
Answer: Crosspriceelasticityofdemandistheresponsivenessofthedemandforonegoodtoa
changeinthepriceofarelatedgood.Goodsarerelatedintwoways:complementsand
substitutes.Forcomplements,thedemandforonegoodincreasesinresponsetoa
decreaseinthepriceoranothergood,sothatthecrosspriceelasticityofdemandfor
complementarygoodsisnegative.Forsubstitutes,thedemandforonegooddecreasesin
responsetoadecreaseinthepriceofanothergood,sothatthecrosspriceelasticityof
demandforsubstitutablegoodsispositive.
Diff:2
19.6IncomeElasticityofDemand
1) Incomeelasticityrelatesto
A) amovementdownademandcurve.
B) amovementupademandcurve.
C) ahorizontalshiftinademandcurve.
D) thepercentagechangeinquantitydemandeddividedbythepercentagechangeinthe
price.
Answer: C
Diff:1
Topic: 19.6IncomeElasticityofDemand
2) Supposethattheincomeelasticityofdemandforpeanutbutteris0.75.Whichofthefollowing
istrue?
A) Peanutbutterisanormalgood,becauseincomeelasticityispositive.
B) Peanutbutterisaninferiorgood,becauseincomeelasticityispositive.
C) Peanutbutterisanormalgood,becauseincomeelasticityislessthan1.
D) Peanutbutterisaninferiorgood,becauseincomeelasticityislessthan1.
Answer: A
Diff:1
3) Incomeelasticityofdemandisdefinedas
A) thechangeinquantitydemandeddividedbythechangeinincome.
B) thechangeinquantitydemandeddividedbythechangeinmarketprice.
C) thepercentagechangeinincomedividedbythepercentagechangeinquantitydemanded.
D) thepercentagechangeindemanddividedbythepercentagechangeinincome.
Answer: D
Diff:1
4) Ifonesdemandforpeanutbutterdecreasesasincomerises,theincomeelasticityofdemandfor
theproductis
A) elastic. B) inelastic. C) unitelastic. D) negative.
Answer: D
Diff:1
5) Ifanindividualsincomerises40percentandhisclothingpurchasesincrease50percentin
response,theincomeelasticityforclothingbytheindividualis
A) -0.8. B) 0.8. C) 1.25. D) -1.25.
Answer: C
Diff:1
6) Whichofthefollowinggoodsislikelytohavethehighestincomeelasticity?
A) Adesignerblouse B) Tomatosoup
C) Hamburger D) Canoftuna
Answer: A
Diff:2
7) Incomeelasticityofdemandisdefinedas
A) thechangeinincomedividedbythechangeinquantity.
B) thechangeinpricedividedbythechangeinincome.
C) thepercentagechangeindemanddividedbythepercentagechangeinincome.
D) thechangeinincomemultipliedbythechangeinquantity.
Answer: C
Diff:1
8) IfdemandforRollsRoyceautomobilesrisesinanareawhereincomeshaveincreased,thistells
usthataRollsRoyceis
A) anormalgood. B) aninferiorgood.
C) acomplementarygood. D) asubstitutegood.
Answer: A
Diff:2
9) WhenFredsincomewas$100perweek,10unitsofgoodXweredemanded.Nowhisincomeis
$150perweekand12unitsofgoodXaredemanded.Usingthepercentagechangeformula,the
incomeelasticityofdemandforgoodXequals________.
A) 0.45 B) 0.40 C) 2.20 D) 2.50
Answer: A
Diff:1
10) Incomeelasticityofdemandreflects
A) thechangeintotalquantitydemandeddividedbythetotalchangeinincome.
B) theresponsivenessofthequantitydemandedtochangesinincome,adjustingitsrelative
pricesorealincomedoesnotchange.
C) theresponsivenessofincomeofproducerstoachangeinquantitysoldofthegood.
D) theresponsivenessofdemandtochangesinincome.
Answer: D
Diff:1
11) WhenMaryearned$3,200permonth,shebought2concertticketseachmonth.Nowher
monthlyincomeis$5,600,andthenumberofconcertticketsshepurchaseshasrisento3per
month.Marysincomeelasticityofdemandforconcertticketsequals________andthetickets
area(n)________goodforMary.
A) -1.36;normal B) -0.21;inferior
C) +0.21;complementary D) +0.73;normal
Answer: D
Diff:3
12) Theincomeelasticityofdemandis
A) thepercentagechangeindemanddividedbythepercentagechangeinincome.
B) thechangeinincomedividedbythepercentagechangeinprice.
C) thechangeinquantitydemandeddividedbythechangeinprice.
D) thepercentagechangeinincomedividedbythepercentagechangeinquantitydemanded.
Answer: A
Diff:1
13) Ameasureoftheresponsivenessofdemandtochangesinincome,allotherthingsbeing
constant,is
A) incomeelasticityofdemand. B) priceincomeelasticityofdemand.
C) priceelasticityofdemand. D) crosspriceelasticityofdemand.
Answer: A
Diff:1
14) Theresponsivenessofdemandtochangesinincomeholdingthegoodsrelativepriceconstantis
A) priceelasticityofdemand. B) incomeelasticityofdemand.
C) elasticityofsupply. D) crosspriceelasticityofdemand.
Answer: B
Diff:1
15) Thedifferencebetweenpriceelasticityofdemandandincomeelasticityofdemandisthat
A) incomeelasticityofdemandexamineshowanindividualsincomechangeswhenprices
changeandthepriceelasticityofdemandexamineshowquantitydemandchangeswhen
pricechanges.
B) incomeelasticityreferstothemovementalongthedemandcurvewhilepriceelasticity
referstoahorizontalshiftofthedemandcurve.
C) incomeelasticitymeasurestheresponsivenessofincometochangesinsupplywhileprice
elasticityofdemandmeasurestheresponsivenessofdemandtoachangeinprice.
D) incomeelasticityreferstoahorizontalshiftofthedemandcurvewhilepriceelasticityof
demandreferstoamovementalongthedemandcurve.
Answer: D
Diff:2
16) WhenJohnearned$65,000hepurchased10DVDsayear.Hisincomehasjustincreasedto
$68,000andheplanstopurchase15DVDsthisyear.Johnsincomeelasticityofdemandequals
A) 0 B) 0.11 C) 1.67 D) 8.87
Answer: D
Diff:2
17) Janiceearnsanincomeof$2,000aweekandgoesouttolunch3timesaweek.Ifherincome
increasedto$2,100shewouldgoouttolunch4timesaweek.ComputeJanicesincome
elasticityofdemand.
A) 0.17 B) 5.86 C) 7 D) 100
Answer: B
Diff:2
18) Theincomeelasticityofdemand
A) ispositiveonly. B) isnegativeonly.
C) mustliebetween-1and+1. D) canbepositive,negative,orzero.
Answer: D
Diff:1
19) Theincomeelasticityofdemandforallgoodstakentogethermustbe
A) zero. B) -1.
C) +1. D) between0and1.
Answer: C
Diff:3
20) Usetheabovefigure.Whichgraphdepictsaninferiorgood?
A) A B) B C) C D) D
Answer: B
Diff:3
21) Usetheabovefigure.Whichgraphdepictsanormalgood?
A) A B) B C) C D) D
Answer: A
Diff:3
22) Aninferiorgoodhasanincomeelasticityofdemandthatis
A) positive. B) negative.
C) positivebutlessthan1. D) zero.
Answer: B
Diff:1
23) Formostgoodsandservicestheincomeelasticityofdemandis
A) negative. B) positive. C) invisible. D) inverse.
Answer: B
Diff:1
PoundsofArtisan Jarsof
Period Income/Week BreadSold JamSold
1 $250 2 10
2 $500 5 8
24) Usetheabovetable.Theincomeelasticityofartisanbreadis
A) 1.285. B) 0.780. C) 0.012. D) 8.330.
Answer: A
Diff:2
25) Usetheabovetable.Basedontheinformationinthetable,artisanbreadisa(n)
A) normalgood. B) necessarygood.
C) inferiorgood. D) negativegood.
Answer: A
Diff:2
26) Usetheabovetable.Theincomeelasticityofjamis
A) -0.33. B) 0.33. C) 3.00. D) -3.00.
Answer: A
Diff:3
27) Usetheabovetable.Basedontheinformationinthetable,jamisa(n)
A) normalgood. B) necessarygood.
C) inferiorgood. D) negativegood.
Answer: C
Diff:2
28) Ifyourincomerisesby25percentand,asaresult,youbuyfewerpackagesofRamenNoodles,
thenRamenNoodlesarea(n)
A) substitute. B) normalgood. C) complement. D) inferiorgood.
Answer: D
Diff:2
29) Ifyourincomerisesby15percentand,asaresult,youbuymoresteak,thensteakisa(n)
A) substitute. B) normalgood. C) complement. D) inferiorgood.
Answer: B
Diff:2
30) Chadsincomewentfrom$1000perweekto$1500perweek.Asaresultheincreasedhis
consumptionofsteakfrom1poundaweekto3poundsaweek.Basedonhisconsumption
patterns,theincomeelasticityofsteakforChadis
A) 2.50. B) -.50. C) .50. D) -1.50.
Answer: A
Diff:3
31) Incomeelasticityofdemandisalwayspositive.Doyouagreeordisagree?Explain.
Answer: Disagree.Incomeelasticityofdemandcanbepositiveornegative.Fornormalgoods,an
increaseinincomeresultsinanincreaseindemand.Forinferiorgoods,however,an
increaseinincomeresultsinadecreaseindemand.
Diff:2
32) Theincomeelasticityofagoodispositiveifaconsumerincreasesthetotalspendingonthat
goodasaresultofanincreaseinitsmarketprice.Doyouagreeordisagree?Why?
Answer: Disagree.Ifaconsumerincreasesthetotalspendingonagoodwhenthepriceofthat
goodincreases,thenthegoodwillhaveapriceinelasticdemand.Theincomeelasticityof
agoodispositiveifitsdemandincreasesasresultofanincreaseinincome.
Diff:2
33) Graphically,whatisthemaindifferencebetweenthemeasureofincomeelasticityofdemandas
opposedtothemeasureofpriceelasticityofdemand?
Answer: Graphically,incomeelasticityofdemandismeasuredbyahorizontalshiftinthedemand
curveinresponsetoachangeinincome,whilepriceelasticityofdemandismeasuredby
amovementalongthedemandcurveinresponsetoachangeinprice.
Diff:1
19.7PriceElasticityofSupply
1) Ifthepriceelasticityofsupplyoftelevisionsetsisconstantandequalto3,a10percentincrease
inpricewillresultinachangeinquantitysuppliedequalto
A) 31/3percent. B) 30percent. C) 1/3percent. D) -30percent.
Answer: B
Diff:1
Topic: 19.7PriceElasticityofSupply
2) Ifthequantitysuppliedofcandyincreasesby10%whenthepriceofcandyincreasesby20%,
whichofthefollowingistrue?
A) Supplyforcandyiselastic,andpriceelasticityofsupply= 2.0.
B) Supplyforcandyisinelastic,andpriceelasticityofsupply= 2.0.
C) Supplyforcandyiselastic,andpriceelasticityofsupply= 0.5.
D) Supplyforcandyisinelastic,andpriceelasticityofsupply= 0.5.
Answer: D
Diff:1
3) Ifthesupplyofagoodisperfectlyinelastic,thepriceelasticityofsupplywillequal
A) positiveinfinity. B) one.
C) zero. D) noneoftheabove.
Answer: C
Diff:1
4) An18percentincreaseinthepriceofsmallcarsresultsina10percentexpansioninthequantity
supplied.Thesupplyelasticityinthisrangeequals________.
A) 9/5 B) 5/9 C) 7/10 D) 4/10
Answer: B
Diff:1
5) Colortelevisionpricesriseby10percent,andinresponsethequantityofthoseTVssupplied
increasesby6percent.Thesupplyelasticityforcolortelevisionsetsinthatpricerangeis
A) 0.6. B) 1.66. C) 6.0. D) -1.66.
Answer: A
Diff:1
6) Thepriceelasticityofsupply
A) istheslopeofthesupplycurve.
B) isthepercentagechangeinquantitysupplieddividedbythepercentagechangeinprice.
C) isalwaysnegative.
D) doesnotvarybetweenthelongandtheshortrun.
Answer: B
Diff:1
7) Weexpectthepriceelasticityofsupplytobe
A) negative. B) positive.
C) between-1and+1. D) zero.
Answer: B
Diff:1
8) WhentheGizmoCompanycouldsellagizmofor$10,itproduced2,500permonth.More
recently,thepriceofagizmohasfallento$9andsoGizmoisonlyproducing2,000unitsper
month.Whatisthepriceelasticityofsupplyforgizmos?
A) 0.47 B) -0.47 C) -2.11 D) 2.11
Answer: D
Diff:2
9) Ifthequantitysuppliedstaysthesamenomatterwhatthepriceis,thensupplyis
A) perfectlyinelastic. B) perfectlyelastic.
C) unitelastic. D) undefined.
Answer: A
Diff:1
10) Averticalsupplycurvemaybedescribedasbeing
A) relativelyelastic. B) perfectlyinelastic.
C) relativelyinelastic. D) perfectlyelastic.
Answer: B
Diff:1
11) Ifthesupplycurveisvertical,thensupplyis
A) relativelyelastic. B) perfectlyelastic.
C) unitelastic. D) perfectlyinelastic.
Answer: D
Diff:1
12) Ifa1percentincreaseinpricecausesa2percentincreaseinquantitysupplied,thensupplyis
A) elastic. B) inelastic. C) unitelastic. D) infinite.
Answer: A
Diff:2
13) Ifa10percentincreaseinpricecausesa5percentincreaseinquantitysupplied,thensupplyis
A) elastic. B) inelastic. C) unitelastic. D) infinite.
Answer: B
Diff:2
14) Whenthepriceofcablemodemsdecreasedfrom$100to$85,thenumberofcablemodems
producedfellfrom1,000perweekto850perweek.Usingthisinformation,weknowthesupply
ofcablemodemsis
C) unitelastic. D) perfectlyinelastic.
Answer: C
Diff:3
15) Inthelongrun,thesupplycurve
A) ismoreelasticthanitisintheshortrun.
B) islesselasticthanitisintheshortrun.
C) exhibitsnosystematicsequenceofchangesinelasticity.
D) exhibitsnochangeinelasticityatall.
Answer: A
Diff:1
16) Changesintechnologyovertimewillresultin
A) amoreinelasticsupplycurve. B) amoreelasticsupplycurve.
C) aunitaryelasticsupplycurve. D) nochangeintheelasticityofsupply.
Answer: B
Diff:1
17) Themostimportantdeterminantoftheelasticityofsupplyis
A) whetherthegoodisadurablegoodoranondurablegood.
B) thepriceofthegood.
C) thetimeperiodfirmshavetoadjusttothenewprice.
D) theproportionofthegoodinthebudgetofconsumers.
Answer: C
Diff:2
18) IfthepriceofgoodXincreasesby1percent,thenthequantitysuppliedincreasesbymorethan
1percent.Thismeans
A) supplyiselastic. B) supplyisunit-elastic.
C) supplyisinelastic. D) thegoodhasgoodsubstitutes.
Answer: A
Diff:1
19) Priceelasticityofsupplyisalways
A) positivebecauseofthelawofsupply.
B) negativebecauseofthelawofsupply.
C) positivebecauseofdiminishingmarginalutility.
D) negativebecausepercentagescanonlybenegative.
Answer: A
Diff:1
20) Thepriceelasticityofsupplymeasures
A) theresponsivenessofquantitydemandedtoachangeinprice.
B) theresponsivenessofquantitysuppliedtoachangeinprice.
C) thechangeinsupplyduetoachangeininputprices.
D) thechangeinpriceduetoachangeinquantitysupplied.
Answer: B
Diff:1
21) Wegenerallyexpectthepriceelasticityofsupplytobe
A) zero. B) negative.
C) positive. D) between-1and+1.
Answer: C
Diff:1
22) Whenquantitysuppliedisveryresponsivetoachangeinprice,supplyis
C) inelastic. D) incomesensitive.
Answer: A
Diff:1
23) Whenquantitysuppliedisnotveryresponsivetoachangeinprice,supplyis
C) inelastic. D) incomesensitive.
Answer: C
Diff:1
A) Aperfectlyinelasticsupplycurveisaverticalline.
B) Timeisanimportantconsiderationindeterminingsupplyelasticity.
C) Priceelasticityofsupplycanneverequal1.
D) Ahorizontalsupplycurveispossible.
Answer: C
Diff:1
25) Aperfectlyinelasticsupplycurveis
A) anupwardslopingstraightlinethatintersectstheorigin.
B) horizontal.
C) vertical.
D) downwardsloping.
Answer: C
Diff:1
26) Aperfectlyelasticsupplycurveis
A) anupwardslopingstraightlinethatintersectstheorigin.
B) horizontal.
C) vertical.
D) downwardsloping.
Answer: B
Diff:1
27) Refertotheabovefigure.Thesupplycurveis
B) unitaryforallprices.
C) perfectlyelastic.
D) perfectlyinelastic.
Answer: D
Diff:1
28) Refertotheabovefigure.Thesupplycurveis
B) unitaryforallprices.
C) perfectlyelastic.
Answer: C
Diff:1
29) Supplywillbecomemoreelasticwhen
A) atimeperiodlengthens. B) thetimeperiodshortens.
C) thegoodisimportanttoconsumers. D) therearegoodsubstitutesforthegoods.
Answer: A
Diff:1
30) Supposetheshort-runsupplycurveisastraightlineofslope+1thatintersectstheorigin.The
long-runsupplycurvewillbe
A) horizontal. B) steeper. C) shallower. D) vertical.
Answer: C
Diff:3
31) Themostimportantdeterminantofpriceelasticityofsupplyis
A) thenumberofclosesubstitutesthereareforthegood.
B) thetimeperiodfirmshavetoadjusttothenewprice.
C) thepriceofthegood.
D) theimportanceofthegoodinthebudgetsofconsumers.
Answer: B
Diff:2
32) Thesupplycurveforhousingintheveryshortrunislikelytobe
A) veryelastic. B) veryinelastic.
C) unit-elasticelastic. D) perfectlyelastic.
Answer: B
Diff:2
33) Supposethedemandforrentalapartmentsdecreasedsubstantially.Wewouldexpecttoobserve
A) nochangeinrentandasharpreductioninquantitysuppliedintheshortrun,andaneven
largerdecreaseinquantitysuppliedinthelongrun.
B) alargedecreaseinquantitysuppliedintheshortrun,followedbyacounter -reactionand
anincreaseinquantitysuppliedinthelongrun.
C) asmalldecreaseinquantitysuppliedandsignificantlylowerrentsintheshortrun,and
quantitysuppliedtodecreasemuchmoreinthelongrun.
D) alargedecreaseinquantitysuppliedintheshortrunandthelongrun,butmuchlarger
reductionsinrentinthelongrun.
Answer: C
Diff:3
34) Acafeteriaiswillingtoproduce100cupsofcoffeewhenthepriceis$1and150cupsofcoffee
whenthepriceis$1.30,otherthingsbeingequal.Thepriceelasticityofsupplyofcoffeeis
A) 1.53. B) 0.67. C) 0.10. D) 0.50.
Answer: A
Diff:2
35) Thepriceelasticityofsupplyis
A) negative. B) zero.
C) positive. D) unknown,dependingonotherfactors.
Answer: C
Diff:2
36) Aperfectlyelasticsupplycurveis
A) astraightlinethatcrossesthehorizontalaxis.
B) astraightlinecomingoutoftheorigin.
C) ahorizontalstraightline.
D) averticalstraightline.
Answer: C
Diff:1
37) Thepriceelasticityofsupplyishigherwhen
A) thenumberofbuyersinthemarketdecreases.
B) theproductinquestionisaninferiorgood.
C) thenumberofbuyersinthemarketincreases.
D) producershavemoretimetoadjusttopricechanges.
Answer: D
Diff:2
38) Thepriceelasticityofsupplyishigherwhen
A) thenumberofproducersinthemarketincreasesovertime.
B) theproductinquestionisacomplementarygood.
C) thenumberofbuyersinthemarketincreases.
D) producershavelesstimetoadjusttopricechanges.
Answer: A
Diff:2
39) Whiletheslopeoftheperfectlyinelasticsupplycurve________,theslopeoftheperfectlyelastic
supplycurve________.
A) iszero,approachesinfinity B) approachesinfinity,iszero
C) iszero,iszero D) approachesinfinity,approachesinfinity
Answer: A
Diff:3
40) Asituationinwhichthereisareductioninquantitysuppliedtozerowhenthereistheslightest
decreaseinpriceis
A) perfectlyelasticsupply. B) perfectlyelasticdemand.
C) perfectlyinelasticsupply. D) perfectlyinelasticdemand.
Answer: A
Diff:1
41) Whichofthefollowingstatementsregardingpriceelasticityofsupplyandthelengthoftimefor
adjustmentisFALSE?
A) Thelongeristhetimeperiodforadjustment,thegreateristhepriceelasticityofsupply.
B) Thelongeristhetimeperiodforadjustment,thelessistheextenttowhichresourcesflow
into(oroutof)anindustrythroughexpansion(orcontraction)ofexistingfirms.
C) Thelongeristhetimeperiodforadjustment,thegreateristheextenttowhichentryor
(exit)offirmsincreasesor(decreases)productioninanindustry.
D) Theshorterthetimeperiodforadjustment,thegreateristhepriceelasticityofsupply.
Answer: B
Diff:2
42) Usually,priceelasticitiesofsupplyare
A) positive,becausehigherpricesyieldlargerquantitiessupplied.
B) consideredshort-runadjustmentsduetosupplyconstraints.
C) ordinarilyanegativenumberbasedonthelawofsupply.
D) aninverserelationshipbetweenpriceandquantitysupplied.
Answer: A
Diff:2
43) Ifpriceelasticityofsupplyislessthan1,
A) supplyiselastic. B) demandiselastic.
C) demandisinelastic. D) supplyisinelastic.
Answer: D
Diff:1
44) VincentVanGoghpaintingshaveapriceelasticityofsupply
A) equalto2.0. B) equalto1.0.
C) closeto0.0. D) approachinginfinity.
Answer: C
Diff:2
A) Supplyismoreelasticintheshortrunthaninlongrun.
B) Supplyismoreelasticinthelongrunthaninshortrun.
C) Priceelasticityofsupplyisconstantalongthesupplycurve.
D) Priceelasticityofsupplyisalwaysanegativenumber.
Answer: B
Diff:1
46) TicketsfortheSuperBowlareanexampleofsupplythatis
A) perfectlyelastic. B) unitelastic.
C) slightlyinelastic. D) perfectlyinelastic.
Answer: D
Diff:1
47) Formostitems,wefindthepriceelasticityofsupplywillbe
A) negative. B) positive. C) invisible. D) inverse.
Answer: B
Diff:1
48) Thelongerthetimeperiodthatsuppliershavetoadjusttopricechanges,the
A) greaterwillbethepriceelasticityofsupply.
B) lowerwillbethepriceelasticityofsupply.
C) lowerwillbethepriceelasticityofdemand.
D) greaterwillbethepriceelasticityofdemand.
Answer: A
Diff:1
49) Ifthepriceofhamburgermeatincreasesby20percentandthequantitysuppliedbymeat
packingcompaniesincreasesby30percent,whatisthepriceelasticityofsupply?
A) 1.65 B) 1.20 C) 0.67 D) 1.50
Answer: D
Diff:3
50) Ifthepriceelasticityofsupplyisequalto1,wewouldsaythesupplyoftheitemis
C) elastic. D) perfectlyelastic.
Answer: A
Diff:1
51) Asupplycurvethatisparalleltothepriceaxisis
C) relativelyinelastic. D) unitaryelastic.
Answer: B
Diff:1
52) Asupplycurvethatisparalleltothequantityaxisis
C) relativelyinelastic. D) unitaryelastic.
Answer: A
Diff:1
53) Thepriceelasticityofsupplyis0.6.Thismeansthat
A) a$10increaseinpricewouldincreasequantitysuppliedby60.
B) a150percentincreaseinpricewouldincreasequantitysuppliedby90percent.
C) a50percentincreaseinquantitywilloccurwhenpriceincreasesby30percent.
D) a10percentincreaseinquantitywilloccurwhenpriceincreasesby6percent.
Answer: B
Diff:3
54) Whyisthepriceelasticityofsupplygreaterifthereismoretimeforadjustmenttoanincreasein
thepriceofanitem?
Answer: Ifmoretimeisavailableforadjustmenttoapriceincrease,thenmoreresourcescanflow
intoanindustry,andmorefirmscanentertheindustry.Thus,afteralongerperiodof
timeagreaterexpansionofproductioncantakeplaceinresponsetotheriseintheprice
oftheitem.
Diff:2
55) Whyistimesuchanimportantdeterminantintheelasticityofsupply?Istimealsoimportantin
determiningpriceelasticityofdemand?Explain.
Answer: Timeisanimportantdeterminantintheelasticityofsupplybecausemoreresourcescan
flowintooroutofproductionofagoodthegreaterthetimeperiodallowedforsupplyto
adjusttopricechanges.Intheshortrun,someinputsarefixedsofirmscannotmakeall
theadjustmentstheywouldliketomake.Inthelongrun,alladjustmentscanbemadeso
quantitysuppliedwillbemoreresponsivetoachangeinprice.Timeisalsoimportantfor
determiningpriceelasticityofdemand.Again,peoplehavemoretimetoadjusttonew
situations,andmoretimetofindsubstitutesforthegood.
Diff:2
Chapter20
ConsumerChoice
20.1UtilityTheory
1) Ineconomics,anothertermforsatisfactionis
A) incomeelasticity. B) priceelasticity.
C) utility. D) marginalproductivity.
Answer: C
Diff:1
Topic: 20.1UtilityTheory
2) Theamountofpleasureorsatisfactionderivedfromconsumptionofagoodiscalled
A) elasticity. B) utility.
C) consumersurplus. D) demand.
Answer: B
Diff:1
3) SupposethatUsherderives45utilsoftotalutilityfromeating6hotdogsand55utilsoftotal
utilityfromeating7hotdogs.WhatisUshersmarginalutilityfromeatingthe7thhotdog?
A) 10 B) 45 C) 55 D) 100
Answer: A
Diff:1
4) Utilityanalysishelpseconomistsunderstand
A) howpeoplemakedecisionsaboutwhattheybuyandhowmuch.
B) howtoeliminateopportunitycosts.
C) howtoeliminatescarcity.
D) noneoftheabove.
Answer: A
Diff:1
Chapter20ConsumerChoice99
5) WhichofthefollowingisNOTtrueofutility?
A) Itrepresentsthewant-satisfyingpowerofagood.
B) Itismeasuredusingarepresentativeunitcalledautil.
C) Theutilitythatagoodprovidesdependsonaconsumerspreferences.
D) Utilitycanbemeasuredobjectively.
Answer: D
Diff:1
6) Theutilitythatpeopleexperiencefromtheconsumptionofagooddependson
A) theirincomelevel.
B) theirtastesandpreferences.
C) totalsalesofthegood.
D) howmuchshoppingtimetheyspentobtainingthegood.
Answer: B
Diff:2
7) Economistsusewhattermtodescribethewant-satisfyingpowerofagood?
A) Demand B) Utility
C) Marginalpropensitytoconsume D) Incomeelasticity
Answer: B
Diff:1
8) Ineconomics,utilityisdefinedas
A) thewant-satisfyingpowerofagoodorservice.
B) theusefulnessofagoodorservice.
C) theutilitarianvalueofagoodorservice.
D) theobjectivemeasureofthedesirabilityofagoodorservice.
Answer: A
Diff:1
9) Ineconomicutilityanalysis,consumertastesandpreferencesareassumed
A) tobedeterminedbyincome. B) tobeinfluencedbythepricesofgoods.
C) givenandstableforanindividual. D) givenbutrapidlychangeable.
Answer: C
Diff:1
10) Arepresentativeunitthatmeasuresthewant-satisfyingpowerofagoodis
A) amargin. B) purchasingpower.
C) income. D) autil.
Answer: D
Diff:1
11) WhichEnglishphilosophersetouttodevelopanarithmeticformulaformeasuringhappiness
andalongthewayinventedtheutil?
A) JohnMaynardKeynes B) MiltonFriedman
C) JeremyBentham D) AdamSmith
Answer: C
Diff:2
12) Marginalutilityismeasuredas
A) utilityperunitofproduction.
B) extraoutputdividedbyextrautility.
C) outputofagoodorservicedividedbyprice.
D) extrautilityfromeachadditionalgoodconsumed.
Answer: D
Diff:1
13) Marginalutilityis
A) theutilityreceivedfromconsumingoneunitofagood.
B) thechangeintotalutilityduetoaone-unitchangeinthequantityofagoodconsumed.
C) thetotalutilityreceivedfromconsumingacertainquantityofagooddividedbythe
quantity.
D) theutilityreceivedbythelastconsumerofagood.
Answer: B
Diff:1
14) Tocalculatemarginalutility,dividethechangeintotalutilityby
A) thenumberofunitsconsumed.
B) thepriceoftheproduct.
C) thechangeinthenumberofunitsconsumed.
D) theconsumerssubjectivelevelofpreference.
Answer: C
Diff:1
15) Thetermmarginalmeans
A) total. B) cumulative. C) subjective. D) additional.
Answer: D
Diff:1
16) Wheneconomistsrefertopeoplemakingdecisions atthemargin,theymeanthatwecompare

________benefitswith________costs.
A) total;total B) total;incremental
C) additional;additional D) additional;marginal
Answer: C
Diff:2
17) Theconceptofmarginalityisimportantineconomicsbecause
A) individualsmakedecisionsatthemargin.
B) marginaldecisionsindicatealackofimportance.
C) individualsmakedecisionsbasedontastesonly.
D) largeexpendituresaretheonlyfactorinfluencingconsumption.
Answer: A
Diff:1
18) Marginalutilitycanbethoughtofas
A) theincrementalchangeinapersonstotalsatisfactionlevelfromthebuyingofagood.
B) thetotalchangeinsatisfactionfrombuyingagood.
C) theadditionalcostofthatnextgoodpurchased.
D) theopportunitycostofbuyingthenextgood.
Answer: A
Diff:2
19) Iftotalutilityisdecreasing,thenmarginalutilityis
A) negative. B) positive. C) zero. D) increasing.
Answer: A
Diff:1
20) Iftotalutilityisincreasing,thenmarginalutilityis
A) negative. B) positive. C) zero. D) decreasing.
Answer: B
Diff:1
21) Iftotalutilityisunchanged,thenmarginalutilityis
A) negative. B) positive. C) zero. D) increasing.
Answer: C
Diff:1
Quantityof TotalUtility TotalUtility

Movies Mary John
3 100 190
4 140 250
5 170 300
6 190 340
7 200 370
8 210 390
9 210 405
10 200 415
11 190 420
22) Accordingtotheabovetable,Marysmarginalutilityfromwatchingthe6thmovieis
A) 190unitsofutility. B) 40unitsofutility.
C) 10unitsofutility. D) 20unitsofutility.
Answer: D
Diff:2
23) Accordingtotheabovetable,Johnsmarginalutilityfromwatchingthe9thmovieis
Answer: C
Diff:2
24) Accordingtotheabovetable,Marysmarginalutilityfromwatchingthe4thmovieis
Answer: B
Diff:2
25) Refertotheabovetable.Whatisthemarginalutilityforthe10thunitforMaryandforJohn?
A) Mary:-10;John:10 B) Mary:10;John10
C) Mary:220;John450 D) Mary:0;John:0
Answer: A
Diff:2
26) Thetotalutilityfromconsuming8unitsofagoodis155.Themarginalutilityofthe8thunitis7
andthemarginalutilityofthe7thunitis11.Thetotalutilityfromconsuming6unitsofthegood
is
A) 173. B) 144. C) 137. D) 130.
Answer: C
Diff:3
Quantity TotalUtility
perWeek Michelle Robert David Lauren
0 0 0 0 0
1 50 1000 60 60
2 99 1900 120 130
3 147 2700 180 220
4 194 3400 240 310
5 240 4000 300 425
6 285 4500 360 575
7 329 4900 420 900
8 372 5200 480 1275
9 414 5400 540 1770
27) Accordingtotheabovetable,whatisLaurensmarginalutilityofthe4thunit?
A) 90 B) 220 C) 310 D) 115
Answer: A
Diff:2
28) Accordingtotheabovetable,whatisMichellesmarginalutilityofthe8thunit?
A) 372 B) 43 C) 42 D) 44
Answer: B
Diff:2
29) Accordingtotheabovetable,whatisRobertsmarginalutilityofthe5thunit?
A) 60 B) 4500 C) 600 D) 500
Answer: C
Diff:2
30) Accordingtotheabovetable,whatisDavidsmarginalutilityofthe7thunit?
A) 420 B) 400 C) 120 D) 60
Answer: D
Diff:2
31) Whenthetotalutilityfromconsumingonegoodismaximized,marginalutilityis
A) maximized. B) minimized. C) zero. D) positive.
Answer: C
Diff:1
32) Iftwounitsofagoodprovide7utilsandthemarginalutilityofthethirdunitofthegoodis2
utils,whatisthetotalutilityfromconsumingthreeunitsofthegood?
A) 3utils B) 7utils C) 9utils D) 10utils
Answer: C
Diff:1
33) Marginalutilityisdefinedas
A) theincreaseinutilitydividedbythetotalnumberofunitsconsumed.
B) thetotalutilitydividedbythetotalnumberofunitsconsumed.
C) thechangeintotalutilitydividedbythechangeinnumberofunitsconsumed.
D) thenumberofunitsconsumeddividedbythetotalutility.
Answer: C
Diff:1
34) Consumersaremostsatisfiedwhen
A) alloftheirincomehasbeensaved.
B) thetotallevelofutilityisashighaspossible.
C) goodsareboughtonsale.
D) theysavemorethantheyspend.
Answer: B
Diff:1
35) Utilityrefersto
A) theusefulnessofagoodorservice.
B) thevalueofagoodorservice.
C) thewant-satisfyingpowerofagoodorservice.
D) thedegreetowhichagoodorserviceisneeded.
Answer: C
Diff:1
36) Thewant-satisfyingpowerofagoodorserviceisknownas
A) purchasingpower. B) utility.
C) consumeroptimum. D) principleofsubstitution.
Answer: B
Diff:1
37) Agoodsynonymforutilityis
A) marginal. B) need. C) practical. D) satisfaction.
Answer: D
Diff:1
38) Theconceptofutilityis
A) subjectivesothattherecanbenotruemeasurementofsomeonesutility.
B) subjectivesomeasurementofsomeonesutilitymustbedonescientifically.
C) objectivesothatdevicescanbedevelopedthatwouldmeasureapersonsutility.
D) objectivesothatpsychologistscanmeasureutilityandcompareonepersonsutilitywith
thatofanotherperson.
Answer: A
Diff:2
39) Economistsinferthataconsumerreceivesmoreutilityfromonegoodthananotherby
A) givingconsumerssurveysabouttheutilitytheyreceivefromthegoods.
B) observingtheconsumersbehavior.
C) thelogicofthemodelsused.
D) meansofintrospectionandspeculation.
Answer: B
Diff:2
40) Utilityanalysisistheanalysisof
A) howconsumersdecidehowtospendtheirmoney.
B) theformationoftastesandpreferences.
C) thepsychologyofdecisionmaking.
D) consumerdecisionmakingbasedonutilitymaximization.
Answer: D
Diff:1
41) Theanalysisofconsumerdecisionmakingbasedonutilitymaximizationisknownas
A) specializationanalysis. B) consumptionanalysis.
C) utilityanalysis. D) marketanalysis.
Answer: C
Diff:1
42) Ataballgamewecanobservepeopleeatinghotdogs,chips,andburgers.Ifallarepricedthe
sameandweobserveMichelleeatingahotdogandDavideatingahamburger,wecanconclude
that
A) Robertwillbeeatingchips.
B) MichellelikeshotdogsbetterthanDaviddoesandDavidlikeshamburgersbetterthan
Michelledoes.
C) MichellederivesthesameamountofutilityfromeatingahotdogasDavidderivesfrom
eatingahamburger.
D) atthistimeMichellederivesmoreutilityfromeatingahotdogthanfromeatingeithera
hamburgerorchips,whileDavidderivesmoreutilityfromeatingahamburgerthanfrom
eatingeitherahotdogorchips.
Answer: D
Diff:3
43) JuanandSophiahavedecidedtostopstudyingeconomicsandgetabitetoeat.Juanwantstogo
forapizzaandSophiawantsahamburger.Theydecidetogoforpizza.Whatcanweconclude
fromthis?
A) JuanalwaysgetsmoreutilityfrompizzathanSophiadoes.
B) Sophiagetslessutilityfrompizzathanshecouldfromahamburger.
C) Sophiawillgetnegativeutilityfromthepizza.
D) UtilityanalysisdoesnotworkheresinceSophiadidnoteatahamburger.
Answer: B
Diff:3
44) Arepresentativeunitbywhichutilityismeasuredis
A) autil. B) utility.
C) marginalutility. D) ordinalutility.
Answer: A
Diff:1
45) Incardinalutilityanalysis
A) numberscanbeassignedtoutility.
B) itisrecognizedthatnumberscannotbeassignedtoutility.
C) theconceptofmarginalutilityexistswhileinordinalutilityanalysismarginalutilitydoes
notexist.
D) marginalutilityalwaysincreasesasmoreofagoodisconsumed.
Answer: A
Diff:2
46) Marginalutilityis
A) theutilityreceivedbythelastconsumerofagood.
B) thetotalutilityreceivedfromconsumingagivenquantityofagooddividedbythe
numberofunitsconsumed.
C) thechangeintotalutilityfromconsuminganadditionalunitofagood.
D) theutilityreceivedfromconsumingthefirstunitofagood.
Answer: C
Diff:1
47) Thechangeinthetotalutilityasaresultofincreasingconsumptionbyoneunitisknownas
A) marginalutility. B) averageutility.
C) proportionalutility. D) utils.
Answer: A
Diff:1
48) Therateofchangeintotalutilityequals
A) marginalutility.
B) thechangeinmarginalutilityassociatedwitheatingallthequantitiesapersoncanhandle.
C) thechangeinmarginalutilitydividedbythechangeinquantity.
D) therateofchangeinmarginalutilitydividedbytheprice.
Answer: A
Diff:2
49) Johnhasjusteatenanotherpotatochipandhistotalutilityincreased.ThismeansthatJohns
marginalutilityforthisadditionalpotatochipis
A) positive.
B) negative.
C) zero.
D) notdeterminablewithoutmoreinformation.
Answer: A
Diff:1
50) Johnhasjusteatenanotherpotatochipandhistotalutilitydecreased.ThismeansthatJohns
marginalutilityforthisadditionalpotatochipis
A) positive.
B) negative.
C) zero.
D) notdeterminablewithoutmoreinformation.
Answer: B
Diff:1
51) Karenhasdecidedthatshewouldenjoyeatinganothercookie.Whichofthefollowing
statementsisconsistentwithKarensdecision?
A) Karensmarginalutilityhasdecreasedwithacorrespondingdecreaseintotalutility.
B) Karensmarginalandtotalutilityremainunchanged.
C) Karensmarginalutilityhasdecreasedbutitisunclearwhathashappenedtototalutility.
D) Karenstotalutilityhasincreasedbutitisunclearwhathashappenedtohermarginal
utility.
Answer: D
Diff:3
52) Awell-knownathletelovescupcakes.Hereceives200utilsforthefirstcupcake,anadditional
160forthesecond,anadditional120forthethird,another80forthefourth,andanother40for
thefifth.Themarginalutilityofthefourthcupcakeis________andthetotalutilityof
consumingfourcupcakesis________.
A) 40;80 B) 80;600 C) 80;560 D) 40;40
Answer: C
Diff:2
53) Samlovescookies.Shereceives200utilsforonecookie,360fortwocookies,480forthethird,
560forfourcookies,and600forfivecookies.Themarginalutilityofthethirdcookieis
A) 120 B) 480
C) 80 D) unabletodetermine
Answer: A
Diff:2
QuantityofMovies MichellesTotal RobertsTotal

WatchedperWeek UtilityperWeek UtilityperWeek
0 0 0
1 100 100
2 195 190
3 270 270
4 340 340
5 390 400
6 420 350
7 435 390
8 445 420
9 450 440
10 440 450
54) Refertotheabovetable.Themarginalutilityofthe6thmovieforMichelleis
Answer: B
Diff:2
Answer: B
Diff:2
Answer: A
Diff:2
57) Refertotheabovetable.Themarginalutilityofthe2ndmovieforRobertis
Answer: B
Diff:2
58) Refertotheabovetable.Themarginalutilityofthe5thmovieforRobertis
Answer: C
Diff:2
59) Refertotheabovetable.Themarginalutilityofthe8thmovieforRobertis
Answer: A
Diff:2
60) Refertotheabovetable.Whatisthemarginalutilityforthe10thunitforMichelleandfor
Robert?
A) Michelle:50;Robert:50 B) Michelle:15;Robert:20
C) Michelle:10;Robert:10 D) Michelle:-10;Robert:10
Answer: D
Diff:2
61) Refertotheabovetable.Whatisthemarginalutilityforthe3rdunitforMichelleandfor
Robert?
A) Michelle:-10;Robert:20 B) Michelle:75;Robert:75
C) Michelle:75;Robert:80 D) Michelle:270;Robert:270
Answer: C
Diff:2
62) Refertotheabovetable.InexaminingtheutilityschedulesforMichelleandRobert,wecan
concludethat
A) theylikemoviesthesame.
B) theylikethethirdmoviethesame.
C) MichellelikesmoviesmorethanRobertdoes.
D) theybothreceivedthesamesatisfactionfromwatchingthefourthmovie.
Answer: D
Diff:3
63) Thetotalutilityofconsuming6unitsofagoodis255.Themarginalutilityofthe6thunitis45
andthemarginalutilityofthe5thunitis60.Thetotalutilityofconsuming5unitsofthegoodis
A) 300. B) 150. C) 210. D) 195.
Answer: C
Diff:2
64) Whenyoubuysomething,youdosobecauseofthesatisfactionyouexpecttoreceivefrom
havingandusingthatgood.Anothertermthatcanbeusedforsatisfactionis
A) need. B) purchasingpower.
C) utility. D) priceelasticity.
Answer: C
Diff:1
65) Economistsoncebelievedutilitycouldbemeasured.Thephilosophicalschoolbasedonthe
thoughtknownasutilitarianismwasdevelopedbytheEnglishphilosopher
A) JeremyBentham. B) HenriLeconte.
C) JohnLennon. D) BernardMandeville.
Answer: A
Diff:1
66) KathleeneatsthreeTVdinners.ThethirdTVdinnermakesKathleensick.Thismeansthatfor
Kathleen
A) thethirdTVdinnerhaslittleutility.
B) thethirdTVdinnerhasnegativeutility.
C) theopportunitycostofTVdinnersishigh.
D) TVdinnersmustbeinexpensive.
Answer: B
Diff:2
67) Marginalutility
A) atfirstrisesandthendeclinesasapersonconsumesmoreofagoodorservice.
B) canbethoughtofasbeingtheequivalenttototalutility.
C) equalsthetotalsatisfactionfromconsumptionofgoodsandservices.
D) isstable,butthenasapersonconsumesmoreofagoodorservice,hasapropensityto
increase.
Answer: A
Diff:1
68) Theadditionalutilityorsatisfactionthatonederivesfromconsumingonemoreunitofany
goodorserviceisreferredtoas
A) totalutility. B) substantiveutility.
C) averageutility. D) marginalutility.
Answer: D
Diff:1
69) Thechangeintotalutilityderivedwhenacustomerconsumesonemoreunitofagoodor
serviceiscalled
A) totalutility. B) marginalutility.
C) averageutility. D) finalutility.
Answer: B
Diff:1
70) Theequationforthecalculationofmarginalutilityis
A) totalutility/numberofunitsconsumed.
B) changeintotalutility/numberofunitsconsumed.
C) changeintotalutility/changeinnumberofunitsconsumed.
D) totalutility/changeinnumberofunitsconsumed.
Answer: C
Diff:1
71) Ineconomics,thetermmarginalrefersto
A) total. B) achangeinthetotal.
C) negative. D) inverse.
Answer: B
Diff:1
72) Utilityanalysisassumesthattheconsumerstastesandpreferencesare
A) dependentonincomeandeducation. B) predeterminedandstable.
C) dependentonnationalorigin. D) dependentongeographiclocation.
Answer: B
Diff:2
73) Atthepointatwhichtotalutilityisatamaximum,
A) marginalutilityisataminimum. B) marginalutilityisnegative.
C) marginalutilityiszero. D) marginalutilityisequaltototalutility.
Answer: C
Diff:2
74) Totalsatisfactionismaximizedwhen
A) marginalutilityispositive. B) marginalutilityisnegative.
C) marginalutilityiszero. D) marginalutilityisequaltototalutility.
Answer: C
Diff:2
75) Asmoreofaproductisconsumed,totalutilityincreasesuptoapointatwhich
A) marginalutilityincreasesatanincreasingrate.
B) marginalutilityincreasesataconstantrate.
C) marginalutilitydecreases.
D) marginalutilitywillinitiallydecrease,thenincrease.
Answer: C
Diff:1
76) Whenmarginalutilityisnegative,totalutilityis
A) increasingatadecreasingrate. B) zero.
C) atitsmaximum. D) decreasing.
Answer: D
Diff:2
77) Whenmarginalutilityispositive,totalutilityis
A) increasing. B) zero.
C) atitsminimum. D) decreasing.
Answer: A
Diff:2
78) Whenmarginalutilityiszero,totalutilityis
A) increasing. B) atitsmaximum.
C) atitsminimum. D) decreasing.
Answer: B
Diff:2
79) ThemarginalutilityderivedfromviewingthenextmovieDVDisthe
A) averageutilityperminuteofviewing.
B) additionalutilityfromviewingtheDVD.
C) averageutilityperhourofviewing.
D) additionalutilityfromviewingthefirstminuteoftheDVD.
Answer: B
Diff:2
80) ArationalconsumerwillNEVERpurchaseaproductwhenits
A) marginalutilityisnegative.
B) totalutilityisincreasingatadecreasingrate.
C) marginalutilityisdecreasing.
D) totalutilityisdecreasingatanincreasingrate.
Answer: A
Diff:2
81) Economistsassumethatpeoplemakedecisionsregardingconsumptionbasedoncomparing
A) additionalunitsofsatisfactionwithadditionalcosts.
B) averagesatisfactionwithadditionalcosts.
C) averagesatisfactionwithaveragecosts.
D) additionalunitsofsatisfactionwithaveragecosts.
Answer: A
Diff:3
82) Ifthecommercialiscorrectthateveryadditionalbitetastesasgoodasthefirst,themarginal
utilityfromconsumingmoreoftheadvertisedproductmustbe
A) increasing. B) decreasing. C) constant. D) zero.
Answer: C
Diff:1
83) Ifyouandagroupoffriendshavebeenconsuminglargequantitiesofliquidbeveragesonahot
summerafternoonandyoudecidetorefrainfromanyadditionalconsumption,itcanbe
concludedthat
A) totalutilityhasreachedaminimumandthemarginalutilityofanadditionaldrinkwould
belarge.
B) totalutilityhasreachedamaximumandthemarginalutilityofanadditionaldrinkwould
besmall.
C) totalutilityhasreachedamaximumandthemarginalutilityofanadditionaldrinkwould
bezero.
D) totalutilityhasreachedaminimumandthemarginalutilityofanadditionaldrinkwould
benegative.
Answer: C
Diff:1
AACSB: Reflectivethinkingskills
84) Ifmarginalutilityiszero,
A) arationalconsumerwillconsumeonemoreunit.
B) arationalconsumerwillconsumeonelessunitnexttime.
C) arationalconsumerwillnotconsumeadditionalunitsbeyondthispoint.
D) arationalconsumerwillconsumeonemoreunitifthepriceiszero.
Answer: C
Diff:2
85) Acertainathletelovesdonuts.Hereceives100unitsofutilityforthefirstdonut,anadditional
80forthesecond,anadditional60forthethird,another40forthefourth,andanother20forthe
fifth.Themarginalutilityofthefourthdonutis________andthetotalutilityfromconsuming
fourdonutsis________.
A) 40;40 B) 40;280 C) 140;280 D) 280;100
Answer: B
Diff:2
86) Ifthetotalutilityderivedfromconsumingthreeoysterswas40utilsandthetotalutilityderived
fromconsumingfouroysterswas52utils,whatwasthemarginalutilityderivedfromthe
consumptionofthefourthoyster?
A) 92utils B) 52utils
C) 12utils D) Itisimpossibletodetermine.
Answer: C
Diff:1
87) Assumingthatthemarginalutilityofthefirstfourpiecesofcandywas30,28,24,and18
respectively,howmuchtotalutilitywasderivedfromeatingthefirstthreepiecesofcandy?
A) 58 B) 82 C) 54 D) 100
Answer: B
Diff:2
88) Utilityanalysisistheanalysisof
A) theformationoftastesandpreferences.
B) thedifferencesoftastesandpreferencesacrossindividuals.
C) theconsumptiondecisionsofpeoplebasedonutilitymaximization.
D) howconsumersdeterminetheutilitytheyreceivefromconsumption.
Answer: C
Diff:1
89) Theutilityanalysistheoryassumesthatconsumerstryto
A) maximizetheiraverageutility.
B) maximizetheirmarginalutility.
C) maximizethedifferencebetweentotalandmarginalutility.
D) maximizetheirtotalutility.
Answer: D
Diff:1
90) Whatisutilityandwhatareitscharacteristics?
Answer: Utilityisthewant-satisfyingpowerofagoodorservice.Itissubjective,sothatitcannot
bemeasuredobjectivelyorbyscientificinstruments,andonepersonsutilitycannotbe
comparedtoanothersutility.Itisnotnecessarilyusefulorutilitarianeither.Ifan
individualchoosesabananainsteadofanapple,wecansaythepersonexpectstoreceive
moreutilityfromthebananathanfromtheapple.
Diff:1
91) Whatismarginalutility?Whyisthetermmarginalimportantinutilityanalysis?
Answer: Marginalutilityisthechangeintotalutilityduetoaone-unitchangeinthequantityofa
goodconsumed.Marginalmeansadditionalorincremental.Marginalisimportantin
utilityanalysisbecauseanindividualcontemplatingincreasingconsumptionofanitem
byoneadditionalunitcomparestheutilitygainfromthatoneadditionalunitconsumed
perdollarspentwiththeadditionalutilityperdollarspentonallotheritems.
Diff:1
92) Whatisutilityanalysis?Whatisthegoalofthisanalysis?
Answer: Utilityanalysisistheanalysisofconsumerdecisionmakingbasedonutility
maximization.Economistsassumeindividualsactsoastomaximizetheirutility.The
goaloftheanalysisistoexplainandpredictconsumerbehavior.Animportantpartof
thisisthatutilityanalysiscanbeusedtoderiveademandcurve,becauseutilitygoverns
peoplespreferencesforgoodsandservices.
Diff:2
93) Whatdoweknowabouttotalutilitywhenmarginalutilityiszero?
Answer: Marginalutilityistheextrautilityfromconsuminganotherunitofagood.Ifmarginal
utilityis0,totalutilitydoesnotincreasefurtherwhentheconsumerconsumesthenext
unit,sototalutilitymustbeatitsmaximumvalue.
Diff:2
94) SupposethatJacobisgoingtoabuffetrestaurantthatallowshimtoeatasmanychickenwings
ashewantsatafixedprice.HowwouldyoupredictthenumberofchickenwingsthatJackwill
eatusingutilitytheory?
Answer: UtilitytheorypredictsthatJacobwilltrytomaximizehisutilityfromhischickenwing
consumptionattherestaurant.Thismeansthathewillcontinuetoeatonemorechicken
winguntilhismarginalutilitybecomeszeroandsohistotalutilityfromthechicken
wingsismaximized.
Diff:2
20.2GraphicalAnalysis
1) Ifmarginalutilityispositivebutdecreasing,totalutilityis
A) decreasing. B) negative. C) increasing. D) constant.
Answer: C
Diff:1
Topic: 20.2GraphicalAnalysis
2) Whentotalutilityisfalling,
A) marginalutilityisatamaximum.
B) marginalutilityisatzero.
C) marginalutilityisnegative.
D) marginalutilityhasdecreased,butisnowincreasing.
Answer: C
Diff:2
3) Ifmarginalutilityispositivebutdiminishing,then
A) averageutilitymustbenegative.
B) marginalutilitymustbeabove-averageutility.
C) totalutilitymustbepositive.
D) marginalutilitymustbemorethantotalutility.
Answer: C
Diff:1
4) Ifmarginalutilityiszero,totalutilityis
A) falling. B) increasing.
C) atitsmaximum. D) negative.
Answer: C
Diff:1
5) Ifwearegraphingtotalutility,thenthetotalutilitycurvewill
A) alwaysbeincreasing.
B) alwaysbedecreasing.
C) beincreasingaslongasmarginalutilityispositive.
D) behorizontalifmarginalutilityispositive.
Answer: C
Diff:2
6) Asmarginalutilitydeclinesbutremainspositive,then
A) totalutilitycontinuestoincreasebutatadecreasingrate.
B) totalutilityalsodeclines.
C) totalutilityisunaffected.
D) noneoftheabove.
Answer: A
Diff:1
7) Refertotheabovefigures.Whichpanelbestrepresentsmarginalutility?
A) PanelA. B) PanelB. C) PanelC. D) PanelD.
Answer: C
Diff:2
8) Refertotheabovefigures.Amystotalutilityforchocolatechipcookiesreachesamaximumat4
cookies.Whichpanelbestrepresentsmarginalutility?
Answer: B
Diff:3
9) Whichofthefollowingstatementsisnottrueaboutmarginalutilitywhentotalutilityisatits
maximumpoint?
A) Marginalutilityiszero.
B) Marginalutilityisdecreasing.
C) Arationalconsumerwillnotconsumeadditionalunitsbeyondthispoint.
D) Marginalutilityisundefined.
Answer: D
Diff:2
10) Ifmarginalutilityiszero,
A) totalutilityincreasesatadecreasingrate.
B) totalutilityincreasesatanincreasingrate.
C) totalutilityisatamaximum.
D) peoplewillnotconsumethegoodevenifthepriceiszero.
Answer: C
Diff:2
11) Ifthepriceofagoodiszero,arationalconsumerwill
A) buyalloftheunitsavailable.
B) notconsumethegoodatallsinceitmustnotbevaluableifithasazeroprice.
C) stopconsumingthegoodwhentotalutilityismaximized.
D) consumethegooduptothepointwheretotalutilityisjustbelowzero.
Answer: C
Diff:2
SlicesofPizza TotalUtility MarginalUtility

1 50
2 90
3 120
4 130
5 137
6 120
12) Intheabovetable,whatisthemarginalutilityofthefourthsliceofpizzaconsumed?
A) 10 B) 30 C) 120 D) 130
Answer: A
Diff:2
13) Intheabovetable,whatisthemarginalutilityofthesecondsliceofpizzaconsumed?
A) 10 B) 90 C) 30 D) 40
Answer: D
Diff:2
14) Intheabovetable,whatisthemarginalutilityofthesixthsliceofpizzaconsumed?
A) 7 B) 137 C) 120 D) -17
Answer: D
Diff:2
NumberofBottlesofSoda TotalUtility MarginalUtility

1 100
2 20
3 15
4 140
15) Usingtheabovetable,whatisthetotalutilityofconsuming2bottlesofsoda?
A) 115 B) 120 C) 140 D) 240
Answer: B
Diff:2
16) Usingtheabovetable,whatisthetotalutilityofconsuming3bottlesofsoda?
A) 115 B) 120 C) 240 D) 135
Answer: D
Diff:2
17) Usingtheabovetable,whatisthemarginalutilityofthe4thsoda?
A) 23.2 B) 5 C) 10 D) 15
Answer: B
Diff:2
18) Giventheabovefigure,whenJoeyeatsathirdpieceofpizzahismarginalutilityis________
andhistotalutilityis________.
A) falling;falling B) falling;rising C) rising;falling D) rising;rising
Answer: B
Diff:2
19) Giventheabovefigure,ifJoeywasarationalconsumerhewouldNOTeatmorethan________
piece(s)ofpizza.
A) 1 B) 5 C) 4 D) 6
Answer: C
Diff:2
20) Giventheabovefigure,marginalutilitybecomesnegativewhenJoeyconsumesthe________
pieceofpizza.
A) 1st B) 3rd C) 4th D) 5th
Answer: D
Diff:2
21) Whenmarginalutilityispositive,butdecreasing,thentotalutilityis
A) increasingatadecreasingrate. B) negative.
C) decreasing. D) increasingatanincreasingrate.
Answer: A
Diff:3
22) Whatistherelationshipbetweenmarginalutilityandtotalutility?Whathappenstototalutility
asmarginalutilitydeclines?
Answer: Marginalutilityisthechangeintotalutilityresultingfromaone-unitchangeinthe
consumptionofagoodorservice.Asmarginalutilitydeclines,theadditionalutilityper
unitconsumeddecreases,sototalutilityrisesatadecreasingrate.Whenmarginalutility
reacheszero,totalutilityisatitsmaximum.Ifmarginalutilitycontinuestodeclinebelow
avalueofzero,sothatmarginalutilitybecomesnegative,thentotalutilitybeginstofall.
Diff:1
23) Asanindividualconsumesmoreunitsofagood,hertotalutilityfallsbecauseofthelawof
diminishingmarginalutility.Doyouagreeordisagree?Explain.
Answer: Disagree.Thelawofdiminishingmarginalutilitysuggeststhatmarginalutility
eventuallydeclines.Totalutilitycontinuestoriseaslongasmarginalutilityispositive.
Totalutilityfallsonlywhenmarginalutilityisnegative.
Diff:1
20.3DiminishingMarginalUtility
1) Theprinciplethatasmoreofagoodisconsumed,itsextrabenefitdeclinesisknownas
A) thelawofdemand.
B) thelawofdiminishingmarginalproduct.
C) thelawofdiminishingmarginalutility.
D) thelawofcomparativeadvantage.
Answer: C
Diff:2
Topic: 20.3DiminishingMarginalUtility
2) Ifadinnerguestisseriouswhenclaiminghejustcouldnotgetenoughofyourlasagnaandthat
themoreheatethemorehewanted,youwouldconcludethatforhimthemarginalutilityof
lasagnawas
A) increasing. B) decreasing. C) zero. D) constant.
Answer: A
Diff:1
3) Ifapersonclaims,Iwouldnteatliverifyoupaidme,wecanassumethathismarginalutility
ofliveris
A) positive. B) positive,butdecreasing.
C) zero. D) negative.
Answer: D
Diff:1
4) Ifsomeonecomplainsthatshedoesntfeelverywellbecausesheatetoomuchpizza,wewould
concludethatthemarginalutilityofthelastpieceofpizzaeatenwas
A) positive. B) zero. C) verylarge. D) negative.
Answer: D
Diff:1
5) Thelawofdiminishingmarginalutilityimpliesthatthemarginalutilityforaparticularproduct
A) remainsconstant,regardlessofhowmuchoftheproductisconsumed.
B) remainsconstantaslongastheproductisstillconsidereduseful.
C) decreasesasmoreoftheproductisconsumed.
D) increasesasmoreoftheproductisconsumed.
Answer: C
Diff:1
6) Typically,anindividualtakesonlyonenewspaperfromthebinbecause
A) ofthelowmarginalutilityofadditionalnewspapers.
B) totalutilitywillrisewithconsumptionofmorethanonenewspaper.
C) marginalutilityincreaseswiththefirstconsumptionofnewspapers.
D) therearelimitedamountsofnewspapersinthebin.
Answer: A
Diff:2
7) Theprincipleofdiminishingmarginalutilitysuggeststhat
A) totalutilityfallswithadditionalconsumption.
B) totalutilityisusuallynegative.
C) theconsumerwillnevertireofadditionalunitsofagood.
D) therateatwhichutilityincreasesdiminishesasmoreofagoodisconsumed.
Answer: D
Diff:1
8) Regrettingalastunitofconsumptionofcakeimpliesthat
A) thetotalutilityfromeatingcakewasnegative.
B) cakeisaninferiorgood.
C) themarginalutilityofthelastunitofcakeconsumedwasnegative.
D) thedemandcurveforcakeishorizontal.
Answer: C
Diff:1
9) Arationalindividualwillneverconsumeaunitofagoodifits
A) marginalutilityisdiminishing.
B) marginalutilityislessthanaverageutility.
C) marginalutilityisincreasing.
D) marginalutilityisnegative.
Answer: D
Diff:1
10) Ifmarginalutilityisnegative,
A) totalutilityincreasesatadecreasingrate.
B) theconsumerconsidersextraunitsofthecommoditytobeabad.
C) theconsumerwillwanttoconsumetheunitonlyifitisfree.
D) theconsumerlikesthecommodity,butnotasmuchasheorsheoncedid.
Answer: B
Diff:2
11) Asanindividualconsumesmoreofaparticularcommodity,thetotallevelofutilityderived
fromthatconsumptionusually
A) increasesataconstantrate. B) increasesatanincreasingrate.
C) increasesatadecreasingrate. D) decreasesatanincreasingrate.
Answer: C
Diff:1
12) Whicheconomicprincipleaccountsforthefactthatall-you-can-eatbuffetrestaurantscanbe
profitable?
A) Thelawofdemand
B) Theprincipleofdiminishingmarginalutility
C) Theprincipleofdiminishingmarginalproduct
D) Thelawofsupply
Answer: B
Diff:1
0 0
1 15
2 35
3 55
4 75
5 85
6 90
13) Refertotheabovetable.Atwhatquantitydoesdiminishingmarginalutilitysetin?
A) 1st. B) After4. C) After5. D) After6.
Answer: B
Diff:2
0 0
1 10
2 25
3 35
4 42
5 47
6 49
A) After0. B) After1. C) After2. D) After10.
Answer: C
Diff:2
0 0
1 10
2 25
3 45
4 60
5 68
6 72
A) After3. B) After2. C) After10. D) After15.
Answer: A
Diff:2
PerWeek Amy Robert David Michelle
0 0 0 0 0
1 5.0 100 600 60
2 9.9 190 1200 130
3 14.7 270 1800 220
4 19.4 340 2400 310
5 24.0 400 3000 425
6 28.5 450 3600 575
7 32.9 490 4200 900
8 37.2 520 4800 1275
9 41.4 510 5400 1770
16) Refertotheabovetable.Whichofthefourpeoplehaveutilityschedulescharacterizedbythe
lawofdiminishingmarginalutility?
A) Amy,Robert,andDavidonly B) Michelleonly
C) MichelleandDavidonly D) AmyandRobertonly
Answer: D
Diff:2
17) Refertotheabovetable.Amysutilityscheduleshows
A) diminishingmarginalutilitythroughouttheentireschedule.
B) initiallyincreasingmarginalutilityandthendecreasingmarginalutility.
C) initiallydecreasingmarginalutilityandthenincreasingmarginalutility.
D) increasingmarginalutilitythroughouttheentireschedule.
Answer: A
Diff:1
18) Refertotheabovetable.Robertsutilityscheduleshows
A) diminishingmarginalutilitythroughouttheentireschedule.
B) initiallyincreasingmarginalutilityandthendecreasingmarginalutility.
C) initiallydecreasingmarginalutilityandthenincreasingmarginalutility.
D) increasingmarginalutilitythroughouttheentireschedule.
Answer: A
Diff:1
19) Refertotheabovetable.Davidsutilityscheduleischaracterizedby
A) diminishingmarginalutility. B) increasingmarginalutility.
C) constantmarginalutility. D) decreasingmarginalutility.
Answer: C
Diff:2
20) Refertotheabovetable.Michellesutilityscheduleischaracterizedby
A) diminishingmarginalutility. B) increasingmarginalutility.
C) constantmarginalutility. D) constanttotalutility.
Answer: B
Diff:2
21) Refertotheabovetable.Theonewholikesthegoodthemostis
A) David.
B) Michelle.
C) Robert.
D) uncertainsincewecannotcompareutilityacrosspeople.
Answer: D
Diff:3
22) Asanindividualconsumesmoreofaparticularcommodity,thetotallevelofutilityderived
fromthatconsumptionwill
A) increaseatanincreasingrate. B) increaseatadecreasingrate.
C) increaseataconstantrate. D) remainconstant.
Answer: B
Diff:1
23) WhichofthefollowingisNOTconsistentwiththelawofdiminishingmarginalutility?
A) Newspapervendingmachinesarenotassecureassoftdrinkmachines.
B) Astudentselectstoeatatanall-you-can-eatrestaurantratherthanatarestaurantthat
chargesforrefills.
C) Astudentsenjoymentofoperaincreasesthemoreshelistenstoit.
D) Asymphonyhasfreethroatlozengesintheirlobby.
Answer: C
Diff:2
24) Increasesintotalutilityfromtheconsumptionofagooddecreaseasmoreisconsumed.This
statementis
A) thelawofdiminishingmarginalutility. B) thelawofaverageutility.
C) theconsumeroptimum. D) false.
Answer: A
Diff:1
25) Olgabuysabagofpotatochipseverydayafterhereconomicsclass.Thefirstpotatochipalways
tasteswonderful.Theseconddoesnottastequiteasgoodasthefirst.Thethirddoesnottaste
quiteasgoodasthesecond.Olgaisexperiencing
A) irrationalbehavior. B) thelawofdiminishingmarginalutility.
C) theincomeeffect. D) thesubstitutioneffect.
Answer: B
Diff:2
26) Onahotsummerday,aconstructionworkerentersaMcDonaldsfast -foodrestaurant.He

ordersthefirstBigMac.Heconsumesitwithin3minutes.HethenordersasecondBigMac
andconsumesitin10minutes.Heeatsonlyhalfofthethirdonein18minutesandthrows
awaytherest.Thestoremanageroffershimthefourthforfree.Theconstructionworkersays:
Nothanks.Why?
A) Fortheconstructionworker,totalutilityincreasedatanincreasingrate.
B) Marginalutilityincreasedatanincreasingrate.
C) MarginalutilitydeclinedasheconsumedadditionalBigMacs.
D) ThelawofdiminishingmarginalutilitydoesnotapplytoconsumptionofBigMacs.
Answer: C
Diff:2
27) Onahotsummerday,aconstructionworkerentersaMcDonaldsfast -foodrestaurant.He

ordersthefirstBigMac.Heconsumesitwithin3minutes.HethenordersasecondBigMac
andconsumesitin10minutes.Heeatsonlyhalfofthethirdonein18minutesandthrows
awaytherest.Thestoremanageroffershimthefourthforfree.Theconstructionworkersays:
Nothanks.Fortheconstructionworkerdescribedabove,wecansaythat
A) diminishingmarginalutilitysetinonlyafterhehadconsumedthesecondBigMac.
B) diminishingmarginalutilitybeganassoonashehadeatenthefirstBigMac.
C) diminishingmarginalutilitydidnotoccur,hesimplywantedtoquiteating.
D) thelawofdiminishingmarginalutilityonlyappliestodurablegoods.
Answer: B
Diff:2
28) Carolisveryhungry.Shehasjustsatdowntoeat.Herfirstbitegivesheracertainlevelof
utility.Hersecondbiteincreasesherutilitybymorethanthefirstbite.Herthirdbiteincreases
herutilitybymorethanthesecondbite.Carolhas40bitesleftbeforeshefinishes.Whichofthe
followingstatementsistrueaboutCarol?
A) Carolisbeinginconsistentwiththelawofdiminishingmarginalutility.
B) Carolstotalutilitydecreaseswitheachbite.
C) Carolsmarginalutilitywillbenegativewhenshetakesherlastbite.
D) Carolwilleventuallyexperiencediminishingmarginalutilitybythetimeshefinishes
eating,ifhermarginalutilitybeginstodecline.
Answer: D
Diff:3
29) Billatefourhotdogsatthebaseballgame.Thefirstonetastedbest,buthefoundthatasheate
morehotdogstheamountofextrasatisfactionhewasreceivingwasbeginningtofall.This
woulddemonstrate
A) thelawoftotalutilitymaximization. B) thelawofzeroutility.
C) thelawofdiminishingmarginalutility. D) thelawofdiminishingcosts.
Answer: C
Diff:2
30) Thereasonthatall-you-can-eatrestaurantscanmakeaprofitisdueto
A) thelawofdemand.
B) thelawofincreasingrelativecosts.
C) thelawofdiminishingmarginalutility.
D) thelawofdiminishingmarginalreturns.
Answer: C
Diff:2
31) Ifyourdinnerguestsaid,Everybite,includingthelastbite,tastedasgoodasthefirst,thenthe
marginalutilityforhim
A) isdecreasing. B) isincreasing. C) isconstant. D) ispositive.
Answer: C
Diff:2
32) Diminishingmarginalutilitymeansthatasmoreofagoodisconsumed,
A) therateatwhichtotalutilityincreasesstartstodiminish.
B) therateatwhichtotalutilityincreasesstaysthesame.
C) therateatwhichtotalutilityincreasesstartstoincrease.
D) thereisnoimpactontherateofchangeoftotalutility.
Answer: A
Diff:3
33) Whichofthefollowingstatementsistruewithrespecttototalutilityandmarginalutility?
A) Marginalutilityalwaysrisesastotalutilityincreases.
B) Marginalutilitycandeclineastotalutilityrises.
C) Totalutilityisnotrelatedtomarginalutility.
D) Totalutilitycandeclinewhilemarginalutilityrises.
Answer: B
Diff:2
SlicesofPizza TotalUtility MarginalUtility

0 0 -
1 20
2 50
3 20
4 10
5 0
34) Intheabovetable,themarginalutilityofthesecondsliceofpizzais
A) 20. B) 30. C) 50. D) 10.
Answer: B
Diff:1
35) Intheabovetable,thetotalutilityof4slicesofpizzais
A) 50. B) 70. C) 80. D) 20.
Answer: C
Diff:2
36) Intheabovetable,marginalutilitybeginstodiminishafterconsumptionofthe
A) secondsliceofpizza. B) thirdsliceofpizza.
C) fourthsliceofpizza. D) fifthsliceofpizza.
Answer: A
Diff:3
37) Afterconsumingwhatquantityofpizzadoestheconsumerinthetablebelowexperience
diminishingmarginalutility?
Quantity MarginalUtility
ofPizza ofPizza
1 100
2 80
3 60
4 40
A) 1 B) 2 C) 3 D) 4
Answer: A
Diff:1
Quantity MarginalUtility
ofPizza ofPizza
1 50
2 25
3 0
4 -25
38) Usingtheabovetable,whatisthemaximumnumberofslicesofpizzaarationalconsumer
wouldbuy?
A) 4 B) 3 C) 2 D) 1
Answer: B
Diff:2
39) Usingtheabovetable,whatisthetotalutilityofthethirdpieceofpizza?
A) 75utils B) 0utils C) 25utils D) -25utils
Answer: A
Diff:2
40) Usingtheabovetable,whatisthetotalutilityofthefirstpieceofpizza?
Answer: B
Diff:2
41) Whenyoutellyourmother,Illneverbetiredofyourcooking,youaresayingthe
A) totalutilityofhercookingtoyouisconstant.
B) totalutilityofhercookingtoyouisequalto1.
C) marginalutilityofhercookingtoyouis0.
D) marginalutilityofhercookingtoyouwillneverbe0.
Answer: D
Diff:2
Glassesof
Water TotalUtility MarginalUtility
1 100
2 175
3 225
4 250
5 260
6 255
42) Usingtheabovetable,diminishingmarginalutilitybeginsafterthe________glassofwateris
consumed.
A) 1st B) 2nd C) 6th D) 5th
Answer: A
Diff:2
43) Usingtheabovetable,themarginalutilityforthesixthglassofwateris
A) -5utils. B) 255utils. C) 5utils. D) 260utils.
Answer: A
Diff:2
44) Newspapervendingmachinesareoftenbuiltsothatcustomerscanpaytoliftadoorandtakea
paperoffapileofdailynewspapers.Newspaperdistributorsarenotconcernedaboutcustomers
takingthewholestackofpapersbecause
A) thetotalutilityofadailynewspaperiszero.
B) themarginalutilityofanyonedailynewspaperiszero.
C) themarginalutilityofaseconddailynewspaperiszero.
D) thepriceofadailynewspaperisrelativelylow.
Answer: C
Diff:1
45) Whydoestotalutilityriseatadecreasingrateasanindividualsconsumptionofanitem
increases?
Answer: Thisisduetotheprincipleofdiminishingmarginalutility.Asmoreofanygoodor
serviceisconsumed,itsextrabenefitdeclines,meaningthattheextrautilityfrom
consumingeachadditionalunitoftheitemfallsoffasconsumptionincreases.
Diff:2
46) Whatistheprincipleofdiminishingmarginalutility?
Answer: Theprincipleofmarginalutilityisthatasmoreofanygoodisconsumedtheextra
satisfactionderiveddeclines.Increasesintotalutilityfromtheconsumptionofagood
becomessmallerandsmallerasmoreofthegoodisconsumedinagiventimeperiod.
Diff:1
47) Restaurantsthatallowcustomerstoeatasmuchastheywantforafixedpricemustmake
moneyortheywouldnotremaininbusiness.Howcantheyearnprofitswhenpeoplecan
alwayseatmoresothattherestaurantscostskeepgettinghigher?Whatpracticethatregular
restaurantsusewillnotbeusedbyall-you-can-eatplaces?
Answer: Restaurantsarerelyingontheprincipleofdiminishingmarginalutility.Eventuallythe
marginalutilityofthefoodwillgosoloworevenbecomenegativesopeoplewillquit
eating.Suchrestaurantsdonotofferdoggiebags,becausethiswouldallowpeopleto
takeextrafoodandeatitlaterwhenthemarginalutilitywouldagainbehigher,thereby
increasingthecostsofall-you-can-eatrestaurants.
Diff:3
48) Jilllikeslobstersbutshedoesnoteatlobstersineverymeal.Howcanutilitytheoryexplainthis?
Answer: EventhoughJilllikeslobsters,sheisprobablyfacingdiminishingmarginalutilityfrom
lobsterconsumptionoveragivenperiodoftime.Hermarginalutilityfromeatingmore
lobsterswithinaweekafteramealoflobstersmightbezero.Thus,shedoesnotwantto
eatanymorelobstersinthatweek.
Diff:2
20.4OptimizingConsumptionChoices
1) Inordertomaximizeutility,aconsumershouldallocatemoneyincomesothat
A) themarginalutilityofthelastunitofeachproductconsumedisgreaterthanthetotal
utilityofeachproductconsumed.
B) thetotalutilityderivedfromeachproductconsumedisthesame.
C) themarginalutilityobtainedfromthelastdollarspentoneachproductisthesame.
D) theelasticityofdemandonallproductspurchasedisthesame.
Answer: C
Diff:1
Topic: 20.4OptimizingConsumptionChoices
2) SupposeIsaacsmarginalutilityfromattendinghis5thWhiteSoxgamewas40andthe
marginalutilityfromattendinghis1stU2concertwas200.AssumethatthepriceofaSoxticket
is$20andthepriceofaU2ticketis$120.Whichofthefollowingwouldbetrue?
A) IsaacwouldattendmoreU2concertsandlessSoxgames.
B) IsaacwouldattendmoreSoxgamesandlessU2concerts.
C) Isaacwouldnotalterhisbehavior.
D) IsaacwouldattendlessofbothSoxgamesandU2concerts.
Answer: B
Diff:1
3) Ifaconsumerconcludesthatthemarginalutilityofthelastdollarspentonvegetablesexceeds
themarginalutilityofthelastdollarspentonjunkfood,hewillrespondby
A) consumingrelativelymorejunkfoodandfewervegetables.
B) consumingrelativelymorevegetablesandlessjunkfood.
C) consumingequalamountsofvegetablesandjunkfood.
D) haltingconsumptionofjunkfoodaltogether.
Answer: B
Diff:1
4) ForgoodAandgoodB,theconsumermaximizespersonalsatisfactionwhen
A) MUA/PA=PB/MU B. B) PA/MU A = PB/MUB.
C) MUA/PA=MUB/PB. D) MUA/MU B =PA/PB.
Answer: C
Diff:1
BobsMarginalUtilityforconsumingbeerandpizzawith$8.00inincome
Quantity Marginal Quantityof Marginal

ofPizza Utility Beer Utility
1 45 1 40
2 40 2 40
3 30 3 35
4 15 4 10
5 -5 5 0
5) Intheabovetable,Bobexperiencesdiminishingmarginalutilityafterconsuminghowmany
piecesofpizza?
A) 1 B) 2 C) 3 D) 4
Answer: A
Diff:1
6) Intheabovetable,Bobexperiencesdiminishingmarginalutilityafterconsuminghowmany
beers?
A) 1 B) 2 C) 3 D) 4
Answer: B
Diff:1
7) Intheabovetable,howmuchtotalutilitydoesBobgetfromconsuming4beers?
Answer: C
Diff:1
8) Accordingtotheabovetable,howmuchtotalutilitydoesBobgetfrom3piecesofpizza?
Answer: C
Diff:1
9) Intheabovetable,howmuchbeerandpizzawillBobconsumeifthepriceofapieceofpizzais
$2.00andthepriceofabeeris$2.00?
A) 1pieceofpizzaand3beers B) 2piecesofpizzaand2beers
C) 2piecesofpizzaand3beers D) 3piecesofpizzaand1beer
Answer: B
Diff:1
10) Referringtotheabovetable,supposeBobsratiosofmarginalutilityofbeertothepriceofbeer
andthemarginalutilityofpizzatothepriceofpizzaareequal.Ifthepriceofbeerincreases
A) Bobwillprobablyconsumemorebeerandlesspizza.
B) Bobwillprobablyconsumelessbeerandlesspizza.
C) Bobwillprobablyconsumelessbeerandmorepizza.
D) Bobwillstillconsumethesameamountofbeerandpizza.
Answer: C
Diff:1
11) AssumethatJackieconcludesthatheshouldeatlessandplayracquetballmore.Inthis
situation,itmustbetruethatthemarginalutilityofthelastdollarspentonfoodis
A) morethanthemarginalutilityofthelastdollarspentonracquetball.
B) lessthanthemarginalutilityofthelastdollarspentonracquetball.
C) equaltothemarginalutilityofthelastdollarspentonracquetball.
D) negativeandlessthanthemarginalutilityofthelastdollarspentonracquetball.
Answer: B
Diff:1
12) Foranytwogoods,XandY,ifMU X dividedbyPX equals2.5andMUYdividedbyPY equals

4.0,thenwithgivenincomeandpricestheconsumershould
A) buymoreofgoodXandlessofgoodY.
B) buymoreofgoodYandlessofgoodX.
C) buyallofgoodYandnoX.
D) stopbecauseanequilibriumisachieved.
Answer: B
Diff:1
13) Dr.Rodriguezisconsumingbeerandwine.Athiscurrentlevelofconsumption,themarginal
utilityperdollaris30unitsforbeerand15unitsforwine.Dr.Rodriguezshould
A) consumetwiceasmuchbeeraswine.
B) consumetwiceasmuchwineasbeer.
C) increasehisconsumptionofbeerrelativetowine.
D) increasehisconsumptionofwinerelativetobeer.
Answer: C
Diff:1
14) Despitethefactthatwaterisnecessarytosustainlife,itislessexpensivethansoftdrinks.
Economictheorysuggeststhatthisissobecause
A) thereisaconspiracyamongsoftdrinksproducerstoholdpricesartificiallyhigh.
B) althoughthetotalutilityofwaterconsumptionishigh,itsmarginalutilityperdollarspent
islowwhencomparedtosoftdrinks.
C) consumersareirrational.
D) sellersofwaterholdthepriceofwaterartificiallylowbecauseofitsimportance.
Answer: B
Diff:1
15) Theconsumeroptimumforconsumingtwogoodsisachievedwhen
A) thetotalutilityfromeachgoodisequal.
B) thepriceofeachgoodisequal.
C) thepricemultipliedbythemarginalutilityisequalforthetwogoods.
D) themarginalutilityperlastdollarspentisequalforthetwogoods.
Answer: D
Diff:1
16) Theconsumeroptimum(fortwogoods,aandb)isreachedwhen
A) TUa =TUb. B) MUa = MUb.
C) TUa /Pa =TUb/Pb. D) MUa /Pa = MUb/Pb.
Answer: D
Diff:1
17) Thepriceofgoodais$5andthepriceofgoodbis$15.Ifthemarginalutilityofgoodais
20thenthemarginalutilityofgoodbmustbe________tohaveanoptimumcombinationof
goodspurchased.
A) 4 B) 20 C) 60 D) 80
Answer: C
Diff:3
18) ThemarginalutilityofgoodAis6andthemarginalutilityofgoodBis15.ThepriceofgoodA
is$2.ThepriceofgoodBmustbe________iftheconsumerisoptimizingherutility.
A) $2 B) $5 C) $45 D) $15
Answer: B
Diff:2
19) Whenthemarginalutilityperdollarofgoodxexceedsthemarginalutilityperdollarofgoody,
A) theconsumershouldconsumemoreofgoodx.
B) theconsumerisconsumingtoomuchofgoodx.
C) goodymusthaveanegativemarginalutility.
D) theconsumerisinanoptimalsituationifthepriceofgoodxexceedsthepriceofgoody.
Answer: A
Diff:1
20) Assumethatthemarginalutilityfromgoodxis10unitsandthatthepriceofgoodxis$5per
unit.Themarginalutilityfromgoodyis15unitsanditsunitpriceis$7.Inthissituation,a
utility-maximizingconsumershould
A) consumemoreofgoodx. B) consumeonlygoody.
C) consumemoreofgoody. D) consumeneitherxnory.
Answer: C
Diff:2
21) Usingtheutility-optimizingmodel,whichofthefollowingwouldinduceaconsumerto
increaseconsumptionofgoodx,anormalgood?
A) Anincreaseinthemarginalutilityofx
B) Adecreaseinthetotalutilityofy
C) Anincreaseinthemarginalutilityofgoody
D) Adecreaseinincome
Answer: A
Diff:1
22) Inarestaurantwecanobservepeopleconsumingcoffee,tea,andsoftdrinks.Allarepricedthe
same.IfSallyconsumescoffeeandAliconsumessoftdrinks,wecanconcludethat
A) Billwillbedrinkingtea.
B) SallylikescoffeemorethanAlidoes,andAlilikessoftdrinksmorethanSallydoes.
C) Sallyderivesmoreutilityfromcoffeethanfromteaorsoftdrinks,andAliderivesmore
utilityfromsoftdrinksthanfromteaorcoffee.
D) theutilitySallyreceivesfromcoffeeconsumptionequalstheutilitythatAlireceivesfrom
consumingsoftdrinks.
Answer: C
Diff:3
23) Consumersdonotbuyasmanyunitsofeachgoodastheywantbecause
A) ofthelawofdiminishingmarginalutility.
B) theyhavelimitedincomes.
C) theydonotknowwhattheywantinallsituations.
D) eventuallymarginalutilityequalszero.
Answer: B
Diff:1
24) Theconsumeroptimumisthesetofgoodsandservices,subjecttothelimitedincomeofthe
consumer,that
A) theconsumercanaffordtobuy.
B) ischaracterizedbyzeromarginalutilityoneachgoodandservice.
C) maximizesthelevelofsatisfactionforeachconsumer.
D) ischaracterizedbyincreasingmarginalutility.
Answer: C
Diff:1
25) Aconsumerwithunlimitedincomewillcontinueconsuminggoodsuntil
A) themarginalutilityofeachisequaltozero.
B) themarginalutilityofeachisnegative.
C) totalutilityrises.
D) marginalutilityequalstotalutility.
Answer: A
Diff:2
26) Thepriceofahamburgeris$1,thepriceofamovieis$5,andtheconsumerhas$13.A
consumerhaspurchased3hamburgersandtwomovies,receiving10unitsofutilityforthelast
hamburgerand10unitsofutilityforthelastmovie.Thesetofgoods
A) isanoptimumsincetheentireincomeisspentandthemarginalutilityisthesameforthe
lastunitofeachgood.
B) isanoptimumbecausetheconsumerhasmaximizedherutilitygiventhelimitedincome
shehad.
C) isnotanoptimumbecausethemarginalutilityperdollarspentisgreaterforthe
hamburgerthanforthemovie.
D) isnotanoptimumbecausethemarginalutilityforthesecondhamburgerwaslessthanthe
marginalutilityforthefirsthamburger.
Answer: C
Diff:3
27) Aconsumerhasspentallofhisfundsonhamburgersandmovies.Thepriceofahamburgeris
$1andthepriceofamovieis$5.Themarginalutilityofthelasthamburgeris5andthe
marginalutilityofthelastmovieis40.Thisconsumerhas
A) notmaximizedutility.Tomaximizeutility,heshouldcutbackonmoviesandbuymore
hamburgers.
B) notmaximizedutility.Tomaximizeutility,heshouldcutbackonhamburgersandbuy
moremovies.
C) notmaximizedutility.Tomaximizeutility,heshouldcutbackconsumptionofeach.
D) maximizedutility.
Answer: B
Diff:3
Quantityof Total Quantityof Total

Hamburgers/Wk Utility Movies/Wk Utility
0 0 0 0
1 25 1 200
2 45 2 260
3 55 3 300
4 60 4 320
5 61 5 325
28) Refertotheabovetable.Assumetheconsumerspendshisentireincome.Iftheconsumers
optimumatthecurrentpriceofamovieisat4hamburgersand4movies,andthepriceofa
hamburgeris$1,whatistheconsumersincome?
A) $28 B) $20 C) $16 D) $40
Answer: B
Diff:3
29) Refertotheabovetable.Assumetheconsumerspendshisentireincome.Thepriceofa
hamburgeris$1,thepriceofamovieis$6,andtheconsumerhas$15.Whatistheconsumers
optimum?
A) 2hamburgersand2movies B) 3hamburgersand2movies
C) 4hamburgersand4movies D) 0hamburgersand2.5movies
Answer: B
Diff:2
30) WhenStephanieincreasestheconsumptionofpizzaanddecreasetheconsumptionofsoda,her
marginalutilityof
A) pizzafallsandthemarginalutilityofsodawillincrease.
B) bothpizzaandsodawilldecrease.
C) pizzaincreasesandthemarginalutilityofsodawillfall.
D) bothpizzaandsodawillincrease.
Answer: A
Diff:2

Magazines/Wk Utility PaperbackBooks/Wk Utility
0 0 0 0
1 50 1 300
2 90 2 500
3 120 3 600
4 130 4 650
5 132 5 675
6 132 6 680
31) Thepriceofamagazineis$2,thepriceofapaperbackbookis$5,andtheconsumerhas$33.
Accordingtotheabovetable,therationalconsumerwillpurchase
A) 1magazineand2books. B) 2magazinesand3books.
C) 4magazinesand5books. D) 5magazinesand6books.
Answer: C
Diff:2
32) Refertotheabovetable.Ifaconsumersoptimumconsistsof3magazinesand6books,then
A) thepriceofamagazineissixtimesmorethanthepriceofabook.
B) thepriceofamagazineisthreetimesmorethanthepriceofabook.
C) thepriceofabookismorethanfivetimesmorethanthepriceofamagazine.
D) thepriceofabookissixtimesmorethanthepriceofamagazine.
Answer: A
Diff:3
33) Accordingtoutilitytheory,consumerpurchasedecisionsaremadesuchthat
A) thevalueoftheratioofmarginalutilitytopriceforthelastunitspurchasedandconsumed
isequal.
B) thedifferencebetweenthevalueofthemarginalutilityofthelastunitpurchasedandthe
pricepaidismaximized.
C) thetotalutilityofthelastunitpurchasedisequaltothepriceofthatunit.
D) thetotalutilityfromconsumingthegoodislessthanthemarginalutilityofthelastunit
consumed.
Answer: A
Diff:2
34) Consumersusuallybuyfewerunitsofagoodthanthequantitythatwouldmaximizetotal
utilityfromconsumingthegoodbecause
A) theyarenotrational.
B) ofthelawofdemand.
C) theyhavelimitedincomes.
D) marginalutilitybecomeszeroafterjustafewunitsofthegood.
Answer: C
Diff:1
35) Theconsumeroptimumisdefinedas
A) thesetofgoodsandservicesthatmaximizesmarginalutilityforeachgood.
B) thesetofgoodsandservicessuchthatthemarginalutilityofeachgoodequalszero.
C) thesetofgoodsandservicesthatmaximizesthemarginalutilityofeachgoodconsumed.
D) thesetofgoodsandservices,subjecttothelimitedincomeoftheconsumer,that
maximizesthetotalutilityoftheconsumer.
Answer: D
Diff:1
36) Thesetofgoodsandservicesthatmaximizesthelevelofsatisfactionforeachconsumersubject
tolimitedincomeis
A) theconsumeroptimum. B) diminishingmarginalutility.
C) increasingmarginalutility. D) substitutioneffect.
Answer: A
Diff:1
37) Aconsumersoptimumisfoundwhen
A) themarginalutilityofthelastdollarspentequalszeroforeachgood.
B) themarginalutilityofeachgoodisincreasingandthetotalincomeisspent.
C) thetotalutilityofeachgoodisthesameandthetotalincomeisspent.
D) themarginalutilityofthelastdollarspentoneachgoodisthesameandallincomeis
spent.
Answer: D
Diff:2
38) Aconsumersoptimumisfoundwhen
A) pricesofgoodsgodown.
B) theconsumerisachievingthemaximumlevelofutilitygivenmarketpricesandtheir
limitedincome.
C) themarginalutilityofthelastdollarspentequals0foreverygood.
D) theconsumersavespartoftheirincome.
Answer: B
Diff:2
39) Aconsumerhasspentallofhisincomeonhamburgersandmovies.Thepriceofahamburgeris
$1andthepriceofamovieis$6.Themarginalutilityofthelasthamburgeris5andthe
marginalutilityofthelastmovieis24.Theconsumerhas
A) maximizedutility.
B) notmaximizedutility.Heshouldcutbackonmoviesandbuymorehamburgers.
C) notmaximizedutility.Heshouldcutbackonhamburgersandbuymoremovies.
D) notmaximizedutility.Heshouldcutbackconsumptionofeachgood.
Answer: B
Diff:3
40) Thepriceofahamburgeris$1,andthepriceofamovieis$6.Theconsumerhaspurchased2
hamburgersand2movies,andhermarginalutilityfromthesecondhamburgeris20andfrom
thesecondmovieis120.Theconsumerhasanincomeof$21.Thiscombinationofgoods
A) maximizesutilityandisanoptimumbecausethemarginalutilityofthelastdollarspent
oneachgoodisthesame.
B) maximizesutilitybecausethemarginalutilityofthelastdollarspentoneachgoodisthe
same,butitisnotanequilibriumbecausemarginalutilityisnotzero.
C) isnotanoptimumbecausetheconsumerhasnotspentallofhermoney.
D) isnotanoptimumbecausethemarginalutilityofthelastdollarspentoneachgoodisnot
thesame.
Answer: C
Diff:3
41) Thepriceofahamburgeris$1andthepriceofamovieis$6andtheconsumerhas$14.A
consumerhaspurchased2hamburgersand2movies,receiving20unitsofutilityforthesecond
hamburgerand100unitsofutilityforthesecondmovie.Thesetofgoods
A) isanoptimumsincetheentireincomeisspentandthemarginalutilityperdollarspentis
thesameforthelastunitofeachgood.
B) isanoptimumsincetheentireincomeisspentandtotalutilityismaximized.
C) isnotanoptimumbecausethemarginalutilityperdollarspentisgreaterforhamburgers
thanformoviesandtheconsumerisnotspendingallofhisincome.
D) isnotanoptimumbecausethemarginalutilityforeachgoodisnotequal.
Answer: C
Diff:3
42) Thepriceofahamburgeris$1andthepriceofamovieis$4andtheconsumerhas$10.A
consumerhaspurchased2hamburgersand2movies,receiving25unitsofutilityforthesecond
hamburgerand100unitsofutilityforthesecondmovie.Thesetofgoods
B) isanoptimumsincetheentireincomeisspentandtotalutilityisminimized.
thanformovies.
D) isnotanoptimumbecausetheconsumerhasnotspentallofhismoney.
Answer: A
Diff:3
43) Thepriceofhamburgersis$2andthepriceofmoviesis$4.Theconsumerhas$14ofincome.
Theconsumerispurchasing3hamburgersandreceiving20utilsforthelasthamburger.Heis
alsopurchasing2moviesandreceiving40utilsforthelastmovie.Thissetofgoods
B) isanoptimumsincetheentireincomeisspentandtotalutilityisminimized.
thanformovies.
Answer: A
Diff:3
thanformovies.
Answer: D
Diff:3
thanformovies.
Answer: C
Diff:3
46) Johniscurrentlyspendingallofhisincome.ForthelastunitofGoodAconsumedJohngets20
utilsandforthelastunitofGoodBconsumedhegets10utils.ThepriceofGoodAis$4.The
priceofGoodBis$1.IfJohnwantstomaximizehisutilityheshould
A) continuetopurchasethesameamountofGoodAandGoodB.
B) increasetheconsumptionofGoodAanddecreasetheconsumptionofGoodB.
C) decreasetheconsumptionofGoodAandincreasetheconsumptionofGoodB.
D) decreasetheconsumptionofGoodAanddecreasetheconsumptionofGoodB
Answer: C
Diff:3
D) decreasetheconsumptionofGoodAanddecreasetheconsumptionofGoodB
Answer: A
Diff:3
D) decreasetheconsumptionofGoodAanddecreasetheconsumptionofGoodB.
Answer: B
Diff:3
Answer: C
Diff:3
Answer: B
Diff:3
Answer: A
Diff:3
52) WhenBonnieincreasestheconsumptionofGoodAanddecreasetheconsumptionofGoodB,
hermarginalutilityof
A) AfallsandthemarginalutilityofBwillincrease.
B) bothAandBwilldecrease.
C) AincreasesandthemarginalutilityofBwillfall.
D) bothAandBwillincrease.
Answer: A
Diff:2

Hamburgers/Wk Utility BroadwayShows/Wk Utility
1 40 1 400
2 60 2 700
3 76 3 850
4 86 4 950
5 91 5 1000
6 93 6 1025
53) Refertotheabovetable.Ifthepriceofahamburgeris$2,thepriceofaBroadwayShowis$60,
andtheconsumerhas$128,whatistheconsumeroptimum?
A) 2hamburgersand2Broadwayshows. B) 2hamburgersand3Broadwayshows.
C) 3hamburgersand2Broadwayshows. D) 4hamburgersand2Broadwayshows.
Answer: D
Diff:2
54) Refertotheabovetable.Ifthepriceofahamburgeris$2,thepriceofaBroadwayShowis$60,
andtheconsumerhas$190,whatistheconsumeroptimum?
A) 4hamburgersand2Broadwayshows. B) 5hamburgersand3Broadwayshows.
C) 6hamburgersand0Broadwayshows. D) 0hamburgersand6Broadwayshows.
Answer: B
Diff:2
55) IfthepriceofXis$3andthepriceofYis$5,then,inaconsumeroptimum,
A) thequantitypurchasedofYmustbe60percentofthequantityofXpurchased.
B) thequantitypurchasedofYmustbe67percentofthequantityofXpurchased.
C) themarginalutilityofYmustbe67percentmorethanthemarginalutilityofX.
D) themarginalutilityofXmustequal3andthemarginalutilityofYmustequal5.
Answer: C
Diff:3

Magazines/Wk Utility Paperbacks/Wk Utility
0 0 0 0
1 60 1 200
2 100 2 400
3 130 3 500
4 140 4 550
5 142 5 575
6 142 6 580
56) RefertotheabovetableIfthepriceofamagazineis$2andthepriceofapaperbackbookis$5
andtheconsumerhas$40,therationalconsumerwillpurchase
A) 2magazinesand2books. B) 2magazinesand3books.
Answer: C
Diff:2
57) Refertotheabovetable.Ifthepriceofamagazineis$2andthepriceofapaperbackbookis$5
Answer: B
Diff:2
58) Refertotheabovetable.Ifthepriceofamagazineis$2andthepriceofapaperbackbookis$5
Answer: D
Diff:2
59) Refertotheabovetable.Iftheconsumersequilibriumconsistsof4magazinesand4books,then
weknowthat
A) thepriceofamagazineis5timesmorethanthepriceofabook.
B) thepriceofamagazineis6timesmorethanthepriceofabook.
C) thepriceofabookis5timesmorethanthepriceofamagazine.
D) thepriceofabookis3timesmorethanthepriceofamagazine.
Answer: C
Diff:3
60) Refertotheabovetable.Iftheconsumersequilibriumconsistsof3magazinesand6books,then
weknowthat
A) thepriceofamagazineis4.5timesmorethanthepriceofabook.
B) thepriceofamagazineis6timesmorethanthepriceofabook.
C) thepriceofabookis2timesmorethanthepriceofamagazine.
D) thepriceofabookis3timesmorethanthepriceofamagazine.
Answer: B
Diff:3
Quantity Quantity
ofA TUa ofB TUb
1 18 1 10
2 33 2 18
3 42 3 22
4 48 4 24
5 51 5 25
61) ThepriceofproductAis$3,thepriceofproductBis$2,andyouhave$18tospend.What
combinationofproductAandproductBwillgiveyouthemostsatisfaction?
A) 5unitsofproductA;1unitofproductB
B) 4unitsofproductAand3unitsofproductB
C) 2unitsofproductAand5unitsofproductB
D) 3unitsofproductAand5unitsofproductB
Answer: B
Diff:3
Quantity Quantity Quantity

ofA MUa ofB MUb ofC MUc
1 15 1 12 1 15
2 12 2 10 2 10
3 9 3 8 3 5
4 6 4 4 4 4
62) Basedontheinformationintheabovetable,thepriceofAis$3,thepriceofBis$2,andthe
priceofCis$5.IfMaryhas$22tospend,whatcombinationofproductsA,B,andCshouldshe
buyinordertomaximizehersatisfaction?
A) 3unitsofproductA;3unitsofproductB;1unitofproductC
B) 2unitsofproductA;3unitsofproductB;2unitsofproductC
C) 3unitsofproductA;4unitsofproductB;0unitsofproductC
D) 2unitsofproductA;1unitofproductB;4unitsofproductC
Answer: B
Diff:3
63) Basedontheinformationintheabovetable,whatisthetotalsatisfactionMarycanachieveifshe
isawiseconsumer?
Answer: B
Diff:3
QuantitiesMUapples(Adam)MUoranges(Adam)QuantitiesMUapples(Eve)MUoranges(Eve)
1 40 30 1 15 20
2 30 20 2 10 15
3 25 15 3 8 12
4 20 12 4 5 10
64) Adamhas3applesand3oranges.Evehas2applesand2oranges.Themarginalutilitiesfor
AdamandEvearesummarizedintheabovetable.AdamasksEvetoexchangeoneofher
applesforanorange.
A) Evewillbewillingtomaketheexchange,becausehertotalsatisfactionwillremain
unchanged.
B) Evewillbewillingtomaketheexchange,becausehertotalsatisfactionwillincrease.
C) Evewillbeunwillingtomaketheexchange,becausesheloses5utilsofsatisfaction.
D) Evewillbeunwillingtomaketheexchange,becausesheloses15utilsofsatisfaction.
Answer: B
Diff:3
65) Usetheabovetable.Adamhas3applesand3oranges.Evehas2applesand2oranges.Eveasks
Adamtogiveheranappleinexchangeforanorange.ShouldEvegothroughwiththis
exchange?
A) Yes.Thiswayshewillhave3apples,whichwillgivehermoretotalsatisfaction.
B) Yes.Sheisindifferentbetweenconsumingapplesandoranges.
C) No.Shegivesupmoresatisfactionthanshegets.
D) No.Adamlikesapplesmorethanoranges.
Answer: C
Diff:3
66) Yourallergiesarebadthissummersoyourallergistwritesyouaprescriptiontorelieveyour
symptoms.Whenyougettothepharmacy,younoticethenamebrandallergymedicineismore
expensivethanitsgenericequivalent.Youpurchasethegenericequivalentanddemonstrateall
ofthefollowingEXCEPT
A) theprincipleofsubstitutionofoneproductforanother.
B) theprincipleofdiminishingmarginalutility.
C) whenpricedecreases,thequantitydemandedincreases.
D) apricechangemayaffectconsumeroptimum.
Answer: B
Diff:1
67) Aconsumerisbuyingtheoptimalamountofgoodswhen
A) thetotalutilityfromthepurchasesonallthegoodspurchasedisthesame.
B) themarginalutilityfromthepurchasesofallthegoodspurchasedisthesame.
C) themarginalutilityperlastdollarspentonallofthegoodspurchasedisthesame.
D) themarginalutilityfromthepurchasesofallthegoodsisequalto1.
Answer: C
Diff:2
68) Whenaconsumerisattheconsumeroptimum,
A) MUa =MUb=MUc = ...= MUn .
B) MUa /Pa =MUb/Pb= MUc/Pc = ...= MUn /Pn = 1.
C) TUa =TUb=TUc=...= TUn .
D) MUa /Pa =MUb/Pb= MUc/Pc = ...= MUn /Pn .
Answer: D
Diff:2
69) Whichofthefollowingbestdescribestheconsumeroptimum?
A) MUa /Pa =TUb/Pb B) MUa /TUa = Pa
C) MUa /Pa =MUb/Pb=...=MUz /Pz D) changeinTU/changeinP=MU
Answer: C
Diff:2
70) Aconsumerwhohaschosentherightmixofgoodsandservicestomaximizehisorherutilityis
saidtohaveachieved
A) consumerequilibrium. B) consumerbenefit.
C) consumersurplus. D) consumeroptimum.
Answer: D
Diff:1
71) WhenDVDsandhamburgerswerethesameprice,Mavisconsumed3hamburgersand5DVDs,
andMavisreceived10utilsfromthelasthamburgerand15utilsfromthelastDVDconsumed.
WhatshouldbeMavisconsumptionstrategy?
A) consumemoreDVDsandfewerburgers B) consumemoreburgersandfewerDVDs
C) consumemoreofbothitems D) consumelessofbothitems
Answer: A
Diff:2
72) Theideathatconsumerscontinuetoadjusttheirpurchasesuntilthemarginalutilityperlast
dollarspentonallitemsisequaliscalledthe
A) lawofincreasingcosts. B) lawofdiminishingmarginalutility.
C) ruleof72. D) consumeroptimum.
Answer: D
Diff:2
73) Peterconsumesbagsofpotatochipsandcansofsoftdrink.Themarginalutilityofbagsof
potatochipsis10utilsperbagandthemarginalutilityofcansofsoftdrinkis50utilspercan.
Potatochipscost$0.50abag,andacanofsoftdrinkcosts$1.00.WhatshouldPeterdo?
A) Petershouldeatmorechips,becausetheycostless.
B) Petershouldbuymorechipsandlesssoftdrink.
C) Petershouldbuymoresoftdrink,becauseitcostsless.
D) Petershouldbuymoresoftdrinkandfewerpotatochips.
Answer: D
Diff:2
74) Basedonthematerialpresentedinthechapter,canweconcludethatpeoplewillconsume
goodsuntilthemarginalutilityofeachgoodiszero?
A) Yes,becauseatthatpointtotalutilityismaximum.
B) Yes,becauseatthatpointmarginalutilityisminimum.
C) No,becauseconsumptionisdeterminedbytotalutility.
D) No,becauseconsumptionisdeterminedbythemarginalutility/priceratio.
Answer: D
Diff:1
75) Thepriceofacanofsoftdrinkis$1.25andthemarginalutilityofthesecondcanconsumedis10
utils.Themarginalutilityofthethirddonutis4utils.Youshouldonlyconsumethethirddonut
ifthepriceofthedonutislessthanorequalto
A) $0.41. B) $0.625. C) $0.25. D) $0.50.
Answer: D
Diff:2
76) Ifthelast$5spentonmoviesadded30utilstoyourtotalsatisfactionandthelast$8spenton
booksadd64utils,
A) youcanincreaseyoursatisfactionbybuyingmorebooksandseeingfewermovies.
B) yourtotalsatisfactionis94utils.
C) youcanincreaseyoursatisfactionbybuyingfewerbooksandseeingmoremovies.
D) youcanincreaseyoursatisfactionbybuyingonlybooks.
Answer: A
Diff:2
77) Thestateofconsumeroptimumisreachedwhentheconsumers
A) totalutility/marginalutilityratioforallitemsisequal.
B) totalutility/priceratioforallitemsisequal.
C) marginalutilityforaproductiszero.
D) marginalutility/priceratiosforallitemsareequal.
Answer: D
Diff:1
78) Youconsideryourselftobewiseconsumer.Themarginalutility/priceratioofcoffeeis12utils
perdollar.Ifthepriceofadonutis$0.75,youshouldonlybuythedonutifitgivesyouatleast
A) 16utilsofsatisfaction.
B) 9utilsofsatisfaction.
C) 12utilsofsatisfaction.
D) Theanswercannotbedeterminedwiththisinformation.
Answer: B
Diff:1
79) WhenaconsumershiftshispurchasesfromproductAtoproductB,themarginalutilityof
A) AfallsandthemarginalutilityofBwillincrease.
B) bothAandBwilldecrease.
C) AincreasesandthemarginalutilityofBwillfall.
D) bothAandBwillincrease.
Answer: C
Diff:2
80) Inorderforaconsumertochoosebetweentwodifferentgoods,hehastotakeintoconsideration
the
A) marginalutilityofproduction. B) marginalutilitydividedbytheprice.
C) marginalutilityplustheprice. D) totalutilitydividedbyprice.
Answer: B
Diff:1
81) Theconsumeroptimumisfoundbyusing
A) marginalutility. B) totalutility.
C) totalutilityminusmarginalutility. D) totalutils.
Answer: A
Diff:2
Pepsi MUofPepsi Pizza MUofPizza

1stcan 18 1stslice 7
2ndcan 15 2ndslice 6
3rdcan 12 3rdslice 4
4thcan 9 4thslice 3
5thcan 6 5thslice 0
82) Usingtheabovetable,ifthepriceofPepsiis$3,howmanycansofPepsiwouldhavetobe
consumedinordertohaveamarginalutilitytopriceratioof3?
A) onecan B) twocans C) threecans D) fourcans
Answer: D
Diff:2
83) AssumethatCatherinehasthepreferencesshownintheabovetable.Alsoassumethattheprice
ofacanofPepsiis$3.00andthatthepriceofasliceofpizzais$2.00.Ifshehas$16availableto
spend,whatcombinationofPepsiandpizzawillbeherconsumeroptimum?
A) 1canofPepsi,4slicesofpizza B) 2cansofPepsi,5slicesofpizza
C) 4cansofPepsi,2slicesofpizza D) 6cansofPepsi,0slicesofpizza
Answer: C
Diff:3
84) AssumethatJackhasthepreferencesshownintheabovetable.Alsoassumethatthepriceofa
canofPepsiis$3.00andthatthepriceofasliceofpizzais$1.00.Ifhehas$16availableto
spend,whatcombinationofPepsiandpizzawillbehisconsumeroptimum?
A) 4cansofPepsi,1sliceofpizza B) 3cansofPepsi,2slicesofpizza
C) 2cansofPepsi,4slicesofpizza D) 4cansofPepsi,4slicesofpizza
Answer: D
Diff:3
85) Theexpressiongettingthemostbangforyourbuckisanillustrationofthe
A) totalutility/priceratio. B) totalutility/marginalutilityratio
C) marginalutility/priceratio. D) marginalutility/totalutilityratio.
Answer: C
Diff:2
86) SupposethataconsumeriscurrentlyatanoptimumwhenconsuminggoodsAandB.Whichof
thefollowingmustbetrue?
A) ThetotalutilityfromAisequaltothetotalutilityfromB.
B) ThepriceofAisequaltothepriceofB.
C) ThemarginalutilityofAisequaltothemarginalutilityofB.
D) ThemarginalutilitytopriceratioofAisequaltothemarginalutilitytopriceratioofB.
Answer: D
Diff:2

1 40 1 400
2 60 2 700
3 76 3 850
4 86 4 950
5 91 5 1000
6 93 6 1025
87) Refertotheabovetable.Supposethepriceofahamburgeris$2,thepriceofamovieis$5,and
theincomeoftheconsumeris$29.Howmanyhamburgersandmovieswillthisconsumerbuy
tobeatanoptimum?
A) 1hamburgerand5movies. B) 6hamburgersand3movies.
C) 4hamburgersand4movies. D) 2hamburgersand5movies.
Answer: D
Diff:2
88) Refertotheabovetable.Supposethepriceofahamburgeris$2,thepriceofamovieis$5,and
theincomeoftheconsumeris$29.Whatwilltheconsumerstotalutilityequalatanoptimum?
A) 70 B) 1025 C) 1060 D) 1118
Answer: C
Diff:2
89) Refertotheabovetable.Thepriceofahamburgeris$2,thepriceofamovieis$5,andthe
consumersincomeis$29.Whatisthemarginalutilityperlastdollarspentonmoviesequaltoif
theconsumerisatanoptimum?
A) 50 B) 40 C) 20 D) 10
Answer: D
Diff:2
Quantityof Marginal Quantityof Marginal

GoodX/Wk Utility GoodY/Wk Utility
1 1200 1 1700
2 1000 2 1400
3 800 3 1100
4 600 4 800
5 400 5 500
6 100 6 200
90) Refertotheabovetable.IfthepriceofGoodXis$2,thepriceofGoodYis$1,andtheconsumer
has$9,therationalconsumerwillpurchase
A) 6unitsofGoodXand0unitsofGoodY.
B) 6unitsofGoodXand3unitsofGoodY.
C) 2unitsofGoodXand5unitsofGoodY.
D) 5unitsofGoodXand6unitsofGoodY.
Answer: C
Diff:3
Answer: A
Diff:3
Answer: D
Diff:3
93) Whatisconsumeroptimumaccordingtoutilitytheory?
Answer: Consumeroptimumisthesetofgoodsandservicesthatmaximizesthelevelof
satisfactionforaconsumer,giventheconsumersincomeandthepricesofthegoodsand
services.Atconsumeroptimum,themarginalutilityperdollarspentisequalacrossall
goodsandservicespurchased.
Diff:1
94) Explainhowaconsumermaximizesutility.
Answer: Tomaximizeutility,theconsumerallocatesincomeamonggoodsandservicessuchthat
thelastdollarspentoneachgoodpurchasedyieldsthesameamountofmarginalutility.
Thisoccursif
(MUa /Pa )=(MUb/Pb)=...=(MUz /Pz ).
Diff:2
95) Supposethatanindividualconsumesonlytwogoods.Whatwillhappentotheindividualif
herlastdollarspentononegoodyieldsmoremarginalutilitythanthatfromanothergood?
Answer: Theindividualwillconsumemoreofthegoodthatyieldsmoremarginalutility.
However,becauseoftheprincipleofdiminishingutility,themarginalutilitydeclinesas
sheconsumesmoreofthegoodwithhighermarginalutility.Shewillcontinueto
consumethegoodwithhighermarginalutilityuntilanoptimumpointatwhichthelast
dollarspentoneachgoodpurchasedyieldsthesameamountofmarginalutility.
Diff:2
96) Supposeafamilypurchases10,000gallonsofwaterayearat20centsagallonandonediamond
ringatapriceof$1000.Canweconcludethatthediamondringprovidesmoreutilitytothe
familythanwater?Explain.
Answer: No.Infact,thewaterprovidesmoretotalutilitythanthediamond.Weknowthatthe
(MUofthelastgallonofwater)/($0.20) =(MUofthering)/($1000).ThisimpliestheMUof
theringis5000timesmorethantheMUofthelastgallonofwater.Further,thetotal
utilityoftheringequalsmarginalutilitysinceonlyoneringwaspurchased.Giventhe
lawofdiminishingmarginalutility,thetotalutilitymustbemorethan10,000times
greaterthanthemarginalutilityofthe10,000thgallon,sothetotalutilityforthewater
mustbegreaterthanthetotalutilityofthediamond.
Diff:3
20.5HowaPriceChangeAffectsConsumerOptimum
1) Supposeaconsumeriscurrentlybuying5goodssothatutilityismaximized.Thepriceofoneof
thegoodsfallswhilethepricesoftheother4goodsdonotchange.Theconsumershould
A) buylessofallgoodsbeingconsumedtogettotheoptimalposition.
B) buymoreofallofthegoodsbuttheonethatexperiencesthedeclineinprice,togettothe
optimalposition.
C) buymoreofallgoodsbeingconsumedtogettotheoptimalposition.
D) buymoreofthegoodthathasexperiencedthefallinpricetogettotheoptimalposition.
Answer: D
Diff:1
Topic: 20.5HowaPriceChangeAffectsConsumerOptimum
2) IfFrankhasbeenconsuming5hamburgersperweekataconsumeroptimum,andthepriceof
hamburgersfalls,howwillFrankrespond?
A) Hewillsavemoreincome.
B) Hewillbuymoreofeverything.
C) Hewillbuymoreburgers.
D) Hewillbuymoreofeverythingexceptburgers.
Answer: C
Diff:1
3) Toremaininconsumeroptimum
A) apriceincreaserequiresanincreaseinconsumption.
B) apricedecreaserequiresanincreaseinconsumption.
C) apricedecreaserequiresadecreaseinconsumption.
D) pricesmustremainstatic.
Answer: B
Diff:2
4) Thechangeinpeoplespurchasingpowerthatoccurswhenthepriceofagoodtheypurchase
changes,assumingallelseisheldconstantisknownas
A) thesubstitutioneffect. B) therealincomeeffect.
C) theelasticityeffect. D) themultipliereffect.
Answer: B
Diff:2
5) SupposethataconsumerisatanoptimumconsumingXandY.IfthepriceofXfalls,thento
gettoanewequilibriumtheconsumermust
A) purchaselessXandmoreY. B) purchaselessYandlessX.
C) purchasemoreX. D) purchasemoreY.
Answer: C
Diff:2
6) Supposeaconsumerisatanoptimum.Whathappenswhenthepriceofonegoodshehasbeen
consumingincreases?
A) Thevalueofthemarginalutilityofthelastunitconsumeddecreases.
B) Thevalueofthemarginalutilityofthelastunitconsumedincreases.
C) Themarginalutilityperdollarspentonthelastunitconsumedofthatgoodincreasesby
thesameproportionasthepriceincreases.
D) Themarginalutilityperdollarspentonthelastunitconsumedofthatgoodisnowsmaller
thanthemarginalutilityperdollarspentonothergoodsthepersonconsumes.
Answer: D
Diff:3
7) Aconsumerisatanoptimumwhenthepriceofonegoodshehasbeenconsumingdecreases.As
aresult
A) thevalueofthemarginalutilityofthelastunitconsumedhasincreased.
B) thevalueofthemarginalutilityofthelastunitconsumedhasdecreased.
C) thepriceoftheothergoodmustdecreasetoo.
D) themarginalutilityofthelastdollarspentonthisgoodisnowgreaterthanthemarginal
utilityofthelastdollarspentonothergoods.
Answer: D
Diff:3
8) Aconsumerhasbeenbuying4magazinesand3booksamonthformanymonths.Thepriceof
magazinesthendecreases,whichdirectlycausesthemarginalutilityperdollarspenton
A) magazinestoincrease,therebyinducingtheconsumertopurchasefewermagazinesand
morebooks.
B) magazinestoincrease,therebyinducingtheconsumertopurchasemoremagazinesand
fewerbooks.
C) bookstoincrease,therebyinducingtheconsumertopurchasefewermagazinesandmore
books.
D) bookstodecrease,therebyinducingtheconsumertopurchasefewermagazinesandmore
books.
Answer: B
Diff:2
9) Thereal-incomeeffectshowsthat
A) adecreaseinthepriceofagoodincreasesthepurchasingpoweroftheconsumersincome.
B) iftheconsumersincomerises,heorshebuysmoreofinferiorgoodsandlessofnormal
goods.
C) ifagoodisinferior,adecreaseinthepurchasingpowerofincomeresultsinlessofthe
goodbeingconsumed.
D) whenthepriceofagoodrises,consumersareabletobuymoreofothergoodsbecauseof
theincreaseinthepurchasingpowerofincome.
Answer: A
Diff:1
10) Thereal-incomeandthesubstitutioneffectsreinforceeachotherby
A) increasingtheconsumptionofgoodywhenthepriceofxfalls.
B) increasingtheconsumptionofbothgoodsxandywhenincomeincreases.
C) decreasingtheconsumptionofgoodxwhenthepriceofgoodyfalls.
D) decreasingtheconsumptionofgoodxwhenthepriceofgoodxincreases.
Answer: D
Diff:2
11) Thereal-incomeeffectistypicallysmallbecause
A) thechangeinpriceofoneparticularitemhaslittleeffectontotalpurchasingpower.
B) incomehasnorelationtoconsumption.
C) pricechangestendtobalanceoutovertime.
D) real-incomesarealwaysrising.
Answer: A
Diff:2
12) Thereal-incomeeffectofapricechangeismostsignificantwhen
A) thesubstitutioneffectisinsignificant.
B) thesubstitutioneffectissignificanttoo.
C) thegoodunderconsiderationconstitutesamajorportionoftheconsumersbudget.
D) themarginalutilityperdollarspentonthelastunitishigh.
Answer: C
Diff:2
13) Thesubstitutioneffectshowsthat
A) ifthepriceofagoodincreases,consumersbuymoreofthatgoodandlessofallothers.
B) ifthepriceofagoodfallsrelativetoallothergoods,consumersbuylessofthatgoodand
moreofallothers.
C) ifthepriceofagoodfalls,consumersbuylessofallgoods.
D) ifthepriceofagoodrises,consumersbuylessofthatgoodandmoreofothers.
Answer: D
Diff:1
14) Thesubstitutioneffectarguesthataconsumer
A) willalwaysusetheadditionalpurchasingpowerfromapricedecreasetopurchasemore
ofbothgoods.
B) willnotpurchasemoreofagoodwhenitspricefalls.
C) willpurchasemoreofagoodthathasbecomerelativelycheaper,andlessofagoodthat
hasbecomerelativelymoreexpensive.
D) willpurchaselessofbothgoodsifhisorherrealincomeincreases.
Answer: C
Diff:2
15) Whenyoupurchasethelower-pricedstorebrandbreadinsteadofthemoreexpensivename
brand,youareexperiencing
A) thesubstitutioneffect. B) theincomeeffect.
C) afallintotalutility. D) diminishingmarginalproduct.
Answer: A
Diff:1
16) Thefactthatconsumerswillpurchasemoreofagoodthathasbecomerelativelycheaper
A) iscalledthenominalincomeeffect.
B) iscalledthesubstitutioneffect.
C) leadstoanupwardslopingdemandcurve.
D) leadstonegativemarginalutility.
Answer: B
Diff:1
17) Otherthingsbeingequal,whenthemoneypriceofagoodincreases,itsrelativeprice
A) staysthesame. B) increases. C) decreases. D) fallstozero.
Answer: B
Diff:1
18) Thepriceofalargepepperonipizzausedtobe$14,butthisweekthepriceroseto$18.Witha
budgetofjust$30,youcantaffordasmanypizzasatthehigherprice.Thischangeinconsumer
behaviorreflectsthe
A) realincomeeffect. B) substitutioneffect.
C) nominalincomeeffect. D) conceptofdiminishingmarginalutility.
Answer: A
Diff:1
19) Ifaconsumerisinitiallyatanoptimum,andthenthepriceofYfalls,then
A) MUX/PX<MUY/PY. B) MUX/PX > MUY/PY.
C) MUX/PX=MUY/PY. D) MUX/MUY > PY/PX.
Answer: A
Diff:2
20) Ifaconsumerisinitiallyatanoptimum,andthenthepriceofYincreases,then
C) MUX/PX=MUY/PY. D) MUX/MUY > PY/PX.
Answer: B
Diff:2
21) Ifaconsumerisatanoptimum,consumingXandY,andthepriceofXincreases,thentogetto
anewequilibriumtheconsumermust
A) purchaselessX. B) purchaselessY.
C) purchasemoreX. D) purchasemoreofbothXandY.
Answer: A
Diff:2
22) Ifaconsumerisatanoptimum,consumingXandY,andthepriceofXdecreases,thentogetto
anewequilibriumtheconsumermust
A) purchaselessX. B) purchaselessofbothXandY.
C) purchasemoreX. D) purchasemoreofbothXandY.
Answer: C
Diff:2
23) Ahigherpriceforagoodimpliesthat
A) themarginalutilityofthegoodhasdeclined.
B) thetotalvalueofthegoodtotheconsumerhasincreased.
C) thesacrificeofutilityofanothergoodhasincreased.
D) themarginalutilityofanothergoodhasdecreased.
Answer: C
Diff:3
24) Initially,aconsumerisatanoptimum.ThenthepriceofXdecreases.Consequently,
C) MUX/PX=MUY/PY. D) MUX > MUY.
Answer: B
Diff:2
25) Initially,aconsumerisatanoptimum.ThenthepriceofXincreases.Consequently,
C) MUX/PX=MUY/PY. D) MUX > MUY.
Answer: A
Diff:2
26) Aconsumerhasbeenbuying5magazinesand2booksamonthformanymonths.Thepriceof
booksthenincreases.Toattainanewoptimum,theconsumerwill
A) buymoremagazinesbecausetheyarenowrelativelymorevaluablethantheywerebefore,
whilecontinuingtobuythesamenumberofbooks.
B) buymorebooksbecausetheyarenowrelativelymorevaluablethantheywerebefore.
C) buythesamenumberofbooksandmagazinesasbeforebecausetheyprovidedifferent
typesofutility.
D) buyfewerbooksthanbeforebecausetheyarerelativelymoreexpensivethantheywere
before.
Answer: D
Diff:2
27) Daveisundecidedaboutwhethertoeatatarestaurantortoorderpizzaathome.Hethen
obtainsacouponfor20percentoffattherestaurantanddecidestogotheretoeat.Thisisan
exampleof
A) someoneusingcriteriaotherthanpricetomakeaconsumptiondecision.
B) alowerpriceleadingaconsumertosubstitutemoreofthelessexpensivegoodforthe
relativelymoreexpensivegood.
C) alowerpriceleadingaconsumertobuymoreofagoodbecauseoftheincomeeffect.
D) aconsumermakingadecisionirrationally.
Answer: B
Diff:3
28) Thesubstitutioneffectrefersto
A) thelawofdiminishingmarginalutility.
B) thewant-satisfyingpowerofagoodorservice.
C) substitutionoflessexpensivecommoditiesformoreexpensivecommodities.
D) thechangeinpurchasingpowerwhenthepriceofagoodchanges.
Answer: C
Diff:1
29) Thetendencyofpeopletosubstitutecheapercommoditiesformoreexpensivecommoditiesis
the
A) lawofdiminishingmarginalutility. B) real-incomeeffect.
C) substitutioneffect. D) priceincomeeffect.
Answer: C
Diff:1
30) Thereal-incomeeffectrefersto
A) thelawofdiminishingmarginalutility.
B) thewant-satisfyingpowerofagoodorservice.
C) substitutionoflessexpensivecommoditiesformoreexpensivecommodities.
D) thechangeinpurchasingpowerwhenthepriceofagoodchanges.
Answer: D
Diff:1
31) Thechangeinpeoplespurchasingpowerthatoccurswhenthepriceofonegoodthatthey
purchasechangesisthe
A) lawofdiminishingmarginalutility. B) real-incomeeffect.
C) substitutioneffect. D) priceincomeeffect.
Answer: B
Diff:1
32) ThepriceofagoodthatJoeiscurrentlyconsuminghasincreased.
A) Joehasexperiencedadecreaseinpurchasingpower.
B) Joewillexperienceashiftinthedemandcurveofthegoodwhosepricehasincreased.
C) Joewillstopconsumingthisgood.
D) Joewillexperienceincreasingmarginalutility.
Answer: A
Diff:1
33) Whenthepriceofanormalgooddecreases,peopleincreasetheirconsumptionofthegood.The
reasonis
A) thelawofdiminishingmarginalutility. B) thesubstitutionandincomeeffects.
C) thesubstitutioneffectonly. D) theincomeeffectonly.
Answer: B
Diff:1
34) Thereal-incomeeffectislikelytobegreaterwhen
A) thesubstitutioneffectisnotverylarge.
B) themarginalutilityofthelastunitishigh.
C) themarginalutilityperdollarspentonthelastunitishigh.
D) thegoodisanexpensivegood.
Answer: D
Diff:2
35) Adecreaseinthepriceofagoodcauses
A) theutilityofthegoodtodecrease.
B) themarginalutilityofthegoodtodecrease.
C) purchasingpowerofapersonsincometoincrease.
D) thenominalwealthofapersontoincrease.
Answer: C
Diff:1
36) Formostgoods,thereal-incomeeffectofapricechangeis
A) smallbecausethegoodaccountsforasmallpartoftheconsumersbudget.
B) smallbecausethedecisiontobuyagooddependsonlyontheincomeofaconsumer.
C) largebecausethepriceofthegoodisintermsofthecurrencyandtheincomeoftheperson
isalsointermsofthecurrency.
D) zerobecausethereal-incomeeffectonlyappliestodurablegoods.
Answer: A
Diff:2
37) Ifyourmoneyincomestaysthesamebutthepriceofonegoodthatyouarebuyinggoesup,
youreffectivepurchasingpower
A) rises. B) doesnotchange.
C) cannotbedetermined. D) falls.
Answer: D
Diff:1
38) Yourannualreviewisgiventoyouatyourplaceofemployment,andyougetaraiseof3
percentforthenextyear.Onthesubwayhomethough,youreadanarticlestatingthepriceof
homesintheareayouarelookingtobuywillincreaseby6percentduringthecomingyear.You
determinefromthearticlethatifyoubuyinyourfavoriteneighborhood
A) yourpurchasingpowerdeclines. B) consumeroptimumisreached.
C) yourrealincomeactuallyincreases. D) quantitydemandedwillincrease.
Answer: A
Diff:1
39) WhenthepriceofDVDsfallsrelativetomovieandrestaurantprices,andconsumersbuymore
oftheDVDs,economistscallthis
A) indifference. B) satisfaction.
C) marginalization. D) substitution.
Answer: D
Diff:1
40) WhichofthefollowingstatementsisFALSEregardingconsumerchoice?
A) Eachchangeinpricehasasubstitutioneffectandarealincomeeffect.
B) Whenpricefalls,theconsumerchoosesinfavorofthecheapergood.
C) Diminishingmarginalutilityisonereasonforadownwardslopingdemandcurve.
D) Purchasingpowerhasaninverserelationshipwiththeriseinincome.
Answer: D
Diff:1
41) IfacollegestudentstayshomeandwatchesarentedDVDfor$5ratherthangoingouttoa$10
movie,thisisanexampleofthe
A) utilityeffect. B) valueeffect.
C) substitutioneffect. D) incomeeffect.
Answer: C
Diff:1
42) Whenconsumersshiftawayfromrelativelyhigherpricegoodsandservicesinfavorofthose
thatarelessexpensive,thisisknownasthe
A) principleofutility.
B) principleofsubstitution.
C) principleofsupply.
D) principleofincreasingopportunitycosts.
Answer: B
Diff:2
43) Ifyouregularlyspend$100amonthongasolineandthepriceofgasolinedoubles,your
purchasingpowerhas
A) increased. B) remainedconstant.
C) becamestable. D) decreased.
Answer: D
Diff:1
44) Withagivenlevelofmoneyincome,whenthepriceofaproductthataconsumerbuysdeclines,
thepurchasingpowerofyourmoneyincome
A) decreases.
B) increases.
C) isunchanged.
D) canincreaseordecreasesdependingonthegoodsbeingconsumed.
Answer: B
Diff:1
45) Whenthepriceofagoodthatapersonisconsumingfalls,otherthingsbeingconstant,thereis
A) adeclineinrealincome. B) adeclineinpurchasingpower.
C) arealincomeeffect. D) nochangeinpurchasingpower.
Answer: C
Diff:1
46) Ifthepriceofcoffeerisesrelativetoallotherprices,consumersarelikelyto
A) buymorecoffee. B) buymoretea.
C) buylesscoffeeandlesstea. D) buylesstea.
Answer: B
Diff:1
47) Ifthepriceofasliceofpizzafallsfrom$2to$1,apizza -lovingconsumerwill

A) seeherpurchasingpowerfall.
B) seeherpurchasingpowerrise.
C) substitutemoreChinesefoodforpizza.
D) spendmoreonsoftdrinksandlessonpizza.
Answer: B
Diff:1
48) Ifthepriceofapizzaslicefalls,Tomcan
A) buymorepizzawithhispaycheck. B) buymoresoftdrinkswithhispaycheck.
C) nolongeraffordpizzaonhispaycheck. D) EitherAorBispossible.
Answer: D
Diff:1
49) Theideathatpeoplewillsubstitutecheapercommoditiesformoreexpensivecommoditiesis
called
A) themarginaleffect. B) thereal-incomeeffect.
C) thesubstitutioneffect. D) theutilityeffect.
Answer: C
Diff:2
50) Whenanindividualspurchasingpowerchangesduetoachangeinthepriceofagoodor
service,thisisreferredtoas
A) marginaleffect. B) real-incomeeffect.
C) substitutioneffect. D) utilityeffect.
Answer: B
Diff:2
Pizza MarginalUtility
1stSlice 7utils
2ndSlice 6utils
3rdSlice 4utils
4thSlice 3utils
51) Supposethepriceofpizzais$2andtheconsumeroptimumisreachedwhenMU/P = 3.Toms

preferencesforpizzaareshownintheabovetable.HowmanysliceswillTombuy?
A) 1slice B) 2slices C) 3slices D) 4slices
Answer: B
Diff:1
52) Supposethepriceofpizzafallsto$1perslice.AssumingthatTomspreferencescontinuetobe
thoseshownintheabovetable,andassumingthatMU/P=3isstillthepointatwhichhis
consumeroptimumisreached,howmanysliceswillTomnowbuy?
A) 1slice B) 2slices C) 3slices D) 4slices
Answer: D
Diff:2
53) SupposeLoisusuallybuystwocupsofcoffeefortwodollarseachandonesconefortwodollars
each.Ifthepriceofsconesfallstoonedollareachandshenowbuystwocupsofcoffeeandtwo
scones,thisillustratesthe
A) substitutioneffect. B) marginalrateofsubstitution.
C) totalutilityeffect. D) real-incomeeffect.
Answer: D
Diff:2
54) Supposeaconsumerisatanoptimum,consuming6hamburgersaweekatapriceof$1.50each
and10donutsaweekat50centsadonut.Ifthepriceofahamburgerincreasesto$2.00,what
willtheconsumerdotoarriveatanewequilibrium?Why?
Answer: Attheequilibrium,theMUofthelastdollarspentonbothgoodsisequal.Aftertheprice
ofahamburgerincreases,theMUofthelastdollarspentonhamburgerislessthanthe
MUofthelastdollarspentondonuts.EithertheMUofhamburgermustincreaseorthe
MUofadonutmustdecrease.Thelattercannothappenbecausetheconsumercannot
affordtobuymoredonuts.Therefore,theconsumermustbuyfewerhamburgers.Given
theprincipleofdiminishingmarginalutility,MUwillincreaseandanewequilibriumcan
beestablished.
Diff:3
55) Discussthesubstitutionandreal-incomeeffectsofapricedecrease.
Answer: Thesubstitutioneffectofapricedecreaseisforpeopletosubstitutecheapergoodsfor
moreexpensivegoods.So,aconsumerwillpurchasemoreofagoodwhosepricefelland
lessofasubstitutegood.Apricedecreaseraisestherealincomeoftheconsumer,sothe
consumerwillwanttobuymoreofallgoodsincludingthegoodwhosepricefell.The
moreimportanteffectisthesubstitutioneffectsincethechangeinrealincomefroma
pricechangeofasinglegoodisusuallyverysmall.
Diff:2
20.6TheDemandCurveRevisited
1) Thenegativerelationshipbetweenthequantitydemandedofacommodityanditspricecanbe
explainedbytheprincipleof
A) increasingtotalutility. B) contingentvaluation.
C) indifferenceanalysis. D) diminishingmarginalutility.
Answer: D
Diff:1
Topic: 20.6TheDemandCurveRevisited
2) Accordingtothesubstitutioneffect,ifthepriceofaproductgoesdown
A) theconsumerwillbuymoreofthegoodatthelowerpricethanatahigherprice,creatinga
downwardslopingdemandcurve.
B) theconsumerwillbuymoreofthegoodatalowerpricethanatahigherprice,creatinga
horizontaldemandcurve.
C) theconsumerwillnotchangethelevelofpurchasesofthegoodwhenthepricechanges,
makingthedemandcurveaverticalline.
D) therealincomeoftheconsumerwillincrease,causingtheconsumertowanttobuymore
ofthegood,creatingadownwardslopingdemandcurve.
Answer: A
Diff:2
3) Theinverserelationshipbetweenquantitydemandedandpriceofagoodorservicecanbe
explained,inpart,by
A) ashiftinthedemandcurve.
B) diminishingmarginalutilityonly.
C) diminishingmarginalutilityandtheruleofequalmarginalutilitiesperdollar.
D) therealincomeeffect.
Answer: C
Diff:2
4) WhichofthefollowingisFALSE?
A) Aconsumerismaximizingtotalutilitywhenheorshegetsthesameamountofmarginal
utilityfromthelastdollarspentoneachgoodpurchased.
B) Asadditionalunitsofagoodorserviceareconsumed,marginalutilitydiminishes.
C) Utilityiswant-satisfyingpower.
D) Assumingthatthelawofdiminishingmarginalutilityholds,thedemandcurvemustbe
upwardsloping.
Answer: D
Diff:1
5) Giventheutility-optimizingruleandthepresenceofdiminishingmarginalutilityforagood,
A) thedemandcurveforthegoodwillbevertical.
B) therewillnotbeawell-defineddemandcurve.
C) therewillnotbeasubstitutioneffect.
D) thedemandcurveforthegoodwillbenegativelysloped.
Answer: D
Diff:1
6) Thelawofdemandisderivedundertheassumptionof
A) constantprices.
B) constantrealincomes.
C) constantconsumertastesandpreferences.
D) constantmarginalutility.
Answer: C
Diff:1
7) Thetotalutilityofwateris
A) lowerthanthetotalandmarginalutilityofdiamonds.
B) lowerthanthetotalutilityofdiamonds,butthemarginalutilityishigher.
C) higherthanthetotalutilityofdiamonds,butthemarginalutilityofdiamondsishigher.
D) thesameasthetotalutilityofdiamonds,butthemarginalutilitiesarethesame.
Answer: C
Diff:1
8) Thediamond-waterparadoxillustratestheideathat________determineswhatconsumersare
willingtopayforaparticulargood.
A) totalutility B) thereal-incomeeffect
C) marginalutility D) thesubstitutioneffect
Answer: C
Diff:2

1 40 1 400
2 60 2 700
3 76 3 850
4 86 4 950
5 91 5 1000
6 93 6 1025
9) Refertotheabovetable.Supposethepriceofamovieis$5andtheincomeoftheconsumeris
$29.Whatarethequantitiesdemandedofhamburgeratpricesof$2and$1respectively?
A) 0;1 B) 2;4 C) 1;2 D) 3;5
Answer: B
Diff:2
10) Refertotheabovetable.Thepriceofahamburgeris$2,thepriceofamovieis$10,andthe
consumerhas$44.Whatisthechangeinquantitydemandedofhamburgersifthepriceofa
hamburgerdecreasesto$1?
A) Quantitydemandedincreasesby1hamburger.
B) Quantitydemandedincreasesby2hamburgers.
C) Quantitydemandedincreasesby3hamburgers.
D) Quantitydemandedincreasesby4hamburgers.
Answer: B
Diff:3
11) Anindividualsdemandcurveslopesdownbecause
A) marginalutilityfallsaspricefalls.
B) thevalueofthemarginalutilityfallsasthepricefalls.
C) oftherulethatthemarginalutilityofthelastunitmustequaltheprice.
D) ofthelawofdiminishingmarginalutilityandtheruleofequalmarginalutilitiesper
dollar.
Answer: D
Diff:2
12) Aconsumerwasatanoptimum.Shethendiscoversthatthemarginalutilityperdollarspenton
foodismorethanthemarginalutilityperdollarspentongasoline.Sheknowsthenthat
A) thepriceofgasolinemusthavedecreased.
B) thepriceoffoodmusthaveincreased.
C) thepriceofgasolinemusthaveincreasedorthepriceoffoodmusthavedecreased.
D) thepriceofgasolinemusthavedecreasedorthepriceoffoodmusthaveincreased.
Answer: C
Diff:2
13) Toderivethelawofdemand,weassumethat
A) pricesareconstant. B) realpricesareconstant.
C) marginalutilityisconstant. D) tastesareconstant.
Answer: D
Diff:1
14) Thediamond-waterparadoxisanexamplethatshowsthat
A) necessitieslikewatershouldhaveahigherprice.
B) marginalutilityratherthantotalutilitydetermineswhatpeoplearewillingtopayfora
good.
C) thereareexceptionstothelawofdiminishingmarginalutility.
D) marginalutilitycaninitiallyincreaseandthendecrease.
Answer: B
Diff:1
15) Whyarediamondsmoreexpensivethanwater?
A) becausethelastglassofwaterhashighermarginalutilitythanthelastdiamond
B) becausethelastdiamondhashighermarginalutilitythanthelastglassofwater
C) becauseyougetmoretotalutilityfromdiamonds
D) becausewaterisanecessity
Answer: B
Diff:2
16) Thediamond-waterparadoxwassolvedbyknowingthat
A) thetotalutilityofwaterisgreaterthanthetotalutilityofdiamonds.
B) themarginalutilityofwaterisgreaterthanthemarginalutilityofdiamonds.
C) thepriceofwateranddiamondsisdeterminedbytotalutilityreceived,notmarginal
utility.
D) thepriceofwateranddiamondsisdeterminedbymarginalutility,nottotalutility.
Answer: D
Diff:2
17) Thereasonthatdiamondscostmorethanwateris
A) themarginalutilityofeachdiamondaconsumerpurchasesisquitehighduetothesmall
amountofdiamondsthatmostconsumerspurchase.
B) mostconsumersconsumelittlewater.
C) diamondsaremorebeautifulthanwater.
D) waterisanecessity.
Answer: A
Diff:1
18) Refertotheabovefigure.Allofthefollowingaretrueconcerningthediamond -waterparadox

EXCEPT
A) thedemandforwaterexceedsthedemandfordiamonds.
B) thepriceofdiamondsexceedsthepriceofwater.
C) sincethepriceofdiamondsishigh,demandisgreat.
D) marginalutilityofdiamondconsumptionisrelativelyhigh.
Answer: C
Diff:1
19) WhichofthefollowingstatementsisFALSE,withrespecttowhateconomistAdamSmithcalled
thediamond-waterparadox?
A) Thetotalutilityofwatergreatlyexceedsthetotalutilityderivedfromdiamonds.
B) Totalutilitydoesnotdeterminewhatpeoplearewillingtopayforaunitofaparticular
commodity;marginalutilitydoes.
C) Thedemandforwaterismuchsmallerthanthedemandfordiamonds.
D) Therearerelativelyfewdiamonds,sothemarginalutilityofthelastdiamondconsumedis
relativelyhigh.
Answer: C
Diff:2
20) Giventhepriceofagoodorservice,whatdetermineshowmuchapersoniswillingtopayfor
thatgoodorservice?
A) marginalutility B) totalutility
C) thesubstitutioneffect D) averageutility
Answer: A
Diff:1
21) TheaveragedemandcurveslopesdownwardduetoallofthefollowingEXCEPT
A) thelawofincreasingrelativecosts.
B) thelawsofdiminishingmarginalutility.
C) thereal-incomeeffect.
D) theprincipleofsubstitution.
Answer: A
Diff:2
22) Ifyoucouldpayforaproductaccordingtothemarginalutilitythatyougainfromadditional
consumption,thenasyouconsumemoreofaproductthepriceyoupaywould
A) remainthesame. B) increase.
C) bedeferred. D) decline.
Answer: D
Diff:2
23) Whydoesapriceincreaseofaproductresultinadecreaseinthequantitydemandedofthat
product,accordingtoutilityanalysis?
Answer: Therearetwoeffectsassociatedwithapriceincrease.Thefirstisthesubstitutioneffect,
whichisthetendencyofconsumerstosubstitutecheapergoodsforthemoreexpensive
good.Thesecondeffectistherealincomeeffect,whichistheloweroverallpurchasing
poweroftheconsumerasaresultofthepriceincrease.Asaresultofthetwoeffects,a
priceincreaseresultsinasmallerquantitydemanded.
Diff:2
24) Whyiswatermuchcheaperthandiamondseventhoughwaterisessentialtohumanliveswhile
diamondsarenot?
Answer: Thisiscalledthediamond-waterparadox.Thetotalutilityofwatergreatlyexceedsthe
totalutilityofdiamonds,butthemarginalutilityofdiamondsfarexceedsthemarginal
utilityofwaterbecauseofthemuchmorelimitedsupplyofdiamondsthanwater.The
relativepricesaredeterminedbymarginalutilities,nottotalutilities.
Diff:2
25) Explainhowutilityanalysiscanbeusedtoderiveadownwardslopingdemandcurve.
Answer: Giventhelawofdiminishingmarginalutilityandtheequalmarginalutilitiesperdollar
rule,thereisanegativerelationshipbetweenpriceandquantitydemandedofagood.A
fallinpricemeanspeoplewanttobuymoreofthegoodinordertogetthemarginal
utilityperdollarofthisgoodinlinewiththeothergoods.Themarginalutilitymustfall
togetthemarginalutilityperdollarofthisgoodinlinewiththeothergoods,andthelaw
ofdiminishingmarginalutilityimpliesthatmoreofthegoodmustbepurchasedtoget
marginalutilitytodecrease.
Diff:3
26) Usethelawofdiminishingmarginalutilitytoexplainthediamond-waterparadox.
Answer: Thediamond-waterparadoxreferstothefactthatdiamondsarelessusefultohumans
thanwaterbuttheirpricesaremuchhigher.However,thepriceofagoodisdetermined
notbasedonitstotalutilitybutitsmarginalutility.Becauseofthelimitedsupplyof
diamonds,themarginalutilityofdiamondsismuchhigherandsoarethepricesof
diamonds.
Diff:2
20.7BehavioralEconomicsandConsumerChoiceTheory
1) Observationsofviolationsofconsumeroptimumpredictedbyconsumerchoicetheorycould
providesupportfor
I. utilityanalysis
II. boundedrationality
III. behavioraleconomics
A) Ionly. B) IIIonly. C) bothIandII. D) bothIIandIII.
Answer: D
Diff:2
Topic: 20.7BehavioralEconomicsandConsumerChoiceTheory
2) Thefactthatthepriceofdiamondsishigherthanthepriceofwater
A) cannotbeexplainedbybehavioraleconomicsorconsumerchoicetheory.
B) isanoutcomeofirrationalbehaviorinconsumerchoicetheory.
C) canbeexplainedonlybybehavioraleconomicsbutnotbyconsumerchoicetheory.
D) canbeexplainedastheoutcomeofaconsumeroptimuminconsumerchoicetheory.
Answer: D
Diff:2
3) Becausethebehavioraleconomicsapproachsuggestsmanyalternativebehaviorsthatpeople
mightexhibitiftheyfailtobehaveasiftheyarerational,thisapproach
A) oftenfailstoprovideclearlytestablebehavioralpredictions.
B) reproducesthesamepredictionsasutilityanalysis.
C) hasanoverrelianceontherationalityassumption.
D) ignoresthepossibilityofboundedrationality.
Answer: A
Diff:1
4) Observationsofreal-worldsituationsthatappeartoviolateaconsumeroptimumcouldbe
offeredasevidencefavoring
A) utilityanalysis.
B) boundedrationality.
C) diminishingmarginalutility.
D) zeromarginalutilityatautility-maximizingpoint.
Answer: B
Diff:1
5) Onepieceofevidencethatpossiblysupportsthebounded -rationalityassumptionofbehavioral
economicsisthatexperimentsappeartohaveshownthat
A) peoplemakedifferentdecisionsincalmsituationsthaninsituationsinwhichemotions
comeintoplay.
B) peoplemakethesamedecisionsincalmsituationsthaninsituationsinwhichemotions
comeintoplay.
C) totalutilityismaximizedwhenmarginalutilityisequaltozero.
D) totalutilityisdecliningwhenmarginalutilityisnegative.
Answer: A
Diff:1
6) Behavioraleconomicssuggeststhatpeoplefacehumanlimitationsthatpreventthemfrom
examiningeverypossiblechoiceavailabletothem,withtheimplicationthat
A) theconsumeroptimumimpliedbyutilitytheoryisaninappropriateapproachtoderiving
demandcurves.
B) theconsumeroptimumimpliedbyutilitytheoryisanappropriateapproachtoderiving
demandcurves.
C) marginalutilityisalwaysequaltozero.
D) marginalutilityisalwaysnegative.
Answer: A
Diff:2
20.8AppendixF:OnBeingIndifferent
1) Anindifferencecurveprovidesthesetofconsumptionalternativesthat
A) yieldthesametotalamountofsatisfaction.
B) maximizetheutilityoftheconsumer.
C) canbepurchasedforthesameamountofmoney.
D) yieldthesamemarginalutilityforthelastunitconsumedofeachgood.
Answer: A
Diff:1
Topic: 20.8AppendixF:OnBeingIndifferent
2) Anindifferencecurveshows
A) thecombinationsofgoodsthataconsumerdoesnotlikeverymuch.
B) thecombinationsofgoodsthatgeneratethesameratioofmarginalutilities.
C) thesetofconsumptionalternativesthatyieldthesameamountoftotalutility.
D) thesetofconsumptionalternativesthatyieldthesameamountofmarginalutility.
Answer: C
Diff:1
3) Acurvewhereeverycombinationofthetwogoodsbeingconsideredyieldsthesamelevelof
satisfactionisknownas
A) amarginalutilitycurve. B) atotalutilitycurve.
C) anindifferencecurve. D) abudgetconstraint.
Answer: C
Diff:1
4) Alonganindifferencecurve
A) everycombinationofgoodstheconsumercanpurchasewiththeirincomeisgiven.
B) thepricesofgoodswillchange.
C) utilityincreasesasyoumovetotheright.
D) everycombinationofthegoodsgivethesamelevelofsatisfaction.
Answer: D
Diff:1
5) Alonganindifferencecurve,
A) themarginalutilityofallitemsisequal.
B) thetotalsatisfactionisthesame.
C) thepricesofallgoodsareequal.
D) themarginalutility/priceratiosofallitemsareequal.
Answer: B
Diff:1
6) Acurvethatshowsasetofconsumptionalternativesthatgivethesamelevelofsatisfactionis
A) asubstitutioncurve. B) abudgetline.
C) anindifferencecurve. D) anincomecurve.
Answer: C
Diff:2
20.9AppendixF:PropertiesofIndifferenceCurves
1) Anindifferencecurvecannotbepositivelyslopedbecause
A) thelawofdiminishingmarginalutilitywouldbeviolated.
B) thesubstitutioneffectwouldbeviolated.
C) apointtotherightofanotherpointwillrepresentalowerquantityofbothgoodsanda
reductioninutility.
D) apointtotherightofanotherpointwillrepresentahigherquantityofbothgoodsandan
increaseinutility.
Answer: D
Diff:1
Topic: 20.9AppendixF:PropertiesofIndifferenceCurves
2) Anindifferencecurvebetweenonedozeneggsandseveraldozensofeggswouldbe
A) bowedintotheorigin. B) bowedoutfromtheorigin.
C) adownwardslopingstraightline. D) astraightlinefromtheorigin.
Answer: C
Diff:2
3) Ifthemarginalutilityofeachgoodisconstantasconsumptionincreases,theindifferencecurves
are
C) straightlines. D) positivelysloped.
Answer: C
Diff:1
4) WhichofthefollowingisNOTtrueaboutindifferencecurves?
A) Indifferencecurvesslopedownward.
B) Indifferencecurvesshowequallypreferredcombinationsoftwogoods.
C) Indifferencecurvesarenotstraightlinesbecausethemarginalrateofsubstitutionfalls.
D) Indifferencecurvesshiftwhenpriceschange.
Answer: D
Diff:1
5) Indifferencecurves
A) arevertical. B) arehorizontal.
C) slopeupward. D) slopedownward.
Answer: D
Diff:1
6) AssumethatgoodXandgoodYeachhavediminishingmarginalutilityforaconsumer.Inthis
case,
A) anindifferencecurvelinkingthetwogoodswillhaveaconstantslope.
B) anindifferencecurvewillbeconvextotheorigin.
C) thedemandcurvesforthesegoodswillbepositivelysloped.
D) thedemandcurvesforthesegoodswillbehorizontal.
Answer: B
Diff:1
7) WhichofthefollowingisFALSEaboutindifferencecurves?
A) Theyaredownwardsloping. B) Theyareconvextotheorigin.
C) Theyintersect. D) Theycanshift.
Answer: C
Diff:1
8) Theindifferencecurvebetweeneggsanddozensofeggswouldbe
A) bowedintotheorigin.
B) bowedoutfromtheorigin.
C) arectangularhyperbola.
D) adownwardslopingstraightlinewithaslopeof-12.
Answer: D
Diff:2
9) Refertotheabovefigures.Whichpanelbestrepresentsanindifferencecurve?
Answer: C
Diff:2
10) Anindifferencecurve
A) mustslopedownwardtowardstheright.
B) ispositivelysloped.
C) isupslopingandisconcavetotheorigin.
D) maybeupslopingordownsloping,dependingonwhetherthetwoproductsare
complementsorsubstitutes.
Answer: A
Diff:1
11) Anindifferencecurve
A) mustbeconvextotheorigin.
B) mustbeconcavetotheorigin.
C) maybeconvexorconcavetotheorigin.
D) dependsonthepricesoftheproductsandtheconsumersincome.
Answer: A
Diff:1
12) Onecharacteristicofindifferencecurvesisthat
A) theymustintersectattheorigin. B) theycannotintersect.
C) theyhaveapositiveslope. D) theyarestraightlines.
Answer: B
Diff:1
13) Whatarethekeypropertiesofindifferencecurves?
Answer: Indifferencecurveshaveadownwardslopeandareconvextotheorigin.Also,theutility
levelisconstantalonganindifferencecurve.
Diff:1
14) Whycantanindifferencecurvebeastraightline?
Answer: Astraight-lineindifferencecurveindicatesthattheconsumerwillalwaysbewillingto
giveupthesamenumberofonegoodtogetonemoreunitofanothergood.Thisisnot
plausible,becauseiftheconsumerconsumesmanyunitsofonegoodandnoneofanother
good,sheshouldbewillingtogiveupsomeunitsoftheformergoodtoconsumesomeof
thelattergood.Therefore,indifferencecurvesmustbeconvextotheorigin.
Diff:2
20.10AppendixF:TheMarginalRateofSubstitution
1) Themarginalrateofsubstitutionisthe
A) rateatwhichtheconsumercanexchangeonegoodfortheother.
B) changeinthequantityofonegoodthatjustoffsetsaone-unitchangeintheconsumption
ofanothergoodsuchthatthetotalsatisfactionremainsconstant.
C) changeinthequantityofonegoodthatchangestheutilityreceivedbyoneunit.
D) samethingasthemarginalutilityofagood.
Answer: B
Diff:1
Topic: 20.10AppendixF:TheMarginalRateofSubstitution
2) Themarginalrateofsubstitutionismeasuredalong
A) thedemandcurve. B) thetotalutilitycurve.
C) agivenindifferencecurve. D) agivenbudgetline.
Answer: C
Diff:1
3) Themarginalrateofsubstitutionis
A) equaltounitchangesinthequantitiesofbothgoodssothatutilityrises.
B) theslopeofthebudgetlineatallpoints.
C) thechangeinthequantityofonegoodthatjustoffsetsaunitchangeinanothergood,
keepingutilityconstant.
D) foundbyaddingadditionalunits.
Answer: C
Diff:1
4) Themarginalrateofsubstitutionis
A) thechangeinthequantityofonegoodthatjustoffsetsaoneunitchangeinthe
consumptionofanothersuchthatthetotalsatisfactionremainsconstant.
B) theadditionalsatisfactionfromconsuminganadditionalunitofagoodorservice.
C) positivelyrelatedtothelevelofincome.
D) thesetofgoodsandservicesthatareavailabletotheconsumergivenhisincome.
Answer: A
Diff:1
5) Themarginalrateofsubstitutionisthe
A) rateatwhichtheconsumerwillgiveuponegoodforanadditionalunitoftheothergood,
suchthattotalsatisfactionisconstant.
B) rateatwhichtheconsumercantradeonegoodfortheotherinthemarketplace.
C) changeinthequantityofonegoodthatchangestheutilityreceivedbyoneunit.
D) samethingasthemarginalutilityofagood.
Answer: A
Diff:1
6) Alongagivenindifferencecurve,aconsumerreducesthequantityofonegoodinfavorofmore
unitsoftheother.Inthissituation
A) themarginalrateofsubstitutionfalls.
B) themarginalutilityofthefirstrisesandthemarginalutilityofthesecondgoodfalls.
C) Totalutilityrises.
D) BothAandBarecorrect.
Answer: D
Diff:1
Combination GoodA GoodB

A 17 4
B 13 5
C 10 6
D 8 7
7) Refertotheabovetable.ThetablegivesthevariouscombinationsofGoodAandGoodBalong
Janesindifferencecurve.ThemarginalrateofsubstitutionwhenJanegoesfromcombinationA
tocombinationBis
A) 4:1. B) 3:1. C) 2:1. D) 0.
Answer: A
Diff:2
Janesindifferencecurve.ThemarginalrateofsubstitutionwhenJanegoesfromcombinationB
tocombinationCis
A) 4:1. B) 3:1. C) 2:1. D) 0.
Answer: B
Diff:2
Janesindifferencecurve.ThemarginalrateofsubstitutionwhenJanegoesfromcombinationC
tocombinationDis
A) 4:1. B) 3:1. C) 2:1. D) 0.
Answer: C
Diff:2
10) Alonganindifferencecurve,astheconsumerreducesthequantityofGoodAinfavorofmore
GoodBthemarginalrateofsubstitutionofGoodAforGoodBwill
A) fall. B) rise.
C) staythesame. D) fallandeventuallyturnnegative.
Answer: A
Diff:2
11) Thechangeintheconsumptionofonegoodthatjustoffsetsaone -unitchangeinthe

consumptionofanothergoodisthe
A) marginalutility. B) marginalrateofconsumption.
C) marginalrateofsubstitution. D) marginalrateofsatisfaction.
Answer: C
Diff:2
12) Themarginalrateofsubstitutionmeasures
A) theimpactofproductsubstitution.
B) thechangesinmarginalutilityalongtheindifferencecurve.
C) theconsumerswillingnesstosubstituteoneproductforanothersothattotalutilitywill
remainunchanged.
D) theconsumerswillingnesstosubstituteoneproductforanothersothatmarginalutility
willremainunchanged.
Answer: C
Diff:2
13) Mathematicallythemarginalrateofsubstitutionis
A) alwaysanegativenumber.
B) alwaysapositivenumber.
C) isequalto1.
D) sometimesapositiveandsometimesanegativenumber.
Answer: A
Diff:2
14) Whatisthemarginalrateofsubstitutionbetweentwogoodsandhowisitrelatedtothe
indifferencecurve?
Answer: Themarginalrateofsubstitutionbetweentwogoodsisthechangeinthequantityofone
goodthatjustoffsetsaone-unitchangeintheconsumptionofanothergood,sothattotal
satisfactionbetweenthetwogoodsremainsconstant.Themarginalrateofsubstitutionis
reflectedbytheslopeoftheindifferencecurvebetweenthetwogoods.
Diff:2
20.11AppendixF:TheIndifferenceMap
1) Inamapshowingthreeindifferencecurvesaconsumerismostwelloffon
A) thecurvewhichisclosesttotheoriginofthecoordinateaxes.
B) thecurvewhichismostfartherawayfromthecoordinateaxes.
C) Thecurvethatisinthemiddle.
D) noneoftheabove
Answer: B
Diff:2
Topic: 20.11AppendixF:TheIndifferenceMap
2) Anindifferencemapshows
A) thatmoneyincomeisconstant,butproductpricesmaychange.
B) thatutilityisatamaximumattheorigin.
C) thatcurvesclosertotheoriginrepresenthigherlevelsofutility.
D) thatcurvesfurtherfromtheoriginrepresenthigherlevelsofutility.
Answer: D
Diff:1
3) Ifanindividualstotalutilityfromconsumingtwogoodsincreases,thentheremustbe
A) adownwardrotationoftheindividualsindifferencecurve.
B) aninwardrotationoftheindividualsindifferencecurve.
C) anoutwardshiftoftheindividualsindifferencecurve.
D) aninwardshiftoftheindividualsindifferencecurve.
Answer: C
Diff:1
4) Ifanindividualstotalutilityfromconsumingtwogoodsdecreases,thentheremustbe
D) aninwardshiftoftheindividualsindifferencecurve.
Answer: D
Diff:1
5) Asetofindifferencecurvesonagraphiscalled
A) adifferencemap. B) anindifferencemap.
C) abudgetmap. D) acluster.
Answer: B
Diff:1
6) BasketofgoodsAisonanindifferencecurvethatliesfurtherfromtheoriginthanbasketB.
Fromthisweknowthat
A) thepricesofthegoodsinAaremorethanthepricesofthegoodsinB.
B) thesatisfactionfromconsumingAismorethanthesatisfactionfromconsumingB.
C) themarginalutilityfromconsumingAismorethanthemarginalutilityfrom
consumingB.
D) allotherconsumerswouldalsorankBaboveA.
Answer: B
Diff:2
7) BasketofgoodsAisonanindifferencecurvethatliesclosertotheoriginthanbasketB.From
thisweknowthat
A) thepricesofthegoodsinAarelessthanthepricesofthegoodsinB.
B) thesatisfactionfromconsumingAismorethanthesatisfactionfromconsumingB.
C) themarginalutilityfromconsumingAislessthanthemarginalutilityfrom
consumingB.
D) thesatisfactionfromconsumingAislessthanthesatisfactionfromconsumingB.
Answer: D
Diff:2
8) Refertotheabovefigure.Whichpointrepresentsthehighestlevelofutility?
A) PointA B) PointB C) PointC D) PointD
Answer: D
Diff:1
9) Refertotheabovefigure.Whichpoint(s)representsthelowestlevelofutility?
A) PointsA&C B) PointB C) PointConly D) PointD
Answer: A
Diff:1
10) Refertotheabovefigure.Whichpointrepresentsthesecondhighestlevelofutility?
A) PointA B) PointB C) PointC D) PointD
Answer: B
Diff:1
11) SupposethatindifferencecurveI 1liestotheleftofindifferencecurveI2 .Wecanconcludethat

A) some,butnotall,pointsonindifferencecurveI 1 willcorrespondtohigherutilitythan
pointsalongindifferencecurveI2.
B) some,butnotall,pointsonindifferencecurveI 1 willcorrespondtolowerutilitythan
pointsalongindifferencecurveI2 .
C) allpointsalongindifferencecurveI 1 willcorrespondtohigherutilitythanpointsalong
indifferencecurveI2 .
D) allpointsalongindifferencecurveI 1 willcorrespondtolowerutilitythanpointsalong
Answer: D
Diff:2
12) SupposethatindifferencecurveI 1liestotherightofindifferencecurveI 2 .Wecanconclude

that
A) some,butnotall,pointsonindifferencecurveI 1 willcorrespondtohigherutilitythan
pointsalongindifferencecurveI2.
B) some,butnotall,pointsonindifferencecurveI 1 willcorrespondtolowerutilitythan
pointsalongindifferencecurveI2 .
C) allpointsalongindifferencecurveI 1 willcorrespondtohigherutilitythanpointsalong
D) allpointsalongindifferencecurveI 1 willcorrespondtolowerutilitythanpointsalong
Answer: C
Diff:2
13) Ifanindividualsutilityfromconsumingtwogoodsincreases,thentheremustbe
D) ininwardshiftoftheindividualsindifferencecurve.
Answer: C
Diff:1
20.12AppendixF:TheBudgetConstraint
1) Theslopeofthebudgetlineis
A) zerosincepricesofthegoodsandincomeareassumedtobeconstant.
B) negativesincetopurchasemoreofonegoodmeansthatsomeoftheothergoodmustbe
givenup.
C) negativebecauseofthemarginalrateofsubstitution.
D) positivesincepricesandincomearepositive.
Answer: B
Diff:1
Topic: 20.12AppendixF:TheBudgetConstraint
2) Thepossiblecombinationsofgoodsthatcanbepurchasedwithaspecificincomearecalledthe
A) budgetconstraint. B) indifferencemap.
C) marginalrateofsubstitution. D) income-consumptioncurve.
Answer: A
Diff:1
3) Ifincomesfall,then
A) thebudgetconstraintshiftsinward.
B) thebudgetconstraintshiftsout.
C) thereisnochangeinthebudgetconstraint.
D) thereisnorelationshipbetweenthebudgetconstraintandincome.
Answer: A
Diff:2
4) Thebudgetconstraintshowsthat
A) theconsumerfacesatrade-offintheconsumptionofgoods.
B) theconsumercanhaveasmanygoodsashewants.
C) asconsumersspendmoreononegood,theyspendmoreonothers.
D) totalincomeequalstotalspendingononegood.
Answer: A
Diff:1
5) Whichofthefollowingshowsthefeasiblecombinationsoftwogoodsthataconsumercould
affordgivenhermoneyincome?
A) Thebudgetconstraint B) Theindifferencemap
C) Theincomeconsumptioncurve D) Thepriceconsumptioncurve
Answer: A
Diff:1
6) Anincreaseinconsumerincomewill
A) shiftthebudgetconstraintandincreaseitsslope.
B) reduceconsumptionofallnormalgoods.
C) pivotthebudgetconstraintontheaxiswiththegoodthathasthehigherprice.
D) shiftoutthebudgetconstraintandincreasetheconsumptionofbothgoods,iftheyare
normalgoods.
Answer: D
Diff:2
7) Ifthequantityofhamburgersismeasuredalongthehorizontalaxisandthequantityofmovies
ismeasuredalongtheverticalaxis,andthepriceofahamburgeris$2.00whilethepriceofa
movieis$12,thentheslopeofthebudgetlineis
A) -1/3. B) -3.5 C) -1/6. D) -6.
Answer: C
Diff:2
8) Theslopeofthebudgetconstraintlineisthe
A) incomeofconsumersdividedbythepriceofeachgood.
B) ratioofthisyearsincometolastyearsincome.
C) rateofexchangebetweenthetwogoods.
D) ratioofdifferentlevelsofincome.
Answer: C
Diff:1
9) Supposethatthequantityofgoodyismeasuredalongtheverticalaxisandthatthequantityof
goodxismeasuredalongthehorizontalaxis.Ifthepriceofgoodxis$5andthepriceofgoody
is$10whenincomeis$200pertimeperiod,theslopeoftheconsumersbudgetconstraintwill
be
A) -0.5. B) -2. C) -5. D) -10.
Answer: A
Diff:1
10) Thebudgetconstraintshowsthe
A) combinationsofgoodsthatgeneratethesameamountoftotalsatisfaction.
B) possiblecombinationsofgoodsthatcanbepurchasedwithaspecifiedincome.
C) changesinconsumptionofgoodsthataconsumermakeswhenhisincomeincreases.
D) amountofagoodtheconsumerwillbuyatvariousprices.
Answer: B
Diff:1
11) Allpossiblecombinationsofgoodsthatcanbepurchasedatfixedpriceswithaspecificincome
is
A) amarginalutilitycurve. B) atotalutilitycurve.
C) anindifferencecurve. D) abudgetconstraint.
Answer: D
Diff:1
12) Theconsumptionpossibilitiescurveisthe
A) supplycurve. B) demandcurve.
C) budgetconstraint. D) indifferencecurve.
Answer: C
Diff:1
13) Letthequantityofhamburgersbemeasuredalongtheverticalaxisandthequantityofmovies
bemeasuredalongthehorizontalaxis.Ifthepriceofahamburgeris$1.50andthepriceofa
movieis$6,thentheslopeofthebudgetlineis
A) -6. B) -4. C) -3. D) -0.25.
Answer: B
Diff:2
14) ThequantityofgoodAismeasuredalongtheverticalaxis,andthequantityofgoodBis
measuresalongthehorizontalaxis.IfthepriceofGoodAfalls
A) theverticalinterceptofthebudgetlinemovesalongtheverticalaxisawayfromtheorigin.
B) theverticalinterceptofthebudgetlinemovesalongtheverticalaxistowardtheorigin.
C) thehorizontalintercept(alongGoodB)ofthebudgetlinewillincrease.
D) noneoftheabove
Answer: A
Diff:2
15) ThequantityofgoodYismeasuredalongtheverticalaxis,andthequantityofgoodXis
measuredalongthehorizontalaxis.IfthepricesofbothgoodYandgoodXrise,thebudgetline
A) shiftsoutwardtotherightandtheverticalandhorizontalinterceptswillbothrise.
B) shiftsinwardtotheleftandbothinterceptswilldecline.
C) rotates,risingalongtheverticalaxisbutfallingalongthehorizontalaxis.
D) noneoftheabove
Answer: B
Diff:2
16) ThequantitiesofGoodMareplottedontheverticalaxiswhilethequantitiesofGoodNare
plottedonthehorizontalaxis.ThepricesofbothMandNfall.Theinterceptsofthebudgetline
would
A) declinealongbothaxes.
B) riseontheverticalaxisandalsoriseonthehorizontalaxis.
C) riseonthehorizontalaxisbutstayunchangedontheverticalaxis.
D) riseontheverticalaxisbutstayunchangedalongthehorizontalaxis.
Answer: B
Diff:2
17) ThequantityofgoodMismeasuredalongtheverticalaxis,andthequantityofgoodNis
measuredalongthehorizontalaxis.IfthepricesofbothgoodsMandNdeclinesby50%each,
thenthebudgetline
A) shiftsinwardtotheleftby50%. B) shiftsoutwardtotherightby50%.
C) shiftsoutwardtotherightby100%. D) rotatesclockwiseby180degrees.
Answer: C
Diff:2
18) Thebudgetline
A) shiftstotheleftasincomeincreases.
B) hasapositiveslope.
C) isaverticalline.
D) showsthecombinationofgoodsthatcanbepurchasedatfixedpricesandwithagiven
income.
Answer: D
Diff:1
19) Abudgetconstraintshows
A) allofthecombinationsofsetsofgoodsthatyieldthesamelevelofsatisfaction.
B) allofthepossiblecombinationsofgoodsthatcanbepurchasedwithaspecificbudget.
C) allofthegoodstheconsumergetspositivemarginalutilityfromwhenthegoodsare
consumed.
D) allofthegoodsthataconsumersubstitutesforothergoodswhenpricesfall.
Answer: B
Diff:2
20) Anincreaseinincomewill
A) shiftthebudgetconstrainttotheright.
B) makethebudgetconstraintsteeper.
C) makethebudgetconstraintflatter.
D) makethebudgetconstraintmorebowed.
Answer: A
Diff:2
20.13AppendixF:ConsumerOptimumRevisited
1) Usingtheabovefigure,wecanconcludethat
A) theconsumerwillpurchasegoodsatcombinationM.
B) theconsumerisindifferentbetweenJandM.
C) Kistheoptimalcombinationofgoods.
D) LispreferredtoK.
Answer: C
Diff:2
Topic: 20.13AppendixF:ConsumerOptimumRevisited
2) Intheabovefigure,ifthebudgetlineisthelineDE,theconsumerwillmaximizeutilityatpoint
A) A. B) B. C) C. D) G.
Answer: B
Diff:1
3) Intheabovefigure,ifthebudgetlineisthelineDF,theconsumerwillmaximizeutilityatpoint
A) A. B) B. C) C. D) G.
Answer: C
Diff:1
4) Intheabovefigure,thebudgetlinewillchangefromlineDEtolineDFwhen
A) incomerises. B) thepriceofbagelsincreases.
C) thepriceofcoffeeincreases. D) thepriceofcoffeedecreases.
Answer: D
Diff:1
5) Intheabovefigure,ifthebudgetlineisoriginallylineDEandthepriceofcoffeedecreases,the
consumerwill
A) drinklesscoffeeandincreasebagelconsumptionslightly.
B) drinkmorecoffeeandincreasebagelconsumptionslightly.
C) drinkmorecoffeeanddecreasebagelconsumptionslightly.
D) leaveconsumptionofbothcoffeeandbagelsunchanged.
Answer: B
Diff:1
6) Intheabovefigure,pointCis
A) preferredtopointsG,A,andB. B) preferredtopointsAandB.
C) lesspreferredthanpointG. D) lesspreferredthanpointH.
Answer: B
Diff:1
7) Intheabovefigure,budgetlineDFwouldswivelintotheleftif
A) thepriceofbagelsincreased. B) thepriceofbagelsdecreased.
C) thepriceofcoffeeincreased. D) thepriceofcoffeedecreased.
Answer: C
Diff:1
8) Usingindifferencecurveanalysis,anoptimumischaracterizedby
A) themarginalrateofsubstitutionofonegooddividedbyitspriceequaltothemarginalrate
ofsubstitutionoftheothergooddividedbyitsprice.
B) themarginalrateofsubstitutionbeingequaltoone.
C) themarginalrateofsubstitutionbeingequaltozero.
D) themarginalrateofsubstitutionbeingequaltotheratioofthepricesofthetwogoods.
Answer: D
Diff:2
9) Ifanindividualconsumesonlytwogoodsandconsumptionofonegoodincreases,thenin
ordertokeeptheconsumeronthesameindifferencecurve,consumptionoftheothergoodmust
C) increaseproportionately. D) becomenegative.
Answer: B
Diff:1
10) Aconsumerismaximizingutilitywhen
A) theslopeofthebudgetconstrainthasreached-1.
B) diminishingmarginalutilityhassetin.
C) theslopeofthebudgetconstraintequalsthemarginalrateofsubstitution.
D) theconsumerhasspentallofhisincome.
Answer: C
Diff:2
11) Aconsumerwillachievethehighestlevelofutilitypossiblewhensheconsumes
A) atthepointatwhichthehighestindifferencecurveistangenttothebudgetconstraint.
B) atthepointatwhichtheindifferencecurvecrossesthebudgetconstraint.
C) atapointtotheleftofthebudgetconstraint.
D) justbelowthepointwheretheindifferencecurvecrossesthebudgetconstraint.
Answer: A
Diff:1
12) Refertotheabovefigure.Giventheindifferencemapandbudgetconstraintrepresentedabove
theconsumerwillmaximizeutilitywhensheconsumesat
A) pointA. B) pointB.
C) pointC. D) eitherpointsAorB.
Answer: C
Diff:2
13) Refertotheabovefigure.Giventheindifferencemapandbudgetconstraintrepresentedabove,
whatareallpossiblepointsatwhichthattheindividualcanconsume?
A) PointsAandConly B) PointBonly
C) PointDonly D) PointsA,BandConly
Answer: D
Diff:2
14) Refertotheabovefigure.Giventheindifferencemapandbudgetconstraintrepresentedabove,
whatwouldmakeallpossiblepointsattainablefortheindividualtoconsume?
A) AnincreaseinthepriceofGoodX. B) Adecreaseinincome.
C) AnincreaseinthepriceofGoodY. D) AdecreaseinthepriceofGoodX.
Answer: D
Diff:2
15) Usetheabovefigure.Theoptimalpositionfortheconsumerisat
A) JorL B) M C) K D) N
Answer: C
Diff:2
16) Usetheabovefigure.Whatwouldmakeallpossiblepointsattainablefortheindividualto
consume?
A) Adecreaseinthepriceofgoody. B) Anincreaseinthepriceofgoody.
C) Anincreaseinthepriceofgoodx. D) Adecreaseinincome.
Answer: A
Diff:2
17) Usetheabovefigure.WhatdoespointNrepresent?
A) Aconsumermaximizinghersatisfaction.
B) Aconsumernotmaximizinghersatisfaction.
C) Aconsumerisspendingmorethanhercurrentincome.
D) AlesssatisfyingpointthancomparedtopointJ.
Answer: B
Diff:2
18) Whenindifferencecurveanalysisisused,aconsumeroptimumoccursatthepointatwhich
A) theindifferencecurvesintersect.
B) theindifferencecurveistangenttothebudgetline.
C) totalutilityismaximum.
D) marginalutility/priceratioofallgoodsconsumedisequal.
Answer: B
Diff:2
19) Ifaconsumerchoosesacombinationofgoodsthatareinsideofherbudgetline,than
A) theconsumerismaximizinghersatisfaction.
B) theconsumerisspendingmorethanhercurrentincome.
C) theconsumerhasaconstantmarginalrateofsubstitutionforthetwogoods.
D) theconsumerisnotmaximizinghersatisfaction.
Answer: D
Diff:2
20) Aconsumeroptimumischaracterizedby
A) themarginalrateofsubstitutionofonegooddividedbyitspriceequaltothemarginalrate
ofsubstitutionoftheothergooddividedbyitsprice.
B) themarginalrateofsubstitutionequaltounity.
C) themarginalrateofsubstitutionequaltotheratioofthepricesofthetwogoods.
D) themarginalrateofsubstitutiondividedbythepriceratioofthetwogoodsequaltothe
incomeoftheconsumer.
Answer: C
Diff:2
20.14AppendixF:DerivingtheDemandCurve
1) Ifthequantityofhamburgersismeasuredalongthehorizontalaxisandthequantityofmovies
ismeasuredalongtheverticalaxis,anincreaseinthepriceofamoviewouldbeshownby
A) shiftingthebudgetconstraintintowardstheorigin.
B) shiftingthebudgetconstraintout.
C) rotatingthebudgetconstraintaroundthehorizontalinterceptsuchthatthenewvertical
interceptisclosertotheorigin.
D) makingthebudgetconstraintsteeper.
Answer: C
Diff:2
Topic: 20.14AppendixF:DerivingtheDemandCurve
2) Usetheabovefigure.Whenthebudgetlinerotatesfrombtoc
A) thepriceofproductJincreases. B) thepriceofproductJdecreases.
C) thepriceofproductKincreases. D) thepriceofproductKdecreases.
Answer: C
Diff:2
A) fewerunitsofJandfewerunitsofKwillbepurchased.
B) moreunitsofJandmoreunitsofKwillbepurchased.
C) fewerunitsofJandmoreunitsofKwillbepurchased.
D) moreunitsofJandfewerunitsofKwillbepurchased.
Answer: D
Diff:2
4) Usetheabovefigure.Whenthebudgetlinerotatesfromctob
A) thepriceofproductJincreases. B) thepriceofproductJdecreases.
C) thepriceofproductKincreases. D) thepriceofproductKdecreases.
Answer: D
Diff:2
A) fewerunitsofJandfewerunitsofKwillbepurchased.
B) moreunitsofJandmoreunitsofKwillbepurchased.
C) fewerunitsofJandmoreunitsofKwillbepurchased.
D) moreunitsofJandfewerunitsofKwillbepurchased.
Answer: C
Diff:2
6) Ifpriceofaproductfalls
A) themarginalutilityoftheproductalsofalls.
B) thebudgetlinerotatestotheright.
C) thebudgetlinerotatestotheleft.
D) theindifferencecurvewillshifttotheleft.
Answer: B
Diff:1
7) Usetheabovefigure.LastweekJoeconsumedcombinationBofgoodsXandY.Thisweek
hepurchasedcombinationA.Thereasonforthischangeisthatthe
A) priceofgoodXhasincreased. B) priceofgoodXhasdecreased.
C) priceofgoodYhasdecreased. D) priceofgoodYhasincreased.
Answer: D
Diff:2
8) Usetheabovefigure.LastweekJoeconsumedcombinationAofgoodsXandY.Thisweek
hepurchasedcombinationB.Thereasonforthischangeisthatthe
A) priceofgoodXhasincreased. B) priceofgoodXhasdecreased.
C) priceofgoodYhasdecreased. D) priceofgoodYhasincreased.
Answer: C
Diff:2
9) Theslopeofthebudgetlinewillchange
A) whentheconsumersincomeincreases.
B) whentheconsumerstastechanges.
C) whenthetotalsatisfactionchanges.
D) whenthepriceofoneoftheproductschanges.
Answer: D
Diff:2
10) Holdingallotherpricesandmoneyincomeconstant,ifthepriceoffoodrises,thenthe
consumerwilladjustherexpendituresand
A) reachanoptimumonahigherindifferencecurve.
B) reachanoptimumonalowerindifferencecurve.
C) reachanoptimumonthesameindifferencecurve.
D) herlevelofsatisfactionmaygoupordown.
Answer: B
Diff:2
11) Ifthebudgetlinerotates,thenweknowthat
A) incomehaschanged.
B) theirhasbeenachangeintheconsumerstastes.
C) thepriceofoneofthegoodshadchanged.
D) theconsumerwasnotmaximizingtheirutility.
Answer: C
Diff:1
12) Ifthepriceofaproductincreases,then
A) thebudgetlinerotatesandtheoptimalquantitydemanded,whichcorrespondstothe
higherprice,decreases.
B) thebudgetlinerotatesandtheoptimalquantitydemanded,whichcorrespondstothe
higherprice,increases.
C) thebudgetlineshiftsoutwardandtheoptimalquantitydemanded,whichcorrespondsto
thehigherprice,decreases.
D) thebudgetlineshiftsinwardandtheoptimalquantitydemanded,whichcorrespondsto
thehigherprice,increases.
Answer: A
Diff:2
13) Toderivethedemandcurvefromtheindifferencemap,
A) varythepriceofonegoodwhileholdingthepriceoftheothergoodandincomeconstant.
B) varythepricesofbothgoodswhileholdingincomeconstant.
C) varythepriceofonegoodandincomewhileholdingthepriceoftheothergoodconstant.
D) varyincomewhileholdingthepricesconstant.
Answer: A
Diff:1
14) Theinformationonademandcurveisalsoona(n)
A) indifferencecurve. B) budgetconstraint.
C) income-consumptioncurve. D) price-consumptioncurve.
Answer: D
Diff:2
15) Supposethatthequantityofhamburgersismeasuredalongtheverticalaxisandthatthe
quantityofpopcornismeasuredalongthehorizontalaxis.Theverticalinterceptis10
hamburgers,andtheslopeofthebudgetlineis-2.Ifthepriceofpopcornfallsfrom$1to$0.50,
thenweknowthat
A) theverticalinterceptshiftsto20hamburgers.
B) theverticalinterceptshiftsto5hamburgers.
C) thehorizontalinterceptshiftsto10bagsofpopcorn.
D) thehorizontalinterceptshiftsto20bagsofpopcorn.
Answer: C
Diff:3
16) Supposethatthequantityofhamburgersismeasuredalongtheverticalaxisandthatthe
numberofbagsofpopcornismeasuredalongthehorizontalaxis.Thebudgetconstrainthasa
verticalinterceptof10hamburgers,andtheslopeofthelineis-1.Ifthepriceofpopcorn
doubles,weknowthat
A) theconsumerwillbuyhalfasmanybagsofpopcornasbefore.
B) thenewequilibriumwillhaveamarginalrateofsubstitutionof -2.
C) thenewequilibriumwillhaveamarginalrateofsubstitutionof -0.5.
D) theverticalaxisofthebudgetlineshiftsto5hamburgers.
Answer: B
Diff:3
17) Usetheabovefigure.TheconsumerschoicechangesfromY B toY A.Whichofthefollowing

statementsistrue?
A) ThischangeintheconsumerschoiceresultsfromariseinthepriceofgoodY.
B) ThischangeintheconsumerschoiceresultsfromafallinthepriceofgoodX.
C) ThischangeintheconsumerschoiceresultsfromariseinthepriceofgoodX.
D) Thischangeintheconsumerschoiceresultsfromanincreaseintheconsumersincome.
Answer: A
Diff:2
18) Usetheabovefigure.TheconsumerschoicechangesfromY B toY A.Whichofthefollowing

statementsaboutgoodYistrue?
A) pricehasincreasedandthequantitydemandedhasrisen..
B) pricehasdecreasedandthequantitydemandedhasrisen..
C) pricehasdecreasedandthequantitydemandedhasfallen.
D) pricehasincreasedandthequantitydemandedhasfallen.
Answer: D
Diff:2
19) Usetheabovefigure.TheconsumerschoicechangesfromY A toY B.Whichofthefollowing

statementsaboutgoodYistrue?
A) pricehasincreasedandthequantitydemandedhasrisen..
B) pricehasdecreasedandthequantitydemandedhasrisen.
C) pricehasdecreasedandthequantitydemandedhasfallen.
D) pricehasincreasedandthequantitydemandedhasfallen.
Answer: B
Diff:2
20) ToderivethedemandcurveforgoodX,allthefollowingareconstantEXCEPT
A) thepriceofgoodX. B) income.
C) thepriceofgoodY. D) tastesandpreferences.
Answer: A
Diff:1
A) thepriceofproductJincreasesandthequantitydemandedofproductJdecreases.
B) thepriceofproductJdecreasesandthequantitydemandedofproductJincreases.
C) thepriceofproductKincreasesandthequantitydemandedofproductKdecreases.
D) thepriceofproductKdecreasesandthequantitydemandedofproductKincreases.
Answer: C
Diff:2
A) thepriceofproductJincreasesandthequantitydemandedofproductJdecreases.
B) thepriceofproductJdecreasesandthequantitydemandedofproductJincreases.
C) thepriceofproductKincreasesandthequantitydemandedofproductKdecreases.
D) thepriceofproductKdecreasesandthequantitydemandedofproductKincreases.
Answer: D
Diff:2
23) Howdoesanincreaseinthepriceofanindividualgoodorserviceaffectaconsumeroptimum,
andhowdoesthishelpexplainthelawofdemand?
Answer: Eachpersonmakeschoicessuchthatthemarginalutilityperdollarspentisequalforall
goodsconsumed.Ifanitemspriceincreases,anindividualrespondsbyreducingthe
quantityofthatitemdemanded,whichbooststhemarginalutilityofthatitem.
Consequently,whenthepriceofanitemincreases,thequantityoftheitemdemanded
declines,sothelawofdemandemerges.
Diff:3
Chapter21
Rents,Profits,andtheFinancialEnvironmentofBusiness
21.1EconomicRent
1) Pureeconomicrentis
A) apaymenttoaresourceowneroverandabovewhatisnecessarytokeeptheresourcein
itscurrentuse.
B) apaymenttoaresourceownerjustsufficienttokeepitssupplyconstant.
C) theinverseofeconomicprofit.
D) thecompetitiverentalrateoncapital.
Answer: A
Diff:1
Topic: 21.1EconomicRent
2) Apaymentfortheuseofanyresourceoverandaboveitsopportunitycostiscalled
A) accountingprofit. B) economicprofit.
C) normalcost. D) economicrent.
Answer: D
Diff:1
3) Economicrentisdefinedas
A) anypaymentthathasacontractperiod.
B) apaymenttoanownerofafactorthatisinperfectlyelasticsupply.
C) apaymenttoanownerofafactorgreaterthantheopportunitycostofutilizingthefactor.
D) theopportunitycostorreturntoaproductivefactorsuchascapital.
Answer: C
Diff:1
4) Economicrentisaconceptthatcanbeapplied
A) onlytoland,asthatistheonlyresourcethatisinlimitedsupply.
B) onlytolandandnaturaltalent.
C) toanyfactorofproductionthatisfixedinsupply.
D) toanyresourceorfactorofproductionthathasasupplycurvewithapositive(upward)
slope.
Answer: C
Diff:1
5) Economicrentisbroadlydefinedas
A) apaymentreceivedbyalandowner.
B) apaymentfortheuseofanyresourcethathasafixedsupply.
C) thereturntoownersoffarmland.
D) thedividendreturnonashareofstock.
Answer: B
Diff:1
6) Economicrentappliesto
A) landonlyandnothingelse. B) realpropertyonly.
C) allresources. D) anyresourceinfixedsupply.
Answer: D
Diff:1
7) Economicrentisanypayment
A) receivedbytheownerofaresourceinperfectlyelasticsupply.
B) receivedbytheownerofaresourcewithasupplycurvethatisnothorizontal.
C) inexcessoftheresourcesopportunitycost.
D) belowthatofanormalprofitorreturn.
Answer: C
Diff:2
8) Pureeconomicrentisapaymenttoaresourcethat
A) hasahighopportunitycost. B) hasaperfectlyinelasticsupply.
C) hasanegativeopportunitycost. D) hasaperfectlyelasticdemand.
Answer: B
Diff:1
9) Ricardosassumptionforeconomicrentsforlandwasbasedon
A) thesupplyoflandbeingafixedquantity.
B) ashortageofland.
C) asurplusofland.
D) totalgovernmentcontrolofland.
Answer: A
Diff:2
Chapter21Rents,Profits,andtheFinancialEnvironmentofBusiness 221
10) Refertotheabovefigure.Whatcanwesayabouteconomicrent?
A) EconomicrentequalstheareaIJK0.
B) EconomicrentequalstheareaHJI.
C) EconomicrentequalstheareaHJK0.
D) Thereisnoeconomicrentrepresentedinthefigure.
Answer: A
Diff:1
11) Inanalyzinglandrent,DavidRicardoconstructedamodelbasedon
A) perfectlyelasticdemandforland.
B) aperfectlyelasticsupplyofland.
C) landbeingavailableininfinitequantities.
D) thesupplyoflandbeingperfectlyinelastic.
Answer: D
Diff:2
12) AkeyassumptionofRicardoseconomicrentconceptwasthat
A) alllandisequallyproductive.
B) landistoodifferentiatedtobeabletomeasure.
C) onlylandinlargecitiesmatters.
D) landisalwayscheapandneedsdevelopment.
Answer: A
Diff:2
13) Theconceptofeconomicrentisassociatedwiththeeconomist
A) AdamSmith. B) KarlMarx. C) DavidRicardo. D) HenryGeorge.
Answer: C
Diff:1
14) AccordingtoRicardosexplanationoflandrent,whathappenswhenthedemandforland
increases?
A) Thesupplycurveshiftstotherightjustenoughtokeepthepriceperacreconstant.
B) Revenuestoownersoflandincreasebuteconomicrentdeclines.
C) Theamountofeconomicrentstaysconstant,constrainedbyaperfectlyinelasticsupply
curve.
D) Bothrevenuestoownersoflandandeconomicrentincrease.
Answer: D
Diff:2
15) Foranindividualwhohasspecialtalentasanentertainer,alargeproportionofhissalarycanbe
considered
A) afixedcost. B) economicrent.
C) apaymentbelowopportunitycost. D) non-taxableincome.
Answer: B
Diff:1
16) Foranindividualsuchasamoviestarorapopsingerwhosenaturaltalentsarealmost
impossibletoduplicate,
A) alloftheirearningsconsistofeconomicrents.
B) noneoftheirearningsconsistofeconomicrentssincerentappliesonlytoland.
C) partoftheirearningsconsistsofeconomicrents.
D) alloftheirearningsconsistofinterestpayments.
Answer: C
Diff:2
17) Aportionofaworkersearningsiseconomicrentiftheworker
A) hasskillsthatmakehimmoreproductivethananunskilledworker.
B) wouldacceptasmallreductioninpaywithoutquitting.
C) wasthelastpersonhiredatthegoingwagerate.
D) hasbeenonthejobforatleastayear.
Answer: B
Diff:2
18) Adedicatedteacherlovesbeingintheclassroomandwouldteachfor$40,000peryear,butheis
actuallypaid$55,000peryear.Thisindividual
A) receiveseconomicrentof$20,000. B) receivesaccountingprofitof$20,000.
C) hasanopportunitycostof$15,000. D) receiveseconomicrentof$15,000.
Answer: D
Diff:1
19) World-classmodelsreceivesignificanteconomicrentsbecause
A) theirtalentsandabilitiesareinfixedsupply.
B) thereisashortageofworld-classmodels.
C) thereisasurplusofworld-classmodels.
D) thereisnoequilibriumquantityofworld-classmodels.
Answer: A
Diff:2
20) Anindividualwouldwillinglygiveaconcertfor$2,000.Ifsheispaid$5,000fortheconcert,she
is
A) receiving$3,000tocoverheropportunitycost.
B) notbeingpaidherfullopportunitycost.
C) receiving$3,000ofeconomicrent.
D) certainlybeingpaidmorethanwarrantedbythelevelofdemand.
Answer: C
Diff:1
21) SupermodelLindaEvangelistahasbeenquotedassaying,[I]dontwakeupforlessthan
$10,000aday.IfMs.Evangelistaispaid$15,000forhernextdaylongphotoshoot,then
A) sheisbeingpaid$15,000tocoverheropportunitycost.
B) thefirst$10,000shereceivesiseconomicrenttolaborandthenext$5,000ismore
economicrent.
C) theentire$15,000wouldbeconsideredeconomicrenttolabor.
D) sheisreceivingeconomicrenttolaborequalto$5,000.
Answer: D
Diff:2
22) Iflandisreallocatedorswitchedfromagriculturalusetorecreationaluse,thenitislikelythat
A) foodisnotasimportantasrecreation.
B) thedemandforfoodislesstodaythaninpreviousdecades.
C) landearnsahigherrentinrecreationalusethaninagriculturaluse.
D) thedemandcurveforlandintheagriculturalindustryisshiftingtotheright.
Answer: C
Diff:1
23) SupposethatJustinTimberlakesells10,000ticketstoaconcertsat$480each.Iftheequilibrium
priceis$600perticketforafixedsupplyof10,000tickets,whatisthevalueoftheadditional
economicrentthatTimberlakecouldearnifhechargedthemarketclearingprice?
A) $12.00 B) $1.2million C) $3million D) $1.8million
Answer: B
Diff:1
24) Ifafactorofproductionwithafixedsupplyisearning$100initscurrentuseanditsnextbest
usewouldyieldearningsof$80,thefactorisearningapureeconomicrentequalto
A) $0. B) $20. C) $80. D) $180.
Answer: B
Diff:1
25) IfLadyGagainsiststhatticketstoherconcertbesoldfor$100eachratherthanthe$500each
thatcouldbechargedasreflectedbydemandforthosetickets,thentheresultwillbe
A) tocreateanexcesssupplyoftickets.
B) toeliminate$150worthofeconomicrentperticket.
C) thatpartoftheeconomicrentwillbedissipatedbyscalpers,radiostationowners,etc..
D) thatthedemandforticketswilldecrease.
Answer: C
Diff:1
26) Economicrentdirectsresourcesto
A) thepeoplewhocanusethemmostefficiently.
B) peopleonly.
C) largecorporations.
D) labor-intensiveindustriesonly.
Answer: A
Diff:1
27) TheHawaiianislandofLanaiisprivatelyownedbyCastle&Cookeandforgenerationsmost
ofitslandwasusedtogrowpineapples.Now,manyofthepineapplefieldshavebeenreplaced
bytouristaccommodations,includingapairofworld-classhotelsandatopratedgolfcourse.
Whatwouldaneconomistsayaboutthischangeinland-usepatterns?
A) Whilegrowingpineapplesusedtheislandslandmoreefficiently,tourismprovidesutility
tothelargestnumberofpeople.
B) Economicrenthasallocatedtheislandsresourcestotheirhighestvalueduse:tourism.
C) Agricultureisstillthelandshighest-valuedandmostefficientuse,buttourismearns
moreprofitsforCastle&Cooke.
D) Tofindthelandseconomicrent,addthepriceperacrethatlandonLanaiwouldbe
worthifusedtogrowpineapplestothevalueperacrewhenusedforagolfcourse.
Answer: B
Diff:2
28) Economicrentis
A) thereturntoownersoffarmland.
B) thereturntolandlords.
C) apaymentfortheuseofanyresourceaboveitsopportunitycost.
D) apaymentforland,anapartment,orahousethatonedoesnotown.
Answer: C
Diff:1
29) Thepaymentfortheuseofaresourceinanamounthigherthantheresourcesopportunitycost
is
A) aproprietorship. B) anirrationaleconomicconcept.
C) economicrent. D) reinvestment.
Answer: C
Diff:1
30) Thepaymentforafactorofproductionthatiscompletelyinelasticinsupplyis
A) opportunitycost. B) economicrent.
C) discounting. D) limitedliability.
Answer: B
Diff:1
31) Pureeconomicrentinvolvessituationswhere
A) thesupplycurveisperfectlyinelastic.
B) thesupplycurveisperfectlyelastic.
C) theusestowhicharesourcecanbeusedcanbevariedbutthequalityoftheresource
cannotbevaried.
D) thequalityofaresourcecanbevariedbutthepricecannotbevaried.
Answer: A
Diff:2
32) Whenthesupplycurveofaresourceisvertical,thenthereturntotheresourceowneris
A) zero.
B) partlyeconomicrentandpartlyopportunitycosts.
C) partlyeconomicrentandpartlyprofits.
D) pureeconomicrent.
Answer: D
Diff:1
33) Thefirsteconomisttoanalyzeeconomicrentwas
A) HenryGeorge. B) DavidRicardo.
C) KarlMarx. D) JohnStuartMill.
Answer: B
Diff:1
34) Refertotheabovefigure.WhichpanelisconsistentwithRicardosviewonthesupplyofland?
Answer: D
Diff:2
35) Ifallthereturntoaresourceiseconomicrent,weknowthat
A) thepriceoftheresourceisbelowitsopportunitycost.
B) thepriceoftheresourceequalsitsopportunitycost.
C) thepriceoftheresourceisaboveitsopportunitycost.
D) theresourcehasnoopportunitycost.
Answer: C
Diff:2
36) Supposethesupplyoflandisperfectlyinelasticandlandownersarereceivingpaymentsequal
to$25,000anacre.Ifthegovernmenttaxedthelandownersincomewithataxrateof80percent,
howmuchtaxwouldthegovernmentcollect?
A) Zero,becausetheownerwoulddosomethingelsewiththetaxratherthanpaysuchahigh
tax.
B) Lessthan$20,000becausetheownerswouldchangetheirbehaviorsoastopaylesstax.
C) Morethan$20,000becausethecombinedeffectsofalltheownerstryingtochangetheir
behavioractuallywouldgeneratehigherreturns.
D) $20,000becausetheuseofthelanddoesntdependonthepricethelandownersreceivefor
theland.
Answer: D
Diff:3
37) Theconceptofeconomicrentcanbeappliedto
A) landonly.
B) landandnaturalresourcesonly.
C) land,naturalresources,andpaintingsbydeadmastersonly.
D) anyresourcethatcannotbereplicatedexactly.
Answer: D
Diff:1
38) Rents
A) havenousefuleconomicpurpose.
B) haveanallocativefunctionsincetheyhelpdecidetowhichusearesourcewillbeput.
C) haveadistributionalfunctionsincetheyaffectincomes,buthavenoallocativefunction
sincetheresourceisinfixedsupply.
D) haveaneconomicpurposeonlyiftheyaretaxedandproviderevenuetothegovernment.
Answer: B
Diff:2
39) Economicrentsareusefulbecause
A) theyincreasetheincomeoftheowner.
B) theymakeiteasytocalculateopportunitycost.
C) resourceswillgototheirmostefficientuse.
D) theyincreasetaxrevenue.
Answer: C
Diff:1
40) Forsuperstarathletes,
A) theirentireearningsareeconomicrent.
B) partoftheirearningsareeconomicrent.
C) noneoftheirearningsareeconomicrentsincerentdoesntapplytolabor.
D) noneoftheirearningsareeconomicrentsincetheywilldosomeotherworkoncetheyare
toooldtobeanathlete.
Answer: B
Diff:2
41) Inwhichfieldwouldeconomicrentslikelybegreatestforthebestintheirfield?
A) Farming B) Teaching C) Hockey D) Carrepairing
Answer: C
Diff:2
42) Superstarsinsportsorentertainmentpresumablywouldbewillingtocontinueworkingintheir
specificareasforlowerincomethantheyarecurrentlyearning.Thisimpliesthat
A) thelargesalariesservenoallocativefunctionandonlyservetomakethesuperstarsricher.
B) superstarsareexploitingtheirfansbyreceivingsuchalargesalary.
C) superstarsdonotrespondtomonetaryincentives.
D) thehighsalariesareusedtoallocatetheirtimebutfailtobringinnewsourcesofsupply
(othersuperstars)thatareexactlylikethemselves.
Answer: D
Diff:3
43) Apopularentertainergivesaconcertina50,000seatstadium.Togiveherfansabreak,she
chargesonly$50aseatinsteadofthecustomary$75aseat.At$75aticket,therewouldhave
been50,000ticketssold,andat$50,thereare80,000peoplewhowanttickets.Asaconsequence
ofthegenerosityoftheentertainer,
A) herfansaremadebetteroff.
B) amorefairsystemofpricingtheticketshasbeenfound.
C) anothertypeofsystemwillhavetobefoundtoallocatethetickets,makingsomeofher
fansbetteroffandothersworseoff.
D) herfansaremadeworseoffsincethereisanexcessdemandof30,000tickets.
Answer: C
Diff:3
44) Economicrentserves
A) adescriptivefunctionbymakingsomewealthierthanothers,butservesnoallocative
function.
B) anallocativefunctionbyguidingavailablesuppliestothemostefficientuse.
C) onlytomaketherichricherandthepoorpoorer.
D) nousefulfunctioninamoderneconomy.
Answer: B
Diff:2
45) Wheneconomicrentexists,
A) thepriceisequaltotheopportunitycostoftheresources.
B) priceisthesameasthediscountrate.
C) resourcesareallocatedinefficiently.
D) resourcesareallocatedefficiently.
Answer: D
Diff:1
46) Georgeisdebatingwhethertoconcentrateonplayingprofessionalfootballorprofessional
baseball.Heisoffered$6millionayeartoplaybaseballand$7millionayeartoplayfootball.If
hechoosestoplayfootball,
A) theeconomicrentinhissalaryis$7million.
B) theeconomicrentinhissalaryis$6million.
C) theeconomicrentinhissalaryis$1million.
D) theeconomicrentinhissalaryis$13million.
Answer: C
Diff:2
47) Theopportunitycostofowner-providedlaboristhe
A) wageratepaidtotheowner.
B) explicitpartofthewageratepaidtotheowner.
C) salarytheownercouldhavemadeifsheworkedatherbestalternativejob.
D) profitafterallofthebillshavebeenpaid.
Answer: C
Diff:1
48) Bonnieisdebatingwhethertotakeajobasaprofessionaltherapistoraflorist.Shewillearn
$40,000ayearasatherapistor$22,000ayearasaflorist.Ifshechoosestobeatherapist,the
opportunitycostis
A) $40,000. B) $22,000.
C) $18,000. D) unabletodetermine.
Answer: B
Diff:2
49) Bonnieisdebatingwhethertotakeajobasaprofessionaltherapistoraflorist.Shewillearn
$40,000ayearasatherapistor$22,000ayearasaflorist.Ifshechoosestobeatherapist,the
economicrentis
A) $40,000. B) $22,000.
C) $18,000. D) unabletodetermine.
Answer: C
Diff:2
50) Aportionofaworkersearningsisrentif
A) theworkerwasthelastpersonhiredatthegoingwagerate.
B) thesupplycurveoflaborishorizontal.
C) theworkerwouldacceptasmallwagecutwithoutquittingorworkingforsomeoneelse.
D) theworkerhasindustry-specificskills.
Answer: C
Diff:3
51) Refertotheabovefigure.IfdemandcurveD1 istherelevantdemandcurve,rentis

A) zero. B) OG. C) areaFHGO. D) areaKHG.
Answer: A
Diff:2
52) Refertotheabovefigure.SupposedemandisD2 andthenincreasestoD3 .Economicrentafter

thechangeis
A) zero. B) areaCIHF. C) areaCIGO. D) areaBJC.
Answer: C
Diff:2
53) Refertotheabovefigure.SupposedemandisD2 andthenincreasestoD3 .Thechangein

economicrentis
A) zero. B) areaCIHF. C) areaCIGO. D) areaBJC.
Answer: B
Diff:2
54) Refertotheabovefigure.AtdemandcurveD2 ,priceequals________andeconomicrentequals

________.
A) OF;KHG B) OF;FHGO C) OE;EKGO D) OE;KHG
Answer: B
Diff:2
55) Apaymenttoanownerofaresourceinexcessofitsopportunitycostisknowas
A) realwages. B) economicrent.
C) financialinterest. D) accountingprofits.
Answer: B
Diff:1
56) TheconceptofeconomicrentisassociatedwiththeBritisheconomistDavidRicardo
(1772-1823).Ricardoanalyzedeconomicrentforland.WhichofthefollowingisFALSEwith
respecttodetermininglandrent?
A) Thesupplycurveforlandisvertical(perfectlyinelastic).
B) Rentispaymentforaresourceaboveitsopportunitycost.
C) Paymentforaresourcebelowitsopportunitycostisrent.
D) Ricardoassumedthequantityoflandinacountryisfixed.
Answer: C
Diff:1
57) Apaymentforaresourceabovetheopportunitycostoftheresourceis
A) economicrent. B) socialrent. C) nominalrent. D) realrent.
Answer: A
Diff:1
58) Whenaresourcehasaperfectlyinelasticsupplycurve,
A) theamountofeconomicrentforthisresourceisdeterminedbyitssupply.
B) theamountofeconomicrentforthisresourceisdeterminedbydemandfortheresource.
C) theamountofeconomicrentforthisresourceisdeterminedbythegovernment.
D) thereisnoeconomicrentbeingearnedbythisresource.
Answer: B
Diff:2
59) Whenaresourcehasaperfectlyelasticsupplycurve,
A) theamountofeconomicrentfortheresourceisdeterminedbyitssupply.
B) theamountofeconomicrentforthisresourceisdeterminedbydemandfortheresource.
C) thereisnoeconomicrentbeingearnedbythisresource.
D) theentirepaymentreceivedbythisresourceiseconomicrent.
Answer: C
Diff:3
60) ThesupplycurveforlandinNewYorkCityismostlikely
A) horizontalorperfectlyelastic. B) adownwardslopingstraightline.
C) anupwardslopingstraightline. D) verticalorperfectlyinelastic.
Answer: D
Diff:2
61) Ifthesupplycurveforlandwasaverticalline,thenanypaymentmadeforlandwouldbe
considered
A) aseconomicrent. B) aseconomiclease.
C) aseconomicinterest. D) asanopportunityleasepayment.
Answer: A
Diff:1
62) TheBritisheconomistmostoftenassociatedwiththeissueofeconomicrentforlandwas
A) JohnMaynardKeynes. B) JeremyBentham.
C) A.W.Phillips. D) DavidRicardo.
Answer: D
Diff:2
63) Whichofthefollowingwouldbemostlikelytoreceivehigheconomicrentpayments?
A) farmer B) professionalbaseballplayer
C) factoryworker D) doctor
Answer: B
Diff:2
64) Afamousoperastarmade$2millionperyear.Hesaidhewouldrathersellinsuranceifhe
couldntmakemorethan$100,000peryear.Ifheistellingthetruth,whatshisopportunitycost
asanoperastar?
A) $2.0million B) $100,000 C) $1.9million D) $2.1million
Answer: B
Diff:2
65) Afamousoperastarmade$2millionperyear.Hesaidhewouldrathersellinsuranceifhe
couldntmakemorethan$100,000peryear.Ifheistellingthetruth,howmuchishebeingpaid
ineconomicrent?
A) $2.0million B) $100,000 C) $1.9million D) $2.1million
Answer: C
Diff:3
66) Thetermeconomicrentreferstopayments
A) toownersofrealestate.
B) fortheuseofanyresourceaboveitsopportunitycost.
C) equaltotheopportunitycostoftheuseofland.
D) fortheuseofhousingincompanyownedproperties.
Answer: B
Diff:1
67) DavidRicardousedtheexampleoflandtodemonstratetheconceptofrent,asthesupplyof
landis
A) perfectlyelastic. B) relativelyelastic.
C) perfectlyinelastic. D) negativelysloped.
Answer: C
Diff:1
68) Apaymentfortheuseofaninputthatexceedstheopportunitycostoftheinputisknownas
A) realinterest. B) economicprofit.
C) economicrent. D) economiccost.
Answer: C
Diff:1
69) Inthemarketforland,ifthesupplyoflandisperfectlyinelastic,anincreaseinthedemandfor
landwillresultina(n)
A) increaseintherealinterestrate.
B) increaseineconomicrent.
C) decreaseintheequilibriumprice.
D) increaseinthequantitysuppliedofland.
Answer: B
Diff:2
70) Ifamajorleaguebaseballplayerwouldbewillingtoworkfor$500,000peryearandiscurrently
beingpaid$1,200,000peryear,thatplayerisearninganannualeconomicrentof
A) $500,000. B) $1,200,000. C) $1,700,000. D) $700,000.
Answer: D
Diff:2
71) Ifamajorleaguebaseballplayerwouldbewillingtoworkfor$500,000peryearandiscurrently
beingpaid$1,200,000peryear,theopportunitycostofhisdecisiontoplaybaseballis
A) $500,000. B) $1,200,000. C) $1,700,000. D) $700,000.
Answer: A
Diff:2
72) LetussupposethatifOprahWinfreywasnotasuperstarshewouldhavebeenajudgemaking
$100,000peryear.Ifshemakes$63milliondollarsthisyear,hereconomicrentis
A) $63.0million. B) $63.1million. C) $100,000. D) $62.9million.
Answer: D
Diff:2
73) LetussupposethatifOprahWinfreywasnotasuperstarshewouldhavebeenajudgemaking
$100,000peryear.Ifshemakes$63milliondollarsthisyear,heropportunitycostis
A) $63.0million. B) $63.1million. C) $100,000. D) $62.9million.
Answer: C
Diff:2
74) SupposethesupplyofoceanfrontpropertyinCaliforniaisperfectlyinelastic.Anyincreasesin
demandforthispropertyincreasesthe
A) economicrent. B) opportunitycostoflandowners.
C) presentdiscountedvalue. D) realinterestrate.
Answer: A
Diff:2
75) SupposeJonStewartoftheDailyShowmakesanannualincomeof$1,000,000.Ifhequithis
televisionjobandwentintoproducinghecouldmake$400,000peryear.JonStewartsannual
economicrenttolaboris
A) $1,400,000. B) 1,000,000. C) $400,000. D) $600,000.
Answer: D
Diff:2
76) SupposeJonStewartoftheDailyShowmakesanannualincomeof$1,000,000.Ifhequithis
televisionjobandwentintoproducinghecouldmake$400,000peryear.JonStewarts
opportunitycostasaproduceris
A) $1,400,000. B) 1,000,000. C) $400,000. D) $600,000.
Answer: B
Diff:2
77) ConsideranNBAsuperstarKobeBryantandoneofyoureconomicsprofessors.Whoislikely
toreceivemoreeconomicrentinhis/herjob?Explainyouranswer.
Answer: Economicrentisapaymentfortheuseofanyresourceaboveitsopportunitycost.
BecauseitishardertoduplicateahighlypaidNBAsuperstarlikeKobeBryantthanan
economicsprofessor,itismorelikelythattheNBAsuperstar,whohasaratherinelastic
supplycurve,receivesmoreeconomicrent.
Diff:2
78) Economicrentreflectsawasteofresources.Doyouagreeordisagree?Explain.
Answer: Disagree.Economicrentisindeedapaymentfortheuseofaresourceaboveits
opportunitycost.However,asdeterminedbythedemandfortheresource,economic
rentdirectstheresourcetoitshighest-valuedormostefficientuseandthusisnotawaste
ofresources.
Diff:2
21.2FirmsandProfits
1) Thefundamentalgoalofafirmorabusinessisto
A) producethelargestnumberofoutputunitspossible.
B) employlaborinthemostsociallyresponsiblemannerpossible.
C) organizethefactorsofproductionandtakerisks.
D) earnthehighestpossiblereturns.
Answer: D
Diff:1
Topic: 21.2FirmsandProfits
2) Abusinesswhichisownedbytwoormorepeopleiscalleda
A) proprietorship. B) partnership.
C) corporation. D) noneoftheabove.
Answer: B
Diff:1
3) Whichofthefollowingisadisadvantageofthecorporateformofbusinessorganization?
A) Limitedliability B) Limitedfinancing
C) Doubletaxation D) Unlimitedliability
Answer: C
Diff:1
4) WhichofthefollowingisthemostcommonformofbusinessorganizationintheUnitedStates?
A) Proprietorship B) Partnership C) Corporation D) S-corporation
Answer: A
Diff:1
5) Economicprofitcanbecalculatedas
A) totalrevenue-explicitcosts.
B) totalrevenue-implicitcosts.
C) totalrevenue-explicitcosts-implicitcosts.
D) totalrevenue-fixedcosts.
Answer: C
Diff:1
6) Accountingprofitcanbecalculatedas
A) totalrevenue-explicitcosts.
B) totalrevenue-implicitcosts.
C) totalrevenue-explicitcosts- implicitcosts.
D) totalrevenue-fixedcosts.
Answer: A
Diff:1
7) Whichofthefollowingparticipantsintheworkingofafirmarereferredtoas residualclaimants?
A) Workers B) Managers
C) Entrepreneurs D) Alloftheabove
Answer: C
Diff:1
8) Aproprietorshipis
A) difficulttoform.
B) taxedtwiceoncewhenitpaysbusinesstaxesandagainwhenitsownerpayspersonal
incometaxes.
C) notoftenfoundindevelopedeconomies,inwhichcorporationshavebecomethemost
commonformofbusinessorganization.
D) riskyforitsowner,whoispersonallyresponsibleforthefirmsdebts.
Answer: D
Diff:2
9) ThemostcommontypeoffirmintheUnitedStatesisthe
C) corporation. D) limitedpartnership.
Answer: A
Diff:1
10) WhichofthefollowingoptionsisNOTacharacteristicofaproprietorship?
A) Singleownership B) Unlimitedliability
C) Doubletaxation D) Easytoformanddissolve
Answer: C
Diff:1
A) twoormoreindividualsinbusinesstogether.
B) acorporationthatistaxedlikeanindividual.
C) abusinessownedbyoneindividualwhomakesallofthedecisions.
D) agovernment-ownedfranchise.
Answer: C
Diff:1
12) Thedisadvantagesofproprietorshipsinclude
A) limitedliabilityfortheowner.
B) doubletaxationofbusinessprofits.
C) thefactthattheproprietorshipcancontinueevenaftertheownerdies.
D) thefactthattheproprietorissolelyresponsibleforallthefirmsdebts.
Answer: D
Diff:1
13) Bydefinition,aproprietorshipis
A) ownedbymanyshareholders.
B) alargemanufacturingconcern.
C) ownedbyasingleindividual.
D) managedbyalargegroupcalledtheboardofdirectors.
Answer: C
Diff:1
14) Anadvantageofproprietorshipsis
A) theeasewithwhichtheycanbeformedanddissolved.
B) theirabilitytoraiselargeamountsofequitycapital.
C) thefactthattheirprofitsarenottaxed.
D) thebreadthofmanagementexpertisethatcomesfromhavingaboardofdirectors.
Answer: A
Diff:1
15) Oneadvantageofaproprietorshipisthat
A) itisrelativelyeasytoraisefinancialcapitalforaproprietorship.
B) aproprietorshipisrelativelyeasytoformandtodissolve.
C) therearelimitstothepossibleliabilitiesoftheowner.
D) depreciationratesoncapitalarehigher.
Answer: B
Diff:2
A) abusinesswithannualsalesoflessthan$50,000ayear.
B) abusinessownedbyoneindividualthatemploys10orfewerworkers,andhasbeenin
businesslessthan15years.
C) abusinessownedbyoneindividualwhoreceivestheprofitsandislegallyresponsiblefor
thedebtsofthefirm.
D) aformofbusinessinwhichthestockofthecompanyiscloselyheldbymembersofone
family.
Answer: C
Diff:1
17) Themostcommonformofbusinessorganization,asfarasthenumberofsuchfirmsinbusiness,
isthe
C) corporation. D) Scorporation.
Answer: A
Diff:1
18) Onedisadvantageofapartnershipis
A) limitedliability. B) lowermonitoringcosts.
C) difficultyraisingfunds. D) itpermitsgreaterspecialization.
Answer: C
Diff:2
19) Inapartnership,legalresponsibilityforalldebtsis
A) sharedbythepartners. B) passedtotheshareholders.
C) paidbytheprincipleowner. D) handledbythebondholders.
Answer: A
Diff:1
20) Oneadvantageofapartnershipis
A) lowercosts. B) theyareeasytoform.
C) alltheprofitsgototheolderpartner. D) theyaredoubletaxed.
Answer: B
Diff:1
21) Inapartnership,debtsaccumulatedbyonepartner
A) aretheresponsibilityofthatpartneronly.
B) aretheresponsibilityoftheotherpartnersaswell.
C) aretheresponsibilityofalltheemployeesofthepartnership,regardlessofwhetherthose
employeesarepartners.
D) aretheresponsibilityoftheotherpartnersonlyuptotheamounteachpartnerinitially
investedinthepartnership.
Answer: B
Diff:2
22) Comparedtoaproprietorship,anadvantageofapartnershipis
A) thatprofitsarenottaxedtwice.
B) doubletaxation.
C) theabilitytotakeadvantageofgreaterspecialization.
D) thelimitedliabilityofthepartners.
Answer: C
Diff:2
23) Comparingproprietorshipswithpartnerships,whichistrue?
A) Inbothcases,profitsaretaxedonlyonce.
B) Partnershipsoutnumberproprietorships2-to-1intheUnitedStates.
C) Proprietorshipsgenerallyendwiththedeathoftheowner,butpartnershipscontinueas
longasatleastonepartnersurvives.
D) Aproprietorfacesunlimitedliabilityforherfirmsdebts,butinapartnershipeachpartner
isonlyresponsibleforanevenshareofthefirmsindebtedness.
Answer: A
Diff:2
24) Oftheownersofthefollowingfirms,whichdoesnothaveunlimitedliabilityforthebusiness
debts?
A) RoyRaysGroceryStore,RoyRay,proprietor
B) ThepartnershipofReeseandJones,Attorneys-at-Law
C) TheHuberCorporation
D) WrensFeedandSeedStore,aproprietorship
Answer: C
Diff:1
25) Corporationsaccountfor
A) thelargestproportionofbusinessrevenuesgeneratedintheUnitedStates.
B) thelargestamountoftaxespaidtotheU.S.government.
C) thelargestnumberoffirmsintheUnitedStates.
D) thesmallestamountofrevenuesintheUnitedStates.
Answer: A
Diff:1
26) WhichofthefollowingisNOTacharacteristicofacorporation?
A) Limitedliabilityforshareholders B) Doubletaxation
C) Separationofownershipproblems D) Limitedabilitytoraisecapitalfunds
Answer: D
Diff:1
27) Themainadvantageofacorporateformoforganizationisthat
A) shareholdershavelimitedliability.
B) shareholdershaveunlimitedliability.
C) shareholdersarenotsubjecttodoubletaxation.
D) allcorporateprofitsmustbedistributedasdividends.
Answer: A
Diff:1
28) Ingeneral,whichformofbusinessorganizationhasthegreatestcapacitytoraiselargesumsof
financialcapital?
A) Soleproprietorships B) Partnerships
C) Limitedpartnerships D) Corporations
Answer: D
Diff:1
29) Theformofbusinessorganizationresponsibleforgeneratingthegreatestportionofbusiness
revenuesintheUnitedStatesisthe
A) corporation. B) dualproprietorship.
C) proprietorship. D) partnership.
Answer: A
Diff:1
30) Theownersofacorporationare
A) theemployeesofthefirm. B) theshareholders.
C) completelyincontrolofthefirm. D) taxedonlyonce.
Answer: B
Diff:2
31) Corporationshaveaseparationandcontrolproblembecause
A) ownersandmanagersfrequentlyhavedifferentincentives.
B) mostoftheprofitsarereinvested.
C) theshareholderscontrolthefirm.
D) taxesarepaidonlybytheboardofdirectors.
Answer: A
Diff:2
32) ThedoubletaxationofcorporateprofitintheUnitedStatesreferstothefactthat
A) taxratesonpartnershipsareveryhigh.
B) depreciationisnotadeductibleexpense.
C) corporateprofitisfirsttaxedandthenanydividendspaidaresubjecttopersonalincome
tax.
D) proprietorshipsarenotsubjecttoanytaxonearnings.
Answer: C
Diff:1
33) Anadvantageofacorporationis
A) theabilitytoraiselargesumsoffinancialcapital.
B) unlimitedliabilityonthepartofshareholders.
C) thefactthatownershipandcontrolareneverseparated.
D) thefactthatthecorporationisdissolvedwhenoneofitsownersdies.
Answer: A
Diff:1
34) Limitedliabilityisacharacteristicof
A) partnershipsonly. B) corporationsonly.
C) partnershipsandproprietorshipsonly. D) proprietorshipsonly.
Answer: B
Diff:2
35) Monitoringtheperformanceofthepeoplemanagingthefirmiseasiestinthecaseof
A) proprietorships. B) partnerships.
C) corporations. D) Scorporations.
Answer: A
Diff:2
36) Ownersmayhavelittletodowiththemanagementofthefirminthecaseof
A) partnerships. B) corporations.
C) proprietorships. D) eithercorporationsorproprietorships.
Answer: B
Diff:2
37) Accountingcostsrepresent
A) explicitcostspaidbythefirm. B) opportunitycosts.
C) bothsunkandfuturecosts. D) longruncostsonly.
Answer: A
Diff:2
38) Implicitcostsaremeasuredby
A) thevalueofthenext-bestalternativeusesofinputs.
B) actualexpensespaidbyafirm.
C) totalrevenuesminustotalcosts.
D) thelowestvalueofallalternativeusesofinputs.
Answer: A
Diff:2
39) Theimplicitcostincurredbyafirmtouseitsresourcestoproduceitsoutputisthefirms
A) totalcost. B) explicitcost.
C) opportunitycost. D) accountingcost.
Answer: C
Diff:1
40) Whichisthebestexampleofafirmsimplicitcosts?
A) Wages
B) Theopportunitycostofowner-providedlabor
C) Rent
D) Taxes
Answer: B
Diff:1
41) Explicitcostsare
A) theopportunitycostsofallresourcesusedbythefirm.
B) thecostsassociatedwiththeresourcesthatthefirmowns.
C) actualexpendituresthatafirmmustmake.
D) allcostsassociatedwiththeshortrun.
Answer: C
Diff:1
42) Implicitcostsare
A) thecostsofusingfactorsthataproducerhiresorrents.
B) theopportunitycostsofusingfactorsthataproducerdoesnotbuyorhirebutalready
owns.
C) coststhataretakenintoconsiderationbyaccountants.
D) coststhatarevariableintheshortrunandfixedinthelongrun.
Answer: B
Diff:1
43) Economistsalsorefertothenormalrateofreturnoninvestmentas
A) aresidualcost. B) theopportunitycostofcapital.
C) theequitykicker. D) thefixedcostofentrepreneurship.
Answer: B
Diff:1
44) Anothertermtodescribethenormalrateofreturnoncapitalisthe
A) fixedcostofcapital. B) depreciationcostofcapital.
C) opportunitycostofcapital. D) monopolyrent.
Answer: C
Diff:1
45) Thenormalrateofreturnisthe
A) averagerateofreturnearnedinanindustryatagivenpointintime.
B) opportunitycostofcapital.
C) returnoncapitalassociatedwithzeroaccountingprofits.
D) theamountpaidtoaninvestorwhenthefirmisanon-goingconcern.
Answer: B
Diff:2
46) Theopportunitycostofcapitalis
A) therateofreturnrealizedonaninvestment.
B) therateofreturnthatcouldbeearnedbytheownerscapitalwereitusedelsewhere.
C) therateusedtocalculateafirmstaxliability.
D) therateofinterestthegovernmentusestocalculatelegalbusinesstaxpenalties.
Answer: B
Diff:1
47) WhichofthefollowingisNOTacorrectdescriptionofopportunitycostofcapital?
A) Itisthenormalrateofreturnoninvestment.
B) Itisnormallyincludedinaccountingcosts.
C) Itistheincomesacrificedbynotinvestinginanotherfirm.
D) Itisanimplicitcost.
Answer: B
Diff:2
48) Whenanentrepreneurinvestshisownfinancialcapitalinordertostartabusiness,
A) theopportunitycostofcapitalshouldbeincludedintheeconomiccostofdoingbusiness.
B) theinvestmentistreatedasafixedcost,soitshouldnotbeconsideredasacostofdoing
business.
C) thefirmseconomicprofitswillexceeditsaccountingprofits.
D) theaccountingcostsincreasebecausethefundswouldotherwisehavetobeborrowed.
Answer: A
Diff:1
49) Supposethebestinvestmentyoucouldmakewith$100,000incashistopurchaseagovernment
bondthatpays14percentinterestperyear.Ifyoudecidetoinvestthemoneyinyourown
businessinsteadofbuyingthegovernmentbond,theopportunitycostofthisfinancialcapitalis
A) $1,400peryear.
B) $100,000peryear.
C) $14,000peryear.
D) zero,becauseyoualreadyhadthe$100,000.
Answer: C
Diff:2
50) Single-ownerproprietorshipsoftenunintentionallyexaggeratetheirprofitsbecausethey
A) forgettheirexplicitlosses.
B) lookatafter-taxinsteadofpre-taxcosts.
C) paytheirbillslateandthereforeincurlargeinterestcharges.
D) neglecttoconsidertheopportunitycostoftheownerslabor.
Answer: D
Diff:1
51) Oftensingle-ownerproprietorshipsseemmoreprofitablethantheyreallyare.Thereasonfor
thisisthat
A) theyreceivespecialtaxbenefitscomparedtocorporations.
B) theyusedifferentaccountingprocedures.
C) theyoftenfailtoconsidertheopportunitycostofthelaborprovidedbytheowner.
D) theyarenotallowedtodeductdepreciationexpense.
Answer: C
Diff:1
52) If,asanentrepreneur,Iamearningaccountingprofitsof$50,000peryearandtheopportunity
costofmytimeis$60,000,
A) Iamearningeconomicprofitsof$10,000.
B) Iamearningeconomicprofitsof$50,000.
C) Ishouldclosemybusiness.
D) Iaminalong-runequilibriumposition.
Answer: C
Diff:1
53) If,asanentrepreneur,Iamearningaccountingprofitsof$60,000peryearandtheopportunity
costofmytimeis$50,000,
A) Iamearningeconomicprofitsof$10,000.
B) Iamearningeconomicprofitsof$60,000.
C) Iamearningeconomiclossesof$10,000.
D) Ishouldclosemybusiness.
Answer: A
Diff:1
54) Economicprofitsequal
A) accountingprofits.
B) accountingprofitslesseconomicrents.
C) totalrevenuelesstheopportunitycostsofallfactorsofproduction.
D) accountingprofitsplustheownerslaboropportunitycosts.
Answer: C
Diff:1
55) Iftheexplicitcoststoafirmtoproduceaunitofoutputare$6andthefirmsells200,000unitsof
outputfor$9perunit,theaccountingprofitreceivedbytheproduceris
A) $1.2million. B) $850,000. C) $1.8million. D) $600,000.
Answer: D
Diff:1
A) Acorrectmeasureofafirmseconomiccostincludesbothaccountingandopportunity
cost.
B) Theaccountingprofitearnedbyafirmwillalwaysbelessthanitseconomicprofit.
C) Themajordifferencebetweenaccountingandeconomicprofitisthataccountingprofit
doesnotreflecttheopportunitycostofusingresources.
D) Theaccountingprofitofafirmisitstotalrevenueminustotalexplicitcosts.
Answer: B
Diff:1
57) Supposeafamily-ownedyogurtshophas$80,000intotalrevenues,$36,000inrent,and$20,000
inadditionaloperatingcosts.Thehusbandandwifeworkintheshopandpaynowagesto
themselvesorothers.Theeconomicprofitsfromtheshopare
A) $24,000. B) lessthan$24,000.
C) morethan$24,000. D) $80,000.
Answer: B
Diff:1
58) Supposethatyouopenyourownbusinessandearnanaccountingprofitof$30,000peryear.
Whenyoustartedyourbusiness,youleftajobthatpaidyoua$25,000salaryannually.Also,
supposethatyouinvested$70,000ofyourownfundstostartupyourbusiness.Ifthenormal
rateofreturnoncapitalis5percent,youreconomicprofitis
A) $5,000. B) -$1,500. C) $1,500. D) -$5,000.
Answer: C
Diff:2
59) Supposethatyouopenyourownbusinessandearnanaccountingprofitof$35,000peryear.
Whenyoustartedyourbusiness,youleftajobthatpaidyoua$30,000salaryannually.Also,
supposethatyouinvested$70,000ofyourownfundstostartupyourbusiness.Ifthenormal
rateofreturnoncapitalis10percent,youreconomicprofitis
A) $5,000. B) -$5,000. C) $2,000. D) -$2,000.
Answer: D
Diff:2
60) Economicprofitsareequalto
A) totalrevenuesminustotalfixedcosts.
B) totalrevenues,aftertax,minuscostofgoodssold.
C) totalrevenuesminustheimplicitandexplicitcostsofallinputsused.
D) totalrevenuesminustheopportunitycostoflabor.
Answer: C
Diff:1
61) Accountingprofitsaretotalrevenuesminus
A) allrelevantopportunitycosts.
B) explicitandimplicitcosts.
C) explicitcostsandallotherrelevantopportunitycosts.
D) explicitcosts.
Answer: D
Diff:1
62) Accountingprofitisequalto
A) totalrevenueminusdividendsandinterest.
B) dividendspaid.
C) totalrevenueminusimplicitcosts.
D) totalrevenueminusexplicitcosts.
Answer: D
Diff:1
63) Incomparingaccountingprofitwitheconomicprofit,wegenerallyfindthat
A) accountingprofitislessthaneconomicprofit.
B) economicprofitandaccountingprofitarethesameintheshortrun.
C) accountingprofitisgreaterthanorequaltoeconomicprofit.
D) economicprofitexceedsaccountingprofitbytheamountofopportunitycosts.
Answer: C
Diff:1
64) Inconsideringeconomicprofitinamarketeconomy,itiscorrecttosaythat
A) thereshouldneverbeanyeconomicprofit.
B) economicprofitwillonlyoccur,evenintheshortrun,asaresultofimperfectcompetition.
C) economicprofitperformsanimportantfunctioninallocatingresourcestotheirmost
highlyvalueduses.
D) economicprofittendstoreducetheproductionefficiencyoftheeconomy,leadingto
wastedresources.
Answer: C
Diff:1
65) Economicprofitsare
A) thesameasaccountingprofitswhenfirmsdonotowncapitalequipment.
B) alwaysgreaterthanaccountingprofits.
C) equaltoaccountingprofitsplustheimplicitcostsofthefirm.
D) whateverremainsafterallopportunitycostshavebeentakenintoaccount.
Answer: D
Diff:2
66) Accountingprofitwillalwaysbe
A) morethaneconomicprofit. B) equaltosunkcosts.
C) lessthaneconomicprofit. D) equaltoimplicitcosts.
Answer: A
Diff:1
67) Economicprofitisalways
A) greaterthanaccountingprofit.
B) equaltoaccountingprofit.
C) lessthanaccountingprofit.
D) equallylikelytobeeithergreaterorlessthanaccountingprofit.
Answer: C
Diff:1
68) Supposeyourdonutshopearns$24,000intotalrevenuespermonthwithexplicitcostsof
$12,000andopportunitycostsof$8,000.Youreconomicprofitis
A) $16,000. B) $12,000. C) $4,000. D) zero.
Answer: C
Diff:2
69) Supposeyourdonutshopearns$24,000intotalrevenuespermonthwithexplicitcostsof
$12,000andopportunitycostsof$8,000.Youraccountingprofitis
A) $16,000. B) $12,000. C) $4,000. D) zero.
Answer: B
Diff:2
70) Ifyourbusinessearns$10,000inrevenues,hasexplicitcostsof$7,000,andimplicitcostsof
$5,000,youreconomicprofitis
A) $2,000. B) -$2,000. C) $5,000. D) $3,000.
Answer: B
Diff:1
71) Ifyourbusinessearns$10,000inrevenues,hasexplicitcostsof$7,000,andimplicitcostsof
$5,000,youraccountingprofitis
A) $2,000. B) -$2,000. C) $5,000. D) $3,000.
Answer: D
Diff:1
72) Theeconomyscurrentrateofinterestis10percentandafirmhas$10,000ofowner -invested

capital.Itstotalrevenueis$5000andthefirmsexplicitcostsare$3500.Fromthisweknowthat
thisfirms
A) accountingprofitis$500. B) economicprofitis$1,500.
C) accountingprofitis$1,500. D) economicprofitis$5,000.
Answer: C
Diff:2
73) Theeconomyscurrentrateofinterestis10percentandafirmhas$10,000ofowner -invested

capital.Itstotalrevenueis$5000andthefirmsexplicitcostsare$3500.Fromthisweknowthat
thisfirms
A) accountingprofitis$500. B) economicprofitis$1,500.
C) accountingprofitis$11,500. D) economicprofitis$500.
Answer: D
Diff:2
74) Tofindeconomicprofitfromaccountingprofit,itisnecessaryto
A) subtractdividends. B) addretainedearnings.
C) subtracttheopportunitycostofcapital. D) adddepreciationexpense.
Answer: C
Diff:1
75) Onabargraphcomparingafirmseconomicprofitwithitsaccountingprofit,itwillalwaysbe
truethat
A) explicitcostswillbegreaterinthecolumnrepresentingaccountingprofit.
B) explicitcostswillbegreaterinthecolumnrepresentingeconomicprofit.
C) totalrevenuewillbegreaterinthecolumndepictingaccountingprofit.
D) opportunitycostswillbemissingfromthecolumndepictingaccountingprofit.
Answer: D
Diff:1
76) Thegoalofthefirmis
A) lowlaborturnover. B) tomaximizesales.
C) tominimizecosts. D) profitmaximization.
Answer: D
Diff:1
77) Abasictenetofthetheoryofthefirmisthatthefirmsprimaryobjectiveisto
A) stayoutofdebt.
B) produceagivenlevelofoutputataspecifiedcost.
C) maximizeeconomicprofits.
D) operateforthebenefitofsociety.
Answer: C
Diff:1
78) Economistsassumethatthegoalofafirmisto
A) maximizeeconomicprofits. B) sellasmanyunitsaspossible.
C) maximizegrossrevenues. D) bethelargestfirminitsindustry.
Answer: A
Diff:1
79) Themostcommonlyacceptedobjectiveforafirmis
A) tostayinbusinessatallcost. B) tomaximizetotalrevenue.
C) tomaximizeeconomicprofit. D) tominimizethevariablecostoutlay.
Answer: C
Diff:1
80) Thehigherareafirmsrisk-correctedreturns,
A) thelowerareitslaborcosts.
B) thehigherareitsopportunitycosts.
C) themoreadvantageithasinobtaininginvestorfinancing.
D) themoredifficultyitwillhavefinancingitsexpansionplans.
Answer: C
Diff:1
81) Abusinessorganizationthatemploysresourcestoproducegoodsandservicesforprofitis
A) economicrent. B) afirm.
C) insideinformation. D) theopportunitycostofcapital.
Answer: B
Diff:1
82) Anentrepreneuris
A) therateofreturnoncapital.
B) alegalformofbusiness.
C) onewhotakesrisksandmakesinnovationsinorganizingafirm.
D) therateofdiscount.
Answer: C
Diff:1
83) Whichofthefollowingisnotalegalorganizationofafirm?
A) Corporation B) Partnership
C) Entrepreneurship D) Proprietorship
Answer: C
Diff:1
84) ThemostnumerousorplentifulfirmsintheUnitedStatesarefoundinthisformofbusiness
A) partnership. B) proprietorship.
C) monopoly. D) corporation.
Answer: B
Diff:1
85) Aproprietorshipisabusiness
A) withannualsalesbelow$100,000.
B) inwhichthestockofthecompanyiscloselyheldbymembersofonefamily.
C) whichproducesaserviceratherthangoods.
D) ownedbyoneindividualwhoisresponsiblelegallyforthedebtsofthefirm.
Answer: D
Diff:1
86) Bydefinition,afirmis
A) abusinessorganizationthatmakesprofits.
B) abusinessorganizationthatutilizesresourcestoproducegoodsorserviceswiththegoal
ofmakingaprofit.
C) abusinessorganizationthatconsistsofmorethanoneperson.
D) anorganization,whetherprivateorpublic,thatmayormaynotmakeaprofit.
Answer: B
Diff:1
87) Inafirm,anentrepreneurisonewho
A) decidestohireorfire.
B) worksfortheownerbyrunningthefirm.
C) takestherisksassociatedwithabusinessfirm.
D) representsthefirminlegalproceedings.
Answer: C
Diff:1
88) Iftheentrepreneurisalsothemanagerofthefirm,wewouldexpect
A) themanagertoworkhardbecauseheorsheisalsotheresidualclaimant.
B) themanagertonotworkhardsincethereisnopossibilityoffurtheradvancement.
C) thefirmtooperatepoorlybecausethespecializationoflaborisnotadequate.
D) thefirmtooperatepoorlybecausetheentrepreneurisnotasgoodatmanagingworkersas
aprofessionalmanagerwouldbe.
Answer: A
Diff:2
89) Out-of-pocketexpensessuchaswagesandrawmaterialsare
A) directcosts. B) anowner-providedcapitalcost.
C) implicitcosts. D) explicitcosts.
Answer: D
Diff:1
90) Expensesthatafirmdoesnothavetopayoutofpocketare
A) wagesofemployees. B) taxes.
C) implicitcosts. D) explicitcosts.
Answer: C
Diff:1
91) Whichofthefollowingisnotanimplicitcost?
A) Wages
B) Opportunitycostofusinganownerssavings
C) Owner-providedcapital
D) Owner-providedlabor
Answer: A
Diff:1
92) Whichofthefollowingisnotanexplicitcost?
A) Taxes
B) Rent
C) Wages
D) Opportunitycostofusinganownerssavings.
Answer: D
Diff:1
93) Juanitahasjuststartedabusinessandisusingherpersonalcartodelivergoods.Theuseofher
carisanexampleof
A) anexplicitcosttothebusiness. B) animplicitcosttothebusiness.
C) financialcapital. D) interest.
Answer: B
Diff:2
94) Alegalorganizationofafirmwherethebusinessisownedbyoneindividualwhomakesthe
businessdecisions,receivesalltheprofits,andislegallyresponsibleforthedebtsofthefirmis
a(n)
A) corporation. B) entrepreneur.
Answer: C
Diff:1
95) Thedifferencebetweenexplicitcostsandimplicitcosts
A) isthatexplicitcostsareopportunitycostswhileimplicitcostsarenot.
B) isthatimplicitcostsareopportunitycostswhileexplicitcostsarenot.
C) isthatexplicitcostsareshort-runcostsandimplicitcostsarelong-runcosts.
D) isthatexplicitcostsinvolveresourcesthatarepurchasedandimplicitcostsinvolve
resourcesthefirmalreadyowns.
Answer: D
Diff:2
96) MaryandJanearepartnersinabusiness.Theirbusinessisgrowingbuthasnotyetreachedthe
pointwheretheycanaffordanewdeliverytruck.Janeownsanoldtruckthatshehasnotbeen
using.Shedecidestodonateittotheirbusinessforfree.
A) Thistransaction(donation)involvesnoeconomiccost.
B) Thistransactioninvolvesbotheconomiccostandaccountingcost.
C) Thistransactioninvolveseconomiccostbutnoaccountingcost.
D) Thistransactioninvolvesnoeconomiccostandnoaccountingcost.
Answer: C
Diff:2
97) Anaccountantshowsaninvoiceforaresourcetothemanagerofthefirm.Theyarediscussing
A) explicitcosts.
B) implicitcosts.
C) economicprofits.
D) eitherexplicitcostsorimplicitcosts,butwecanttellwithoutmoreinformation.
Answer: A
Diff:2
98) Proprietorshipsare
A) themostcommonformofbusinessorganizationinthecountry.
B) responsibleformostoftheprofitsinthecountry.
C) generallylargerelativetootherbusinessorganizations.
D) easytoformbutdifficulttodissolve.
Answer: A
Diff:1
99) AllofthefollowingarecharacteristicsofaproprietorshipEXCEPT
A) thebusinessisownedbyoneindividual.
B) onepersonisresponsibleforallthedebtsofthefirm.
C) onepersongetsalloftheprofits.
D) thefirmcanformacorporationtoprotectitselfagainstthedebts.
Answer: D
Diff:1
100) WhichofthefollowingisNOTanadvantageofaproprietorship?
A) Theyareeasytoformanddissolve.
B) Decision-makingresideswithonepersontheowner.
C) Liabilityoftheownerisunlimited.
D) Profitsareonlytaxedonce.
Answer: C
Diff:2
101) Whichofthefollowingisnotadisadvantageofaproprietorship?
A) Howprofitsaretaxed
B) Abilitytoraisecapital
C) Unlimitedliability
D) Thedispositionofthefirmwhentheownerdies
Answer: A
Diff:1
102) Unlimitedliabilityexistswhen
A) theprofitsofthefirmaretaxedonce.
B) afirmdissolveswhentheownerdies.
C) acorporationexists.
D) thepersonalassetsoftheownerofafirmcanbeseizedtopayoffthefirmsdebts.
Answer: D
Diff:1
103) Themostlikelysourceofinvestmentfundsforaproprietorshipis
A) salesofstocks. B) salesofbonds.
C) loansfrombanks. D) thepersonalfundsoftheowner.
Answer: D
Diff:2
104) Abusinessownedbytwoormorejointowners,orpartners,whosharetheresponsibilitiesand
theprofitsofthefirmandareindividuallyliableforallthedebtsisa(n)
Answer: D
Diff:1
105) Inapartnership,debtsaccumulatedbyonepartnerare
A) theresponsibilityofthatpartneronly.
B) theresponsibilityofthatpartnerplusanypartnerswhoareactivelyinvolvedinrunning
thepartnership.
C) theresponsibilityofalloftheotherpartnersforthefullamountofthedebt.
D) theresponsibilityofalloftheotherpartners,uptothetotalvalueofthefirm.
Answer: C
Diff:2
106) Whichofthefollowingisnotanadvantageofapartnership?
A) Limitedliability
B) Easytoform
C) Profitsaresubjecttoonlypersonaltaxation
D) Permitsmoreeffectivespecializationinoccupations
Answer: A
Diff:1
107) Anadvantageofapartnershipoveraproprietorshipis
A) limitedliability.
B) thatprofitsarenottaxedtwice.
C) theabilitytotakeadvantageofgreaterspecialization.
D) thatitiseasiertodissolve.
Answer: C
Diff:2
108) Theowner(s)ofacorporation
A) istheentrepreneur. B) aretheshareholders.
C) arethebondholders. D) istheCEO.
Answer: B
Diff:1
109) Comparedtoaproprietorship,adisadvantageofapartnershipis
A) thatprofitsaretaxedtwice.
B) thatitishardertokeepthefirmgoingafterthedeathofanowner.
C) unlimitedliability.
D) thatpotentialliabilitytoeachpartnerisgreater.
Answer: D
Diff:2
110) Whichofthefollowingisnotanadvantageofapartnership?
A) Thetaxationofprofits
B) Theissueofliability
C) Thelegalpaperworkneededtoformapartnership
D) Separationofpartnersduties
Answer: B
Diff:1
111) Inapartnership,
A) eachpartnersliabilityislimitedtotheirinvestmentinthecompany.
B) profitsaretaxedatboththecorporaterateandthepersonalincometaxrate.
C) uponthedeathofapartneritmaybenecessarytosellthebusiness.
D) thereisaseparationofownershipandmanagementlikeinacorporation.
Answer: C
Diff:1
112) Adifferencebetweenaproprietorshipandapartnershipisthat
A) aproprietorshipiseasytoformwhileapartnershipishardtoform.
B) aproprietorshiphasonlyoneownerwhileapartnershiphasonlytwoowners.
C) apartnershipallowsforspecializationwhileaproprietorshipdoesnot.
D) theprofitsinaproprietorshiparetaxedonlyoncewhileinapartnershiptheyaretaxed
twice.
Answer: C
Diff:1
113) Alegalentitythatmayconductbusinessinitsownnamejustasanindividualdoesisa(n)
Answer: A
Diff:1
114) Corporationsareresponsibleforapproximatelywhatpercentageoftotalbusinessrevenues?
Answer: D
Diff:2
115) Thecharacteristicoflimitedliabilityenablescorporationsto
A) avoidtaxesonsomeoftheirprofits. B) existevenwhenownersdie.
C) raiselargeamountsoffinancialcapital. D) startupanddissolveeasily.
Answer: C
Diff:2
116) Theconceptoflimitedliability
A) doesnotapplytoacorporation.
B) meansthattheownersofacorporationhaveliabilitylimitedtothevalueofthesharesin
thefirm.
C) meansthatownersofafirmaresubjecttodoubletaxation.
D) limitstheamountofspecializationthatcanoccurinafirm.
Answer: B
Diff:1
117) Limitedliabilityexistswhen
A) theliabilityofownersislimitedtothevalueofthesharesinthefirmtheyown.
B) theliabilityofownersislimitedtotheshareofthedebttheypersonallytookon.
C) partnersspecializeandeachpartnerisresponsibleforthedebtsofhisorherspecialized
area.
D) bondholdersmustreceivetheirpaymentsbeforestockholderscanearnanymoney.
Answer: A
Diff:2
118) Dividendsare
A) theportionofacorporationsprofitsthataredistributedtostockholders.
B) theportionofacorporationsrevenuesthataredistributedtobondholders.
C) bonusesgiventomanagersofcorporations,toensurethatthemanagersperforminthe
waythatstockholderswant.
D) taxesontheprofitsofcorporations.
Answer: A
Diff:1
119) WhichofthefollowingstatementsaboutbusinessorganizationsisTRUE?
A) Partnershipsaremorecommonthanproprietorshipsandareresponsibleforalarger
percentageofbusinessreceipts.
B) Proprietorshipsaremorecommonthaneitherpartnershipsorcorporationsbutare
responsibleforthesmallestshareoftotalbusinessreceipts.
C) Corporationsarelargerinnumberthaneitherproprietorshipsorpartnershipsandalso
receivealargerpercentageoftotalbusinessreceipts.
D) Partnershipsarelargerthanbothproprietorshipsandcorporationsbutarelessnumerous
thancorporations.
Answer: B
Diff:2
120) Animportantproblemwithcorporationsis
A) theinabilityofthegovernmenttocontrolandtaxthefirms.
B) thepossibilityoflargeliabilitiesfortheowners.
C) theseparationofownershipandcontrol.
D) thedifficultieswithraisingfinancialcapital.
Answer: C
Diff:2
121) Ifthedeathofanownercausesthefirmtodissolve,thefirmmusthavebeen
A) apartnershiponly. B) aproprietorshiponly.
C) acorporationonly. D) eitheraproprietorshiporapartnership.
Answer: D
Diff:2
122) Itislikelythattheownershavelittletodowiththeday-to-daymanagementofafirminthe
caseof
A) partnershipsonly. B) proprietorshipsonly.
C) corporationsonly. D) partnershipsandcorporations.
Answer: C
Diff:2
123) Theproblemwiththeseparationofownershipfromcontrolisthat
A) theownerinaproprietorshipmaynotalwaysactintheprofit -maximizingfashion
becauseheorshemaynothavetheexperienceorexpertisethatprofessionalmanagers
have.
B) themanagingpartnerofafirmmaynotalwaysbehaveinthewaythatothermanagers
wouldiftheywerethemanagingpartners.
C) themanagersofthefirmcanmakedecisionsthatreducethewealthoftheownerswhile
notreducingtheirownwealth.
D) theownersoffirmsmaynotalwaysknowthebestwaytorunafirm,yettheyaretheones
whoelectthemanagersofthefirm.
Answer: C
Diff:3
124) Accountingprofitsarefoundbytotalrevenuesminus
A) explicitcosts. B) explicitandimplicitcosts.
C) implicitcosts. D) allopportunitycosts.
Answer: A
Diff:1
125) Normalrateofreturnis
A) accountingprofit.
B) anexplicitcost.
C) economicprofit.
D) theamountthatmustbepaidtoobtaininvestmentinabusiness.
Answer: D
Diff:1
126) Theamountthatmustbepaidtoanindividualtogetthemtoinvestintheindustryis
A) anormalrateofreturn. B) theexplicitcosts.
C) reinvestment. D) financialcapital.
Answer: A
Diff:1
127) Theopportunitycostofcapitalis
A) anexplicitcost.
B) apartofeconomicprofits.
C) usuallyunknownandmustbeestimatedbylookingatthepriceofcapitalgoods.
D) thenormalrateofreturn.
Answer: D
Diff:2
128) Economicprofitsarefoundbytotalrevenuesminus
A) explicitcosts. B) explicitandimplicitcosts.
C) implicitcosts. D) allopportunitycosts.
Answer: B
Diff:1
129) Wheneconomicprofitsarepositive,accountingprofits
A) mustbepositive. B) willbenegative.
C) willequalzero. D) couldbepositive,negativeorzero.
Answer: A
Diff:1
130) Whenaccountingprofitsarepositive,economicprofits
Answer: D
Diff:1
131) Wheneconomicprofitsarenegative,accountingprofits
Answer: D
Diff:1
132) Whenaccountingprofitsarenegative,economicprofits
Answer: B
Diff:1
133) Wheneconomicprofitsarezero,accountingprofits
Answer: A
Diff:1
134) Whatistherelationshipbetweenaccountingandeconomicprofits?
A) Accountingprofitsarealwayslargerthaneconomicprofits.
B) Economicprofitsarealwayslargerthanaccountingprofits.
C) Thereisnorelationshipbetweeneconomicandaccountingprofits.
D) Economicprofitsarealwaysnegative.
Answer: A
Diff:1
135) Anybusinesswantingtoattractfinancialcapitalmustexpectto
A) earnapositiveeconomicprofit.
B) keepimplicitcostsasclosetozeroaspossible.
C) payanormalrateofreturn.
D) payabelownormalrateofreturninordertomakeapositiverateofreturnitself.
Answer: C
Diff:2
136) Apersonstartsherownbusiness.Shequitsher$40,000ayearjob,rentsanofficefor$15,000a
year,payswagesandsalariesof$50,000ayear,utilitiesof$4,000ayear,andmaterialsof
$20,000.Sheusesherowncarforsalesworkratherthanleasinganequivalentcarfor$6000a
year.Ifrevenuesare$140,000,heraccountingprofitandeconomicprofitarerespectively
A) $45,000and$11,000. B) $45,000and$5000.
C) $51,000and$5000. D) $51,000and$45,000.
Answer: C
Diff:3
137) Apersonstartshisownbusinessafterquittinghisjobinwhichhemade$75,000.Expenses
include$100,000forwagesandsalaries,whichincludesawagefortheownerof$75,000,
utilitiesof$5000,equipmentof$50,000,andmaterialsof$40,000.Ifrevenuesare$200,000,his
accountingandeconomicprofitsarerespectively
A) $80,000and$5000. B) -$70,000and-$70,000.
C) -$70,000and$5000. D) $5000and$5000.
Answer: D
Diff:3
138) Afirmismakingzeroeconomicprofits.Fromthis,weknowthat
A) thefirmisgoingtogooutofbusiness.
B) implicitcostsarezero.
C) thefirmisgoingtostayinbusiness,butwillnotbeabletoattractnewfinancialcapital.
D) thefirmwillstayinbusinesssinceitiscoveringallrelevantopportunitycosts.
Answer: D
Diff:2
139) Thegoalofthefirm,accordingtoeconomists,isto
A) stayinbusinessforaslongaspossible.
B) sellasmanyunitsofthegooditproducesaspossible.
C) growaslargeaspossible.
D) makeasmucheconomicprofitasispossible.
Answer: D
Diff:1
140) Afirmthatisnotmaximizingprofits
A) wouldneverbeabletooperateintheUnitedStates.
B) mustnotbeownedbystockholders.
C) mayfinditdifficulttoraisefinancialcapitalfromexternalcapitalmarkets.
D) islikelytofacelegalprosecutionfromtheDepartmentofCommerce.
Answer: C
Diff:2
141) Adisadvantageofcorporationsoveraproprietorshiporpartnershipisinthe
A) legalliability. B) abilitytoraisefunds.
C) taxationsystem. D) futureofthefirmwhenanownerdies.
Answer: C
Diff:1
142) Anorganizationthatbringstogetherthefactorsofproductioniscalled
A) anindustry. B) aconglomerate.
C) aplant. D) afirm.
Answer: D
Diff:1
143) WhichofthefollowingstatementsregardingaccountingandeconomicprofitsisFALSE?
A) Economicprofitscanbezeroevenifaccountingprofitsarepositive.
B) Economicprofits=totalrevenue- (explicit+ implicitcosts)
C) Accountingprofitscanbenegativeifeconomicprofitsarepositive.
D) Accountingprofits= totalrevenue- explicitcosts
Answer: C
Diff:2
144) Anothertermfortheopportunitycostofcapitalis
A) thenormalinterestrate. B) thenormalrateofreturn.
C) anormalprofit. D) anormalwagerate.
Answer: B
Diff:2
145) Whichofthefollowingistheformulausedforcomputingeconomicprofits?
A) economicprofits=totalrevenue- implicitcosts
B) economicprofits=totalrevenue- (implicitcosts+ explicitcosts)
C) economicprofits=totalcosts- totalrevenue
D) economicprofits=totalrevenue- explicitcosts
Answer: B
Diff:2
146) Ineconomicsweassumethatthegoalofafirmisto
A) minimizecosts. B) maximizerevenue.
C) maximizeeconomicprofits. D) maximizetotalsales.
Answer: C
Diff:2
147) Inanalyzingtheoperationofafirm,aneconomistassumesthefirmwantsto
A) maximizetotalsales. B) maximizetotalrevenue.
C) maximizetotalproduction. D) maximizetotalprofits.
Answer: D
Diff:1
148) Joanneleftherlastjob,inwhichshewasearning$50,000,inordertoformherownconsulting
business.Herrevenuesforthefirstyearofconsultingwere$200,000.Duringthatyear,she
hiredtwoassistantsfor$25,000eachandspent$25,000onofficeequipment.Inaddition,she
incurred$75,000inmiscellaneousexpenses.Hereconomicprofitthatfirstyearwas
A) $0. B) $50,000. C) $200,000. D) $75,000.
Answer: A
Diff:1
149) Joanneleftherlastjob,inwhichshewasearning$50,000,inordertoformherownconsulting
business.Herrevenuesforthefirstyearofconsultingwere$210,000.Duringthatyear,she
hiredtwoassistantsfor$25,000eachandspent$25,000onofficeequipment.Inaddition,she
incurred$75,000inmiscellaneousexpenses.Heraccountingprofitthatfirstyearwas
A) $10,000. B) $60,000. C) $210,000. D) $50,000.
Answer: B
Diff:1
150) Accountingprofitsaretypically
A) greaterthaneconomicprofitsbecauseaccountingprofitsdonotincludeexplicitcosts.
B) greaterthaneconomicprofitsbecauseaccountingprofitsdonotincludeimplicitcosts.
C) smallerthaneconomicprofitsbecauseaccountingprofitsdonotincludeexplicitcosts.
D) equaltoeconomicprofitsinthelongrun.
Answer: B
Diff:2
151) Whichofthefollowingequationsiscorrect?
A) accountingprofit=totalrevenue- (explicitcosts+ implicitcosts)
B) normalprofit=accountingprofit+ economicprofit
C) economicprofit=accountingprofit- implicitcosts
D) economicprofit=accountingprofit- explicitcosts
Answer: C
Diff:2
152) Supposethatduringagiventimeperiodtheimplicitcostforabusinesswas$1,000andthatthe
explicitcostwas$5,000.Alsosupposethatthefirmsold1,000unitsofitsproductsat$5per
item.Wecanconcludethatthefirms
A) accountingprofitwas$5,000,anditseconomicprofitwas$0.
B) accountingandeconomicprofitswereboth$0.
C) accountingprofitwas$0,andeconomicprofitwas$1,000.
D) accountingprofitwas$0,andeconomicprofitwas-$1,000.
Answer: D
Diff:2
153) Supposethatduringagiventimeperiodtheimplicitcostforabusinesswas$1,500andthatthe
explicitcostwas$6,000.Alsosupposethatthefirmsold1,000unitsofitsproductsat$7per
item.Wecanconcludethatthefirms
A) accountingprofitwas$1,000,anditseconomicprofitwas -$500.
C) accountingprofitwas-$500,andeconomicprofitwas$1,000.
D) accountingprofitwas$1000,andeconomicprofitwas -$1,500.
Answer: A
Diff:2
154) Whichofthefollowingistheformulausedforcomputinganaccountingprofit?
A) accountingprofits=totalrevenue- implicitcosts
B) accountingprofits=totalrevenue- (implicit+ explicitcosts)
C) accountingprofits=totalcosts- totalrevenue
D) accountingprofits=totalrevenue- explicitcosts
Answer: D
Diff:2
155) Whenabusinesshasimplicitcosts,
A) economicprofitsaregreaterthanaccountingprofits.
B) economicandaccountingprofitsarethesame.
C) economicprofitsarelessthanaccountingprofits.
D) economiccostsarethesameasaccountingcosts.
Answer: C
Diff:2
156) Anexampleofanimplicitcostis
A) paymentofasalarytoaCEOofacompany.
B) abusinessusingabuildingownedbythebusinessowner.
C) apaymenttoaresourceowner.
D) thepaymentofinterestonabond.
Answer: B
Diff:2
157) Iftheinterestrateis10percentandabusinesspays$100,000foraleaseonafactory,theexplicit
costsare
A) $110,000. B) $10,000. C) $100,000. D) $90,000.
Answer: C
Diff:2
158) Supposethattheimplicitcostforabusinesswas$1,000andtheexplicitcostwas$5,000andthat
thefirmsold1,000unitsofitsproductsat$6peritem.Wecanconcludethatthefirms
A) accountingprofitwas$6,000,anditseconomicprofitwas$0.
C) accountingprofitwas$1,000,andeconomicprofitcannotbedetermined.
D) accountingprofitwas$1,000,andeconomicprofitwas$0.
Answer: D
Diff:2
159) Accountingprofitsare
A) totalrevenueminusexplicitcosts.
B) totalrevenueminusimplicitcosts.
C) totalrevenueminusexplicitandimplicitcosts.
D) totalrevenueminusnormalcosts.
Answer: A
Diff:2
160) Owner-providedcapitalandowner-providedlaborareexamplesof
A) explicitcosts. B) implicitcosts.
C) normalrateofreturn. D) accountingcosts.
Answer: B
Diff:2
161) Economicprofitsare
A) totalrevenueminusexplicitcosts.
B) totalrevenueminusimplicitcosts.
C) totalrevenueminusexplicitandimplicitcosts.
D) totalrevenueminusaccountingcosts.
Answer: C
Diff:2
162) Economicprofitis
A) totalrevenue(explicitcosts- implicitcosts).
B) totalrevenue-(explicitcosts- implicitcosts).
C) totalrevenue+(explicitcosts+ implicitcosts).
D) totalrevenue-(explicitcosts+ implicitcosts).
Answer: D
Diff:1
163) ThethreebasiclegalformsofbusinessenterpriseintheUnitedStatesare
A) monopolies,enterprises,andcompetitors.
B) vertical,horizontal,andconglomeratecorporations.
C) national,global,andmultinationalcorporations.
D) proprietorships,partnerships,andcorporations.
Answer: D
Diff:1
164) Whichofthefollowingisthemostcommonformofabusinessorganization?
A) corporation B) partnership
C) soleproprietorship D) subchapterScorporation
Answer: C
Diff:2
165) ThemostcommonformofbusinessorganizationintheUnitedStatesisthe
C) corporation. D) cooperative.
Answer: A
Diff:1
166) Whichofthefollowingisconsideredanadvantageofasoleproprietorship?
A) easytoraiselargesumsofcapital B) limitedliabilityforowner
C) profittaxedonlyonce D) permitseffectivespecialization
Answer: C
Diff:2
167) Anadvantageoftheproprietorshipasaformofbusinessorganizationis
A) itslimitedliability.
B) itslimitedaccesstocapital,thusreducingthepossiblesizeofdebt.
C) thatitiseasytoform.
D) thatitcansellbondstothepublic.
Answer: C
Diff:1
168) Adisadvantageoftheproprietorshipformofbusinessorganizationis
A) itslimitedaccesstocapital.
B) itslimitedliability.
C) thatitcanissueonlyoneclassofstock.
D) thattheownermustfightalotofredtapetoformthefirm.
Answer: A
Diff:1
169) Numerically,thedominanttypeofbusinessenterpriseintheUnitedStatesis
A) thecorporation. B) thepartnership.
C) theproprietorship. D) themultinationalcorporation.
Answer: C
Diff:1
170) AllofthefollowingareadvantagesoforganizingabusinessasasoleproprietorshipEXCEPT
A) easeofformation. B) limitedliability.
C) easeofdecision-making. D) singletaxation.
Answer: B
Diff:2
171) Whenabusinessisownedandoperatedbyasingleindividualwhoreceivesalloftheprofits
andisresponsibleforalldebts,itisknownasa
A) partnership. B) conglomerate.
C) corporation. D) proprietorship.
Answer: D
Diff:1
172) Timhasatoenailclippingbusinessthatisasoleproprietorship.Ifheissuedforabotched
pedicure,
A) hehaslimitedliability.
B) hehasseparationofownershipandcontrol.
C) allofhispersonalassetsareatrisk.
D) hewillbetaxeddoubly.
Answer: C
Diff:2
173) Unlimitedliabilityisfoundin
A) proprietorshipsandcorporations.
B) partnershipsandcorporations.
C) proprietorshipsandpartnerships.
D) proprietorships,partnerships,andcorporations.
Answer: C
Diff:2
174) Inapartnershipoftwopeople
A) eachpersonhas50percentliability.
B) itismoredifficulttospecializewithtwopersonsthanwithone.
C) eachpersonhasunlimitedliability.
D) thelawreleaseseachpartnerfromlegalliabilities.
Answer: C
Diff:3
175) Ownersfaceunlimitedliabilityin
A) nationalcorporationsandglobalcorporations.
B) partnershipsandcorporations.
C) proprietorshipsandcorporations.
D) proprietorshipsandpartnerships.
Answer: D
Diff:1
176) Anadvantageofthepartnershipformofbusinessorganizationis
A) itslimitedliability.
B) itslimitedaccesstocapital,thusreducingthepossiblesizeofdebt.
C) theabilityofitsownerstospecialize.
D) thatitisdifficulttostartup,becausealotofthoughthastogointotheestablishmentofthe
firm.
Answer: C
Diff:1
177) Adisadvantageofthepartnershipformofbusinessorganizationis
A) itslimitedaccesstocapital.
B) itslimitedliability.
C) thatitcanissueonlyoneclassofstock.
D) thattheownersmustfightalotofredtapetoformthefirm.
Answer: A
Diff:1
178) YouhavereceivedyouradvanceddegreeinbiochemistrywithaspecialtyinrecombinantDNA
technology.Yourcolleagueswishtoformapartnershiptoresearchadenovirusvectors.Your
legalcounseladvisesyouonthefollowingaspectsofapartnership,yetyoutellher,basedon
yourknowledgeofeconomics,thatyouthinkoneofthefollowingpointsisINCORRECT.
A) Anadvantageofthepartnershipwouldbethatitisrelativelyeasytoform,almostaseasy
asformingaproprietorship.
B) Theincomeofthepartnershipistreatedaspersonalincomeandissubjectonlytopersonal
taxationrates.
C) Thepersonalassetsofeachpartnershouldbesafeandwouldnotnecessarilybeatriskdue
toclaimsbyfinancialinstitutions.
D) Partnershipsoftenhelpreducethecostsofmonitoringjobperformanceinsituationsin
whichitisdifficulttomeasureobjectively.
Answer: C
Diff:2
179) ThemajorityofbusinessrevenuesearnedintheUnitedStatesareearnedby
A) proprietorships. B) corporations.
C) partnerships. D) cooperatives.
Answer: B
Diff:1
180) WhichstatementisFALSEconsideringbothadvantagesanddisadvantagesofcorporationsasa
legalbusinessorganization?
A) Perhapsthegreatestadvantageofcorporationsisthattheirowners(theshareholders)
enjoylimitedliabilitylimitedtothevalueoftheirshares.
B) Legallythecorporationcontinuestoexistevenifoneormoreownersceasetobeowners.
C) Corporationsusuallyarenotaswellpositionedasproprietorshipsandpartnershipsto
raiselargesumsoffinancialcapital.
D) Separationofownershipandcontrolisadisadvantageofthecorporatestructure;owners
andmanagersmayhavedifferentincentives.
Answer: C
Diff:1
181) WhichformofbusinessorganizationaccountsforthelargestproportionofsalesintheUnited
States?
A) thecorporation
B) thepartnership
C) theproprietorship
D) thesubchapterSpartner-basedproprietorship.
Answer: A
Diff:2
182) MostbusinessesintheUnitedStatesare________,andthetypeofbusinessorganizationthat
accountsfortheLEASTamountoftotalrevenuesis________.
A) proprietorships;partnerships B) corporations;proprietorships
C) proprietorships;proprietorships D) corporations;partnerships
Answer: C
Diff:2
183) Anadvantageofthecorporateformofbusinessorganizationis
A) unlimitedliability. B) easieraccesstocapital.
C) thatprofitsaretaxedonlyononelevel. D) governmentsupervisionofitsactivities.
Answer: B
Diff:1
184) Adisadvantageofthecorporateformofbusinessorganizationis
A) doubletaxation.
B) limitedaccesstocapital.
C) thatthecorporationcanonlydobusinessinthestatewhereitwasincorporated.
D) unlimitedliabilityforshareholders.
Answer: A
Diff:1
185) Youown$10,000inpersonalproperty,$2,000inCompanyXstocks,$1,000inU.S.Savings
Bondsandhave$500inyourcheckingaccount.IfCompanyXgoesbankrupt,themostyou
couldloseis
A) $13,500. B) $11,500. C) $2,000. D) $500.
Answer: C
Diff:2
186) Whenabusinessisconsideredbylawtobealegalentity,itisknownasa
A) partnership. B) conglomerate.
C) corporation. D) proprietorship.
Answer: C
Diff:1
187) AllofthefollowingareadvantagesofacorporationEXCEPT
A) doubletaxation.
B) limitedliability.
C) abilitytoraiselargesumsoffinancialcapital.
D) unlimitedlife.
Answer: A
Diff:1
188) Thegreatestadvantageofacorporationis
A) easeofsettingupthebusiness.
B) thedoubletaxationofdividends.
C) separationofownershipandcontrolofthebusiness.
D) limitedliability.
Answer: D
Diff:1
189) CorrinawasworkingasawaitressinanItalianrestaurantmakinganannualincomeof$25,000
peryearwhenshedecidedtostartupherowncateringbusiness.Corrinaused$10,000ofher
savingsthatwasearning5percentannualinteresttoestablishherbusiness.Afterthefirstyear
shemadeanaccountingprofitof$20,000.Hereconomicprofitwas
A) -$5,550. B) -$5,000. C) $20,000. D) $25,000.
Answer: A
Diff:3
190) Anormalrateofreturnoninvestmentisequalto
A) accountingprofitminuseconomicprofit.
B) theopportunitycostofcapitalplusanyotherimplicitcosts.
C) accountingprofitpluseconomicprofit.
D) totalrevenueplustotalaccountingprofit
Answer: B
Diff:3
191) Whatisanormalrateofreturn?
Answer: Anormalrateofreturnistheamountthatmustbepaidaninvestortoinduceinvestment
inabusiness.Itistheopportunitycostofcapital.
Diff:1
192) Discusstheadvantagesanddisadvantagesofproprietorships.
Answer: Proprietorshipsareeasytoformandtodissolve.Furthermore,allthedecisionsaremade
bytheproprietor,sodecisionscanbemadequickly.Theprofitsaretaxedonlyonce,
whichisnotthecaseforcorporations.However,therearealsodisadvantages.The
biggestdisadvantageisunlimitedliability:theownerispersonallyresponsibleforallthe
debtsofthefirm,andcouldloseassetsthatarenotpartofthefirm.Thisoftenmakesit
difficulttoraisefinancialcapital.Finally,thefirmendswiththedeathoftheowner,
creatinguncertaintyforemployeesandcreditors.
Diff:2
193) Whyaretheresomanymoreproprietorshipsthancorporations,yetcorporationsaccountforso
muchmoreofthesalesofbusinessfirmsinthecountry?
Answer: Proprietorshipsareeasytoformandcanberunbyanindividual,sotherecanbemanyof
them,especiallyinbusinessesinwhichlargesizeisnotnecessaryforsuccess.However,
large-scalebusinesswillusuallybedonebycorporationsbecauseoftheadvantages
corporationshaveinraisingfinancialcapital.
Diff:2
194) Whatisthedifferencebetweenaccountingprofitsandeconomicprofits?Whichofthetwo
conceptsismoreappropriateforexplainingdecisionsmadebyentrepreneurs?Explain.
Answer: Thedifferencebetweenaccountingprofitsandeconomicprofitsisimplicitcosts,which
representtheopportunitycostsoffactorsofproductionthatareowned,suchaslaborand
capital.Opportunitycostisthehighestvalueofalternativestoafirmsinputs.Economic
profitstakesuchimplicitcostsintoconsiderationandsoisamoreappropriatefor
explainingthebehaviorofentrepreneurs.
Diff:2
195) Whyislimitedliabilitysoimportantwhenfirmstrytoraiselargeamountsoffinancialcapital?
Howisthisadvantageofacorporationtiedtoadisadvantageofacorporation?
Answer: Limitedliabilityisimportantinraisinglargefundsbecausetheowners(stockholders)
knowthatthetotalliabilitytheyhaveconnectedwiththefirmislimitedtotheinvestment
theymadeinbuyingthesharesofstock.Itiseasiertogetpeopletobuyaportionofthe
firmwhentheirliabilityislimited.But,thislargegroupofownersalsomeansthatthe
diverseownershipmaymakeitdifficulttomonitortheperformanceofthemanagement
team.
Diff:3
196) Forwhichtypeoforganizationisunlimitedliabilitylikelytobethegreater
problem-proprietorshipsorpartnerships?Why?
Answer: Unlimitedliabilityprobablyposesmoreproblemsforpartnershipsbecauseeachpartner
isliablefordebtsincurredbythefirm,evenifthosedebtsareincurredbytheother
partner.Aproprietorknowsallthedebtsheorshehastakenon,butapartnercouldbein
thedarkonsomeoccasions.
Diff:3
197) Amberhasopenedacoffeeshopformanyyearsonapieceoflandthatshehasalsoowned.She
hasalsomadeaccountingprofitsfromthecoffeeshop.Thisyear,rentsinthearearose
considerably,andAmberrespondedbydecidingtosellthelandandthecoffeeshoptoan
apartmentbuilder.HowcanyouexplainAmbersdecisiontosellherbusiness?
Answer: EventhoughAmberhasbeenmakingaccountingprofits,herdecisiontosellherbusiness
wasbasedontheopportunitycostoftheland,whichobviouslyhadrisentothepoint
thatshemadeanegativeeconomicprofitonhercoffeeshopbusiness.
Diff:2
198) Economicprofitsarelessthanoratmostequaltoaccountingprofits.Doyouagreeor
disagree?Explain.
Answer: Agree.Economicprofitsareaccountingprofitslessimplicitcosts,ortheopportunity
costsofinputs.Sincetheopportunitycostsofcapitalandlaborinputsarenevernegative,
economicprofitsarelessthanoratmostequaltoaccountingprofits.
Diff:2
21.3Interest
1) Interestispaidto
A) allholdersofstock. B) individualswhoowngold.
C) ownersofcapital. D) borrowersoffunds.
Answer: C
Diff:2
Topic: 21.3Interest
A) realinterestrate=nominalinterestrate- anticipatedinflationrate
B) realinterestrate=nominalinterestrate+ anticipatedinflationrate
C) realinterestrate=nominalinterestrate*anticipatedinflationrate
D) realinterestrate=nominalinterestrate/anticipatedinflationrate
Answer: A
Diff:2
Topic: 21.3Interest
3) Interestcanbedefinedas
A) theamountoffundsloanedtoacreditor.
B) theparticipationofashareholderintheoperationsofafirm.
C) thereturnpaidtoownersofcapital.
D) thereturnaboveopportunitycostpaidtoownersofafirm.
Answer: C
Diff:1
Topic: 21.3Interest
4) Ineconomicterms,interestisthepaymentfor
A) currentcommandoverresources. B) producersgoods.
C) stocks. D) bothconsumerandcapitalgoods.
Answer: A
Diff:1
Topic: 21.3Interest
5) WhichofthefollowingcharacteristicsisNOTlikelytoincreasetheinterestonaloan?
A) Ahigh-riskproposal B) Anon-creditworthyborrower
C) Ashort-termloan D) Alargerdollarloan
Answer: C
Diff:1
Topic: 21.3Interest
6) Inmostcases,thehigheristhequalityofthecollateralforaloanis,
A) thehigheristheinterestrate.
B) theloweristheinterestrate.
C) theriskieristheloan.
D) thegreateristhehandlingchargefortheloan.
Answer: B
Diff:1
Topic: 21.3Interest
7) Creditorsrequirecollateralinmanycases,because
A) ithelpsoffsettherisksoflendingthefunds.
B) theborrowerisalowrisk.
C) theloanissmall.
D) noneoftheabove.
Answer: A
Diff:2
Topic: 21.3Interest
8) Becausehandlingchargesarerelativelyfixed,theinterestrateonaloangenerally
A) increaseswiththesizeoftheloan.
B) decreaseswiththesizeoftheloan.
C) isconstantregardlessofthesizeoftheloan.
D) isunrelatedtothesizeoftheloan.
Answer: B
Diff:1
Topic: 21.3Interest
9) Peoplebasicallyborrowinorderto
A) gointodebt.
B) havemorefunds.
C) haveinterestpayments.
D) havecurrentconsumptionratherthanwaitingtoconsumeinthefuture.
Answer: D
Diff:1
Topic: 21.3Interest
10) Interestratesarepositivebecause
A) peoplepreferfutureconsumptionovercurrentconsumption.
B) peopleprefercurrentconsumptionoverfutureconsumption.
C) usurylawsrequireratestobeveryhigh.
D) banksarenotcompetitive.
Answer: B
Diff:1
Topic: 21.3Interest
11) Thegreateristheriskofnon-repaymentofaloan,the
A) higheristheexpectedrateofinterest.
B) longeristheexpectedtimetorepaytheloan.
C) loweristhehandlingchargesfortheloan.
D) loweristheexpectedrateofinterest.
Answer: A
Diff:1
Topic: 21.3Interest
12) Whichcombinationofcircumstanceswillmostlikelyraisetherateofinterestforaloanthe
most?
A) Lowhandlingchargesandlowrisk
B) Lowhandlingchargesandalonglengthoftimeforrepayment
C) Highriskandlowhandlingcharges
D) Highriskandalonglengthoftimeforrepayment
Answer: D
Diff:1
Topic: 21.3Interest
13) Underwhichoneofthefollowingsituationswouldyoubebetteroff?
A) Youhave$10,000inyoursavingsaccountpaying5percentperyearandunanticipated
inflationis8percentperyear.
B) Youhavepaid$500fora$1,000U.S.savingsbondthatmaturesin10yearsand
unanticipatedinflationis10percentperyear.
C) Youlendafriend$1,000at6percenttoberepaidinoneyearandunanticipatedinflationis
7percentduringtheyear.
D) Youborrowed$2,500at7percenttopayforthisyearscollegeexpensesandunanticipated
inflationis12percentduringtheyear.
Answer: D
Diff:2
Topic: 21.3Interest
14) Supposethatyouborrow$5,000fromthebanktopurchasesomelandandyouagreetopay9
percentinterestontheloan.Iftheloanmustberepaidin12monthsandtheinflationrateis13
percentduringtheyear,then
A) youwillrepaythebankwithdollarswithmorepurchasingpowerthanyouinitially
borrowed.
B) youwillrepaythebankwithfewerdollarsthanthebankinitiallyloanedyou.
C) youwillrepaythebankwithdollarswithlesspurchasingpowerthanitinitiallyloaned
you.
D) thebankwillreceivefewerdollars,becauseofinflation,thanithadinitiallyexpectedto
receive.
Answer: C
Diff:2
Topic: 21.3Interest
15) Iftherateofinflationiszero,pricesareexpectedtoremainstable,andthenominalrateof
interestis5percent,thenthe
A) realrateofinterestisequaltothenominalrate.
B) realrateofinterestislessthanthenominalrate.
C) nominalrateisgreaterthantherealrateofinterest.
D) investmentdemandschedulewillshiftupward.
Answer: A
Diff:2
Topic: 21.3Interest
16) Whentheanticipatedrateofinflationdeclines,therealrateofinterest
A) increases. B) decreases.
C) isnotaffected. D) increasesexponentially.
Answer: A
Diff:1
Topic: 21.3Interest
17) Therealrateofinterestwillapproximatelybeequalto
A) thenominalinterestrateplustheexpectedrateofinflation.
B) thestatedrateofinterestinahigh-inflationeconomy.
C) thenominalinterestrateminustheexpectedrateofchangeinthepricelevel.
D) thestatedrateminustheopportunitycostofcapital.
Answer: C
Diff:1
Topic: 21.3Interest
A) thesameasthepricelevel.
B) therealrateofinterestminusthepreviousyearschangeinthepricelevel.
C) theinterestrateactuallypaidbytheborrower.
D) lowerthantherealrateinaperiodofinflation.
Answer: C
Diff:1
Topic: 21.3Interest
A) thenominalinterestrateminustheanticipatedrateofinflation.
B) theinterestrateactuallypaidexplicitlybytheborrower.
C) theinterestratereceivedbythelenderminusthehandlingchargesoftheloan.
D) theaveragerateofinterestoverthelast20years.
Answer: A
Diff:1
Topic: 21.3Interest
20) Inaninflationaryatmospherethateveryoneanticipateswillpersist,lenderswill
A) desirealowernominalinterestratetoincreasetherealrate.
B) desireahighernominalinterestratetoprotectagainsttheinflation.
C) tendtoseetherealrateofinterestincrease,particularlyiftheinflationisunforeseen.
D) havetherealrateofinterestguaranteedbytheFederalReserveBoard.
Answer: B
Diff:1
Topic: 21.3Interest
21) Whentheanticipatedrateofinflationis5percentandtherealrateofinterestis4percent,the
nominalrateofinterestis
Answer: D
Diff:1
Topic: 21.3Interest
22) Supposethatthenominalrateofinterestisholdingsteadyat8percentevenastheanticipated
rateofinflationrises.Whatishappeningtotherealrateofinterest?
A) Itisunchanged. B) Itisincreasing.
C) Itisdecreasing. D) Itequalsthenominalinterestrate.
Answer: C
Diff:2
Topic: 21.3Interest
23) Oneroleoftheinterestrateisto
A) allocatecapitaltoitsmostefficientuses.
B) redistributeincomefromthewealthytothepoor.
C) reducetherateofinflationbyencouraginggovernmentborrowing.
D) discouragesavingandencouragecurrentconsumption.
Answer: A
Diff:1
Topic: 21.3Interest
24) Astarbasketballplayersignsacontractthatnewspaperreportsindicateisworth$10million.
Theplayerreceives$2millionuponsigning,and$2millioneveryyearforfouryears.The
contractisworth
A) lessthan$10millionsincethepresentvalueof$2millionreceivedoneormoreyearsfrom
nowislessthan$2million.
B) morethan$10millionsincethepresentvalueof$2millionreceivedoneormoreyears
fromnowismorethan$2million.
C) $10millionasreportedinthepress.
D) someamountaround$10million.Todeterminewhetheritismoreorlessthan$10million
weneedtoknowwhethertheinteresttheplayercanearnismoreorlessthanthemarket
rateofinterest.
Answer: A
Diff:2
Topic: 21.3Interest
25) Iftheinterestrateis5percentperyearandyouborrow$100foroneyear,attheendoftheyear
youmustpayback
A) $95. B) $100. C) $105. D) $5.
Answer: C
Diff:1
Topic: 21.3Interest
26) Iftheinterestrateis5percentperyearandyouborrow$100fortwoyears,attheendofthe
secondyearyoumustpayback
A) $90.70. B) $10.25. C) $105. D) $110.25.
Answer: D
Diff:1
Topic: 21.3Interest
27) Givenadiscountrateof10percent,thepresentvalueofreceiving$10,000twoyearsinthe
futureis
A) $12,000. B) $8,000. C) $8,264.46. D) $12,100.
Answer: C
Diff:1
Topic: 21.3Interest
28) Whatisthefuturevalueof$1,000inthreeyearsiftherateofdiscountisequalto5percent?
A) $1,150.00 B) $1,005.00 C) $1,157.63 D) $863.84
Answer: C
Diff:1
Topic: 21.3Interest
29) Supposethatyouborrow$10,000foroneyear,andattheendoftheyear,youmustrepay
$10,450.Theinterestrateis
Answer: C
Diff:2
Topic: 21.3Interest
30) Supposethatyouborrow$10,000foroneyear,andattheendoftheyear,youmustrepay
$10,450.Also,duringthatyearinflationwas2.5%.The realinterestrateis
Answer: D
Diff:2
Topic: 21.3Interest
31) Supposethatyouborrow$10,000fortwoyears,andattheendofthesecondyear,youmust
repay$11,664.Theinterestrateis
Answer: B
Diff:2
Topic: 21.3Interest
32) Assumingamarketinterestrateof6percentperyear,whatisthepresentvalueof$5,000
payableattheendofthreeyears?
A) $4,717 B) $4,450 C) $4,198 D) $4,317
Answer: C
Diff:2
Topic: 21.3Interest
33) Therateofdiscountisbestdescribedastherateof
A) returnonphysicalcapitalafterthecostofcapitalhasbeenremoved.
B) returnonfinancialassetsafteraninflationadjustmenthasbeenmade.
C) interestusedtoderivethepresentvaluesoffuturesums.
D) returnonfinancialcapitalthathasnotbeenadjustedforinflation.
Answer: C
Diff:1
Topic: 21.3Interest
34) Theinterestrateusedtobringfuturesumsbacktopresentvalueis
A) alwaysnegative. B) zerowhenthereisnoinflation.
C) therateofdiscount. D) theprimerate.
Answer: C
Diff:1
Topic: 21.3Interest
35) Whentherateofinterestis10percent,thepresentvalueof$100payableintwoyearsis
approximately
A) $65. B) $83. C) $100. D) $117.
Answer: B
Diff:2
Topic: 21.3Interest
36) Presentvalueis
A) thevalueofafutureamountexpressedintodaysdollars.
B) thevalueofadollarreceivedayearfromnow,expressedintermsofitsfuturevalue.
C) theinverseoftheinterestrate.
D) thenominalvalueinsteadoftherealvalueofsomething.
Answer: A
Diff:1
Topic: 21.3Interest
37) Thepresentvalueof$110tobereceivedoneyearfromnow
A) is$110. B) is$100.
C) is$121. D) dependsontherateofdiscount.
Answer: D
Diff:2
Topic: 21.3Interest
38) Ifthepresentvalueof$110tobereceivedoneyearfromnowis$100,whatwill$100beworth
twoyearsfromnow?
A) $110
B) $121
C) $100
D) Cantsaysincewedontknowwhattheinterestrateis
Answer: B
Diff:3
Topic: 21.3Interest
39) Financialcapitalis
A) thecollectionofstockandbondexchangesaroundthecountry.
B) fundsusedtopurchasecapitalgoods.
C) theforeignexchangemarket.
D) assetsoffinancialinstitutions.
Answer: B
Diff:1
Topic: 21.3Interest
40) Thefundsusedtopurchasecapitalgoodsarecalled
A) investment. B) savings.
C) financialcapital. D) dividendsandinterest.
Answer: C
Diff:1
Topic: 21.3Interest
41) Ineconomics,interestreferstoallofthefollowingEXCEPT
A) thepaymentforcurrentratherthanfuturecommandoverresources.
B) thecostofobtainingcredit.
C) thereturnpaidtoownersoffinancialinstitutions.
D) thereturnpaidtotheownersofcapital.
Answer: C
Diff:1
Topic: 21.3Interest
42) Businessesgotocreditmarketsinorderto
A) obtaincapital.
B) obtainfinancialassetsthatcanbeusedtobuycapital.
C) obtaincapitalsotheycanearnrents.
D) channeltheirsavingsintoinvestments.
Answer: B
Diff:2
Topic: 21.3Interest
43) Thepaymentforcurrentratherthanfuturecommandoverresourcesis
A) animplicitcost. B) animplicitbenefit.
C) interest. D) opportunitycost.
Answer: C
Diff:1
Topic: 21.3Interest
44) Interestratesarehigherthe
A) shorterthedurationoftheloan.
B) greatertherisk.
C) largertheamountoftheloan,holdingotherthingsconstant.
D) lowertheinflationrate.
Answer: B
Diff:1
Topic: 21.3Interest
45) Largerloans,otherthingsconstant,havelowerinterestratesbecause
A) onlylarge,financiallysoundcorporationsobtainsuchloans.
B) largeloansalwayshavecollateral.
C) largeloansarealwaysforshorttimeperiods.
D) thefixedcostsassociatedwiththehandlingchargesasapercentofthetotalloanareless.
Answer: D
Diff:2
Topic: 21.3Interest
46) Businessesdemandfundsbecause
A) theypreferearlierconsumptiontolaterconsumption.
B) theyhavedeficitstocover.
C) theyprefertopurchasecapitalgoodsinthecurrentyear.
D) theymakeinvestmentsthattheybelievewillincreaseproductivityandprofitability.
Answer: D
Diff:1
Topic: 21.3Interest
A) equaltothenominalrateofinterestlesstheanticipatedrateofinflation.
B) equaltothenominalrateofinterestplustheanticipatedrateofinflation.
C) foundbytakingthenominalrateofinterestanddividingitbytheactualrateofinflation.
D) foundbytakingthenominalrateofinterestandaddingtheactualrateofinflation.
Answer: A
Diff:1
Topic: 21.3Interest
A) therateobservedinthemarketthatincludesaninflationpremium.
B) nottherateobservedinthemarket.
C) notadjustedforinflation.
D) expressedindollarsfromthechosenbaseyear.
Answer: A
Diff:1
Topic: 21.3Interest
49) Ifthenominalinterestrateishighandrising,apossiblecauseis
A) increasedlendingactivity. B) arisinginflationrate.
C) afallingrealinterestrates. D) increasedgovernmentborrowing.
Answer: B
Diff:2
Topic: 21.3Interest
50) Therealrateofinterestis4%andtheanticipatedrateofinflationis1%.Whatisthenominalrate
ofinterest?
A) 1% B) 3% C) 4% D) 5%
Answer: D
Diff:2
Topic: 21.3Interest
51) Therealrateofinterestis5%andtheanticipatedrateofinflationis2%.Whatisthenominalrate
ofinterest?
A) 7% B) 5% C) 3% D) 2%
Answer: A
Diff:2
Topic: 21.3Interest
52) Thenominalrateofinterestis4%andtheanticipatedrateofinflationis5%.Whatistherealrate
ofinterest?
A) 1% B) -1% C) 4% D) 9%
Answer: B
Diff:2
Topic: 21.3Interest
53) Thenominalrateofinterestis6%andtheanticipatedrateofinflationis2%.Whatistherealrate
ofinterest?
A) 8% B) 6% C) 4% D) 2%
Answer: C
Diff:2
Topic: 21.3Interest
54) Interestratesperformthefunctionof
A) signalinginformationabouttheinflationrate.
B) allocatingfunds,butonlyintheconsumersector.
C) allocatingfunds,whichdeterminestheallocationofphysicalcapital.
D) rewardingthosewhosavebuthasnodirectallocativerole.
Answer: C
Diff:2
Topic: 21.3Interest
55) Supposetheautoindustryhasseveralinvestmentprojectswithanexpectedrateofreturnof15
percent,thealuminumindustryhasprojectswithanexpectedreturnofover20percent,the
publishingindustryprojectswithanexpectedreturnof10percent,thesteelindustryhas
projectswithanexpectedreturnof7percentandtherubberindustryprojectswithanexpected
returnof5percent.Thecurrentmarketrateofinterestis7percent.Areductioninthesupplyof
fundscausesinterestratestoriseto11percent.Theeffectisto
A) causethefirmsinthesteelandpublishingindustriestocanceltheirprojects,whichwould
havebeenfundedattheoldinterestrate.
B) causethefirmsinthesteelandtherubberindustriestogoaheadwiththeirprojects.
C) forcethefirmsintheautomobileindustryandthepublishingindustrytorelyonfunding
theirprojectsthroughothermeans.
D) maketheprojectsofthealuminumindustryandthesteelindustryunprofitable;thefirms
intheseindustrieswillnotborrowthefundsormaketheinvestments.
Answer: A
Diff:2
Topic: 21.3Interest
56) Wheninterestratesallocatecapital,
A) manyworthwhileprojectsfailtogetfundedandsocietyisworseoff.
B) investmentprojectsoffirmstendtogetfundedwhilevaluablesocialinvestmentsfunded
bythegovernmenttendnottogetfunded.
C) onlyinvestmentprojectsarefundedforwhichtheexpectedbenefitsoftheprojectsequal
orexceedtheopportunitycostoftheprojects.
D) thereisanunderinvestmentincapitalandoverspendingondurableconsumergoods.
Answer: C
Diff:3
Topic: 21.3Interest
57) Thevalueofafutureamountexpressedintodaysdollarsis
A) theinterestrate. B) presentvalue.
C) thediscountrate. D) theinflationrate.
Answer: B
Diff:1
Topic: 21.3Interest
58) Themostthatsomeonewouldpaytodaytoreceiveacertainsumatsomepointinthefutureis
knownas
A) theinterestrate. B) presentvalue.
C) futurevalue. D) economicprofit.
Answer: B
Diff:1
Topic: 21.3Interest
59) Whatisthepresentvalueof$100oneyearfromnowataninterestrateof5%?
A) $5 B) $95.24 C) $100 D) $105
Answer: B
Diff:2
Topic: 21.3Interest
60) Whatisthepresentvalueof$100one-yearfromnowataninterestrateof6%?
A) $160 B) $106 C) $94.34 D) $6
Answer: C
Diff:2
Topic: 21.3Interest
61) Whatisthepresentvalueof$100twoyearsfromnowataninterestrateof5%?
A) $105 B) $95.24 C) $90.70 D) $5
Answer: C
Diff:3
Topic: 21.3Interest
62) Whatisthepresentvalueof$100twoyearsfromnowataninterestrateof6%?
A) $6 B) $89 C) $94.34 D) $106
Answer: B
Diff:3
Topic: 21.3Interest
63) Whatisthepresentvalueof$100threeyearsfromnowataninterestrateof5%?
A) $85 B) $115.76 C) $90.70 D) $86.38
Answer: D
Diff:3
Topic: 21.3Interest
64) Whatisthepresentvalueof$100threeyearsfromnowataninterestrateof6%?
A) $83.96 B) $82 C) $94.34 D) $119.10
Answer: A
Diff:3
Topic: 21.3Interest
65) Thepresentvalueof$100tobereceivedoneyearfromnow
A) is$100.
B) is$110.
C) is$90.
D) cannotbedeterminedwithoutknowingtheinterestrate.
Answer: D
Diff:2
Topic: 21.3Interest
66) Iftheannualinterestrateremainsunchangedoverthenexttwoyears,andthepresentvalueof
$120tobereceivedoneyearfromnowis$100,whatwill$100beworthtwoyearsfromnow?
A) $120
B) $140
C) $144
D) Uncertain.Weneedtoknowtheinterestrate.
Answer: C
Diff:3
Topic: 21.3Interest
67) Thegeneralformfordiscountingis
A) PV=At(1+i)t. B) PV=At/(1+i)t.
C) PV=(1+i)t/At. D) PV= 1/(1+ it)t.
Answer: B
Diff:2
Topic: 21.3Interest
68) Afirmisconsideringthreeprojects.Eachcosts$1millionnow.ProjectAwillyield$400,000a
yearforthreeyears,beginningoneyearfromnow.ProjectBwillyield$1.25millionthreeyears
fromnow,andProjectCwillyield$600,000fortwoyears,beginningtwoyearsfromnow.Ifthe
interestrateis8percent,whichoftheseprojectsshouldthefirmundertake?
A) ProjectA. B) ProjectB. C) ProjectC. D) Noneofthese.
Answer: A
Diff:3
Topic: 21.3Interest
69) Thepresentvalueofasumtobereceivedinthefutureisgreater
A) thegreatertheinterestrate.
B) thelessthetimeperiodbeforereceivingthesum.
C) thegreatertheinflationrate.
D) thegreaterthediscountrate.
Answer: B
Diff:2
Topic: 21.3Interest
70) Afirmisconsideringaninvestmentthatwillcost$2milliontodayand$2millionayearfrom
now.Itwillgeneraterevenuesof$1millionayearforfiveyears,beginningtwoyearsfromnow.
Iftheinterestrateis10percent,thefirmshould
A) notmaketheinvestmentbecausethepresentvalueofthenetrevenuesislessthanthe
presentvalueoftheinvestmentspending.
B) notmaketheinvestmentbecausethepresentvalueofthenetrevenuesislessthan$4
million.
C) maketheinvestmentbecausethepresentvalueofthenetrevenuesisgreaterthanthe
presentvalueoftheinvestment.
D) maketheinvestmentbecausetheprojectwillgenerateanetprofitof$1million.
Answer: A
Diff:3
Topic: 21.3Interest
71) Thegreatertheinterestrate,
A) thegreaterthepresentvalueofasumtobereceivedayearinthefuture.
B) thegreatertheopportunitycostofanotherdollarofcurrentconsumption.
C) themoreadollarinvestedtodaywillbeworthayearfromnow.
D) thelowerthediscountrate.
Answer: B
Diff:2
Topic: 21.3Interest
72) Astarbasketballplayersignsacontractthatnewspaperreportssayisworth$20million.The
playerreceives$5milliononsigning,and$5millionayearforthreeyears.Thecontractisworth
A) $20millionasreportedinthepapers.
B) lessthan$20millionsincethepresentvalueof$5millionreceivedoneormoreyearsfrom
nowislessthan$5million.
C) morethan$20millionbecausethepresentvalueof$5millionreceivedoneormoreyears
fromnowismorethan$5million.
D) eithermoreorlessthan$20million,dependingonthevalueofthediscountrate.
Answer: B
Diff:2
Topic: 21.3Interest
73) Thedifferencebetweenthenominalrateofinterestandtherealrateofinterestis
A) handlingcharges. B) governmentregulatorycharges.
C) administrativeoverheadcharges. D) theanticipatedrateofinflation.
Answer: D
Diff:2
Topic: 21.3Interest
74) Assumingamarketrateofinterestequalto7percent,whatisthepresentvalueof$200tobe
receivedoneyearfromtoday?
A) $123 B) $156 C) $187 D) $210
Answer: C
Diff:3
Topic: 21.3Interest
75) Assumingamarketrateofinterestequalto7percentandanticipatedinflationis2percent,what
isthereal(adjustedforinflation)presentvalueof$200tobereceivedoneyearfromtoday?
A) $190 B) $214 C) $187 D) $210
Answer: A
Diff:3
Topic: 21.3Interest
76) Howmuchmoneywouldyouhavetoputintoasavingsaccounttodaytobeworth$500three
yearsfromnowatamarketrateofinterestequalto8percent?
A) $397 B) $351 C) $420 D) $459
Answer: A
Diff:3
Topic: 21.3Interest
77) Ifthebankadvertises6percentannualinterestrateonaone -yearcertificateofdepositandyou

anticipatetherateofinflationtoriseto3percentduringtheyear,thentherealrateofintereston
thecertificateofdepositis
Answer: C
Diff:2
Topic: 21.3Interest
78) TherateofinterestthatyoupayonahomeloandependsuponallofthefollowingEXCEPT
A) thesupplyofhousesintherealestatemarket.
B) thelengthoftheloan.
C) yourcreditrating.
D) handlingchargesorloanfees.
Answer: A
Diff:2
Topic: 21.3Interest
79) Whatisthepresentvalueof$104.25thatyoucouldreceiveoneyearfromnow,giventhatthe
rateofinterestis4.25percent?
A) $108.50 B) $0.00 C) $4.25 D) $100.00
Answer: D
Diff:1
Topic: 21.3Interest
80) Whatisthereal(adjustedforinflation)presentvalueof$104.25thatyoucouldreceiveoneyear
fromnow,giventhattherateofinterestis4.25percentandtheanticipatedrateofinflationis1
percent?
A) $99.05 B) $100.97 C) $107.64 D) $100.00
Answer: B
Diff:3
Topic: 21.3Interest
81) Thehighertheexpectedrateofinflation,
A) theloweristhenominalrateofinterest.
B) thehigheristherealrateofinterest.
C) thehigheristhenominalrateofinterest.
D) thehighertherealandnominalratesofinterest.
Answer: C
Diff:1
Topic: 21.3Interest
82) Thegreatertheriskofnonrepaymentofaloan,otherthingsbeingequal
A) thelongeristherepaymentterm.
B) theloweristhechargedloanfees.
C) thehigheristherateofinterest.
D) thesmalleristheamountofcollateralthatisused.
Answer: C
Diff:1
Topic: 21.3Interest
83) Presentvalueis
A) unrelatedtotherateofinterest. B) lowerthelongerthetimehorizon.
C) notexpressedintodaysdollars. D) oppositethetimevalueofmoney.
Answer: B
Diff:1
Topic: 21.3Interest
84) Therealinterestrateisthe
A) nominalinterestrateplustheanticipatedinterestrate.
B) nominalinterestrateminustheanticipatedinterestrate.
C) nominalinterestrateplustheanticipatedinflationrate.
D) nominalinterestrateminustheanticipatedinflationrate.
Answer: D
Diff:1
Topic: 21.3Interest
85) Iftheinterestrateis10percentperyear,andyouhave$100,000now,whichofthefollowingis
closesttowhatyour$100,000willbeworthinoneyear?
A) $105,000 B) $110,000 C) $100,000 D) $102,000
Answer: B
Diff:2
Topic: 21.3Interest
86) TheABCCorporationearnedarealratereturnof4.5percentonaninvestment.Intheeconomy,
thenominalrateofinterestwas6percentandtherateofinflationwas3percent.Wecan
concludethat
A) theinvestmentwasunprofitable. B) theinvestmentwasprofitable.
C) therealrateofinterestwas9percent. D) therealrateofinterestwas1.5percent.
Answer: B
Diff:2
Topic: 21.3Interest
87) Lastyear,thenominalinterestratewaslessthantheanticipatedrateofinflation.
A) Thismeansthatnotenoughloansweremadebybanks.
B) Thismeansthattherealinterestratewasnegative.
C) Thismeansthattherealinterestratewasveryhigh.
D) Thisscenarioisnotpossible.
Answer: B
Diff:1
Topic: 21.3Interest
closesttowhatyour$100,000willbeworthinthreeyears?
A) $155,000 B) $115,000 C) $120,000 D) $133,000
Answer: D
Diff:3
Topic: 21.3Interest
closesttowhatyour$100,000willbeworthinfouryears?
A) $175,000 B) $125,000 C) $146,000 D) $190,000
Answer: C
Diff:3
Topic: 21.3Interest
90) Supposesomeoneofferedtogiveyou$1,000,000fiveyearsinthefutureandtheanticipated
interestrateis5percent.Thepresentvalueofthisofferwouldbeworthapproximately
A) $784,000. B) $500,000. C) $1,050,000. D) $286,000
Answer: A
Diff:3
Topic: 21.3Interest
91) Whatarethetwomeaningsofinterestineconomics?
Answer: Interestreferstothepricepaidbydebtorstocreditorsfortheuseoffundsandrefersto
themarketreturnearnedbycapitalasafactorofproduction.
Diff:1
Topic: 21.3Interest
92) Dopeoplemakedecisionsonthebasisofthenominalinterestrateortherealinterestrate?What
istherelationshipbetweenthetwointerestrates?
Answer: Peoplemaketheirdecisionsonthebasisoftherealinterestratesincedecisionsarealways
madeonthebasisofrelativeandnotabsoluteprices.Thenominalinterestrateequalsthe
realinterestrateplustheanticipatedrateofinflation.
Diff:2
Topic: 21.3Interest
93) Howisinflationrelatedtointerestrates?
Answer: Peoplebasetheirdecisionsonborrowing,lending,andinvestingonthebasisofthereal
interestrate.Ifthereisanticipatedinflation,thenominalrateofinterestwillequalthereal
rateofinterestplustheanticipatedinflationrate.So,interestratesvarydirectlywith
anticipatedinflation.Unanticipatedinflationleadstoarealinterestratedifferentfrom
whatpeoplethought,andthedecisionspeoplemadeturnouttobemistaken.
Diff:2
Topic: 21.3Interest
94) Whatisthemainpurposeofaninterestpayment?Whatmajorfactorsaffectinterestrates?
Answer: Interestisthepricepaidbydebtorstocreditorsfortheuseofloanablefundsorfinancial
capital.Itrepresentsthecostofobtainingcreditanditcompensatesthecreditorsfortheir
lossofcurrentcommandoverresources.Interestratesareaffectedbysuchfactorsasthe
lengthofloan,riskofnonrepaymentoftheloanandhandlingchanges.
Diff:1
Topic: 21.3Interest
95) Youhavewonthelottery.Therearetwopaymentoptionsforyou.Thefirstoptionisalump
sumpaymentof$10millionthatyouwillreceiveimmediately.Thesecondoptionisanannual
paymentof$1millionforeachofthenext12years.Assumethereisnoinflation.Howwould
youmakeadecisionbetweenthetwooptions?
Answer: Youneedtocomparethepresentvaluesofthetwopaymentoptionsandselecttheoption
withthehigherpresentvalue.Thepresentvalueofthelumpsumpaymentis$10
million,butthetotalpresentvalueofthescheduledpaymentsdependsontheinterest
ratethatyouwouldusetodiscountthefuturepaymentsbacktopresentvalue.
Diff:2
Topic: 21.3Interest
21.4CorporateFinancingMethods
1) Ashareholderinacorporation
A) maynotsellhisorhershareofownershipinthebusinesswithoutthebusinessdissolving.
B) canearninterest,butnotdividends,fromtheprofitsofthebusiness.
C) isapartownerofthebusiness.
D) ispersonallyliableforthedebtsofthecorporation.
Answer: C
Diff:1
Topic: 21.4CorporateFinancingMethods
2) Thepartofcorporateprofitsthatispaidtotheshareholdersofacorporationis
A) retainedearnings. B) shareholders.
C) dividends. D) businessrevenue.
Answer: C
Diff:1
3) EachofthefollowingisasourceoffinancialcapitalforacorporationEXCEPT
A) issuingnewstock.
B) reinvestmentofprofitorretainedearnings.
C) issuingbondsorborrowingfundsfromabank.
D) dividends.
Answer: D
Diff:1
4) Corporationsareabletoraiselargeamountsoffinancialcapitalbecause
A) ofthetaxbreakscorporationsaregivenrelativetopartnershipsorproprietorships.
B) oftheeliminationoftheproblemofseparationofownershipandcontrol.
C) oflimitedliabilityandthetreatmentofacorporationasanindividualentity.
D) oftheirgreaterabilitytomonitortheperformanceofdecisionmakers.
Answer: C
Diff:3
5) Inwhichofthefollowingwayscanacorporationraisenewfundsforinvestment?
I. Issuingnewsharesofstock
II. Havingexistingstockresoldbetweentwoowners
Answer: A
Diff:1
6) Adifferencebetweenashareofstockinacorporationandacorporatebondisthat
A) theshareofstockisalegalclaimwhilethebondisnot.
B) thebondownerhasvotingrightswithinthecorporationwhereasthestockholderdoes
not.
C) thebondownerisentitledtoreceiveafixedannualcouponpaymentplusalump -sum
paymentatthebondsmaturitydate,whereasthestockholderisentitledtoashareof
futureprofits.
D) stocksareissuedinreturnforfundsthatarelenttothecorporation.
Answer: C
Diff:1
7) Theownersofpreferredstock
A) receivepreferentialtreatmentinthepaymentofdividends.
B) havethesamevotingrightsasownersofcommonstock.
C) aretheoriginalownersofthecorporation.
D) havethesamerightsasbondholders.
Answer: A
Diff:1
8) Whenafirmusesprofitstopurchasenewcapitalequipment,itisengagingin
A) taxevasion.
B) balancesheetaccounting.
C) reinvestment.
D) themostriskywaythefirmcanobtaininvestmentfunds.
Answer: C
Diff:1
9) Ashareofstockinacorporationis
A) aguaranteetoafixedamountofincomefromthecorporation.
B) alegalclaimtoalump-sumpaymentataspecifiedpointoftimeinthefuture.
C) alegalclaimtoadividend,regardlessofthecorporationsabilitytopayitsinterest
payments.
D) alegalclaimtoashareofthecompanysfutureprofits.
Answer: D
Diff:1
10) Thepersonleastlikelytoreceiveapaymentfromacorporationinayearoflossesisthe
A) bankthatloanedmoneytothecorporation.
B) bondholder.
C) preferredstockholder.
D) commonstockholder.
Answer: D
Diff:2
11) Ifprofitsarereinvestedinthecorporation,then
A) paymentsmadetobondholderswillbeless.
B) therearefewerfundsavailabletodistributetostockholders.
C) thecompanywillsellmorebondsinordertopaydividendstostockholders.
D) thehighprofitsindicatethatcommonstockholderswillgetlargerdividendsthannormal.
Answer: B
Diff:1
12) Ifyouwantasayinthemanagementofacorporation,youshouldbuy
A) commonstock. B) preferredstock.
C) bonds. D) eitherbondsorpreferredstock.
Answer: A
Diff:2
13) Alegalclaimagainstafirmthatusuallyentitlestheowneroftheclaimtoreceiveafixedannual
couponpayment,plusalump-sumpaymentatsomefuturedate,isknownas
A) abond. B) ashareofcommonstock.
C) ashareofpreferredstock. D) areinvestmentcoupon.
Answer: A
Diff:1
14) Aninvestorwhoownspreferredstockhas
A) regularvotingrights.
B) preferentialtreatmentinthepaymentofdividends.
C) thesamerightsasabondholder.
D) unlimitedliabilityforthedebtsofthefirm.
Answer: B
Diff:1
15) Bondcouponpaymentsrepresent
A) dividendspaidtoowners. B) interestontheamountborrowed.
C) capitalgainsfortaxpurposes. D) paymentstopreferredshareholders.
Answer: B
Diff:1
16) Whichofthefollowingmodernmethodsoffinancingacorporationwasnotavailableto
corporationsfourhundredyearsago?
A) Sellingstock.
B) Sellingbonds.
C) Reinvestment.
D) Allofthesemethodswereusedthenaswellasnow.
Answer: D
Diff:1
17) Alegalclaimtoapartofacorporationsfutureprofitsiscalled
A) abond. B) ashareofstock.
C) adividend. D) afinancialdebt.
Answer: B
Diff:1
18) Whichlegalclaimcomeswithvotingrights?
A) Commonstock B) Preferredstock C) Bond D) Reinvestment
Answer: A
Diff:1
19) Whichlegalclaimhasafixedannualcouponpayment?
Answer: C
Diff:1
20) Whichlegalclaimcomeswiththemostpreferentialtreatmentinthepaymentofdividends?
Answer: B
Diff:1
21) Whichofthefollowingisnotaprincipalmethodoffinancingtoday?
A) Commonstock B) Bond
C) Reinvestment D) Theentrepreneurswealth
Answer: D
Diff:1
22) Abondis
A) alegalclaimtoapartofacorporationsfutureprofitsthatincludesvotingrights.
B) alegalclaimtoapartofacorporationsfutureprofitsthatdoesnotincludevotingrights.
C) alegalclaimagainstafirm,providingafixedannualcouponpaymentandalump -sum
paymentatmaturity.
D) anonlegalpromisetoprovideanannualpaymenttotheholderwhenthecorporation
makesprofits.
Answer: C
Diff:1
23) Themostimportantsourceoffinancialcapitalforfirmstodayis
A) saleofbonds. B) saleofnewissuesofstock.
C) tradeofpreviouslyissuedstock. D) reinvestmentofprofits.
Answer: D
Diff:2
24) Thepersonmostlikelytoreceiveapaymentfromacorporationinayearoflossesisthe
A) bondholder. B) commonstockholder.
C) preferredstockholder. D) investmentbanker.
Answer: A
Diff:2
25) Themoreprofitsarereinvestedintothefirm,the
A) lessthereisavailabletodistributetobondholders.
B) lessthereisavailabletodistributetostockholders.
C) morethefirmwillbeabletoraiseinsalesofnewissuestostock.
D) morebondsthefirmwillsellinordertopaytheirrequireddividendstopreferred
stockholders.
Answer: B
Diff:3
26) Apersonwhoiswillingtobearmoreriskwillbuy
C) bonds. D) governmentbonds.
Answer: A
Diff:2
27) Thethreeprimarysourcesofcorporatefundsare
A) banks,friends,andfamily.
B) government,othercorporations,andthecentralbank.
C) investmentbanks,brokerages,andinsurancecompanies.
D) stocks,bonds,andreinvestmentofprofits.
Answer: D
Diff:1
28) Ifyouown500sharesofpreferredstock,howmanyregularvoteswouldyougettocastatthe
nextstockholdersmeeting?
A) 500 B) 250 C) 1 D) 0
Answer: D
Diff:2
29) WhentheDutchEastIndiaCompanywasfoundedin1602,itraisedfinancialcapitalbyissuing
notesofindebtednesscalled
A) stocks. B) bonds. C) funds. D) notes.
Answer: B
Diff:1
30) WhenPatriciasellsherGeneralMotorscommonstockatthesametimethatBrianpurchasesthe
sameamountofGeneralMotorsstockfromanotherparty,GeneralMotorsreceives
A) thedollarvalueofthetransaction.
B) onlytheparvalueofthecommonstock.
C) nothing.
D) thedollaramountofthetransaction,lessbrokeragefees.
Answer: C
Diff:1
31) Stocksare
A) promisestorepayloans. B) aliabilityofaproprietorship.
C) aliabilityofacorporation. D) sharesofownershipinacorporation.
Answer: D
Diff:1
32) Bondsare
A) promisestorepayloans.
B) promissorynotesissuedbypartnerships.
C) promissorynotesissuedbyproprietorships.
D) sharesofownershipinacorporation.
Answer: A
Diff:1
33) Whenapersonbuysstockinacompany,thatpersonisbuying________,butwhenaperson
buysabondinacompany,thatpersonis________thecompany.
A) ownership;borrowingfundsfrom B) ownership;lendingfundsto
C) debt;lendingfundsto D) debt;borrowingfundsfrom
Answer: B
Diff:2
34) Alegalclaimtoapercentageofacompanysfutureprofitsandassetsisknownasa
A) shareofstock. B) bond. C) dividend. D) randomwalk.
Answer: A
Diff:1
35) Along-termloanthatisgiventoafirmisknownasa
A) shareofstock. B) bond. C) dividend. D) randomwalk.
Answer: B
Diff:1
36) Whenacorporationusesprofitstopayforthepurchaseofnewcapitalequipment,thisisknow
as
A) reinvestment. B) acouponpayment.
C) dividend. D) collusion.
Answer: A
Diff:1
37) Ifacorporationfails,thefirstrecipientsoffundsthatmayremainare
A) preferredstockholders. B) commonstockholders.
C) bondholders. D) noone.
Answer: C
Diff:2
38) Ifacorporationfails,thelastrecipientsoffundsthatmayremainare
A) preferredstockholders. B) commonstockholders.
C) bondholders. D) governmenttaxcollectors.
Answer: B
Diff:2
39) Supposeyouown$15,000ofpersonalproperty,$5,000ofstockinABCCorporation,a$1,000
certificateofdeposit,and$10,000ofgovernmentbonds.IfABCgoesbankrupt,themostyou
couldloseis
A) $31,000. B) $26,000. C) $15,000. D) $5,000.
Answer: D
Diff:2
40) Acompanyraisesfundsbyselling5millionsharesofcommonstockto5,000shareholdersand
$1millionbondsto1,000bondholders.Thenumberofindividualswhovoteforthecompanys
boardofdirectorsis
A) 6,000. B) 5,000. C) 1,000. D) 5,000,000.
Answer: B
Diff:2
41) Alegalclaimentitlingtheowneroftheclaimtofixedannualpaymentsandalump -sum

paymentiscalleda(n)
A) equityshare. B) bond. C) stock. D) debit.
Answer: B
Diff:1
42) Ifyouwanttovoteforthemanagementofthecorporation,youshouldbuy
C) bonds. D) eithercommonstockorpreferredstock.
Answer: A
Diff:1
43) Supposeafirmwantedtogooutofbusiness.Thefirmsellsallitsassetsandpaysoffeverything
itowestocreditors.Thestockholderswouldreceive
A) nothing.
B) theirannualdividendpayment.
C) onehalfofthefunds;theotherhalfofthefundsgoestobondholders.
D) therestofthefunds,aftereveryonewhohasaclaimagainstthefirmispaid.
Answer: D
Diff:2
44) Describeandexplainthethreeprinciplemethodsoffinancingusedbycorporations.
Answer: Corporationsraisefundsbysellingstocks,sellingbonds,andreinvestingprofits.Ashare
ofstockisaformofownershipinthefirmandentitlestheownertoashareoffuture
profits.Apersonwhobuysabondfromafirmislendingthefirmmoney.Finally,ifthe
firmearnsprofits,itcanusesomeofthemforinvestmentratherthanpaythemalloutto
stockholdersasdividends.
Diff:1
45) Whatwouldhappenifacorporationgoesoutofbusiness?
Answer: Theassetsofthecorporationwouldbesoldandthebondholderswouldreceivethefunds
duethem.Anyfundsleftoverwouldbedividedamongtheshareholders.Firmsmust
paytheirobligationstobondholdersbeforestockholdersgetmoney.
Diff:1
46) Whichmethodofcorporatefinanceisusedthemost?Why?
Answer: Reinvestmentaccountsforabout75percentofnewfinancialcapitalforcorporations.
Smallercorporationsmayfinditdifficulttofindpeoplewillingtobuysharesofstock,
andtheexistingownersmaynotwantotherownersinvolvedinelectingdirectors.
Smallerfirmsmayalsohaveadifficulttimegettingpeopletolendtothem.So,theyhave
torelyonreinvestingprofits.
Diff:3
47) Supposethatyoudecidetopurchaseeitherstocksorbondsofaparticularcorporationandyou
alsoprefertoreceivesomereturnsfromthesecuritieseveryyear.Whichshouldyoubuy -
stocksorbonds?Why?
Answer: Youshouldbuybondsbecauseyouwouldreceivecouponspaymentseachyearfrom
holdingthebondswhetherthecorporationmakesprofitsornotwhilethereisno
guaranteeforanypaymentforholdingstocks.
Diff:2
21.5TheMarketsforStocksandBonds
1) Accordingtotherandomwalktheory,
A) todaysstockpricewillberelatedtoyesterdaysstockprice.
B) successivepricesofastockareindependentofeachother.
C) stockpricescaneasilybepredictedforasmuchas52weeksintothefuture.
D) stockpricesriseandfallinpredictablecyclesthatcorrespondwiththeoverallbusiness
cycle.
Answer: B
Diff:1
Topic: 21.5TheMarketsforStocksandBonds
2) Therandomwalktheorysaysthat
A) stockpricesfollowatrendforvaryingperiodsoftime.
B) successivestockpricesincreasemorethantheydecrease.
C) successivestockpricesaredependentontheweightedaverageofthepreviousweeks
prices.
D) successivestockpricesareindependentofeachother.
Answer: D
Diff:2
3) WhichofthefollowingstatementsaboutinsideinformationisFALSE?
A) Itisinformationthatisnotavailabletothegeneralpublic.
B) Itisillegaltoknowinglyuseinsideinformationwhentradingstocks.
C) Profitscanbemadeusinginsideinformation.
D) Thegovernmentneverimposesfinesorotherpenaltiesforabuseofinsideinformation.
Answer: D
Diff:1
4) Theideathatanypublicinformationyouwillbeabletofindwillproveoflittlevaluetoyou
whenbuyingandsellingstocks,becausethatinformationissoquicklyincorporatedintothe
tradingpricesofstocks,isknownasthe
A) theoryofefficientmarkets. B) theoryoffundamentalanalysis.
C) principleofcontext. D) over-the-counterhypothesis.
Answer: A
Diff:1
5) Theyieldpercentageofastockiscalculatedas
A) thecorporationsnetworthdividedbythenumberofshareholders.
B) thebookvalueofthestockdividedbythenumberofshareholders.
C) thestockdividenddividedbythepriceofthestock.
D) theexpectedappreciationofthestock.
Answer: C
Diff:1
6) ThePEratioforastockis
A) thepredictedearningspershareofthestockdividedbyitscurrentyield.
B) thecurrentyieldofthestock.
C) thepriceofthestockdividedbyitsearningspershare.
D) thepredictedvolatilityofthestock.
Answer: C
Diff:1
7) Astockthathasapriceof$20pershare,earningspershareof$2.00,andadividendof$1.50
willhave
A) aPEratioof20/1.50. B) ayieldof7.5percent.
C) ayieldof12percent. D) aPEratioof1.333.
Answer: B
Diff:1
8) Themostprestigiousstockmarketintheworldisthe
A) NewYorkStockExchange. B) ChicagoMercantileExchange.
C) LondonStockExchange. D) TokyoStockExchange.
Answer: A
Diff:1
9) Stockmarketsforsecuritiesareimportantbecause
A) theyarewherecorporationsraisefinancialcapital.
B) theyarewhereproprietorshipsandpartnershipsraisefinancialcapital.
C) theypermitindividualstotransfertheirsavingsdirectlyintoinvestmentspending.
D) theymakethestocksandbondsmorevaluable.
Answer: A
Diff:1
10) Exchangesofstockstakeplace
A) inNewYorkCityonly.
B) intheprinciplefinancialcityofeachcountry,suchasNewYorkCityfortheUnitedStates
andLondonforEngland.
C) inadecentralizedfashionaroundtheworld.
D) incentralizedphysicallocationsknownasstockexchangesandonlinethroughInternet
brokers.
Answer: D
Diff:2
11) Accordingtotherandomwalktheory,
A) theprobabilitythatastockspricewillincreasetomorrowisgreaterifitincreasedtoday.
B) theprobabilitythatastockspricewillincreasetomorrowisgreaterifitdecreasedtoday.
C) thebestforecastoftomorrowspriceistodaysprice.
D) thebestforecastoftomorrowspriceisfoundbydeterminingthetrendforthelastfive
tradingdays.
Answer: C
Diff:2
12) Thetheorythatthereisnopredictabletrendsinsecuritiespricesisthe
A) opportunitycostofcapital. B) randomwalktheory.
C) capitalreinvestment. D) presentvalue.
Answer: B
Diff:1
13) WhichofthefollowingisaTRUEstatementaboutstockmarkets?
A) Economistscanmakeabove-averageprofitsinthestockmarketbecauseoftheir
specializedknowledgeofeconomics.
B) Itisalwaysbettertobuygrowthstocksthantheolderandmorestableblue -chipstocks.
C) Thestockmarketonaverageovertimeisrandomandtotallyunrelatedtotheperformance
oftheeconomy.
D) Itisillegalforafriendofacorporateexecutivetomakelargeprofitsinthestockmarketby
usinghisinsideinformation.
Answer: D
Diff:3
14) Informationthatisnotavailabletothegeneralpublicaboutwhatishappeninginacorporation
is
A) opportunitybenefit. B) limitedliability.
C) economicrent. D) insideinformation.
Answer: D
Diff:1
15) Insideinformation
A) appliestoproprietorshipsonly.
B) appliestoproprietorshipsandpartnershipsonly.
C) appliestocorporationsonly.
D) appliestoallformsofbusiness.
Answer: C
Diff:1
16) Stocksandbondsarecollectivelyknownas
A) securities. B) equities. C) realproperty. D) shares.
Answer: A
Diff:1
17) Thetheorythatthereisnowaytogetrichquickinsecuritiesduetoalackofpredictable
trendsis
A) no-wintheory. B) markettrendanalysis.
C) randomwalktheory. D) trading.
Answer: C
Diff:2
18) WhichofthefollowingstatementsaboutstockmarketbrokersanddealersisTRUE?
A) Brokersearncommissionsfromtradingstocksbutdealerstrytoprofitfromtradingstocks.
B) Brokerstrytoprofitfromtradingstocksbutdealersearncommissionsfromtradingstocks.
C) Bothbrokersanddealersearncommissionsfromtradingstocks.
D) Bothbrokersanddealerstrytoprofitfromtradingstocks.
Answer: A
Diff:1
19) Efficientmarketstheorysuggeststhatpurchasingthepublishedreportsoffinancialanalysts
A) islikelytoincreaseonesreturnsbyanaverageof5percent.
B) islikelytoincreaseonesreturnsbyanaverageofabout3to5percent.
C) isnotlikelytoincreasefinancialreturns.
D) willincreasefinancialreturnsinthefirstyearbutnotinfollowingyears.
Answer: C
Diff:3
20) Thetheorythattherearenopredictabletrendsinsecuritiespricesthatcanbeusedtogetrich
quickisthe
A) dartboardtheory. B) randomwalktheory.
C) WallStreettheory. D) inefficientmarkethypothesis.
Answer: B
Diff:1
21) Insideinformationistheuseofinformation
A) bythosewhoreadthecompaniesannualreports.
B) bythosewhowritethecompaniesannualreports.
C) bystockbrokersatthelargestbrokeragefirms.
D) thatisnotavailabletothepublic.
Answer: D
Diff:1
22) Accordingtoefficientmarkettheory,whichofthefollowingcanbestpredictthestockpriceofa
particularcompanytomorrow?
A) afinanceprofessorwhoknowsalotofinvestmenttheory
B) astocktraderwhohastradedstocksformorethan10years
C) thatcompanysemployeewhohasinsideinformationaboutthecompany
D) noneoftheabove:Everyonehasanequalchanceofpredictingfuturestockprices
Answer: C
Diff:2
23) Thepriceofthestockdividedbytheprofitspershareofstockisknownasthe
A) price-earningsratio.
B) dividend.
C) yieldinpercentperyear.
D) numberofsharestradedduringtheday.
Answer: A
Diff:2
24) ThestockmarketshowedaPEforBluarCoequalto17.WhatdoesPEmean?
A) price-earningsratio B) profit-earningsratio
C) perfect-earningsratio D) price-equityratio
Answer: A
Diff:2
25) Whatistherandomwalktheory?
Answer: Therandomwalktheoryisthetheorythatpricesofstocksmoveindependentlyin
securitiesmarketsand,hence,thattherearenopredictabletrendsthatcanbeusedto
makerisklessprofits.Thetheoryassumesthatinformationaboutcompaniesandstocks
quicklyareprocessedbythemarketandreflectedinchangedprices.Thisprocess
happenssofastthatnoonecangeneraterisklessprofits.
Diff:1
26) Iftherandomwalktheoryiscorrect,thenisthereanywaytobeatthemarket?
Answer: Iftherandomwalktheoryiscorrect,thennoonecanusepubliclyavailableinformation
topredictthemagnitudeordirectionofastockpricechange.However,ifyouhave
insideinformationthatisnotavailabletothepublic,thenyoucanstillbeatthemarket.
Insideinformationisaboutwhatishappeninginacorporationthatisnotavailabletothe
public.
Diff:2
27) Howcanonebeatthemarket?
Answer: Mosteconomistsfeeltheonlywayonecanbeatthemarketistohaveinsideinformation,
whichisinformationaboutwhatishappeninginacorporationthatisnotavailabletothe
generalpublic.
Diff:1
Chapter22
TheFirm:CostandOutputDetermination
22.1ShortRunversusLongRun
1) Economistsgenerallydefinetheshortrunasbeing
A) thatperiodoftimeinwhichatleastoneofthefirmsinputs,usuallyplantsize,isfixed.
B) thatperiodoftimeinwhichallinputsarevariable.
C) anyperiodoftimelessthanoneyear.
D) anyperiodoftimelessthansixmonths.
Answer: A
Diff:1
Topic: 22.1ShortRunversusLongRun
2) WhichofthefollowingisTRUEaboutthelongrun?
A) Allresourcesarevariable. B) Allresourcesarefixed.
C) Atleastoneresourceisfixed. D) Noneoftheabove.
Answer: A
Diff:1
3) Whichofthefollowingisashort-rundecisionforafirm?
A) Downsizingthefirmsmanufacturingplant
B) Expandingthefirmsdistributionnetworkoflong-haulfreighttrucksandsmallerdelivery
trucks.
C) Firingworkers
D) Investinginanewadditiontothefirmsmanufacturingplant
Answer: C
Diff:1
4) Thefocusoffirmdecisionsintheshortrunisprimarilyon
A) variableinputs. B) capitalinvestment.
C) plantsize. D) economiesofscale.
Answer: A
Diff:2
Chapter22TheFirm:CostandOutputDetermination 321
5) WhichofthefollowingwouldNOTbeashort-rundecisionforthefirm?
A) Recallworkerswhowerepreviouslylaid-off
B) Havelaborworktwohoursovertimeeachdayinordertoexpandoutput
C) Buildanotherwingontheplantinordertoaddanewassemblyline
D) Placeanorderwithasupplierforadditionalrawmaterials
Answer: C
Diff:1
6) Abasicdistinctionbetweenthelongrunandtheshortrunisthat
A) ifafirmproducesnooutputinthelongrun,itstillincursacost.
B) theopportunitycostsofproductionarelowerintheshortrunthaninthelongrun.
C) inthelongrun,someinputsarefixed,whileintheshortrun,allinputsarevariable.
D) intheshortrun,completeadjustmentofallinputsisimpossible,whileinthelongrunall
inputscanbeadjusted.
Answer: D
Diff:1
7) Duringtheshortrun,afirmcannot
A) increaseitsuseoflabor. B) changeitsplantsize.
C) purchasemorerawmaterials. D) changeitsvariablecosts.
Answer: B
Diff:1
8) Forahotdogvendor,thehotdogstandrepresentshis
A) fixedinput. B) variableinput.
C) diseconomiesofscale. D) noneoftheabove.
Answer: A
Diff:2
9) Forahotdogvendor,thehotdogbunsrepresentshis
A) fixedinput. B) variableinput.
C) sunkcost. D) noneoftheabove.
Answer: B
Diff:2
10) Thetimeperiodduringwhichafirmscapitalisfixedbutitslaborisvariableiscalled
A) theplanninghorizon. B) theshortrun.
C) thelongrun. D) theverylongrun.
Answer: B
Diff:1
11) Thelongrunisdefinedasthetimeperiodinwhich
A) thefirmcanvaryonlyoneinput.
B) thefirmcanmakepositiveeconomicprofits.
C) allfactorsofproductioncanbealtered.
D) thefirmcanalteritsrateofproduction.
Answer: C
Diff:1
12) Afixedresourceisonethat
A) isphysicallytiedtoaspecificlocation.
B) costsmorethantheaveragedailyrevenueofthefirm.
C) cannotbevariedintheshortrun.
D) canbedisposedofonlyifthefirmgoesoutofbusiness.
Answer: C
Diff:1
13) Whichofthefollowingwouldbeafixedinputtoanautomobilefirm?
A) Steel B) AfactoryinDetroit
C) Carbatteries D) Engineers
Answer: B
Diff:2
14) Whichofthefollowingwouldbeafixedinputforanamusementpark?
A) Tickettakers B) Unpoppedpopcorn
C) Concessionworkers D) Therollercoaster
Answer: D
Diff:1
15) Mr.Jamescompanyproducescandybars.WhichisNOTavariableinputforthisfirm?
A) Sugar B) Assemblylineworkers
C) Thebigchocolate-stirringmachines D) Packagingmaterials
Answer: C
Diff:2
16) Ineconomics,howlongisthelongrun?
A) Morethan12months
B) 24monthsorlonger
C) 5yearsormore
D) Whatevertimeittakesafirmtovaryallinputs
Answer: D
Diff:2
17) Theshortrunis
A) ayearorless.
B) uptothreeyears.
C) theperiodoftimeinwhichthefirmcanvaryitsrateofoutput.
D) theperiodoftimeinwhichthefirmcannotchangeitsuseofatleastoneinput.
Answer: D
Diff:1
18) Thetimeperiodduringatleastoneinputcannotbechangedisthe
A) productiontime. B) calendaryear.
C) longrun. D) shortrun.
Answer: D
Diff:1
19) Thetimeperiodduringwhichallfactorsofproductioncanbevariedisthe
A) productiontime. B) calendaryear.
Answer: C
Diff:1
20) AjaxCorporationhasrecentlyfinishedbuildinganewfactory.Theymovedintothefactorya
monthagoandfoundthatitistheperfectsizegiventheamounttheywanttoproduce.Ajaxis
operatinginthe
A) productiontime. B) corporationtime.
Answer: C
Diff:2
21) Ifthefirmcanvaryallfactorsofproduction,itisoperating
A) ataprofit. B) atazeroeconomicprofit.
C) intheshortrun. D) inthelongrun.
Answer: D
Diff:1
22) Thedifferencebetweentheshortrunandthelongrunis
A) economicprofitsarenegativeintheshortrunandpositiveinthelongrun.
B) economicandaccountingprofitsarenotequalintheshortrunbutareequalinthelong
run.
C) thatintheshortrunatleastonefactorofproductioncannotbevariedwhileinthelong
runallfactorsofproductioncanbevaried.
D) theshortrunisaperiodlessthanayearwhilethelongrunisaperiodgreaterthanayear.
Answer: C
Diff:1
23) Whichofthefollowingstatementsisnottrueabouttheshortrunandthelongrun?
A) Theshortrunforafirmistodaywhilethelongrunisnextweek.
B) Thesetermsapplytotheplanningdecisionsoffirms.
C) Thefirmisalwaysoperatingintheshortrun.
D) Intheshortrun,thefirmcanchangetheamountofvariableinputs.
Answer: A
Diff:2
24) Forawheatfarmerinthemiddleofharvestingsystem,afixedinputwouldbe
A) workershired. B) combinesrented.
C) thelandthathadbeenplanted. D) trucksrentedtohaulthewheat.
Answer: C
Diff:2
25) Thebestwaytothinkoftheshortrunandthelongrunisas
A) specificperiodsoftime,althoughthetimeperiodsmaydifferacrossindustries.
B) planningtermsthatapplytomanagers.
C) conceptsthatapplytoallpeoplewhoworkforafirm.
D) aconceptthatonlyaccountantsareconcernedwith.
Answer: A
Diff:3
26) Forafirm,wedefinetheshortrunasaperiodoftimeduringwhich
A) atleastoneinputcannotbechanged. B) allinputscanbechanged.
C) onlytheplantsizecanbechanged. D) allinputscannotbechanged.
Answer: A
Diff:2
27) Theshortrunis
A) aperiodoftimeduringwhichatleastoneinputcannotbechanged.
B) aperiodoftimeduringwhichnoinputscanbechanged.
C) aperiodoftimeduringwhichallinputscanbechanged.
D) aperiodoftimeshorterthanoneyear.
Answer: A
Diff:2
28) Foraneconomist,theshortrunmeansatimeperiod
A) duringwhichnewfirmsareprohibitedfromenteringtheindustry.
B) duringwhichfirmsarenotallowedtochangetheamountofimportedresourcestheyuse.
C) thatisbetweenoneandfiveyears.
D) duringwhichthefirmisunabletochangeitsplantsize.
Answer: D
Diff:1
29) WhenElToritoRestaurantisdecidinghowmanywaiterstohireforaholidayweekend,itis
makinga________decision.
A) plant-size B) long-run C) short-run D) fixed-input
Answer: C
Diff:2
30) Inthelongrun,afirmcanchange
A) nothing. B) onlyoneinput,suchasplantsize.
C) allinputs. D) Noneoftheabovearecorrect.
Answer: C
Diff:2
31) Theamountofcalendartimeassociatedwiththelongrun
A) islessthanfiveyears. B) isgreaterthanoneyear.
C) isbetweenoneandfiveyears. D) variesbyindustry.
Answer: D
Diff:1
32) IfMicrosoftisdeterminingwhethertobuildanewplantinSouthernCaliforniaorinNew
Mexico,itismakinga(n)________decision.
A) immediate-run B) long-run
C) short-run D) variable-input
Answer: B
Diff:2
33) Thetimeframeinwhichallfactorsofproductioncanvaryis
A) theshortrun. B) theintermediaterun.
C) thelongrun. D) indeterminate.
Answer: C
Diff:1
34) Ifafirmcanvaryallofitsfactorsofproduction,itisoperatingin
A) thelongrun. B) theimmediaterun.
C) equilibrium. D) theshortrun.
Answer: A
Diff:1
35) Whichofthefollowingisalong-runadjustment?
A) Arestauranthiresanewchef.
B) Acompanybuildsanewmanufacturingplant.
C) AbankhiresanewCEO.
D) Acompanyhirestennewmanagementtrainees.
Answer: B
Diff:1
36) Ifafarmerseekstobuyone-hundredmoreacresforherkiwifruitfarm,sheismakinga
A) long-rundecision. B) short-rundecision.
C) immediate-rundecision. D) variable-inputdecision.
Answer: A
Diff:1
37) Whatisthedifferencebetweentheshortrunandthelongrun?Whatistheappropriatetime
dimensionofthelongrun?
Answer: Theshortrunisthetimeperiodwhenatleastoneinputcannotbechangedandthelong
runisthetimeperiodwhenallinputscanbevaried.Thereisnoappropriatetime
dimensionforthelongrun.Itdependsontheproductionprocessesusedbyfirms.
Diff:2
38) Intheshortrun,afirmcannotchangeanyofitsinputs.Doyouagreeordisagree?Explain.
Answer: Disagree.Theshortrunisaperiodthatissoshortthatthefirmcannotchangeatleast
oneofitsinputs.Inotherwords,itcanstillchangeotherinputs,knownasvariable
inputs.
Diff:2
39) Ineconomics,theshortruncommonlyreferstoaperiodwithinoneyearandthelongrunisa
periodlongerthanoneyear.Doyouagreeordisagree?Explainyouranswer.
Answer: Disagree.Thetimeperiodoftheshortrunversusthelongrundependsoneach
individualindustry.Ineconomics,theshortrunistheperiodduringwhichatleastone
inputcannotbechanged,whilethelongrunistheperiodlongenoughsothatallinputs
canchange.
Diff:2
22.2TheRelationshipBetweenOutputandInputs
1) Productionfunctionsindicatetherelationshipbetween
A) factorcostsandoutputprices. B) factorinputsandthequantityofoutput.
C) thevalueofinputsandaveragecosts. D) factorinputsandfactorprices.
Answer: B
Diff:1
Topic: 22.2TheRelationshipBetweenOutputandInputs
2) Supposethatoneworkercanproduce15cookies,twoworkerscanproduce35cookiestogether,
andthreeworkerscanproduce65cookiestogether.Whatisthemarginalproductofthe2nd
worker?
A) 15cookies B) 20cookies C) 30cookies D) 35cookies
Answer: B
Diff:1
andthreeworkerscanproduce65cookiestogether.Whatisthemarginalproductofthe3rd
worker?
A) 21.67cookies B) 65cookies C) 30cookies D) 35cookies
Answer: C
Diff:1
andthreeworkerscanproduce65cookiestogether.Whatistheaverageproductofthefirsttwo
workers?
A) 15cookies B) 20cookies C) 17.5cookies D) 35cookies
Answer: C
Diff:1
andthreeworkerscanproduce65cookiestogether.Whatistheaverageproductofthefirst
threeworkers?
A) 65cookies B) 30cookies C) 17.5cookies D) 21.67cookies
Answer: D
Diff:1
6) Whenafirmusestechnologicalimprovementstoincreaseoutputfromthesameamountof
inputs,theresultis
A) anewproductionfunction. B) losses.
C) guaranteedprofits. D) diseconomiesofscale.
Answer: A
Diff:1
7) Theconceptoftheproductionfunctionimpliesthatafirmusingresourcesinefficientlywill
A) obtainlessoutputthanthetheoreticalproductionfunctionshows.
B) obtainmoreoutputthanthetheoreticalproductionfunctionshows.
C) obtainexactlytheamountthatthetheoreticalproductionfunctionshows.
D) notbesubjecttodiminishingmarginalproduct.
Answer: A
Diff:1
8) Changesinproductionfunctionsareassociatedwithchangesin
A) thelevelofoutput. B) demand.
C) thelevelsofcosts. D) technology.
Answer: D
Diff:1
A) Includedinthefirmsshort-runproductionfunctionarebothfixedandvariableinputs.
B) Anefficientfirmcanobtainmoreoutputthantheproductionfunctionshows.
C) Theproductionfunctionshowsthetechnicalrelationshipbetweenafirmsinputsand
outputs.
D) Theproductionfunctionpresentsthetechnicallyefficientmethodsofcombininginputsto
produceoutput.
Answer: B
Diff:1
10) FredsFranksoriginallysoldhotdogsandsoftdrinksfromacartlocatedinfrontofCityHall.
ThenFredpurchasedanotherhotdogcartandhiredsomeonetosellhotdogsandsoftdrinks
nearthehighschool.Bothlocationshavebeensuccessful.WhenFredsFranksexpandedtotwo
locations,whichofthefollowingdidNOToccur?
A) Fredsproductionfunctionchanged.
B) Productionincreased.
C) Thecompanyincreasedtheinputsitemploys.
D) Thefirmemployedadditionalcapital.
Answer: A
Diff:2
11) Whichofthefollowingchangesafirmsproductionfunction?
A) Hiringadditionalworkers
B) Acquiringadditionalphysicalcapital
C) Addingasecondproductionfacilityexactlylikeitsfirstproductionsite
D) Adoptingnewtechnology
Answer: D
Diff:2
12) Anegativevalueforthemarginalphysicalproductwouldindicatethat
A) thecompanyhasnotyetreachedthepointofsaturation.
B) totaloutputincreasedbyasignificantamount.
C) totaloutputdecreasedwhentheextraunitofthevariableinputwasadded.
D) totaloutputincreased,buttheincreasewasverysmall.
Answer: C
Diff:1
13) Ifthemarginalproductcurveisincreasingfromworkers1-89andthendecreasessteadily,
crossingthehorizontalaxisat190workers,weknowthat
A) thetotaloutputcurveincreasesfromworkers1-89,decreasesfromworkers90-189,and
becomes0atthe190thworker.
B) thetotaloutputcurveisincreasingatanincreasingratefromworkers1 -89,thenincreases
atadecreasingrateuntilthe190thworker,afterwhichitdecreases.
C) thetotaloutputcurveisincreasingthroughout,althoughatanincreasingrateforthefirst
190workersandatadecreasingrateafterthe190thworker.
D) diminishingmarginalproductsetsinwiththe190thworker.
Answer: B
Diff:3
14) Ifmarginalproductisnegative,then
A) totalproductisrising. B) totalproductisfalling.
C) marginalcostisfalling. D) averageprofitisrising.
Answer: B
Diff:2
15) Marginalphysicalproductofthefirstworkeris100,120forthesecond,80forthethird,30for
thefourth,5forthefifth,3forthesixth,2fortheseventh,1fortheeighth,and0fortheninth.
Whatistotalproductforthefifthworkerandtheninthworkerrespectively?
A) 335;341 B) 335;0 C) 5;0 D) 0;5
Answer: A
Diff:2
16) Whentotalproductisrising,
A) fixedcostmustberising. B) marginalproductmustbepositive.
C) variablecostmustbedeclining. D) marginalproductmustbenegative.
Answer: B
Diff:1
17) Ifintheshortruntotalproductisdecreasingasmoreworkersarehired,thenthemarginal
physicalproductis
A) increasing. B) zero. C) negative. D) positive.
Answer: C
Diff:2
18) Theproductionfunction
A) showsthemaximumlevelofoutputforagivensetofinputs.
B) isaneconomicrelationshipbetweenrevenueandcost.
C) showstherelationshipbetweeninputpricesandamountofinputused.
D) alwaysshowsincreasingmarginalproductoflabor.
Answer: A
Diff:1
InputofLabor TotalProduct
(no.ofworkers (no.ofsnowboards
inweeks) produced)
0 0
1 30
2 68
3 110
4 140
5 135
19) Intheabovetable,averagephysicalproductis30snowboardswhen
A) 4workersareemployed. B) 3workersareemployed.
C) 2workersareemployed. D) 1workerisemployed.
Answer: D
Diff:1
20) Intheabovetable,whenthefirmemploys4workers,themarginalproductwillbe
A) 140snowboards. B) 30snowboards.
C) 35snowboards. D) 208snowboards.
Answer: B
Diff:1
21) Intheabovetable,whenthefirmemploys3workers,themarginalproductwillbe
A) 42snowboards. B) 30snowboards.
C) 36.67snowboards. D) 208snowboards.
Answer: A
Diff:1
22) Intheabovetable,howmanyworkersareemployedwhenmarginalproductreachesits
maximum?
A) 1 B) 2 C) 3 D) 4
Answer: C
Diff:1
23) Intheabovetable,diminishingmarginalproductoccursafteremployingthe
A) firstworker. B) secondworker.
C) thirdworker. D) fourthworker.
Answer: C
Diff:1
24) Intheabovetable,marginalproductbecomesnegativeafteremployingthe
A) secondworker. B) thirdworker.
C) fourthworker. D) fifthworker.
Answer: C
Diff:1
25) Intheabovetable,themarginalproductofthesecondworkeris
A) 68. B) 98.
C) 38. D) Itcannotbedetermined.
Answer: C
Diff:1
26) Intheabovetable,theaverageproductofthefifthworkeris
A) 35. B) 135. C) -5. D) 27.
Answer: D
Diff:1
27) Intheabovetable,whichtwoworkershavethesamemarginalphysicalproduct?
A) 1and2 B) 2and4 C) 1and3 D) 1and4
Answer: D
Diff:2
28) Themarginalphysicalproductoflaboriscalculatedassumingotherfactorinputs
A) increasemorethanproportionately. B) increaselessthanproportionately.
C) remainconstant. D) decrease.
Answer: C
Diff:1
29) Intheshortrun,theadditionaloutputthatresultsfromhiringanadditionalunitofavariable
inputisthe
A) marginalphysicalproduct. B) averageproduct.
C) averagevariablecost. D) marginalcost.
Answer: A
Diff:1
30) Averagephysicalproductiscalculatedbydividingtotalproductbythe
A) amountofvariableandfixedinputsemployed.
B) quantityofthevariableinput.
C) quantityofthefixedinput.
D) productionfunction.
Answer: B
Diff:1
Afirmhasthefollowingproductionrelationshipbetweenlaborandoutput,forafixedcapitalstock.
Labor Output
0 0
1 5
2 11
3 18
4 23
5 26
31) Accordingtotheabovetable,atwhatusageoflabordoesdiminishingmarginalproductbegin?
A) 1 B) 2 C) 4 D) 5
Answer: C
Diff:1
32) Accordingtotheabovetable,whatisthemarginalproductofthe4thunitoflabor?
A) 3 B) 5 C) 6 D) 7
Answer: B
Diff:1
33) Accordingtotheabovetable,whatistheaverageproductoflaborwhenthreelaborersare
employed?
A) 3 B) 4 C) 5 D) 6
Answer: D
Diff:1
34) Accordingtotheabovetable,whatisthemarginalproductofthe5thunitoflabor?
A) 3 B) 4 C) 5.2 D) 5
Answer: A
Diff:1
35) Accordingtotheabovetable,whatistheaverageproductoflaborwhenfivelaborersare
employed?
A) 3 B) 5.2 C) 5.75 D) 6
Answer: B
Diff:1
36) Production
A) isaprocessbywhichresourcesareproduced.
B) isaprocessbywhichresourcesaretransferredintogoodsandservices.
C) onlyappliestomanufacturingofgoods.
D) iscarriedonbycorporations,butnotbysoleproprietorships.
Answer: B
Diff:1
37) Anyactivitythatresultsintheconversionofresourcesintoproductsthatcanbeusedin
consumptionis
A) planning. B) investment. C) production. D) discounting.
Answer: C
Diff:1
38) TherelationshipQ=f(K,L)isanexampleofa
A) costfunction. B) productionfunction.
C) demandequation. D) profitequation.
Answer: B
Diff:2
39) Whichofthefollowingactivitiesisnotincludedintheproductionprocess?
A) Determiningthevalueofthegoods B) Makingthegoods
C) Packagingthegoods D) Transportingthegoods
Answer: A
Diff:2
40) Theproductionfunction
A) givesthemaximumamountofoutputforagivenlevelofinputs.
B) givestheimplicitcostsforallinputs.
C) givestheamountoftimenecessarytoreachthelongrun.
D) allowsustocomputethedifferencebetweenaccountingandeconomicprofits.
Answer: A
Diff:1
41) Whichofthefollowingstatementsisnottrueabouttheproductionfunction?
A) Itgivesthemaximumoutputthatcanbeobtainedforagivenlevelofinputs.
B) Anewproductionfunctiondoesnothavetobedevelopedwhenthereistechnical
progresssincetechnologyisincludedinthefunction.
C) Theproductionfunctiondependsupontheleveloftechnologyavailabletothefirm.
D) Itspecifiesthecostofinputsnecessarytoproduceacertainlevelofoutputs.
Answer: B
Diff:2
42) Therelationshipbetweeninputsandoutputsisknownas
A) business. B) manufacturing.
C) aproductionfunction. D) marginalproduct.
Answer: C
Diff:1
43) Aproductionfunctionisa(n)
A) costrelationship. B) economicrelationship.
C) accountingrelationship. D) technologicalrelationship.
Answer: D
Diff:1
44) Theproductionfunctiondoesnotprovideinformationabout
A) thetechnologyusedintheproductionprocess.
B) thetypesofinputsusedintheproductionprocess.
C) therelationshipbetweenchangesinquantityofinputsandchangesinthequantityof
output.
D) theprofitsofproducingagood.
Answer: D
Diff:2
45) Anothertermforthetotalquantityofoutputis
A) averagephysicalproduct. B) marginalphysicalproduct.
C) totalproduct. D) averagevariableproduct.
Answer: C
Diff:1
46) Totalproductdividedbythevariableinputis
A) averagetotalcost. B) marginalcost.
C) averagephysicalproduct. D) marginalphysicalproduct.
Answer: C
Diff:1
47) Marginalphysicalproductandaveragephysicalproductaremeasuredin
A) dollars.
B) profitterms.
C) unitsofproduction.
D) thesameunitsasmarginalcostandaveragetotalcost.
Answer: C
Diff:1
Quantityof Total
Labor Product
1 20
2 46
3 63
4 72
48) Refertotheabovetable.Whenthequantityoflaborequals2,whatdoestheaverageproduct
equal?
A) 46 B) 23 C) 26 D) 92
Answer: B
Diff:2
equal?
A) 21 B) 17 C) 63 D) 189
Answer: A
Diff:2
equal?
A) 9 B) 18 C) 72 D) 216
Answer: B
Diff:2
51) Refertotheabovetable.Whatdoesthemarginalproductequalwhenthequantityoflaborgoes
from1to2?
A) 46 B) 23 C) 26 D) 92
Answer: C
Diff:2
from2to3?
A) 21 B) 17 C) 63 D) 189
Answer: B
Diff:2
from3to4?
A) 9 B) 18 C) 72 D) 216
Answer: A
Diff:2
54) Refertotheabovefigure.Thecurverepresentsa
A) marginalproductcurve. B) totalproductcurve.
C) totalcostcurve. D) averagetotalcostcurve.
Answer: B
Diff:1
55) Astheamountofavariableinputincreases,whileallotherinputsareheldconstant,total
productwill
A) alwaysincrease. B) alwaysdecrease.
C) initiallydecreaseandthenincrease. D) initiallyincreaseandthendecrease.
Answer: D
Diff:1
56) Iftheaverageproductof20workersis100bushelsofwheatandtheaverageproductof21
workersofwheatis99bushelsofwheat,thenthemarginalproductofthe21stworkerwas
A) -1bushelofwheat. B) 5bushelsofwheat.
C) 79bushelsofwheat. D) 99bushelsofwheat.
Answer: C
Diff:2
57) Marginalphysicalproductis
A) thechangeintotaloutputfromusinganadditionalunitofonevariableinput,holding
otherinputsconstant.
B) thechangeintotaloutputfromusinganadditionalunitofallvariableinputs.
C) thetotaloutputdividedbythenumberofunitsofthevariableinput.
D) thechangeintotaloutputdividedbythenumberofunitsofthevariableinput,holding
constantallotherinputs.
Answer: A
Diff:1
58) Thechangeintotalproductoccurringwhenavariableinputisincreasedandallotherinputsare
heldconstantis
Answer: D
Diff:1
59) Thephysicaloutputthatisduetotheadditionofonemoreunitofavariablefactorof
productionis
Answer: D
Diff:1
60) Asthequantityoflaborincreaseswhiletheamountofotherinputsareheldconstant,marginal
productoflaborwill
A) increasecontinuously. B) decreasecontinuously.
C) initiallydecreaseandthenincrease. D) initiallyincreaseandthendecrease.
Answer: D
Diff:1
61) RecentlyAppleComputerdevelopedApplesnewiTunesMusicStore,whichoffersmorethan
200,000songsfromfivemajorrecordlabels,forusewithApplesiPodandiMac.Morethana
millionsongsweredownloadedthefirstweekalone!Ineconomicterms,CEOSteveJobshelped
convertcapitalandlaborinputsintoproductsconsumersuse.Anyactivitythatresultsinthe
conversionofresourcesintoproductsthatcanbeusedinconsumptionis
A) notprofitable. B) astartupventure.
C) demand. D) production.
Answer: D
Diff:2
AveragePhysical
Labor Output Product MarginalProduct
1 10 -
2 12
3 15
4 52
5 9
62) Usingtheabovetable,thetotalproductandaveragephysicalproductwhen3workersare
employedare
A) 36and12,respectively. B) 39and13,respectively.
C) 37and27,respectively. D) 40and10,respectively.
Answer: B
Diff:2
63) Usingtheabovetable,thetotalproductandaveragephysicalproductwhen5workersare
employedare
C) 62and15,respectively. D) 61and12.2,respectively.
Answer: D
Diff:2
64) Usingtheabovetable,theaveragephysicalproductandmarginalproductwhen4workersare
employedare
C) 13and9,respectively. D) 14and13,respectively.
Answer: A
Diff:2
65) Usingtheabovetable,themarginalproductofthe2ndworkeris
A) 12. B) 14. C) 15. D) 13.
Answer: B
Diff:2
66) Usingtheabovetable,themarginalproductofthe4thworkeris
A) 12. B) 13. C) 14. D) 15.
Answer: B
Diff:2
Usetheinformationfromthebelowtabletoanswerfollowingquestion(s).
Inputof Total
Labor Product
0 0
1 20
2 50
3 80
4 105
5 125
6 140
7 150
67) Intheabovetable,theaverageproductfor5unitsoflaboris
A) 20.0. B) 22.5. C) 25.0. D) 15.0.
Answer: C
Diff:2
68) Intheabovetable,theaverageproductfor3unitsoflaboris
A) 30.0. B) 26.7. C) 26.3. D) 25.0.
Answer: B
Diff:2
69) Intheabovetable,themarginalproductofthefourthworkeris
A) 30. B) 25. C) 20. D) 15.
Answer: B
Diff:2
70) Intheabovetable,themarginalproductofthesixthworkeris
A) 10. B) 25. C) 20. D) 15.
Answer: D
Diff:2
71) Whentotalproductisincreasingatanincreasingrate,marginalproductis
A) positiveandincreasing. B) positiveanddecreasing.
C) constant. D) negative.
Answer: A
Diff:2
72) Whentotalproductisincreasingatadecreasingrate,marginalproductis
Answer: B
Diff:2
73) Iffourlaborerswerehiredandwediscoveredthatwecouldproduce88unitsofproduction,
whatistheaveragephysicalproductoflabor?
A) 44 B) 352 C) 11 D) 22
Answer: D
Diff:2
74) AtPhilsHotDogStand,wefoundthefollowing:
4laborersproduced66hotdogs
Whatwasthemarginalphysicalproductofthesixthlaborer?
A) 10hotdogs B) 8hotdogs C) 6hotdogs D) 4hotdogs
Answer: B
Diff:2
75) AtPhilsHotDogStand,wefoundthefollowing:
Whatwasthemarginalphysicalproductoftheseventhlaborer?
A) 8hotdogs
B) 10hotdogs
C) 4hotdogs
D) noneoftheaboveduetoinsufficientinformation
Answer: C
Diff:2
76) Thechangeinoutputcausedbyaone-unitchangeinlaborisreferredtoasthe
A) compoundedphysicalproductoflabor. B) averagephysicalproductoflabor.
C) marginalphysicalproductoflabor. D) totalphysicalproductoflabor.
Answer: C
Diff:2
77) Whichofthefollowingstatementiscorrect?
A) WhenMarginalProductisgreaterthanAveragePhysicalProduct,AveragePhysical
Productisincreasing.
B) WhenMarginalProductisgreaterthanAveragePhysicalProduct,AveragePhysical
Productisdecreasing.
C) WhenMarginalProductisgreaterthanAveragePhysicalProduct,AveragePhysical
ProductisequaltoTotalProduct.
D) WhenMarginalProductisgreaterthanAveragePhysicalProduct,TotalProductis
increasingatadecreasingrate.
Answer: A
Diff:2
78) Theaverageproductoflaborisequalto
A) totalproductdividedbyquantityoflabor.
B) changeintotalproductdividedbyquantity oflabor.
C) totalproductdividedbychangeinquantityoflabor.
D) changeintotalproductdividedbychangeinquantity oflabor.
Answer: A
Diff:2
Quantityof Total AveragePhysical MarginalPhysical

Workers Product Product Product
0 0
1 3
2 7
3 12
4 16
5 18
6 18
79) Intheabovetable,theaveragephysicalproductofthe3rdworkeris
A) 5. B) 4. C) 3. D) 12.
Answer: B
Diff:2
80) Intheabovetable,themarginalphysicalproductofthe3rdworkeris
A) 5. B) 4. C) 3. D) 12.
Answer: A
Diff:2
81) Intheabovetable,theaveragephysicalproductofthe6thworkeris
A) 5. B) 4. C) 3. D) 0.
Answer: C
Diff:2
82) Intheabovetable,themarginalphysicalproductofthe6thworkeris
A) 5. B) 4. C) 3. D) 0.
Answer: D
Diff:2
83) Intheabovetable,theaveragephysicalproductof2workersandthemarginalphysicalproduct
ofthe2ndworkeris
A) 2;2. B) 4;1. C) 3.5;3.5. D) 3.5;4.
Answer: D
Diff:2
84) Intheabovetable,theaveragephysicalproductfor5workersandthemarginalphysical
productofthe5thworkeris
A) 3.6;2. B) 0.72;1. C) 2;0.6. D) 16;2.
Answer: A
Diff:2
85) Theproductionfunctionillustratestheamountoftotalphysicalproductthatcanbeproduced
withagivensetof
A) inputs. B) outputs.
C) marginalproduct. D) marginalinput.
Answer: A
Diff:2
Quantityof Total Average Marginal

Labor Product Product Product
1 320
2 335
3 338
4 320
86) Refertotheabovetable.Whatdoestotalproductequalwhen2unitsoflaborareused?
A) 320 B) 335 C) 350 D) 670
Answer: D
Diff:3
A) 336 B) 1008 C) 338 D) 3
Answer: B
Diff:3
A) 1328 B) 332 C) 320 D) 960
Answer: A
Diff:3
89) Describetheconceptoftheproductionfunction.Whathappenstotheproductionfunction
whenafirmbecomeslessefficient,sothatitnowrequiresmorelabortoproducethesame
amountofoutputasbefore?
Answer: Theproductionfunctionisthemaximumpossibleoutputthatcanbeproducedwitha
givenamountofinputs.Ifafirmnowrequiresmorelabortoproducethesameamount
ofoutputasbefore,thenitsproductionfunctioneitherrotatesdownwardoritscurvature
changes.
Diff:2
90) Explainhowyoucancalculateaveragephysicalproductandmarginalphysicalproductfrom
informationontotalphysicalproductandvariableinput.
Answer: Giventheinformationontotalphysicalproductandvariableinput,averagephysical
productcanbecalculatedbydividingtotalproductbythevariableinput.Marginal
physicalproductisthechangeintotalphysicaloutputgivenaone -unitincreaseinthe
variableinput,holdingallotherinputsconstant.Hence,itcanbecomputedbydividinga
changeintotalphysicaloutputbythecorrespondingone-unitincreaseinthevariable
output.
Diff:2
91) Whatisaproductionfunction?
Answer: Productionisaprocessthattransformsresourcesintogoodsorservices.Aproduction
functionisarelationshipbetweeninputsandoutput.Itisatechnologicalrelationshipand
notaneconomicrelationship.
Diff:1
92) Graphically,whathappenstotheproductionfunctionifafirmusesautomationtoraisethe
amountofoutputperworker?Explain.
Answer: Theproductionfunctionistherelationshipbetweeninputsandmaximumphysical
output.Ifautomationraisestheproductivityofworkers,thentheproductionfunction
willrotateupwardsothathigheroutputcorrespondstoagivenleveloflaborinput.
Diff:2
22.3DiminishingMarginalProduct
1) Refertotheabovefigure.Thecurvereflects
A) thelawofdiminishingmarginalproductinlabor.
B) thelawofincreasingmarginalproductinlabor.
C) thelawofdiminishingmarginalproductincapital.
D) thelawofincreasingmarginalproductincapital.
Answer: A
Diff:1
Topic: 22.3DiminishingMarginalProduct
2) Philfoundthatashecontinuedtocrowdlaborersintohishotdogstand,theextraoutputhe
wasreceivingfromeachadditionallaborerwasbeginningtofalloff.Thisisanexampleofthe
A) lawofincreasingopportunities. B) lawofdemand.
C) lawofdiminishingmarginalutility. D) lawofdiminishingproduct.
Answer: D
Diff:2
3) Themarginalproductivityoflaborwilleventuallydecreaseasmoreworkersareemployed
because
A) averageproductisincreasing.
B) totalproductisdecreasing.
C) theamountofcapitalwillalsobeincreasing.
D) ontheaverageeachworkerwillhavefewerinputstoworkwith.
Answer: D
Diff:2
4) Ifweaddsuccessivelaborerstoworkagivenamountoflandonawheatfarm,eventually
A) averagetotalcostwillfalltozero.
B) theincreasesinwheatharvestedwillriseataconstantrate.
C) theincreasesinwheatharvestedwillgetsmallerandsmaller.
D) theincreasesinwheatharvestedwillgetlargerandlarger.
Answer: C
Diff:1
5) Aftersomepointsuccessiveequalincreasesinavariablefactorofproduction,whenaddedtoa
fixedamountofinputs,willresultinsmallerincreasesinoutput.Thisisknownas
A) thelongrun.
B) thelawofdiminishingmarginalproduct.
C) marginalphysicalproduct.
D) shortrunaveragecost.
Answer: B
Diff:1
6) Themarginalproductoflabormayincreaserapidlyinitiallyasmore
A) workersareabletospecialize.
B) totalproductisdecreasing.
C) theamountofotherinputsisheldconstant.
D) workerswillgetcrowdedinafixedfactory.
Answer: A
Diff:2
7) Assuccessiveequalincreasesinavariablefactorofproductionareaddedtofixedfactorsof
production,therewillbeapointbeyondwhichtheextraproductthatcanbeattributedtoeach
additionalunitofthevariablefactorofproductionwilldecline.Thisisknownasthelawof
A) diminishingtotalproduct. B) diminishingaverageproduct.
C) diminishingmarginalproduct. D) decreasingproduct.
Answer: C
Diff:1
8) Thelawofdiminishingmarginalproductindicatesthat
A) averageproductwilleventuallydecrease.
B) marginalproductwilleventuallydecrease.
C) totalproductwilleventuallydecrease.
D) resourcesareinefficient.
Answer: B
Diff:1
9) Theobservationthatbeyondsomepoint,successiveincreasesinavariablefactorofproduction
addedtoafixedfactorofproductionleadtosmallerandsmallerincreasesinoutputis
A) thelawofmarginalutility.
B) thelawofaverages.
C) thelawofdiminishingmarginalproduct.
D) thelawofopportunitycosts.
Answer: C
Diff:1
10) Thelawofdiminishingmarginalproductstatesthat
A) outputwillcontinuetoincreaseindefinitelyifmorevariablefactorsofproductionare
addedtoanexistingstockoffixedfactors.
B) successiveequal-sizedincreasesinlabor,whenaddedtofixedfactorsofproduction,will
resultinsmallerincreasesofoutput.
C) adoublingallinputswilldoubleoutput.
D) variablecoststendtodecreasewithoutput.
Answer: B
Diff:1
11) Thelawofdiminishingmarginalproductisastatement
A) thatconcernschangesinvariableinputandchangesinoutput.
B) thatconcernsthelongrun.
C) thatconcernschangesinprofits.
D) thatrelatestoplantsize.
Answer: A
Diff:2
12) Thepointofsaturationoccurswhenafirm
A) hastotalreturnsequaltozero.
B) firstencountersnegativemarginalproduct.
C) firstexperiencespositivemarginalproduct.
D) maximizesitstotalreturns.
Answer: B
Diff:1
13) Whathappensatafirmspointofsaturation?
A) Forthefirsttime,hiringanadditionalworkerdecreasestotalproduct.
B) Workerscannottakeonanyadditionaltaskswithoutworkingovertimehours.
C) Themarketforafirmsoutputhasbeensaturatedandsalesfalltozero.
D) Thefirmstotalcostsexceeditsrevenues.
Answer: A
Diff:2

1 22 22 22
2 52 26 30
3 81 27 29
4 100 25 19
5 115 23 15
6 126 21 11
14) Refertotheabovetable.Atwhatquantityoflabordoesthelawofdiminishingmarginal
productsetin?
A) After1unit. B) After2units. C) After3units. D) After6units.
Answer: B
Diff:3
15) Refertotheabovetable.Atwhatquantityoflaboristheaverageproductoflabormaximized?
A) 1unit. B) 2units. C) 3units. D) 6units.
Answer: C
Diff:3
16) Refertotheabovetable.Atwhatquantityoflabordoesitbecomeobviousthatthelawof
diminishingmarginalproducthassetin?
A) workernumber3 B) workernumber4
C) workernumber21 D) workernumber5
Answer: A
Diff:3
17) Aslongasmarginalproductoflaborexceedstheaverageproductoflabor,thenaverage
productoflabor
A) mustfall. B) mustrise.
C) willstayunchanged. D) willbeatitsmaximumvalue.
Answer: B
Diff:3
18) Ifmarginalproductiszero,weknowthat
A) totalproductisalsozero. B) averageproductisalsozero.
C) totaloutputismaximized. D) averageproductisconstant.
Answer: C
Diff:2
19) Totalproductwillstarttodecrease
A) atthequantitywherethelawofdiminishingreturnsstarts.
B) whenaveragephysicalproductdecreases.
C) whenmarginalphysicalproductincreases.
D) whenmarginalphysicalproductbecomesnegative.
Answer: D
Diff:1
20) Supposethetotaloutputcurveincreasesatanincreasingrateforworkers1-50,increasesata
decreasingratefromworkers51-101,anddecreasesbeyond101workers.Wewouldknowthat
A) marginalproductisincreasingfromworkers1-50andthenbecomesnegativeafterworker
51.
B) marginalproductisincreasingfromworkers1-50,decreasingafter51workers,and
becomesnegativeafterthe101stworker.
C) marginalproductisdecreasingfromworkers1-101,becomingnegativeatthe102nd
worker.
D) marginalproductisincreasingfromworkers1-50,constantfromworkers51to101,andis
decreasingafterthat.
Answer: B
Diff:3
Quantityof Total AveragePhysical MarginalPhysical

Workers Product Product Product
0 0
1 3
2 7
3 12
4 16
5 18
6 18
21) Intheabovetable,thelawofdiminishingmarginalproductsetsinafterthe________worker.
A) first B) sixth C) third D) fourth
Answer: C
Diff:2
22) Theobservationthataftersomepoint,successiveequalsizeincreasesinavariablefactorof
production,suchaslabor,addedtofixedfactorsofproduction,willresultinsmallerincreasesin
outputisthe
A) lawofdiminishingmarginalproduct. B) streamliningproductionfunction.
C) consumerequilibrium. D) theoryofincreasingmarginalutility.
Answer: A
Diff:2
23) Whentotalproductisdecreasing,marginalproductis
Answer: D
Diff:2
24) Thelawofdiminishingmarginalproductshowstherelationship
A) betweenaccountingandeconomicprofits.
B) betweenshort-runandlong-runoutputsofafirm.
C) betweeninputsandoutputsforafirmintheshortrun.
D) betweeninputsandoutputsforafirminthelongrun.
Answer: C
Diff:2
25) Supposethemanagerofarestaurantnoticesthatwhenshehastoomanywaitersonthefloorfor
ashiftthatthewaitersgetineachotherswayandfewerdinnersareserved.Thisisanexample
of
A) diminishingmarginalproduct. B) diminishingmarginalutility.
C) diminishingmarginalworkforce. D) diminishingmarginalinputs.
Answer: A
Diff:2
26) Whatisthelawofdiminishingmarginalproduct?
Answer: Thelawofdiminishingmarginalproductstatesthat,aftersomepoint,successiveequal
increasesinavariableinputaddedtofixedinputswillgeneratesmallerandsmaller
incrementsinoutput.Thatis,aftersomepoint,themarginalphysicalproductfrom
addingavariableinputtooneormorefixedinputswilldecrease.
Diff:1
27) Graphically,whatdoesthemarginalproductcurveforalaborinputlooklike?Explainin
words.
Answer: Typically,themarginalproductoflaborincreasesatlowlevelsoflaborinputsdueto
specializationandotherfactors.Aslaborinputscontinuetoincrease,someworkersmay
havefewermachinestoworkwithandthustheirmarginalproductdecreases.Inother
words,themarginalproductcurveincreasesfirstandthendecreaseswithsuccessively
increasesinlaborinputs.
Diff:2
28) Whatisthelawofdiminishingmarginalproduct?Isitarealisticconceptfordescribingthereal
world?Explain.
Answer: Thelawofdiminishingmarginalproductistheobservationthataftersomepoint,
successiveequal-sizedincreasesinavariableinputaddedtofixedinputswillresultin
smallerincreasesinoutput.Thisisarealisticconceptbecausewithoutdiminishing
marginalproduct,firmswillcontinueto,say,hireadditionalworkerswithoutadding
moremachinesorofficespace.Thisisnotwhatwecommonlyseeintheworld.
Diff:2
29) Diminishingmarginalproductisabasiclawbecausenewworkersarealwayslessqualified
thantheexistingworkers.Doyouagreeordisagree?Explain.
Answer: Disagree.Diminishingmarginalproductoccursnotbecauseworkersarelessqualified
butbecause,givenfixedsomefactorsofproduction,eachworkerwillhave,onaverage,
fewerofthefixedfactorsofproductiontoutilize.Outputperworkercanberaisedby
increasingthosefixedfactorsofproduction.
Diff:2
22.4Short-RunCoststotheFirm
1) Thefirmsshort-runcostscontain
A) onlyvariablecosts. B) onlyfixedcosts.
C) bothvariableandfixedcosts. D) onlyopportunitycosts.
Answer: C
Diff:1
Topic: 22.4Short-RunCoststotheFirm
A) TC=TFC+TVC B) TC= TFC- TVC
C) TC=TFC*TVC D) TC= TFC/TVC
Answer: A
Diff:1
3) Supposethatafirmiscurrentlyproducing1,000unitsofoutput.Atthislevelofoutput,AVCis
$1perunit,andTFCis$500.WhatisthefirmsTC?
A) $1,500 B) $1,000 C) $501 D) $499
Answer: A
Diff:1
4) Supposethatafirmiscurrentlyproducing500unitsofoutput.Atthislevelofoutput,TVC =
$1,000andTFC=$2,500.WhatisthefirmsATC?
A) $2 B) $5 C) $7 D) $10
Answer: C
Diff:1
5) Supposethatwhenthelevelofoutputforthefirmincreasesfrom100to110units,itsvariable
costsincreasefrom$500to$700.Whatisthefirmsmarginalcost?
A) $5 B) $7 C) $20 D) $200
Answer: C
Diff:1
6) WhichoneofthefollowingstatementsisFALSE?
A) TC=TFC+TVC B) ATC= AFC+ AVC
C) AFC=TFCdividedbyQ D) MC= TCdividedbyQ
Answer: D
Diff:1
7) Assumeittakes10unitsoflabortoproduce4unitsofoutput.Whenthepriceoflaboris$6per
unitandfixedcostsequal$60,whatisthetotalcostofthose4unitsofoutput?
A) $60 B) $70 C) $120 D) $84
Answer: C
Diff:2
8) Short-runtotalcostisdefinedas
A) thesumofmarginalcostandtotalvariablecost.
B) priceoflaborperunitmultipliedbythenumberoflaborunits.
C) totalfixedcostplustotalvariablecost.
D) totalcapitalcostonly.
Answer: C
Diff:1
9) Ineconomics,afixedcostisacostthat
A) ispresentonlyintheshortrun.
B) goesupasthelevelofoutputgoesup.
C) goesdownasthelevelofoutputgoesup.
D) doesnotvarywiththelevelofoutput.
Answer: D
Diff:1
10) WhichofthefollowingwouldNOTbeconsideredafixedcostofproduction?
A) Wagespaidtolabor
B) Theopportunitycostofcapital
C) Interestpaymentsonaloan
D) Insurancepaymentsonplantandequipment
Answer: A
Diff:1
11) AllofthefollowingaremostlikelytobefixedcostsEXCEPTthecostrelatingto
A) insurance. B) taxes. C) rent. D) packaging.
Answer: D
Diff:2
12) Withagivenplantsize,anincreaseinoutputwillNOTresultinanincreasein
A) totalcost. B) averagefixedcost.
C) totalfixedcost. D) averagevariablecost.
Answer: C
Diff:1
13) Whenoutputis100units,thefirmstotalfixedcostis$500.Whatwillthisfirmstotalfixedcost
beifoutputdoublesto200units?
A) $1,000
B) $500
C) $250
D) Canttellfromtheinformationprovided
Answer: B
Diff:2
14) Whichofthefollowingstatementsaboutafirmsshort-runvariablecostsiscorrect?
A) Theyincreaseasthelevelofoutputdecreases.
B) Theytypicallyincludethecostofworkerswages.
C) Theyincludethecostsofplantandequipment.
D) Theyarealwaysagreaterexpensethanarefixedcosts.
Answer: B
Diff:1
15) Asafirmincreasesthelevelofoutputthatitproduces,short-runaveragefixedcost
A) risesandthenfalls.
B) remainsconstantsincefixedcostsareconstant.
C) decreases.
D) decreasesuptoaparticularlevelofoutputandthenincreases.
Answer: C
Diff:1
16) Averagefixedcostswill
A) riseasoutputrises. B) fallthenriseasoutputrises.
C) risethenfallasoutputrises. D) fallasoutputrises.
Answer: D
Diff:1
17) WhenSuperStuffCorporationproduces5,000units,totalcostsequal$150,000andtotalvariable
costsequal$75,000.Atthislevelofoutput,whatisSuperStuffsaveragefixedcost?
A) $75,000 B) $30 C) $225,000 D) $15
Answer: D
Diff:3
18) Intheshortrun,averagetotalcostis
A) higherthanaveragevariablecost.
B) equaltoaveragevariablecost.
C) lessthanaveragevariablecost.
D) sometimeshigherandsometimeslowerthanaveragevariablecost.
Answer: A
Diff:1
Q TFC TVC TC
0 $90 $0 $90
1 90 25 115
2 90 32 122
3 90 42 132
4 90 64 154
5 90 95 185
19) Refertotheabovetable.Atanoutputof4units,averagevariablecostsare
A) $16. B) $22. C) $38.50. D) $44.
Answer: A
Diff:2
20) Refertotheabovetable.Atanoutputof3units,averagevariablecostsare
A) $42. B) $30. C) $44. D) $14.
Answer: D
Diff:2
21) Refertotheabovetable.Atanoutputof2units,averagetotalcostsare
A) $61. B) $122. C) $16. D) $45.
Answer: A
Diff:2
22) Refertotheabovetable.Atanoutputof5units,averagetotalcostsare
A) $18. B) $19. C) $37. D) $185.
Answer: C
Diff:2
23) Refertotheabovetable.Whenoutputrisesfrom2unitsto3units,marginalcostsare
A) $7. B) $10. C) $22. D) $41.
Answer: B
Diff:2
A) $16. B) $10. C) $22. D) $31.
Answer: C
Diff:2
A) $19. B) $10. C) $22. D) $31.
Answer: D
Diff:2
A) $26.50. B) $31. C) $21. D) $63.
Answer: C
Diff:3
27) Refertotheabovetable.WhatisAVCatanoutputof2units?
A) $7 B) $16 C) $45 D) $61
Answer: B
Diff:2
28) Refertotheabovetable.WhatisMCwhenoutputrisesfrom0unitto1unit?
A) $0 B) $25 C) $90 D) $115
Answer: B
Diff:2
29) Refertotheabovetable.MCisthelowest
A) between0and1unitsofoutput. B) between1and2unitsofoutput.
C) between3and4unitsofoutput. D) at0unitsofoutput.
Answer: B
Diff:2
30) Intheabovefigure,ifthisfirmproducesoutputlevelQ 2 ,ithasaveragevariablecostsof

A) OF. B) OE. C) OC. D) OD.
Answer: B
Diff:1
31) Intheabovefigure,ifthisfirmproducesoutputlevelQ 2 ,ithasaveragetotalcostsof

A) OF. B) OE. C) OC. D) OD.
Answer: D
Diff:1
32) Intheabovefigure,atanoutputlevelofQ 1 ,totalvariablecostis

A) OFtimesQ 1. B) ODtimesQ2. C) OF. D) OFminusDF.
Answer: A
Diff:1
A) TC=TFC+TVC
B) TC=averageproduct+ marginalproduct
C) TC=TFC-TVC
D) TC=averagephysicalproduct- marginalphysicalproduct
Answer: A
Diff:1
34) Coststhatdonotvarywithoutputare
A) totalcosts. B) variablecosts. C) fixedcosts. D) marginalcosts.
Answer: C
Diff:1
35) Fixedcostsare
A) coststhatneverchange.
B) coststhatafirmincursevenwhenoutputiszero.
C) notactuallycostssincetheydonotaffectthedecisionsofafirm.
D) coststhatincreaseataconstantratewhenoutputincreases.
Answer: B
Diff:1
36) Fixedcostsincludeallbut
A) anormalrateofreturnoninvestment.
B) temporarylabor.
C) propertytaxontheexistingbuildings.
D) machinesthathavebeenproducingoutput.
Answer: B
Diff:1
37) Thetotalcostofthefirm
A) includesexplicitcostsbutexcludesimplicitcosts.
B) includesimplicitcostsbutexcludesexplicitcosts.
C) includesimplicitandexplicitcosts.
D) includesimplicitandexplicitcostsbutexcludesanormalrateofreturnoninvestment.
Answer: C
Diff:1
38) Averagevariablecostsequal
A) totalvariablecostsdividedbymarginalcosts.
B) totalvariablecostsdividedbyoutput.
C) thechangeinmarginalcostsfromproducinganotherunitofoutput.
D) outputdividedbythechangeintotalcosts.
Answer: B
Diff:1
39) Averagetotalcostequals
A) TC/Q. B) TVC/Q.
C) TFC/Q. D) changeintotalcost/changeinoutput.
Answer: A
Diff:1
40) Averagevariablecostequals
A) TC/Q. B) TVC/Q.
Answer: B
Diff:1
41) Marginalcostequals
A) TC/Q. B) TVC/Q.
Answer: D
Diff:1
42) Marginalcostisequalto
A) changeintotalcostdividedbychangeinoutput.
B) changeintotalvariablecostdividedbychangeinoutput.
C) totalvariablecostdividedbyquantityofoutput.
Answer: D
Diff:1
43) Thechangeintotalvariablecostwhichaccompaniesoneextraunitofoutputis
A) theaveragetotalcost. B) theaveragevariablecost.
C) theaveragefixedcost. D) marginalcost.
Answer: D
Diff:1
44) Thechangeintotalcostsduetoaone -unitchangeintheproductionrateis

A) totalfixedcost. B) totalvariablecost.
C) marginalcost. D) averagetotalcost.
Answer: C
Diff:1
Q TFC TVC TC AFC AVC ATC

1
2 $75 $25
3 $40
45) Refertotheabovetable.Whataretotalfixedcostsatanoutputof2units?
A) $50 B) $100 C) $150 D) $200
Answer: C
Diff:3
46) Refertotheabovetable.Whataretotalvariablecostsatanoutputof2units?
A) $50 B) $100 C) $150 D) $200
Answer: A
Diff:3
47) Refertotheabovetable.Whataretotalcostsatanoutputof2units?
A) $50 B) $100 C) $150 D) $200
Answer: D
Diff:3
48) Refertotheabovetable.Whataretotalfixedcostsatanoutputof3units?
A) $90 B) $120 C) $150 D) $270
Answer: C
Diff:3
49) Refertotheabovetable.Whataretotalvariablecostsatanoutputof3units?
A) $90 B) $120 C) $150 D) $270
Answer: B
Diff:3
50) Refertotheabovetable.Whataretotalcostsatanoutputof3units?
A) $90 B) $120 C) $150 D) $270
Answer: D
Diff:3
51) Iftotalcostsare$50,000when1000unitsareproduced,andtotalcostsare$50,100when1001
unitsareproduced,wecanconcludethat
A) averagevariablecostsare$100. B) averagetotalcostsare$100.
C) averagefixedcostsare$100. D) marginalcostsare$100.
Answer: D
Diff:2
52) Ifaveragevariablecostsareincreasingwhileaveragetotalcostsaredecreasing,then
A) marginalcostmustliebetweenaveragevariableandaveragetotalcosts.
B) marginalcostmustequalaveragevariablecost.
C) marginalcostmustequalaveragetotalcost.
D) fixedcostsmustbezero.
Answer: A
Diff:3
53) Inagraphshowingtheshort-runcostcurves,theonecurvewhichdeclinescontinuouslyaswe
expandoutputiscalled
A) theaveragefixedcostcurve. B) theaveragevariablecostcurve.
C) theaveragetotalcostcurve. D) themarginalcostcurve.
Answer: A
Diff:3
54) Inamapshowingshort-runcostfunctions,onecurvebeginsattheoriginandrisesasoutput
expands.Itiscalledthe
A) themarginalcostcurve. B) thetotalfixedcostcurve.
C) thetotalcostcurve. D) thetotalvariablecostcurve.
Answer: D
Diff:3
55) If,intheshortrun,thelevelofoutputiszero,whichofthefollowingstatementistrue?
A) totalvariablecostiszerobuttotalcostequalstotalfixedcost,andbothofthelatterexceed
zero
B) totalcostandtotalfixedcostgraphswillbeginattheorigin
C) totalfixedcostwillalsobezeroatfirstbutwillriseonceoutputrises
D) noneoftheabove
Answer: A
Diff:3
56) Refertotheabovefigure.Averagetotalcostsarerepresentedbycurve
A) 1. B) 2. C) 3. D) 4.
Answer: B
Diff:2
57) Refertotheabovefigure.Marginalcostsarerepresentedbycurve
A) 1. B) 2. C) 3. D) 4.
Answer: A
Diff:2
58) Refertotheabovefigure.Averagevariablecostsarerepresentedbycurve
A) 1. B) 2. C) 3. D) 4.
Answer: C
Diff:2
59) Refertotheabovefigure.Curve(4)isthe
A) totalfixedcostcurve. B) marginalproductcurve.
C) averagefixedcostcurve. D) averagevariablecostcurve.
Answer: C
Diff:2
60) Supposetherearefixedcostsandmarginalcoststhatareconstant.Thenweknowthat
A) averagetotalcostsarealsoconstant.
B) averagevariablecostsdecreasecontinuouslyasoutputincreases,andlieabovethe
marginalcostcurve.
C) averagetotalcostsdecreasecontinuouslyasoutputincreases,andlieabovetheaverage
variablecostcurve,whichalsoisdecreasingcontinuously.
D) averagetotalcostsdecreasecontinuouslyasoutputincreases,andlieabovetheaverage
variablecostcurve,whichisconstant.
Answer: D
Diff:3
61) Themarginalcostcurveintersects
A) theaveragefixedcostcurveatitsminimum.
B) theaveragetotalcostcurveatitsmaximum.
C) theminimumoftheaveragefixedcost,averagevariablecostandtheaveragetotalcost
curves.
D) theminimumoftheaveragevariablecostandaveragetotalcostcurves.
Answer: D
Diff:1
62) Whichofthefollowingwouldbeanexampleofafixedcosttoafirm?
A) rentforthebuildingitoccupies B) wagesforthelaborers
C) thecostofrawmaterials D) electricityandotherfuelcosts
Answer: A
Diff:2
63) Whichequationisusedbyamanagerwhenconsideringtotalcost?
A) totalcosts(TC)=consumption(C)+ investment(I)+ government(G)
B) totalcosts(TC)=averagefixedcosts(AFC)+ numberofworkers
C) totalcosts(TC)=averagetotalcosts(ATC)
D) totalcosts(TC)=totalfixedcosts(TFC)+ totalvariablecosts(TVC)
Answer: D
Diff:1
64) Usetheabovefigure.TheTFCatoutputlevel10is
A) $10. B) $3. C) $2. D) $1.
Answer: A
Diff:2
65) Usetheabovefigure.TheAFCatoutputlevel20is
A) $10.00. B) $0.50. C) $3.00. D) $1.00.
Answer: B
Diff:2
66) Usetheabovefigure.TheATCatoutput10is
A) $30.00. B) $2.67. C) $2.00. D) $3.00.
Answer: D
Diff:2
67) Usetheabovefigure.TheAVCatoutput10is
A) $20.00. B) $1.00. C) $2.00. D) $3.00.
Answer: C
Diff:2
68) Usetheabovefigure.TheATCatoutput5is
A) $25.00. B) $2.00. C) $3.00. D) $5.00.
Answer: D
Diff:2
69) Usetheabovefigure.TheAVCatoutput5is
A) $35.00. B) $2.00. C) $3.00. D) $5.00.
Answer: C
Diff:2
70) Noticethecostsofproductionforafirminthetablebelow.Whatarethetotalcostsforoutputs
of7unitsand8unitsrespectively?
TotalOutput TotalFixedCosts TotalVariableCosts

(Q/day) (TFC) (TVC)
0 $10 $0
1 $10 $3.50
2 $10 $4.75
3 $10 $5.80
4 $10 $6.40
5 $10 $7.25
6 $10 $8.32
7 $10 $9.33
8 $10 $10.12
A) $20.12;$19.33 B) $17.25;$18.32 C) $19.33;$20.12 D) $9.33;$10.12

Answer: C
Diff:1
71) Noticethecostsasgiveninthetablebelow.Whatisthemarginalcostwhentotalcostis$23?
TotalOutput TotalCosts
0 $10
1 $15
2 $18
3 $20
4 $21
5 $23
A) $5 B) $3 C) $2 D) $1
Answer: C
Diff:1
72) Noticethecostsasgiveninthetablebelow.Whatisthetotalfixedcostinthetablebelow?
0 $10
1 $15
2 $18
3 $20
4 $21
5 $23
A) $5 B) $0 C) $10 D) $9
Answer: C
Diff:1
73) Marginalcostsaredefinedas
A) thechangeintotalcostsduetoaone-unitchangeinproduction.
B) coststhatareviewedasmarginal;oflittleorsmallimportance.
C) coststhatrepresentachange,butonethatcannotbemeasuredcorrectly.
D) thechangeinthedecisionsthataremadebyhouseholdsandfirms.
Answer: A
Diff:1
74) Intheshortrun,totalcostsequal
A) thesumoftotalfixedcostsandtotalvariablecosts.
B) thesumoftotalfixedcostsandtotalexplicitcosts.
C) thesumoftotalvariablecostsandtotalimplicitcosts.
D) thesumoftotalfixedcostsandtotalimplicitcosts.
Answer: A
Diff:1
75) Summingallofthecoststhatdonotchangeasoutputvariesyields
A) variablecosts. B) fixedcosts. C) implicitcosts. D) explicitcosts.
Answer: B
Diff:1
76) Aslongasoutputincreases,
A) averagetotalcostsdecrease. B) averagevariablecostsdecrease.
C) averagefixedcostsdecrease. D) marginalcostsdecrease.
Answer: C
Diff:2
A) AFC=TC/Q-TVC/Q B) AVC= TVC- AFC
C) TC=AVCQ D) MC= TC- TVC
Answer: A
Diff:1
0 $10
1 18
2 21
3 23
4 24
5 26
6 29
7 33
8 38
9 44
10 51
78) Usingtheabovetable,weseethatwhenoutputis4units,averagetotalcostequals
A) $24.00. B) $14.00. C) $3.50. D) $6.00.
Answer: D
Diff:2
79) Usingtheabovetable,weseethatwhenoutputis4units,averagevariablecostequals
A) $24.00. B) $14.00. C) $3.50. D) $6.00.
Answer: C
Diff:2
80) Intheabovetable,totalfixedcostsare
A) $10.00. B) $5.00. C) $8.00. D) $18.00.
Answer: A
Diff:2
81) Intheabovetable,whenoutputis8units,averagevariablecostsare
A) $4.75. B) $3.50. C) $1.25. D) $4.50.
Answer: B
Diff:3
82) Intheabovetable,whenoutputis8units,averagetotalcostsare
A) $4.75. B) $3.50. C) $38. D) $28.
Answer: A
Diff:3
83) Intheabovetable,themarginalcostoftheninthunitis
A) $4.00. B) $5.00. C) $6.00. D) $7.00.
Answer: C
Diff:2
84) Intheabovetable,themarginalcostofthefourthunitis
A) $1.00. B) $2.00. C) $6.00. D) $24.00.
Answer: A
Diff:2
85) Intheabovetable,themarginalcostoftheseventhunitis
A) $4.00. B) $5.00. C) $3.00. D) $33.00.
Answer: A
Diff:2
86) Marginalcostisequaltoaveragevariablecost
A) whenaveragevariablecostisatitsminimumvalue.
B) whenmarginalcostisatitsminimumvalue.
C) whenaveragevariablecostisgettingsmaller.
D) whenaveragevariablecostisgettinglarger.
Answer: A
Diff:2
87) Theratiooftotalcoststothequantityproducedisreferredtoas
A) averagefixedcosts. B) averagevariablecosts.
C) marginalcosts. D) averagetotalcosts.
Answer: D
Diff:1
88) Asafirmcontinuestoproduceadditionaloutput,whichofthefollowingwillcontinueto
declineasoutputexpands?
A) averagetotalcosts B) marginalcosts
C) averagefixedcosts D) opportunitycosts
Answer: C
Diff:2
89) Theadditiontototalcostsassociatedwiththeproductionofonemoreunitofoutputisreferred
toas
A) averagecost. B) marginalcost.
C) opportunitycost. D) overheadcost.
Answer: B
Diff:2
90) Themarginalcostcurvealwaysintersectstheaveragetotalcostcurveatthepointatwhichthe
averagetotalcostcurve
A) iszero. B) isatitsminimum.
C) isatitsmaximum. D) hasaverticalslope.
Answer: B
Diff:3
91) WhichofthefollowingisNOTcorrect?
A) MC=changeinTC/changeinQ B) ATC= TC/Q
C) AVC=TVC/Q D) ATC+ AVC=AFC
Answer: D
Diff:2
92) Totalfixedcostis
A) thecostofbuyingandinstallingnewmachinery.
B) thecostthatdoesnotchangeasoutputchanges.
C) theexpenditureonimportedrawmaterials.
D) thewagespaidtoconsultants.
Answer: B
Diff:1
93) Whichofthefollowingwouldbeanexampleofafixedcost?
A) theelectricandgasbills
B) wagespaidtotemporaryworkers
C) propertyinsurancepremiums
D) expendituresonimportedrawmaterials
Answer: C
Diff:1
94) Theaveragefixedcostcurve
A) isparalleltothex-axis.
B) isthedistancebetweentheTCandTVCcurves.
C) slopesdownwardasoutputincreases.
D) increasesasthecostofinputsrise.
Answer: C
Diff:1
Q(output) TFC TVC TC AFC AVC ATC MC

0 $0 - - - -
1 $10
2 $5 $15
3 $15
4 $16.75
95) Usingtheabovetable,theAFC,theAVC,andtheATCwhenoutputis1unitare
A) $10,$10,and$20,respectively. B) $5,$10,and$15,respectively.
C) $0,$10,and$10,respectively. D) $5,$10,and$5,respectively.
Answer: B
Diff:3
96) Usingtheabovetable,theTC,theAFC,andtheTVCwhenoutputis2unitsare
A) $20,$2.50,and$15,respectively. B) $35,$2.50,and$30,respectively.
C) $30,$2.50,and$40,respectively. D) $35,$2.50,and$20,respectively.
Answer: B
Diff:3
97) Usingtheabovetable,theTVC,theTC,andMCwhenoutputis3unitsare
A) $45,$50,and$15,respectively. B) $15,$20,and$15,respectively.
C) $45,$18,and$15,respectively. D) $15,$45,and$15,respectively.
Answer: A
Diff:2
98) Usingtheabovetable,theTVC,theTC,andtheMCwhenoutputis4unitsare
A) $67,$72,and$22,respectively. B) $16.75,$21.75,and$22,respectively.
C) $16.75,$21.75,and$30,respectively. D) $67,$62,and$22,respectively.
Answer: A
Diff:3
99) ThedistancebetweentheTCandtheTVCcurve
A) isconstant. B) decreasesasoutputincreases.
C) increasesasoutputincreases. D) istheMCcurve.
Answer: A
Diff:2
100) MC=AVCandMC=ATCatpointsatwhich
A) theAVCandATCcurvesareattheirrespectivemaximums.
B) theAVCandATCcurvesareattheirrespectiveminimums.
C) thedistancebetweentheATCandAVCcurvesisatitsminimum.
D) thedistancebetweentheATCandAVCcurvesisatitsmaximum.
Answer: B
Diff:3
101) AtanoutputatwhichMCisgreaterthanATC
A) theATCcurveisdownwardsloping. B) theATCcurveisupwardsloping.
C) theAFCcurveisupwardsloping. D) theAVCcurveisdownwardsloping.
Answer: B
Diff:3
102) AtanoutputatwhichATCisgreaterthanMC,
A) theATCcurveisdownwardsloping. B) theATCcurveisupwardsloping.
C) theAFCcurveisupwardsloping. D) theAVCcurveisupwardsloping.
Answer: A
Diff:2
103) Afirmhasaveragefixedcostsof$0.20andaveragevariablecostsof$2.50atanoutputof500
units.Thefirmstotalcostsaretherefore
A) $1,250. B) $1,350. C) $1,150. D) $1,500.
Answer: B
Diff:2
Fixed Variable Total Average Average Marginal

Output Costs Costs Costs TotalCosts VariableCostsCosts
0 $0 $100
1 30
2 50
3 60
4 120
5 200
104) Intheabovetable,whatarethetotalfixedcostsforanoutputof4?
A) $0 B) $120 C) $100 D) $220
Answer: C
Diff:3
105) Intheabovetable,whatisthemarginalcosttoproducethe5thunitofoutput?
A) $80 B) $60 C) $55 D) $20
Answer: A
Diff:2
106) Intheabovetable,whatisthemarginalcosttoproducethe4thunitofoutput?
A) $30 B) $60 C) $55 D) $20
Answer: B
Diff:2
107) Intheabovetable,whatisthemarginalcosttoproducethe2ndunitofoutput?
A) $30 B) $60 C) $55 D) $20
Answer: D
Diff:2
108) Intheabovetable,whatistheaveragevariablecosttoproduce4unitsofoutput?
A) $30 B) $60 C) $55 D) $20
Answer: A
Diff:2
A) $30 B) $60 C) $10 D) $20
Answer: D
Diff:2
A) $30 B) $60 C) $55 D) $20
Answer: A
Diff:2
111) Intheabovetable,whatistheaveragetotalcosttoproduce4unitsofoutput?
A) $30 B) $60 C) $55 D) $20
Answer: C
Diff:2
A) $80 B) $55 C) $40 D) $60
Answer: D
Diff:2
A) $33.33 B) $53.33 C) $55 D) $20
Answer: B
Diff:2
114) Whichofthefollowingstatementsregardingtherelationshipbetweenaverageandmarginal
costsisINCORRECT?
A) Thereisalwaysadefiniterelationshipbetweenaverageandmarginalcost.
B) Whenmarginalcostsarelessthanaveragecosts,thelattermustfall.
C) Whenmarginalcostsaregreaterthanaveragecosts,thelattermustrise.
D) Thereisnowayforaveragevariablecoststofallwhenmarginalcostsarefalling.
Answer: D
Diff:3
115) Assumethatintheshortrunafirmisproducing100unitsofoutput,hasaveragetotalcostsof
$100,andaveragevariablecostsof$50.Thefirmstotalfixedcostsare
A) $50. B) $5,000. C) $150. D) $15,000.
Answer: B
Diff:2
116) Assumethatintheshortrunafirmisproducing100unitsofoutput,hasaveragetotalcostsof
$100,andaveragefixedcostsof$20.Thefirmstotalvariablecostatthisoutputlevelis
A) $120. B) $80. C) $8,000. D) $12,000.
Answer: C
Diff:2
117) Usetheabovefigure.AtanoutputequaltoQthetotalcostforthefirmwillbethearea
A) OQDC. B) OQFA. C) OQBC. D) OQEB.
Answer: A
Diff:3
118) Usetheabovefigure.AtanoutputequaltoQtheaveragefixedcostforthefirmwillbethe
linesegment
A) DE. B) AB. C) BE. D) CD.
Answer: A
Diff:3
119) Usetheabovefigure.AtanoutputequaltoQthetotalvariablecostforthefirmwillbethe
area
A) OQAB. B) OQEB. C) OQFA. D) OQDC.
Answer: B
Diff:3
120) Inthetablebelow,whatarethemarginalcostsofthefourthunitofoutput?
Total Total
Output VariableCost
0 $0
1 $10,000
2 $20,000
3 $30,000
4 $40,000
A) $10,000 B) $20,000 C) $30,000 D) $40,000

Answer: A
Diff:2
A) TheMCcurveintersectsAFCatitsminimumpoint.
B) IfMCisbelowAVC,AVCmustbeincreasing.
C) IfMCisaboveATC,ATCmustbeincreasing.
D) Noneoftheabove.
Answer: C
Diff:2
122) Ifaveragetotalcostisdecreasingasmoreandmoreunitsareproduced,thenmarginalcostmust
be
A) rising. B) constant.
C) belowaveragetotalcost. D) negative.
Answer: C
Diff:1
123) Whatisthedifferencebetweenaveragevariablecostsandaveragetotalcosts?
Answer: Averagetotalcostsequalaveragevariablecostsplusaveragefixedcosts.Totalfixedcosts
areconstantanddonotvarywithoutput,soaveragefixedcostsfallasoutputincreases.
Forthisreason,asoutputincreasesaveragevariableandaveragetotalcostsgetcloser
together.
Diff:2
124) Whataretherelationshipsbetweenthemarginalcostcurveandtheaveragecostcurves?
Explaininwords.
Answer: Whenthemarginalcostcurveisbeloweachoftheaveragevariablecostandaveragetotal
costcurves,thelatterfall.Themarginalcostcurveintersectsthetwoaveragecostcurves
attheminimumpointsofthoseaveragecostcurves.Whenthemarginalcostcurveis
abovetheaveragecostcurves,thelatterrise.
Diff:2
125) AllaveragecostshaveaU-shapedcurve.Doyouagreeordisagree?Explainwhy?
Answer: Disagree.Itistruethattheaveragevariablecostcurveandaveragetotalcostcurveare
U-shaped,buttheaveragefixedcostcurveiscontinuouslydownwardsloping.Because
fixedcostsdonotvary,anincreaseinoutputonlyreducesaveragefixedcosts.
Diff:2
22.5TheRelationshipBetweenDiminishingMarginalProductandCostCurves
1) Marginalcostbeginstorisewhen
A) diminishingmarginalproductbegins. B) diminishingmarginalproductends.
C) averagetotalcostfalls. D) fixedcostfalls.
Answer: A
Diff:2
Topic: 22.5TheRelationshipBetweenDiminishingMarginalProductandCostCurves
2) Attheoutputrateatwhichdiminishingmarginalproductbegins,afirmwillexperience
A) constantaveragetotalcosts. B) increasingaveragefixedcosts.
C) increasingmarginalcosts. D) decreasingaveragevariablecosts.
Answer: C
Diff:1
A) Averagevariablecostsalwaysexceedaveragetotalcosts.
B) Averagefixedcostsareconstant.
C) Averagevariablecostreachesitsminimumwhenaverageproductequalsitsmaximum.
D) Averagefixedcostsarealwayslessthanaveragevariablecosts.
Answer: C
Diff:2
4) Ifthemarginalproductofaninputisfalling,then
A) averagefixedcostisconstant. B) marginalcostisfalling.
C) averagetotalcostisconstant. D) marginalcostisrising.
Answer: D
Diff:2
5) Whenmarginalproductisrising,
A) totalproductisfalling. B) marginalcostisfalling.
C) marginalcostisrising. D) averagefixedcostisrising.
Answer: B
Diff:2
6) Theshapeoftheshort-runaveragetotalcostcurveisaresultof
A) economiesofscale.
B) diseconomiesofscale.
C) thelawofdiminishingmarginalproduct.
D) fallingprofits.
Answer: C
Diff:2
7) Asafirmsproductionincreasesintheshortrun,theaveragetotalcostcurveeventuallyslopes
upwardbecause
A) marginalphysicalproducteventuallydeclinesasoutputincreases.
B) marginalcosteventuallydeclinesasoutputincreases.
C) averagefixedcostdeclineswithincreasesinoutput.
D) averagephysicalproductriseswithincreasesinoutput.
Answer: A
Diff:1
8) ThelawofdiminishingmarginalproductisNOTresponsiblefortheshapeof
A) thetotalcostcurve. B) theaveragevariablecostcurve.
C) totalfixedcostcurve. D) marginalcostcurve.
Answer: C
Diff:2
9) Whenthemarginalphysicalproductisrising,
A) totalcostisfalling. B) averagetotalcostisincreasing.
C) marginalcostisfalling. D) marginalcostisrising.
Answer: C
Diff:1
10) Whenthemarginalphysicalproductisfalling,
A) marginalcostisrising. B) averagefixedcostsarerising.
C) totalcostsarefalling. D) averagevariablecostsarefalling.
Answer: A
Diff:1
11) Whentheaveragephysicalproductisrising,
A) totalcostisfalling. B) averagetotalcostisincreasing.
C) averagevariablecostisfalling. D) marginalcostisalwaysrising.
Answer: C
Diff:1
12) Whentheaveragephysicalproductisfalling,
A) averagevariablecostsarerising. B) averagefixedcostsarerising.
C) totalcostsarefalling. D) averagevariablecostsarefalling.
Answer: A
Diff:1
13) Marginalcostswillbegintoriseatthepointwhere
A) fixedcostsincrease. B) variablecostsincrease.
C) averagevariablecostsincrease. D) diminishingmarginalproductbegins.
Answer: D
Diff:1

1 22 22 22
2 52 26 30
3 81 27 29
4 100 25 19
5 115 23 15
6 126 21 11
14) Refertotheabovetable.Atwhatquantityoflabordoesthemarginalcostcurvestartto
increase?
A) After1unit B) After2units C) After3units D) After6units
Answer: B
Diff:3
15) Refertotheabovetable.Atwhatquantityoflabordoestheaveragevariablecostcurvestartto
increase?
A) After1unit B) After2units C) After3units D) After6units
Answer: C
Diff:3
16) Marginalphysicalproductoflaborequals
A) thewage. B) thewagedividedbymarginalcost.
C) marginalcostdividedbythewage. D) marginalcosttimesthewage.
Answer: B
Diff:2
17) Short-runcostrelationshipsforafirmare
A) determinedbythelawofdiminishingmarginalproduct.
B) determinedbythespecificlong-runrelationshipsthatexist.
C) duetothelevelofwagesrelativetootherinputprices.
D) duetothenormalcontractualrelationsinamarket.
Answer: A
Diff:2
18) Ifthemarginalproductcurveisintersectingtheaverageproductcurve,weknowthat
A) theaveragevariablecostcurveisintersectingtheaveragetotalcostcurve.
B) themarginalcostcurveisintersectingtheaveragefixedcostcurve.
C) theaveragetotalcostcurveliesabovethemarginalcostcurve.
D) themarginalcostcurveisintersectingtheaveragetotalcostcurve.
Answer: D
Diff:3
19) Whenmarginalcostsarerising,
A) marginalphysicalproductisalsorising. B) marginalphysicalproductisfalling.
C) averagephysicalproductisrising. D) averagephysicalproductisfalling.
Answer: B
Diff:2
20) Whenaveragevariablecostsarerising,
A) marginalphysicalproductisalsorising. B) marginalcostsisfalling.
C) averagephysicalproductisrising. D) averagephysicalproductisfalling.
Answer: D
Diff:2
21) Whathappenstothemarginalcostcurvewhenthemarginalphysicalproductoflaborisrising?
A) Itbecomesupwardsloping. B) Itbecomesvertical.
C) Itbecomesdownwardsloping. D) Itbecomeshorizontal.
Answer: C
Diff:2
22) ThetypicalcostcurvesareU-shapedduetothe
A) lawofdiminishingmarginalutility. B) lawofsupply.
C) lawofdemand. D) lawofdiminishingmarginalproduct.
Answer: D
Diff:2
23) Ifthepriceoflaborisconstantandafirmexperiencesdiminishingmarginalproduct,thenits
A) marginalcostsincrease. B) marginalcostsdecrease.
C) fixedcostsincrease. D) totalcostsdecrease.
Answer: A
Diff:2
24) Ifthepriceoflaborisconstantandafirmexperiencesdiminishingmarginalproduct,thenits
A) marginalcostsdecrease. B) fixedcostsincrease.
C) averagevariablecostincreases. D) totalcostsdecrease.
Answer: C
Diff:2
25) Whatistherelationshipbetweenthemarginalcostcurveandmarginalproduct?Explain.
Answer: Theshort-runcostcurveisareflectionofthelawofdiminishingmarginalproduct.
Graphically,themarginalcostcurvelooksliketheinverseofmarginalphysicalproduct
ofavariableinput.Aslongasmarginalproductrises,marginalcostsdecline.Atthe
pointatwhichmarginalproductbeginstodecline,marginalcostsbegintorise.
Diff:1
26) Whatisthemostimportantdeterminantofthefirmsshort-runcostcurves?
Answer: Theshort-runcostcurvesowetheirshapestothelawofdiminishingmarginalproduct.
Givenaconstantpriceofavariableinput,marginalcostswillriseasmarginalproduct
diminishes.Similarly,giventherelationshipthatexistsbetweenmarginalcostand
averagetotalandaveragevariablecosts,wecanalsosaythelawofdiminishingmarginal
productdeterminestheirshapes.
Diff:3
27) Whatistherelationshipbetweenmarginalcostandmarginalphysicalproduct?
Answer: Assuminglaboristheonlyvariableinputandthewagerateisfixed,marginalcostthen
equalsthewageratedividedbymarginalphysicalproduct.Thus,marginalcost
increasesasmarginalphysicalproductdecreases,andviceversa.
Diff:2
22.6Long-RunCostCurves
1) Ineconomics,theplanninghorizonisdefinedas
A) 10yearsforeveryfirm.
B) thelongesttimeperiodoverwhichthefirmcanmakedecisions.
C) theperiodoftimeforwhichtechnologyisfixed.
D) thelongrun,duringwhichallinputsarevariable.
Answer: D
Diff:1
Topic: 22.6Long-RunCostCurves
2) Theminimumpossibleshort-runaveragecostsareequaltolong-runaveragecostswhen
A) theplantisproducingatitsshort-runminimumpoint.
B) short-runandlong-runcostsaredeclining.
C) thelong-runcurveisataminimumpoint.
D) productionisatanypointontheLACcurve.
Answer: C
Diff:1
3) Thelong-runaveragecostcurve
A) isalwaysadownwardslopingstraightline.
B) isacurvewhichistangenttoeachmemberofasetofshort-runaveragecostcurves.
C) isidenticaltothemarginalcostcurve.
D) shouldalwaysbehorizontal.
Answer: B
Diff:1
4) Afirmslong-runaveragecostcurveis
A) thelocusofpointsrepresentingtheminimumunitcostofproducinganygivenrateof
outputwhenallinputsmaybeadjusted.
B) thelocusofpointsmadeupoftheminimumpointoneachshort-runaveragetotalcost
curvewhenonlyoneinputmaybeadjusted.
C) theenvelopeofthefirmsvariablecostcurves.
D) identicaltothelowestshort-runaveragecostcurvethefirmhas.
Answer: A
Diff:2
5) Thelongrunis
A) overoneyear.
B) overfiveyears.
C) whenallfactorsofproductionarefixed.
D) thetimeperiodinwhichallfactorsofproductioncanbevaried.
Answer: D
Diff:1
6) WhichofthefollowingisTRUEforafirminthelongrun?
A) Variablecostswillinitiallyincreaseandthendecrease.
B) Thelawofdiminishingmarginalproductholds.
C) Allcostsarevariablecosts.
D) Variablecostswillequalmarginalcostatalloutputlevels.
Answer: C
Diff:1
7) Theplanninghorizonisthe
A) longrun.
B) shortrun.
C) pointwhereproductionbegins.
D) pointwherediminishingmarginalproductstarts.
Answer: A
Diff:1
8) Whichofthefollowingstatementsistrueabouttheplanninghorizon?
A) Allinputsarefixed. B) Allinputsarevariable.
C) Therearefixedandvariableinputs. D) Costsdonotexist.
Answer: B
Diff:1
9) Everypointonthelong-runaveragecostcurveis
A) alsoaminimumpointonashort-runaveragecostcurve.
B) onashort-runaveragetotalcostcurve.
C) onashort-runaveragevariablecostcurve.
D) onashort-runmarginalcostcurve.
Answer: B
Diff:2
10) Thelocusofpointsrepresentingtheminimumunitcostofproducinganygivenrateofoutputis
the
A) short-runaveragetotalcostcurve. B) long-runmarginalcostcurve.
C) short-runtotalcostcurve. D) long-runaveragecostcurve.
Answer: D
Diff:2
11) Thelongrunforabusinessisaperiodoftime
A) longerthanayear.
B) whenmostinputsarevariable.
C) whenallinputscanchange.
D) whenlaboristheonlyinputusedbythebusiness.
Answer: C
Diff:1
12) Thelongrunisdefinedasatimeperiodduringwhichfulladjustmentcanbemadetoany
changeintheeconomicenvironment.Thusinthelongrun,allfactorsofproductionare
variable.Long-runcurvesaresometimescalledplanningcurves,andthelongrunissometimes
calledthe
A) foreseeablefuture. B) minimumefficienttimeperiod.
C) non-adjustmentperiod. D) planninghorizon.
Answer: D
Diff:1
13) WhichofthefollowingstatementswithrespecttothefigurebelowisINCORRECT?
A) Allthepossibleshort-runaveragecostcurvesthatcorrespondtothedifferentplantsizes
areshownasSAC1 -SAC8 .
B) IftheanticipatedpermanentrateofoutputperunittimeperiodisQ1 inpanel(a),the
optimalplantwouldcorrespondtoSAC1 .
C) IfthepermanentrateofoutputincreasestoQ2 inpanel(a),itwillbemoreprofitableto
haveaplantsizecorrespondingtoSAC3 .
D) Thelong-runaveragecostcurveLACinpanel(b)issometimescalledtheplanningcurve
representingthelocus(path)ofpoints.
Answer: C
Diff:2
14) Theplanningcurveisthe
A) long-runaveragecostcurve. B) productionfunction.
C) short-runmarginalcostcurve. D) short-runaveragecostcurve.
Answer: A
Diff:1
15) Explainhowthelong-runaveragecostcurveisconstructedgraphically.
Answer: Thelong-runaveragecostcurveisconstructedastheenvelopeto(acurvetangentto)all
thepossibleshort-runaveragecostcurvesthatcorrespondtodifferentplantsizes.
Diff:1
16) Howisthelong-runaveragecostcurvefound?Whatisitsimportancetothefirm?
Answer: Thelong-runaveragecostcurveisthelocusofpointsrepresentingtheminimumunit
costofproducinganygivenrateofoutput,giventhecurrenttechnologyandresource
prices.Itistheenvelopeofthevariousshort-runaveragecostcurves.Itissignificantin
thatitistheplanningcurveforthefirmindecidingwhethertoexpanditsproduction
facilitiesornot.
Diff:2
17) Thelong-runaveragecostcurveisderivedfromaddingallshort-runaveragecostcurves
together.Doyouagreeordisagree?Explain.
Answer: Disagree.Thelong-runaveragecostcurveisderivedasthecurvethatistangenttothe
short-runaveragecostcurvesratherthanaddingthemtogether.Thereasonforthe
tangentpointsisthatthefirmwilltrytochangeanyofitsinputswhenevertheyleadtoa
loweraveragecost.
Diff:2
22.7WhytheLong-RunAverageCostCurveIsU-Shaped
1) WhichofthefollowingisNOToneofthereasonsafirmmightbeexpectedtoexperience
economiesofscale?
A) specialization B) thedimensionalfactor
C) improvedproductiveequipment D) depreciation
Answer: D
Diff:2
Topic: 22.7WhytheLong-RunAverageCostCurveIsU-Shaped
2) Duetoextremelylargefixedcosts,anelectricitygeneratingplantprobablyexperienceswhichof
thefollowingreturnstosize?
A) diseconomiesofscale B) diminishingmarginalproduct
C) constantreturnstoscale D) economiesofscale
Answer: D
Diff:2
3) Ifafirmgetssolargethatmanagementofemployeesandotherresourcesbecomesacostly
problem,itwillbeexperiencing
A) diseconomiesofscale. B) diminishingmarginalproduct.
C) constantreturnstoscale. D) economiesofscale.
Answer: A
Diff:2
4) Supposeafirmdoublesitsoutputinthelongrun.Atthesametimetheunitcostofproduction
remainsunchanged.Wecanconcludethatthefirmis
A) exploitingtheeconomiesofscaleavailabletoit.
B) facingconstantreturnstoscale.
C) facingdiseconomiesofscale.
D) notusingtheavailabletechnologyefficiently.
Answer: B
Diff:1
5) Intheabovefigure,thelong-runcostcurvebetweenpointsAandBillustrates
Answer: D
Diff:1
6) Intheabovefigure,thelong-runcostcurvebetweenpointsCandDillustrates
Answer: C
Diff:1
7) Intheabovefigure,thelong-runcostcurvebetweenpointsEandFillustrates
Answer: A
Diff:1
8) Economiesofscaleoccurwhenthereare
A) decreasesinlong-runaveragecostsresultingfromincreasesinoutput.
B) nochangesinlong-runaveragecostswhenoutputincreases.
C) increasesinlong-runaveragecostswhenoutputincreases.
D) decreasesinoutputresultingfromdecreasesininput.
Answer: A
Diff:1
9) Intheabovefigure,foranyoutputlevellessthanQ 2 ,thisfirmexperiences
A) economiesofscale. B) diseconomiesofscale.
C) constanteconomiesofscale. D) decreasinglongrunaveragecosts.
Answer: A
Diff:1
10) Intheabovefigure,thefirmexperiencesconstantreturnstoscalebetweenoutputlevelsof
A) zeroandQ1 . B) Q2 andQ3 .
C) Q3 andQ4 . D) anylevelgreaterthanQ 4 .
Answer: B
Diff:1
11) Economiesofscaleexistwherethelong-runaveragecostcurveis
A) horizontal. B) downwardsloping.
C) upwardsloping. D) tangenttothemarginalcostcurve.
Answer: B
Diff:1
12) Thetypicalshapeofthelong-runaveragecostcurveislike
A) theletterC. B) theletterU.
C) aninverseoftheletterV. D) acircle.
Answer: B
Diff:1
13) Diseconomiesofscaleoccur
A) onlyintheshortrun. B) onlyinthelongrun.
C) becauseoffixedcosts. D) noneoftheabove.
Answer: B
Diff:2
14) Ahorizontallong-runaveragecostcurveindicates
A) constantreturnstoscale. B) diseconomiesofscale.
C) constantmarginalphysicalproduct. D) economiesofscale.
Answer: A
Diff:1
15) Whenincreasingitsoutputresultsinfallingcosts,afirmthatcanadjustallinputsis
experiencing
A) diseconomiesofscale. B) economiesofscale.
C) loss. D) capitalgains.
Answer: B
Diff:1
16) WhichofthefollowingisNOTareasonafirmmightexperienceeconomiesofscale?
A) Specialization B) Dimensionalfactors
C) Increasinglong-runaveragecosts D) Moreproductiveequipment
Answer: C
Diff:1
17) Whichofthefollowingphysicalrelationshipsmightgenerateeconomiesofscale?
A) Proportionallylargerpipescantransportmorethanaproportionalincreaseinoil.
B) Largerequipmenttendstoweighmoreandusemorefuelonaper-unit-of-outputbasis.
C) Eachlifttruckrequiresonelifttruckdriver.
D) Adoublingofallinputsleadstoadoublingofoutput.
Answer: A
Diff:2
18) Ifafirmisexperiencingdiseconomiesofscale,then
A) proportionalincreasesinallinputsresultinproportionalincreasesinoutput.
B) thelong-runaveragecostcurveisrisingasoutputexpands.
C) thelong-runaveragecostcurveisdecreasingasoutputexpands.
D) thefirmshouldexpandthesizeofitsoperation.
Answer: B
Diff:1
19) Thelawofdiminishingmarginalproductisresponsiblefor
A) economiesofscale. B) constantreturnstoscale.
C) diseconomiesofscale. D) noneofthelong-runrelationships.
Answer: D
Diff:1
20) Thelawofdiminishingmarginalproduct
A) holdsintheshortrunandthelongrunbecauseasyouincreasetheamountofvariable
inputseventuallytheincreasesinoutputwilldecrease.
B) doesnotholdintheshortrunbecauseoffixedcosts.
C) doesnotholdinthelongrunbecausetherearenofixedinputsinthelongrun.
D) holdsintheshortandlongrunbecauseofeconomiestoscale.
Answer: C
Diff:1
21) Adecreaseinlong-runaveragecostsresultingfromincreasesinoutputis
A) attributedtoeconomiesofscale.
B) attributedtodiseconomiestoscale.
C) attributedtoconstantreturnstoscale.
D) attributedtothelawofdiminishingmarginalproduct.
Answer: A
Diff:1
22) Anincreaseinlong-runaveragecostsresultingfromdecreasesinoutputis
A) attributedtothelawofdiminishingmarginalproduct.
B) attributedtoconstantreturnstoscale.
C) attributedtoeconomiesofscale.
D) attributedtodiseconomiestoscale.
Answer: C
Diff:1
23) Anincreaseinlong-runaveragecostsresultingfromincreasesinoutputis
A) attributedtoeconomiesofscale.
B) attributedtodiseconomiestoscale.
C) attributedtoconstantreturnstoscale.
D) attributedtothelawofdiminishingmarginalproduct.
Answer: B
Diff:1
24) Adecreaseinlong-runaveragecostsresultingfromdecreasesinoutputis
A) attributedtoconstantreturnstoscale.
B) attributedtoeconomiesofscale.
C) attributedtothelawofdiminishingmarginalproduct.
D) attributedtodiseconomiestoscale.
Answer: D
Diff:1
25) Anincreaseinoutputwouldresultinnochangeinlong-runaveragecostswhenthereare
A) economiesofscale. B) diseconomiestoscale.
C) constantreturnstoscale. D) diminishingmarginalproduct.
Answer: C
Diff:1
26) Anincreaseinoutputwouldresultinariseinlong-runaveragecostswhenthereare
A) economiesofscale.
B) diseconomiestoscale.
C) constantreturnstoscale.
D) thelawofdiminishingmarginalproduct.
Answer: B
Diff:1
27) Constantreturnstoscaleareillustratedby
A) adownwardslopinglong-runaveragecostcurve.
B) ahorizontallong-runaveragecostcurve.
C) anupwardslopinglong-runaveragecostcurve.
D) along-runaveragecostcurvethatisshapedlikeanupsidedownU.
Answer: B
Diff:1
28) Economiestoscaleareillustratedby
Answer: A
Diff:1
29) Diseconomiestoscaleareillustratedby
Answer: C
Diff:1
30) Increasesinlong-runaveragecostthatresultfromoutputincreasesis
A) thelawofdiminishingmarginalproduct.
B) economiesofscale.
C) constantreturnstoscale.
D) diseconomiesofscale.
Answer: D
Diff:1
31) WhichofthefollowingisNOTareasonwhyafirmmayexperienceeconomiesofscale?
A) Productivespecialization B) Dimensionalfactors
C) Improvedproductiveequipment D) Increasedlevelsofmanagement
Answer: D
Diff:2
32) Themainsourceofdiseconomiesofscaleis
A) dimensionalfactorsassociatedwithmanyphysicalrelationships.
B) specializationoflabor.
C) limitstotheefficientfunctioningofmanagement.
D) constantreturnstoscale.
Answer: C
Diff:2
33) Refertotheabovefigure.Economiesofscaleexist
A) overtheentirerangeofoutput. B) fromoutputQ2 toQ5 .
C) uptooutputQ2 . D) afteroutputQ5 .
Answer: C
Diff:2
34) Refertotheabovefigure.Diseconomiesofscaleexist
A) overtheentirerangeofoutput. B) fromoutputQ2 toQ5 .
C) uptooutputQ2 . D) afteroutputQ5 .
Answer: D
Diff:2
35) Refertotheabovefigure.Constantreturnstoscaleexist
A) uptooutputQ2 .
B) fromQ2 toQ5 .
C) afterQ5 .
D) overtheentirelong-runaveragecostcurve.
Answer: B
Diff:2
36) Adecreaseinthelong-runaveragecostsresultingfromincreasingoutputisreferredtoas
A) diseconomiesofscale. B) constantreturntoscale.
C) ascaleinvariantprocess. D) economiesofscale.
Answer: D
Diff:1
37) Whenlong-runaveragecostsdeclineasoutputincreases,thefirmisexperiencing
A) negativereturnstoscale. B) diseconomiesofscale.
Answer: D
Diff:1
38) Whenlong-runaveragecostsriseasoutputincreases,thefirmisexperiencing
A) diseconomiesofscale. B) diminishingreturns.
Answer: A
Diff:1
39) AllofthefollowingarereasonsforeconomiesofscaleEXCEPT
A) diminishingmarginalproduct. B) specialization.
C) dimensionalfactors. D) improvedproductionequipment.
Answer: A
Diff:2
A) Ifafirmisexperiencingeconomiesofscale,diminishingmarginalproducthasnotsetin
yet.
B) Nofirmwouldeveroperateatalevelofoutputforwhichitexperiencesdiseconomiesof
scale.
C) Afirmcanexperiencediminishingmarginalproductandeconomiesofscaleatthesame
time.
D) Diseconomiesofscaleisashort-runconcept,whileeconomiesofscaleisalong-run
concept.
Answer: C
Diff:3
41) Whatfactorsgenerateeconomiesofscale?
Answer: Economiesofscalecanbegeneratedbyspecialization.Asafirmsscaleofoperations
increases,therearemoreopportunitiesforspecializationoflabor,andthisusuallyisvery
productive.Further,therearecertainphysicalrelationshipsthatgenerateeconomiesof
scale,suchasthatbetweenthevolumeofacylinderandthediameterofthecylinder.
Finally,large-scaleenterprisecantakeadvantageoflargervolumetypesofmachinery
whichlowerper-unitcosts.
Diff:2
42) Theshort-runaveragetotalcostcurveandthelong-runaveragecostcurvearebothU-shaped
forthesamereasons.Doyouagreeordisagree?Why?
Answer: Disagree.TheU-shapedshort-runaveragecostcurvesareduetothelawofdiminishing
marginalproduct,butinthelongruntherearenofixedinputssothelawofdiminishing
marginalproductdoesnotapply.Thelong-runaveragecostcurveisU-shapedif
economiesofscaleapplyatsmallerratesofoutputanddiseconomiesofscaleapplyat
largerratesofoutput.
Diff:2
43) Afirmcannotexperiencebotheconomiesofscaleanddiminishingmarginalproduct.Doyou
agreeordisagree?Why?
Answer: Disagree.Diminishingmarginalproductisashort -runconceptwhileeconomiesofscale
isalong-runconcept.Theformeroccurswhenoneinputisfixedandtheotherwhenall
inputsarevariable.So,thereisnoreasonwhyafirmcannotexperienceboth.
Diff:3
44) Whymightfirmsexperiencediseconomiesofscale?
Answer: Themainreasonforfirmstoexperiencediseconomiesofscaleisthattherearelimitsto
theefficientfunctioningofmanagement.Asafirmgetsbigger,thelayersofsupervision
grow,thecostsofinformationandcommunicationalsogrowmorethanproportionally
sothattheaveragecostincrease.
Diff:2
22.8MinimumEfficientScale
1) Intheabovefigure,pointBiscalled
A) themaximumefficientscale.
B) theminimumefficientscale.
C) theplanninghorizon.
D) thepointofdiminishingmarginalproduct.
Answer: B
Diff:1
Topic: 22.8MinimumEfficientScale
2) Asingle-plantfirmtryingtoselecttherateofoutputconsistentwithanoverallplantsizethat
yieldstheminimumefficientscalewillchoosearateofoutputforwhich
A) theshort-runmarginalcostcurvecrossestheshort-runaveragetotalcostcurveatthat
rateofoutput.
B) thelong-runmarginalcostcurvecrossesthelong-runaveragefixedcostcurveatthatrate
ofoutput.
C) long-runaveragetotalcostislowestatthatrateofoutput.
D) totalfixedcotsareminimizedatthatrateofoutput.
Answer: C
Diff:2
3) Whenafirmisatitsminimumefficientscaleofoperation,itproducesthe
A) maximumrateofoutputatwhichlong-runaveragecostisminimized.
B) minimumrateofoutputatwhichlong-runaveragecostisminimized.
C) maximumrateofoutputconsistentwithlowestlong-runmarginalcost.
D) minimumrateofoutputconsistentwithlowestlong-runmarginalcost.
Answer: B
Diff:1
4) Minimumefficientscaleisdefinedas
A) thelowestoutputlevelatwhichlong-runaveragecostsareattheirminimum.
B) theamountoflaborthatmaximizesthemarginalproductoflabor.
C) thepointatwhichmarginalcost,averagevariablecost,andaveragefixedcostareall
equal.
D) thepointatwhicheconomiesofscaleareattheirmaximum.
Answer: A
Diff:1
5) Ifthelong-runaveragecostcurvecontinuouslyslopesupwardasoutputrises,minimum
efficientscalewouldbe
A) zero.
B) atthemidpointofthelong-runaveragecostcurve.
C) attherateofoutputassociatedwiththesmallestsizedplantthefirmcanbuild.
D) nonexistent.
Answer: D
Diff:2
6) Refertotheabovefigure.Minimumefficientscaleisatoutputrate
A) Q1 . B) Q2 . C) Q3 . D) Q5 .
Answer: B
Diff:2
7) Minimumefficientscale
A) isthepointatwhicheconomiesofscalebeginforaparticularfirm.
B) isthelowestrateofoutputperunitoftimeatwhichlong-runaveragecostsreacha
minimumforaparticularfirm.
C) appliesonlytofirmswithU-shapedlong-runaveragecostcurves.
D) isthepointatwhichdiseconomiesofscalebeginforaparticularfirm.
Answer: B
Diff:1
8) Thelowestrateofoutputperunitoftimeatwhichlong-runaveragecostsforaparticularfirm
areataminimumis
A) economiesofscale. B) diseconomiesofscale.
C) constantreturnsofscale. D) minimumefficientscale.
Answer: D
Diff:1
9) Whentheminimumefficientscaleoccursatahighlevelofindustryoutput
A) thefirmsintheindustrywillbeproducinginthediseconomiesofscaleportionofthe
curve.
B) therewillonlybeafewfirmsintheindustry.
C) thegovernmentwillhavetotakeovertheproductionofthegoodsinceitwillbe
unprofitableforfirms.
D) therewillbealotoffirmsinthisindustry.
Answer: B
Diff:1
10) Thelowestrateofoutputperunitoftimeatwhichlong-runaveragecostsforafirmareata
minimumdefines
A) maximumefficientscale. B) minimumefficientscale.
C) allowableefficientscale. D) short-runefficientscale.
Answer: B
Diff:2
11) Theminimumefficientscaleinthefigurebelowshowsthat
A) pointAistheminimumefficientscale(MES)forthefirm.
B) pointBistheminimumefficientscale(MES)forthefirm.
C) thelong-runaveragecostcurve(LAC)reachesaminimumpointatB.
D) theminimumefficientscale(MES)illustratesmaximumaveragecosts.
Answer: A
Diff:2
12) Whatisminimumefficientscale?Whyisitimportant?
Answer: Minimumefficientscale(MES)isthelowestrateofoutputperunitoftimeatwhich
long-runaveragecostsforaparticularfirmareataminimum.IftheMESissmallrelative
toindustryoutput,firmswillberelativelysmallandnumerous.IftheMESislarge
relativetoindustryoutput,firmswillbelargeandfew.
Diff:2
13) Foranindustryinwhichaveragecostscontinuetodeclineasoutputrises,whatwouldyou
expecttheminimumefficientscaletobe?Explainyouranswer.
Answer: Whenaveragecostscontinuetodeclineasoutputrises,theindustryexperiences
economiesofscaleoveralloutputlevels.Thus,thelong-runaveragecostcurveonlyfalls
withincreasingoutput.Thismeansthattheminimumefficientscaledoesnotexist.
Diff:2
14) Ifanindustrysminimumefficientscaleisbetween2,000and4,000unitsofoutput,thenafirm
producing2,000unitsofoutputinthatindustryhasacost-savingadvantageoveranotherfirm
producing4,000unitsofoutputinthesameindustry.Doyouagreeordisagree?Explain.
Answer: Disagree.Iftheminimumefficientscaleisbetween2,000and4,000unitsofoutput,then
theaveragecostsarethesameforanyfirmproducingwithinthatoutputrange.This
meansthatthefirmproducing2,000unitsofoutputhasnocost-savingadvantageover
thefirmproducing4,000unitsofoutput.
Diff:2
Chapter23
PerfectCompetition
23.1CharacteristicsofaPerfectlyCompetitiveMarketStructure
1) WhichofthefollowingisNOTacharacteristicofaperfectlycompetitivemarket?
A) Theproductssoldbythefirmsinthemarketarehomogeneous.
B) Therearemanybuyersandsellersinthemarket.
C) Itisdifficultforafirmtoenterorleavethemarket.
D) Eachfirmisapricetaker.
Answer: C
Diff:1
Topic: 23.1CharacteristicsofaPerfectlyCompetitiveMarketStructure
2) Whichofthefollowingisacharacteristicofperfectcompetition?
A) Easyentryandexit B) Fewfirms
C) Differentiatedproducts D) Noneoftheabove
Answer: A
Diff:1
3) AllofthefollowingarecharacteristicsofperfectcompetitionEXCEPT
A) homogenousproducts. B) eachfirmisapricetaker.
C) productdifferentiation. D) alackofbarriers.
Answer: C
Diff:1
4) Perfectcompetitionischaracterizedby
A) manybuyersandsellers.
B) asmallnumberoffirms.
C) differentiatedproductsoffirmsintheindustry.
D) highbarrierstoentry.
Answer: A
Diff:1
Chapter23PerfectCompetition413
5) Theperfectlycompetitivefirmcannotinfluencethemarketpricebecause
A) ithasmarketpower.
B) itsproductionistoosmalltoaffectthemarket.
C) itisapricemaker.
D) itscostsaretoohigh.
Answer: B
Diff:1
6) WhichofthefollowingisNOTacharacteristicofaperfectlycompetitiveindustry?
A) Thereisfreeentryandexitinthelongrun.
B) Theindustrydemandcurveisdownwardsloping.
C) Eachfirmproducesthesamehomogeneousproduct.
D) Economicprofitsmustbepositiveintheshortrun.
Answer: D
Diff:1
7) Beingapricetakeressentiallymeans
A) afirmcaninfluencethemarketprice.
B) afirmcannotinfluencethemarketprice.
C) thefirmcannotlegallysetitspriceabovethemarketprice.
D) thefirmcannotlegallysetitspricebelowthemarketprice.
Answer: B
Diff:2
8) Inaperfectlycompetitiveindustry
A) eachfirmisapricemaker.
B) nobuyerorsellercaninfluencethemarketprice.
C) thereisapttobeashortageofsellersofoutput.
D) firmscannevermakeaneconomicprofit.
Answer: B
Diff:1
9) Eachfirminaperfectlycompetitiveindustryis
A) producingauniqueproduct. B) relativelylarge.
C) apricetaker. D) apricesetter.
Answer: C
Diff:1
10) Allfirmsinaperfectcompetitionindustry
A) arepricemakers. B) producedifferentiatedproducts.
C) produceidenticalproducts. D) losemoney.
Answer: C
Diff:2
11) WhichofthefollowingisNOTacharacteristicofaperfectlycompetitiveindustry?
A) Therearelargenumbersofbuyersandsellers.
B) Thefirmsintheindustryproduceahomogeneousproduct.
C) Sellershavebetterinformationabouttheproductthanconsumers.
D) Anyfirmcanenterorleavetheindustrywithoutseriousimpediments.
Answer: C
Diff:2
12) Amarketstructureinwhichthedecisionsofindividualbuyersandsellershavenoeffecton
marketpriceis
A) perfectcompetition. B) ashort-runindustry.
C) along-runindustry. D) amarketsupplyindustry.
Answer: A
Diff:1
13) Amarketstructureinwhichthedecisionsofindividualbuyersandsellershavenoeffecton
marketpriceis
A) monopoly. B) monopolisticcompetition.
C) perfectcompetition. D) oligopoly.
Answer: C
Diff:1
14) Afirminaperfectlycompetitiveindustryisa
A) pricetaker. B) quantitytaker. C) qualitymaker. D) pricemaker.
Answer: A
Diff:1
15) Underperfectcompetition,afirmthatsetsitspriceslightlyabovethemarketpricewould
A) makelowerprofitsthantheotherfirms,buttheamountwoulddependontheelasticityof
demand.
B) makeanormalrateofreturn,butonreducedrevenues.
C) loseallofitscustomers.
D) earnhigherprofitsaslongastheotherfirmscontinuedtochargethemarketprice.
Answer: C
Diff:2
16) Apricetakerisafirmthat
A) seekstomaximizerevenueratherthanprofit.
B) cannotinfluencethemarketprice.
C) searchesforthebestpriceandthentakesthehighestprofitspossible.
D) buysinputsforfirms.
Answer: B
Diff:1
17) WhichofthefollowingisNOTacharacteristicofperfectcompetition?
A) Therearelargenumbersofbuyersandsellers.
B) Thefirmsinanindustryproducegoodsthataredifferentfromeachother.
C) Anyfirmcaneasilyenterorleavetheindustry.
D) Bothbuyersandsellershaveequallygoodinformation.
Answer: B
Diff:2
18) Whenconsideringperfectcompetitiontheabsenceofentrybarriersimpliesthat
A) nofirmcanentertheindustry.
B) firmscanenterbutcannotgetoutoftheindustryeasily.
C) allfirmswillearneconomicprofit.
D) firmscanenterandleavetheindustrywithoutseriousimpediments.
Answer: D
Diff:2
19) Inaperfectlycompetitivemarket,whichofthefollowingisthemainfactorthataffects
consumersdecisionsonwhichfirmtopurchaseagoodfrom?
A) Quality B) Customerservice
C) Reputation D) Price
Answer: D
Diff:2
20) AllofthefollowingarecharacteristicsofaperfectlycompetitiveindustryEXCEPT
A) theproductsoldishomogeneous.
B) firmsintheindustryarepricetakers.
C) buyersandsellershaveequalaccesstoinformation.
D) therearealargenumberofbuyersandsellerswithonlyafewbeingabletoinfluencethe
marketprice.
Answer: D
Diff:1
21) Whentherearelargenumbersofbuyersandsellers,then
A) theproductssoldmustlookidentical.
B) firmswillmovelaborandcapitalinpursuitofprofit-makingopportunitiestowhatever
businessventuregivesthemthehighestreturnontheirinvestment.
C) noonebuyerorsellerhasanyinfluenceonprice.
D) consumersareabletofindoutaboutlowerpriceschargedbyotherfirms.
Answer: C
Diff:1
22) Whatdoesitmeanwhentheproductssoldbythefirmsinanindustryarehomogeneous?
A) Theproductsoldbyonefirmisaperfectsubstituteoftheproductsoldbyanotherfirmin
thesameindustry.
B) Firmsintheindustrycanproducethesameproductwithdifferentinputs.
C) Allfirmsintheindustryareidenticalinsize.
D) Theproductsoldbyonefirmisaperfectcomplementoftheproductsoldbyanotherfirm
inthesameindustry.
Answer: A
Diff:1
23) Inaperfectlycompetitivemarketstructurebothbuyersandsellershaveequalaccessto
information.Thisimplies
A) theproductssoldwillbealike.
Answer: D
Diff:1
24) Inaperfectlycompetitivemarketstructureanyfirmcanenterorleavetheindustrywithout
seriousimpediments.Thisimplies
A) theproductssoldwillbealike.
Answer: B
Diff:1
25) MalfeasanceatEnron,aHouston-basedenergyfirm,ledtooverstatementofrevenuesby
almost$92billion.AsEnroncloseditsoperations,U.S.energypricesremainedstable.Thismay
havebeenevidencethat
A) Enroncouldchargewhateverpriceitwantedtoforenergy.
B) therewaslackofanycompetition,soEnronwasthewinner.
C) thereisacompetitivemarketinenergydistributionintheUnitedStates.
D) theaccountingprofessionneedstoreviewitspoliciesquickly.
Answer: C
Diff:2
26) Clothingretailershavefacedgreatercompetitioninrecentyearsasmorefirmshaveenteredthe
clothingmarket.Someofthecompetitionhascomefromforeigncompetitors,butmuchofitis
domesticcompetition.Asaresultthereismuchcompetitioninmarketsformanytypesof
clothingand
A) individualbuyersandsellerscannotaffectthemarketprice becauseitisdeterminedby
themarketforcesofdemandandsupply.
B) therearenootherimplications.
C) firmshaveagreatdegreeofflexibilityinpricingtheirproducts becausetheseproductscan
besoldatahighprofitlevel.
D) therearerelativelyfewbuyersandsellersinthemarket,andoneindividualfirmcan
determinethemarketprice.
Answer: A
Diff:1
27) Yourlocalfarmerhasmanycompetitorsandexistsinamarketstructureknownasperfect
competition.Thismeansthatpriceisdeterminedoutsideoftheindividualfarmersabilityto
chargeapricehigherthanthegoingmarketforabushelofwheat,hencethefarmeris
A) apricemakerandcanthereforechargedifferentcustomersdifferentprices.
B) alwaysabletopriceproduceabovethecompetitionandearnalargerprofit.
C) neverabletodetermineanypriceshechargesforanything,suchassoybeans.
D) apricetakerandcannotaffectthemarketpriceofwheat.
Answer: D
Diff:1
28) Perfectcompetitionisamarketstructure
A) inwhichanyfirmwouldhaveseriousimpedimentstoentryorexit.
B) inwhichindividualbuyersandsellershavenoeffectonthemarketprice.
C) resultingfromindividualfirmssellinghighlydifferentiatedproducts.
D) wherethereissignificantregulationandmarketsarealwaysefficient.
Answer: B
Diff:1
29) Thefirminaperfectlycompetitiveindustryisa
A) pricetaker. B) pricemaker. C) priceseeker. D) pricedealer.
Answer: A
Diff:1
30) WhichofthefollowingstatementsabouttheperfectcompetitorisINCORRECT?
A) Theperfectlycompetitivefirmisalwaysapricetaker.
B) Theperfectcompetitorsellsahomogeneouscommodity.
C) Ifanindividualfirmraisesprice,itwilllosebusiness.
D) Theproductsmadebyaperfectlycompetitivefirmhavenoclosesubstitutes.
Answer: D
Diff:1
A) Therearemanybuyersandsellers.
B) Eachfirmdeterminesthemarketpriceofitsproduct.
C) Productsarehomogeneous.
D) Buyersandsellershaveequalaccesstoinformation.
Answer: B
Diff:1
A) differentiatedproducts B) largenumberofbuyersandsellers
C) pricetakingbyeachfirm D) easyentryandexitintothemarket
Answer: A
Diff:1
A) Firmsarepricetakers.
B) Allfirmssellidenticalproducts.
C) Therearesubstantialbarrierstoentryintotheindustry.
D) Therearemanybuyersandsellers.
Answer: C
Diff:1
34) AllofthefollowingarecharacteristicsofaperfectlycompetitivemarketEXCEPT
A) homogeneousproducts.
B) largenumberofbuyersandsellers.
C) buyersandsellerhaveequalaccesstoinformation.
D) highbarrierstoentryandexit.
Answer: D
Diff:2
35) Whichofthefollowingisclosesttoaperfectlycompetitivemarket?
A) thecomputersoftwaremarket B) themarketforhandmadeguitars
C) themarketforbroccoli D) themarketforathleticshoes
Answer: C
Diff:1
A) thepizzamarket B) themarketforbreakfastcereal
C) themarketforcorn D) themarketforautomobiles
Answer: C
Diff:1
A) thesodapopmarket B) themarketforbread
C) themarketforsugar D) themarketforfastfood
Answer: C
Diff:1
38) Aperfectlycompetitivemarkethas
A) highbarrierstoentryorexit.
B) homogeneousproducts.
C) todoalotofadvertisingtoattractbuyers.
D) fewfirms.
Answer: B
Diff:1
39) Whatisapricetaker?Discusstheassumptionsusedtoobtaintheperfectlycompetitivemodel.
Answer: Apricetaker,orperfectlycompetitivefirm,isafirmthatmusttakethemarketpriceofits
productasgivenbecauseitcannotinfluencethemarketprice.Themodelofperfect
competitionhasfourassumptions.Thereisalargenumberofbuyersandsellers,andno
onehasanyinfluenceonthemarketprice.Theproductishomogeneous,sotheoutputof
onefirmisaperfectsubstitutefortheoutputofanotherfirm.Buyersandsellershaveall
theinformationtheyrequiretodeterminethelowestpriceandbestproductiontechnique.
Finally,allfirmscaneasilyenterorleavetheindustry.
Diff:2
40) Whatarethemaincharacteristicsofaperfectlycompetitivemarket?
Answer: Inaperfectlycompetitivemarket,therearelargenumbersofbuyersandsellers;the
productssoldbythefirmsintheindustryarehomogeneous;bothbuyersandsellershave
equalaccesstoinformation;andanyfirmcanenterorleaveindustrywithoutserious
impediments.Asaresultofthesecharacteristics,allfirmsintheindustryarepricetakers.
Diff:2
41) Amarketissaidtobeperfectlycompetitivewhenconsumerscantellthatsomeproductsareof
betterqualitythanothers.Doyouagreeordisagree?Why?
Answer: Disagree.Amarketisperfectlycompetitivewhenfirmsproducehomogeneousproducts
andconsumerscannotdifferentiatethequalityoftheproductsproducedbydifferent
firms.
Diff:1
23.2TheDemandCurveofthePerfectCompetitor
1) Undertheperfectlycompetitivemarketstructure,thedemandcurveofanindividualfirmis
A) perfectlyinelastic. B) downwardsloping.
C) relativelyinelastic. D) perfectlyelastic.
Answer: D
Diff:2
Topic: 23.2TheDemandCurveofthePerfectCompetitor
2) Ifafirmisaperfectcompetitor,then
A) thedemandcurveforitsproductisperfectlyelastic.
B) itcanindependentlysetthepriceoftheproductitsellswithoutregardtowhatotherfirms
inthemarketaredoing.
C) itisimpossibleforthefirmtoearnshort-runeconomicprofits.
D) itsmarginalcostwillexceedmarginalrevenueattheoptimallevelofoutput.
Answer: A
Diff:1
3) Forafirminaperfectlycompetitiveindustry,thedemandcurveforitsownproductis
Answer: A
Diff:1
4) Forafirminaperfectlycompetitiveindustry,thedemandcurveforitsownproductis
A) downwardsloping.
B) vertical.
C) alwaysabovethemarginalrevenuecurve.
D) thesameasthemarginalrevenuecurve.
Answer: D
Diff:1
5) Inaperfectlycompetitiveindustry,theindustrydemandcurve
A) mustbehorizontal. B) mustbevertical.
C) isupwardsloping. D) isdownwardsloping.
Answer: D
Diff:1
6) Theperfectlycompetitivefirmfaces
A) adownwardslopingdemandcurve. B) ahorizontalsupplyfunction.
C) perfectlyelasticdemand. D) constantmarginalcosts.
Answer: C
Diff:1
7) Aperfectlyelasticdemandfunction
A) showsthataconsumeriswillingtopayanyamountfortheproduct.
B) ischaracteristicofanindividualfirmoperatinginaperfectlycompetitivemarket.
C) showsthattheindividualfirmcanincreasesalesbyloweringthepriceofoutput.
D) hasamarginalrevenuethatisalwaysdecreasing.
Answer: B
Diff:2
8) Thedemandcurveforaperfectlycompetitivefirmishorizontalbecause
A) consumersarewillingtopayanypricetoobtainitsproduct.
B) itsproductiondecisionscannotinfluencethemarketprice.
C) thefirmprofitsfromsettingitspricehigherthanthemarketprice.
D) itsproductiseasyforconsumerstodifferentiatefromthoseofotherfirms.
Answer: B
Diff:1
9) Thedemandcurveforaperfectlycompetitiveindustryis
A) downwardsloping.
B) horizontal.
C) vertical.
Answer: A
Diff:2
10) Thedemandcurveforaperfectlycompetitivefirmis
A) elasticatrelativelyhighpricesandinelasticatrelativelylowprices.
B) perfectlyelastic.
D) unitaryelastic.
Answer: B
Diff:2
11) Inthemodelofperfectcompetition,themarketdemandcurveisfoundby
A) amarketinganalysis.
B) takingthedemandcurveofarepresentativeconsumerandexpandingitbythenumber
ofconsumersofthegood.
C) horizontallysummingthedemandcurvesofindividualconsumers.
D) horizontallysummingthesupplycurvesofindividualfirms.
Answer: C
Diff:2
12) Thedemandcurvefortheproductofaperfectlycompetitivefirmsdemandcurveindicatesthat
ifthefirm
A) lowersitsprice,itcansellmore.
B) acceptsthemarket-setprice,thenumberofunitsthefirmcansellislimited.
C) raisesitsprice,saleswillfalltozero.
D) changesitsprice,thequantitydemandedwillchangeintheoppositedirection.
Answer: C
Diff:2
13) Whichofthefollowingstatementsisnot trueforaperfectlycompetitivefirm?

A) Afirmsdemandcurveishorizontal.
B) Thefirmcaninfluenceitsdemandcurvebyadvertisingitsproduct.
C) Thefirmsdemandcurveisperfectlyelastic.
D) Themarketdemandandsupplycurvesdeterminethemarketprice.
Answer: B
Diff:1
14) Aperfectlycompetitiveproducerfacesademandcurveforitsownproductthatis
A) downwardsloping. B) upwardsloping.
Answer: C
Diff:1
15) Whichofthefollowingstatementsiscorrectaboutthedemandcurveoftheperfectly
competitiveindustry?
A) Thedemandcurveoftheperfectlycompetitiveindustryishorizontalasarethedemand
curvesfacingtheindividualfirms.
B) Themarketdemandcurveofperfectcompetitionisverticalbecausetheindividual
consumersarebuyingahomogeneousproduct.
C) Themarketdemandcurveoftheperfectlycompetitiveindustryisdownwardsloping
whilethedemandcurvefacinganindividualfirmishorizontal.
D) Themarketdemandcurveoftheperfectlycompetitiveindustryisdownwardsloping,so
thedemandcurvesoftheindividualfirmsarealsodownwardsloping.
Answer: C
Diff:2
A) Thedemandcurveoftheperfectlycompetitiveindustryiselasticasarethedemand
curvesfacingtheindividualfirms.
B) Themarketdemandcurveofperfectcompetitionisinelasticbecausetheindividual
consumersarebuyingahomogeneousproduct.
C) Themarketdemandcurveoftheperfectlycompetitiveindustryisdownwardsloping
whilethedemandcurveofanindividualfirmishorizontalwithaheightequaltothe
productprice.
D) Themarketdemandcurveoftheperfectlycompetitiveindustryisdownwardsloping,so
thedemandcurvesoftheindividualfirmsarealsodownwardsloping.
Answer: C
Diff:2
17) Thedemandcurvefortheproductofaperfectlycompetitivefirmis
B) perfectlyinelastic.
C) elasticathighpricesandinelasticatlowprices.
D) identicaltotheelasticityofdemandonthemarketdemandcurve.
Answer: A
Diff:1
18) Refertotheabovefigure.Themarketsupplyanddemandcurvesinaperfectlycompetitive
marketintersectat$4.Whichofthegraphsrepresentthesituationforanindividualfirm?
Answer: C
Diff:2
19) Refertotheabovefigure.Whichofthegraphsrepresentthesituationforaperfectlycompetitive
industry?
Answer: A
Diff:2
20) Refertotheabovefigure.Thefigurerepresentsthemarketdemandandsupplycurvesfor
widgets.Whatstatementcanbemadeaboutthedemandcurveforanindividualfirminthis
market?
A) Anindividualfirmsdemandcurvewillbeasmallerversionofthemarketdemandcurve.
B) Anindividualfirmsdemandcurvewillbehorizontalat$5.
C) Anindividualfirmsdemandcurvewillbehorizontalatapricebelow$5.
D) Anindividualfirmsdemandcurvecannotbedeterminedfromthegraphabove.
Answer: B
Diff:1
21) Referringtothediagram,whichofthefollowingstatementsisINCORRECT?
A) Theequilibriummarketpriceis$5,atwhichtheindustrydemandandsupplycurves
intersect.
B) Iftheindividualfirmraisesitsprice,itwillcaptureallsalesinthemarket.
C) Theindividualfirmtakesasgiventhemarketpricealongtheperfectlyelasticdemand
curved.
D) Theindividualfirmfacesthegoingmarketpriceasdeterminedbytheindustry.
Answer: B
Diff:2
22) Thedemandcurvefacedbyaperfectlycompetitiveindustry
A) slopesupward. B) slopesdownward.
C) hasnoslope. D) isperfectlyinelastic.
Answer: B
Diff:2
23) Thedemandcurveforaperfectlycompetitiveindustryis
A) perfectlyelastic. B) downwardsloping.
C) perfectlyinelastic. D) unitelastic.
Answer: B
Diff:2
24) Thedemandcurvefortheproductofaperfectlycompetitivefirmis
C) perfectlyinelastic. D) perfectlyelastic.
Answer: D
Diff:1
25) Ifafirminaperfectlycompetitivemarketraisesitsprice,
A) itwillsellmoreproducts. B) itwillsellfewerproducts.
C) itssaleswillremainunchanged. D) itwillsellnothing.
Answer: D
Diff:1
26) Aperfectlycompetitivefirmfacesahorizontaldemandcurvebecauseitis
A) apricetaker. B) apricemaker.
C) alargefirminasmallindustry. D) oneoffewfirmsinthemarket.
Answer: A
Diff:2
27) Theperfectlycompetitivefirmsdemandcurvehas
A) anegativeslope. B) apositiveslope.
C) anundefinedslope. D) aslopeof0.
Answer: D
Diff:2
28) Demandcurvesslopedown,sothedemandcurvefacedbyaperfectlycompetitivefirmmust
alsobedownwardsloping.Doyouagreeordisagree?Why?
Answer: Marketdemandcurvesslopedown.However,thedemandcurvefacedbyaperfectly
competitivefirmishorizontalatthemarketprice.Thefirmsoutputissuchasmall
portionofindustryoutputsothatitcannotinfluencethemarketprice.Ifitsetstheprice
ofitsgood,whichisidenticaltootherfirmsproducts,itwillbeunabletosellanyofits
output.Ifitsetsitspricebelowthemarketprice,itwillnotmaximizeeconomicprofits.
Consequently,thefirmtakesthemarketpriceasgiven,anditreceivesthisper -unitprice
foranygivenquantityitproducesandsells.
Diff:3
29) Describeandexplainhowaperfectlycompetitivefirmsdemandcurveisfound.
Answer: Theinteractionofsupplyanddemandintheindustrydeterminestheprice.Thefirmisa
pricetaker,soittakesthepriceasagiven.Itcansellasmanyunitsasitwantsatthis
price.Hence,thedemandcurvefortheproductofaperfectlycompetitivefirmis
perfectlyelastic,orhorizontal,atthemarketprice.
Diff:1
30) Whyisthedemandcurvehorizontalforaperfectlycompetitivefirm?
Answer: Thedemandcurveforaperfectlycompetitivefirmishorizontaltoreflectthefactthatifit
raisesitsprice,itssaleswilldroptozero.Thefirmhasnocontroloverthemarketprice.
Diff:1
23.3HowMuchShouldthePerfectCompetitorProduce?
1) Forafirminaperfectlycompetitivemarket,averagerevenueequals
A) averagecost. B) thechangeintotalrevenue.
C) themarketprice. D) pricedividedbyquantity.
Answer: C
Diff:1
Topic: 23.3HowMuchShouldthePerfectCompetitorProduce?
2) Thetotalrevenueofaperfectlycompetitivefirmiscalculatedby
A) multiplyingaveragerevenuebyprice.
B) dividingpricebyquantity.
C) multiplyingpricebyquantity.
D) multiplyingquantitybyaveragetotalcost.
Answer: C
Diff:1
3) Economistsgenerallyassumethatfirmsattempttomaximize
A) totalrevenue. B) sales.
C) marginalrevenue. D) totaleconomicprofits.
Answer: D
Diff:1
4) Intheabovefigure,themarketpricechargedbythisprofit -maximizing,perfectlycompetitive
firmis
A) $5perunitofoutput. B) $10perunitofoutput.
C) $8perunitofoutput. D) $14perunitofoutput.
Answer: B
Diff:2
5) Intheabovefigure,theprofit-maximizingrateofproductionfortheperfectlycompetitivefirm
is
A) 5. B) 10.
C) 13. D) noneoftheabove.
Answer: B
Diff:2
6) Intheabovefigure,attheprofit-maximizingrateofproductionfortheperfectlycompetitive
firmtotalrevenueis
A) $100. B) $70. C) $30. D) $130.
Answer: A
Diff:2
firmtotalcostis
A) $100. B) $70. C) $30. D) $130.
Answer: B
Diff:2
firmaveragetotalcostis
A) $10. B) $3. C) $7. D) $70.
Answer: C
Diff:2
firmprofitis
A) $100. B) $70. C) $30. D) $130.
Answer: C
Diff:2
10) Intheabovefigure,atoutputlevelsbetween5unitsand13units,
A) thefirmsaccountingprofitsarenegative.
B) totalrevenueequalstotalcosts.
C) thefirmseconomicprofitsarepositive.
D) thefirmisbreakingeven.
Answer: C
Diff:1
11) Intheabovefigure,atwhichoutputlevelisthisfirmearningnegativeeconomicprofits?
A) 2 B) 5 C) 10 D) 12
Answer: A
Diff:1
12) Afirminaperfectlycompetitivemarketmaximizesprofitswhenitfinds
A) thepriceatwhichtotalrevenueminustotalcostisthegreatest.
B) thequantityatwhichtotalrevenueminustotalcostisthegreatest.
C) thequantityatwhichtotalrevenueequalstotalcost.
D) thequantityatwhichtotalrevenueismaximized.
Answer: B
Diff:1
13) Whenafirmisoperatingatanoutputrateatwhichtotalrevenueequaltotalcosts,thisiscalled
A) itsshutdownpoint. B) itsbreakevenpoint.
C) ashort-runprofit. D) aloss.
Answer: B
Diff:1
Total Total Total Total

Output Costs Output Costs
100 $500 106 $528
101 501 107 540
102 503 108 555
103 506 109 580
104 510 110 615
105 518 111 660
14) Refertotheabovetable.Thisfirmoperatesinaperfectlycompetitivemarketinwhichthe
marketpriceis$10perunit.Whatisitsprofit-maximizingrateofproduction?
A) 104units B) 106units C) 108units D) 110units
Answer: B
Diff:2
marketpriceis$10/unit.Whatistruewhenthefirmproduces103units?
A) Totalrevenueequals$5,060.
B) Totalcostsexceedtotalrevenueby$403.
C) Marginalrevenueislessthanmarginalcost.
D) Itstotalprofitis$524.
Answer: D
Diff:2
marketpriceis$5/unit.Whatistruewhenthefirmproduces110units?
A) Totalrevenueequals$3,075.
B) Totalcostsexceedtotalrevenueby$65.
C) Marginalrevenueismorethanmarginalcost.
D) Itstotalprofitis$65.
Answer: B
Diff:2
17) Refertotheabovefigure.Ifanindividualfirmwantstomaximizeeconomicprofits,itshould
A) charge$5foritsproduct.
B) chargemorethan$5foritsproductsinceincreasingthepricewillincreaserevenues.
C) chargelessthan$5foritsproductsincealowerpricewillattractmorecustomers.
D) withdrawitsproductfromthemarketforcingthemarketpriceup.
Answer: A
Diff:1
18) Thetotalamountreceivedfromthesaleofoutputis
A) averagerevenue. B) marginalrevenue.
C) totalrevenue. D) pricerevenue.
Answer: C
Diff:1
19) Thepriceperunittimesthetotalquantitysoldis
C) totalrevenue. D) pricerevenue.
Answer: C
Diff:1
20) Totalrevenuedividedbyquantityis
C) quantityrevenue. D) pricerevenue.
Answer: A
Diff:1
Total
Output Costs
0 $8
1 13
2 16
3 21
4 30
5 45
21) Refertotheabovetable.ThetablerepresentsinformationonthecostsforAjaxCorporation.
Ajaxoperatesinaperfectlycompetitivemarketandthepriceoftheproductis$9.Whatdoes
totalrevenueequalwhenquantityequals4?
A) $4 B) $9 C) $30 D) $36
Answer: D
Diff:3
Ajaxoperatesinaperfectlycompetitivemarketandthepriceoftheproductis$9.Whatwillbe
thevalueoftotalrevenuewhenquantitysoldequals3?
A) $27 B) $21 C) $3 D) $9
Answer: A
Diff:3
Ajaxoperatesinaperfectlycompetitivemarketandthepriceoftheproductis$7.Whatwillbe
thevalueoftotalrevenuewhenquantitysoldequals2?
A) $7 B) $14 C) $21 D) $16
Answer: B
Diff:3
profitequalwhenquantityequals4?
A) $4 B) $6 C) $9 D) $36
Answer: B
Diff:3
A) $13 B) $10 C) $6 D) $2
Answer: C
Diff:3
A) $14 B) -$2 C) $16 D) $2
Answer: B
Diff:3
27) Weassumethatfirms,whentheyaredecidingthebestrateofoutputatwhichtoproduce,
A) trytogetthehighestpricepossible. B) wanttomaximizesales.
C) wanttominimizecosts. D) wanttomaximizeprofits.
Answer: D
Diff:1
28) TheequationTR/Qisusedtocompute
A) totalcost. B) averagerevenue.
C) demand. D) marginalrevenue.
Answer: B
Diff:1
29) Foraperfectcompetitor,priceequals
A) marginalrevenueonly.
B) averagerevenueonly.
C) bothaveragerevenueandmarginalrevenue.
D) neithermarginalrevenuenoraveragerevenue.
Answer: C
Diff:1
30) Inaperfectlycompetitivemarket,theaveragerevenuecurveofafirmis
A) thesameasitstotalrevenuecurve.
B) thesameasitsdemandcurve.
C) thesameitseconomicprofits.
D) thedifferencebetweenitstotalrevenuecurveanditsmarginalrevenuecurve.
Answer: B
Diff:1
31) Underperfectcompetition,thefirmmustdecide
A) thebestpricetochargeforitsproduct.
B) thebestrateofoutputitshouldproduce.
C) theoptimallevelofadvertisingtoengagein.
D) theoptimallevelofqualityandthepackagingthatwillmaximizeprofits.
Answer: B
Diff:2
32) Refertotheabovefigure.Profitsforthisfirmarepositive
A) onlyforallpointslessthanB.
B) onlyatpointsBandC.
C) forpointsbetweenBandC.
D) forallpointslessthanBandgreaterthanC.
Answer: C
Diff:1
33) Refertotheabovefigure.Profitsforthisfirmwillbemaximizedat
A) pointB. B) pointC.
C) aquantitygreaterthanpointC. D) aquantitybetweenpointsBandC.
Answer: D
Diff:1
34) Refertotheabovefigure.Profitsforthisfirmareequaltozero
Answer: B
Diff:1
35) Refertotheabovefigure.Profitsforthisfirmarenegative
Answer: D
Diff:1
36) Whichofthefollowingequalstheratioofthechangeintotalrevenuesoverthechangein
output?
A) Totalcost B) Averagerevenue
C) Demand D) Marginalrevenue
Answer: D
Diff:1
37) Fortheperfectlycompetitivefirm,price
A) equalsaveragerevenueandmarginalrevenue.
B) equalsaveragetotalcost.
C) changesasoutputchanges.
D) dependsonthefixedcostforthefirm.
Answer: A
Diff:2
38) Totalrevenues
A) aredefinedasthequantitysolddividedbyprice.
B) arenotthesameastotalreceiptsfromthesaleofoutput.
C) equalgrossrevenuesminusallexpensesofthefirm.
D) equalthepriceperunittimesthetotalquantitysold.
Answer: D
Diff:1
39) Theperfectlycompetitivefirmstotalrevenuecurve
A) islinearandupwardsloping. B) hasaconstantslope.
C) hasapositiveslope. D) alloftheabove
Answer: D
Diff:1
40) Thegoaloftheperfectlycompetitivefirmisto
A) maximizetotalrevenue. B) maximizetotalprofits.
C) minimizeAFC. D) minimizeATC.
Answer: B
Diff:1
41) Theverticaldistancebetweenthehorizontalaxisandanypointonaperfectcompetitors
demandcurvemeasures
A) totalcost.
B) totalrevenues.
C) productprice,marginalrevenue,andaveragerevenue.
D) supplycurvefortheproduct.
Answer: C
Diff:2
42) Therateofproductionthatmaximizesthepositivedifferencebetweentotalrevenuesandtotal
costsisthe
A) profit-maximizingrateofproduction.
B) rateofproductionatwhichmarginalrevenueequalsmarginalproduct.
C) rateofproductionatwhichmarginalrevenueequalsaveragerevenue.
D) rateofproductionatwhichaveragerevenueequalsaveragetotalcost.
Answer: A
Diff:2
43) Aperfectcompetitorshouldmaximizetotalrevenues.Doyouagreeordisagree?Explain.
Answer: Disagree.Aperfectcompetitorshouldmaximizetotalprofitsinsteadoftotalrevenues.
Becausethefirmsaveragerevenueisconstantforalloutputlevels,itstotalrevenues
increaseproportionallytoitsoutput.However,becauseitstotalcostsdonotincrease
proportionallytooutput.Assuch,thereisalevelofoutputatwhichtotalprofits--the
differencebetweentotalrevenuesandtotalcosts--aremaximized.
Diff:2
23.4UsingMarginalAnalysistoDeterminetheProfit-MaximizingRateofProduction
1) Whichisalwaystrueatafirmsprofit-maximizingrateofproduction?
A) TotalRevenue=TotalCosts
B) Thetotalrevenuecurveliesbelowthetotalcostcurve.
C) MarginalRevenue> MarginalCost
D) MarginalRevenue= MarginalCost
Answer: D
Diff:1
Topic: 23.4UsingMarginalAnalysistoDeterminetheProfit-MaximizingRateofProduction
2) Theperfectlycompetitive,profit-maximizingrateofproduction
A) occursatthepointatwhichmarginalrevenueisequaltomarginalcost.
B) occursatthepointatwhichthedifferencebetweenmarginalrevenueandmarginalcostis
maximized.
C) isnotmeasurableforaperfectlycompetitivefirm.
D) ignorestherelationoftotalrevenuesandtotalcosts.
Answer: A
Diff:2
3) Whichofthefollowingistruefortheperfectlycompetitivefirm?
A) PriceandMRarealwaysequal. B) ARislessthanprice.
C) ARismorethanprice. D) Priceelasticityofdemandisequalto1.
Answer: A
Diff:2
4) Theprofit-maximizingoutputfortheperfectlycompetitivefirmoccursatthepointatwhich
A) TR-MRisatamaximum. B) TR- TCisataminimum.
C) MR=MC. D) TR- ATCisatamaximum.
Answer: C
Diff:2
5) WhenMR<MCforafirm,thefirmshould
A) reduceitslevelofoutput. B) stayatthesamelevelofoutput.
C) stopproducing. D) increaseoutput,unlessP< AVC.
Answer: A
Diff:1
6) Afirmseekingtomaximizeeconomicprofitsshouldproduceattheoutputatwhich
A) totalrevenueequalstotalcost.
B) marginalrevenueequalsmarginalcost.
C) averagerevenueequalsaveragecost.
D) marginalrevenueequalsaveragerevenue.
Answer: B
Diff:1
7) Aperfectlycompetitivefirmwillmaximizeprofitswhen
A) averagecostisgreaterthanmarginalrevenue.
B) marginalcostisgreaterthanmarginalrevenue.
C) marginalcostisequaltomarginalrevenue.
D) averagecostisequaltoaveragerevenue.
Answer: C
Diff:1
8) Foraperfectlycompetitivefirm,profitmaximizationoccurswhen
A) marginalrevenueequalsaveragetotalcost.
B) marginalrevenueequalsmarginalcost.
C) marginalcostisequaltoaveragetotalcost.
D) averagetotalcostisatitsminimum.
Answer: B
Diff:1
9) Whenpriceandmarginalcostareequalforaperfectlycompetitivefirm,thefirmis
A) minimizingaveragetotalcost. B) maximizingtotalrevenue.
C) maximizingeconomicprofit. D) earningnegativeeconomicprofit.
Answer: C
Diff:1
10) Whenpriceisgreaterthanbothmarginalcostandaveragevariablecost,theperfectly
competitivefirm
A) ismaximizingeconomicprofit. B) shouldincreaseitslevelofoutput.
C) shouldreduceitslevelofoutput. D) shouldstopproduction.
Answer: B
Diff:1
11) Ifafirmisproducinganoutputrateatwhichmarginalcostisgreaterthanprice,thefirm
A) issustainingeconomicloss. B) shouldincreaseitsoutputlevel.
C) shouldreduceitsoutputlevel. D) willnotbecoveringitsfixedcost.
Answer: C
Diff:2
12) Ifafirmisproducinganoutputrateatwhichmarginalcostisequalprice,thefirm
A) ismaximizingprofits. B) shouldincreaseitsoutputlevel.
C) shouldreduceitsoutputlevel. D) willnotbecoveringitsfixedcost.
Answer: A
Diff:2
13) Forafirminaperfectlycompetitiveindustry,whichofthefollowingisTRUE?
A) MR=P B) MR< P C) AVC= ATC D) MR> P
Answer: A
Diff:1
14) Whendemandisperfectlyelastic,marginalrevenueis
A) zero. B) equaltoprice. C) declining. D) increasing.
Answer: B
Diff:1
15) WhichofthefollowingconditionsisTRUEforaprofit-maximizingfirminaperfectly
competitiveindustry?
A) MR=TC B) ATC= AFC C) MR= MC D) MC=AVC
Answer: C
Diff:1
16) Supposethatatthecurrentlevelofoutput,price= $10,MC= $4,AVC= $7,andATC=$11.

Whichofthefollowingistrue?
A) Thefirmshoulddecreaseoutput.
B) Thefirmshouldshutdown.
C) Thefirmshouldincreaseoutput.
D) Thefirmshouldmaintainthecurrentlevelofoutput.
Answer: C
Diff:1

Answer: A
Diff:1

Answer: D
Diff:1
19) Forafirminaperfectlycompetitiveindustry
A) thedemandcurveisunitaryelasticthroughout.
B) marginalrevenueandproductpriceareequalateverylevelofoutput.
C) thepriceelasticityofdemandiszero.
D) moreoutputcanbesoldonlyifthefirmunilaterallylowersitsproductprice.
Answer: B
Diff:1
20) Themarginalrevenuecurveofaperfectlycompetitivefirm
A) hasaverticalinterceptequaltoexactlyone-halfoftheverticalinterceptforthedemand
curve.
B) liesbelowthedemandcurveandabovetheaveragerevenuecurve.
C) intersectstheaveragerevenuecurvefromaboveatthemaximumpointoftheaverage
revenuecurve.
D) isalsothedemandcurvefacedbythefirm.
Answer: D
Diff:2
21) Inaperfectlycompetitiveindustry,thefirmsmarginalrevenuecurveis
Answer: D
Diff:1
22) Intheabovefigure,whathappenstothefirmsoptimallevelofoutputifthepriceitreceivesfor
itsproductincreasesfromP 2 toP3 ?
A) Outputstaysthesame.
B) Outputdecreases.
C) Outputincreases.
D) Thereisnotenoughinformationprovidedtoknowwhathappenstooutput.
Answer: C
Diff:2
23) Intheabovefigure,whathappenstothefirmsoptimallevelofoutputifthepriceitreceivesfor
itsproductdecreasesfromP 4 toP3 ?
A) Outputstaysthesame.
B) Outputdecreases.
C) Outputincreases.
D) Thereisnotenoughinformationprovidedtoknowwhathappenstooutput.
Answer: B
Diff:2
24) Marginalrevenueequals
A) totalrevenuedividedbyoutput.
B) pricetimesquantity,dividedbyaveragerevenue.
C) totalrevenuedividedbyaveragerevenue.
D) thechangeintotalrevenuefromsellingonemoreunit.
Answer: D
Diff:1
25) Thechangeintotalrevenuesresultingfromachangeinoutputofoneunitis
C) quantityrevenue. D) pricerevenue.
Answer: B
Diff:1
26) Foraperfectcompetitor,marginalrevenueequals
A) theslopeofthedemandcurve. B) averagerevenuedividedbyprice.
C) pricedividedbyaveragerevenue. D) themarketprice.
Answer: D
Diff:1
27) Whichofthefollowingisnot trueforaperfectlycompetitivefirm?

A) P=MR B) AR= MR C) MR= TR D) P= AR
Answer: C
Diff:2
28) Foraperfectcompetitor,themarginalrevenuecurvewillbe
C) positivelysloped. D) negativelysloped.
Answer: A
Diff:1
29) Refertotheabovefigure.LineCinPanelBdoes not represent

A) theequilibriumprice. B) averagerevenue.
C) totalrevenue. D) marginalrevenue.
Answer: C
Diff:3
30) Theperfectlycompetitivefirmmaximizesprofitswhen
A) itproducesandsellsthequantityatwhichthedifferencebetweenmarginalrevenueand
marginalcostisthegreatest.
B) itproducesandsellsthequantityatwhichmarginalrevenueandmarginalcostareequal.
C) itproducesandsellsthequantityatwhichthedifferencebetweenaveragerevenueand
averagecostisthegreatest.
D) itproducesandsellsthequantityatwhichthedifferencebetweenpriceandaveragecostis
thegreatest.
Answer: B
Diff:2
31) Therateofproductionatwhichmarginalrevenueequalsmarginalcostis
A) apointofnegativeprofitsforthefirm.
B) whatdeterminestheequilibriumpriceinthemarket.
C) thefirmsshutdownpoint.
D) thepointwhereprofitsaremaximized.
Answer: D
Diff:1
32) Ifmarginalrevenueislessthanmarginalcost,thefirmshould
A) raiseprice. B) raisemarginalrevenue.
C) increaseitsrateofoutput. D) decreaseitsrateofoutput.
Answer: D
Diff:2
33) Ifmarginalrevenueisgreaterthanmarginalcost,thefirmshould
A) raiseprice. B) raisemarginalrevenue.
C) increaseitsrateofoutput. D) decreaseitsrateofoutput.
Answer: C
Diff:2
34) Whichofthefollowingisalwaystrueforaperfectlycompetitivefirm?
A) P=d=MR B) P= d= AVC
C) MC=MR=AVC D) AVC= ATC=P
Answer: A
Diff:1
35) Whichofthefollowingisalwaystrueintheshortrunforaperfectlycompetitivefirmthatis
maximizingeconomicprofits?
A) P=d=MR=MC= AVC B) P= d= MR=MC
C) P=d=MR=Q D) MR= MC=Q
Answer: B
Diff:1
36) Marginalrevenueis
A) changeintotalrevenue/changeinoutput.
B) totalrevenue/output.
C) changeintotalrevenue/output.
D) totalrevenue/changeinoutput.
Answer: A
Diff:1
37) Foraperfectlycompetitivefirm,
A) priceisgreaterthanmarginalrevenue.
B) priceequalsmarginalrevenue.
C) priceislessthanmarginalrevenue.
D) thereisnorelationshipbetweenpriceandmarginalrevenue.
Answer: B
Diff:2
38) Theprofit-maximizinglevelofoutputforafirmoccursatthepointatwhich
A) P=ATC. B) P=AVC. C) MR= MC. D) MR=ATC.
Answer: C
Diff:1
39) Marginalrevenue
A) cannotbeusedtodeterminetheprofit-maximizingrateofproduction.
B) isthechangeintotalrevenuesresultingfromachangeinoutput.
C) isachangeinrevenuethatisimmeasurableandnon -quantifiable.
D) cannotbeeffectivelyutilizedwhenanalyzingtheperfectcompetitor.
Answer: B
Diff:1
40) Underwhatconditionareprofitsmaximized?
A) attherateofoutputatwhichmarginalrevenueequalsmarginalcost
B) attheoutputratewheremarginalcostisgreaterthanmarginalrevenue
C) atthepointatwhichthedifferencebetweentotalrevenuesandtotalcostsisnegative
D) atthepointatwhichthedifferencebetweenpriceandquantitydemandedisgreatest
Answer: A
Diff:1
41) Theloss-minimizingoutputfortheperfectlycompetitivefirmoccursatthepointatwhich
A) TR-MR=minimum. B) TR- TC= maximum.
C) MR=MC. D) TC- ATC= maximum.
Answer: C
Diff:2
42) Aperfectlycompetitivefirmisselling300unitsofoutputat$4each.Atthisoutputlevel,total
fixedcostis$100andtotalvariablecostis$500.Thefirm
A) ismaximizingitsprofit.
B) isearningaprofit,butnotnecessarilythemaximumprofit.
C) isexperiencinganeconomicloss.
D) shouldshutdown.
Answer: B
Diff:2
43) Economicprofitsaremaximizedatthepointatwhich
A) marginalrevenuesequalmarginalcosts.
B) accountingprofitexceedseconomicprofit.
C) totalrevenuesaregreaterthantotalcosts.
D) accountingprofitsareequaltozero.
Answer: A
Diff:1
44) Foraperfectlycompetitivefirm,whenMCislessthanMR,
A) theproducerhasanincentivetoexpandoutput.
B) theproducerhasanincentivetodecreaseoutput.
C) theproducerhasnoincentivetochangeproduction.
D) economicprofitsmustbepositive.
Answer: A
Diff:1
45) Ifaperfectlycompetitivefirmisproducingatanoutputatwhichmarginalcostexceeds
marginalrevenue,
A) pricewillbeattheprofitmaximizinglevel.
B) saleswillbeattheprofitmaximizinglevel.
C) thefirmshouldexpandproduction.
D) thefirmshouldreduceproduction.
Answer: D
Diff:1
46) Afirminacompetitiveindustryfacesthefollowingshort-runcostandrevenueconditions:
ATC=$16;AVC=$8;andMR=MC=$12.Thisfirmshould
A) expandproductionandkeeppriceconstant.
B) decreaseproductionandraiseitsprice.
C) shutdown.
D) continuetooperateatthesamepriceandoutputlevelintheshortrun.
Answer: D
Diff:2
47) Supposeaperfectlycompetitivefirmfacesthefollowingshort-runcostandrevenueconditions:
ATC=$12;AVC=$10;MC=$15;MR=$13.Thefirmshould
A) decreaseoutput. B) increaseoutput.
C) increaseprice. D) changenothing.
Answer: A
Diff:2
ATC=$7.00;AVC=$5.00;MC=$6.50;MR=$6.50.Thefirmshould
A) increaseoutput. B) decreaseoutput.
C) continuetoproduceitscurrentoutput. D) shutdown.
Answer: C
Diff:2
49) Supposeaperfectlycompetitivefirmfacesthefollowingcostandrevenueconditions:ATC =
$25.50;AVC=$20.50;MC=$25.50;MR=$28.50.Thefirmshould
C) shutdown. D) continuetoproduceitscurrentoutput.
Answer: B
Diff:1
C) increaseprice. D) continuetoproduceitscurrentoutput.
Answer: B
Diff:1
51) Afirmshouldcontinueproducinguntil
A) thecostofproducingtheoutputequalstherevenuesobtainablefromsellingtheoutput.
B) thecostofincreasingoutputbyonemoreunitequalstherevenuesobtainablefromselling
theextraunit.
C) averagecostsareataminimum.
D) theaveragecostwhenanotherunitisproducedequalstheaveragerevenueobtainable
fromsellingtheextraunit.
Answer: B
Diff:2
52) Foraperfectlycompetitivefirm,whichofthefollowingisNOTtrue?
A) Theaveragerevenuecurve,thedemandandthemarginalrevenuecurvesareidentical.
B) Thetotalrevenuecurvebeginsattheoriginandslopesupwardasoutputincreases.
C) Theslopeofthetotalrevenuecurveisequaltotheproductprice.
D) Thetotalrevenuecurveishorizontal.
Answer: D
Diff:2
53) Whatdoesaperfectlycompetitivefirmdotomaximizeprofits?
Answer: Theperfectcompetitorcannotinfluencemarketprice,soitmustfindtherateof
productionthatmaximizesitsprofits.Theprofit-maximizingoutputistheoutputat
whichmarginalrevenueequalsmarginalcost.Ifmarginalrevenueisgreaterthan
marginalcost,anadditionalunitincreasesrevenuesmorethancosts,soprofitsincrease.
Ifmarginalrevenueislessthanmarginalcost,areductioninoutputofoneunitreduces
costsmorethanrevenues,soprofitsincrease.Economicprofitsaremaximizedwhen
marginalrevenueequalsmarginalcost.
Diff:2
54) Whyshouldaperfectcompetitorproduceatwhichpriceequalsmarginalcost?
Answer: Foraperfectcompetitor,itsmarketpriceequalsmarginalrevenue.Becauseprofitsare
maximizedwhenmarginalrevenueequalsmarginalcost,aperfectcompetitorwill
thereforemaximizeprofitsbyproducingatmarginalrevenueequalsmarginalcost.A
lowerorhigherlevelofoutputthanthatprofit-maximizingoutputlevelwillonlyresult
inlowerprofits.
Diff:2
55) Whyshouldafirmnotproducemorethantherateofoutputatwhichmarginalrevenueequals
marginalcost?
Answer: Afirmmaximizesitstotalprofitswhenproducingtherateofoutputatwhichmarginal
revenueequalsmarginalcost.Ifthefirmproducesmorethanthisrateofproduction,
thenmarginalcostwillexceedmarginalrevenue,meaningthattotalprofitsdecreaseasa
resultofahigherproductionrate.Therefore,theprofit-maximizingfirmshouldnot
producemorethantherateofproductionatwhichmarginalrevenueequalsmarginal
cost.
Diff:2
56) Howdowedeterminewhetherafirmhasmaximizedprofits?
Answer: Afirmmaximizesprofitsonlywhenitproduceswheremarginalrevenueequalsmarginal
cost.Whenevermarginalrevenueexceedsmarginalcost,thefirmcanalwaysmakemore
profitbyincreasingproduction;whenevermarginalrevenueislessthanmarginalcost,
thefirmcanalwaysmakemoreprofitbyreducingproduction.
Diff:1
23.5Short-RunProfits
Total
Output Costs
100 $400
101 402
102 405
103 409
104 414
105 420
106 427
107 435
1) Refertotheabovetable.Ifthepriceis$5,theperfectlycompetitivefirmshouldproduce
A) 104units. B) 105units. C) 106units. D) 107units.
Answer: A
Diff:3
Topic: 23.5Short-RunProfits
2) Refertotheabovetable.Ifthepriceis$5,themaximumeconomicprofitsthisfirmcouldearnis
A) $520. B) $420. C) $414. D) $106.
Answer: D
Diff:3
Answer: B
Diff:3
4) Refertotheabovetable.Ifthepriceis$6themaximumprofitthisfirmcouldearnis
A) $210. B) $414. C) $420. D) $630.
Answer: A
Diff:3
Answer: A
Diff:3
6) Refertotheabovetable.Ifthepriceis$3themaximumprofitthisfirmcouldearnis
A) $99. B) $306. C) -$100. D) -$99.
Answer: D
Diff:3
7) Afirminaperfectlycompetitiveindustryfacesthefollowingcostandrevenueconditions:ATC
=$6;AVC=$3;MR=MC=$5.Thefirmis
A) earningeconomicprofits.
B) experiencingeconomiclosses.
C) experiencingzeroprofits.
D) inapositioninwhichitshouldshutdown.
Answer: B
Diff:2
8) Intheabovefigure,ifthefirmisfacingdemandcurved 2 ,thentomaximizeprofitsitwill
produceatoutputlevel
A) A. B) B. C) C. D) D.
Answer: B
Diff:1
9) Intheabovefigure,ifd3istherelevantdemandcurveforthisfirm,thenwhichlevelofoutput
willmaximizethisfirmsprofitsorminimizeitslosses?
A) A B) B C) C D) D
Answer: C
Diff:2
A) A B) B C) C D) D
Answer: D
Diff:2
A) A B) B C) C D) D
Answer: A
Diff:2
12) IfthefirmintheabovefigureproducesoutputlevelD,itincursanaveragefixedcostof
productionequaltothedistance
A) DK. B) RN. C) JL. D) KR.
Answer: A
Diff:3
13) Whatisalwaystrueabouttheshort-runequilibriumpositionforafirminperfectcompetition?
A) MR=MC=P=ATC=AR B) TR= TC
C) MR=MC=P=AR D) MC= ATC
Answer: C
Diff:2
14) Profitperunitisthedifferencebetween
A) averagerevenueandaveragetotalcost. B) marginalrevenueandmarginalcost.
C) totalrevenueandtotalcost. D) averagerevenueandmarginalcost.
Answer: A
Diff:1
15) Aperfectlycompetitivefirmismaximizingprofitsintheshortrun.Thisimpliesthatthefirmis
earningthemosteconomicprofitspossible,which
A) mustbepositive.
B) mustbeeitherzeroorpositive.
C) canbepositive,negative,orzero.
D) existatthepointatwhichpriceequalstotalcost.
Answer: C
Diff:2
16) Refertotheabovefigure.Profitswillequalzero
A) whenthepriceequals$1. B) whenthepriceequals$2.
C) whenthepriceequals$4. D) atpricesbetween$1and$2.
Answer: B
Diff:3
17) Refertotheabovefigure.Profitswillbepositive
C) atpricesbetween$1and$2. D) whenthepriceisabove$2.
Answer: D
Diff:3
18) Refertotheabovefigure.Thefirmwilljustbecoveringallofitsvariablecostbutnoneofits
fixedcost
C) whenthepriceequals$4. D) atpricesbetween$1and$2.
Answer: A
Diff:3
19) Refertotheabovefigure.Profitswillbenegative
A) whenthepriceequals$2. B) whenthepriceisabove$2.
C) whenthepriceisbelow$2. D) onlywhenthepriceequals$1.
Answer: C
Diff:3
20) Refertotheabovefigure.Thefirmsshort-runshutdownpriceis
A) at$1. B) at$2. C) at$4. D) above$4.
Answer: A
Diff:3
21) Thedifferencebetweenpriceandaveragetotalcostis
A) totalcosts. B) marginalcosts.
C) averageprofit. D) anirrelevantquantity.
Answer: C
Diff:1
22) Refertotheabovefigure.Whenthepriceinthemarketis$4,economicprofitswillequal
A) $100. B) $200. C) $300. D) $400.
Answer: A
Diff:3
23) Refertotheabovefigure.IfthemarketpriceisequaltoA,whichstatementcanbemadeabout
economicprofits?
A) EconomicprofitsarepositiveandequaltoABCG.
B) EconomicprofitsarepositiveandequaltoABEF.
C) EconomicprofitsarenegativeandequaltoGCEF.
D) EconomicprofitsarenegativeandequaltoABQ0.
Answer: A
Diff:3
24) Refertotheabovefigure.IfthemarketpriceisequaltoA,whichstatementcanbemadeabout
profits?
A) ProfitsarepositiveandequaltoBCEA. B) ProfitsarepositiveandequaltoBCFG.
C) ProfitsarenegativeandequaltoBCEA. D) ProfitsarenegativeandequaltoGFQ0.
Answer: C
Diff:3
25) Refertotheabovefigure.Inordertostayopenintheshortrun,thisfirmmust
A) earnapositiveprofit.
B) receiveapriceequaltoorgreaterthantheminimumofitsaveragevariablecost.
C) receiveapriceexactlyequaltoitsaveragetotalcost.
D) recoveritsfixedcost.
Answer: B
Diff:3
26) Intheabovefigure,whatistheprofit-maximizingoutputandprice?
A) 8,$7 B) 10,$8 C) 12,$10 D) 10,$10
Answer: D
Diff:2
27) Intheabovefigure,whatistheprofitattheprofit -maximizingoutputlevel?

A) $70 B) $2 C) $20 D) $10
Answer: C
Diff:2
28) Intheabovefigure,whatisthepricethefirmreceivesiftheoutputis8?
A) $10 B) $2 C) $7 D) $8
Answer: A
Diff:2
29) Supposeaperfectlycompetitiveasparagusfarmcanproducesixcontainersofasparagusatan
outputatwhichmarginalcostequalsmarginalrevenue.Thepricepercontainerofasparagusis
$100andtheaveragetotalcostis$75.Whatistheprofitorlossthatthisasparagusfarmis
earning?
A) $450.00 B) $600.00 C) $150.00 D) -$450.00
Answer: C
Diff:2
30) Supposeaperfectlycompetitiveukulelefactorycanproduce35ukulelesatanoutputatwhich
marginalcostequalsmarginalrevenue.Thepriceperukuleleis$1300andtheaveragetotalcost
is$1500.Whatistheprofitorlossthatthisfurniturefactoryisearning?
A) $700.00 B) -$7,000.00 C) -$1,050.00 D) -$450.00
Answer: B
Diff:2
31) Inprinciple,howdowedetermineaperfectlycompetitivefirmsprofit-maximizingoutputand
maximumprofitsgiveninformationaboutthemarketclearingprice,andaboutthemarginal
costandaveragetotalcostcurvesofthefirm?Explaininwords.
Answer: Foraperfectlycompetitivefirm,themarketclearingpriceisthefirmsmarginalrevenue
andaveragerevenue.Thefirmmaximizesprofitsbyproducingtheoutputatwhich
marginalrevenueequalsmarginalcost,whichisatthepointwherethefirmsmarginal
revenuecurvecrossesitsmarginalcostcurve.Per-unitprofitequalsthemarketclearing
priceminustheaveragetotalcostofproducingtheprofit-maximizingoutput.Total
profitsequalprofitperunit(priceminusaveragetotalcost)timestheprofit-maximizing
output.
Diff:2
32) Canafirmmakelossesbyproducingtherateofoutputatwhichmarginalrevenueequals
marginalcost?Why?
Answer: Evenwhenafirmisproducingtheoutputrateatwhichmarginalrevenueequalto
marginalcost,thereisnoguaranteethatitmakesprofits.Marketpriceisaffectedby
marketsupplyandmarketdemandconditions.Ifpricefallsbelowaveragetotalcosts,
thefirmmakesaloss.However,thefirmisdoingitsbestandminimizingeconomic
lossesbyproducingtherateofoutputatwhichmarginalrevenueequalsmarginalcost.
Diff:2
33) Byproducingatanoutputrateatwhichmarginalrevenueequalsmarginalcost,afirmis
definitelymakingpositiveeconomicprofits.Doyouagreeordisagree?Why?
Answer: Whenitproducesatanoutputrateatwhichmarginalrevenueequalsmarginalcost,the
firmisdoingitsbest(providingpriceexceedsitsaveragevariablecost).However,the
firmdoesnotnecessarilymakeaprofit.Dependingonthemarketconditionsthataffect
themarketpriceanditsaveragevariablecost,itmayactuallyincuralossbutthelossis
stilltheminimumaslongasmarginalrevenueequalsmarginalcost.
Diff:2
23.6TheShort-RunBreak-EvenPriceandtheShort-RunShutdownPrice
1) Whenafirmearnszeroeconomicprofits,
A) itcannotcontinuetoproduce.
B) ithasnotcovereditsopportunitycosts.
C) ithasapositiveaccountingprofit.
D) ithasaveragerevenuethatislessthanaveragecost.
Answer: C
Diff:2
Topic: 23.6TheShort-RunBreak-EvenPriceandtheShort-RunShutdownPrice
2) Theshort-runbreak-evenprice
A) isthepriceatwhichthefirmscurrentliabilitiesarepaidoff.
B) isthepriceatwhichafirmstotalrevenuesequaltotalcosts.
C) occursattheoutputatwhichthefirmyieldsabelownormalrateofreturn.
D) occursattheoutputatwhichthefirmyieldsapositiveeconomicprofit.
Answer: B
Diff:2
3) Intheabovefigure,thefirmwillshutdownifpricefallsbelow
A) F. B) I. C) H. D) E.
Answer: D
Diff:1
4) Intheabovefigure,thefirmwillshutdownifquantityfallsbelow
A) A. B) B. C) C. D) D.
Answer: A
Diff:1
5) Thefirmintheabovefigurebreaksevenwhenmarketpriceis
A) H. B) E. C) I. D) G.
Answer: A
Diff:1
6) Thefirmintheabovefigurebreaksevenwhenquantityis
A) A. B) B. C) C. D) D.
Answer: C
Diff:1
7) Intheshortrun,theperfectlycompetitivefirmwillalwaysearnaneconomicprofitwhen
A) P=ATC. B) P>AVC. C) P= MC. D) P>ATC.
Answer: D
Diff:1
8) Acompanyfindsthatattheoutputlevelatwhichmarginalcostequalsmarginalrevenue,TC =
$500,TVC=$400,andTR=$450.Youradvicetothefirmis
A) shutdown,asTC>TR.
B) reduceoutputtoreducethecostofproduction.
C) increaseoutputtoreducetheperunitcostofproduction.
D) continuetoproducebecauselossislessthanTFC.
Answer: D
Diff:3
9) Acompanyfindsthatatitspresentlevelofproduction,MC= AVCat$15,MC=ATCat$20,
andMC=MRat$17.Youradvicetothefirmregardingitsshort -runoperationsis
A) tocontinueproduction,asitisearninganeconomicprofitof$2perunit.
B) tocontinueproduction,asitisearninganeconomicprofitof$3perunit.
C) toshutdown.
D) tocontinueproductionataloss.
Answer: D
Diff:3
10) Acompanyfindsthatatitspresentlevelofproduction,MR= MCat$14,MC=AVCat$15,and

MC=ATCat$20.Youradvicetothefirmregardingitsshort-runoperationsis
A) tocontinueproduction,asitisearninganeconomicprofitof$1perunit.
B) tocontinueproduction,asitisearninganeconomicprofitof$6perunit.
C) toshutdown.
D) tocontinueproductionataloss.
Answer: C
Diff:2
11) Supposethatinaperfectlycompetitivemarket,themarketpriceis$10.Afirminthatmarket
hasmarginalcostof$10,averagetotalcostof$12,anditisproducing100units.Thefirmis
A) earning$1,000intotaleconomicprofitsandismaximizingeconomicprofits.
B) earning$200intotaleconomicprofitsandismaximizingeconomicprofits.
C) earningzerototaleconomicprofitsandisnotmaximizingeconomicprofits.
D) incurring$200intotaleconomiclossesandisminimizingeconomiclosses.
Answer: D
Diff:2
12) Intheabovefigure,ifpriceisequaltoP 4 ,thefirmwill

A) earnpositiveeconomicprofits. B) incuraneconomicloss.
C) earnzeroeconomicprofits. D) shutdown.
Answer: A
Diff:1
13) Ifpriceis$5,marginalcostis$5,averagetotalcostis$3,andthequantityproducedis150units,
thentheperfectlycompetitivefirmis
A) notmaximizingeconomicprofit.
B) earning$2ineconomicprofitsandismaximizingeconomicprofits.
C) earning$150ineconomicprofitsandisnotmaximizingeconomicprofits.
D) earning$300ineconomicprofitsandismaximizingeconomicprofits.
Answer: D
Diff:2
14) Supposethemarketpriceis$5,marginalcostis$4,andaveragetotalcostis$2.Theperfectly
competitivefirminthatmarketis
A) earning$3ineconomicprofitsperunitofoutputandisnotmaximizingprofits.
B) earning$2ineconomicprofitsperunitofoutputandismaximizingprofits.
C) earning$1ineconomicprofitsperunitofoutputandisnotmaximizingprofits.
D) noneoftheabove:Insufficientinformationisgiven.
Answer: A
Diff:2
15) Intheabovefigure,assumed 1 isthedemandcurvefacedbythisfirm.Whichistrue?

A) Thisfirmisearninganeconomicprofit.
B) Thisfirmisexperiencinganeconomicloss.
C) Thisfirmisbreakingeven.
D) ThisfirmstotalcostsequalEJA0.
Answer: B
Diff:2
16) Intheabovefigure,assumed 3 isthedemandcurvefacedbythisfirm.Whichistrue?

A) Thisfirmisearninganeconomicprofit.
B) Thisfirmisexperiencinganeconomicloss.
C) Thisfirmisbreakingeven.
D) ThisfirmstotalrevenuesequalHRD0.
Answer: C
Diff:2
17) Intheabovefigure,whenpriceisbelowE,thisfirmshould
A) lowerprices.
B) continuetooperateas-is.
C) attempttolowerATCandtoraiseAVC.
D) shutdown.
Answer: D
Diff:2
18) Foraperfectlycompetitivefirm,theshort-runbreak-evenpointoccursatthelevelofoutput
where
A) P>MR=MC. B) MR= P> MC.
C) MR<P=MC. D) P= MC= ATC.
Answer: D
Diff:2
19) Attheshort-runbreak-evenpoint,theperfectlycompetitivefirmis
A) earningpositiveeconomicprofits. B) earningzeroeconomicprofits.
C) earningnegativeeconomicprofits. D) justcoveringitstotalvariablecosts.
Answer: B
Diff:1
20) Whenafirmisearningzeroeconomicprofits,
A) accountingprofitiszero. B) totalrevenueisgreaterthantotalcost.
C) P=ATC. D) PisgreaterthanATC.
Answer: C
Diff:1
21) Attheshort-runbreak-evenpoint,thefirmis
A) earningzeroaccountingprofit. B) losingmoney.
C) earningzeroeconomicprofit. D) readytoshutdown.
Answer: C
Diff:1
22) Aperfectlycompetitivefirmsshort-runbreak-evenoutputoccurs
A) attheminimumpointofitsaveragevariablecostcurve.
B) attheminimumpointofitsaveragetotalcostcurve.
C) attheminimumpointofitsmarginalcostcurve.
D) attheintersectionofitstotalcostcurveanditsmarginalrevenuecurve.
Answer: B
Diff:1
23) Accordingtotheabovefigure,ifthefirmisearningzeroeconomicprofits,whatquantityisthe
firmsellingandatwhatprice?
A) Q=200;P=$4 B) Q= 1,000;P=$5
C) Q=800;P=$4 D) Q= 1,200;P=$7
Answer: B
Diff:2
24) Theshort-runbreak-evenpriceisthepointatwhich
A) priceislessthanmarginalcost.
B) marginalcost,averagetotalcostandmarginalrevenueareallequal.
C) averagevariablecostisataminimum.
D) marginalcost,priceandaveragevariablecostareallequal.
Answer: B
Diff:2
25) Economicprofitsattheshort-runbreak-evenpointare
A) positive.
B) negative.
C) equaltozero.
D) indeterminatesincetheyalsodependonthesizeofthefixedcosts.
Answer: C
Diff:1
26) Accountingprofitsatafirmsbreak-evenpointare
A) positive.
B) negative.
C) zero.
D) indeterminatesinceweneedtoknowwhatdemandis.
Answer: A
Diff:2
27) Ataperfectlycompetitivefirmsshort-runbreak-evenprice,
A) P=ATC.
B) TRismorethanTC.
C) theaveragecostisbelowthetotalrevenueline.
D) P>AVC,butP<AFC.
Answer: A
Diff:1
A) increaseoutput. B) increaseprice.
C) remainatthesameposition. D) shutdown.
Answer: D
Diff:1
29) Foraperfectlycompetitivefirm,anypricebelowitsminimumAVCisa
A) marketprice. B) shutdownprice.
C) profitmaximizingprice. D) negativeprice.
Answer: B
Diff:1
30) Thefirmwillshutdownintheshortrunif
A) thepricefallsbelowitsminimumAVC. B) themarketpricerisesunexpectedly.
C) P=MC. D) P= ATCatitsminimum.
Answer: A
Diff:2
31) Theshort-runshutdownpriceoccurswherepriceequals
A) MC. B) AVCatanypoint.
C) AVCattheminimumpoint. D) AFCattheminimumpoint.
Answer: C
Diff:1
32) Whenafirmhasanaccountingprofitthatisnegative,it
A) willneverproduceoutput,evenintheshortrun.
B) maystillhaveeconomicprofit.
C) hastotalrevenuethatislessthantotalcost.
D) cannotbeproducingwherepriceequalsmarginalcost.
Answer: C
Diff:1
33) Intheshortrun,afirmshouldshutdownwhen
A) P<AVC. B) P> MC. C) MR> MC. D) MR= ATC.
Answer: A
Diff:1
34) IfAVCis$6whenP=MC,afirm
A) willhavepositiveeconomicprofitsifpriceisgreaterthan$6.
B) isproducingtoolittleoutput.
C) shouldshutdownifpriceislessthan$6.
D) isexperiencingeconomiesofscale.
Answer: C
Diff:1
35) Afirmshouldneverproduceanyoutputif
A) P<AVC. B) P<ATC. C) AR< ATC. D) MR<MC.
Answer: A
Diff:1
36) Afirmearningeconomiclossesshouldoperateintheshortrunaslongas
A) thepriceperunitsoldisgreaterthantheaveragefixedcostperunitproduced.
B) thepriceperunitsoldisgreaterthantheaveragevariablecostperunitproduced.
C) marginalrevenueisatleastthepriceperunitsold.
D) thepriceperunitsoldisequaltoorgreaterthanthemarginalcostofproduction.
Answer: B
Diff:1
37) Afirmthatshutsdownintheshortrunexperienceslossesequaltoits
A) totalfixedcosts.
B) averagevariablecosts.
C) totalvariablecosts.
D) totalvariablecostsminusitstotalfixedcosts.
Answer: A
Diff:2
38) Theshort-runshutdownpriceforaperfectlycompetitivefirmiswherepriceequals
A) minimumATC. B) AR.
C) MR. D) minimumAVC.
Answer: D
Diff:1
39) Theshutdownruleforafirminaperfectlycompetitiveindustryisthatthefirmshouldcease
productionif
A) P<MC. B) P< ATC. C) P< AVC. D) P< AFC.
Answer: C
Diff:1
40) AslongaspriceexceedsAVC,thefirmisbetteroff
A) continuingproduction. B) closing.
C) raisingitsprice. D) cuttingprice.
Answer: A
Diff:2
41) Afirmwillshutdownintheshortrunwhen
A) priceisbelowaveragetotalcostsatallpossibleratesofoutput.
B) priceisbelowaveragevariablecostsatallpossibleratesofoutput.
C) priceisbelowmarginalcostatallpossibleratesofoutput.
D) itismakingaloss.
Answer: B
Diff:2
42) Intheshortrun,whichofthefollowingisFALSEabouttheshutdownpoint?
A) Totalrevenueisequaltototalfixedcost.
B) Totalrevenueisequaltototalvariablecost.
C) Productpriceisequaltotheminimumaveragevariablecost.
D) Pricemultipliedbyquantitymustbeequaltominimumaveragevariablecostmultiplied
byquantity.
Answer: A
Diff:3
43) Intheshortrun,thepriceatwhichafirmstotalrevenuesequalitstotalcostsis
A) apointofpositiveprofits. B) anoreturnprice.
C) theshort-runshutdownpoint. D) theshort-runbreak-evenpoint.
Answer: D
Diff:1
44) Attheshort-runbreak-evenprice,thefirm
A) isearningpositiveeconomicprofits.
B) isearningnegativeeconomicprofits.
C) ismakinganormalrateofreturnonitscapitalinvestment.
D) maybeearningapositiveornegativeprofiteconomicdependinguponcosts.
Answer: C
Diff:1
45) Ifpriceisaboveaveragetotalcosts,thefirm
A) isearningpositiveprofits.
B) isearningnegativeprofits.
D) maybeearningapositiveornegativeprofitdependinguponcosts.
Answer: A
Diff:1
46) Belowtheshort-runshutdownprice,thefirm
A) isearningpositiveeconomicprofits.
B) isearningnegativeeconomicprofits.
D) maybeearningapositiveornegativeeconomicprofitsdependinguponcosts.
Answer: B
Diff:1
47) Afirmwillcontinuetoproduceintheshortruneventhougheconomicprofitsarenegativeas
longas
A) theamountofthelossisnogreaterthantheamountoffixedcost.
B) MC=MR.
C) itearnedpositiveeconomicprofitslastyear.
D) ithasfixedobligationstopay.
Answer: A
Diff:1
48) Afirmthatshutsdownintheshortrunexperienceslossesequalto
A) zero. B) totalvariablecosts.
C) totalfixedcosts. D) totalmarginalcosts.
Answer: C
Diff:2
49) Ifthereisnooutputforwhichproductpriceissufficienttocovervariablecosts,
A) thefirmshouldstayopenintheshort-run.
B) thefirmshouldshutdownintheshortrun.
C) thefirmearnseconomicprofitsbystayingopen.
D) thefirmshouldincreaseproduction.
Answer: B
Diff:2
50) Aperfectlycompetitivefirmfacesamarketclearingpriceof$150perunit.Averagevariable
costsareattheminimumvalueof$200perunitatanoutputrateof100units.Marginalcost
equals$150perunitatanoutputrateof75units.Itcanbeconcludedthattheshort -run
profit-maximizingoutputrateis
A) 75units,atwhichthefirmearnszeroeconomicprofitsperunitsold.
B) 75units,atwhichthefirmearns$50ineconomicprofitsperunitsold.
C) 100units,becausemarginalcostequalsaveragevariablecosts.
D) 0units,becausepriceislessthanaveragevariablecosts.
Answer: D
Diff:2
51) Aperfectlycompetitivefirmfacesamarketclearingpriceof$150perunit.Averagetotalcosts
areattheminimumvalueof$200perunitatanoutputrateof100units.Averagevariablecosts
areattheminimumvalueof$100perunitatanoutputrateof50units.Marginalcostequals
$150perunitatanoutputrateof75units.Itcanbeconcludedthattheshort -run
B) 75units,atwhichthefirmearnsnegativeeconomicprofitsperunitsold.
C) 75units,atwhichthefirmearnspositiveeconomicprofitsperunitsold.
D) 50units,becausepriceislessthanaveragevariablecosts.
Answer: B
Diff:2
52) Aperfectlycompetitivefirmfacesamarketclearingpriceof$150perunit.Averagetotalcosts
areattheminimumvalueof$120perunitatanoutputrateof70units.Marginalcostequals
$150perunitatanoutputrateof75units.Itcanbeconcludedthattheshort -run
B) 75units,atwhichthefirmearnsnegativeeconomicprofitsperunitsold.
C) 75units,atwhichthefirmearnspositiveeconomicprofitsperunitsold.
D) 70units,becausepriceislessthanaveragetotalcosts.
Answer: C
Diff:2
53) AfirmiscurrentlyproducingatthepointwhereMC= MR.Thesituationforthefirmatthis

pointisP=$5,Q=100,ATC=$6,AVC=$4.50.Whatdoyourecommendthisfirmdo?
A) Increaseproductionabovethecurrentoutputrate,becauseMC= MRatthisrateofoutput.
B) Continuetoproducethecurrentoutputrate,becauseP> AVC.
C) Shutdown,becauseAVC>P.
D) Shutdown,becauseATC>P.
Answer: B
Diff:2
54) AfirmiscurrentlyproducingatthepointwhereMC= MR.Thesituationforthefirmatthis

pointisP=$5,Q=100,ATC=$6,AVC=$5.50.Whatdoyourecommendthisfirmdo?
A) Increaseproductionabovethecurrentoutputrate,becauseMC= MRatthisrateofoutput.
B) Continuetoproducethecurrentoutputrate,becauseP> AVC.
C) Shutdown,becauseAVC>P.
D) Shutdown,becauseATC>P.
Answer: C
Diff:1
55) Afirmthathaspositiveeconomicprofitshasaccountingprofitsthatare
A) zero.
B) positive.
C) negative.
Answer: B
Diff:1
56) Afirmthathasnegativeeconomicprofitshasaccountingprofitsthatare
A) zero.
B) positive.
C) negative.
Answer: D
Diff:1
57) Whenafirmhaseconomicprofitsequaltozero,
A) thefirmisearninganormalrateofreturnoninvestment.
B) thefirmisnotearninganormalrateofreturnoninvestment.
C) thefirmshouldshutdown.
D) thefirmsaccountingprofitsarealsozero.
Answer: A
Diff:1
58) Whenafirmisatitsshort-runbreak-evenpoint,
A) economicprofitsarepositive.
B) economicprofitsequalzeroandthefirmshouldshutdown.
C) economicprofitsequalzeroandthefirmisearninganominalrateofreturnoninvestment.
D) economicprofitsarenegativebutthefirmshouldcontinuetoproducebecauseaccounting
profitsarepositive.
Answer: C
Diff:1
59) Theownerofaperfectlycompetitivefirmthatisearningeconomiclossesintheshortrun
A) shouldaltertherateofoutputinordertoincreaseprofitability.
B) shouldcuthisownsalaryinordertoreachthebreak-evenpoint.
C) isactuallylosingmorethanhethinksbecausenotalloftheimplicitcostshavebeen
considered.
D) isearninglessthanhewouldifheworkedforsomeoneelse.
Answer: D
Diff:2
60) Theownerofaperfectlycompetitivefirmiscurrentlyearninganeconomicprofitofzero.This
owner
A) shouldshutdownsinceprofitsofzeroarenotgood.
B) shouldraisethepriceoftheproducttoincreaseprofits.
C) iscoveringallofhisfixedcosts.
D) willcontinueproducingintheshort-runbutwillshutdowninthelongrunifprofitsdo
notincrease.
Answer: C
Diff:1
61) Intheshortrun,inaperfectlycompetitivemarket,afirmwillshutdownif
A) P<AVCforalllevelsofoutput. B) P< ATCforalllevelsofoutput.
C) ATC>P>AVCforalllevelsofoutput. D) P> AFCforalllevelsofoutput.
Answer: A
Diff:2
62) Foraperfectlycompetitivefirmfacingtheshort-runbreak-evenprice,
A) ithasanegativeaccountingprofit. B) ithasaneconomicprofitofzero.
C) itshouldshutdown. D) itshouldexpandproduction.
Answer: B
Diff:2
63) Intheabovefigure,ifthemarketpriceis$10,thefirm
A) produces10units. B) produces12units.
C) shutsdownoperations. D) produces11units.
Answer: A
Diff:2
64) Intheabovefigure,ifthemarketpriceislessthan$7,thefirm
A) produces10units. B) produces8units.
C) produces0units. D) produces11units.
Answer: C
Diff:2
65) Intheabovefigure,ifthemarketpriceis$8,thefirm
A) continuestoproducebutataneconomicloss.
B) continuestoproducebutataneconomicprofit.
C) shutsdownoperations.
D) produces10units.
Answer: A
Diff:2
66) Theshort-runbreak-evenpriceis
A) thepriceatwhichafirmstotalrevenuesexceedtotalcosts.
B) thepointatwhichthefirmstotalcostsaremaximized.
C) thepriceatwhichafirmstotalrevenuesequalitstotalcosts.
D) thepointatwhichthefirmsimplicitcostsaremaximized.
Answer: C
Diff:1
67) Ifafirmshutsdownintheshortrun,
A) itwillloseitsoperatingcosts. B) itslosseswillbeequaltozero.
C) itwillincuritsfixedcosts. D) itwillincuronlyitsexplicitcosts.
Answer: C
Diff:2
68) Supposethepriceofaniteminaperfectlycompetitivemarketis$3.Forafirminthismarket,
MC=MRatanoutputof100units.Theaveragetotalcostatthisoutputlevelis$4perunit,and
TVCis$80.Wemayconcludethat
A) thefirmshouldshutdownbecauseTC> TR.
B) thefirmshouldcontinuetoproducebecauseP>AVC.
C) thefirmshouldshutdownbecauseitsTFCis$320anditsTCis$400.
D) thefirmshouldshutdownbecauseotherfirmswillentertheindustryasthemarketis
perfectlycompetitive.
Answer: B
Diff:2
69) Supposeaperfectlycompetitivefirmcanproduce20,000bushelsofcornayearatanoutputat
whichmarginalcostequalsmarginalrevenue.Themarketpriceofcornperbushelis$1.00.The
firmstotalcostsperyearare$50,000andfixedcostsperyearare$25,000.Intheshortrun,this
firmshould
A) shutdown.
B) continueproducinguntilthepriceofcornincreases.
C) produce20,000bushelsofcornbecause,althoughtheyarelosingmoney,theyarelosing
lessthaniftheyshutdown.
D) produce40,000bushelstotrytoincreaseeconomicprofit.
Answer: A
Diff:2
70) Supposeaperfectlycompetitivefirmcanproduce20,000bushelsofcornayearatanoutputat
whichmarginalcostequalsmarginalrevenue.Themarketpriceofcornperbushelis$2.00.The
firmstotalcostsperyearare$50,000andfixedcostsperyearare$25,000.Intheshortrun,this
firmshould
A) shutdown.
B) continueproducinguntilthepriceofcornincreases.
C) produce20,000bushelsofcornbecause,althoughtheyarelosingmoney,theyarelosing
lessthaniftheyshutdown.
D) produce40,000bushelstotrytoincreaseeconomicprofit.
Answer: C
Diff:2
71) Afirmstotalexplicitcostsare$1,000.Itstotalimplicitcostsare$500,andithasatotalrevenue
of$2000.Thisfirmreceives
A) anaccountingprofitonly.
B) aneconomicprofitonly.
C) bothaneconomicprofitandanaccountingprofit.
D) neitheraneconomicprofitnoranaccountingprofit.
Answer: C
Diff:2
Answer: A
Diff:2
Answer: D
Diff:2
74) Thebreak-evenpriceforaperfectlycompetitivefirmisthepricethatisequalto
A) AVC. B) ATC. C) MC. D) MR
Answer: B
Diff:2
75) Usingtheabovefigure,theperfectlycompetitivefirminthediagramwillearnaneconomic
profitifthemarketpriceis
A) P1 . B) P2 . C) P3 . D) P4 .
Answer: D
Diff:1
76) Usingtheabovefigure,theperfectlycompetitivefirmshouldshutdownifthemarketpriceis
below
A) P1 . B) P2 . C) P3 . D) P4 .
Answer: A
Diff:2
77) Usingtheabovefigure,theshort-runbreak-evenpricefortheperfectlycompetitivefirmwillbe
A) P1 . B) P2 . C) P3 . D) P4 .
Answer: C
Diff:2
78) Usingtheabovefigure,thepricefacingtheperfectlycompetitivefirminthelongrunwillbe
A) P1 . B) P2 . C) P3 . D) P4 .
Answer: C
Diff:1
79) Whatistheshort-runbreak-evenprice?Whatareeconomicprofitsatthisprice?Whywoulda
firmbewillingtooperatepermanentlyatthisprice?
Answer: Theshort-runbreak-evenpriceisthepriceatwhichtotalrevenueequalstotalcosts,so
thateconomicprofitsequalzero.Thefirmiswillingtostayinbusinessatzeroeconomic
profitsbecauseallopportunitycostsarecovered,includingtheopportunitycostsofthe
entrepreneurstimeandanyotherresourcesheorshebringsintothefirm.Thezero
economicprofitsareassociatedwithanormalrateofreturn,andtheentrepreneurcannot
expecttodobetteranywhereelse.
Diff:2
80) Whatistheshort-runshutdownprice?UsingagraphandamarketpriceofP,showthatlosses
arelesswhenshuttingdownthanwhenproducing.
Answer:
Theshort-runshutdownpriceisthepricethatequalstheminimumpointonthe
short-runaveragevariablecostcurve.Atanypricelowerthanthisthefirmshouldshut
downandproducenothing.Intheabovefigure,thepriceisbelowtheshutdownprice.Its
fixedcostsequalareaCADE,soifitshutsdown,thisareaequalsitslosses.Ifitproduces
whereMR=MC,thefirmslossesareCAFP,whicharemorethanthelosseswith
shuttingdown.
Diff:2
81) Afirmshouldshutdownimmediatelywhenitearnszeroeconomicprofits.Doyouagreeor
disagree?Explainyouranswer.
Answer: Disagree.Whenafirmearnseconomicprofitsorbreakseven,thepriceperunitofoutput
soldstillexceedstheaveragevariablecostsothatitisbetteroffcontinuingtoproduce.
Therevenuesinexcessofvariablecostscanbeusedtowardcoveringfixedcosts.Onlyif
thepriceperunitofoutputfallsbelowtheaveragevariablecostthatthefirmshouldshut
down.
Diff:2
82) Whenshouldafirmshutdown?Whenshouldafirmgooutofbusiness?
Answer: Afirmshouldshutdownwhenthepriceperunitofoutputsolddropsbelowtheaverage
variablecostperunitproduced.Thefirmcanshutdownorstopproducingintheshort
run,butitcanstillstayinbusiness.Inthelongrun,ifthemarketpriceremainsbelowthe
firmsshutdownpoint,thenitsownersshouldsellthefirmsassetsandgooutof
business.
Diff:2
23.7TheSupplyCurveforaPerfectlyCompetitiveIndustry
1) Whichofthefollowingcouldgenerateeconomicprofitsforperfectlycompetitivefirmsinthe
shortrun,iftheyinitiallyearnzeroeconomicprofits?
A) Afallindemand B) Aunittaxonoutput
C) Anincreaseintotalfixedcosts D) Adecreaseininputprices
Answer: D
Diff:1
Topic: 23.7TheSupplyCurveforaPerfectlyCompetitiveIndustry
2) Afirmiscurrentlyproducinganoutputatwhichpriceequalstheminimumpointonthe
averagevariablecostcurve.Ifwageratesincrease,thefirmwill
A) increaseitsrateofoutputtomakeupforthehighervariablecosts.
B) shutdownsinceitwouldnolongerbecoveringitsvariablecosts.
C) decreaseitsrateofoutputtooffsetthehighervariablecosts.
D) notmakeanychangessinceitscurrentrateofoutputisstillminimizingitslosses.
Answer: B
Diff:3
3) Theperfectlycompetitivesellersshort-runsupplycurveis
A) itsentiremarginalcostcurve.
B) itsmarginalrevenuecurve.
C) thepartofitsmarginalcostcurveabovetheaveragevariablecostcurve.
D) thepartofitsmarginalcostcurveabovetheaveragetotalcostcurve.
Answer: C
Diff:1
4) Therisingportionofaperfectlycompetitivefirmsmarginalcostcurve,abovetheintersection
withAVC,isits
A) demandcurve. B) economicprofit.
C) supplycurve. D) accountingprofit.
Answer: C
Diff:1
5) Inaperfectlycompetitivemarket,afirmsshort-runsupplycurveis
A) itstotalcostcurve.
B) itsmarginalcostcurveequaltoorabovethepointofintersectionwithitsaveragevariable
costcurve.
C) itsaveragevariablecostcurvebelowthepointofintersectionwithitstotalcostcurve.
D) itstotalcostcurvebetweentheshutdownpointandthebreak-evenpoint.
Answer: B
Diff:1
6) Ifpriceisbelowaveragevariablecostsatallratesofoutput,thequantitysuppliedbyaperfectly
competitivefirmwillequal
A) zero.
B) therateofoutputwherepriceequalsmarginalcost.
C) therateofoutputassociatedwiththebreak-evenpoint.
D) therateofoutputwheremarginalrevenueequalsaveragefixedcosts.
Answer: A
Diff:2
7) Assumingfixedfactorprices,theshort-runindustrysupplycurveforaperfectlycompetitive
industryisequaltothesumofthe
A) AVCcurvesaboveminimumAVC. B) ATCcurvesaboveminimumATC.
C) MCcurvesaboveminimumAVC. D) MCcurvesaboveminimumATC.
Answer: C
Diff:1
8) Intheabovefigure,assumingFirm1andFirm2arethesoleproducersintheindustry,the
industryquantitysuppliedatpriceP 1 isequalto
A) Q1 +Q 2. B) Q1 +Q 3. C) Q2 + Q 4. D) Q4 -Q 2.
Answer: C
Diff:2
9) Intheabovefigure,assumingFirm1andFirm2arethesoleproducersintheindustry,the
industryquantitysuppliedatpriceP 2 isequalto
A) Q1 +Q 2. B) Q1 +Q 3. C) Q2 + Q 4. D) Q4 -Q 2.
Answer: B
Diff:2
10) Aperfectlycompetitiveindustrysshort-runsupplycurveisbestdescribedas
A) theupwardslopingportionoftheindustrysmarginalcostcurve.
B) horizontal.
D) thehorizontalsummationoftheindividualfirmssupplycurves.
Answer: D
Diff:1
11) Theshort-runsupplycurveofaperfectcompetitoris
A) itsaveragevariablecostcurve.
B) itsmarginalrevenuecurve.
C) itsentiremarginalcostcurve.
D) itsmarginalcostcurveequaltoorabovetheminimumpointonitsaveragevariablecost
curve.
Answer: D
Diff:1
12) Refertotheabovefigure.Thecompetitivefirmsshortrunsupplycurve
A) startsatAandgoesalongtheMCcurveasquantityincreases.
B) startsatBandgoesalongtheMCcurveasquantityincreases.
C) startsatAandgoesalongtheAVCcurveasquantityincreases.
D) startsatBandgoesalongtheATCcurveasquantityincreases.
Answer: A
Diff:1
13) Aperfectlycompetitivefirmisproducingzerounitsofoutputintheshortrun.Weknowthat
priceis
A) belowtheminimumpointofitsaveragefixedcostcurve.
B) belowtheminimumpointofitsaveragevariablecostcurve.
C) belowtheminimumpointofitsaveragetotalcostcurve.
D) betweentheminimumpointsofitsaveragetotalcostcurve.
Answer: B
Diff:2
14) Theshort-runindustrysupplycurveisfoundby
A) takingtheinverseoftheindustrydemandcurve.
B) horizontallysummingtheaveragetotalcostcurveofallfirmsintheindustry.
C) addingupthequantitiessuppliedateachpricebyeachfirmintheindustry.
D) addingupthequantitiessuppliedateachpricebyeachofthefirmsintheindustrythatare
makingaprofit.
Answer: C
Diff:1
15) Theshort-runindustrysupplycurveslopesupbecause
A) thefirmseventuallyexperiencediseconomiesofscale.
B) thelawofdiminishingmarginalproductappliesintheshortrun.
C) wagesincreaseastheindustryincreasesoutput.
D) thehigherpriceisneededtogetmorefirmstoentertheindustry.
Answer: B
Diff:3
16) Factorsthatcausetheshort-runsupplycurvetochangearefactorsthataffect
A) demand. B) fixedcosts.
C) variablecosts. D) themarketbutnottheindividualfirm.
Answer: C
Diff:2
17) Anincreaseintheproductivityoflaborcauses
A) quantitysuppliedbyeachfirminacompetitiveindustrytodecrease.
B) supplyinacompetitiveindustrytoincrease.
C) themarketpricetoincreaseinacompetitiveindustry.
D) thefirmssupplycurvetoshiftbuthasnoeffectontheindustrysupplycurve.
Answer: B
Diff:2
18) Ifthewagerateincreasesandfirmsinaperfectlycompetitiveindustryarehiringlabor,then
A) thefirmswillquitusinglabor. B) profitswillincrease.
C) marketsupplywilldecrease. D) marketpricewilldecrease.
Answer: C
Diff:2
19) Theshort-runsupplycurveforaperfectlycompetitivefirmistheportionofits
A) ATCcurveabovetheMCcurve. B) MCcurveabovetheATCcurve.
C) ATCcurvebelowtheMCcurve. D) MCcurveaboveitsAVCcurve.
Answer: D
Diff:2
20) Theshort-runsupplycurvefortheperfectlycompetitivefirmistheportionofits
A) MCcurveabovetheAVCcurve. B) MCcurveabovetheAFCcurve.
C) MCcurveabovetheATCcurve. D) MCcurveabovetheMRcurve.
Answer: A
Diff:2
21) Whydoestheindustryshort-runsupplycurveslopeupward?
Answer: Theindustryshort-runsupplycurveslopesupbecausetheindividualfirmsshort-run
supplycurvesslopeup.Theperfectcompetitorsshort-runsupplycurveslopesup
becausethemarginalcostcurveslopesup,andthemarginalcostcurveslopesupbecause
ofthelawofdiminishingmarginalproduct.Hence,theindustryshort -runsupplycurve
slopesupbecauseofthelawofdiminishingmarginalproduct.
Diff:3
22) Whatdeterminestheperfectcompetitorssupplycurve?Howistheindustrysupplycurve
found?
Answer: Asupplycurveshowsthequantitysuppliedatvariousprices.Thefirmdecideshow
muchtosupplyateachpricebyequatingpriceandmarginalcost.Therefore,the
marginalcostcurveshowsthequantitysuppliedateachprice.However,atapricebelow
theshutdownprice,outputiszero,sothatportionofthemarginalcostcurveisnotpart
ofthesupplycurve.Theindustrysupplycurveisfoundbyaddingthequantities
suppliedofeachfirmforeachprice.Itisthehorizontalsummationoftheindividual
firmssupplycurves.
Diff:2
23) Anindustrysshort-runsupplycurveisconstructedbyaddinghorizontallyalltheaverage
variablecostcurvesoffirmsinthatindustry.Doyouagreeordisagree?Why?
Answer: Disagree.Anindustrysshort-runsupplycurveisconstructedbysumminghorizontally
alloftheindividualfirmssupplycurves,whicharetheirmarginalcostcurves(not
averagecostcurves)abovetheirrespectiveminimumaveragevariablecostpoints.
Diff:2
23.8PriceDeterminationUnderPerfectCompetition
1) Afirmiscurrentlyproducingattherateofoutputatwhichtotalrevenuesjustcoveritstotal
variablecosts.Ifdemandfalls,thefirmshould
A) lowerbothpriceanditsrateofoutput.
B) shutdown.
C) increaseitsrateofoutputtomakeupforthelowerprice.
D) notchangeitsrateofoutputbecauseitisstillcoveringitsvariablecosts.
Answer: B
Diff:2
Topic: 23.8PriceDeterminationUnderPerfectCompetition
2) Aperfectlycompetitiveindustrysmarketorgoingpriceisestablishedby
A) thelargestfirmintheindustry.
B) thelargestpurchaserofthisindustrysoutput.
C) eachindividualproducingfirmandreflectsthatfirmscosts.
D) theforcesofsupplyanddemand.
Answer: D
Diff:1
3) Aperfectlycompetitiveindustrysmarketpriceisfoundby
A) findingthepointonthemarketdemandcurvewherethelargestnumberofunitswillbe
purchased.
B) locatingtheintersectionofthemarketdemandandmarketsupplycurves.
C) thehorizontalsummationofalltheindustryfirmsindividualsupplycurves.
D) identifyingthepriceatwhicheachfirmrealizesitslargesteconomicprofit.
Answer: B
Diff:1
4) Underperfectcompetition,thedemandcurvefacingthefirmisdeterminedby
A) theintersectionoftheindustrydemandandsupplycurves.
B) thetastesandpreferencesofconsumers.
C) utilitymaximizingbehavioronthepartofconsumers.
D) thewillingnessofthefirmtosupplythegood.
Answer: A
Diff:2
5) Themarketdemandcurveinperfectcompetitionisfoundby
A) horizontallysummingthesupplycurvesoftheindividualfirmsintheindustry.
B) horizontallysummingthedemandcurvesoftheindividualconsumers.
C) utilitymaximizingbehavioroftherepresentativeconsumer.
D) theinteractionofsupplyanddemandattheindividualfirmandconsumerlevels.
Answer: B
Diff:2
6) Inaperfectlycompetitivemarketinwhichallfirmsaremaximizingtheireconomicprofits,the
demandandsupplycurvesintersectatapriceof$8.Fromthisweknowthateach
A) firmsaveragetotalcostofproducingthegoodis$8.
B) firmsaveragevariablecostofproducingthegoodis$8.
C) firmsmarginalcostofproducingthegoodis$8.
D) firmisearningpositiveeconomicprofitsatapriceof$8ormore.
Answer: C
Diff:3
7) AllofthefollowingaretrueregardingperfectlycompetitivepricedeterminationEXCEPT
A) themarketpriceisdeterminedbytheinteractionsamongallbuyers(households)and
firms.
B) theindividualfirmtakesthemarketpriceasgiven.
C) theindividualfirmisknownasamarketpricemaker.
D) theindividualfirmsmarginalrevenuecurveishorizontalatthemarketprice.
Answer: C
Diff:1
8) Howisthemarketclearingpriceestablishedinaperfectlycompetitiveindustry?
Answer: Themarketclearingpriceisestablishedbytheforcesofmarketsupplyanddemand.
Marketdemandisdeterminedcollectivelybythebuyers.Marketsupplyisdetermined
collectivelybythesuppliers.Eventhougheachindividualsupplierorbuyerhasno
controlonthepriceoftheproductinaperfectlycompetitiveindustry,theinteractionof
allthebuyersandsuppliersdeterminestheprice.
Diff:2
9) Usingagraph,showashort-runequilibriumfortheindustryandthefirm.Explainthegraph.
Answer:
Intheabovefigure,theindustrydemandandsupplycurvesintersectverticallyaboveQ,
whereQisquantityproducedandsoldatpriceP.ThefirmtakesPasgiven,andchooses
toproducequnitssincethisiswhereMR=MC.Averagerevenueatqisaqandaverage
totalcostisbq,soaverageprofitisabandtotalprofitisPabc.
Diff:2
23.9TheLong-RunIndustrySituation:ExitandEntry
1) Marketsignals
A) arewaysofconveyinginformation. B) donotinvolveeconomicprofits.
C) arebestignoredbyinvestors. D) donotinvolveeconomiclosses.
Answer: A
Diff:1
Topic: 23.9TheLong-RunIndustrySituation:ExitandEntry
2) Whatistheshapeofthelong-runsupplycurveinadecreasing-costindustry?
A) Horizontal B) Increasing
C) Downwardsloping D) Upwardsloping
Answer: C
Diff:1
3) Inthelongrunwhenaperfectlycompetitivefirmexperiencespositiveeconomicprofits,
A) firmsexittheindustry,themarketsupplycurveshiftsrightward,andthemarketprice
falls.
B) firmsentertheindustry,themarketsupplycurveshiftsrightward,andthemarketprice
falls.
C) firmsexittheindustry,themarketsupplycurveshiftsleftward,andthemarketpricerises.
D) firmsentertheindustry,themarketsupplycurveshiftsrightward,andthemarketprice
rises.
Answer: B
Diff:2
4) Inthelongrunwhenaperfectlycompetitivefirmexperiencesnegativeeconomicprofits,
falls.
falls.
C) firmsexittheindustry,themarketsupplycurveshiftsleftward,andthemarketpricerises.
rises.
Answer: C
Diff:2
5) Ifanindustryhasconstantmarginalandaveragecosts,anyshiftindemandwilleventually
A) resultinahigherequilibriumprice.
B) bemetbyasmallerchangeinquantitysupplied.
C) bemetbyanequalchangeinquantitysupplied,andequilibriumpricewillnotchange.
D) makeeconomicprofitszerointheshortrun.
Answer: C
Diff:2
6) Inaperfectlycompetitivemarket,positiveeconomicprofitsactto
A) attractnewentrantsintotheindustry.
B) drivepotentialcompetitorsawayfromtheindustry.
C) preventreinvestmentonthepartoffirmswithintheindustry.
D) signalresourceownerselsewherenottoinvesttheircapitalinthisindustry.
Answer: A
Diff:1
7) Inaperfectlycompetitivemarket,ifP> ATCintheshortrun,thereisapttobe
A) entryofnewfirmsintothemarket.
B) anaccountinglossforexistingfirms.
C) aninwardshiftintheindustrysupplycurve.
D) anupwardpressureonprice.
Answer: A
Diff:1
8) IfaperfectcompetitorfacesP=ATCinthelongrun,thefirmwill
A) earneconomicprofits. B) earneconomiclosses.
C) leavetheindustry. D) remainintheindustry.
Answer: D
Diff:2
9) Theexitingoffirmsfromaperfectlycompetitiveindustryoccurswhen
A) opportunitycostscannotbecovered.
B) P=ATC.
C) accountingprofitislessthaneconomicprofit.
D) MRequalsMC.
Answer: A
Diff:1
10) Inaperfectlycompetitiveindustry,whichofthefollowingisamarketsignaltoresource
owners?
A) Economicprofits
B) Qualityofgoods
C) Thelevelofexportsinthecountry
D) Thelevelofsubsidiestheindustryreceives
Answer: A
Diff:2
11) Economicprofitsandlossesaretruemarketsignalsbecausethey
A) conveyinformationinanasymmetricalfashion.
B) conveyinformationaboutrewardspeopleshouldanticipateexperiencingbyshifting
resourcesfromoneactivitytoanother.
C) conveyinformationtopublicofficialsaboutwheretoencouragepeopletoinvestandwhat
skillspeopleshoulddevelop.
D) causepeopletomoveintocareersinbothundesirableanddesirableindustrieswithequal
ease.
Answer: B
Diff:2
12) Alawthatrestrictsplantclosingswill
A) maketheeconomymoreefficientbyslowingdownthemovementofresourcestoamore
optimalrate.
B) maketheeconomymoreefficientbyreducingpoordecisionsonthepartofentrepreneurs.
C) preventresourcesfromflowingtotheirhighest-valueduses.
D) allowprofitsandlossestoprovideasignalingfunction.
Answer: C
Diff:2
13) Inadecreasing-costindustry,anincreaseinoutputwillleadto
A) anupwardshiftintheATCcurve. B) anupwardshiftintheMCcurve.
C) areductioninlong-runper-unitcosts. D) anincreaseinlong-runper-unitcosts.
Answer: C
Diff:1
14) Inanincreasing-costindustry,anincreaseinoutputwillleadto
A) andownwardshiftintheATCcurve. B) andownwardshiftintheMCcurve.
C) areductioninlong-runper-unitcosts. D) anincreaseinlong-runper-unitcosts.
Answer: D
Diff:1
15) Ifanindustryslong-runper-unitcostsincreaseasitsoutputincreasesthen
A) thefirmslong-runeconomicprofitsmustbegreaterthanzero.
B) thefirmismostlikelyadecreasing-costindustry.
C) thefirmismostlikelyanincreasing-costindustry.
D) thefirmismostlikelyaconstant-costindustry.
Answer: C
Diff:1
16) Ifanindustryslong-runper-unitcostsdecreaseasitsoutputincreasesthen
A) thefirmslong-runeconomicprofitsmustbelessthanzero.
Answer: B
Diff:1
17) Ifanindustryslong-runper-unitcostsareconstantasitsoutputincreasesthen
A) thefirmslong-runeconomicprofitsmustbegreaterthanzero.
Answer: D
Diff:1
18) Ifaconstant-cost,perfectlycompetitiveindustryexperiencesanincreaseinthedemandforits
product,wewouldexpect
A) onlythemarketpriceofthegoodtoincrease.
B) boththemarketpriceandquantitysuppliedtoincrease.
C) decreasesinthemarketprice,butincreasesinquantitysupplied.
D) onlythequantitysuppliedoftheproducttoincrease.
Answer: D
Diff:2
19) Aconstant-costindustryisoneinwhich
A) outputincreasesleadtoproductivitygains.
B) themarginalproductoflaborisconstant.
C) thereisnochangeinlong-runper-unitcosts,evenasoutputvaries.
D) eachfirmhasahorizontallong-runaveragecostcurve.
Answer: C
Diff:1
20) Inanincreasing-costindustry,anincreaseinindustryoutputwill
A) leadtoahighermarketprice.
B) leadtoalowermarketprice.
C) shifteachfirmsaveragefixedcostcurvedown.
D) shifteachfirmsshortrunsupplycurvedown.
Answer: A
Diff:1
21) Inadecreasing-costindustry,anincreaseinindustryoutputwill
A) leadtoahighermarketprice.
B) leadtoalowermarketprice.
C) shifteachfirmsaveragefixedcostcurveup.
D) shifteachfirmsshortrunsupplycurveup.
Answer: B
Diff:1
22) Aconstant-costindustry
A) isoneinwhichanincreaseindemandismatchedbyaproportionalincreasesinlong -run
supply.
B) generatesincreasingprofitswheneverdemandincreasesbecausethenewlong-run
equilibriumpriceisabovetheoldpriceeventhoughaveragecostshavenotchanged.
C) hasahorizontallong-runsupplycurve.
D) hasadownwardslopinglong-runsupplycurve.
Answer: C
Diff:1
23) Wheneconomicprofitsinaperfectlycompetitiveindustryarepositive,
A) newfirmswillbeattractedtotheindustry,andeconomicprofitswilldeclinetozero.
B) theindustryisinequilibrium.
C) firmswillincreaseoutputtoearnevenhigherprofits.
D) firmswillincreasepriceswhiletheyhavetheopportunity.
Answer: A
Diff:1
24) Inaperfectlycompetitiveindustry,anyrestrictionsthatpreventnewfirmsfromentering
A) leadtonegativeprofits.
B) guaranteethatallexistingfirmswillearnexactlyazeroprofit.
C) hindereconomicefficiency.
D) reducetheaveragecostofproduction.
Answer: C
Diff:1
25) Signalsare
A) usedbyeconomicdecision-makerstoinformothersabouttheirplans.
B) themethodbywhichgovernmentplannersinformeconomicdecision -makersaboutthe
typesofdecisionstheyshouldmake.
C) themethodbywhichfirmsdeterminetheirprofitmaximizingquantity.
D) compactwaysofconveyingtoeconomicdecisionmakersinformationneededtoidentify
industrieswheremoreresourcesareneeded.
Answer: D
Diff:1
26) Atruesignalmust
A) conveyinformationonly.
B) conveyinformationanddirecttheresourceownerstoactappropriately.
C) conveyinformationaboutthelong-runfuture.
D) explainindetailwhysomethingshouldbedone.
Answer: B
Diff:1
27) Profitsandlossesaretruesignalsbecausethey
A) conveyinformationabouttruelong-runprofits.
B) cannotbemisinterpretedbyentrepreneurs.
C) conveyinformationaboutwheretoplaceresourcesandrewardpeoplewhoactonthe
information.
D) rewardpeoplewhomakeprofitswithevenmoreprofitsandpunishthosewhomake
losseswithevenmorelosses.
Answer: C
Diff:2
28) Firmsinaperfectlycompetitiveindustryareearningeconomiclosses.Thisis
A) asignaltoentrepreneursthatsomeofthefirmsintheindustryshouldexitandthe
resourcesofthesefirmsshouldmoveintoproductionofothergoods.
B) asignaltoentrepreneursthatadditionalresourcesshouldbebroughtintothisindustryin
ordertomakeitprofitable.
C) asignalthattheentrepreneursaredoingapoorjobandshouldbecomeworkersfor
someoneelse.
D) asignaltogovernmentofficialsthatasubsidyisneededforthefirmsintheindustry.
Answer: A
Diff:2
29) Refertotheabovefigure.Whichpanelrepresentsthelong-runsupplycurveforaconstantcost
industry?
Answer: A
Diff:2
30) Refertotheabovefigure.Whichpanelrepresentsthelong-runsupplycurveforanincreasing
costindustry?
Answer: C
Diff:2
31) Refertotheabovefigure.Whichpanelrepresentsthelong-runsupplycurveforadecreasing
costindustry?
Answer: D
Diff:2
32) Whichofthefollowingwouldtellusthatresourcesarenotflowingtotheirhighestvalueduses?
A) Short-runeconomicprofits B) Short-runeconomiclosses
C) Long-runeconomicprofits D) Somefirmsarejustbreakingeven.
Answer: C
Diff:1
33) Alonganindustryslong-runsupplycurve,
B) economicprofitsarezero.
C) entrepreneursearnanabove-averagerateofreturn.
D) thenumberoffirmsisconstant.
Answer: B
Diff:1
34) Ifthelong-runsupplycurveisupwardsloping,weknowthat
A) entrepreneursareearninghigherprofitsasoutputexpands.
B) someinputpricesareincreasingastheindustryexpands.
C) firmsaregettinglargerastheindustrycontracts.
D) thelawofdiminishingmarginalreturnshassetin.
Answer: B
Diff:2
35) Anindustrywhosetotaloutputcanbeincreasedwithoutachangeinlong-runper-unitcostsis
a(n)
A) increasing-costindustry. B) constant-costindustry.
C) break-evencostindustry. D) decreasing-costindustry.
Answer: B
Diff:1
36) Anindustryinwhichanincreaseinindustryoutputisaccompaniedbyanincreaseinlong -run

per-unitcostsisa(n)
Answer: A
Diff:1
37) Anindustryinwhichanincreaseinoutputleadstoareductioninlong-runper-unitcostsis
a(n)
Answer: D
Diff:1
38) Supposeaperfectlycompetitiveindustryisinlong-runequilibrium.Ifadecreaseindemand
leadstoalowerlong-runprice,weknowthat
A) thisisadecreasing-costindustry.
B) thisisanincreasing-costindustry.
C) somefirmswillbelosingmoneyinthelongrun.
D) afterfurtheradjustments,pricewillrisetoitsoriginallevel.
Answer: B
Diff:3
39) Supposeaperfectlycompetitiveindustryisinlong-runequilibrium.Ifadecreaseindemand
leadstoahigherlong-runprice,weknowthat
A) thisisadecreasing-costindustry.
B) thisisanincreasing-costindustry.
C) somefirmswillbelosingmoneyinthelongrun.
D) afterfurtheradjustments,pricewillfalltoitsoriginallevel.
Answer: A
Diff:3
40) Aperfectlyelasticlong-runsupplycurveindicates
A) adecreasing-costindustry.
B) aconstant-costindustry.
C) anincreasing-costindustry.
D) thatsomeinputpriceschangeasfirmsenterandexittheindustry.
Answer: B
Diff:2
41) Ifthelong-runsupplycurveishorizontal,weknowthatthisis
D) asituationsinwhichsomeinputpriceschangeasfirmsenterandexittheindustry.
Answer: B
Diff:2
42) Ifthelong-runsupplycurveslopesdownward,weknowthatthisis
D) asituationinwhichnoinputpriceschangeasfirmsenterandexittheindustry.
Answer: A
Diff:2
43) Ifthelong-runsupplycurveslopesupward,weknowthatthisis
D) asituationinwhichnoinputpriceschangeasfirmsenterandexittheindustry.
Answer: C
Diff:2
44) Consideranindustrythatisinlong-runequilibrium.Anincreaseindemandleadstoan
increaseinthepriceofthegood.Weknowthatthisis
A) adecreasingcostindustry. B) aconstantcostindustry.
C) anincreasingcostindustry. D) notacompetitiveindustry.
Answer: C
Diff:1
45) Consideranindustrythatisinlong-runequilibrium.Anincreaseindemandleadstoadecrease
inthepriceofthegood.Weknowthatthisis
Answer: A
Diff:1
46) Consideranindustrythatisinlong-runequilibrium.Anincreaseindemandleadstonochange
inthepriceofthegood.Weknowthatthisis
Answer: B
Diff:1
47) Anincreasing-costindustrywillhave
A) aperfectlyelasticlong-runsupplycurve.
B) aperfectlyinelasticlong-runsupplycurve.
C) anupwardslopingsupplycurveinthelongrun.
D) anupwardslopingdemandcurveinthelongrun.
Answer: C
Diff:1
48) Adecreasing-costindustrywillhave
C) anupwardslopingdemandcurveinthelongrun.
D) adownwardslopingsupplycurveinthelongrun.
Answer: D
Diff:1
49) Ifanindustryslong-runsupplycurveslopesdownward,thentheindustryis
A) afixed-costindustry. B) aconstant-costindustry.
C) anincreasing-costindustry. D) adecreasing-costindustry.
Answer: D
Diff:1
50) Aconstant-costindustrywillhave
C) anupwardslopingdemandcurveinthelongrun.
D) anupwardslopingsupplycurveinthelongrun.
Answer: A
Diff:1
51) Aperfectlycompetitivefirmwillnotearnaneconomicprofitinthelongrun,because
A) itisaprice-maker.
B) itfacesaperfectlyinelasticdemandcurve.
C) therearenobarrierstoentryintotheindustry.
D) itproducesdifferentiatedproducts.
Answer: C
Diff:2
52) Whenaperfectlycompetitivefirmexperiencespositiveeconomicprofits,
A) thehighbarrierstoentrypreventfurthercompetition.
B) existingfirmsexittheindustry.
C) additionalfirmsentertheindustry.
D) firmshavenoincentivetoexitorentertheindustry.
Answer: C
Diff:2
53) Inthelongrunwhenaperfectlycompetitivefirmexperiencesnegativeeconomicprofits,
Answer: B
Diff:2
54) Whenaperfectlycompetitivefirmexperienceszeroeconomicprofits,
Answer: D
Diff:2
55) Themotivethatdrivesfirmstoenterorexitanindustryis
A) utility. B) governmental.
C) economicprofit. D) accountingcosts.
Answer: C
Diff:1
56) Ifafirmisearningshort-runeconomicprofitsshownintheabovefigure,inthelongrun
falls.
falls.
C) firmsexittheindustry,themarketsupplycurveshiftsleftward,andthemarketpricefalls.
rises.
Answer: B
Diff:3
57) Whichofthefollowingisthebestexampleofadecreasing-costindustry?
A) thehealthcareindustry B) thepersonalcomputerindustry
C) thecollege-educationindustry D) theoilindustry
Answer: B
Diff:1
58) Ifthecostsofproductiondonotincreaseasoutputincreasesinthelongruninaperfectly
competitiveindustry,thenthisisa
A) constant-return-to-scaleindustry. B) constant-competitiveindustry.
C) constant-costindustry. D) constant-priceindustry.
Answer: C
Diff:2
59) Thelong-runsupplycurveinaconstant-cost,perfectlycompetitiveindustryis
A) perfectlyinelastic. B) upwardsloping.
C) downwardsloping. D) perfectlyelastic.
Answer: D
Diff:2
60) Thelong-runindustrysupplycurveinadecreasing-cost,perfectlycompetitiveindustryis
A) negativelysloped. B) perfectlyelastic.
C) positivelysloped. D) perfectlyinelastic.
Answer: A
Diff:2
61) Becauseafirmssupplycurveslopesupward,thelong-runsupplycurveofanindustrymust
alsoslopeupward.Doyouagreeordisagree?Explain.
Answer: Disagree.Eventhoughafirmssupplycurveslopesupward,theslopeoftheindustry
supplycurveinthelongruncanbepositive,negativeorhorizontal.Anupwardsloping
industrysupplycurvereflectsthatanincreaseinindustryoutputisaccompaniedbyan
increaseinlong-runaveragecosts,whileadownwardslopingindustrysupplycurve
reflectsacorrespondingdecreaseinlong-runaveragecosts,andahorizontalindustry
supplycurvereflectsnochangeinlong-runaveragecosts.
Diff:2
62) Whataresignals?Howdoprofitsfunctionassignals?
Answer: Signalsarecompactwaysofconveyingtoeconomicdecisionmakersinformationneeded
tomakedecisions.Asignalnotonlyconveysinformation,butalsoprovidestheincentive
toreactappropriately.Economicprofitsaresuchsignalsbecausetheyindicateto
entrepreneurswheretheyshouldoperateandprovidetheincentiveinthatthe
entrepreneursincomesareincreasedwhentheyrespondtothesignals.
Diff:2
63) Whatdetermineswhethertheindustrylong-runsupplycurveisupwardslopingorhorizontal?
Answer: Whenfirmsenterandexittheindustry,newresourcesareeitherdrawnintotheindustry
oraretemporarilyleftunemployed.Ifthesemovementsinresourcescauseresource
pricestorise,thentheindustrywillbeanincreasing-costindustryandhaveanupward
slopinglong-runsupplycurve.Ifthesemovementsinresourcesdonotaffectresource
prices,thentheindustryisaconstant-costindustryandthelong-runsupplycurveis
horizontal.
Diff:3
64) Explainwhathappenstothelong-runsupplycurveofanindustrywhenfirmentryraisesthe
priceofinputsusedintheindustry.
Answer: Whenfirmentryraisesthepriceofinputsusedintheindustry,theaveragetotalcost
curveandmarginalcostcurvesshiftupward.Thisinturncausesthefirmsshort -run
supplycurvestoshiftupwardwhenthereisanincreaseinmarketdemand.Asaresult,
thelong-runindustrysupplycurveslopesupward.
Diff:2
23.10Long-RunEquilibrium
1) Ifaperfectlycompetitivefirmhaseconomicprofitsgreaterthanzero,thenweknowthat
A) thefirmsindustryisnotinlong-runequilibrium.
B) thefirmsindustryisinlong-runequilibrium.
C) thefirmisproducingatthebottomoftheaveragetotalcostcurve.
D) thefirmwillreduceoutput.
Answer: A
Diff:1
Topic: 23.10Long-RunEquilibrium
2) Intheabovefigure,thelong-runequilibriumpriceandoutputare
A) $10and10. B) $10and12. C) $7and8. D) $8and10.
Answer: C
Diff:2
3) Inthelongrun,aperfectcompetitor
A) earnspositiveprofitsbutwillnotmakelosses.
B) earnspositiveeconomicprofits.
C) earnszeroeconomicprofits.
D) producesatitsshutdownpoint.
Answer: C
Diff:2
4) Inthelongrun,thepriceforaperfectlycompetitivefirm
A) willbedeterminedbythefirmssupplyanddemandcurves.
B) willallowforpositiveeconomicprofits.
C) willequalmarginalcostwheremarginalcostisataminimum.
D) willequaltheminimumaveragetotalcost.
Answer: D
Diff:1
5) WhichofthefollowingisNOTcorrectforaperfectlycompetitivefirminlong-runequilibrium?
A) SAC=LAC B) MR= P= AR
C) MC=MR>LAC D) LAC= P
Answer: C
Diff:1
6) Whichofthefollowingistrueinperfectcompetitionatlong-runequilibrium?
A) P=ATC=MC=MR B) ATCisminimized
C) economicprofitis$0 D) alloftheabove
Answer: D
Diff:1
7) Inthelongruninaperfectlycompetitiveindustry,
A) opportunitycostsarenegligible.
B) economicprofitswillbezero.
C) somefirmswillbeexperiencingeconomiclosses.
D) onlyentrepreneurswillearnmorethantheiropportunitycosts.
Answer: B
Diff:1
8) WhichofthefollowingisNOTtrueforaperfectlycompetitivefirminthelongrun?
A) MR=MC B) MC> LAC C) Price= MC D) SAC=LAC
Answer: B
Diff:1
9) WhichofthefollowingisNOTcorrectconcerningperfectlycompetitivefirmsinthelongrun?
A) Long-runeconomicprofitsarezero.
B) Priceequalsminimumlong-runaveragecost.
C) Entrepreneursearntheopportunitycostoftheirinvestment.
D) Theopportunitycostofcapitaliszero.
Answer: D
Diff:1
10) Inthelongrun,theperfectlycompetitivefirm
A) doesnothaveashutdownprice. B) earnsonlyanormalprofit.
C) mayproduceevenifitsuffersaloss. D) earnsaneconomicprofit.
Answer: B
Diff:1
11) Forafirminaperfectlycompetitiveindustry,
A) short-runeconomicprofitsmustbezero.
B) short-runandlong-runeconomicprofitsmustbezero.
C) short-runeconomicprofitsmaybepositive,butlong-runeconomicprofitsmustbezero.
D) bothshort-runandlong-runeconomicprofitsmaybenegative.
Answer: C
Diff:1
12) Firmsinaperfectlycompetitiveindustryareproducinggoodsefficientlyinthelongrunifeach
isproducingattheminimumpointofthe
A) AVCcurve. B) MCcurve. C) LACcurve. D) AFCcurve.
Answer: C
Diff:1
13) Inlong-runequilibrium,theperfectlycompetitivefirmwill
A) gooutofbusiness.
B) producetothepointatwhichmarginalcostisatitsminimum.
C) producetothepointatwhichmarginalcostequalsaveragetotalcost.
D) produceontheupwardslopingportionofitsATCcurve.
Answer: C
Diff:1
14) Priceequalstheminimumoflong-runaveragecost
A) inalong-runequilibrium.
B) inashort-runequilibriumaswellasinalong-runequilibrium.
C) wheneveraveragerevenueequalsmarginalcost.
D) alongahorizontallong-runsupplycurve,butnotalonganupwardslopinglong-run
supplycurve.
Answer: A
Diff:2
15) WhichofthefollowingisNOTacharacteristicofaperfectlycompetitivelong-runequilibrium?
A) Firmsareearningzeroprofits.
B) Priceequalsmarginalcost.
C) Priceequalslong-runminimumaveragecost.
D) Firmsareproducingonthedownwardslopingportionsoftheirshort-runaveragecost
curves.
Answer: D
Diff:2
16) Foraperfectlycompetitivefirmatitslong-runequilibrium,
A) P=MR=MC=AC.
B) P=MR>MC.
C) accountingprofitmustbezero.
D) therearenoopportunitycoststobeconcernedwith.
Answer: A
Diff:1
17) Ifaperfectlycompetitiveindustryisinlong-runequilibrium,then
A) priceequalsaveragecost.
B) priceisgreaterthanaveragecostandequaltomarginalcost.
C) allfirmsearnthesameaccountingprofits.
D) marginalcostislessthanaveragecost.
Answer: A
Diff:2
18) Whenaperfectlycompetitivefirmisinlong-runequilibrium,economicprofits
A) arepositive.
B) arezero.
C) arenegative.
D) maybepositive,zeroornegativedependinguponcosts.
Answer: B
Diff:1
19) Inaperfectlycompetitivemarket,afirminlong-runequilibriumwillbeoperating
A) totherightoftheminimumofthelong-runaveragecostcurve.
B) totheleftoftheminimumofthelong-runaveragecostcurve.
C) attheminimumofthelong-runaveragecostcurve.
D) attheminimumofthemarginalcostcurve.
Answer: C
Diff:1
20) Refertotheabovefigure.Aperfectlycompetitivefirmthatisinlong -runequilibriumwillbe

operating
A) withpositiveeconomicprofits. B) ataquantitygreaterthanpointE.
C) ataquantitylessthanpointE. D) atpointE.
Answer: D
Diff:1
21) Inreferencetothelong-runfirmcompetitiveequilibriumdiagram,whichofthefollowing
statementsisINCORRECT?
A) Inthelongrun,thefirmhasnoincentivetoalteritsscaleofoperations.
B) Becauseprofitsmustbezerointhelongrun,thefirmsshort-runaveragecosts(SAC)
mustequalPatQe,whichoccursatminimumSAC.
C) Inthelongrun,thefirmoperateswhereprice,marginalrevenue,marginalcost,short -run
minimumaveragecost,andlong-runminimumaveragecostallareequal.
D) Inthelongrun,thisfirmmustbepartofaconstant -costindustry,becauseitsmarginal
revenuecurveisperfectlyelastic.
Answer: D
Diff:2
22) Inalong-runequilibrium,aperfectlycompetitivefirmsaveragetotalcostis
A) minimized. B) maximized.
C) zero. D) equaltoaveragefixedcost.
Answer: A
Diff:1
23) Inthelongrun,allfirmsinaperfectlycompetitiveindustry
A) earneconomicprofits.
B) breakeven.
C) suffereconomiclosses.
D) selldifferentiatedproductstoearneconomicprofits.
Answer: B
Diff:2
24) Foraperfectlycompetitivefirmatitslong-runcompetitiveequilibriumpoint,
A) P=AR=MR=LATC= SATC= MC. B) P= AR= MR=LATC>SATC= MC.
C) P=AR=MR=MC= LATC= AVC. D) P> MR> AR>MC>LATC> SATC.
Answer: A
Diff:2
25) Inalong-runperfectlycompetitiveequilibrium,
A) P=MR=MC>ATC. B) P= MR> MC=ATC.
C) P=MR=MC=ATC. D) P> MR> MC=ATC.
Answer: C
Diff:2
26) Iffirmsinaperfectlycompetitiveindustryareearningpositiveeconomicprofits,thenwhatwill
happeninthelongrun?
Answer: Economicprofitsprovideincentivesforentrepreneurstostartnewfirmsandenterthe
industry.Whenentryofnewfirmstakesplace,themarketsupplycurveshiftsoutward.
Theequilibriumquantityincreases,andthemarketclearingpricedeclines.Thispushes
economicprofitsbackdowntowardzero.Wheneconomicprofitsreturntozero,thereis
nolongeranincentivefornewfirmstoentertheindustry,andanewlong -run
equilibriumwillhavebeenreached.
Diff:2
27) Inthelongrun,aperfectlycompetitivefirmsaveragetotalcostisalwaysbelowthemarket
clearingprice.Agreeordisagree?Why?
Answer: Disagree.Inthelongrun,aperfectlycompetitivefirmproducesatanoutputrateat
whichthemarketclearingpriceequalsshort-runminimumaveragetotalcostand
long-runminimumaveragetotalcost.Ifthefirmsaveragetotalcostisbelowthemarket
clearingprice,itsprofitswillleadtofirmentryintotheindustry.Asaresultoffirmentry,
themarketclearingpricewilldecline.Thisprocesswillcontinueuntilthemarketclearing
priceequalsthefirmsaveragetotalcost.
Diff:1
23.11CompetitivePricing:MarginalCostPricing
1) Economicefficiencymeans
A) thesameastechnicalefficiency.
B) thatallfirmswithinasinglecompetitiveindustryareproducingatthesamelevelof
output.
C) thatitisimpossibletoincreasetheoutputofanygoodwithoutloweringthetotalvalueof
theoutputoftheeconomy.
D) thathigh-techmethodsofproductionarethemostefficient.
Answer: C
Diff:1
Topic: 23.11CompetitivePricing:MarginalCostPricing
2) Withmarginalcostpricing,
A) marginalbenefitsareusuallylessthanmarginalcost.
B) allopportunitycostswillbecoveredintheshortrun.
C) thepricechargedisequaltotheopportunitycosttosocietyofproducingonemoreunitof
thegood.
D) therecannotbeanyshort-runeconomicprofit.
Answer: C
Diff:1
3) Whenmarginalcostpricingoccurs,
A) priceequalstheadditionalcostsocietyincursinproducingthenextunitofanitem.
B) thefirmcanonlybreakevenifitdoesnotsetpricetomarginalcost.
C) priceequalsaveragevariablecostbutexceedsaveragetotalcost.
D) thefirmisattheshutdownpoint.
Answer: A
Diff:2
4) Competitivepricingisefficientbecause
A) thepricethatconsumerspayreflectstheopportunitycosttosocietyofproducingthe
good.
B) firmsmakepositiveeconomicprofitsinlong-runequilibrium.
C) averagerevenueequalsaveragecost.
D) firmsproduceabovetheminimumefficientscale.
Answer: A
Diff:1
5) Amarketfailureisasituationinwhich
A) resourcesarebeingefficientlyallocated,butsomecompaniesareforcedtoshutdown.
B) themarketequilibriumleadstoeithertoomanyortoofewresourcesgoingtowards
producingthegoodorservice.
C) thegovernmentmusttakeactionstocorrectthefailuresofthemarketinaparticular
industry.
D) thereisnofreeentryorexitintoanindustry.
Answer: B
Diff:2
6) Theopportunitycosttosocietyofproducingonemoreunitofthegoodis
A) averagecost. B) marginalcost.
C) efficiencycosting. D) theoptimalcost.
Answer: B
Diff:1
7) Whenpriceequalsmarginalcost
A) firmsmakezeroprofits.
B) firmsmakepositiveprofits.
C) theindustryisinlong-runequilibrium.
D) themarginalbenefitsofconsuminganextraunitofthegoodexactlyequalsthemarginal
costtosocietyofproducingthegood.
Answer: D
Diff:2
8) Thevalueoftotaloutputdecreaseswhenlaborleavesoneindustryandgoestoanotherand
capitalleavesthesecondindustryandgoestothefirst.Thisindicatesthat
A) thefirstsituationwasnotefficient.
B) thesecondsituationisefficient.
C) priceisgreaterthanmarginalcost.
D) itwouldbeefficienttoreturntothefirstsituation.
Answer: D
Diff:3
9) Ifmarketsareperfectlycompetitive,thentheproductionofgoods
A) willusetheleastcostlycombinationofresources.
B) willoccuratanaveragetotalcostvaluethatisabovetheminimum.
C) willrequiregovernmentintervention.
D) willalwaysleadtobusinessfailures.
Answer: A
Diff:1
10) Perfectlycompetitivemarketsareefficientbecause
A) theyalwaysreachequilibrium.
B) firmsinthemarketarepricetakers.
C) thecosttosocietyforproducingthegoodsisexactlyequaltothevaluethatsocietyplaces
onthegood.
D) thelongrunequilibriumassuresthatthepricesofresourceswillnotincrease.
Answer: C
Diff:1
11) Supposetheperfectlycompetitiveequilibriumoccurssuchthattoomanyunitsofthegoodare
produced.Thisisanexampleof
A) marginalcostpricing.
B) marketfailure.
C) firmshavenotyetexitedtheindustry.
D) greedybusinesspeoplebehavinginaninappropriatemanner.
Answer: B
Diff:2
12) Economicefficiencyisindicatedby
A) P=AVC. B) MR= MC. C) P= MR. D) P=MC.
Answer: D
Diff:2
13) Asituationinwhichthepricechargedisequaltosocietysopportunitycostisknownas
A) marketfailure. B) marginalmonopolypricing.
C) marginalprofits. D) marginalcostpricing.
Answer: D
Diff:2
14) Asituationinwhichthepricechargedisgreaterthansocietysopportunitycostwouldleadto
A) marketfailure. B) marginalmonopolypricing.
C) marginalprofits. D) marginalcostpricing.
Answer: A
Diff:2
15) Asituationinwhichthepricechargedisgreaterthansocietysopportunitycostwouldleadto
A) toolittlebeingproduced. B) toomuchbeingproduced.
C) anefficientamountbeingproduced. D) marginalcostpricing.
Answer: A
Diff:2
16) Asituationinwhichthepricechargedislessthansocietysopportunitycostwouldleadto
A) toolittlebeingproduced. B) toomuchbeingproduced.
C) anefficientamountbeingproduced. D) marginalcostpricing.
Answer: B
Diff:2
17) Whichofthefollowingbestdescribesasituationofeconomicefficiency?
A) AfirmproducestothepointatwhichP= AVC,withMR< MC.
B) AfirmproducestothepointatwhichP= ATC,withMC< MR.
C) AfirmproducestothepointatwhichMR= AFC,withP= AVC.
D) AfirmproducestothepointatwhichMR= MC,withP= MC.
Answer: D
Diff:2
18) Afirmslong-runpositionunderperfectcompetitionisoftensaidtobeefficientbecause
A) P=AR>MC=AVC. B) P= AR> MR=MC.
C) P=MR=AVC=AFC. D) P= MR= MC=ATC.
Answer: D
Diff:2
19) Inaperfectlycompetitivemarket,ifP> MC,then

A) toolittleoutputisbeingproduced.
B) toomuchoutputisbeingproduced.
C) productionisefficient,asthefirmisearningprofits.
D) thefirmispayingapriceforresourcesthatistoohigh.
Answer: A
Diff:2
20) Inaperfectlycompetitivemarket,ifP< MC,then

A) toolittleoutputisbeingproduced.
B) toomuchoutputisbeingproduced.
C) productionisefficient,asthefirmisearningprofits.
D) thefirmispayingapriceforresourcesthatistoohigh.
Answer: B
Diff:2
21) Whatismarginalcostpricing?Whyismarginalcostpricingimportant?
Answer: Marginalcostpricingisasituationinwhichpriceequalstheopportunitycosttosociety
ofproducingonemoreunitofthegood,whichisthemarginalcostofthegood.Itis
efficientinthesensethatitisimpossibletoincreasetheoutputofanygoodwithout
loweringthevalueofthetotaloutputproducedbythesocietyasawhole.
Diff:3
22) Whywoulditbeeconomicallyinefficientforafirmtochargethepriceofagoodgreaterthanits
marginalcost?
Answer: Whenpriceequalsmarginalcost,themarginalbenefittoconsumersequalsthe
opportunitycosttosocietyofproducingonemoreunitofthegood.Thisconditionis
efficientbecauseitisimpossibletoincreasetheoutputofthatgoodwithoutloweringthe
valueofthetotaloutputproducedintheeconomy.Ifafirmchargesapricegreaterthan
itsmarginalcost,thenthefirmisproducingtoolittleaspeoplevalueadditionalunits
morethanthecosttosocietyofproducingthem.
Diff:3
23) Whyisthepricingoutcomeofaperfectlycompetitivefirmefficientineconomicsense?
Answer: Aperfectlycompetitivefirmsellsitsproductatapricethatequalstheopportunitycost,
orthemarginalcost,tosocietyofproducingonemoreunitoftheproduct.Becausethe
pricethatconsumersarewillingtopayforthelastunitofthegoodisthemarginalbenefit
tothem,thepricingoutcomeofacompetitivefirmimpliesthatthemarginalbenefitto
consumersequalsthemarginalcosttosocietyofproducingthelastunit.Thisoutcomeis
efficientbecauseitisimpossibletoincreasetheoutputofanygoodwithoutloweringthe
valueofthetotaloutputproducedintheeconomy.
Diff:2
Chapter24
Monopoly
24.1DefinitionofaMonopolist
1) Monopolyproducersface
A) manycompetitorsproducingthesameproduct.
B) onlyafewcompetitorsproducingthesameproduct.
C) atleastonecompetitiveproducerofthesameproduct.
D) nocompetitiveproducersofthesameproduct.
Answer: D
Diff:1
Topic: 24.1DefinitionofaMonopolist
2) Whichofthefollowingisacharacteristicofamonopolymarket?
A) manyfirms B) onefirm
C) easyentry D) firmisapricetaker
Answer: B
Diff:1
A) Anunregulated,profit-maximizingmonopolistwillnotoperateintheinelasticportionof
thedemandcurve.
B) Themarginalrevenueearnedbyamonopolistwillalwaysbelessthantheproductsprice.
C) Typicallytherearenumerousveryclosesubstitutesfortheproductofamonopolist.
D) Foraprofit-maximizingmonopolist,marginalrevenueequalsmarginalcost.
Answer: C
Diff:1
4) Amonopolistisdefinedas
A) afirmwithannualsalesover$10million.
B) alargefirm,makingsubstantialprofits,thatisabletomakeotherfirmsdowhatitwants.
C) asinglesupplierofagoodorserviceforwhichthereisnoclosesubstitute.
D) aproducerofagoodorservicethatisexpensivetoproduce,requiringlargeamountsof
capitalequipment.
Answer: C
Diff:1
Chapter24Monopoly525
5) Afirmcanbethesolesupplierofagoodandisstillnotamonopolistif
A) thefirmisnotlarge.
B) thegoodproducedisnotimportanttotheeconomy.
C) thefirmisnotmakingexcessiveprofits.
D) thereareveryclosesubstitutesforthegood.
Answer: D
Diff:2
6) Themarketstructurewherethereisasinglesupplierofagoodorserviceforwhichthereisno
closesubstituteis
A) apricesearcher.
B) amonopoly.
C) atariff.
D) themosteconomicallyefficientmarketstructure.
Answer: B
Diff:1
7) Themarketstructureinwhichthereisasinglesupplierofagoodorserviceforwhichthereis
noclosesubstituteis
A) oligopoly. B) perfectcompetition.
C) monopoly. D) monopolisticcompetition.
Answer: C
Diff:1
8) Amonopolistis
A) afirmwithannualsalesover$50million.
B) asinglesupplierofagoodforwhichthereisnoclosesubstitute.
C) alargefirmthatmakesalltheotherfirmsintheindustrydowhatitwants.
D) asupplierofagoodthateveryoneneedswiththeresultthatitmakeslargeprofits.
Answer: B
Diff:1
9) Inamonopoly,
A) thefirmislargeinanabsolutesense.
B) themarketissmallinanabsolutesense.
C) thefirmandtheindustryarethesamething.
D) themonopolistdetermineshowmucheachfirmwillproduce.
Answer: C
Diff:2
10) Afirmcanbetheonlyfirminanindustryandstillnotbeamonopolyif
A) thefirmisnotlarge.
B) thefirmisnotmakingeconomicprofits.
C) thefirmproducesagoodsimilartoagoodinanotherindustry.
D) thefirmproducesagoodthatisnotconsideredanecessity.
Answer: C
Diff:2
11) Inamonopolymarketstructure,thefirm(themonopolist)always
A) isthewholeindustry. B) producestoomuch.
C) sellsfaultyproducts. D) earnseconomicprofit.
Answer: A
Diff:1
12) WhichofthefollowingregardingamonopolistisINCORRECT?
A) Themonopolistisasinglesupplierofagoodorservice.
B) Themonopolistconstitutestheentireindustry.
C) Onlyexpensiveproductsareproducedbymonopolies.
D) Therearebarrierstoentrythatallowmonopoly.
Answer: C
Diff:1
13) Asinglesupplierofagoodorserviceforwhichthereisnoclosesubstituteisreferredtoasa(n)
A) strategiccompetitor. B) monopoly.
C) oligopoly. D) monopolisticcompetitor.
Answer: B
Diff:1
14) Afirmthatistheonlysellerofagoodwithnoclosesubstitutesisa(n)
A) perfectcompetitor. B) monopolisticcompetitor.
C) oligopolist. D) monopolist.
Answer: D
Diff:2
15) AllofthefollowingaretrueaboutamonopolistEXCEPT
A) thedemandcurveforitsproductisperfectlyelastic.
B) itproducesaproductwithnoclosesubstitutes.
C) itsdemandcurveisthesameasthemarketdemandfortheindustry.
D) itisasinglesellerofagoodorservice.
Answer: A
Diff:2
16) Whatisamonopolist,andwhatisrequiredforamonopolisttoearnprofitsinthelongrun?
Answer: Amonopolistisasinglesupplierofagoodorserviceforwhichthereisnoclose
substitute.Forthefirmtoreceiveeconomicprofitsinthelongrun,theremustbesome
typeofbarriertoentrythatkeepsentrantsinsearchofprofitsoutoftheindustry.
Diff:1
17) Amonopolistreferstoanyfirmthatislargeinsize.Doyouagreeordisagree?Why?
Answer: Disagree.Amonopolistdoesnothavetobelargeinsize.Regardlessofitssize,a
monopolistinamarketisthesinglesupplierofagoodorserviceforwhichthereisno
closesubstitute.
Diff:2
24.2BarrierstoEntry
1) Inorderforafirmtoreceivemonopolyprofits,theremustbe
A) homogeneousproducts. B) barrierstomarketentry.
C) mutualinterdependenceamongfirms. D) freeentryandexittothemarket.
Answer: B
Diff:1
Topic: 24.2BarrierstoEntry
2) Whichofthefollowingarebarrierstoentry?
A) Economiesofscale B) Patentsandcopyrights
C) Controlofresources D) Alloftheabove
Answer: D
Diff:1
3) WhichofthefollowingisNOTabarriertoentry?
A) Patents B) Licenses
C) Economiesofscale D) U.S.antitrustlegislation
Answer: D
Diff:1
4) Tobeabletoengageinprofit-maximizingpricesearching,amonopolyfirmmustbeableto
A) preventtheentryofotherfirmsintothemarketforitsproduct.
B) inducetheentryofotherfirmsintothemarketforitsproduct.
C) avoidearningnegativeeconomicprofitsintheshortrun.
D) alwaysearnzeroeconomicprofits.
Answer: A
Diff:1
5) WhichofthefollowingisNOTabarriertoentrythatwouldallowamonopolisttokeep
potentialcompetitorsoutofitsmarket?
A) Significanteconomiesofscaleexist.
B) Themarketpriceoftheproductistoohigh.
C) Thefirmhasapatentonthegoodorcontroloversomeresourcerequiredforthe
productionofthegood.
D) Thefirmhasgovernmentauthorizationtobeamonopoly.
Answer: B
Diff:1
6) WhichofthefollowingwouldNOTbeabarriertoentryforaparticularmarket?
A) Ownershipofapatent B) Lowcostofobtaininginitialcapital
C) Thepresenceofeconomiesofscale D) Governmentregulation
Answer: B
Diff:1
7) Ifgovernmentregulationssignificantlyincreasethecostofoperatingwithinaparticularmarket,
oneresultisthat
A) newfirmsarediscouragedfromenteringthemarket.
B) barrierstoentryarenullified.
C) aperfectlycompetitivemarketenvironmentisencouraged.
D) newfirmsareencouragedtoenterthemarket.
Answer: A
Diff:1
8) Iftherearenobarrierstoentryintoanindustry,
A) short-runeconomicprofitsmustbezero.
B) long-runeconomicprofitsmustbezero.
C) bothshort-runandlong-runeconomicprofitsmustbezero.
D) short-runandlong-runprofitsmuststillbepositive.
Answer: B
Diff:1
9) Afirmtypicallyachievesitspositionasamonopolistasaresultof
A) asmallmarketandaconstantaveragecost.
B) adownwardslopingdemandfortheproduct.
C) barrierstoentry.
D) theabsenceoflong-runprofitsinanindustry.
Answer: C
Diff:1
10) Amonopolistcanearneconomicprofitsinthelongrunbecause
A) amonopolyisbydefinitionlarge,andthisgivesittheabilitytomakelargeprofits.
B) amonopolymakesthegoodorservicebetterthananyoneelse.
C) barrierstoentrypreventnewfirmsfromenteringtheindustry.
D) monopoliescanlegallyforcepeopletobuytheirproductsandtopaymoreforthemthan
theyareworth.
Answer: C
Diff:2
11) Whichofthefollowingcanbeabarriertoentry,closingamarkettonewfirms?
A) Anelasticindustrydemandcurve
B) Controlofavitalresourcebyoneproducer
C) Diseconomiesofscale
D) Easeofobtainingcapitalfinancing
Answer: B
Diff:1
12) Economiesofscalecan
A) resultinanincreasingcostindustry.
B) causeinputpricestodrop.
C) preventtheentryofnewfirmsintoamarket.
D) reducetherateofreturnwhichthefirmmayearn.
Answer: C
Diff:1
13) Anaturalmonopolyusuallyariseswhen
A) therearediseconomiesofscaleinanindustry.
B) thegovernmentallowsunrestrictedaccesstoamarket.
C) therearelargeeconomiesofscalerelativetotheindustrysdemand.
D) companiesbandtogethertoformalargercompany.
Answer: C
Diff:2
14) Accordingtothetext,governmentlicensingfrequentlyenablesmonopolyin
A) agriculture. B) electricityproduction.
C) mining. D) retailsales.
Answer: B
Diff:1
15) Drugcompaniesprotecttheirmonopoliesovervariousdrugstheydevelopbyutilizing
A) patentprotection. B) lowcostproduction.
C) diseconomiesofscale. D) zeroeconomicprofitsinthelongrun.
Answer: A
Diff:1
16) Apatentonaproductgivesafirm
A) protectionfromhavingtheinventioncopiedorstolenforaperiodof20years.
B) economiesofscaleinproducingtheproduct.
C) excessiveprofitsinthelongrun.
D) thepowertoimposeatariffonacompetingproduct.
Answer: A
Diff:1
17) Ifacertificateofconvenienceandpublicnecessityprotectsamonopolistsposition,thebarrier
toentrythisfirmreliesoniscalled
A) atariff. B) agovernmentlicense.
C) apatent. D) economiesofscale.
Answer: B
Diff:2
18) Apatentprovideslegalprotectionforaninventionfor
A) 7years. B) 11years.
C) 20years. D) aslongastheinventionisvaluable.
Answer: C
Diff:1
19) FromthedateaU.S.patentisgrantedtoafirm,itceasestobeapotentialsourceofmonopoly
profitsafter
A) 20years. B) 14years. C) 10years. D) 7years.
Answer: A
Diff:2
20) Theuseofatariffprovidesmonopolyprotectionsince
A) itallowsmoreimportsintothecountry.
B) itreducescompetitionfromimportsbyraisingtheimportprice.
C) itreducesexportersprofits.
D) itexpandstaxcredits.
Answer: B
Diff:2
21) Ifagovernmentimposeshighenoughtariffs,oneresultwillbethat
A) foreignproducerswillbeabletosellmoregoods.
B) domesticproducerswillfacenoforeigncompetition.
C) consumerswillbenefitfromlowerprices.
D) marketswillbecomemoreglobalized.
Answer: B
Diff:1
22) Abarriertoentryis
A) atermusedtoexplainwhymonopoliesalwaysmakeeconomicprofits.
B) arestrictionontheprofitsthatamonopolycanmake.
C) thesituationwhenthegovernmentproducesagoodinsteadofrelyingonprivatefirmsto
producethegood.
D) arestrictiononstartingabusiness.
Answer: D
Diff:1
23) Forafirmtobecomeamonopolyinanindustry,
A) barrierstoentrymustexist.
B) thefirmmustchargehigherpricesthanitscompetitors.
C) thefirmmustproduceafaultyproduct.
D) thefirmwillengageinunfairpracticestodriveallcompetitorsoutofthemarket.
Answer: A
Diff:1
24) AllofthefollowingareconsideredabarriertoentryintoamarketEXCEPT
A) ownershipofresourceswithoutclosesubstitutes.
B) whenfirmscanonlyearnanormalrateofreturninamarket.
C) economiesofscale.
D) governmentalrestrictionsonafirmsabilityenteramarket.
Answer: B
Diff:1
25) AllofthefollowingareconsideredabarriertoentryintoamarketEXCEPT
A) governmentlicenses.
B) persistentdeclininglong-runaveragecostsasoutputincreases.
C) loweringtariffs.
D) governmentalregulationsofbusinessconductrelatingtoworkplaceconditions.
Answer: C
Diff:1
26) Shortlyaftertheturnofthecentury,U.S.Steelownedmostoftheironorereservesinthe
country.Thisisanexampleof
A) monopolyduetogovernmentrestrictions.
B) abarriertoentryfromowninganimportantresource.
C) abarriertoentryfromscaleeconomies.
D) monopolyduetogovernmentalentryrestrictions.
Answer: B
Diff:2
27) Entrybarriersaremostsignificantin
A) purecompetition. B) monopolisticcompetition.
C) oligopoly. D) puremonopoly.
Answer: D
Diff:2
28) Consideringthespectrumofmarketstructuresandmovingfrompurecompetitiontopure
monopolywecansaythat
A) entrybarriersgetlowerbutexitgetsmoredifficult.
B) entrybecomesharderbutexitbecomeseasier.
C) entrygetsharderandthenumberoffirmsdwindles.
D) noneoftheabove
Answer: C
Diff:2
29) Whenittakesonefirminanindustrytoproducethequantitynecessarytorealizelowunit
costs,theindustry
A) experienceseconomiesofscale.
B) hasbarrierstoentryduetoownershipofresources.
C) hasnobarriertoentry.
D) hasalicensegrantedbythegovernment.
Answer: A
Diff:1
30) Whichofthefollowingisnottruewhentherearelargeeconomiesofscalesuchthatonefirm
canproduceataloweraveragecostthancanbeachievedbymultiplefirms?
A) Thissituationproducesanaturalmonopoly.
B) Proportionalincreasesinoutputyieldproportionallysmallincreasesintotalcost.
C) Thelong-runaveragecostcurveofthefirmwillincreaseatalowlevelofoutput.
D) Therewillonlybeonefirminthisindustry.
Answer: C
Diff:2
31) Ifitisnotprofitableformorethanonefirmtobeinanindustry,wehaveanexampleof
A) monopolyduetoownershipofkeyresources.
B) monopolyduetogovernmentalentryrestrictions.
C) monopolyduetoeconomiesofscale.
D) purecompetition.
Answer: C
Diff:2
32) Ifitisnotpossibleforapharmaceuticaldrugmakertosellitsgenericcholesterolreducingdrug
alongwithsomenamebrandcholesterolreducingdrugs,wehaveanexampleof
A) monopolyduetoownershipofkeyresources.
B) monopolyduetogovernmentalentryrestrictions.
C) monopolyduetoeconomiesofscale.
D) purecompetition.
Answer: B
Diff:2
33) Anaturalmonopolyexistswhen
A) thefirmholdsapatent.
B) therearegovernmentalentryrestrictions.
C) thefirmownsalloftherawmaterialsneededtoproducetheproduct.
D) economiesofscaleoccur.
Answer: D
Diff:1
34) Economiesofscalewillleadtoonlyonefirmintheindustrybecause
A) byincreasingoutputafirmisabletolowerthecostperunitandchangelowerprices
drivingsmallerfirmsoutofbusiness.
B) onefirmhasanaveragecostcurve,whichhasshiftedbelowtheaveragecostcurvesofits
competitors.
C) therearegovernmentalentryrestrictions.
D) ofgovernmentlicensing.
Answer: A
Diff:1
35) Refertotheabovefigure.Thelong-runaveragecostcurveandthelong-runmarginalcost
curvesrepresent
A) thecostcurvesforacompetitivefirm.
B) thecostcurvesforanaturalmonopoly.
C) asituationwhereafirmhascontrolovertherawmaterials.
D) asituationwhereafirmhasapatent.
Answer: B
Diff:1
36) WhichofthefollowingisNOTarestrictionthegovernmentimposestokeeppotentialentrants
outofamarket?
A) Patents B) Tariffs
C) Assistancewithopeningnewfirms D) Copyrights
Answer: C
Diff:2
37) WhichofthefollowingisNOTarestrictionthegovernmentimposestokeeppotentialentrants
outofamarket?
A) Subsidizingimportedgoods
B) Licensingofexclusiveownershipofsuchavitalresources
C) Certificateofconvenience
D) Compliancewithgovernmentsafetyregulations
Answer: A
Diff:2
38) Someelectricalutilitiesaremonopoliesbecauseof
A) governmentrestrictionsthatpreventnewfirmsfromenteringthemarket.
B) ownershipofresourceswithoutclosesubstitutes.
C) diseconomiesofscale.
D) theirinabilitytoearnprofits.
Answer: A
Diff:3
39) Whichofthefollowingisnottrueaboutacertificateofconvenienceandpublicnecessity?
A) Itisabarriertoentry. B) Itisapatent.
C) Itisissuedbyagovernmentagency. D) Itlimitscompetition.
Answer: B
Diff:1
40) Apatentprovideslegalprotectionforaninventionfor
Answer: A
Diff:1
41) Whichofthefollowingisissuedtoaninvestortoprovideprotectionfromhavingtheinvention
copiedorstolenfor20years?
A) Alicense B) Anaturalmonopoly
C) Apatent D) Acertificateofconvenience
Answer: C
Diff:1
42) Barrierstoentryenablemanymonopoliststo
A) chargeashighapriceastheywant.
B) makepeoplebuymoreofagoodthantheyreallywant.
C) earneconomicprofitsinthelongrun.
D) manipulatethegovernmentintoprovidingspecialfavorsforthemselves.
Answer: C
Diff:2
43) Ataxthatisimposedonanimportedgoodiscalleda
A) tariff. B) quota.
C) governmentlicense. D) patent.
Answer: A
Diff:1
44) Whichofthefollowingisnottrueaboutatariff?
A) Itisabarriertoentryinamarket. B) Itleadstoanaturalmonopoly.
C) Itisatax. D) Itaffectsimportedgoods.
Answer: B
Diff:1
45) Theeffectofatariff
A) isnegligiblesinceitappliestofirmsoutsidetheU.S.
B) canleadtoeconomiesofscaleforfirmsinsidetheU.S.
C) canleadtoamonopolyadvantageforfirmsinsidetheU.S.sincetheybecomethesole
suppliersinsidetheU.S.
D) willbemorebeneficialtolargefirmsthantosmallfirms.
Answer: C
Diff:1
46) Amonopolistwouldprobablyearnfewerprofitsif
A) theimportanceofspecializedcapitalequipmentinitsproductiontechniquesincreased.
B) thetimelengthofpatentsincreased.
C) environmentalregulationsincreasedthatrequiredthepurchaseofspecialcapital
equipment.
D) tariffsoncompetingproductswerelowered.
Answer: D
Diff:3
47) Whichofthefollowingisacharacteristicofamonopolyfirm?
A) horizontalindividualdemandcurve B) barrierstoentry
C) easyentryandexit D) manybuyersandsellers
Answer: B
Diff:2
48) Amonopolywhicharisesfromsignificanteconomiesofscaleisreferredtoasa
A) monopolisticcompetitor. B) strategicresourcemonopoly.
C) naturalmonopoly. D) patentmonopoly.
Answer: C
Diff:2
49) Apatentprotectsaninventorscreationfrombeingcopiedorstolenforaperiodof
Answer: B
Diff:2
50) Whenafirmexperiencesdeclininglong-runaveragetotalcostsasitproducesmoreoutput,
thereare
A) increasingmarginalreturnstovariableinputs.
B) economiesofscale.
C) diseconomiesofscale.
D) constantreturnstoscale.
Answer: B
Diff:1
51) Whenafirmexperiencessteadilydeclininglong-runaveragetotalcostsasitproducesmore
output,itisknownasa(n)
A) oligopoly. B) rentseeker.
C) naturalmonopoly. D) monopolisticcompetitor.
Answer: C
Diff:1
52) Anaturalmonopoly
A) requiresgovernmentlicensinginitially.
B) isderivedfromdepositsofnaturalresources.
C) usuallyariseswhentherearelargeeconomiesofscale.
D) involvesmultiplefirmssellingdifferentiatedproducts.
Answer: C
Diff:1
53) Governmentsandlegislaturescanerectbarrierstoentry.WhichofthefollowingwouldNOTbe
oneofthem?
A) Licenses B) Tariffs
C) Patents D) Lawsthatensurepropertyrights
Answer: D
Diff:1
54) Whichofthefollowingwouldmostlikelybeclassifiedasanaturalmonopoly?
A) Acitywaterdistrict B) Microsoft
C) Disneyland D) Exxon-Mobil
Answer: A
Diff:2
55) AllofthefollowingarebarrierstoentryinanindustryEXCEPT
A) apatent. B) governmentalrestrictions.
C) lowmarginaltaxrates. D) economiesofscale.
Answer: C
Diff:2
56) SupposethatadrugfortreatingcancerisclearedbytheFoodandDrugAdministrationand
thatthecompanyissuccessfulinobtainingapatentforitsproduct.Whichofthefollowingis
thentrue?
A) Thepatentholdernowfacesbarrierstoentry.
B) Themethodofproducingtheproductwouldnotbeconsideredintellectualproperty.
C) Thepatentholderhasamonopoly.
D) Thedrugwouldhavemanyclosesubstitutes.
Answer: C
Diff:1
57) Abarriertoentry
A) makesitillegalforfirmstoentertheindustry.
B) canbethoughtofasunrelatedtomonopoly.
C) slowsorevenpreventsentryintoamarket.
D) usuallytakestheformofacartel.
Answer: C
Diff:1
58) BarrierstoentrymightincludeallofthefollowingEXCEPT
A) patentsandcopyrights. B) ownershipofessentialresources.
C) governmentfranchise. D) positiveeconomicprofits.
Answer: D
Diff:1
59) Economiesofscalemaybeabarriertoentryinasituationinwhich
A) onlysmall-scaleproductioncanlowertheper-unitcostofproduction.
B) onlysmall-scaleproductioncanmeettheconstantlychangingmarketdemand.
C) onlylarge-scaleproductioncanlowertheper-unitcostofproduction.
D) large-scaleproductionisinefficient.
Answer: C
Diff:1
60) Whichofthefollowingismostlikelytobeamonopoly?
A) AOL(AmericaOnLine),aninternetserviceprovider
B) WABC,atelevisionstation
C) TheWashingtonPost
D) apublicwaterutility
Answer: D
Diff:1
61) Legalorgovernmentalrestrictionsthatgivemonopolisticadvantagestoafirmincludeallofthe
followingEXCEPT
A) economiesofscale. B) tariffs.
C) licenses. D) franchises.
Answer: A
Diff:2
62) Legalorgovernmentalrestrictionsthatgivemonopolisticadvantagestoafirmincludeallofthe
followingEXCEPT
A) franchises.
B) environmentalprotection.
C) exclusiveownershipofanunimportantresource.
D) patents.
Answer: C
Diff:2
63) Inwhatwaysisgovernmentinvolvedwiththecreationofbarrierstoentry?
Answer: Thegovernmentoftenerectsbarrierstoentrybyrequiringlicensesandfranchisesbefore
firmscanlegallyoperateinamarket,bygrantingpatents,byassessingtariffs,orby
implementingspecificregulationsthatlimitentry.Itisillegaltoentermanyindustries
withoutagovernmentlicense,andoftenthenumberofsuchlicensesislimited.Patents
createalegalmonopolyforaperiodof20years,andtariffshelptokeepoutcompetition
fromforeignfirms.
Diff:2
64) Whichofthebarrierstoentrycanlastindefinitelyandwhicharemorelikelytoeventuallyerode
suchthatanewentrycantakeplace?
Answer: Barrierssuchaseconomiesofscaleandgovernmentrestrictionscanlastindefinitelysince
thefirstdependsontechnologyandthelatterongovernmentaction.Itisunlikelythata
firmcanmaintaincontrolofakeyinputindefinitely,andpatentsexpireafter20years.
Governmentregulationsandtariffscanlastindefinitely,althoughachangeof
governmentcouldknockthesedownaswell.
Diff:3
65) Inprinciple,canamonopolistholditsmonopolypowerinthelongrun?Explain.
Answer: Yes.Monopolypowerexistsinthelongrunwhenthemarketisclosedtoentryinsome
way.Barrierstoentryincludeownershiptoresourceswithoutclosesubstitutes,
economiesofscale,governmentrestrictions,licensesandpatents,andregulations.
Diff:1
66) Whywouldeconomiesofscalebeabarriertoentry?
Answer: Ifsignificanteconomiesofscaleexistinanindustry,thenthelong-runaveragecostscan
declineoverawiderangeofoutputratessothatitmaynotbeprofitableformorethan
onefirmtoexistinthatindustry.Thisisthecaseofanaturalmonopoly,whichisableto
underpricepotentialcompetitorsandkeepthemoutofthemarket.
Diff:2
24.3TheDemandCurveaMonopolistFaces
1) Ifamonopolistwishestoincreaseitsoutputandquantitysold,
A) itmustreduceitsprice,soitsmarginalrevenueisgreaterthanitsprice.
B) itmustreduceitsprice,soitsmarginalrevenueislessthanitsprice.
C) itmustraiseitsprice,soitsmarginalrevenueisgreaterthanitsprice.
D) itmustraiseitsprice,soitsmarginalrevenueislessthanitsprice.
Answer: B
Diff:1
Topic: 24.3TheDemandCurveaMonopolistFaces
2) Thedemandcurvefacedbythemonopolist
A) isperfectlyelastic. B) isperfectlyinelastic.
C) slopesdownward. D) slopesupward.
Answer: C
Diff:1
3) Comparedtoperfectlycompetitivefirms,thedemandcurveforamonopolistwillbe
A) aselastic. B) moreelastic.
C) lesselastic. D) perfectlyelastic.
Answer: C
Diff:1
4) Comparedtoamonopolist,thedemandcurveforaperfectlycompetitivefirmwillbe
A) aselastic. B) moreelastic.
C) lesselastic. D) perfectlyelastic.
Answer: B
Diff:1
5) Thedemandcurveamonopolyfacesis
Answer: D
Diff:1
6) Whichofthefollowingconditionsistrueforamonopolist?
A) MR<P B) MR= P C) MR= AFC D) MR< AVC
Answer: A
Diff:1
7) Amonopolistsdemandcurveis
C) ofunitelasticitythroughout. D) theindustrydemandcurve.
Answer: D
Diff:1
8) Tosellonemoreunitofagood,amonopolistmust
A) lowerthepriceonthelastunitonly. B) lowerthepriceonallunits.
C) raisethepriceonlyonthelastunitsold. D) raisethepricesonallgoods.
Answer: B
Diff:1
9) Thedemandcurvefacedbyapuremonopolist
A) isthesameasitsmarginalrevenuecurve.
B) isperfectlyinelastic.
C) liesbelowthemarginalrevenuecurve.
D) isthemarketdemandcurve.
Answer: D
Diff:1
10) Amajordifferencebetweenamonopolistandaperfectlycompetitivefirmisthat
A) themonopolistiscertaintoearneconomicprofits.
B) themonopolistsmarginalrevenuecurveliesbelowitsdemandcurve.
C) themonopolistengagesinmarginalcostpricing.
D) themonopolistchargesthehighestpossiblepricethathecan.
Answer: B
Diff:1
11) Amonopolistfacesademandcurvethat
A) isperfectlyhorizontalatthemarketprice.
B) isbelowthemarginalrevenuecurve.
C) isdownwardsloping.
D) coincideswiththeindustrysupply.
Answer: C
Diff:1
12) Thedemandcurveamonopolistfacesis
A) horizontal. B) theindustrydemandcurve.
C) vertical. D) inelasticatallpoints.
Answer: B
Diff:1
13) Animportantdifferencebetweenaperfectlycompetitivefirmandamonopolistis
A) thesizeofthefirms.
B) theshapeofthedemandcurveeachfaces.
C) thegoalsoftheownersofthefirms.
D) amonopolistnormallyproducesaservice,whileaperfectcompetitornormallyproducesa
good.
Answer: B
Diff:2
14) Animportantdifferencebetweenaperfectlycompetitivefirmandamonopolistis
A) thesizeoftheindustry.
B) theprimaryobjectiveofthefirms.
C) amonopolistonlyproducesinthelongrun,whileaperfectcompetitoronlyproducesin
theshortrun.
D) thepriceitchargestoselladditionalunitsofagood.
Answer: D
Diff:2
15) Tosellmoreunits,amonopolistmust
A) merelyproducemoreunits.
B) advertisemore.
C) producetheprofitmaximizingrateofproduction.
D) lowerprice.
Answer: D
Diff:2
16) Tosellmoreunits,amonopolist
A) simplymovesacrossitshorizontaldemandcurvetoalargerquantity.
B) movesdownitsdemandcurvetoalowerpricethatwillincreasequantitydemand.
C) cancontinuetoreceivethesamepriceitalwayshasaslongasithasitscustomers
goodwill.
D) mustbewillingtolowerthebarrierstoentrythathaveprotectedit.
Answer: B
Diff:2
17) Amonopolistsmarginalrevenuecurveis
A) thesameasaperfectlycompetitivefirmsmarginalrevenuecurve.
B) higherthanthemonopolistsdemandcurve.
C) belowthefirmsdemandcurve.
D) ahorizontallineatthemarketprice.
Answer: C
Diff:1
18) Foramonopolist,themarginalrevenuegainedwhenonemoreunitofoutputissoldis
A) thepriceatwhichtheextraunitissoldminusthelossinrevenuethatresultsfromcutting
thepriceonunitssoldpreviously.
B) equaltothepriceoftheproduct.
C) negativeifpriceisabovethemidpointofthedemandcurve.
D) theaveragerevenuecreatedbytheincreasedsales.
Answer: A
Diff:1
19) Ifafirmsells10unitsofoutputat$100perunitand11unitsofoutputwhenpriceisreducedto
$99,itsmarginalrevenueforthelastunitsoldis
A) $11. B) $99. C) $109. D) $89.
Answer: D
Diff:1
20) Ifafirmsells5unitsofoutputat$10perunitand6unitsofoutputwhenpriceisreducedto$9,
itsmarginalrevenuefromsellingthesixthunitis
A) $9. B) $40. C) $540. D) $4.
Answer: D
Diff:2
21) Ifafirmsells20unitsofoutputat$15perunitand21unitsofoutputwhenpriceisreducedto
$14,itsmarginalrevenuefromsellingthelastunitis
A) $6. B) $21. C) $294. D) -$6.
Answer: D
Diff:2
22) Forafirmfacingadownwardslopingdemandcurve,marginalrevenue
A) isataminimumatthemidpointofthedemandcurve.
B) isgreaterathigherpricesthanatlowerprices.
C) increaseseachtimepricesarelowered.
D) fallseachtimepricesareraised.
Answer: B
Diff:1
23) Forthemonopolist,marginalrevenueis
A) equaltoprice.
B) lessthanaveragerevenuesincepricemustbeloweredtoselladditionalunits.
C) greaterthanprice.
D) notaconsiderationinthefirmspricing.
Answer: B
Diff:1
24) Themonopolistsmarginalrevenueislessthanpricesince
A) additionalunitscanonlybesoldifthepriceisloweredonallunitssold.
B) thedemandfunctionishorizontal.
C) averagerevenueisalsolessthanprice.
D) averagetotalcostisdeclining.
Answer: A
Diff:1
25) Amonopolistfaces
A) aperfectlyelasticdemandcurve. B) aperfectlyinelasticdemandcurve.
C) themarketdemandcurve. D) atwo-tiereddemandcurve.
Answer: C
Diff:1
26) Thedemandcurvefacingamonopolistis
Answer: A
Diff:1
27) Whichofthefollowingisnottrueaboutthedemandcurvefacedbyamonopolist?
A) Thedemandcurveisdownwardsloping.
B) Thefirmsdemandcurveisthesameasthemarketdemandcurve.
C) Themarginalrevenuecurveisbelowthemarketdemandcurve.
D) Thedemandcurveisperfectlyelastic.
Answer: D
Diff:2
28) Animportantdifferencebetweenperfectcompetitionandmonopolyis
A) amonopolyisprofitableandaperfectcompetitorisnot.
B) themonopolyfacesadownwardslopingdemandcurveandtheperfectcompetitorfacesa
horizontaldemandcurve.
C) themonopolyfacesaninelasticdemandcurveandtheperfectcompetitorfacesanelastic
demandcurve.
D) amonopolyisnotregulatedbythemarket,whileaperfectcompetitorisregulatedbythe
market.
Answer: B
Diff:2
29) Refertotheabovefigure.Whichofthefollowingstatementsistrueaboutthedemandcurvesfor
anindividualfirminaperfectlycompetitiveindustryandamonopoly?
A) PanelAisthedemandcurveforaperfectlycompetitivefirmandpanelBisthedemand
curveforamonopoly.
B) PanelCisthedemandcurveforaperfectlycompetitivefirmandpanelAisthedemand
curveforamonopoly.
C) PanelCisthedemandcurveforaperfectlycompetitivefirmandpanelBisthedemand
curveforamonopoly.
D) PanelBisthedemandcurveforaperfectlycompetitivefirmandpanelAisthedemand
curveforamonopoly.
Answer: C
Diff:3
30) WhichofthefollowingstatementsisTRUEabouttherelationshipbetweenafirmsdemand
curveunderperfectcompetitionandmonopoly?
A) Underperfectcompetition,thedemandcurveisperfectlyelastic;undermonopoly,the
demandcurvehaselastic,unit-elasticandinelasticportions.
B) Undermonopoly,thedemandcurveisperfectlyelastic;underperfectcompetition,the
demandcurvehaselastic,unit-elasticandinelasticportions.
C) Thedemandcurvesforamonopolyandperfectcompetitionarealwaysinelastic.
D) Wecandefineademandcurveunderperfectcompetitionbutnotundermonopoly.
Answer: A
Diff:1
31) Ifamonopolistraisesitsprice,
A) itraisesthebarrierstoentry.
B) thequantitydemandedincreases.
C) thequantitydemandedremainsthesame.
D) thequantitydemandeddecreases.
Answer: D
Diff:2
32) Ifamonopolistlowersitsprice,
A) itlowersthebarrierstoentry.
B) thequantitydemandedincreases.
C) thequantitydemandedremainsthesame.
D) thequantitydemandeddecreases.
Answer: B
Diff:2
33) Ifamonopolistwantstoincreasetheamountitsells,it
A) willkeepthepricethesame. B) mustlowerthepriceonallunits.
C) mustacceptlowerprofits. D) mustlowerthecostofproduction.
Answer: B
Diff:1
34) Toinduceanincreaseinthequantitydemandedofitsproduct,amonopolistmustreducethe
A) qualityofitsproductandtherebygenerateadownwardshiftitsATCcurve.
B) priceofitsproductandtherebygeneratearightwardshiftinitsdemandcurve.
C) priceofitsproductandtherebygeneratearightwardmovementalongitsdemandcurve.
D) qualityofitsproductandtherebygenerateadownwardmovementalongitsATCcurve.
Answer: C
Diff:2
35) Successivedownwardmovementsalongthedemandcurvefortheproductofamonopolist
alwaysgeneratesuccessive
A) increasesinthemonopolistsmarginalrevenue.
B) increasesinthemonopolistsaveragetotalcosts.
C) decreasesintheadditionalper-unitcostsincurredbythemonopolist.
D) decreasesintheadditionalper-unitrevenuesearnedbythemonopolist.
Answer: D
Diff:2
36) Amonopolistwishingtoincreaseitsprofithasjustdiscoveredthatloweringitspriceandselling
moreoutputyieldedthedesiredresult.Profitincreased.Basedonthis,wecanconcludethat
thecostoftheadditionalproductionis
A) greaterthantherevenuefromtheadditionalproduction.
B) preciselyequaltotherevenuefromtheadditionalproduction.
C) lessthantherevenuefromtheadditionalproduction.
D) thereisnowaytoanswerthisbecauseyouhavenotgivenusthemarginalrevenueand
marginalcostdata.
Answer: C
Diff:3
37) Foramonopolist,
A) marginalrevenueislessthanprice.
B) marginalrevenueequalsprice.
C) marginalrevenueisgreaterthanprice.
D) marginalrevenueequalsaveragerevenue.
Answer: A
Diff:1
38) Foramonopolist,thereasonthatmarginalrevenueislessthanpriceis
A) becauseoftheperfectlyelasticdemandcurvethatthemonopolistfaces.
B) becausethemonopolistmustlowerthepriceofthegoodinordertosellanadditionalunit.
C) becauseoftheU-shapedaveragerevenuecurve.
D) becauseofthelackofcompetitioninthemarket.
Answer: B
Diff:1
39) Whichofthefollowingwouldbestdescribethedemandcurvefacedbyamonopolyfirm?
A) horizontallineatthemarketprice
B) verticallineattheoutputlevel
C) sameasthemarketdemandcurve
D) sameastheperfectcompetitorsdemandcurve
Answer: C
Diff:2
40) Thedemandcurvefacedbythemonopolist
A) hasaconstantpriceelasticity. B) istheindustrydemandcurve.
C) isidenticaltothefirmsMRcurve. D) isidenticaltothefirmsTRcurve.
Answer: B
Diff:1
41) Thedemandcurveforamonopolistis
A) theindustrydemandcurve.
B) thesameasthedemandcurveforaperfectlycompetitivefirm.
C) aperfectlyinelasticdemandcurve.
D) aunitaryelasticdemandcurve.
Answer: A
Diff:1
42) WhichofthefollowingstatementsaboutamonopolistisFALSE?
A) Apuremonopolististhesolesupplierofoneproduct,good,orservice.
B) Themonopolistfacesademandcurvefortheentiremarketforthatgood.
C) Apuremonopolistisnotthesameasaperfectcompetitor.
D) Themonopolistfacestheindustrydemandcurve,whichisupwardsloping.
Answer: D
Diff:1
43) Whenconsideringmarginalrevenueforthemonopolist,whichofthefollowingisFALSE?
A) Tosellmoreofaparticularproduct,giventheindustrydemandcurve,themonopolyfirm
mustlowertheprice.
B) Anessentialpointforthemonopolist,marginalrevenueisalwayslessthanprice.
C) Marginalrevenueisalwayslessthanpricebecausepricemustbereducedonallunitsto
sellmore.
D) Themorethemonopolistwantstosell,thehigherthepriceithastochargeinorderto
makemoreprofits.
Answer: D
Diff:2
44) Foramonopolist,
A) marginalrevenueisequaltopriceforallunitsbeingsold.
B) marginalrevenueislessthanpriceforallunitsbeingsoldexceptthefirstunit.
C) marginalrevenueisgreaterthanpriceforallunitsbeingsoldexceptforthefirstunit.
D) thereisnorelationshipbetweenmarginalrevenueandprice.
Answer: B
Diff:2
45) Afirmthatfacesadownwardslopingdemandcurveis
A) apricetaker. B) apriceprovider.
C) apricesearcher. D) apricecreator.
Answer: C
Diff:1
46) Afirmthatfacesadownwardslopingdemandcurveisknownasa
A) pricetaker. B) utilitymaximizer.
C) pricesearcher. D) perfectcompetitor.
Answer: C
Diff:1
47) Inordertosellmoregoodsand/orservices,whatmustamonopolydo?
A) Reducepriceandincreaseoutput B) Increaseoutput
C) Increaseprice D) Nothing,sinceitisthemarket
Answer: A
Diff:2
48) Foramonopolist,marginalrevenueisalways
A) greaterthanprice. B) equaltoprice.
C) equaltozero. D) lessthanprice.
Answer: D
Diff:2
49) Unlikeaperfectlycompetitivefirm,amonopolistfacesademandcurvethatis
A) upwardsloping. B) horizontal.
C) vertical. D) downwardsloping.
Answer: D
Diff:1
Price Quantity
$19 11
18 12
17 13
16 14
15 15
14 16
50) Giventhedataintheabovetable,whatisthemarginalrevenuewhenthe15thunitissold?
A) $7.00 B) $5.00 C) $3.00 D) $1.00
Answer: D
Diff:2
A) $7.00 B) $5.00 C) $3.00 D) $1.00
Answer: A
Diff:2
A) $7.00 B) $5.00 C) $3.00 D) $1.00
Answer: B
Diff:2
A) $7.00 B) $5.00 C) $3.00 D) $1.00
Answer: C
Diff:2
54) Giventhedataintheabovetable,themarginalrevenuecurve
A) liesbelowthedemandcurve. B) liesabovethedemandcurve.
C) intersectsthedemandcurve. D) isequaltothedemandcurve.
Answer: A
Diff:2
55) TheMRcurveofamonopolistis
A) downwardslopingandbelowthedemandcurve.
B) downslopingandidenticaltothedemandcurve.
C) downslopingandabovethedemandcurve.
D) horizontalandsameasthemarketdemandcurve.
Answer: A
Diff:2
56) WhenTRisincreasingasamonopolistsoutputincreases,
A) MRisnegative. B) MRispositive.
C) MR=0. D) MRmaybepositiveornegative.
Answer: B
Diff:2
57) Ifamonopolistcansell2unitsatpriceof$200perunitand3unitsatapriceof$180perunit,its
marginalrevenueatanoutputof3is
A) $-20.00. B) $80.00. C) $140.00. D) $180.00.
Answer: C
Diff:2
58) Ifamonopolistcansell3unitsatpriceof$150perunitand4unitsatapriceof$140perunit,its
marginalrevenueatanoutputof4is
A) $-10.00. B) $10.00. C) $560.00. D) $110.00.
Answer: D
Diff:2
59) Discussandexplaintherelationshipsbetweenthemonopolistsdemandcurve,averagerevenue
curve,andmarginalrevenuecurve.
Answer: Themonopolistsdemandcurveistheindustrydemandcurve,anditisdownward
sloping.TotalrevenueisPQ,soaveragerevenueisPQ/Q=P.Thus,theaveragerevenue
curveisthedemandcurve.Themarginalrevenuecurveliesbelowthedemandcurve.Ifa
firmsellsanotherunit,itreceivesthepricefortheunit.But,itmustreducepricetomake
thesale,andhencemustlowerpriceonotherunitsitcouldhavesoldatahigherprice.
Consequently,theextrarevenueearnedfromsellinganextraunitislessthantheprice.
Diff:2
60) Whyispricelessthanmarginalrevenueforamonopolist?
Answer:
Considertheabovefigure.IfthemonopolistreducesitspricefromP 1 toP2 ,itsrevenues

increasebytheareaoftherectanglebcde.Atthesametime,however,itsrevenuesdecline
bytheareaoftherectangleP 1 acP2 .Marginalrevenueisthedifferencebetweenthesetwo
areas,whichislessthanthepriceoftheone-unitchangeentailedinincreasingoutput
fromQtoQ+1.Thus,marginalrevenueislessthanprice.
Diff:3
61) Whatdoesthedemandcurvefacingamonopolylooklike?Why?
Answer: Thedemandcurvefacingamonopolyisdownwardslopingbecausethemonopolyisthe
industry.Therefore,itfacestheindustrydemandcurve,whichisdownwardsloping.For
amonopolisttosellmoreunits,itmustlowerprice.
Diff:1
62) Usingagraph,showwhymarginalrevenueisalwayslessthanprice.
Answer:
Thedemandcurveslopesdownsothefirmmustlowerpricetosellanotherunit.It
receivesthepriceforthatunit,showninthefigureabovebyrectangleQ 1 cbQ1 +1.
However,itlowerspricesoitreceiveslessontheQ1 unitsitcouldhavesoldatP1 .This
reducedrevenueisareaP1 acP2 .TheextrarevenuethenisQ 1 cbQ1 +1-P1 acP2 ,whichis
lessthanP2 .Hence,themarginalrevenueislessthantheprice.
Diff:3
63) Whatisthemaindifferencebetweenthedemandcurvesfortheperfectcompetitorandthe
monopolist?
Answer: Theperfectcompetitorfacesahorizontaldemandcurvebecauseithasnocontroloverthe
marketprice.Bycontrast,themonopolististhesolesupplieroftheentireindustrysothat
itfacestheindustrydemandcurve,whichisdownwardsloping.
Diff:2
24.4ElasticityandMonopoly
1) Thedemandcurvefacingamonopolistwillbemoreelastic
A) thegreateristhenumberofsubstituteproducts.
B) astheconsumersneedforthegoodincreases.
C) thegreateristheamountoffixedcoststocover.
D) asthenumberofconsumersincreases.
Answer: A
Diff:1
Topic: 24.4ElasticityandMonopoly
2) Thepriceelasticityofdemandforagoodproducedbyamonopolist
A) equalszeroaslongasthegoodhasnoclosesubstitutes.
B) isalwaysinelasticsincethedemandcurveslopesdown.
C) doesnotequalzerobecausetherewillalwaysbesomesubstitutes,howeverimperfectthey
maybe.
D) doesnotequalzerobecauseeverygoodhasatleastonegoodsubstituteforit.
Answer: C
Diff:2
3) Theprofit-maximizingmonopolistwillnever operateinapricerangeoverwhich
A) thedemandcurveslopesdownward. B) demandisinelastic.
C) P>MR. D) P> MC.
Answer: B
Diff:2
4) Theprofit-maximizingmonopolistwilloperateinapricerangeoverwhich
A) demandiselastic.
B) demandisinelastic.
C) thepriceelasticityofdemandislessthan1.
D) supplyiselastic.
Answer: A
Diff:2
5) Thepriceelasticityofdemandforamonopolistsproductdependson
A) thenumberandsimilarityofsubstitutes.
B) theATCoftheitemitproduces.
C) theAVCoftheitemitproduces.
D) theMCoftheitemitproduces.
Answer: A
Diff:2
6) Whatistrueofthepriceelasticityofdemandfacedbyamonopolyfirm?
A) Demandisinelastic.
B) Demandismoreelasticatlowerpricesandmoreinelasticathigherprices.
C) Demandisperfectlyelasticbecausethemonopolisthasnocompetition.
D) Demandbecomesmoreelasticastherangeofimperfectsubstitutesexpands.
Answer: D
Diff:2
7) WhichofthefollowingstatementsabouttheelasticityofdemandforamonopolistisTRUE?
A) Sinceamonopolistproducesagoodwithnoclosesubstitutes,thepriceelasticityof
demandforthegoodiszero.
B) Amonopolistproducesagoodwithdemandthatisperfectlyinelasticbecausepeoplecan
notdowithoutthegood.
C) Sinceeverygoodhassomesubstitute,evenifimperfect,thedemandforagoodproduced
byamonopolistwillnothavezeropriceelasticity.
D) Sincethedemandcurveofamonopolistisdownwardsloping,thedemandforthegood
mustbeinelastic.
Answer: C
Diff:2
8) Amonopolist
A) canchargewhateverpriceitwantsbecauseitistheonlyfirmproducingthegood.
B) canusuallykeeppriceequaltomarginalrevenuebyloweringthepriceonthelastunit
soldonly.
C) facesademandcurvethatismoreelasticthanthedemandcurvefortheindustry.
D) isconstrainedinitspricingdecisionsbythedemandcurveitfaces.
Answer: D
Diff:3
9) Thepriceelasticityofdemandforamonopolist
A) isinfinitesincethemonopolististheonlyfirminthemarket.
B) decreasesasmorecompetitionoccursinthemarket.
C) increasesassimilarproductsenterthemarket.
D) isundefinedduetothelackofcompetition.
Answer: C
Diff:1
10) Themoresubstitutesthereareforamonopolistsproduct
A) thelesselasticisthedemandcurve.
B) themoreelasticisthedemandcurve.
C) thesteeperisthedemandcurve.
D) themorepositivelyslopedthedemandcurvebecomes.
Answer: B
Diff:1
11) Whenthenumberofsubstitutesincrease,thedemandcurveforamonopolistwill
A) notchange. B) becomemoreelastic.
C) becomemoreinelastic. D) becomesteeper.
Answer: B
Diff:1
12) AprivatelyownedmonopolywillNEVERproducealongarangeofoutputforwhich
A) thedemandcurveiselastic.
B) thedemandcurveisinelastic.
C) thepriceelasticityofdemandisgreaterthan1.
D) thepriceelasticityofsupplyisgreaterthan1.
Answer: B
Diff:2
13) ThemonopolistshouldNEVERproduceinthe
A) elasticsegmentofitsdemandcurvebecauseitcanincreasetotalrevenueandreducetotal
costbyloweringprice.
B) inelasticsegmentofitsdemandcurvebecausefurtherloweringofthepricereducestotal
revenue.
C) rangeofoutputforwhichthepriceelasticityofdemandisinfinity.
D) rangeofoutputforwhichthereisapriceelasticityexceedingone.
Answer: B
Diff:2
14) Ifamonopolistweretoproduceintheinelasticsegmentofitsdemandcurve,
A) totalrevenuewouldbeatamaximum.
B) totalrevenuewouldbeataminimum.
C) thefirmwouldmaximizeprofits.
D) afurtherdropinthepricewillchangequantitydemandedlessthanproportionately.
Answer: D
Diff:2
15) Amonopolistproducesintheelasticsegmentofitsdemandcurvebecausewhenitlowersthe
price,
A) thepercentagechangeincreaseinquantitydemandedisgreaterthanthepercentage
changedecreaseinpriceandtotalrevenueincreases.
B) thepercentagechangeincreaseinquantitydemandedislessthanthepercentagechange
decreaseinpriceandtotalrevenueincreases.
C) thepercentagechangeincreaseinquantitydemandedisgreaterthanthepercentage
changedecreaseinpriceandtotalrevenuedecreases.
D) thepercentagechangedecreaseinquantitydemandedislessthanthepercentagechange
decreaseinpriceandtotalrevenueincreases.
Answer: A
Diff:2
16) Whataffectsthepriceelasticityofdemandforamonopolistsproduct?
Answer: Amonopolistmayhaveimperfectsubstitutesforitsproduct.Thepriceelasticityof
demandfortheproductishigheriftheproducthasmoreofthoseimperfectsubstitutesor
thebetterthoseproductsareassubstitutes.
Diff:1
17) Amonopolistcanchargewhateverpriceitwants.Doyouagreeordisagree?Why?
Answer: Disagree.Themonopolistislimitedbythedemandcurveitfaces.Evenamonopolist
producesagoodthathassubstitutes,eveniftheyareimperfectsubstitutes.Themore
substitutesandthebettersomeofthemareassubstitutes,themoreelasticthedemand
curveofthemonopolist.
Diff:2
24.5CostsandMonopolyProfitMaximization
1) Foramonopolistthatismaximizingprofits,
A) priceexceedsmarginalcost. B) priceequalsmarginalrevenue.
C) priceequalsaveragetotalcost. D) marginalrevenueexceedsprice.
Answer: A
Diff:1
Topic: 24.5CostsandMonopolyProfitMaximization
2) Amonopolywillmaximizeprofitsatthelevelofoutputatwhich
A) MR=MC. B) MR= AFC. C) MC= ATC. D) MC=P.
Answer: A
Diff:1
3) Themonopolistwillchoosethepriceandoutputcombinationatwhich
A) MCequalsAR. B) MCequalsMR.
C) MCequalsprice. D) MRequalsAR.
Answer: B
Diff:1
4) Supposeamonopolistscostsandrevenuesareasfollows:ATC= $45.00;MC=$35.00;MR=
$35.00;P=$45.00.Thefirmshould
A) increaseoutputanddecreaseprice. B) decreaseoutputandincreaseprice.
C) notchangeoutputorprice. D) shutdown.
Answer: C
Diff:2
Answer: A
Diff:2
Answer: B
Diff:2
7) Theprofitmaximizingbehaviorofamonopolyisdifferentfromthatofaperfectlycompetitive
firminthatamonopolycan
A) onlychoosethedesiredoutput,whileacompetitivefirmcancontrolonlyprice.
B) onlychoosethedesiredprice,whileacompetitivefirmcancontrolonlyoutput.
C) controlthepositionofitsdemandschedule,butacompetitivefirmcannot.
D) controlthedesiredpriceandoutputtomaximizeprofits,butaperfectlycompetitivefirm
canonlychoosethedesiredoutput.
Answer: D
Diff:1
8) Theprofit-maximizingpriceandquantityestablishedbytheunregulatedmonopolistinthe
abovefigureare
A) Q1 unitsofoutputandapriceofP5 . B) Q3 unitsofoutputandapriceofP3 .
C) Q1 unitsofoutputandapriceofP1 . D) Q4 unitsofoutputandapriceofP4 .
Answer: C
Diff:1
9) Intheabovefigure,atthefirmsprofitmaximizingoutput,totalrevenueisrectangle
A) 0P1 AQ1 . B) 0P3 FQ 3 . C) 0P5 EQ5 . D) 0P2 BQ1 .
Answer: A
Diff:1
10) Intheabovefigure,marginalcostandmarginalrevenueareequalatoutput
A) Q5 . B) Q1 . C) Q3 . D) Q2 .
Answer: B
Diff:1
11) Intheabovefigure,thetotalcostofproducingtheprofitmaximizinglevelofoutputisshownby
rectangle
A) 0P1 AQ1 . B) 0P5 EQ5 . C) 0P4 HQ4 . D) 0P2 BQ1 .
Answer: D
Diff:1
12) Intheabovefigure,supposethemonopolistisproducingatQ 3. Thefirmshould

Answer: B
Diff:1
13) Intheabovefigure,ifthefirmisproducingatQ 3 andchargingapriceofP3 ,itshould

Answer: B
Diff:2
14) Intheabovefigure,ifthefirmisproducingQ 1 unitsatapriceP1 ,thefirmshould

Answer: A
Diff:1
15) Intheabovefigure,ifthefirmisproducingQ 2 unitsatapriceP2 ,itshould

Answer: C
Diff:1
16) WhichofthefollowingstatementsconcerningamonopolistisFALSE?
A) AmonopolistwillproduceatwhichMR= MC.
B) Foramonopolist,marginalrevenueislessthanprice.
C) Amonopolistwillchargethehighestpriceatwhichanyindividualwillpurchasethe
product.
D) Amonopolistwillshutdownifpriceislessthanaveragevariablecost.
Answer: C
Diff:1
17) Asapricesearcher,amonopolyfirm
A) mustonlydeterminethepriceitcharges.
B) mustdetermineitsoptimalprice-outputcombination.
C) mustdetermineitsoutputlevelandthenacceptthemarketpriceforitsproduct.
D) mustdeterminethepricesitpaysforitsinputsandacceptthemarketpriceforitsoutput.
Answer: B
Diff:1
18) Intheabovefigure,themonopolistsprofit-maximizingoutputlevelis
A) A. B) B. C) C. D) D.
Answer: C
Diff:1
19) Intheabovefigure,themonopolistsprofit-maximizingpriceis
A) A. B) B. C) C. D) D.
Answer: A
Diff:1
20) Supposeamonopolistsells10,000unitsofoutputat$22perunit.Thefirmstotalrevenueis
A) $2,200. B) $22,000. C) $220,000. D) $2,200,000.
Answer: C
Diff:1
21) Theprice-outputcombinationthatmaximizesprofitsforamonopolistoccursatthepointwhere
A) totalrevenuesandtotalcostsareequal.
B) thedifferencebetweentotalrevenuesandtotalcostsisthegreatest.
C) totalrevenuesarethegreatest.
D) theelasticityofdemandequalsone.
Answer: B
Diff:1
22) Amonopolistfindstheprice-outputcombinationthatmaximizesitsprofitsby
A) equatingtotalrevenueandtotalcost.
B) equatingmarginalrevenueandmarginalcost.
C) findingthecombinationforwhichthedifferencebetweenmarginalrevenueandmarginal
costisthegreatest.
D) equatingpriceandmarginalcost.
Answer: B
Diff:1
23) Inequilibrium,whichofthefollowingconditionsiscommontobothunregulatedmonopoly
andpurecompetition?
A) P=MR B) AR=ATC C) MR= MC D) MC=P
Answer: C
Diff:1
24) ProfitscanbemaximizedbyequatingMR= MC= Price,

A) onlyinperfectlycompetitivemarkets.
B) onlyinmonopolymarkets.
C) onlyindiscriminatingmonopolymarkets.
D) onlywithgovernmentpricecontrols.
Answer: A
Diff:1
25) Inmaximizingeconomicprofit,themonopolistwill
A) choosethehighestpricethatstillpermitssomeoutputsales.
B) equatemarginalcosttominimumaveragetotalcost.
C) equatepricetomarginalcost.
D) equatemarginalrevenuetomarginalcost.
Answer: D
Diff:1
26) Themonopolistfacesadownwardslopingdemandcurve,andmaximizingprofitsrequiresthe
monopolistto
A) acceptthemarketpriceforitsproduct.
B) willproducewherethedemandcurveisinelastic.
C) searchforthepriceconsistentwithproducingtothepointatwhichmarginalrevenue
equalsmarginalcost.
D) searchforthehighestpossiblepriceconsistentwithmaximizingitsrevenues,irrespective
ofitsexplicitandimplicitopportunitycosts.
Answer: C
Diff:1
27) Accordingtotheabovefigure,theprofitmaximizingprice-outputcombinationforthe
monopolistisapriceof
A) 50centsandanoutputof40,000newspapersperday.
B) 30centsandanoutputof30,000newspapersperday.
C) 60centsandanoutputof30,000newspapersperday.
D) 45centsandanoutputof45,000newspapersperday.
Answer: C
Diff:2
28) Themonopolistisa
A) pricetakerwhotriestofindtheprofit-maximizingrateofoutput.
B) pricetakerwhotriestofindtheprofit-maximizingprice.
C) pricesearcherwhotriestofindtheprofit-maximizingprice-outputcombination.
D) pricesearcherwhotriestofindtherateofoutputthatmaximizesprice.
Answer: C
Diff:2
29) Afirmthatmustdeterminetheprice-outputcombinationthatmaximizesprofitbecauseitfaces
adownward-slopeddemandcurve
A) hasaperfectlyelasticdemandcurve. B) hasaperfectlyinelasticdemandcurve.
C) isaprice-taker. D) isapricesearcher.
Answer: D
Diff:1
30) Amonopolistmaximizesprofitsbyfinding
A) therateofoutputwheremarginalrevenueequalsmarginalcost.
B) therateofoutputwherepriceequalsmarginalcost.
C) thepricewherepriceexceedsmarginalrevenuebythatlargestamount.
D) thepricewhereaveragerevenueandmarginalcostareequal.
Answer: A
Diff:1
P Q TC
$13 10 $15
$12 14 $25
$11 19 $45
$10 25 $75
$9 30 $115
$8 35 $165
31) Refertotheabovetable.Giventhedemandandcostschedules,whatistheprofitmaximizing
quantityforthismonopolist?
A) 14 B) 19 C) 25 D) 30
Answer: C
Diff:3
32) Refertotheabovetable.Giventhedemandandcostschedules,whatistheprofit -maximizing

priceforthismonopolist?
A) $9 B) $12 C) $11 D) $10
Answer: D
Diff:3
33) Refertotheabovetable.Giventhedemandandcostschedules,whatarethemaximum
economicprofitsforthismonopolist?
A) $155 B) $143 C) $175 D) $164
Answer: C
Diff:3
P Q TC
$13 10 $8
$12 15 $30
$11 20 $68
$10 25 $128
$9 30 $208
$8 35 $308
A) 15 B) 20 C) 25 D) 30
Answer: B
Diff:3

A) $13 B) $12 C) $11 D) $10
Answer: C
Diff:3
36) Refertotheabovetable.Giventhedemandandcostschedules,whatarethemaximized
economicprofitsforthismonopolist?
A) $122 B) $152 C) $220 D) $150
Answer: B
Diff:3
P Q MR MC
$7 20 $12 $2
$6 21 $14 $5
$5 22 $16 $10
$4 23 $18 $15
$3 24 $20 $20
$2 25 $22 $26
A) 23 B) 21 C) 20 D) 24
Answer: D
Diff:3

A) $3 B) $4 C) $6 D) $7
Answer: A
Diff:3
39) Ifamonopolistisproducingthequantityatwhichpriceequalsmarginalcost,itshould
A) continuetoproducethisamountifitwantstomaximizeprofits.
B) reduceoutputifitwantstomaximizeprofits.
C) reducepriceandkeepoutputunchangedifitwantstomaximizeprofits.
D) increaseoutputifitwantstomaximizeprofits.
Answer: B
Diff:2
40) Ifamonopolistisproducingthequantityatwhichmarginalrevenueequalsmarginalcost,it
should
C) increasepriceandkeepoutputunchangedifitwantstomaximizeprofits.
Answer: A
Diff:2
41) Ifamonopolistisproducingthequantityatwhichmarginalrevenueexceedsmarginalcost,it
should
C) reducepriceandkeepoutputunchangedifitwantstomaximizeprofits.
Answer: D
Diff:2
42) Amonopolistfindstheoutput(Q*)ratethatmaximizesprofit.Itfindsthepriceby
A) takingtheheightofthemarginalrevenuecurveatoutputrateQ .
B) takingtheheightofthemarginalcostcurveatoutputrateQ .
C) takingtheheightofthedemandcurveatoutputrateQ.
D) settingpriceequaltomarginalcost.
Answer: C
Diff:2
43) Amonopolistwhoismaximizingprofitsproducestothepointatwhich
A) marginalcostandaveragetotalcostareequal.
B) price,marginalcostandaveragevariablecostareequal.
D) priceisgreaterthanaveragetotalcost.
Answer: C
Diff:2
44) Themonopolistdeterminesthepriceandquantitycombinationthatmaximizesshort -run

profitsby
A) findingthequantityatwhichmarginalcostandmarginalrevenueareequalandthen
usingthedemandcurvetofindprice.
B) determiningthepricebyfindingthehighestpriceatwhichsalescanbemadeandthen
usingthedemandcurvetofindtheappropriatequantity.
C) findingthepointatwhichmarginalrevenueanddemandintersect.Thisgivestheprice
andquantitythatmaximizesprofits.
D) findingthequantityatwhichaveragerevenueandaveragetotalcostarefurthestapart.
Answer: A
Diff:3
45) Ifamonopolistproducestoapointatwhichmarginalrevenueislessthanmarginalcostthen
A) profitsarebeingmaximized.
B) profitswillalwaysbenegative.
C) theincrementalcostofproducingthelastunitexceedstheincrementalrevenue.
D) theincrementalcostofproducingthelastunitislessthantheincrementalrevenue.
Answer: C
Diff:1
46) Ifamonopolistproducestoapointatwhichmarginalrevenueisgreaterthanmarginalcost
then
A) profitsarebeingmaximized.
B) profitswillalwaysbenegative.
C) theincrementalcostofproducingthelastunitexceedstheincrementalrevenue.
D) theincrementalcostofproducingthelastunitislessthantheincrementalrevenue.
Answer: D
Diff:1
47) Ifamonopolistproducestoapointatwhichmarginalrevenueislessthanmarginalcostthen
A) thefirmshouldincreaseoutput.
B) thefirmshouldreduceoutput.
C) thefirmismaximizingprofits.
D) wedonotknowifthefirmshouldincreaseorreducewithoutmoreinformation.
Answer: B
Diff:1
48) Ifamonopolistproducestoapointatwhichmarginalrevenueismorethanmarginalcostthen
A) thefirmshouldincreaseoutput.
B) thefirmshouldreduceoutput.
C) thefirmismaximizingprofits.
D) wedonotknowifthefirmshouldincreaseorreducewithoutmoreinformation.
Answer: A
Diff:1
49) Refertotheabovefigure.Theprofitmaximizingquantityforthisfirmis
A) zero. B) Q1 . C) Q2 . D) Q3 .
Answer: B
Diff:1
50) Refertotheabovefigure.Theprofit-maximizingpriceforthisfirmis
A) P1 . B) P2 . C) P3 . D) P4 .
Answer: A
Diff:1
51) Refertotheabovefigure.Profitsforthisfirmare
A) zero.
B) negative.
C) positive.
Answer: C
Diff:1
52) Refertotheabovefigure.Theprofit-maximizingpriceandoutputforthismonopolistare
A) apriceofP1 andoutputofQ1 . B) apriceofP4 andoutputofO1 .
C) apriceofP2 andoutputofQ2 . D) apriceofP3 andoutputofQ3 .
Answer: A
Diff:1
A) negative.
B) zero.
C) positive.
Answer: C
Diff:1
54) Refertotheabovefigure.ThefirmiscurrentlyproducingatQ2 .Thefirmshould

A) reduceproduction. B) leaveproductionasitis.
C) increaseproduction. D) shutdown.
Answer: A
Diff:1
55) Refertotheabovefigure.ThefirmiscurrentlyproducingatQ1 .Thefirmshould

A) reduceproduction. B) leaveproductionasitis.
C) increaseproduction. D) shutdown.
Answer: B
Diff:1
56) Amonopolist
A) isapricesearcher. B) isapricetaker.
C) facesanupwardslopingdemandcurve. D) facesaverticaldemandcurve.
Answer: A
Diff:1
57) Afirmthatcandeterminetheprice-outputcombinationinordertomaximizeprofitisknownas
a
A) pricesearcher. B) pricetaker.
C) demandsearcher. D) costtaker.
Answer: A
Diff:1
58) Thepointofprofitmaximizationforamonopolistisexemplifiedby
A) TR=TC. B) MR= MC. C) ATCmin. D) MR>MC.
Answer: B
Diff:1
59) Amonopolistdeterminestheprofit-maximizingoutput
A) atthepointatwhichTR=TC.
B) atthepointatwhichMR=MC.
C) atanypointitwantsbecauseitistheonlyproduceroftheproduct.
D) atthepointatwhichTRismaximum.
Answer: B
Diff:1
60) Whichofthefollowingconditionsholdtrueforboththeperfectlycompetitivefirmandthe
monopolyattheprofit-maximizingoutputlevel?
A) MR=P B) MC= ATC C) MC= P D) MR= MC
Answer: D
Diff:2
61) Apuremonopolistisselling7unitsatapriceof$12.Ifthemarginalrevenueofthe8thunitis
$4,thenthepriceofthe8thunitis
A) $10. B) $11.
C) greaterthan$12. D) $4.
Answer: B
Diff:2
62) Amonopolysells10unitsofoutputat$10.IftheMRofthe11thunitis$4.50,thenthepriceof
the11thunitis
A) also$10. B) $9.50.
C) greaterthan$10. D) $7.25.
Answer: B
Diff:2
63) Amonopolysells5unitsofoutputat$20.IftheMRofthe6thunitis$14,thenthepriceofthe
6thunitis
A) also$14. B) $17.
C) greaterthan$20. D) $19.
Answer: D
Diff:2
64) AmonopolistisproducingatanoutputlevelatwhichMR= $6andMC=$9.Itcouldincrease

profits
A) byincreasingbothoutputandprice.
B) byreducingoutputandbyincreasingprice.
C) byreducingbothoutputandprice.
D) byincreasingoutputandbyreducingprice.
Answer: B
Diff:3
65) AmonopolistisproducingatanoutputlevelatwhichMR= $9andMC= $8.Itcouldincrease

profits
A) byincreasingbothoutputandprice.
B) byreducingoutputandbyincreasingprice.
C) byreducingbothoutputandprice.
D) byincreasingoutputandbyreducingprice.
Answer: D
Diff:3
66) AmonopolistisproducingatanoutputlevelatwhichATC = $5,P= $6,MC=$3,andMR=$4.

Wecanconcludethat
A) economicprofitcouldbeincreasedbyproducingmore.
B) economicprofitcouldbeincreasedbyproducingless.
C) economicprofitcannotbeincreased.
D) thefirmisearning$10ineconomicprofits.
Answer: A
Diff:3
67) AmonopolistisproducingatanoutputlevelatwhichATC = $5,P= $6,MC=$4,andMR=$3.

Wecanconcludethat
A) economicprofitcouldbeincreasedbyproducingmore.
B) economicprofitcouldbeincreasedbyproducingless.
C) economicprofitcannotbeincreased.
D) thefirmisearning$10ineconomicprofits.
Answer: B
Diff:3
68) Assumethatamonopolyisproducingataprofit-maximizingoutputlevel.Ifthefirmstotal
fixedcostsdecrease,thefirm
A) shouldloweritsprice.
B) shouldincreaseitsprice.
C) shouldcontinuetoproduceatthesamelevel.
D) increaseitsoutputlevel.
Answer: C
Diff:3
69) Foraprofit-maximizingmonopolist,
A) P>MC. B) P= MC. C) P= MR. D) P= ATC.
Answer: A
Diff:2
70) Inthelongrun,allofthefollowingaretrueforamonopolistEXCEPT
A) P>ATC. B) P= MC. C) MR= MC. D) P> AVC.
Answer: B
Diff:2
71) Whichofthefollowingistrueofaperfectlycompetitivefirmandamonopolyinthelongrun?
A) P=MC B) P= ATC C) MR= MC D) P= MR
Answer: C
Diff:2
72) Foramonopolyearningpositiveeconomicprofitsattheprofit-maximizingoutputlevel,allof
thefollowingaretrueEXCEPT
A) P>ATC. B) P> MR. C) P> MC. D) P= MR.
Answer: D
Diff:2
73) IfamonopolistisproducingatanoutputrateatwhichP= ATC,then

A) itseconomicprofitwillbezero. B) itseconomicprofitwillbepositive.
C) itismaximizingitsprofits. D) itisminimizingitslosses.
Answer: A
Diff:2
74) Usetheabovefigure.Theprofit-maximizingoutputwillbe
A) Q1 . B) Q2 .
C) Q3 . D) Noneoftheabovearecorrect.
Answer: C
Diff:2
75) Usetheabovefigure.Theprofit-maximizingpricewillbe
A) P1 . B) P2 . C) P3 . D) P4 .
Answer: C
Diff:2
76) Usetheabovefigure.Theprofit-maximizingorlossminimizingoutputandpricewillbe
A) Q1 andP2 . B) Q2 andP3 . C) Q3 andP3 . D) Q4 andP1 .
Answer: B
Diff:2
77) Intheabovefigure,whatistheprofit-maximizingpriceandoutput?
A) $9,14 B) $13,14 C) $11,16 D) $10,17
Answer: B
Diff:3
78) Intheabovefigure,whatistotalrevenueattheprofit -maximizingpoint?

A) $182 B) $126 C) $170 D) $176
Answer: A
Diff:3
79) Intheabovefigure,whatistotalcostattheprofit-maximizingpoint?
A) $182 B) $126 C) $112 D) $170
Answer: C
Diff:3
80) Intheabovefigure,whatistotalprofitattheprofit-maximizingpoint?
A) $14 B) $56 C) $42 D) $70
Answer: D
Diff:3
81) Intheabovefigure,thebreak-evenoutputandpriceis
A) $9and14. B) $13and14. C) $11and16. D) $10and17.
Answer: D
Diff:3
82) Tomaximizeprofits,themonopolistshouldproduceatwhich
A) MR=MC. B) MCintersectsthedemandcurve.
C) totalrevenueismaximized. D) totalcostsareminimized.
Answer: A
Diff:1
83) Howdoesamonopolymaximizeprofits?Whatpricedoesitcharge?
Answer: Amonopolyfindstherateofoutputatwhichmarginalrevenueequalsmarginalcost.
Anyotheroutputwillgeneratelowerprofits.Ifmarginalrevenueisgreaterthan
marginalcost,anextraunitgeneratesmorerevenuethancosts,soprofitsincrease.If
marginalcostexceedsmarginalrevenue,cuttingoutputbyoneunitreducescostsmore
thanrevenues,soprofitsincrease.Whenmarginalcostequalsmarginalrevenue,profits
aremaximized.Thepriceisfoundbyidentifyingthepriceonthedemandcurve
associatedwiththeprofitmaximizingrateofoutput.
Diff:2
84) Unlikeaperfectcompetitor,aprofit-maximizingmonopolistproducesatanoutputrateat
whichmarginalrevenueexceedsmarginalcost.Doyouagreeordisagree?Why
Answer: Disagree.Tomaximizeprofits,themonopolistproducesatanoutputrateatwhich
marginalrevenueequalsmarginalcostasdoesaperfectcompetitor.Ifitgoespastthat
point,thentheincrementalcostofproducinganymoreunitswillexceedtheincremental
revenueandsoprofitsdecrease.Belowthatpoint,theincrementalrevenueofproducing
anymoreunitswillexceedtheincrementalcostandsoprofitsarenotmaximizedeither.
However,becausepriceishigherthanmarginalrevenueinamonopoly,the
profit-maximizingmonopolistsellsatapricehigherthanmarginalcost.
Diff:2
24.6CalculatingMonopolyProfit
1) Amonopolistismaximizingprofitatanoutputrateof1,000unitspermonth.Atthisoutput
rate,thepricethatitscustomersarewillingandabletopayis$8perunit,averagetotalcostis$5
perunit,andmarginalcostis$6perunit.Itmaybeconcludedthatatthismonthlyoutputrate,
marginalrevenueis
A) $5perunit,andthemonopolistearnszeroeconomicprofits.
B) $6perunit,andthemonopolistearnseconomicprofitsof$2,000permonth.
C) $6perunit,andthemonopolistearnseconomiclossesof$1,000permonth.
D) $6perunit,andthemonopolistearnseconomicprofitsof$3,000permonth.
Answer: D
Diff:2
Topic: 24.6CalculatingMonopolyProfit
2) Accordingtotheabovefigure,themaximumprofitthemonopolistcanreceiveis
A) 0. B) $1,500perday. C) $9,000perday. D) $7,500perday.
Answer: B
Diff:3
3) Accordingtotheabovefigure,whataretheprofitsofthefirmifitproduces50,000units?
A) -$5,000perday B) -$10,000perday
C) -$7,500perday D) -$17,500perday
Answer: C
Diff:2
4) Amonopolistwillnotearnanyeconomicprofitswhen
A) AVCisaminimum. B) AFCisveryhigh.
C) ATCliesabovethedemandcurve. D) ATCliesbelowthedemandcurve.
Answer: C
Diff:1
5) Amonopolistwillearneconomicprofitswhen
A) AVCisaminimum. B) ATCintersectsthedemandcurve.
C) ATCliesabovethedemandcurve. D) ATCliesbelowthedemandcurve.
Answer: D
Diff:1
6) Supposethattheprofitmaximizinglevelofoutputforthemonopolistis10units,andprice =
$50,ATC=$35,andAVC=$25.Whatisthemonopolysprofit?
A) $50 B) $150 C) $250 D) $500
Answer: B
Diff:1
7) Supposethattheprofitmaximizinglevelofoutputforthemonopolistis100units,andATC =
$45.00;MC=$35.00;MR=$35.00;P=$45.00.Whatisthemonopolysprofit?
A) -$1000 B) $4500 C) $0 D) $3500
Answer: C
Diff:2
8) Supposethattheprofitmaximizinglevelofoutputforthemonopolistis100units,andATC =
$45.00;MC=$35.00;MR=$35.00;P=$50.00.Whatisthemonopolysprofit?
A) -$1000 B) $4500 C) $5000 D) $500
Answer: D
Diff:2
9) Whenthemarginalcostcurveofthemonopolistshiftsupward,therewillbe
A) anincreaseinbothpriceandquantity.
B) anincreaseinpricebutadecreaseinquantity.
C) adecreaseinpriceandinmarginalrevenue.
D) adecreaseinquantityandadecreaseinmarginalrevenue.
Answer: B
Diff:1
10) Aprofit-maximizingmonopolistearnsaneconomiclosswhenever
A) itpaystaxestothegovernmentoneachunitofoutputitproduces.
B) thepriceitchargesforitsproductexceedsaveragetotalcost.
C) thedemandcurveliescompletelybelowtheATCcurve.
D) itproducesalongtheelasticportionofademandcurve.
Answer: C
Diff:2
11) Amonopolistwillnotbeabletoreceiveapositiveeconomicprofitatanyprice -output

combinationatwhich
A) marginalcostislessthanaveragetotalcostwhenthemonopolisthasequatedmarginal
revenueandmarginalcost.
B) theaveragetotalcostcurveiseverywhereabovethedemandcurve.
C) marginalcostislessthanaveragevariablecostwhenthemonopolisthasequatedmarginal
revenueandmarginalcost.
D) marginalrevenuefallsatafasterratethanmarginalcostincreases.
Answer: B
Diff:2
12) Accordingtotheabovefigure,theprofit-maximizingoutputforthismonopolistisfound
directlybelowtheletter
A) K. B) M. C) P. D) N.
Answer: A
Diff:2
13) Accordingtotheabovefigure,theprofit-maximizingpriceforthemonopolistis
A) A. B) B. C) C. D) D.
Answer: A
Diff:2
14) Accordingtotheabovefigure,whenthemonopolistmaximizesprofits,itsprofitsareequalto
theareagivenby
A) AKMC. B) AKOD. C) BLPE. D) EPRF.
Answer: B
Diff:3
15) Aprofit-maximizingmonopolistwillreceivezeroprofitswhen
A) theaveragetotalcostcurveliesabovethedemandcurveforallpossibleratesofoutput.
B) theaveragetotalcostcurveistangenttothedemandcurveattheprofitmaximizingprice.
C) marginalrevenue,marginalcost,andaveragetotalcostareallequal.
D) asecondfirmenterstheindustry.
Answer: B
Diff:2
16) Iftheabovefigureaccuratelyportraysthemarketconditionsforagivenmonopolist,wecanbe
assuredthatthemonopolist
A) ismakinganormalprofit.
B) isproducingatthelevelthatwillmaximizebenefittosociety.
C) ismakingexcessiveprofits.
D) willbeforcedtogooutofbusinessinthelongrun.
Answer: D
Diff:1
17) Intheabovefigure,theareaofrectangleABHGrepresentsthemonopolists
A) maximizedeconomicprofits. B) maximizedtotalrevenue.
C) averagetotalprofits. D) totalcosts.
Answer: A
Diff:1
18) Intheabovefigure,thedistancebetweenAandBrepresentsthismonopolyfirms
A) totalprofit. B) totalrevenue.
C) averageprofitperunit. D) averagecostperunit.
Answer: C
Diff:1
19) Intheabovefigure,amonopolistwillsetitslevelofoutputandpriceat
A) Q2 andC,respectively. B) Q3 andF,respectively.
C) Q1 andA,respectively. D) Q1 andB,respectively.
Answer: C
Diff:1
20) Theownerofapatentedinvention
A) mayormaynothavealegalmonopoly.
B) isguaranteedaprofitsinceherideacannotbecopied.
C) willalwayshavedemandhighenoughandcostslowenoughtoensureaprofit.
D) willonlyearnaprofitifaveragetotalcostislessthanprice.
Answer: D
Diff:1
A) negative.
B) zero.
C) positive.
Answer: A
Diff:1
A) positiveandequaltoP2 P1 ab. B) positiveandequaltoP3 P1 ac.
C) negativeandequaltoP3 P2 bc. D) negativeandequalto0P3 cQ1 .
Answer: A
Diff:1
23) Refertotheabovefigure.Totalcostforthisfirmequals
A) P2 . B) P3 . C) 0P2 bQ1 . D) 0P3 cQ1 .
Answer: C
Diff:1
24) Amonopolistwouldnotbeabletomakeapositiveprofitatanypriceoutputcombinationwhen
A) marginalcostislessthanaveragetotalcostforonemoreunitofoutput.
B) theaveragevariablecostcurveiseverywhereabovethemarginalrevenuecurve.
C) theminimumpointoftheaveragetotalcostcurveliestotherightoftheminimumofthe
averagevariablecostcurve.
D) theaveragetotalcostcurveiseverywhereabovethedemandcurve.
Answer: D
Diff:2
25) WhichofthefollowingisaTRUEstatementaboutamonopoly?
A) Amonopolydoesnotnecessarilyearnpositiveeconomicprofits.
B) Amonopolymustearnanabove-normalprofittostayinbusiness.
C) Aslongastherearebarrierstoentry,amonopolycanalwaysfindsomeprice -output
combinationthatgeneratespositiveeconomicprofits.
D) Aslongasthedemandcurveslopesdown,amonopolycanalwaysfindsome
price-outputcombinationthatgeneratespositiveeconomicprofits.
Answer: A
Diff:2
26) Amonopolisticfirmwillshutdownif
A) P<ATCforeverylevelofoutput. B) P> ATCforeverylevelofoutput.
C) P>AVCforeverylevelofoutput. D) P< AVCforeverylevelofoutput.
Answer: D
Diff:2
27) WhichofthefollowingisINCORRECTregardingmonopolyandprofits?
A) Themereexistenceofamonopolydoesnotguaranteehighprofits.
B) Numerousmonopolieshavegonebankrupt.
C) Amonopolistwillneverexperienceeconomiclosses.
D) Themonopolistreachesprofit-maximizingoutputbytrialanderror.
Answer: C
Diff:1
28) Forthemonopolyintheabovefigure,ifthefirmiscurrentlyproducing700units,whichofthe
followingiscorrect?
A) Itcouldearnhigherprofitsifitproducedmoreunitseachday.
B) Itcouldearnhigherprofitsifitproducedfewerunitseachday.
C) Itismaximizingitsprofits.
D) Itisincurringaloss.
Answer: B
Diff:2
29) Usetheabovefigure.Theprofit-maximizingoutputandpriceis
A) 600and$16,respectively. B) 600and$10,respectively.
C) 600and$8,respectively. D) 800and$10,respectively.
Answer: A
Diff:2
30) Usetheabovefigure.Totalrevenueattheprofit-maximizingoutputis
A) $4,800. B) $9,600. C) $5,600. D) $8,000.
Answer: B
Diff:3
31) Usetheabovefigure.Totalcostattheprofit-maximizingoutputisclosetto
A) $6,600. B) $9,600. C) $4,800. D) $8,000.
Answer: A
Diff:3
32) Usetheabovefigure.Theprofitthismonopolistearnsisclosestto
A) $3,000. B) $4,800. C) $1,600. D) $1,000.
Answer: A
Diff:2
33) Usetheabovefigure.Maximizedeconomicprofitsarerepresentedbyrectangle
A) A. B) B. C) C. D) A+B.
Answer: A
Diff:3
34) Allmonopoliesoperatewithpositiveeconomicprofits.Doyouagreeordisagree?Why?
Answer: Disagree.Monopoliescanreceivenegativeeconomicprofitsandcangooutofbusiness.If
thereisnopricethatliesaboveaveragetotalcosts,thefirmwillreceivenegative
economicprofits.Intheshortrun,itwillcontinuetooperateaslongaspriceisgreater
thanaveragevariablecost,butitwillgooutofbusinessinthelongrun.
Diff:2
35) Usingagraph,showtheprofitsofamonopoly.Supposefixedcostsincreasedenoughtomake
thefirmearnaneconomicloss.Showsuchasituation.Wouldthemonopolistearneconomic
lossesinthelongrun?Whyorwhynot?
Answer:
Intheabovefigure,themonopolistproducestothepointatwhichMR =MC,atQunits.
PriceisP1 ,whichisthepriceonthedemandcurveassociatedwithQ.Economicprofits
equalareaP1abciftheaveragetotalcostcurveisATC.Iffixedcostsincreasesoaverage
totalcostsincreasetoATC1 ,thefirmwouldlosefeaP1 .Themonopolistwillnotearn
economiclossesinthelongrunbecauseitcangooutofbusiness.
Diff:3
24.7OnMakingHigherProfits:PriceDiscrimination
1) Pricediscriminationrefersto
A) sellingaproductatdifferentpricesaccordingtothedifferencesinmarginalcostof
providingittodifferentconsumers.
B) sellingaproductatdifferentprices,withthepricedifferencebeingunrelatedtodifferences
inmarginalcost.
C) chargingthesamepricestoallconsumersbutsellingthemdifferentquantities.
D) adeliberateeffortonthepartofamonopolyproducertoconfuseconsumers.
Answer: B
Diff:1
Topic: 24.7OnMakingHigherProfits:PriceDiscrimination
2) Aprice-discriminatingmonopolistwillequate
A) priceandmarginalcostineachmarket.
B) priceandmarginalrevenueineachmarket.
C) marginalrevenueandmarginalcostineachmarket.
D) averagerevenueandmarginalrevenueineachmarket.
Answer: C
Diff:1
3) Amonopolistengagesinpricediscrimination
A) bychargingahigherpricetoconsumerswhosedemandismoreelastic.
B) bychargingahigherpricewhenmarginalcostislower.
C) bychargingalowerpricetoconsumerswhosedemandismoreelastic.
D) bychargingthesamepricetoallconsumers.
Answer: C
Diff:3
4) Amonopolistengagesinpricediscrimination
A) bychargingahigherpricetoconsumerswhosedemandismoreinelastic.
B) bychargingalowerpricewhenmarginalcostishigher.
C) bychargingalowerpricetoconsumerswhosedemandismoreinelastic.
D) bychargingthesamepricetoallconsumers.
Answer: A
Diff:3
5) Whengrocerystoresissuespecialdiscountmembershipcardsforshopperseffectivelyoffering
differentpricesbasedonquantitiesconsumed,thisisanexampleof
A) pricediscrimination. B) pricedifferentiation.
C) productdifferentiation. D) patentprotection.
Answer: A
Diff:2
6) WhichofthefollowingisNOTanecessaryconditionforpricediscrimination?
A) Preventingresaleoftheproduct B) Downwardslopingdemandcurve
C) Separatingmarketsforthegood D) Havingaconstantmarginalcost
Answer: D
Diff:1
7) Pricediscriminationisthe
A) refusalbyafirmtoselltoallcustomers.
B) sellingofagivenproductatmorethanonepricewhenthepricedifferencesreflectcost
differences.
C) pricingofaproductsothatnoteveryonecanaffordit.
D) sellingofagivenproductatmorethanonepricewhenthepricedifferenceisunrelatedto
costdifferences.
Answer: D
Diff:1
8) Amonopolywilllookforopportunitiestopricediscriminatebecausethepractice
A) leadstosellingmoreunits. B) leadstogreaterprofits.
C) allowsittochargehigherprices. D) isdesiredbycustomers.
Answer: B
Diff:2
9) Whichofthefollowingconditionsisnotnecessaryforafirmtobeabletoengageinprice
discrimination?
I. Thefirmmustbeabletoproducetothepointatwhichpriceequalsmarginalrevenue.
II. Thefirmmusteasilybeabletoidentifyconsumerswithdifferentdemandelasticities.
III. Thefirmmustbeabletopreventresaleoftheitemitproducesandsells.
A) Ionly B) IIIonly
C) BothIandIIonly D) BothIIandIIIonly
Answer: D
Diff:3
10) Amonopolistsellsahomogeneousgoodinseveraldistinctsubmarkets,andtheelasticitiesof
demanddifferinthesesubmarkets.Ifthemonopolistselectstherateofoutputtosellineach
submarketbyequatingmarginalrevenueandmarginalcost,then
A) allcustomersinallmarketsenduppayingthesameprice.
B) itisnotpricediscriminating,butmerelypricedifferentiating.
C) customersinmarketswithmoreelasticdemandwillpayhigherpricesthancustomersin
marketswithlesselasticdemand.
D) customersinmarketswithmoreelasticdemandwillpaylowerpricesthancustomersin
marketswithlesselasticdemand.
Answer: D
Diff:3
11) Ifafirmispricedifferentiating,thenitis
A) producingahomogenousproduct.
B) chargingdifferentpricestodifferentconsumersbasedondifferencesinmarginalcosts.
C) chargingdifferentpricesbasedonquality.
D) chargingdifferentpricesbasedonadvertisingcosts.
Answer: B
Diff:2
12) Otherthingsbeingequal,aprice-discriminatingfirmwillchargemoretothecustomerswho
A) havethehighestincomes.
B) havetheleastelasticdemandforitsproduct.
C) havethemostelasticdemandfortheproduct.
D) aretheleastrationalinmakingtheirdecisions.
Answer: B
Diff:2
13) Otherthingsbeingequal,aprice-discriminatingfirmwillchargelesstothecustomerswho
A) havethelowestincomes.
B) havetheleastelasticdemandforitsproduct.
C) havethemostelasticdemandfortheproduct.
D) arethemostrationalinmakingtheirdecisions.
Answer: C
Diff:2
14) Inordertopricediscriminate,afirmmust
A) produceaproductthatisaclosesubstituteforproductsofotherfirms.
B) havedifferentmarginalcostsforservingdifferentcustomers.
C) selltocustomerswithidenticalpriceelasticitiesofdemand.
D) beabletopreventresaleofitsproduct.
Answer: D
Diff:2
15) Ifdifferentmarketsforaproductproducedbyamonopolistcanbeseparatedandifthe
elasticityofdemanddiffersbetweenthetwomarkets,thenthemonopolistwill
A) beabletomakehigherprofitsbyusingpricediscrimination.
B) chargeasinglepriceinallmarkets.
C) gooutofbusiness.
D) selltheproductinonlyoneofthemarketswithinelasticdemandcurves.
Answer: A
Diff:1
16) Apricediscriminatingmonopolistwill
A) chargealowerpricetothoseconsumerswhohavemoreelasticdemand.
B) chargeahigherpricetothoseconsumerswhohavemoreinelasticdemand.
C) chargemoretothoseconsumerswhohavemoresubstitutegoods.
D) chargethesamepricetoallconsumers.
Answer: A
Diff:1
17) IfthepriceelasticityofdemandforU.S.automobilesishigherinEuropethanitisintheUnited
States,andtransportcostsarezero,aprice-discriminatingmonopolistwouldcharge
A) thesamepriceforautosintheUnitedStatesasinEurope.
B) alowerpriceforautosintheUnitedStatesthaninEurope.
C) ahigherpriceforautosintheUnitedStatesthaninEurope.
D) alessprofitablepriceforautosintheUnitedStatesthaninEurope.
Answer: C
Diff:2
18) Ifthepriceelasticityofdemandforairlineticketsis2.0foraleisuretravelerand0.5fora
businesstraveler,thenaprice-discriminatingmonopolistwouldcharge
A) ahigherpriceforthebusinesstravelerthantheleisuretraveler.
B) thesamepriceforbothtravelers.
C) alowerpriceforthebusinesstravelerthantheleisuretraveler.
D) alessprofitablepriceforthebusinesstravelerthantheleisuretraveler.
Answer: A
Diff:3
19) WhichofthefollowingisNOTnecessaryinorderforamonopolisttopracticeeffectiveprice
discrimination?
A) Themarginalcostofprovidingthesamegoodtodifferentgroupsofbuyersmustbe
different.
B) Themonopolistmustbeabletosegregateitsmarketintodifferentsubmarkets.
C) Thebuyersinvariousmarketsmustfacedifferentpriceelasticitiesofdemand.
D) Themonopolistmusthaveadownwardslopingdemandcurve.
Answer: A
Diff:1
20) Establishingdifferentpricesforsimilarproductstoreflectdifferencesinmarginalcostin
providingthosegoodstodifferentgroupsofbuyersis
A) pricediscrimination. B) cost-pluspricing.
C) pricedifferentiation. D) productdifferentiation.
Answer: C
Diff:1
21) WhichofthefollowingisTRUE?
A) Monopolyresultsinahigherquantityofoutputbeingsoldcomparedwithperfect
competition.
B) Pricediscriminationoccurswhentherearedifferencesinpricesthatreflectdifferencesin
marginalcost.
C) Chargingallcustomersthesamepricewhencostsvarycanactuallybeacaseofprice
discrimination.
D) Pricediscriminationguaranteesthatthemonopolistwillmakeaprofit.
Answer: C
Diff:1
22) WhichofthefollowingisNOTanecessaryconditionforafirmtopricediscriminate?
A) Thefirmmustbeabletoseparatemarkets.
B) Buyersindifferentmarketsmusthavedifferentelasticitiesofdemand.
C) Resaleoftheproductmustbepreventable.
D) Thefirmmustbeaprice-taker.
Answer: D
Diff:2
23) IfJapaneseproducerssellcomputerchipsatahigherpriceintheUnitedStatesthaninJapan,
andifthereisnocostdifferenceinproducingortransportingthechips,theJapaneseproducers
wouldbepracticing
A) cartelpricing. B) pricediscrimination.
C) simplemonopolybehavior. D) pricesampling.
Answer: B
Diff:1
24) Whichofthefollowingwillmakepricediscriminationdifficultforamonopolist?
A) Thepossibilityofresaleoftheproduct B) Aconstantmarginalcostcurve
C) Anincreasingmarginalcost D) Adownwardslopingdemandcurve
Answer: A
Diff:1
25) Pricediscriminationis
A) refusingtosellagivenproducttosomegroupofcustomers.
B) sellingagivenproductatmorethanoneprice.
C) sellingagivenproductatmorethanoneprice,withthepricedifferencesreflecting
differencesinmarginalcostinprovidingtheproducttodifferentgroupsofcustomers.
D) sellingagivenproductatmorethanoneprice,withthepricedifferencesbeingunrelated
todifferencesincost.
Answer: D
Diff:1
26) Whenamonopolistsellsthesameproductatdifferentpricesandthepricesarenotrelatedto
costdifferences,wehave
A) monopolypricing. B) marginalcostpricing.
C) pricediscrimination. D) pricedifferentiation.
Answer: C
Diff:1
27) Whenamonopolistsellsthesameproductatdifferentpricesandthepricesarerelatedtocost
differences,wehave
A) monopolypricing. B) marginalcostpricing.
Answer: D
Diff:1
28) Pricedifferentiationisasituationinwhich
A) therearedifferentpricesforsimilarproductsreflectingdifferencesinthemarginalcostof
providingthecommoditiestodifferentgroupsofbuyers.
B) therearedifferentpricesforthesameproductthatarenotduetodifferencesinthe
marginalcostofprovidingthecommoditytodifferentgroupsofbuyers.
C) consumerscomparison-shop.
D) thedemandcurveisvertical.
Answer: A
Diff:1
29) Monopoliesthatpricediscriminatedosobecause
A) theyareabletodosoandnooneelsecan.
B) theycanincreasetheirprofits.
C) itkeepsthemoutoftroublewiththegovernment.
D) itismoreefficient.
Answer: B
Diff:2
30) Forpricediscriminationtoexist,allofthefollowingarenecessaryEXCEPT
A) adownwardslopingdemandcurve.
B) anidentifiablegroupofbuyerswithdifferentelasticitiesofdemand.
C) anupwardslopingmarginalcostcurve.
D) therecanbenoresaleoftheproduct.
Answer: C
Diff:1
31) Forafirmtobeabletoengageinpricediscrimination,itmust
A) faceadownwardslopingdemandcurve.
B) producemorethanoneproduct.
C) havecustomersofdifferentlevelsofwealthandage.
D) haveeconomiesofscale.
Answer: A
Diff:2
32) Amonopolisthasfourdistinctgroupsofcustomers.GroupAhasanelasticityofdemandof0.2,
Bhasanelasticityofdemandof0.8,Chasanelasticityofdemandof1.0,andDhasanelasticity
ofdemandof2.0.Thegrouppayingthehighestpricefortheproductwillbe
A) A. B) B. C) C. D) D.
Answer: A
Diff:2
33) Pricediscriminationismorelikelyinthecaseofservicesthaninthecaseofgoodsbecause
A) producersofgoodsusuallydonotfacedownwardslopingdemandcurves.
B) itiseasiertodistinguishcustomerswithdifferentelasticitiesofdemandwithrespectto
servicesthanwithgoods.
C) elasticitiesofdemandvarymorewithservicesthanwithgoods.
D) itismoredifficulttoresellservices.
Answer: D
Diff:2
34) WhichofthefollowingisNOTanexampleofpricediscrimination?
A) Gasolinestationschargemoreforgasolinewithhigheroctaneandadditionaladditives.
B) Collegesgivesomestudentsmorefinancialaidthantheydootherstudents.
C) AirlineschargemoreforpeoplewhodontstayoveraSaturdaynight.
D) Collegebookstoregivesapricediscounttofaculty.
Answer: A
Diff:3
35) WhichofthefollowingisNOTanexampleofpricediscrimination?
A) Studentdiscountatalocalmovietheater.
B) Breakfastcerealmakerssendingcouponstoselectbuyers.
C) Pharmaceuticalcompanieschargecustomerslivinginwealthiercountrieshigherprices
thanforidenticaldrugsinpoorernations.
D) Ahardcoverbooksellingformorethanthesamebookinelectronicform.
Answer: D
Diff:3
36) Sellingaproductatdifferentpriceswhenthepricedifferenceisunrelatedtocostsisapractice
knownas
A) pricefixing. B) pricemonopolization.
Answer: C
Diff:2
37) Pricediscriminationexistswhen
A) afirmchargesdifferentbuyersdifferentpricesforitsproductbutthecostsarethesame.
B) eachbuyeristreatedequally.
C) salesaremadebelowcost.
D) afirmchargeseachbuyerapriceoftheproductinproportiontoitscosts.
Answer: A
Diff:1
38) WhichisNOTanecessaryconditionforpricediscriminationtoexist?
A) Thefirmmustfaceadownwardslopingdemandcurve.
B) Thefirmmustidentifybuyerswithdifferentelasticitiesofdemand.
C) Thefirmmustbeabletopreventresaleoftheproductorservice.
D) Thefirmmustestablishdifferentpricestoreflectmarginalcost.
Answer: D
Diff:3
39) WhenafirmsellsagivenproductatmorethanonepriceandthepricedifferenceisNOTcaused
bydifferencesincostthenthereis
A) pricediscrimination. B) pricedifferentiation.
C) pricedemarcation. D) pricedelineation.
Answer: A
Diff:1
40) WhichofthefollowingisNOTnecessaryforpricediscriminationtooccur?
A) Thefirmmustbeabletoseparatethemarketintoidentifiablegroups.
B) Thefirmmustbesellingadurablegood.
C) Thefirmmusthaveadownwardslopingdemandcurve.
D) Thefirmhastobeabletopreventresaleoftheproductorservice.
Answer: B
Diff:2
41) Afirmwillpracticepricediscriminationwhenitbelievesthatbydoingsoitwillbeableto
increasetotal
A) sales. B) revenue. C) profits. D) production.
Answer: C
Diff:2
42) Whenafirmpracticespricediscrimination,foreachseparatesetofconsumersitwilldetermine
therateofoutputatwhich
A) MR>MC. B) MR= P. C) MR= AVC. D) MR= MC.
Answer: D
Diff:2
43) WhichofthefollowingisNOTaconditionforpricediscriminationtoexist?
A) downwardslopingdemandcurvefacedbythefirm
B) identificationofbuyerswithdifferingelasticities
C) unpatentedproductortheservice
D) abilitytopreventtheresaleoftheproductorservice
Answer: C
Diff:2
44) Pricediscriminationoccurswhenafirmsells
A) agivenproductatdifferentpricesatdifferentpointsintime.
B) agivenproductatdifferentpricestodifferentethnicgroups.
C) agivenproductatdifferentpricesunrelatedtodifferencesincost.
D) agivenproductatdifferentpriceswhenitisproducedindifferentcolors.
Answer: C
Diff:1
45) Amonopolysgoalusingpricediscriminationistoincrease
A) totalrevenue. B) marginalrevenue.
C) totalprofit. D) theperunitprofit.
Answer: C
Diff:1
46) Amonopolistwillmaximizeitsprofitsbychargingahigherpriceforcustomerswithaprice
elasticityof
A) 0.1. B) 1. C) 1.5. D) 10.
Answer: A
Diff:2
47) WhichofthefollowingisNOTapreconditionforpricediscrimination?
A) Theproductcannotberesoldtoanothercustomer.
B) Thepriceelasticitiesofdemandaredifferentforeachgroupofconsumers.
C) Theproductisadurablegood.
D) Thesellermusthavesomemarketpower.
Answer: C
Diff:2
48) Seniorcitizenscanbuymovieticketsatalowerpricethanthegeneralpublic.Thisisanexample
of
A) agediscrimination. B) demanddiscrimination.
Answer: C
Diff:1
49) WhichofthefollowingisLEASTlikelytobeabletoregularlyengageinpricediscrimination?
A) afarmer
B) anairline
C) auniversity
D) aproducerofcopyrightedcomputersoftware
Answer: A
Diff:1
50) Anupscalefusionbistroinasmalltownchargeshigherpricesforthesamemenuitemsat
dinnertimethanatlunchtime.Doesthebistronecessarilypracticepricediscrimination?
Explainyouranswer.
Answer: Thebistropracticespricediscriminationifitchargescustomersatdinnertimemorethan
thoseatlunchtimeandthereisnocostdifference.However,thecostsforcustomersat
dinnertimearetypicallyhigherthanthecostsforcustomersatlunchtimebecause
customersatdinnertimetendtostaylongerandthereforeconsumemoreservices.The
higherpricesatdinnertimemaywellreflectthehigheroperatingcostsforthesame
menuitems.
Diff:3
51) Explainhowamonopolistcanincreaseprofitsbypricediscriminating.Whataretheconditions
necessaryforpricediscrimination?
Answer: Amonopolistcanincreaseprofitsbypricediscriminating,inwhichcaseitsellssome
unitsatahigherpriceandotherunitsatalowerprice.Itsellstothosewhosedemandfor
thegoodisrelativelyinelasticatahigherpriceandtothosewhosedemandisrelatively
elasticatalowerprice.Todiscriminate,thefirmmusthavemonopolypower,itmustbe
abletodistinguishdifferentmarkets,andbuyersinthosemarketsmusthavedifferent
elasticitiesofdemand.Finally,themonopolistmustbeabletopreventthelower -priced
consumersfromresellingthegoodinthehigher-pricedmarket.
Diff:2
52) Pricediscriminationisthesameaspricedifferentiation.Doyouagreeordisagree?Why?
Answer: Disagree.Pricediscriminationistheactofsellingagivenproductatmorethanoneprice
butnodifferenceinmarginalcost.Incontrast,pricedifferentiationistheactofsellinga
givenproductatmorethanonepriceinordertoreflectdifferencesinmarginalbost.
Diff:2
24.8TheSocialCostofMonopolies
1) WhichofthefollowingstatementsaboutamonopolistisTRUE?
A) Monopoliestendtomisallocateresources.
B) AllmonopoliesareunlawfulintheUnitedStates.
C) Monopoliestendtoallocateresourcesinasociallyoptimalmanner.
D) Monopolieswillalwaysmakeaprofitinthelongrun.
Answer: A
Diff:2
Topic: 24.8TheSocialCostofMonopolies
2) Intheabovefigure,thedifferencebetweenthecompetitiveindustrypriceandthatofthe
monopolistis
A) 0B. B) 0A. C) AB. D) CE.
Answer: C
Diff:2
3) Theprofit-maximizingpriceandquantityestablishedbyaperfectlycompetitivefirminthe
abovefigureare
A) Q1 unitsofoutputandapriceofP5 . B) Q3 unitsofoutputandapriceofP3 .
C) Q1 unitsofoutputandapriceofP1 . D) Q4 unitsofoutputandapriceofP4 .
Answer: B
Diff:2
4) Theprofit-maximizingpriceofthemonopolistcomparedtotheperfectlycompetitiveindustry
intheabovefigureare,respectively
A) P1 andP 3 . B) P1 andP 5 . C) P1 andP 2 . D) P2 andP 5 .
Answer: A
Diff:2
5) Theprofit-maximizingquantityofthemonopolistcomparedtotheperfectlycompetitive
industryintheabovefigureare,respectively
A) Q1 andQ2 . B) Q1 andQ3 . C) Q1 andQ5 . D) Q2 andQ3 .
Answer: B
Diff:2
6) Theprofit-maximizingpriceandquantityofthemonopolistcomparedtotheperfectly
competitiveindustryintheabovefigureare,respectively
A) AandB. B) AandC. C) AandF. D) CandF.
Answer: C
Diff:2
7) MonopoliesarediscouragedintheUnitedStatesbecause
A) theyaremoreefficientthanotherindustries.
B) theycanproduceatlowercostintheshortrun.
C) theyrestrictoutputandboostprices.
D) theyhiretoomanyworkers.
Answer: C
Diff:2
8) Comparedtoperfectcompetition,amonopolywillproduce________output,andchargea
________price.
A) more;higher B) more;lower C) less;higher D) less;lower
Answer: C
Diff:2
A) Atthemonopolistsequilibrium,resourcesarebeingefficientlyallocated.
B) Withamonopoly,thevaluetosocietyofthelastunitproducedislessthanitsproduction
cost.
C) Monopolistsraisethepriceandrestrictproduction,comparedtoacompetitivesituation.
D) Amonopolistalwaysproducesahigherlevelofoutputthanwouldbeproducedifthe
marketwerecompetitive.
Answer: C
Diff:1
A) Otherthingsbeingequal,societysoverallwell-beingisreducedwhenaperfectly
competitiveindustryismonopolized.
B) Whenbothaperfectlycompetitiveindustryandamonopolistfacethesameproduction
costsandthesamemarketdemandcurve,themonopolistoffersalowerlevelofoutputfor
sale.
C) Theprofit-maximizingmonopolistwillalwaysproduceonlyalongtheinelasticportionof
thedemandcurve,whereasequilibriuminaperfectlycompetitiveindustryalwaysoccurs
alongtheelasticportionofthedemandcurve.
D) Whenbothaperfectlycompetitiveindustryandamonopolistfacethesameproduction
costsandthesamemarketdemandcurve,themonopolistchargesahigherpriceforits
productthanwhatwouldbechargedinaperfectlycompetitivesituation.
Answer: C
Diff:1
11) Underamonopoly,resourcesaremisallocatedsuchthat
A) toofewresourcesareusedinotherindustries,andtoomanyareusedbythemonopoly.
B) toofewresourcesareusedbythemonopoly,andtoomanyareusedelsewhere.
C) resourcesarebeingusedasefficientlyaspossibleonlybythemonopoly.
D) consumersarebeingforcedtopayapricebelowtheMCofthemonopolist.
Answer: B
Diff:2
12) Conclusionsaboutthemisallocationofresourcesunderconditionsofmonopolydepend,inpart,
onthecrucialassumptionthat
A) monopoliesareinterestedineconomicprofitsandcompetitivefirmsarenot.
B) themonopolizationofaperfectlycompetitiveindustrydoesnotchangethecoststructure
oftheindustry.
C) theeconomiesofscaleexistonlyinperfectlycompetitiveindustries.
D) themarginalcostcurveofamonopolistisdifferentfromthatofaperfectlycompetitive
firm.
Answer: B
Diff:1
13) Comparedtoanefficientperfectlycompetitiveindustry,themonopolistwill
A) producelessoutputatahighertotalcost.
B) producelessoutputandchargeahigherprice.
C) producemoreoutputatahigherpriceandhigherprofit.
D) producemoreoutputatalowerprice.
Answer: B
Diff:1
14) Thesocialcostattachedtomonopoliesisreflectedbythefactthat
A) monopoliesproducemoreoutputthanconsumersdesiretobuy.
B) consumerspaypricesthatexceedthemarginalcostofproduction.
C) thedemandforamonopolistsproductisalwayslowerthanthedemandfortheproducts
ofperfectlycompetitivefirms.
D) consumersarealwayswillingtopaylowerpricesforamonopolistsproductthanforthe
productsofperfectlycompetitivefirms.
Answer: B
Diff:2
15) Economistscriticizemonopoliesbecausemonopolies
A) alwayspricediscriminate.
B) receiveaccountingprofits.
C) restrictoutputandraisepricescomparedtoacompetitivesituation.
D) makeconsumerspaymorefortheirproductthanthecustomersvaluetheproduct.
Answer: C
Diff:2
16) Theconclusionthatamonopolyresultsinloweroutputandhigherpricesthanperfect
competitionreliesontheassumptionthat
A) thedemandcurveforamonopolyishorizontal.
B) consumersareignorantoftheeffectsofmonopoly.
C) thecostsofproductionarethesamewhethertheindustryisperfectlycompetitiveora
monopoly.
D) elasticityofdemandvariesalongthemarketdemandcurve.
Answer: C
Diff:2
17) WhichofthefollowingisaTRUEstatementaboutmonopolyandperfectcompetition?
A) Priceisalwayshigherandoutputhigherundermonopolythanunderperfectcompetition.
B) Becausecostsdonotdependonmarketstructure,priceisusuallyhigherandoutputis
alwayslowerundermonopolythanperfectcompetition.
C) Iftherearesubstantialeconomiesofscale,pricemaybelowerandoutputgreaterunder
monopolythanunderperfectcompetition.
D) Iftherearesubstantialeconomiesofscale,pricemaybelowerandoutputgreaterunder
monopolythanunderperfectcompetition,andpricemaybebelowmarginalcostinstead
ofequaltomarginalcost.
Answer: C
Diff:3
18) Refertotheabovefigure.Whatprice-outputcombinationwouldapplyunderperfect
competition?
A) P4 andQ1 B) P3 andQ2 C) P2 andQ3 D) P1 andQ1
Answer: B
Diff:2
19) Refertotheabovefigure.Supposethisindustrywasperfectlycompetitiveandthenmergedinto
onemonopolisticfirm.Themonopolywould
A) raisepricefromP1 toP2 .
B) reduceoutputfromQ3 toQ1 .
C) reduceoutputfromQ2 toQ1 andraisepricefromP3 toP4 .
D) raisepricefromP1 toP4 .
Answer: C
Diff:3
20) Refertotheabovefigure.Whatisthesociallyoptimalpointofproduction?
A) P1 andQ1 . B) P4 andQ1 . C) P1 andQ4 . D) P3 andQ2 .
Answer: D
Diff:3
21) Refertotheabovefigure.Whichofthefollowingstatementsistrue?
A) Underperfectcompetition,theefficientpriceischarged,whichisthelowestpricepossible
(P1 )whileundermonopolyoutputistoolarge(Q4 )andpriceistoohigh(P4 ).
B) Underperfectcompetitionpriceequalsmarginalcost(P3 )whileundermonopolyprice(
P4 )isgreaterthanmarginalcost(P1 ).
C) Therateofoutputisthesameunderbothmonopolyandperfectcompetition(Q1 ),but
priceishigherundermonopoly(P4 ratherthanP1 ).
D) Priceequalsmarginalcostunderbothmonopolyandperfectcompetition,butoutputistoo
lowundermonopoly(Q1 insteadofQ2 ).
Answer: B
Diff:3
22) Whichofthefollowingstatementsistrueaboutthepricethatamonopolistcharges?
A) Thepriceisthesameasthepricethatwouldbechargediftherewasperfectcompetition.
B) Thedifferencebetweenthepricechargedbyamonopolistandaperfectcompetitorisdue
todifferencesincosts.
C) Thevaluethatsocietyplacesonthelastunitproducedinamonopolyisgreaterthanits
cost.
D) Toomuchofthegoodisbeingproducedinacompetitivemarketandnotenoughisbeing
producedinamonopoly.Duetothewaythatpricesareset.
Answer: C
Diff:3
23) Monopoliesareinefficientbecause
A) theypricediscriminate.
B) theywanttomaximizeprofits.
C) theyalwaysmakeabove-normalprofits.
D) priceexceedsmarginalcost.
Answer: D
Diff:2
24) Monopoliesmisallocateresourcesbecause
A) pricedoesnotequalmarginalcost.
B) pricedoesnotequalaveragevariablecost.
C) marginalcostdoesnotequalaveragetotalcost.
D) profitsareusuallypositive.
Answer: A
Diff:2
25) Amonopolymisallocatesresourceswhenit
A) restrictsoutputsothatthemarginalbenefitofthelastunitsoldexceedsthemarginalsocial
costofproducingthegood.
B) makesanabove-normalprofit.
C) sellsthesameproducttodifferentgroupsofcustomersatdifferentprices.
D) exploitsscaleeconomies.
Answer: A
Diff:2
26) Oneproblemassociatedwithamonopolyfirmisthatit
A) producestoolittleoutputbutalsochargesalowprice.
B) producestoomuchoutputandchargestoolowaprice.
C) restrictsoutputandchargesarelativelyhigherpricethanapurelycompetitivefirm.
D) isjustasgoodasapurelycompetitivefirmintermsofoutputandprice.
Answer: C
Diff:2
27) Whencomparingperfectcompetitionandmonopoly,amajorassumptionmadeisthat
A) themonopolistfacesadownwardslopingdemandcurve.
B) consumersonlycareaboutthepriceofthegoodandnotwhetherthesellerisamonopoly
ornot.
C) thecostsofproductionarethesameundermonopolyasunderperfectcompetition.
D) themonopolistcanmakeanabovenormalrateofreturn.
Answer: C
Diff:2
28) Asimplewayofdescribingthesocialcostofmonopolyistosaythatit
A) producestoomuch.
B) makestoomuchmoney.
C) hastoomuchpoliticalpower.
D) restrictsoutputandchargesahigherpricethanaperfectlycompetitivefirm.
Answer: D
Diff:2
29) Amonopolistchargesapricethatis________andproduces________thanaperfectcompetitor.
A) lower;less B) higher;less C) higher;more D) lower;more
Answer: B
Diff:1
30) Referringtotheabovegraphic,whichofthefollowingstatementsisFALSE?
A) Inpanel(a),acompetitivesituationisshowninwhichequilibriumisestablishedatthe
intersectionofDandSatpointE.
B) Inpanel(a),theequilibriumpriceisPe andtheequilibriumquantityQe.
C) Thepricethemonopolistchargesinpanel(b)atPm, islowerthanthepricethatthe
competitiveproducercharges.
D) ThemonopolistproducesatQm ,andchargesapriceofPm ,whilemaximizingprofitsat
theintersectionofMCandMR.
Answer: C
Diff:1
31) WhichofthefollowingstatementswithrespecttothemonopolistisFALSE?
A) Amonopolistcanmakehigherprofitsifitcanpricediscriminate.
B) Amonopolytendstoresultinalowerquantitybeingsoldthanperfectcompetitiondoes.
C) Monopolyisasituationinwhichasinglefirmdominates.
D) Amonopolyarisesinasituationwithfewbarrierstoentryintothemarketplace.
Answer: D
Diff:1
32) Economicinefficiencyofamonopolyisindicatedby
A) P=ATCmin. B) P>MR. C) P> MC. D) MR=MC.
Answer: C
Diff:2
33) Economicinefficiencyexistswhen
A) P=MR. B) P=MC. C) MR= MC. D) P>MC.
Answer: D
Diff:2
34) Whyisamonopolyinefficient?
Answer: Amonopolyisinefficientbecauseitproducessuchthatpriceisgreaterthanmarginal
cost.Toachievemaximumeconomicprofits,themonopolistrestrictsoutputandraises
price.Whenpriceisgreaterthantheopportunitycosttosocietyofproducingthelast
unit,theallocationofresourcesisinefficient.Societywouldprefermoreresourceswere
allocatedintoproductionofthegoodproducedbythemonopolist.
Diff:2
35) Thesocialcostofamonopolycomesfromthefactthatitchargesapricehigherthanwhat
consumersarewillingtopay.Doyouagreeordisagree?Why?
Answer: Disagree.Thesocialcostofamonopolycomesfromthefactthatitchargesapricehigher
thanthemarketclearingpriceunderperfectcompetition.Themonopolyisabletosellat
ahigherpricebyproducingasmallerquantitythaninaperfectlycompetitivesituation.
Asaresult,resourcesaremisallocated.
Diff:2
36) Whatisthesocialcostofamonopoly?Explain.
Answer: Thesocialcostofamonopolycomesfromthefactthat,inordertomaximizeprofits,the
monopolistinthemarketchargesahigherpriceandproducesaloweroutputrateas
comparedtoaperfectlycompetitivesituation.Asaresult,consumerspayapricethat
exceedsthemarginalcostofproduction,andthelowerproductionraterepresentsa
resourcemisallocation.
Diff:2
24.9AppendixG:ConsumerSurplusinaPerfectlyCompetitiveMarket
1) Inaperfectlycompetitivemarket,ifallfirmsfaceidentical,constantmarginalmarginalcost
curves,thenconsumersurplusis
A) theareabeneaththemarketdemandcurveandabovethemarketclearingprice.
B) theareaabovethemarketdemandcurveandabovethemarketclearingprice.
C) thetotalareabeneaththemarketdemandcurve.
D) definitelyzero.
Answer: A
Diff:2
Topic: 24.9AppendixG:ConsumerSurplusinaPerfectlyCompetitiveMarket
2) Foraperfectlycompetitivemarketinwhichfirmsfaceanidenticalconstantmarginalcosts,the
amountofconsumersurplusincreasesif
A) marketdemanddecreases.
B) marketdemandincreases.
C) marginalcostincreases.
D) noneoftheabove:insufficientinformationtoanswer.
Answer: B
Diff:2
3) Inaperfectlycompetitivemarket,consumersurplustypicallyis
A) positive. B) negative. C) zero. D) undefined.
Answer: A
Diff:2
4) Inaperfectlycompetitivemarketinwhichidenticalfirmsfacethesamehorizontalmarginalcost
curve,ifdemandincreases,thentheamountofconsumersurpluswill
C) becomenegative. D) notchange.
Answer: A
Diff:2
5) Ifthemarginalcostcurveofallidenticalfirmsinaperfectlycompetitiveindustryarehorizontal
atthesameper-unitcost,thenthemarketsconsumersurplusequalsthearea
A) beneaththedemandcurveandabovethemarginalcostcurve.
B) abovethedemandcurveandbeneaththemarginalcostcurve.
C) belowthemarginalcostcurve.
D) abovethedemandcurve.
Answer: A
Diff:2
6) Unlikeamonopoly,consumersurplusinaperfectlycompetitivemarketiszero.Doyouagree
ordisagree?Why?
Answer: Disagree.Aslongasthemarketdemandcurveisdownwardsloping,consumersurplus,
whichisrepresentedbytheareabetweenthedemandcurveandthemarketsupply
curve,isnotzero.Thereisnodeadweightloss,however.
Diff:2
24.10AppendixG:HowSocietyLosesfromMonopoly
1) Theportionofconsumersurplusthatnooneinsocietyisabletoobtaininasituationof
monopolyisknownas
A) amarketfailure. B) adeadweightloss.
C) anunrealizedloss. D) amarketexternality.
Answer: B
Diff:1
Topic: 24.10AppendixG:HowSocietyLosesfromMonopoly
2) Adeadweightlossoccursina
A) monopoly.
B) perfectlycompetitivemarket.
C) marketinwhichthemarketclearingpriceofagoodequalsthemarginalcostofproducing
it.
D) marketinwhichthemarketclearingpriceofagoodisbelowthemarginalcostof
producingit.
Answer: A
Diff:1
3) Ifmarginalcostisconstant,whathappenstoamarketifitaltersfromperfectcompetitionto
monopolywithoutanychangeinthepositionofthemarketdemandcurveoranyvariationin
costs?
A) Consumersurplusincreases,andthepreviouslyexistingdeadweightlossdecreases.
B) Consumersurplusincreases,andthepreviouslyexistingdeadweightlossincreases.
C) Consumersurplusiseliminated,andanequal-sizeddeadweightlossiscreated.
D) Consumersurplusdecreasesinsize,andadeadweightlossiscreated.
Answer: D
Diff:1
4) Ifmarginalcostisconstant,whathappenstoamarketifitaltersfromperfectcompetitionto
monopolywithoutanychangeinthepositionofthemarketdemandcurveoranyvariationin
costs?
A) Consumersurplusdecreases,producersurplusincreasesanda deadweightlossiscreated.
B) Consumersurplusdecreases,producersurplusdecreasesandadeadweightlossiscreated.
C) Consumersurplusincreases,producersurplusdecreasesanda deadweightlossiscreated.
D) Consumersurplusincreases,producersurplusincreasesandadeadweightlossiscreated..
Answer: A
Diff:2
5) Deadweightlossis
A) theamountoftaxesthatconsumersandmonopolistspay.
B) thelossofoutputwhenaperfectlycompetitivefirmbecomesamonopolist.
C) alossofbenefittoconsumersinamonopolythatnooneelseinsocietycanobtain.
D) thepricethatconsumerspayforaproductinexcessoftheaveragecostofproducingit.
Answer: C
Diff:2
6) Theportionofconsumersurplusthatwouldhaveexistedinaperfectlycompetitivemarketbut
isunobtainablebyanyoneinsocietyunderamonopolyisknownas
A) monopolyprofits. B) anunattainablesurplus.
C) adeadweightloss. D) anexternalcost.
Answer: C
Diff:1
7) Ifamonopolysituationarisesfromaperfectlycompetitivemarket,theportionofproducer
surplusthatincreasesinamonopolyistransferredfromtheperfectlycompetitivemarkets
A) fixedcost. B) long-runpositiveeconomicprofit.
C) deadweightloss. D) consumersurplus.
Answer: D
Diff:2
8) Supposethataperfect-maximizingmonopolistoperateswithahorizontalmarginalcostcurve
andnofixedcosts.WhichofthefollowingwouldNOTberepresentedaspartofthearea
betweenitsdemandcurveandmarginalcostcurve?
A) totalcosts B) economicprofits
C) consumersurplus D) deadweightloss
Answer: A
Diff:2
9) Whatisdeadweightloss?Whoselossisit?Explain.
Answer: Deadweightlossistheportionofconsumersurplusthatnooneinsocietyisabletoobtain
inasituationofamonopoly.Itisalossbyconsumersbecausethefailureofthe
monopolisttoproduceasmanyunitsaswouldhavebeenproduceunderperfect
competitioneliminatesconsumersurplusthatotherwisewouldhavebeenabenefitto
consumers.
Diff:1
10) Thedeadweightlossofamonopolyequalsthemonopolyfirmsprofits.Doyouagreeor
disagree?Why?
Answer: Disagree.Thedeadweightlossfromamonopolyistheportionofconsumersurplusloss
thatnooneinsocietycanobtain.Themonopolyfirmsprofitsrepresentatransferof
consumersurplusawayfromconsumerstothemonopolist,andsoprofitsarenota
deadweightloss.
Diff:2
Chapter25
MonopolisticCompetition
25.1MonopolisticCompetition
1) WhichofthefollowingisNOTacharacteristicofmonopolisticcompetition?
A) Productdifferentiation B) Barrierstoentryintothemarket
C) Advertising D) Asignificantnumberofsellers
Answer: B
Diff:1
Topic: 25.1MonopolisticCompetition
2) Whichofthefollowingisacharacteristicofmonopolisticcompetition?
A) Fewfirms B) Homogeneousproducts
C) Easyentryandexit D) Strategicdependence
Answer: C
Diff:1
3) AllofthefollowingarecharacteristicsofmonopolisticcompetitionEXCEPT
A) afewfirmsdominatetheindustry. B) productdifferentiation.
C) manyfirmsintheindustry. D) advertising.
Answer: A
Diff:1
A) Alargenumberofsellersinahighlycompetitivemarket
B) Differentiatedproducts
C) Theexistenceofadvertising
D) Marginalcostpricinginthelongrun
Answer: D
Diff:1
5) Whichofthefollowingdescribesmonopolisticcompetition?
A) Homogenousproducts B) P= MR= MC
C) Advertisingplaysakeyrole D) Thereisonlyonesellerintheindustry
Answer: C
Diff:2
A) Largenumberofsellers B) Differentiatedproducts
C) Advertising D) Barrierstoentry
Answer: D
Diff:1
7) Monopolisticcompetitionischaracterizedby
A) relativeeaseofentryintothemarket.
B) astandard,undifferentiatedproduct.
C) persistentlong-runeconomicprofits.
D) productionatminimumaveragecostinthelongrun.
Answer: A
Diff:1
8) Agoodexampleofamonopolisticcompetitiveindustryis
A) theU.S.autoindustry. B) thepublicutilityindustry.
C) thecomputergameindustry. D) mining.
Answer: A
Diff:1
9) Agoodexampleofamonopolisticcompetitiveindustryis
A) thefederalhighwaysystem. B) oilproducingindustry.
C) therapmusicindustry. D) farming.
Answer: C
Diff:1
Chapter25MonopolisticCompetition627
10) Inamonopolisticallycompetitivemarket,theconsumerreceivesthebenefitof
A) productionatminimumaveragecost.
B) productionwherepriceequalsmarginalcost.
C) productdiversity.
D) allocativeefficiency.
Answer: C
Diff:1
11) Inamonopolisticallycompetitivemarketthereare
A) manyfirmsproducinganidenticalproduct.
B) manyfirmsproducingsimilarbutnotidenticalproducts.
C) manyfirmsproducingtotallydifferentproducts.
D) fewfirmsproducingidenticalproducts.
Answer: B
Diff:1
12) Entryintoamonopolisticallycompetitiveindustry
A) isrelativelyeasy.
B) isverydifficult.
C) canbeeasyordifficult,dependingonthetypeofproduct.
D) isaboutthesameasenteringamonopolyindustry.
Answer: A
Diff:1
13) AdvertisingbymonopolisticallycompetitivefirmscandoallofthefollowingEXCEPT
A) lowertheconsumerspurchaseprice.
B) helpdifferentiateafirmsproduct.
C) actasasignaltoconsumersthatthecompanyisseriousaboutstayinginbusiness.
D) resultinincreasedprofitsfortheadvertisingfirm.
Answer: A
Diff:1
14) Inamonopolisticallycompetitivemarket,afirmshouldadvertisetothepointatwhich
A) itissellingthemostunitsitcanpossiblysell.
B) theextrarevenuefromanadditionaldollarspentonadvertisingjustequalsthemarginal
costofproducingonemoreunitofthegood.
C) theadditionalrevenuegeneratedbyonemoredollarofadvertisingjustequalstheextra
dollarcostofadvertising.
D) itcanraisepricetothehighestlevelpossible.
Answer: C
Diff:3
15) Inamonopolisticallycompetitivemarketiftheadditionalrevenuegeneratedfromadvertising
equalstheadditionalcostofadvertising,thefirmshould
A) advertisemoretoincreasesales.
B) advertisemoretolowermarginalcosts.
C) maintainitscurrentamountofadvertising.
D) advertiselesstodecreasecosts.
Answer: C
Diff:3
16) Themainobjectiveofadvertisingforamonopolisticallycompetitivefirmis
A) todifferentiatetheproductandboostdemand.
B) toreducecost.
C) toearnlongrunprofits.
D) noneoftheabove.
Answer: A
Diff:2
17) Inwhichindustrystructureisadvertisingandsalespromotionlikelytobemostimportant?
A) Perfectcompetition
B) Monopoly
C) Monopolisticcompetition
D) Alloftheaboveareequallyreliantoneffectiveadvertisingandpromotion
Answer: C
Diff:2
18) Amarketsituationinwhichalargenumberoffirmsproducesimilarbutnotidenticalproducts
is
A) acollusivemarketstructure. B) competitivemonopoly.
C) ahomogeneousmarket. D) monopolisticcompetition.
Answer: D
Diff:1
is
A) amonopoly. B) anoligopoly.
C) monopolisticcompetition. D) perfectcompetition.
Answer: C
Diff:1
20) Thetheoryofmonopolisticcompetitionwasdevelopedintwoseparatemodelsby
A) AdamSmithandDavidRicardo.
B) JohnKennethGalbraithandJohnMaynardKeynes.
C) EdwardChamberlinandJoanRobinson.
D) RogerLeroyMillerandPaulSamuelson.
Answer: C
Diff:1
21) Entryintoamonopolisticcompetitiveindustry
A) iseasy. B) ishard.
C) requiresgovernmentalapproval. D) requirescollusion.
Answer: A
Diff:1
22) AllofthefollowingareassumptionsofmonopolisticcompetitionEXCEPT
A) manybuyersandsellers. B) homogeneousproduct.
C) easyentryofnewfirmsinthelongrun. D) profit-maximizingbehavior.
Answer: B
Diff:1
23) Whichofthefollowingassumptionsistrueaboutmonopolisticcompetition?
A) Thefirmsproductsaredifferentiated.
B) Therearefewproducersoftheproduct.
C) Firmswillnotadvertise.
D) Itisdifficultforfirmstoenterthisindustry.
Answer: A
Diff:1
24) Foramonopolisticallycompetitivemarket,thenumberoffirmsinthemarketimpliesthat
A) eachfirmfacesaperfectlyelasticdemand.
B) allfirmswillmakelosses.
C) eachfirmactsindependentlyofotherfirms.
D) firmswillcolludetosetmonopolypriceandoutput.
Answer: C
Diff:1
25) Thenumberoffirmsinamonopolisticallycompetitivemarketmeansthat
A) allfirmswillhavesubstantialmonopolypowersincetherearesofewfirmsinthe
industry.
B) eachfirmhasarelativelysmallshareofthetotalmarketsincetherearemanyfirmsinthe
industry.
C) thefirmswillbelikelytocolludesincethereareonlyafewfirmsintheindustry.
D) firmswillhaveahardtimeearningnon-negativeprofitssincetherearemanyfirmsinthe
industry.
Answer: B
Diff:1
26) Thenumberoffirmsinamonopolisticallycompetitiveindustrymeansthat
A) firmswillcollude.
B) existingfirmsintheindustrywillmakesurenewfirmsdonotenter.
C) firmswillnotcooperatetosetapuremonopolyprice.
D) firmswilltrytosetacommonprice.
Answer: C
Diff:1
27) Inamonopolisticallycompetitivemarket,havingalargenumberoffirmsinthemarketmeans
that
A) nofirmattemptstotakeintoaccountthereactionofrivalfirms.
B) individualfirmswillhavealargeportionofthemarketgivingthemmonopolypower.
C) firmswillgettogetherandcolludebecausethiswillbetheonlywaytoearnmonopoly
profits.
D) firmswillcooperatewitheachothertodrivecompetitorsoutofthemarket.
Answer: A
Diff:2
28) Themeaningofinterdependenceinamonopolisticallycompetitivemarketis
A) thatitisdifficultforfirmstogettogethertocollude.
B) thatproductsproducedbyfirmswillbegoodsubstitutes.
C) thatfirmswillnottakeintoaccountthereactionofrivalfirms.
D) thatpriceriggingcommonlyoccurs.
Answer: C
Diff:1
29) Thedistinguishingofproductsbybrandname,color,andotherattributes
A) isknownasinterdependence. B) isknownasproductdifferentiation.
C) leadstomanyfirmsinthemarket. D) leadstocollusion.
Answer: B
Diff:1
30) Productscanbedifferentiated
A) ifthebuyersarehomogeneousandtheirnumberincreases.
B) bylocationandbybrandname.
C) onlybybrandname.
D) noneoftheabove
Answer: B
Diff:1
31) Themodelofperfectcompetitionandthemodelofmonopolisticcompetitiondifferinthat
A) perfectcompetitionassumesmanybuyersandsellerswhilemonopolisticcompetition
assumesmanybuyersbutfewsellers.
B) perfectcompetitionassumeseasyentryofnewfirmswhiletherearemoresignificant
barrierstoentryinmonopolisticcompetition.
C) perfectcompetitionassumesfirmsmakezeroprofitsinthelongrunandmonopolistic
competitionassumesfirmsmakepositiveprofits.
D) perfectcompetitionassumestheproductishomogeneousandmonopolisticcompetition
assumestheproductisdifferentiated.
Answer: D
Diff:2
32) Thedemandcurvefortheproductofamonopolisticcompetitoris
C) vertical. D) unitaryelastic.
Answer: A
Diff:1
33) Becauseofproductdifferentiationinamonopolisticallycompetitivemarket,thedemandcurve
foranindividualfirmwillbe
C) downwardsloping. D) upwardsloping.
Answer: C
Diff:1
34) Thedemandcurveforamonopolisticallycompetitivefirmis
A) moreelasticthanforaperfectlycompetitivefirm.
B) moreelasticthanforamonopolyfirm.
C) moreinelasticthanforamonopolyfirm.
D) thesameelasticityasaperfectlycompetitivefirm.
Answer: B
Diff:2
A) elasticbecausetheproductsproducedarehomogeneous.
B) inelasticbecauseofbarrierstoentry.
C) inelasticbecauseoftheprofitmaximizingbehaviorofthefirm.
D) elasticbecauseofproductdifferentiation.
Answer: D
Diff:1
36) Themajorsimilaritybetweenmonopolisticcompetitionandperfectcompetitionis
A) theshapeofthedemandcurve.
B) thatbothassumemanybuyersandsellers.
C) priceequalsmarginalrevenueineach.
D) bothassumeproductsaredifferentiated.
Answer: B
Diff:2
37) Ingeneral,thedemandfortheproductofamonopolisticcompetitoris
A) unitaryelastic. B) relativelyinelastic.
C) relativelyelastic. D) perfectlyelastic.
Answer: C
Diff:2
38) Animplicationofthedownwardslopeofthedemandcurveforamonopolisticcompetitivefirm
isthat
A) itsmarginalrevenuecurveslopesupward.
B) itsmarginalrevenuecurveanditsdemandcurveareidentical(same)line.
C) itsmarginalrevenuecurveslopesdownwardbutliesabovethedemandcurve.
D) itsmarginalrevenuecurveslopesdownwardbutliesbelowthedemandcurve.
Answer: D
Diff:2
39) Thedemandfortheproductofamonopolisticallycompetitivefirmishighlyelasticwhen
A) firmscollude. B) therearefewerfirmsintheindustry.
C) thereisalotofproductdifferentiation. D) therearealotofclosesubstitutes.
Answer: D
Diff:1
40) Thekeyfeatureofmonopolisticcompetitionis
A) interdependenceofthefirms.
B) lackofadvertisement.
C) productdifferentiation.
D) thesmallnumberoffirmsintheindustry.
Answer: C
Diff:2
41) Monopolisticcompetitorsadvertisebecause
A) theyhavedownwardslopingdemandcurves.
B) thedemandcurvestheyfaceareveryelastic.
C) theyproducegoodsthatcanbedifferentiatedfromthegoodsofotherfirmsinthe
industry.
D) theycanearnlong-runprofitsiftheyadvertise.
Answer: C
Diff:2
42) Amonopolisticcompetitorbehavinginaprofit-maximizingwaywill
A) notadvertise.
B) advertiseasmuchasitcaninordertoincreaseitssales.
C) advertisetothepointwheretheadditionalsalesfromadvertisingequaltheadditional
marginalcostsoftheproduct.
D) advertisetothepointwheretheadditionalrevenuefromonemoredollarofadvertising
justequalstheextradollarcostofadvertising.
Answer: D
Diff:3
43) Firmsinamonopolisticallycompetitivemarketwilladvertisebecause
A) theywanttodifferentiatetheirproducts.
B) theywanttoincreasetheelasticityofthedemandcurve.
C) ofthesignificantdifferencesintheirproductovertheircompetitors.
D) theelasticityfortheirproductisinelastic.
Answer: A
Diff:1
44) WhichofthefollowingisNOTafeatureofamonopolisticallycompetitivemarket?
A) numerousbuyersandsellers B) differentiatedproducts
C) advertising D) ahomogeneousproduct
Answer: D
Diff:2
45) Theproductssoldbymonopolisticallycompetitivefirms
A) aredifferentiated.
B) arehomogeneous.
C) canbeeitherhomogeneousordifferentiated.
D) areclosesubstitutesofeachother.
Answer: A
Diff:1
A) largenumberofsellers B) salespromotionandadvertising
C) homogeneousproduct D) easyentryofnewfirmsinthelongrun
Answer: C
Diff:1
47) Thedemandcurvefortheproductofamonopolisticallycompetitivefirm
A) isperfectlyelastic. B) isunitaryelastic.
C) isdownwardsloping. D) isperfectlyinelastic.
Answer: C
Diff:2
48) Whichofthefollowingproductsismostlikelytobesoldinamonopolisticallycompetitive
market?
A) fastfood B) coal C) wheat D) electricity
Answer: A
Diff:2
49) Whichofthefollowingismostlikelytobeamonopolisticallycompetitivefirm?
A) Smartphoneproducer B) Cellphoneserviceprovider
C) Collegetextbookpublisher D) Computersoftwaremaker
Answer: D
Diff:2
50) Monopolisticcompetitionmeans
A) monopoliesfromseveralcountriescompeteintheglobalmarket.
B) alargenumberoffirmsproducinghomogeneousproducts.
C) alargenumberoffirmsproducingdifferentiatedproducts.
D) fewfirmsproducingdifferentiatedproducts.
Answer: C
Diff:1
51) Inamonopolisticallycompetitivemarket,entryintotheindustry
A) isrelativelyeasy.
B) isblocked.
C) isdifficultduetoextensivegovernmentregulation.
D) isasdifficultasentryintoamonopoly.
Answer: A
Diff:1
52) WhichofthefollowingisNOTacharacteristicoffirmsinamonopolisticallycompetitive
market?
A) advertising
B) differentiatedproducts
C) easeofentryandexit
D) existenceofsignificanteconomiesofscale
Answer: D
Diff:1
53) Whichofthefollowingproductswouldmostlikelybeproducedinamonopolistically
competitivemarket?
A) corn B) oil C) electricity D) pizza
Answer: D
Diff:1
54) AllofthefollowingarecharacteristicsofamonopolisticallycompetitiveindustryEXCEPT
A) homogeneousproducts. B) manyfirms.
C) lowbarrierstoentryandexit. D) salespromotionandadvertising.
Answer: A
Diff:1
55) Whichofthefollowingismostlikelytobeamonopolisticallycompetitivefirm?
A) asoybeanfarmer B) alettucefarmer
C) amunicipalwaterdistrict D) afastfoodrestaurant
Answer: D
Diff:1
56) Monopolisticallycompetitivefirmsadvertisetoattemptto
A) lowertheiraveragevariablecosts. B) buildbrandloyalty.
C) lowerbarrierstoentry. D) increasebarrierstoentry.
Answer: B
Diff:2
57) Thegreatertheproductdifferentiationbetweenmonopolisticallycompetitivefirms,
A) thelowerthebarrierstoentry.
B) thegreaterthepriceelasticityofdemand.
C) thehighertheaveragevariablecosts.
D) thelowerthepriceelasticityofdemand.
Answer: B
Diff:2
58) Thegreaterthethenumberandclosenessofsubstitutesavailable betweenmonopolistically

competitivefirms,
A) thegreatertheabilityofafirmtoraiseitspriceabovethepriceofclosesubstitutes.
B) thesmallertheabilityofafirmtoraiseitspriceabovethepriceof closesubstitutes.
C) themoreinelasticthedemandcurve.
D) thegreaterthepositiveeconomicprofitsforasinglefirm.
Answer: B
Diff:2
59) Becausetheproductsoffirmsinamonopolisticallycompetitivemarketarenothomogeneous,
the
A) demandcurvefortheindustryisthesameforthefirm.
B) demandcurveforthefirmsproductishorizontal.
C) demandcurveforthefirmsproductisdownwardsloping.
D) demandcurveforthefirmsproductisupwardsloping.
Answer: C
Diff:1
iscalled
A) puremonopoly. B) monopolisticallycompetitive.
C) oligopolisticbehavior. D) perfectlycompetitive.
Answer: B
Diff:1
61) Inthe1920sand1930s,economistsbecameincreasinglyawarethattherewereindustriesthat
didnotfitthemodelofperfectcompetitionorpuremonopoly.Twoseparatetheoriesof
monopolisticcompetitionresulted.EdwardChamberlinofHarvardpublishedtheTheoryof
MonopolisticCompetitionin1933.Chamberlindefinedmonopolisticcompetitionas
A) arelativelylargenumberofproducersofferingsimilarbutdifferentiatedproducts.
B) arelativelysmallnumberofproducersofferingsimilarbutdifferentiatedproducts.
C) amarketsituationinwhichalargenumberoffirmsproduceidenticalproducts.
D) amarketsituationinwhichasmallnumberoffirmsproducesimilarproducts.
Answer: A
Diff:2
62) WhichofthefollowingisNOTafeatureofmonopolisticcompetition?
A) significantnumbersofsellersinahighlycompetitivemarket
B) differentiatedproducts
C) salespromotionandadvertising
D) inabilityoffirmstoenterorexitthemarket
Answer: D
Diff:1
63) Consideringtherelevantmarketstructures,whichisanINCORRECTstatement?
A) Inaperfectlycompetitivesituation,thereisanextremelylargenumberoffirms.
B) Inpuremonopoly,thereisonlyonefirm.
C) Inmonopolisticcompetition,thereisalargenumberoffirms.
D) Inanymarketsituation,thenumberoffirmsisnotveryimportant.
Answer: D
Diff:1
64) WhichisNOTacharacteristicofmonopolisticcompetition?
A) smallshareofmarkettoeachfirm B) lackofcollusionamongfirms
C) fewfirmsintheindustry D) independenceofeachfirmsdecisions
Answer: C
Diff:1
65) Thetwoeconomistsassociatedwiththedevelopmentofthetheoryofmonopolisticcompetition
were
A) JoanRobinsonandEdwardChamberlin.
B) DavidHumeandAdamSmith.
C) JohnNevilleKeynesandJohnMaynardKeynes.
D) CarlMengerandEugenVonBohm-Bawerk.
Answer: A
Diff:1
66) Amonopolisticcompetitorwouldfaceademandcurvewitha
A) positiveslope. B) negativeslope.
C) constantslope. D) slopeequalto0.
Answer: B
Diff:1
67) WhenCrestclaimsthatitstoothpasteproductwhitensteethmorethantheproductsofits
competitors,Crestispracticing
A) productdifferentiation. B) libel.
C) marginalrevenuepricing. D) marginalcostpricing.
Answer: A
Diff:1
68) Advertisingisusedbyfirmsinamonopolisticcompetitiveindustryto
A) differentiatetheirproductfromthoseofcompetitors.
B) increasebrandloyalty.
C) increasedemandsfortheirindividualproducts.
D) alloftheabove
Answer: D
Diff:2
69) Becausetherearelowbarrierstoentryinamonopolisticallycompetitivemarket,
A) therearemanyfirmsintheindustry. B) theyproduceahomogeneousproduct.
C) thefirmsarepricetakers. D) thereisnonon-pricecompetition.
Answer: A
Diff:2
70) Thedemandcurvefortheproductofamonopolisticallycompetitivefirmslopesdownward
because
A) productsareperceivedbyconsumersasdifferent.
B) productsarehomogeneous.
C) peopleonlycareaboutpricewhentheybuyagood.
D) thefirmsgoalistomaximizeprofits.
Answer: A
Diff:2
71) Thedemandcurvefortheproductofamonopolisticcompetitor
A) isthesameasthemarketdemandcurve.
B) ishorizontal.
C) isvertical.
D) slopesdownward.
Answer: D
Diff:1
72) Comparedwithamonopolist,thedemandcurvefacedbyamonopolisticallycompetitivefirmis
A) moreelastic. B) moreinelastic.
Answer: A
Diff:2
73) Whatisthemostimportantcharacteristicofmonopolisticcompetition?Howdofirmsbehave
differentlyfromperfectcompetitors?
Answer: Productdifferentiationisthemostimportantcharacteristicofperfectcompetition.
Productdifferentiationgeneratesthedownwardslopingdemandcurvethatafirmfaces.
Withheterogeneousproducts,monopolisticcompetitorswilladvertiseandusesales
promotiontechniquesthatperfectcompetitorswouldnotuse.
Diff:2
74) Whataretheimplicationsoftherebeingalargenumberoffirmsinamonopolistically
competitivemarket?
Answer: Alargenumberoffirmshasthreeimplications.(1)Eachfirmwillhaveasmallshareof
themarketsincetherearemanyfirms.(2)Therewillbealackofcollusionamongthe
firmsbecausethelargenumberwillmakeitimpossibleforthefirmstoagreeonpriceand
outputdecisions.(3)Eachfirmwillactindependentlyfromtheircompetitorssincethey
cannottakeintoaccounthowtheirnumerouscompetitorswillreacttochangesintheir
behavior.
Diff:1
75) Whydofirmsinamonopolisticallycompetitiveindustryadvertise?
Answer: Inamonopolisticallycompetitiveindustry,productssoldbyfirmsaredifferentiatedorat
leastperceivedtobedifferentbyconsumers.Otherthingsbeingequal,product
differentiationcanresultinmoreprofits.Firmscanthereforeincreasetheirmonopoly
powerandthusprofitsbydifferentiatingtheirownproductsfromthoseofotherfirms.
Diff:2
25.2PriceandOutputfortheMonopolisticCompetitor
1) Intheshortrun,amonopolisticallycompetitivefirmcanearn
A) positiveprofitsonly. B) zeroprofitsonly.
C) zeroorpositiveprofitsonly. D) zero,positiveornegativeprofits.
Answer: D
Diff:1
Topic: 25.2PriceandOutputfortheMonopolisticCompetitor
2) Intheabovefigure,theprofit-maximizingoutputandpriceforthismonopolistically
competitivefirmare
A) 10,000unitsatapriceof$10perunit. B) 10,000unitsatapriceof$5perunit.
C) 13,000unitsatapriceof$7perunit. D) 12,000unitsatapriceof$8perunit.
Answer: A
Diff:1
3) Intheabovefigure,totalrevenueforthisprofit-maximizingmonopolisticallycompetitivefirm
is
A) $50,000. B) $91,000. C) $96,000. D) $100,000.
Answer: D
Diff:1
4) Intheabovefigure,totalcostforthisprofit-maximizingmonopolisticallycompetitivefirmis
A) $91,000. B) $50,000. C) $70,000. D) $72,000.
Answer: C
Diff:1
5) Intheabovefigure,theprofit-maximizingmonopolisticallycompetitivefirmwill
A) makeaprofitof$24,000. B) makeaprofitof$30,000.
C) makeaprofitof$0. D) incuralossof$20,000.
Answer: B
Diff:1
6) Theabovefigureshowsthesituationofamonopolisticcompetitorintheshortrun.The
maximumeconomicprofitsofthefirmequal
A) $50,000. B) $30,000. C) 15,000. D) zero.
Answer: B
Diff:1
7) Theabovefigureshowsthesituationsofamonopolisticcompetitorintheshortrun.To
maximizeprofits,thefirmshouldproduce
A) 10,000units.
B) 12,000units.
C) 13,000unit.
D) somewherebetween10,000and12,000units.
Answer: A
Diff:2
8) Intheshortrun,theprofit-maximizingmonopolisticallycompetitivefirmwillproducetherate
ofoutputatwhich
A) P=MC. B) MR= MC. C) P= ATC. D) MR= ATC.
Answer: B
Diff:1
9) Thedemandcurvefacedbyamonopolisticallycompetitivefirmis
C) downwardsloping. D) upwardsloping.
Answer: C
Diff:1
10) Foramonopolisticcompetitivefirm,whichofthefollowingistrueinthelongrun?
A) ATCisminimized. B) Economicprofitiszero.
C) P=MC. D) Alloftheabove.
Answer: B
Diff:1
11) WhichofthefollowingisTRUEforamonopolisticallycompetitivefirm?
A) MR=P B) MR> P C) MR< P D) MR=AFC
Answer: C
Diff:1
12) WhichofthefollowingstatementsaboutamonopolisticallycompetitivefirmisFALSE?
A) Ittriestodifferentiateitsproductfromthatofcompetitors.
B) Itmayearnshort-runeconomicprofits.
C) ItproducesthequantityatwhichMC=MR.
D) Itsetspricelikeaperfectlycompetitivefirm.
Answer: D
Diff:1
13) Graphically,howdoesamonopolisticallycompetitivefirmdetermineitsprofit-maximizing
price?
A) Itacceptsthepricesetbytheindustry-wideforcesofsupplyanddemand.
B) Graphically,itfindstheplacewhereMR= MCandchargesthepricedirectlytotheleftof
thatpoint.
C) Thefirmspricingstructureissetbygovernmentregulators.
D) Thefirmdeterminesitsprofit-maximizingoutputandthenchargesthepriceassociated
withthepointonitsdemandcurvedirectlyabovethatquantity.
Answer: D
Diff:2
14) Intheabovefigure,themonopolisticallycompetitivefirmsprofit-maximizingoutputis
A) 1,000units. B) 300units. C) 900units. D) 700units.
Answer: D
Diff:1
15) Intheabovefigure,whenthismonopolisticallycompetitivefirmproducesits
profit-maximizingoutput,itsetsaper-unitpriceof
A) $13. B) $11. C) $10. D) $8.
Answer: B
Diff:1
16) Atitsprofit-maximizingoutput,thefirmintheabovefigureincursatotalcostofproductionof
A) $7,000. B) $9,000. C) $6,300. D) $3,900.
Answer: A
Diff:1
17) Intheabovefigure,thisprofit-maximizingmonopolisticcompetitivefirmwillrealizean
economicprofitof
A) -$1,400. B) $2,100. C) $1,400. D) $700.
Answer: D
Diff:2
18) Sincethefirmintheabovefigureisoperatinginamonopolisticallycompetitiveindustry,inthe
longrunwecanexpecttosee
A) thetypicalfirmseconomicprofitsexpandasproductionbecomesmoreefficient.
B) morefirmsenteringtheindustryuntileconomicprofitsarezero.
C) thetypicalfirmproducingattheminimumpointonitsATCcurve.
D) eachfirmexpanditsshareofthetotalmarket.
Answer: B
Diff:1
A) thesameastheindustrydemandcurve.
B) moreelasticthanthedemandcurveoftheperfectlycompetitivefirm.
C) lesselasticthanthedemandcurveoftheperfectlycompetitivefirm.
D) horizontal.
Answer: C
Diff:1
20) Forthemonopolisticallycompetitivefirm,inboththeshortrunandthelongrun
A) thedemandcurveisinelastic.
B) pricewillexceedmarginalcost.
C) therewillbenoeconomicprofit.
D) productionwillbeatminimumaveragecost.
Answer: B
Diff:1
21) Thedemandcurvefacedbyamonopolisticallycompetitivefirmsis
C) downwardsloping. D) unitaryelastic.
Answer: C
Diff:2
22) Themonopolisticcompetitivefirminshort-runequilibriummayexperienceeconomicprofits
thatare
A) alwayszero. B) greaterthan,equalto,orlessthanzero.
C) alwayspositive. D) alwaysnegative.
Answer: B
Diff:1
23) Inbothamonopolisticallycompetitivemarketandapuremonopolymarket,firms
A) canmakelong-runprofits. B) setpricegreaterthanmarginalcost.
C) areprotectedbyentrybarriers. D) advertiseextensively.
Answer: B
Diff:2
24) Themonopolisticallycompetitivefirmmaximizesprofitbyproducingtothepointatwhich
A) ATC=AVC. B) MC= MR. C) MR= AR. D) MC= AR.
Answer: B
Diff:1
25) Intheshortrun,afirmoperatingasamonopolisticcompetitorwillproducetothepointat
which
A) MR=ATC. B) MC= ATC. C) P= MC. D) MR= MC.
Answer: D
Diff:1
26) Whichwillbetrueforamonopolisticcompetitorexperiencingshort-runlosses?
A) P>ATC B) P= ATC C) P< ATC D) P< MC
Answer: C
Diff:2
27) Amonopolisticallycompetitivefirmfindsitsprofit-maximizingrateofoutputbyequating
A) themarginalrevenueofadvertisingwiththemarginalcostofadvertising.
B) averagerevenueandaveragetotalcost.
C) priceandmarginalcost.
D) marginalrevenueandmarginalcost.
Answer: D
Diff:2
28) Intheshortrun,amonopolisticallycompetitivefirm
A) alwaysearnspositiveeconomicprofits.
B) neverearnspositiveeconomicprofits.
C) canearnpositive,negative,orzeroeconomicprofits.
D) alwaysearnspositiveaccountingprofits.
Answer: C
Diff:1
29) Inthelongrun,inamonopolisticallycompetitivemarket,pricewillbe
A) equaltoMR. B) equaltoMC. C) greaterATC. D) equaltoATC.
Answer: D
Diff:1
30) Inthelongruninamonopolisticallycompetitivemarket,afirmwill,intheory,
A) earneconomicprofits. B) sufferlosses.
C) breakeven. D) earnzeroaccountingprofits.
Answer: C
Diff:1
31) Inthelongrun,themonopolisticallycompetitivefirmsdemandcurvewill
A) intersecttheATCatitsminimumpoint.
B) intersecttheATCcurvesomewherepasttheminimumpoint.
C) becometangenttotheATCcurveatitsminimumpoint.
D) becometangenttotheATCcurvesomewheretotheleftofitsminimumpoint.
Answer: D
Diff:1
32) Themonopolisticallycompetitivefirmseconomicprofitstendtowardzerointhelongrun.Why
isthisso?
A) Monopolisticallycompetitivefirmsarerarelyabletomaintainthecorporatediscipline
necessarytosustainprofitsinthelongrun.
B) Ifamonopolisticallycompetitivefirmisprofitableformorethan2years,theJustice
Departmentordersacorporaterestructuringtopullthecompanybacktoanormalrateof
return.
C) Inthelongrun,otherfirmswillsuccessfullyoffersubstitutesfortheprofitablefirms
product,andcompetitionwilleliminateeconomicprofits.
D) Eventhoughthemonopolisticallycompetitivefirmcansuccessfullymaintainbarriersto
entry,keepingcompetitionatbaybecomesveryexpensive.
Answer: C
Diff:2
33) Thelong-runequilibriumofmonopolisticcompetitionischaracterizedby
A) P=MC=ATC. B) P= MC> ATC.
C) P=MR=MC. D) P= ATC> MC.
Answer: D
Diff:2
34) Inthelongrun,monopolisticallycompetitivefirmswillnotearneconomicprofitsbecause
A) averagetotalcostwillshiftuptomeetthedemandcurve.
B) inputpriceswillbebidup.
C) productionwillnotbeatminimumaveragecost.
D) newfirmswillentertheindustry.
Answer: D
Diff:1
35) Inthelongrun,ifsomemonopolisticallycompetitivefirmsareearningeconomiclossesthen
A) firmswillleavetheindustry.
B) raisepricesuntiltheyearneconomicprofits.
C) theywillincreaseproductionuntilmarginalcostsfall.
D) newfirmswillentertheindustry.
Answer: A
Diff:1
36) Iffirmsinamonopolisticallycompetitiveindustryareoperatingwitheconomiclosses,over
timewewouldsee
A) firmsaltertheiradvertisingratesuntiltheymadeatleastnormalprofits.
B) somefirmsexitingtheindustry,causingthemarketsupplycurvetoshifttotheleft,raising
price.
C) somefirmsexitingtheindustry,causingthedemandcurvesoftheremainingfirmstoshift
totheright.
D) thefirmsworkingtogethertoincreasepriceandeveryonesprofitability.
Answer: C
Diff:2
37) Iffirmsinamonopolisticallycompetitiveindustryareoperatingwithpositiveeconomicprofit,
overtimewewouldsee
A) firmsaltertheiradvertisingratesuntiltheymadeatleastnormalprofits.
B) somefirmsenteringtheindustry,causingthemarketsupplycurvetoshifttotheright,
loweringprice.
C) somefirmsenteringtheindustry,causingthedemandcurvesoftheexistingfirmstoshift
totheleft.
D) somefirmsenteringtheindustry,causingthedemandcurvesoftheexistingfirmstoshift
totheright.
Answer: C
Diff:2
38) Inthelongrun,firmsinamonopolisticallycompetitivemarket
A) usuallyearnpositiveeconomicprofits. B) alwaysearnmonopolyprofits.
C) usuallyearneconomiclosses. D) earnzeroeconomicprofits.
Answer: D
Diff:2
39) Thelong-runequilibriumofamonopolisticallycompetitivefirmischaracterizedby
A) atangencyoftheaveragetotalcostcurvewiththefirmsdemandcurve.
B) priceequaltomarginalcost.
C) productionattheminimumpointofthefirmsaveragetotalcostcurve.
D) productionattheminimumpointofthefirmsaveragevariablecostcurve.
Answer: A
Diff:2
40) Long-runequilibriumischaracterizedbyzeroprofitsin
A) monopolisticcompetitiononly.
B) perfectcompetitiononly.
C) bothperfectcompetitionandmonopolisticcompetition.
D) marketstructuresinwhichtherearebarrierstoentry.
Answer: C
Diff:2
41) Amonopolisticallycompetitivefirmmaximizesprofitswhenit
A) producesthequantityatwhichmarginalcostequalsthemarketprice.
B) producesthequantityatwhichmarginalcostequalsmarginalrevenueandusesthe
demandcurvetodeterminethemarketprice.
C) producesthequantityatwhichmarginalcostequalsmarginalrevenueandsetstheprice
equaltothemarginalcost.
D) producesthequantityatwhichmarginalcostequalsmarginalrevenueandsetstheprice
equaltothemarginalrevenue.
Answer: B
Diff:1
42) WhichofthefollowingstatementsaboutamonopolisticallycompetitivefirmisTRUE?
A) Amonopolisticallycompetitivefirmdoesnotalwaysequatemarginalcosttomarginal
revenuebecauseitusesothermeanstomaximizeprofits.
B) Amonopolisticallycompetitivefirmmaximizesprofitsbychargingapriceequalto
marginalcost.
C) Amonopolisticallycompetitivefirmproducesthequantityatthepointatwhichthe
demandcurvecrossesthemarginalcostcurve.
D) Amonopolisticallycompetitivefirmmaximizesprofitswhenitproducesthequantityat
whichmarginalcostequalsmarginalrevenue.
Answer: D
Diff:1
43) Amonopolisticcompetitorfindsitsprofit-maximizingrateofoutputby
A) equatingthemarginalrevenuefromadvertisingwiththemarginalrevenuefromselling
thegood.
B) settingaveragerevenueequaltoaveragetotalcost.
C) equatingmarginalrevenueandmarginalcost.
D) equatingpriceandmarginalrevenue.
Answer: C
Diff:2
44) Intheshortrun,themonopolisticcompetitorisjustliketheperfectcompetitorinthat
A) equilibriumisdeterminedbysettingpriceequaltomarginalcost.
B) eithertypeoffirmcanearneconomicprofits,experienceeconomiclosses,orbreakevenin
theshortrun.
C) eachequatesmarginalrevenueandmarginalcostinordertomaximizeprofits,withthe
resultthatpriceexceedsmarginalrevenue.
D) newfirmsenterintheshortrunwhenfirmsaremakingprofits.
Answer: B
Diff:3
45) Iffirmsinamonopolisticallycompetitiveindustryexperienceshort-runlosses,
A) somefirmswouldliketoexittheindustrybutfindtheycannot.
B) firmsincreasepricesfurther,untiltheymakeatleastanormalreturn.
C) firmsincreaseadvertisingspendingtoincreasedemand,untiltheymakeatleastanormal
return.
D) somefirmsexittheindustry,causingthedemandcurvesfortheremainingfirmstoshiftto
therightuntiltheyearnanormalprofit.
Answer: D
Diff:3
46) Ifmonopolisticallycompetitivefirmsearnshort-runeconomicprofits,weexpecttosee
A) newfirmsentertheindustry,whichshiftsthedemandcurvesoftheexistingfirmstothe
leftuntilfirmsearnzeroeconomicprofits.
B) newfirmstryingtoentertheindustry,butunabletodosobecauseofbarrierstoentry.
C) existingfirmsalteringtheirscaleofplanttotrytocapturelargerprofits.Thecombined
effectistocauseallfirmstoearnzeroeconomicprofits.
D) existingfirmsincreasingpricestotrytocapturelargereconomicprofits.
Answer: A
Diff:2
47) Amonopolisticcompetitorislikeacompetitivefirminthelongrun,because
A) itearnspositiveeconomicprofits.
B) itearnszeroeconomicprofits
C) bothfirmswillearnpositiveeconomicprofits.
D) bothfirmswillincreasepricetoincreaseprofits.
Answer: B
Diff:1
48) Amonopolisticcompetitorislikeamonopolistinthelongruninthatwheneconomicprofitsare
A) equaltozero,positiveeconomicprofitsaremade.
B) equaltozero,economicprofitsaremade.
C) greaterthanzero,changesinoutputareduetochangestoplantsbyexistingfirmsand
thereisnoentry.
D) greaterthanzero,priceexceedsmarginalcost.
Answer: D
Diff:2
49) Amonopolisticcompetitorisinlong-runequilibriumwhen
A) economicprofitsareequaltozeroandtheaveragetotalcostcurveistangenttothe
demandcurve.
B) economicprofitsareequaltozeroandthemarginalcostcurveistangenttothedemand
curve.
C) economicprofitsaregreaterthanzeroandtheaveragetotalcostcurveistangenttothe
demandcurve.
D) economicprofitsaregreaterthanzeroandthemarginalcostcurveistangenttothe
demandcurve.
Answer: A
Diff:2
50) Whichofthefollowingstatementsistrueabouttheeconomicprofitsearnedbyamonopolistic
competitorfirminthelongrun?
A) Economicprofitscanbepositivesincefirmshavesomedegreeofmonopolypower.
B) Economicprofitswillbepositivesincethefirmhasadownwardslopingdemandcurve.
C) Economicprofitswilltendtowardszerosincepositiveprofitswillattractnewfirmsinto
theindustry.
D) Economicprofitscanbenegativesincethereissomuchcompetitioninthemarket.
Answer: C
Diff:2
51) Refertotheabovefigure.Theprofitmaximizingquantityforamonopolisticcompetitoris
A) Q1 . B) Q2 . C) Q3 . D) Q4 .
Answer: A
Diff:1
52) Refertotheabovefigure.Theprofitmaximizingpriceforamonopolisticcompetitoris
A) P1 . B) P2 . C) P3 . D) P4 .
Answer: B
Diff:1
53) Refertotheabovefigure.Asmoreandmorefirmsareabletoandactuallydoenterthe
industry,thedemandcurveofeachfirmanditsmarginalrevenuecurve
A) willshiftinwarduntilthedemandcurveistangenttotheaveragetotalcostcurve.
B) willbecomevertical.
C) willbecomeupwardsloping.
D) Noneoftheabovewilloccur.
Answer: A
Diff:2
54) Refertotheabovefigure.Thisfirmisoperatinginthe
A) longrunsinceeconomicprofitsaregreaterthanzero.
B) longrunsinceeconomicprofitsarelessthanzero.
C) shortrunsinceeconomicprofitsaregreaterthanzero.
D) shortrunsinceeconomicprofitsarelessthanzero.
Answer: C
Diff:1
55) Refertotheabovefigure.Economicprofitsforthisfirmare
A) negative.
B) zero.
C) positive.
Answer: C
Diff:1
A) negative.
B) zero.
C) positive.
Answer: A
Diff:1
A) negativeandequaltoP2 bcP3 . B) negativeandequaltoP1 bcP2 .
C) positiveandequaltoP2 bcP3 . D) positiveandequaltoP1 abP2 .
Answer: D
Diff:1
58) Amonopolisticcompetitorisinlong-runequilibriumwhen
A) itismakingzeroprofitsandpriceequalsmarginalcost.
B) itsaveragetotalcostcurveistangenttothedemandcurveattheprofit-maximizingrateof
output.
D) itismakingpositiveprofitsorzeroprofitsandpriceisgreaterthanmarginalcost.
Answer: B
Diff:2
59) Refertotheabovefigure.Whichpaneldoesnotrepresentapossibleshort -runsituationfora

monopolisticallycompetitivefirm?
Answer: B
Diff:1
60) Refertotheabovefigure.Whichpanelrepresentsthelong-runsituationforamonopolistically
competitivefirm?
Answer: D
Diff:1
61) Refertotheabovefigure.Along-runequilibriuminmonopolisticcompetitionispicturedby
Answer: B
Diff:2
62) Refertotheabovefigure.Whichpanelshowsapossibleshort-runequilibriumformonopolistic
competition,butisnotalsoalong-runequilibrium?
Answer: A
Diff:2
63) Refertotheabovefigure.WhichofthefollowingstatementsaboutpanelDinthefigureis
TRUE?
A) Thefigurerepresentsalong-runequilibriumforamonopolisticcompetitor.
B) Thefigurerepresentsanindustrylong-runequilibriumformonopolisticcompetition.
C) Thefigureisinerrorsinceitdoesntshowthemonopolisticcompetitormakingprofitsin
thelongrun.
D) ThefigureisinerrorsinceithasmarginalcostintersectingtheATCcurveatapointother
thantheminimumofATC.
Answer: D
Diff:3
64) Refertotheabovefigure.Whichpanelrepresentsamonopolisticcompetitorthatisearningzero
economicprofits?
Answer: B
Diff:1
65) Intheabovefigureforamonopolisticallycompetitivefirm,theprofit-maximizingoutputand
pricearerespectively
A) 80unitsand$11. B) 50unitsand$8.
C) 60unitsand$9. D) 60unitsand$14.
Answer: D
Diff:2
66) Intheabovefigureforamonopolisticallycompetitivefirm,thetotalrevenueatthe
profit-maximizingpointis
A) $540 B) $840 C) $400 D) $880
Answer: B
Diff:2
67) Intheabovefigureforamonopolisticallycompetitivefirm,thetotalcostatthe
A) $480 B) $400 C) $540 D) $880
Answer: A
Diff:2
68) Intheabovefigureforamonopolisticallycompetitivefirm,thetotaleconomicprofitatthe
A) $0 B) $240 C) $360 D) $300
Answer: C
Diff:3
69) Intheabovefigure,whatwouldhappentothemonopolisticallycompetitiveindustryinthe
longrun?
A) Moreproducerswouldenterthemarket,andtheshareofthemarkettothisfirmwould
fall,whichwouldcausethedemandcurvetoshiftleftwarduntilthereiszeroeconomic
profit.
B) Moreproducerswouldexitthemarket,andtheshareofthemarkettothisfirmwouldfall,
whichwouldcausethedemandcurvetoshiftleftwarduntilthereiszeroeconomicprofit.
C) Moreproducerswouldenterthemarket,andtheshareofthemarkettothisfirmwould
rise,whichwouldcausethedemandcurvetoshiftrightwarduntilthereiszeroeconomic
profit.
D) Moreproducerswouldenterthemarket,andtheshareofthemarkettothisfirmwould
fall,whichwouldcausethedemandcurvetoshiftleftwarduntilthereisnegative
economicprofit.
Answer: A
Diff:3
70) Forthemonopolisticcompetitor,whichofthefollowingisINCORRECT?
A) Becausethefirmisnotaperfectcompetitor,itsdemandcurveslopesdownward.
B) Themarginalrevenuecurveisdownwardslopingandliesbelowthedemandcurve.
C) Theprofit-maximizingrateofoutputarisesatthepointatwhichthemarginalcostcurve
intersectsthemarginalrevenuecurve.
D) Ifthefirminamonopolisticallycompetitiveindustryweremakingeconomiclosses,new
firmswillentertheindustry.
Answer: D
Diff:2
71) Usetheabovefigure.Forthismonopolisticcompetitor,whichofthefollowingisINCORRECT?
A) Theprofit-maximizingrateofoutputisqe,andtheprofit-maximizingpriceisP.
B) Thedemandcurveshowsadirectrelationshipbetweenpriceandquantitydemanded.
C) Theprofit-maximizingrateofoutputisatE,whereMRintersectsMC.
D) Adownwardslopingmarginalrevenuecurvethatisbelowthedemandcurve.
Answer: B
Diff:2
72) Usetheabovefigure.Theeconomicprofitforthisfirmis
A) zero. B) thedistancebetweenTandE.
C) thedistancebetweenEandx-axis. D) thedistancebetweenTandx-axis.
Answer: A
Diff:2
Priceper Marginal
Output Book($) Cost
0 8.00 0
1 7.00 1.00
2 6.00 2.00
3 5.00 3.00
4 4.00 4.00
73) Theabovetabledepictsprices,quantities,andmarginalcostsfacedbythecampusbookstore.At
theprofit-maximizinglevelofoutput,whatisthetotalrevenueearnedbythestore?
A) $12 B) $5 C) $15 D) $6
Answer: C
Diff:2
theprofit-maximizinglevelofoutput,whatisthetotalcostearnedbythestore?
A) $4 B) $9 C) $3 D) $16
Answer: B
Diff:2
75) Theabovetabledepictsprices,quantities,andmarginalcostsfacedbythecampusbookstore.
Basedonmarginalanalysis,whatistheprofit-maximizinglevelofoutputforthebookstore?
A) 1book B) 2books C) 3books D) 4books
Answer: C
Diff:2
theprofit-maximizinglevelofoutput,whatistheprofitearnedbythestore?
A) $15 B) $6 C) $8 D) $0
Answer: B
Diff:2
77) Foramonopolisticallycompetitivefirm,
A) priceequalsmarginalrevenueatalllevelsofoutput.
B) priceislessthanmarginalrevenueatalllevelsofoutput.
C) priceisgreaterthanmarginalrevenueatalllevelsofoutputexceptforthefirstunit.
D) thedemandcurveisperfectlyinelasticandmarginalrevenueiszero.
Answer: C
Diff:2
78) Afirminamonopolisticallycompetitivemarketdeterminestheprofit-maximizingoutputat
which
A) MR=P. B) MR= ATC. C) MR= AVC. D) MR=MC.
Answer: D
Diff:1
79) Whichofthefollowingistrueofthepricechargedbyamonopolisticallycompetitivefirmatthe
profit-maximizinglevelofoutput?
A) P>MC B) P=MC C) P= MR D) P<AVC
Answer: A
Diff:2
80) Inthelongrun,amonopolisticallycompetitivefirm
A) earnspositiveeconomicprofits.
B) earnszeroeconomicprofits.
C) earnsnegativeeconomicprofits.
D) canhavepositive,zero,ornegativeprofits.
Answer: B
Diff:2
81) Whichofthefollowingshort-runoutcomesformonopolisticcompetitionisnotpossible?
A) P=MR=MC. B) P> MC> ATC.
C) P=ATC. D) P> ATC.
Answer: A
Diff:2
82) Whichofthefollowingisthelong-runoutcomeformonopolisticcompetition?
A) MR>MC. B) P> ATC> MC.
C) P=ATC. D) P> ATC.
Answer: C
Diff:2
83) Amonopolisticcompetitorwillmaximizeitsprofitsattheoutputlevelatwhich
A) TC=TR.
B) MC=MR.
C) theMCcurveintersectsthedemandcurve.
D) MR=ATC.
Answer: B
Diff:1
84) Inthelongrun,whatlevelofeconomicprofitscanamonopolisticcompetitorexpecttoreceive?
A) positive
B) zero
C) negative
D) eithernegativeorpositive,dependingonthedemandforitsproductanditscosts
Answer: B
Diff:2
85) WhichofthefollowingisNOTacharacteristicofthedemandcurvefacedbyafirmina
monopolisticallycompetitivemarket?
A) Thedemandcurveisdownwardsloping.
B) Theslopeofthedemandcurveisnegative.
C) Thefirmwillproducewherethedemandcurveisinelastic.
D) Thefirmwillproducewherethedemandcurveiselastic.
Answer: C
Diff:1
86) Themarginalrevenuecurveofamonopolisticallycompetitivefirmis
A) downwardslopingandabovethedemandcurve.
B) downwardslopingandbelowthedemandcurve.
C) identicaltothedemandcurveastherearemanysmallfirmsinthemarket.
D) perfectlyelastic.
Answer: B
Diff:1
87) Usetheabovefigure.Theprofit-maximizingmonopolisticallycompetitivefirm
A) islosing$0.05perunitofoutput. B) isearning$0.40perunitofoutput.
C) isearning$0.15perunitofoutput. D) isearning$0.05perunitofoutput.
Answer: D
Diff:3
88) Usetheabovefigure.Thetotalrevenueearnedbythemonopolisticallycompetitivefirmis
A) $300. B) $285. C) $180. D) $255.
Answer: A
Diff:2
89) Usetheabovefigure.Thetotalprofitearnedbythemonopolisticallycompetitivefirmis
A) +$300. B) +$15. C) -$15. D) $0.
Answer: B
Diff:2
90) Usetheabovefigure.Thetotalcostofproducingattheoptimallevelforthemonopolistically
competitivefirmis
A) $285. B) $255. C) $180. D) $300.
Answer: A
Diff:3
91) Theshort-runprofit-maximizingoutputlevelforamonopolisticallycompetitivefirmisthe
pointatwhich
A) P=ATC. B) MR= MC. C) MR> P. D) MR> ATC.
Answer: B
Diff:1
92) Usetheabovefigure.Theprofit-maximizingoutputandpriceforthismonopolistically
competitivefirmarerespectively,
A) 100and$19. B) 160and$13. C) 160and$16. D) 210and$15.
Answer: C
Diff:2
93) Usetheabovefigure.Thetotalrevenueearnedbythismonopolisticallycompetitivefirmis
A) $2,560. B) $1,600. C) $480. D) $1,900.
Answer: A
Diff:2
94) Usetheabovefigure.Thetotalcostearnedbythismonopolisticallycompetitivefirmis
A) $2,080. B) $3,150. C) $1,600. D) $1,900.
Answer: A
Diff:2
95) Usetheabovefigure.Thetotalprofitearnedbythismonopolisticallycompetitivefirmis
A) $2,560. B) $1,600. C) $480. D) $1,900.
Answer: C
Diff:2
96) Usetheabovefigure.Whenitmaximizesitseconomicprofits,themonopolisticallycompetitive
firmdepictedinthefigure
A) isearninganeconomicprofit.
B) isearninganaccountingprofit.
C) isearninganeconomicloss.
D) mustincreaseoutputtoreducetheATC.
Answer: C
Diff:2
97) Whichofthefollowingstatementsistrueforamonopolisticallycompetitivefirminthelong
run?
A) P=ATC>MR B) MC> P> ATC
C) P>MC>ATC D) P= MC= MR
Answer: A
Diff:2
98) Inthelongrun,theeconomicprofitsofamonopolisticallycompetitivefirm
A) willtendtobelargerthanintheshortrun.
B) equalzero.
C) willbetheaverageshort-runprofitsearnedinthelastfiveyears.
D) willbethesameasintheshortrun.
Answer: B
Diff:2
99) Supposeasushirestaurantismakingsignificanteconomicprofitintheshortrun.Inthelong
run
A) morepeoplewillopensushirestaurants,reducingtheeconomicprofitforeachrestaurant.
B) highbarrierstoentrykeeppeoplefromopeningsushirestaurants.
C) thegovernmentwillrequirethesushirestauranttosellpartofitsinterestsinthecity.
D) morepeoplewillopensteakrestaurants,increasingtheeconomicprofitforthesushi
restaurant.
Answer: A
Diff:2
100) Comparedwithafirminaperfectlycompetitivemarket,thedemandcurvefacedbya
monopolisticallycompetitivefirmis
A) moreelastic. B) moreinelastic.
Answer: B
Diff:2
101) Whycantamonopolisticcompetitorearneconomicprofitsinthelongrun?
Answer: Amonopolisticcompetitormayearneconomicprofitsintheshortrun.Inthelongrun,
however,otherfirmswillenterthemarketandproducesubstitutesfortheproductso
thatanyeconomicprofitsearnedbytheexistingfirmswilldisappearduetocompetition.
Thismeansthatthemonopolisticcompetitorwillearnzeroeconomicprofitsinthelong
run.
Diff:2
102) Explainwhatwillhappeniffirmsinamonopolisticallycompetitiveindustryareearning
positiveeconomicprofits.
Answer: Positiveeconomicprofitswillattractnewfirmsintotheindustry.Thenewfirmswill
produceaproductthatisslightlydifferentattractingcustomersawayfromexistingfirms.
Thedemandcurvesoftheexistingfirmswillshiftdownwarduntileconomicprofitsequal
zero.
Diff:1
103) Whyisitthatamonopolisticallycompetitivefirmcannotearnpositiveeconomicprofitsinthe
longrun?
Answer: Amonopolisticallycompetitivefirmcanearnpositiveeconomicprofitsonlyintheshort
run.Inthiscase,otherfirmswillentertheindustryandproducesubstitutesforthe
existingfirmsproductsothatitsdemandcurvewillbecomemoreelastic.Becauseofthe
increasedcompetitioninthelongrun,theexistingfirmseconomicprofitswilldisappear.
Diff:2
25.3ComparingPerfectCompetitionwithMonopolisticCompetition
1) Inthelongrun,monopolisticcompetitivefirmsareconsideredtobeoperatinginefficiently
becausetheir
B) economicprofitsarezero.
C) averagetotalcostsarenotataminimum.
D) marginalcostsarerising.
Answer: C
Diff:3
Topic: 25.3ComparingPerfectCompetitionwithMonopolisticCompetition
2) WhichofthefollowingisFALSEaboutacomparisonbetweenaperfectlycompetitivefirmand
amonopolisticallycompetitivefirm?
A) Aperfectlycompetitivefirmhasahorizontaldemandcurve,whileamonopolistically
competitivefirmhasadownwardslopingdemandcurve.
B) Intheshortrun,aperfectlycompetitivefirmwillearnzeroeconomicprofits,whilea
monopolisticallycompetitivefirmwillearnpositiveeconomicprofits.
C) Boththeperfectlycompetitiveandmonopolisticallycompetitivefirmwillearneconomic
profitsequaltozerointhelong-run.
D) Inthelongrun,theperfectlycompetitivefirmwillproduceattheminimumoftheaverage
totalcostcurve,whilethemonopolisticallycompetitivefirmwillproducetotheleftofthe
minimumoftheaveragetotalcostcurve.
Answer: B
Diff:3
3) Refertotheabovefigure.Whichpanelsrepresentlongrunequilibriumfortheperfectly
competitivefirmandmonopolisticcompetitivefirm,respectively?
A) PanelC&PanelA. B) PanelC&PanelB.
C) PanelB&PanelC. D) PanelC&PanelD.
Answer: B
Diff:2
4) Amonopolisticallycompetitivefirmdiffersfromaperfectlycompetitivefirminthelongrunin
that
A) thedemandcurvefacedbyamonopolisticallycompetitivefirmisdownwardsloping,
whilethedemandcurvefacedbyaperfectlycompetitivefirmishorizontal.
B) profitsarepositiveforamonopolisticallycompetitivefirmandzeroforaperfectly
competitivefirm.
C) profitsarezeroforamonopolisticallycompetitivefirmandpositiveforaperfectly
competitivefirm.
D) marginalcostequalsthemarketpriceforamonopolisticallycompetitivefirmbutnotfora
perfectlycompetitivefirm.
Answer: A
Diff:1
5) Inlong-runequilibriuminamonopolisticallycompetitiveindustry,afirmwill
A) alwaysearnaneconomicprofit.
B) produceanoutputrateatwhichP= MC.
C) produceatapointtotheleftoftheminimumpointonitsaveragetotalcostcurve.
D) haveaperfectlyelasticdemandcurve.
Answer: C
Diff:2
6) Comparedwithaperfectlycompetitivefirmfacingthesamecosts,long -runequilibriumfora
monopolisticallycompetitivefirmwillresultin
A) ahigherpriceandgreateroutput. B) alowerpriceandlessoutput.
C) ahigherpriceandlessoutput. D) alowerpriceandgreateroutput.
Answer: C
Diff:1
7) Comparedtoperfectcompetition,amonopolisticallycompetitivemarketwillproduce________
outputandchargea________price.
A) more;higher B) more;lower C) less;higher D) less;lower
Answer: C
Diff:1
8) Comparedtoaperfectlycompetitivefirm,inalongrunthemonopolisticallycompetitivefirm
willhave
A) alowerprice. B) aloweraveragecost.
C) ahorizontaldemandfunction. D) alowerrateofoutput.
Answer: D
Diff:1
9) Inwhichmarketstructurewillafirmchoosenottoshutdownwhenpriceislessthanaverage
variablecost?
A) Perfectcompetition
B) Monopoly
C) Monopolisticcompetition
D) Noneoftheabove.AllfirmswillshutdownwhenP< AVC.
Answer: D
Diff:2
10) Monopolisticcompetitionandperfectcompetitionaresimilarinthateachmarketstructureis
characterizedby
A) advertising.
B) productionatminimumaveragecostinthelongrun.
C) ahorizontaldemandcurve.
D) theabsenceoflong-runeconomicprofits.
Answer: D
Diff:1
11) Monopolisticcompetitionandperfectcompetitionaredifferentinthat
A) onlymonopolisticallycompetitivefirmsadvertise.
B) onlymonopolisticallycompetitivefirmscanearneconomiclossesintheshort-run.
C) onlyperfectlycompetitivefirmsmaximizeprofitswheremarginalrevenueequals
marginalcost.
D) onlyperfectlycompetitivefirmsarecharacterizedbylong -runeconomicprofitsofzero.
Answer: A
Diff:1
12) Onewaytoviewthecoststructureofmonopolisticcompetitionistosaythatthecostofproduct
differentiationisequalto
A) thedifferencebetweenmarginalrevenueandmarginalcost.
B) thedifferencebetweenthecostofproductionforamonopolisticallycompetitivefirminan
openmarketandtheminimumaveragetotalcost.
C) thesumofpriceandmarginalcost.
D) thesumofmarginalcostandminimumaveragecost.
Answer: B
Diff:2
13) WhatdidHarvardeconomistEdwardChamberlainsayabouttheobservationthata
monopolisticallycompetitivefirmsaveragecostofproductionexceedsitsminimumaverage
totalcost?
A) Chamberlainarguedthatthesehighercostsrepresentthewastefulnessofthismarket
structure.
B) Chamberlainarguedthatthisbeliefisincorrect.Inhisview,monopolisticallycompetitive
firmsdonotproduceatacostabovetheirminimumaveragetotalcosts.
C) AccordingtoChamberlain,thiscostdifferencerepresentsthevalueconsumersplaceon
varietyandhavingmorechoice.
D) InChamberlainsview,thisisevidencethatmonopolisticcompetitionusessocietys
resourcesinefficientlyandinafashionthatmeritsgovernmentintervention.
Answer: C
Diff:2
14) Thelong-runequilibriumofamonopolisticcompetitordiffersfromthelong-runequilibriumof
aperfectcompetitorinthat
A) themonopolisticcompetitormakeseconomicprofits.
B) themonopolisticcompetitorsetspriceequaltomarginalcost.
C) themonopolisticcompetitorproducesattheminimumpointofitsaveragetotalcostcurve.
D) themonopolisticcompetitorchargesapricethatexceedsmarginalcost.
Answer: D
Diff:2
15) Amonopolisticcompetitorinlong-runequilibriumislikeaperfectcompetitorinthat
A) priceequalsmarginalcost.
B) priceisgreaterthanmarginalcost.
C) zeroeconomicprofitsaremade.
D) bothproduceattheminimumpointsoftheiraveragetotalcostcurves.
Answer: C
Diff:2
16) Long-runequilibriumforamonopolisticcompetitorischaracterizedby
A) apriceexceedingmarginalcost. B) marginalcostpricing.
C) economicprofits. D) toofewfirmsintheindustry.
Answer: A
Diff:1
17) Ithasbeenarguedthatamonopolisticallycompetitiveindustryinvolveswastebecause
A) thereistoomuchproductdifferentiationmakingshelvestoocrowded.
B) theyendupproducingtotherightoftheminimumoftheaveragetotalcostcurveandthe
priceisbelowthemarginalcost.
C) thefirmsdonotequatemarginalcosttomarginalrevenuetofindtheprofitmaximizing
priceandoutput.
D) thefirmsdonotproduceattheminimumoftheaveragetotalcostcurveandpriceisabove
marginalcost.
Answer: D
Diff:2
18) AccordingtoChamberlin,thefactthatinthelongrunaveragetotalcostexceedsitsminimum
valueundermonopolisticcompetitionis
A) thesocialcostofmonopolisticcompetition.
B) themostimportantreasonforwhymonopolisticcompetitionisnotefficient.
C) partofthecostofproducingdifferentproductsforconsumers.
D) actuallybeneficialbecauseitmakesadjustmentseasierwhendemandincreases.
Answer: C
Diff:2
19) Inthelongrun,amonopolisticcompetitorwillproducetothepointatwhich
A) averagetotalcostsareattheminimumofpossibleATC.
B) averagetotalcostsarehigherthantheminimumofpossibleATC.
C) resourcesareusedatthelowestpossiblecost.
D) atthelowestpossibleprice.
Answer: B
Diff:3
20) Inthelongrun,equilibriumpositionsthatariseinbothmonopolisticallycompetitiveand
perfectlycompetitivemarketsare
A) MR=MCandP=MC. B) P= ATCandP= MC.
C) MR=MCandP=ATC. D) MR= MC= P.
Answer: C
Diff:2
21) Inalong-runmonopolisticallycompetitiveequilibrium,
A) P=ATC,andATCisnotatitsminimumvalue.
B) P=ATC,andATCisatitsminimumvalue.
C) P>ATC,andATCisatitsminimumvalue.
D) P>ATC,andATCisnotatitsminimumvalue.
Answer: A
Diff:3
22) Inthelongrun,bothmonopolisticallycompetitiveandperfectlycompetitivefirmsattain
A) lowestcostproduction. B) positiveeconomicprofits.
C) zeroeconomicprofits. D) productiveefficiency.
Answer: C
Diff:1
23) Ithasbeenarguedthatinthelongrunmonopolisticcompetitionisinefficient because

A) therearetoomanyfirms,eachwithexcesscapacity,producingtoolittleoutput.
B) therearefewmanyfirms,eachwithexcesscapacity,producingtoomuchoutput.
C) minimumaveragetotalcostsareachievedbutpriceexceedsmarginalcost.
D) minimumaveragetotalcostsarenotachievedandmarginalcostexceedsprice.
Answer: A
Diff:1
24) Inthelongrun,aperfectlycompetitivemarketproducesat________,whereasthemonopolistic
competitivefirmdoesnot.
A) theoutputatwhichthelowestaveragetotalcostofproductionisreached
B) anoutputlevelatwhichpositiveeconomicprofitsexist
C) zeroeconomicprofits
D) thepointatwhichMR= MC=ATC
Answer: A
Diff:2
25) Themostsignificantdifferencebetweenperfectcompetitionandmonopolisticcompetitionis
that
A) inaperfectlycompetitivemarketproductsaredifferentiated,whileinamonopolistically
competitivemarketproductsarehomogeneous.
B) inaperfectlycompetitivemarketproductsarehomogeneous,whileinamonopolistically
competitivemarketproductsaredifferentiated.
C) inaperfectlycompetitivemarketthereisalargenumberofsellers,whileina
monopolisticallycompetitivemarketthereisasmallnumberofsellers.
D) inaperfectlycompetitivemarketthereisasmallnumberofsellers,whileina
monopolisticallycompetitivemarketthereisalargenumberofsellers.
Answer: B
Diff:2
26) Howismonopolisticcompetitionlikeperfectcompetition?Howisitlikemonopoly?
Answer: Monopolisticcompetitionislikeperfectcompetitioninthattherearemanybuyersand
sellersanditiseasyforfirmstoenterandexittheindustry.Butitislikemonopolyinthat
firmsfacedownwardslopingdemandcurves.Thedemandcurvesslopedownbecause
theproductisnothomogeneous,sotheproductofonefirmisnotaperfectsubstitutefor
theproductofanotherfirm.
Diff:1
27) Howdoestheshort-runequilibriumofamonopolisticcompetitordifferfromamonopolist?
Howdoesitdifferfromaperfectcompetitor?
Answer: Theshort-runequilibriumofamonopolisticcompetitorlooksjustlikethatfora
monopolist,withtheexceptionthatthedemandcurvefacingthemonopolistwillbeless
elasticthanthedemandcurvefacingthemonopolisticcompetitor.Theequilibriumdiffers
fromaperfectcompetitorinthatthedemandcurveslopesdown,sopriceisgreaterthan
marginalcost.
Diff:3
28) Ismonopolisticcompetitionefficient?Explain.WhatisEdwardChamberlinsviewaboutthe
efficiencyofmonopolisticcompetition?
Answer: Monopolisticcompetitionisnotefficientbecauseamonopolisticcompetitivefirm
produceswherepriceexceedsmarginalcostandbecauseinthelongruna
monopolisticallycompetitivefirmproducestothepointatwhichaveragetotalcostis
aboveminimumpointofitsaveragetotalcostcurve.However,Chamberlinarguedthat
thedifferencebetweentheaveragecostofproductionforamonopolisticcompetitorand
theminimumofaveragetotalcostrepresentedthecostofproducingdifferentiated
products,whichconsumersvalue.
Diff:3
29) AccordingtoEdwardChamberlin,isthedifferentnessofproductsawasteofresources?
Explain.
Answer: AccordingtoChamberlin,thedifferentnessofproductsthatconsumerspayforis
representedbythedifferencebetweentheaveragecostofproductionforamonopolistic
competitorandtheminimumaveragetotalcost.Hedidnotconsiderthisamountawaste
ofresourcesbutwhatconsumersarewillingtopayforinexchangeformorechoiceand
varietyinoutput.
Diff:2
25.4BrandNamesandAdvertising
1) Whenatelemarketercallsyouaboutaproduct,thisisanexampleof
A) directmarketing. B) indirectmarketing.
C) searchingforagood. D) persuasivemarketing.
Answer: A
Diff:1
Topic: 25.4BrandNamesandAdvertising
2) Aproductwithqualitiesthatconsumerslacktheexpertisetoassesswithoutassistanceiscalled
a(n)
A) searchgood. B) experiencegood.
C) credencegood. D) inferiorgood.
Answer: C
Diff:1
3) Bypromotingitsbrandnameheavily,themonopolisticallycompetitivefirm
A) earnsmoreprofitinthelongrun.
B) signalsitslong-termintentiontostayintheindustry.
C) signalsitsintentiontoleavetheindustry.
D) guaranteesashortrunprofit.
Answer: B
Diff:2
4) Ifafirmproducesanexperiencegood,itsmodeofadvertisingwillbe
A) persuasiveadvertising. B) directadvertising.
C) nottoadvertise. D) noneoftheabove.
Answer: A
Diff:2
5) Todifferentiateitsproduct,amonopolisticcompetitivefirmwillengageinallofthefollowing
advertisingpracticesEXCEPT
A) directmarketing. B) massmarketing.
C) interactivemarketing. D) indirectmarketing.
Answer: D
Diff:2
6) Persuasiveadvertisingisusedto
A) induceaconsumertotryaproductanddiscoverapreviouslyunknowntasteforit.
B) promoteonlyusedgoods.
C) selltoanestablishedclientele.
D) cutcosts.
Answer: A
Diff:2
7) Massmarketinginvolves
A) usingalltypesofmedia,suchastelevisionandradio,toreachasmanyconsumersas
possible.
B) internetadsonly.
C) usingdirectmailingsonly.
D) lower-costmethodsofadvertising.
Answer: A
Diff:2
8) Thebrandnameofafirm
A) hasnothingtodowiththeprofitabilityofafirm.
B) hasbeenconsideredirrelevantbyeconomistssinceprofitsforamonopolisticcompetitive
firmarezerointhelong-run.
C) relatestoconsumersperceptionofproductdifferentiationandtothemarketvalueofa
firm.
D) isimportantintheshort-runbutnotinthelong-run.
Answer: C
Diff:1
9) Afirmstrademarkisprotectedfrommisuseifitisregisteredwiththe
A) U.S.D.A. B) U.S.PatentandTrademarkOffice.
C) U.S.SupremeCourt. D) F.C.C.
Answer: B
Diff:1
10) Inordertodifferentiatetheirproductbrandsfromthoseofcompetingfirms,monopolistically
competitivefirms
A) equatemarginalcosttomarginalrevenuetodeterminetheprofitmaximizingquantity.
B) spreadfalserumorsabouttheircompetitors.
C) taketheircompetitorsreactionstochangesintheirpoliciesintoaccount.
D) advertisetheirproduct.
Answer: D
Diff:1
11) Personalizedadvertisingthatusespostalmailings,phonecalls,ande -mailmessagesisknown

as
C) indirectmarketing. D) interactivemarketing.
Answer: A
Diff:1
12) Directmarketingis
A) advertisingthatpermitsaconsumertofollowupdirectlybysearchingformore
informationandplacingdirectproductorders.
B) advertisingthattargetsaspecificaudienceandallowstheconsumertofollowupdirectly
byplacingdirectproductordersusuallythroughtelevisionorradio.
C) advertisingtargetedatspecificconsumers.
D) advertisingintendedtoreachasmanyconsumersaspossible.
Answer: C
Diff:1
13) WhenafirmreliesonradioandTVadstoreachpotentialcustomers,thefirmisengagingin
C) interactivemarketing. D) noneoftheabove.
Answer: B
Diff:1
14) Massmarketingis
Answer: D
Diff:1
15) Interactivemarketingis
Answer: A
Diff:1
16) Advertisementinwhichfirmsaimmessagestoasmanycustomersaspossibleviamediais
knownas
Answer: B
Diff:1
17) Theadvertisementapproachthatallowsaconsumertofollowupdirectlytoanadvertising
messageisknownas
Answer: D
Diff:1
18) AllofthefollowingareadvertisementmethodsEXCEPT
Answer: C
Diff:1
19) JimhasjustresearchedandpurchasedacomputerthroughtheInternetasaresultofresponding
directlytoapop-upad.Thepop-upadisanexampleof
A) massmarketing. B) directmarketing.
Answer: D
Diff:2
20) Judyhasjustlookedthroughherfavoritecatalogthatcameinthemailandhasplacedanorder.
Thecatalogisanexampleof
Answer: B
Diff:2
21) Stephaniehasjustplacedanorderforthelatestvideoaftershereceivedapersonalizede -mail.

Thee-mailisanexampleof
Answer: B
Diff:2
22) CarolhasjustpurchasedacerealshesawadvertisedonTVbecauseofthehealthbenefits
containedinthead.TheTVadisanexampleof
Answer: A
Diff:2
23) Bonniehasjustpurchasedacrystalvaseshesawadvertisedwhenshewentonlinetofindher
localweatherforecast.Theinternetadisanexampleof
Answer: A
Diff:2
24) Agoodthathasqualitiesthatareeasyforaconsumertoassessinadvanceofapurchaseis
called
A) acredencegood. B) asearchgood.
C) anexperiencegood. D) apersuasivegood.
Answer: B
Diff:1
25) Asearchgoodisaproduct
A) withqualitiesthatconsumerslacktheexpertisetoassesswithoutassistance.
B) thatemphasizesthefeaturesofitsproduct.
C) withcharacteristicsthatenableanindividualtoevaluatetheproductsqualityinadvance
ofapurchase.
D) thatanindividualmustconsumebeforethequalitycanbeestablished.
Answer: C
Diff:1
26) Agoodthatpeoplemustactuallyconsumebeforetheycandeterminequalitiesiscalled
Answer: C
Diff:1
27) Anexperiencegoodisaproduct
ofapurchase.
Answer: D
Diff:1
28) Agoodwithqualitiesthatconsumerslacktheexperiencetoassesswithoutassistanceiscalled
Answer: A
Diff:1
29) Acredencegoodisaproduct
ofapurchase.
Answer: A
Diff:1
30) AllofJillsfriendshavebeentellingJillthatshemustseeacertainmoviebutsheisnotsurethat
shewilllikeit.Themovieisa(n)
A) experiencegood. B) credencegood.
C) logogood. D) searchgood.
Answer: A
Diff:2
31) Johnhasjusttriedonthemostcomfortablepairofpantsthathehaseverknown.Thepantsare
a(n)
C) logogood. D) informationgood.
Answer: A
Diff:2
32) Harryneedstohirealawyerbutdoesnotknowhowtofindagoodone.Thelawyerisa(n)
Answer: B
Diff:2
33) Stevecantellifhiscarhasbeenfixedornotitworks,oritdoesntbuthecannottellhowit
wasfixed.Thecarrepairisa(n)
Answer: B
Diff:2
34) Ifacustomerbuysanairlineticketbasedonlyonthepriceoftheticket,thentheairlineticketis
a(n)
Answer: D
Diff:2
35) Thetypeofadvertisingthatemphasizesthefeaturesofitsproductis
A) informationaladvertising. B) persuasiveadvertising.
C) searchadvertising. D) experienceadvertising.
Answer: A
Diff:1
36) Thetypeofadvertisingthatisusedtoinduceaconsumertodiscoverapreviouslyunknown
tasteforanitemisknownas
Answer: B
Diff:1
37) Informationaladvertisingisthetypeofadvertisingthat
A) isusedexclusivelyontelevision.
B) isusedexclusivelyonradio.
C) emphasizesthefeaturesofaproduct.
D) isusedtoinfluenceaconsumerstastesandpreferences.
Answer: C
Diff:1
38) Persuasiveadvertisingisthetypeofadvertisingthat
A) isusedexclusivelyontelevision.
B) isusedexclusivelyonradio.
C) emphasizesthefeaturesofitsproduct.
D) isusedtoinduceaconsumertodiscoverpreviouslyunknowntastesandpreferences.
Answer: D
Diff:1
39) Informationaladvertisingismostlyusedfor
A) alogogood. B) asearchgood.
Answer: B
Diff:1
40) Persuasiveadvertisingismostlyusedfor
Answer: C
Diff:1
41) Thetypeofadvertisingusedforasearchgoodis
Answer: A
Diff:1
42) Thetypeofadvertisingusedforanexperiencegoodis
Answer: B
Diff:1
43) WhenyouseeanadvertisementonTVforahaircareproductinwhichtheactorusingthe
productisdepictedasbeautifulandhappy,thisis
A) informationaladvertising. B) directmarketadvertising.
C) indirectmarketadvertising. D) persuasiveadvertising.
Answer: D
Diff:2
44) Whenyouseeapreviewofacomingmovieatthemovietheater,thisis
A) informationaladvertising. B) directmarketadvertising.
C) indirectmarketadvertising. D) persuasiveadvertising.
Answer: A
Diff:2
45) Thegoalofadvertisingisto
A) increasethepriceelasticityofdemandforthefirmsproduct.
B) reducethepriceelasticityofdemandforthefirmsproduct.
C) increasethestandardizationoftheindustry.
D) encouragefirmstoenterintotheindustry.
Answer: B
Diff:1
46) Thegoalofadvertisingisto
A) payforpublicbroadcasting.
B) differentiateafirmsproduct.
C) overwhelmthebuyersotheybuyafirmsproduct.
D) minimizecostcurvesforthefirm.
Answer: B
Diff:1
47) Typicallyamixofinformationalandpersuasiveadvertisingisusedfor
A) experiencegoods. B) credencegoods.
C) crediblegoods. D) searchgoods.
Answer: B
Diff:1
48) WhichstatementisINCORRECTwithrespecttosalespromotionandadvertising?
A) Perfectcompetitiondiffersfrommonopolisticcompetitioninthatnoindividualfirmina
perfectlycompetitivemarketwilladvertise.
B) Aperfectlycompetitivefirm,bydefinition,cansellallthatitwantstosellatthegoing
marketprice.
C) Aperfectcompetitoradvertisesaproductthatisdifferentfromtheproductsthatallother
firmsintheindustryareselling.
D) Advertisingshouldbecarriedtothepointatwhichtheadditionalrevenuefromonemore
dollarofadvertisingjustequalsthatonedollarofmarginalcost.
Answer: C
Diff:2
49) Advertisingintendedtoreachasmanyconsumersaspossible,typicallythroughtelevision,
newspaper,ormagazineadsisreferredtoas
A) interactiveadvertising. B) directmarketing.
C) massmarketing. D) subliminaladvertising.
Answer: C
Diff:1
50) WhichofthefollowingisFALSEwithrespecttobrandnamesandadvertising?
A) Becausedifferentnesshasvaluetocustomers,monopolisticallycompetitivefirmsregard
theirbrandnamesasvaluable.
B) Firmsusetrademarkswords,symbols,andlogostodistinguishtheirproductbrands.
C) Companiesdonotregardtheirbrandsasvaluableprivate(intellectual)propertybecause
thevaluecannotbequantified.
D) ThereisconsiderableshiftingovertimeinthemarketvaluerankingsofvariousU.S.
productbrands.
Answer: C
Diff:1
51) Whichofthefollowingismostlikelytobethesubjectofinformationaladvertising?
A) asearchgood B) acrediblegood
C) anexperiencegood D) aninexperiencegood
Answer: A
Diff:1
52) Advertisingthatisintendedtoalteraconsumerstastesandpreferencesandinducethe
customertopurchaseaparticularproductis
A) persuasiveadvertising. B) educationaladvertising.
C) informationaladvertising. D) effectiveadvertising.
Answer: A
Diff:1
53) Anexampleofdirectmarketingis
A) theuseofcouponsinnewspapers.
B) allowingtheuseoftheproductfor7daysbeforetheconsumerisbilledfortheproduct.
C) chargingcustomerswhopaywithcashadifferentpricethanthoseusingcreditcards.
D) theuseofpersonalizedadvertisingbyusingmailinglists.
Answer: D
Diff:1
54) Outofalladvertisingspending,thelargestsharegoesto
A) televisionads. B) magazineads.
C) directmarketing. D) newspaperads.
Answer: C
Diff:1
55) Aproductthatmustbeactuallyconsumedbeforethequalityoftheproductcanbedetermined
isa(n)
A) searchgood. B) consumablegood.
C) consumptiongood. D) experiencegood.
Answer: D
Diff:2
56) Advertisingintendedtoinduceaconsumertodiscoverapreviouslyunknowntasteor
preferenceis
A) persuasiveadvertising. B) informationaladvertising.
C) directadvertising. D) massmarketingadvertising.
Answer: A
Diff:1
57) Productssuchasofficesuppliesareexamplesof
A) experiencegoods. B) simplegoods.
C) searchgoods. D) selectivegoods.
Answer: C
Diff:2
58) Whenapharmaceuticalcompanyadvertisesthatitsallergymedicationisclinicallyprovento
alleviatehayfeversymptoms,thepharmaceuticalcompanyisengagingin
A) informationaladvertising. B) trademarkprotection.
C) persuasiveadvertising. D) directmarketing.
Answer: A
Diff:2
59) Explainwhytheamountthatfirmsspendonadvertisingdependsonthecharacteristicsoftheir
products.
Answer: Therearethreetypesofgoods:searchgoods,whosequalitycanbeevaluatedby
consumersinadvanceofapurchase;experiencegoods,whosequalitycanbeevaluated
onlyafterconsumption;andcredencegoods,whosequalitycannotbeassessedby
consumerswithoutassistance.Forsearchgoods,firmsarelikelytouseinformational
advertisingthatemphasizesthefeaturesoftheproduct.Forexperiencegoods,firmsare
likelytousepersuasiveadvertisingtoinduceconsumerstotrytheproducts.For
credencegoods,firmsarelikelytouseamixofinformationalandpersuasiveadvertising.
Diff:2
60) Explainhowadvertisingcanactasasignal.
Answer: Advertisingcanactasasignalthatthefirmplanstostayinbusinessforalongtimeandit
isnotafly-by-nightoperation.Advertisingcanentailsignificantexpenses,soby
engagingincostlyadvertisingthefirmindicatesthatitplanstoremaininbusinessand
aimstocountonrepeatbusinesstorecoupthecosts.Ofcourse,inthisprocessthefirm
alsoseekstodifferentiateitsproductfromtheproductsofotherfirms.
Diff:2
61) Explainthedifferencebetweeninformationaladvertisingandpersuasiveadvertising.Givean
exampleofaproductthatwouldbethesubjectofeachtypeofadvertisingandexplainwhythat
typeofadvertisingfitstheproduct.
Answer: Informationaladvertisingexplainsthefeaturesofagoodwhilepersuasiveadvertising
triestoinfluenceaconsumerstastesandpreferences.Informationaladvertisingisused
whenaconsumercanassessthebenefitsofthegoodbeforepurchasingwhilepersuasive
advertisingisusedwhenaconsumermustpurchasethegoodtodeterminethegoods
benefits.Furniturewouldbeadvertisedbyinformationaladvertising.Theconsumercan
touchandtrythefurnitureoutbeforepurchasing.Acandybarwouldbeadvertisedby
persuasiveadvertisingsinceyoumusteatthecandybeforeyouknowwhetherornotyou
willlikeit.
Diff:3
62) WhywouldSunkistincursubstantialcoststoadvertiseandestablishabrandnamewhenthe
qualityofitsorangescaneasilybeevaluatedbyconsumers?
Answer: Orangesmightbeconsideredasexperiencegoods,whosequalityintermsoftasteand
sweetnesscanbeestablishedonlyafterconsumption.Becauseofthischaracteristic,the
Sunkistbrandnamecanconveyasignalofhighqualitytoconsumers.
Diff:2
25.5InformationProductsandMonopolisticCompetition
1) Ifamonopolisticallycompetitivefirmsellinganinformationproductengagesinmarginalcost
pricing,itwill
A) earnadditionalprofits.
B) failtoearnsufficientrevenuestocoveritsfixedcosts.
C) lowercosts.
D) breakeven.
Answer: B
Diff:3
Topic: 25.5InformationProductsandMonopolisticCompetition
2) Themanufacturersofinformationproductstypically
A) havelowfixedcosts. B) havehighmarginalcosts.
C) havehighfixedcosts. D) havezerofixedcosts.
Answer: C
Diff:1
3) Inthelongrun,thepriceofinformationproductsinmonopolisticallycompetitivemarketswill
beequalto
A) AVC. B) MC. C) AFC. D) ATC.
Answer: D
Diff:1
4) Theproductionofinformationproductsischaracterizedby
A) relativelylowfixedcost. B) relativelylowmarginalcost.
C) diseconomiesofoperation. D) anupwardslopingmarginalcostcurve.
Answer: B
Diff:1
5) TheATCcurveforafirmthatproducesaninformationproduct
A) slopesdownward,becauseAVCisconstant,AFCslopesdownward,andATC = AVC+
AFC.
B) slopesupward,becauseAFCisconstant,AVCslopesupward,andATC =AFC+ AVC.
C) isU-shaped,becauseAVCisU-shaped,AFCslopesdownward,andATC=AVC+ AFC.
D) slopesdownward,becauseMCslopesdownward,AVCisconstant,andATC = AVC
+MC.
Answer: A
Diff:2
6) Whichofthefollowingconditionsbestexplaintheshort-runeconomiesofoperationassociated
withproductionofaninformationproduct?
A) AVCslopesdownward,andAFCisconstant,sothatATCslopesdownward.
B) AVCisconstant,andAFCslopesdownward,sothatATCslopesdownward.
C) AFCisconstant,andMCslopesdownward,sothatAVCslopesdownward.
D) MCisconstant,andMCslopesupward,sothatAVCslopesupward.
Answer: B
Diff:2
7) Iftheproducerofaninformationproductengagesinmarginalcostpricing,itearns
A) anormalprofit. B) aneconomicloss.
C) zeroeconomicprofits. D) positiveeconomicprofits.
Answer: B
Diff:2
8) Thereisnoincentiveforadditionalproducersofaninformationproducttoentertheindustry
whenthepricechargedfortheseproductsbyeachfirmalreadyintheindustryisequalto
A) marginalcost. B) averagetotalcost.
C) averagefixedcost. D) averagevariablecost.
Answer: B
Diff:2
9) Inalong-runequilibriuminamonopolisticallycompetitiveindustrythatproducesinformation
products,revenuesareequaltothe________costsofdeveloping,producing,andsellingthe
product.
A) total B) fixed C) variable D) marginal
Answer: A
Diff:2
10) Agoodthatentailsrelativelyhighfixedcostsassociatedwiththeuseofknowledgeandother
information-intensiveinputsaskeyfactorsofproductionis
C) apersuasivegood. D) aninformationproduct.
Answer: D
Diff:1
11) WhichofthefollowingstatementsisgenerallyTRUEaboutinformationproducts?
A) Highfixedcostsandlowmarginalcosts
B) Highfixedcostsandhighmarginalcosts
C) Lowfixedcostsandlowmarginalcosts
D) Lowfixedcostsandhighmarginalcosts
Answer: A
Diff:1
12) Marginalcostforaninformationproductwould
A) firstdecreaseandthenincreaseasquantityincreases.
B) increaseconstantlyasquantityincreases.
C) decreaseconstantlyasquantityincreases.
D) remainconstantasquantityincreases.
Answer: D
Diff:1
13) Averyhighfixedcostandarelativelylowmarginalcostisassociatedwith
A) everytypeofgoodorproduct. B) aninformationproduct.
C) apersuasivegood. D) anexperiencegood.
Answer: B
Diff:1
14) Averagetotalcostforaninformationproductwould
Answer: C
Diff:1
15) Averagefixedcostforaninformationproductwould
Answer: C
Diff:1
16) Aninformationproductisaproductforwhich
A) thefirstitemisproducedinexpensivelybutadditionalunitsaremorecostlytoproduce.
B) thefirstunitisverycostlytomakebutadditionalunitsarelesscostlytoproduce.
C) themarginalcostfirstfallsandthenrisesbuttheaveragetotalcostrisesthroughoutits
range.
D) theaveragefixedcostfirstfallsandthenrises,buttheaveragetotalcostfallsthroughout
itsrange.
Answer: B
Diff:1
17) Averagevariablecostforaninformationproductwould
Answer: D
Diff:1
18) Refertotheabovefigure.Theabovefigureshowsthecoststructureofafirmproducingan
informationproduct.Whichcurverepresentsaveragetotalcost?
A) Anyofthe3couldbeATC. B) Curve1
C) Curve2 D) Curve3
Answer: B
Diff:1
informationproduct.Whichcurverepresentsaveragefixedcost?
A) Curve1 B) Curve2
C) Curve3 D) Anyofthe3couldbeAFC.
Answer: B
Diff:1
20) Refertotheabovefigure.Thefigureshowsthecoststructureofafirmproducinganinformation
product.Whichcurvewouldrepresentthemarginalcostforaninformationproduct?
A) Curve1 B) Curve2
C) Curve3 D) noneoftheabove
Answer: C
Diff:1
informationproduct.Whichcurvewouldrepresenttheaveragevariablecost?
A) Curve1 B) Curve2
C) Curve3 D) noneoftheabove
Answer: C
Diff:1
22) Becausetheshort-runaveragetotalcostcurveslopesdownwardforaninformationproduct,
thefirmexperiences
A) adownwardslopingmarginalcostcurve.
B) adownwardslopingaveragevariablecostcurve.
C) short-runeconomiesofoperation.
D) long-rundiseconomiesofscale.
Answer: C
Diff:1
23) Firmsthatproduceaninformationproductexperienceshort-runeconomiesofoperation
because
A) thefirmwillalwaysproduceinthedecreasingportionofthemarginalcostcurve.
B) oftheU-shapednatureoftheaveragetotalcostcurve.
C) oftheU-shapednatureoftheaveragevariablecostcurve.
D) theaveragetotalcostofproducingandsellingtheproductdeclinesasoutputincreases.
Answer: D
Diff:1
24) Ifafirmthatproducesaninformationproductusesmarginalcostpricing,thenthefirm
A) willearnnegativeprofits.
B) willearnprofitsequaltozero.
C) willearnpositiveprofitsbutcouldearnahigherprofitbyusingadifferentmethod.
D) willmaximizeprofits.
Answer: A
Diff:1
25) Forafirmthatsellsaninformationproduct,thelong-runequilibriumexistsatapointatwhich
economicprofitsare
A) negative. B) zero.
C) positive. D) dependentupontheparticularproduct.
Answer: B
Diff:1
26) Thelong-runequilibriumforafirminaninformationproductindustryexistsatapointat
which
A) marginalcostequalsmarginalrevenue.
B) thedemandcurvecrossesthemarginalcostcurve.
C) thedemandcurveistangenttotheaveragetotalcostcurve.
D) averagetotalcostisminimized.
Answer: C
Diff:1
27) Forafirmthatsellsaninformationproduct,thelong-runequilibriumexistsatapointwhere
A) priceequalsaveragetotalcost. B) priceequalsaveragevariablecost.
C) priceequalsaveragefixedcost. D) priceequalsmarginalcost.
Answer: A
Diff:1
28) Informationproducts(e.g.,software)
A) haverelativelyhighfixedcostsbutlowmarginalandaveragevariablecosts.
B) haverelativelylowfixedcostsbuthighmarginalandaveragevariablecosts.
C) haverelativelyhighfixedcostsandrelativelyhighmarginalandaveragevariablecosts.
D) haverelativelylowfixedcostsandrelativelylowmarginalandaveragevariablecosts.
Answer: A
Diff:1
29) WhichofthefollowingstatementsisINCORRECTregardingthepropertiesofinformation
products?
A) Providinganinformationproductentailsincurringrelativelyhighfixedcosts.
B) Theaveragetotalcostcurveforafirmthatsellsaninformationproductslopesupward.
C) Thefirmexperienceseconomiesofoperationintheshortrun.
D) Inthelongrun,theproducerearnssufficientrevenuetocovertheopportunitycostof
capital.
Answer: B
Diff:2
30) WhichofthefollowingstatementsisINCORRECTregardingthemodelforinformation
products?
A) Averagetotalcostsslopedownward,becauseaveragevariablecostisconstant,average
fixedcostslopesdownward.
B) Thefirmmaximizesprofitbysettingthepriceofitsproductequaltomarginalcost.
C) Marginalcostequalsaveragevariablecost.
D) Inthelongrun,accountingprofitispositive.
Answer: B
Diff:2
31) Thefirstunitofaninformationproductisproducedatahighfixedcost.Producingadditional
unitsentailsrelativelylow
A) totalcosts. B) marginalandaveragevariablecost.
C) externalcost. D) socialcost.
Answer: B
Diff:2
32) Adistinguishingcharacteristicofproducersofinformationproductsistheir
A) lowfixedcosts. B) short-runeconomiesofoperation.
C) lowaveragefixedcosts. D) lowoverhead.
Answer: B
Diff:2
33) TheATCcurveandtheAFCcurveforinformationproducts(e.g.,software)intheshortrunare
Answer: A
Diff:1
34) Acomputergameisanexampleof
A) apublicuseproduct. B) aninformationproduct.
C) acapitalgood. D) acredibilityproduct.
Answer: B
Diff:1
35) Firmsthatsellinformationproductsexperiencerelativelyhighfixedcostsbut,oncetheyhave
producedthefirstunit,can
A) selladditionalunitsataloss,orabovecost.
B) provideexpensiveinformationproductstoconsumers.
C) selladditionalunitsatarelativelylowcostperunit.
D) experienceshort-rundiseconomiesofscale.
Answer: C
Diff:2
36) Aninformationproducttypicallyhas
A) hightotalfixedcostsandhighmarginalcosts.
B) lowtotalfixedcostsandlowmarginalcosts.
C) lowtotalfixedcostsandhighmarginalcosts.
D) hightotalfixedcostsandlowmarginalcosts.
Answer: D
Diff:2
37) Marginalcostpricingforaninformationproduct
A) wouldcausethefirmtoexperienceeconomiclosses.
B) wouldallowthefirmtobreakeven.
C) wouldcausethefirmtoearneconomicprofits.
D) wouldcausethefirmtoexpandoutputtoincreaseeconomicprofits.
Answer: A
Diff:2
38) Explainhowinformationproductsarespecial.
Answer: Producinganinformationproductentailsincurringrelativelyhighfixedcosts,butonce
thefirstunitisproduced,afirmcanproduceadditionalunitsataconstantandrelatively
lowunitcost.Consequently,producersofinformationproductsexperienceshort-run
economiesofoperation,becausetheirshort-runaveragetotalcostcurvesslope
downward.Furthermore,theconstantmarginalcostisalwayslessthanaveragetotal
cost,somarginalcostpricingwouldresultineconomiclossesforthesefirms.Inthe
long-runequilibriumformonopolisticallycompetitiveproducersofinformation
products,priceandaveragetotalcostareequal,sothefirmsearnrevenuesjustsufficient
tocovertherelativelyhighfixedcostsofdevelopingthefirstunitoftheirproducts,plus
therelativelylowvariablecostsofsellingadditionalunits.
Diff:2
39) Howdoesaninformationproductdifferfromaproductsuchasadesk?
Answer: Aninformationproducthasaveryhighfixedcostcomponentcomparedtothemarginal
costofproductionwhileadeskdoesnot.Onceaninformationproducthavebeen
developeditisrelativelyinexpensivetoreproducewhilethecostofreproducingadeskis
moreexpensive.
Diff:1
40) Foraninformationproduct,whyaprofit-maximizingfirmunabletopracticemarginalcost
pricing?Howisitspricedeterminedinthelongrun?
Answer: Aninformationproducthasthecharacteristicsofhighfixedcosts,lowmarginalcosts,
andashort-rundownwardslopingaveragetotalcostcurve.Asaresult,marginalcost
pricingwillresultineconomiclosses.Inthelongrun,thefirmspriceequalsaveragetotal
cost.Thus,thefirmchargesapricethatcoversitsaveragetotalcostandearnszero
economicprofitsinthelongrun.
Diff:2
Chapter26
OligopolyandStrategicBehavior
26.1Oligopoly
1) WhichofthefollowingdoesNOThelpexplainwhyoligopoliesexist?
A) Economiesofscale B) Mergers
C) Producthomogeneity D) Barrierstoentry
Answer: C
Diff:1
Topic: 26.1Oligopoly
2) Whichofthefollowingisacharacteristicofoligopoly?
A) Easyentryandexit B) Manyfirms
C) Strategicdependence D) Noneoftheabove
Answer: C
Diff:1
3) Amergerbetweenfirmsthatareinthesameindustryiscalleda
A) conglomeratemerger. B) horizontalmerger.
C) verticalmerger. D) noneoftheabove.
Answer: B
Diff:1
4) Amergerbetweenfirmsinwhichonefirmpurchasesaninputfromtheotheriscalleda
A) conglomeratemerger. B) horizontalmerger.
C) verticalmerger. D) noneoftheabove.
Answer: C
Diff:1
5) Themeasurementofindustryconcentrationwhichcalculatesthepercentageofallsales
contributedbyaspecificnumberofleadingfirmsiscalledthe
A) Herfindahl-HirschmanIndex. B) concentrationratio.
C) producerpriceindex. D) P/Eratio.
Answer: B
Diff:1
Chapter26OligopolyandStrategicBehavior 703
6) Strategicbehaviorandgametheoryarefeaturesofwhichmarketstructure?
A) Perfectcompetition B) Monopoly
C) Monopolisticcompetition D) Oligopoly
Answer: D
Diff:1
7) Inoligopoly,anyactionbyonefirmtochangeprice,output,orqualitycauses
A) areactionbyotherfirms. B) noreactionfromtheotherfirms.
C) aprofitgainfortheotherfirms. D) lossofmarketsharebytheactingfirm.
Answer: A
Diff:1
8) WhichofthefollowingisNOTacharacteristicofoligopolyfirms?
A) Strategicdependence
B) Productdifferentiation
C) Non-pricecompetition,suchasadvertisingandpromotions
D) Perfectlyelasticdemandcurves
Answer: D
Diff:1
9) Whichoneofthefollowingindustriescouldbeclassifiedasanoligopoly?
A) Tobaccoproduction B) Retailing
C) Farming D) Fastfoodrestaurants
Answer: A
Diff:1
10) Whichofthefollowingismostlikelytobesoldinanoligopolymarket?
A) Pizza B) Cellphoneservice
C) Electricity D) Computersoftware
Answer: B
Diff:2
11) WhichofthefollowingisNOTanecessaryconditionforoligopoly?
A) Barrierstoentry
B) Strategicdependenceoffirms
C) Differentiatedproducts
D) Eitherasmallnumberoffirmsormarketdominancebyasmallnumberoffirms
Answer: C
Diff:1
12) Managersinoligopolyfirmsmust
A) eliminateanybarrierstoentryiftheyhopetomakeshort-runprofits.
B) advertiseheavilyinordertodifferentiatetheirproduct.
C) anticipatethereactionofrivalfirms.
D) establishmanyvarietiesoftheirproductstocoverthespectrumofconsumertastes.
Answer: C
Diff:2
13) Inanoligopolisticmarket,eachfirm
A) hasaconstantmarginalcost.
B) facesaperfectlyelasticdemandfunction.
C) mustconsiderthereactionofrivalfirmswhenmakingapricingoroutputdecision.
D) producesatminimumaveragecostinthelongrun.
Answer: C
Diff:1
14) Anoligopolyisamarketsituationinwhich
A) therearemanyfirmsproducingdifferentiatedproducts.
B) thereisasinglefirmproducingseveralvarietiesofaproduct.
C) allthesellersactindependentlyoftheothers.
D) thereareveryfewsellersandtheyrecognizetheirstrategicdependenceononeanother.
Answer: D
Diff:1
15) WhichofthefollowingisNOTacommoncharacteristicofoligopoly?
A) strategicdependenceamongfirmsintheindustry
B) productdifferentiation
C) barrierstoentry
D) marginalcostpricing.
Answer: D
Diff:2
16) Ifafirmisanoligopolist,whichisNOTtrue?
A) Itmustpayattentiontootherfirmsprices.
B) Itisoneofarelativelysmallnumberoffirmsdominatingitsindustry.
C) Itcansellalltheunitsitwantsatthegoingmarketprice.
D) Itisengagedinastrategicgame.
Answer: C
Diff:2
17) Themostcommonreasonfortheexistenceofoligopoliesis
A) easeofentry. B) economiesofscale.
C) diseconomiesofscale. D) advertising.
Answer: B
Diff:1
18) Monopoliesandoligopoliesbotherectbarrierstoentrythroughtheuseof
A) pricecutting. B) patents. C) franchising. D) advertising.
Answer: B
Diff:1
19) OligopoliescanresultfromanyofthefollowingEXCEPT
A) economiesofscale. B) verticalmergers.
C) governmentregulation. D) diseconomiesofscale.
Answer: D
Diff:1
20) WhenU.S.Steel,asteelproducer,boughtcontrolofironorecompaniesatthebeginningofthe
20thcentury,thecompanywasinitiating
A) ahorizontalmerger. B) averticalmerger.
C) acartel. D) anexpropriation.
Answer: B
Diff:1
21) IfFordMotorCompanyandGeneralMotorsCorporationweretomerge,thiswouldrepresent
A) averticalmerger. B) ahorizontalmerger.
C) acartel. D) anup-and-downmerger.
Answer: B
Diff:1
22) Whichofthefollowingcombinationswouldconstituteaverticalmerger?
A) GeneralMotorsandBridgestoneTireCompany
B) GeneralMotorsandFordMotorCompany
C) PhilipMorrisandRJReynolds
D) PhilipMorrisandBarnes&NoblesBooksellers
Answer: A
Diff:1
23) Ingeneral,horizontalmergerswill
A) increasethenumberoffirmsinanindustry.
B) decreasethenumberoffirmsinanindustry.
C) increasecompetitioninanindustry.
D) reduceeconomicprofitsinanindustry.
Answer: B
Diff:1
24) ThecombiningofFirstUnionNationalBankandTheNationalBankofMemphisisanexample
of
A) averticalmerger. B) ahorizontalmerger.
C) adownstreamformation. D) aconglomeratemerger.
Answer: B
Diff:2
25) Thejoiningoffirmsthatareproducingorsellingasimilarproductis
A) aconglomeratemerger. B) ahorizontalmerger.
C) averticalmerger. D) alwaysanillegalmerger.
Answer: B
Diff:1
26) IftheUnitedStateslargestbakerybuysanagriculturalfirmthatspecializesingrowingwheat,
wewouldhaveanexampleof
C) amonopoly. D) excessiveproductdifferentiation.
Answer: B
Diff:2
27) Ahorizontalmergerinvolves
A) thejoiningoftwofirmsatdifferentstagesoftheproductionprocess.
B) theseparationofmanagementfromownership.
C) thejoiningoftwofirmssellingsimilarproducts.
D) theexchangeofdebtforstock.
Answer: C
Diff:1
28) Howdoeconomiesofscalecontributetothedevelopmentofanoligopoly?
A) Economiesofscalemakeitlegallydifficultfornewfirmstoenter.
B) Economiesofscalemakesmall-scaleproducersinefficient.
C) Economiesofscalearebasedoncontrolofakeyresource,withoutwhichotherfirms
cannotenteranindustry.
D) Economiesofscaleareguaranteedwhenapatentisgranted.
Answer: B
Diff:2
Four-FirmConcentrationRatios
Industry Ratio(percent)
W 72
X 30
Y 84
Z 55
29) Themostcompetitiveindustryofthosepresentedintheabovetableislikelytobeindustry
A) W. B) X. C) Y. D) Z.
Answer: B
Diff:1
30) Themostoligopolisticindustryofthosepresentedintheabovetableislikelytobeindustry
A) W. B) X. C) Y. D) Z.
Answer: C
Diff:1
31) Supposeanindustryhastotalsalesof$25millionperyear.Thetwolargestfirmshavesalesof
$6millioneach,thethirdlargestfirmhassalesof$2million,andthefourthlargestfirmhas
salesof$1million.Thefour-firmconcentrationratioforthisindustryis
Answer: B
Diff:2
32) Supposeatenfirmindustryhastotalsalesof$35millionperyear.Thelargestfirmhavesalesof
$10million,thethirdlargestfirmhassalesof$4million,andthefourthlargestfirmhassalesof
$2million.Iffifththroughtenthlargestfirmscombinedhaveannualsalesof$12million,the
four-firmconcentrationratioforthisindustryis
A) 45.7percent. B) 80percent.
C) 65.7percent. D) nonefotheabove.
Answer: C
Diff:2
33) Supposeatenfirmindustryhastotalsalesof$35millionperyear.Thelargestfirmhavesalesof
$10million,thethirdlargestfirmhassalesof$4million,andthefourthlargestfirmhassalesof
$2million.Iftherestoftheindustryhasannualsalesof$12million,thesecondlargestfirmhas
salesof
A) $8million. B) $7million.
C) $4million. D) nonefotheabove.
Answer: B
Diff:1
34) Supposethatanindustryconsistsof100firms,andthetop4firmshaveannualsalesof$1
million,$1.5million,$2million,and$2.5million,respectively.Iftheentireindustryhasannual
salesof$8.5million,thefour-firmconcentrationratioisapproximately
Answer: A
Diff:1
35) Theindustryconcentrationratiomeasuresthe
A) valueoftheassetsownedbythelargestcorporationsinthemarket.
B) percentageofindustrysalesaccountedforbythetopfouroreightfirms.
C) differencebetweenpriceandmarginalcostforthelargestfirmsintheindustry.
D) degreeofproductdifferentiationinthemarket.
Answer: B
Diff:1
36) Ifindustrysalesare$2,000,andthetopfourfirmshavesalesof$170,$140,$100,and$80,
respectively,whatwillbethefour-firmconcentrationratio?
A) 49percent B) 24.5percent C) 490percent D) 200/49
Answer: B
Diff:1
37) Asthedefinitionofproductsnarrows(i.e.,becomesmorespecific),theconcentrationratio
A) isnotvalid.
B) tendstodecrease.
C) tendstoincrease.
D) doesnotchangeinanypredictablemanner.
Answer: C
Diff:1
38) Aconcentrationratiogives
A) theaveragesizeofthefirmsinanindustry.
B) thetotalsalesoffouroreightofthemid-sizedfirmsintheindustry.
C) thepercentageofallsalescontributedbythefouroreightlargestfirmsintheindustry.
D) thesalesofthefourlargestfirmsintheindustrydividedbythesalesoftheeightlargest
firmsintheindustry.
Answer: C
Diff:1
Firm AnnualSales Firm AnnualSales

A $1000 G $800
B 900 H 1200
C 120 I 1050
D 75 J 90
E 50 K 75
F 40 L 600
39) Accordingtotheabovetable,thefour-firmconcentrationratioofthisindustryis
Answer: A
Diff:2
40) Accordingtotheabovetable,ifthefourthandfifthlargestfirmsintheindustrymerge,the
four-firmconcentrationratiointheindustrywillbe
Answer: A
Diff:2
41) TheHerfindahl-Hirschmanindexismeasuredby
A) addingthemarketsharesofallfirmsinanindustry.
B) addingthesquaresofthemarketsharesofallfirmsinanindustry.
C) squaringthesumofthemarketsharesoftheallfirmsinanindustry.
D) addingthemarketsharesofthefourlargestfirmsinanindustry.
Answer: B
Diff:1
QuestionStatus: New
42) Thereare30firmsinanindustry.Whathappenstothatindustrysfour -firmconcentration

whenthethird-andfourth-largestfirmsmerge?
A) Nothing,becausetheirsharesarealreadyincludedintheconcentrationcalculation.
B) Theindustrysconcentrationratiowillfall.
C) Theindustrysconcentrationratiowillincrease.
D) Itisimpossibletoknowwithoutmoreinformation.
Answer: C
Diff:2
43) Overthepastseveraldecades,U.S.firmshavefacedmorecompetitionfromoverseasfirms.
DoesthishaveanyimpactonthemarketpowerofU.S.oligopolyfirms?
A) No,becausedomesticfirmsinoligopolymarketsarealwayssodominantthatoverseas
producershavelittleornoimpactonthosemarkets.
B) No,becausetheUnitedStatesgovernmenthaseffectivelyblockedallimportsthatmight
competewithdomesticfirmsinoligopolyindustries.
C) Yes,competitionfromoverseasfirmscansubstantiallylimitdomesticfirmsmarketpower.
D) Thereisnowaytoknow.
Answer: C
Diff:2
44) Whichofthefollowingisacharacteristicofoligopoly?
A) Mutualfirmindependence B) Zeroeconomicprofitsintheshortrun
C) Marginalcostpricing D) Onlyafewfirmsintheindustry
Answer: D
Diff:1
45) Oligopolyisasituationwhenthere
A) isonefirmintheindustrythatisfairlylarge.
B) areafewlargefirmsintheindustry.
C) aretoomanyfirmsintheindustryandthereisexcesscapacity.
D) isonegiantfirmandmanysmallerfirmsformingacompetitivefringe.
Answer: B
Diff:1
46) Whichofthefollowingistrueofanoligopoly?
A) Theyengageinnonpricecompetition.
B) Theydonotreacttoactionsoftheircompetitors.
C) Eachfirmproducesasmallportionofthetotaloutput.
D) Firmsdonotcarewhattheircompetitorsdo.
Answer: A
Diff:1
47) Whichofthefollowingisnottrueofanoligopoly?
A) Theyadvertisetheirproduct.
B) Thefirmsrecognizetheirinterdependence.
C) Afewfirmaccountforalargeportionofthetotaloutput.
D) Firmsarepricetakers.
Answer: D
Diff:1
48) Whenmanagersinoligopolisticfirmsmakedecisionsthataffectoutputorprice,theymust
A) alsobesuretheyerectbarrierstoentrytopreventnewentrantsfromaffectingtheirplans.
B) anticipatethereactionsoftheirrivalsandplanaccordingly.
C) registerwiththeAntitrustDivisionoftheDepartmentofJustice.
D) informtheregulatorsoftheirindustryabouttheirplans.
Answer: B
Diff:2
49) Asituationinwhichonefirmsactionswithrespecttoprice,quality,advertisingandrelated
changesmaybestrategicallycounteredbythereactionsofoneormoreotherfirmsinthe
industryisknownas
A) strategicdependence. B) economiesofscale.
C) theconcentrationratio. D) barrierstoentry.
Answer: A
Diff:1
50) AllofthefollowingarereasonsforanoligopolytooccurEXCEPT
A) economiestoscale. B) barrierstoentry.
C) independenceamongfirms. D) merger.
Answer: C
Diff:1
51) Theexistenceofeconomiesofscaleisonereasonoligopoliesexistbecause
A) afirmisabletoincreasepriceleadingtoincreasedprofits.
B) themarginalcostdecreasesasoutputincreases.
C) ofstrategicdependence.
D) asoutputincreasesaveragetotalcostdecreasesleadingtolarge -scalefirms.
Answer: D
Diff:1
52) WhichofthefollowingisNOTareasonwhysomeindustriesareoligopolies?
A) Economiesofscale B) Barrierstoentry
C) Strategicindependence D) Mergers
Answer: C
Diff:1
53) Horizontalmergeroccurswhen
A) twofirmsmergewhereonehadsolditsoutputtotheotherasaninput.
B) themergermovesthecombinedfirmontothehorizontalportionofitslong -runaverage
costcurve.
C) twofirmsmergewhereeachisaboutthesamesize.
D) twofirmsproducingasimilarproductmerge.
Answer: D
Diff:1
54) Verticalmergeroccurswhen
A) twofirmsmergewhereonehadsolditsoutputtotheotherasaninput.
B) themergermovesthecombinedfirmontothehorizontalportionofitslong -runaverage
costcurve.
C) twofirmsmergewhereeachisaboutthesamesize.
D) twofirmsproducingasimilarproductmerge.
Answer: A
Diff:1
55) JoeshotdogstandmergeswithacompanythatsuppliesthecondimentstoJoes.Thisisan
exampleof
A) conglomeratemerger. B) concentrationratio.
C) verticalmerger. D) horizontalmerger.
Answer: C
Diff:1
56) StraightCutbeautysalonmergeswithClean-Cutbeautysalon.Thisisanexampleof
A) conglomeratemerger. B) concentrationratio.
C) verticalmerger. D) horizontalmerger.
Answer: D
Diff:1
57) Whichofthefollowingisanexampleofaverticalmerger?
A) NortheasternIllinoisUniversitymergingwithMcDonalds.
B) NortheasternIllinoisUniversitymergingwithatrainingacademyfornewprofessors.
C) NortheasternIllinoisUniversitymergingwithRooseveltUniversity.
D) NortheasternIllinoisUniversitygoingfromapublictoaprivateuniversity.
Answer: B
Diff:1
58) Whichofthefollowingisanexampleofahorizontalmerger?
A) NortheasternIllinoisUniversitymergingwithMcDonalds.
B) NortheasternIllinoisUniversitymergingwithatrainingacademyfornewprofessors.
C) NortheasternIllinoisUniversitymergingwithRooseveltUniversity.
D) NortheasternIllinoisUniversitygoingfromapublictoaprivateuniversity.
Answer: C
Diff:1
59) Thejoiningoffirmsthatareproducingorsellingasimilarproductisknownas
C) averticalmerger. D) economiestoscale.
Answer: B
Diff:1
60) Thejoiningofafirmwithanothertowhichitsellsanoutputorfromwhichitbuysaninputis
knownas
C) averticalmerger. D) economiestoscale.
Answer: C
Diff:1
61) Aconcentrationratiomeasures
A) theaveragesizeofthefirmsintheindustry.
B) thesalesofthethreelargestfirmsintheindustryminusthecostsofthesethreelargest
firmsintheindustry.
C) theshareofindustrysalesaccountedforbythelargestfirmsintheindustry.
D) theexcesscapacityfoundinaparticularoligopolisticindustry.
Answer: C
Diff:1
62) Thepercentageofallsalescontributedbytheleadingfourorleadingeightfirmsinanindustry
isknownas
C) economiestoscale. D) theconcentrationratio.
Answer: D
Diff:1
63) Whichofthefollowingstatementsaboutconcentrationratiosiscorrect?
A) Ahighconcentrationratioindicatesthattheindustryisamonopoly.
B) Ahighconcentrationratioindicatesthattheindustryismonopolisticallycompetitive.
C) Ahighconcentrationratiosuggeststhattheindustryischaracterizedbystrategic
independence.
D) Ahighconcentrationratiosuggeststhattheindustryischaracterizedbystrategic
dependence.
Answer: D
Diff:3
64) Aconcentrationratioisusedto
A) determinewhetheramarketstructureisoligopoly.
B) determinetheimportanceoflaborintheproductionprocess.
C) determinethedegreeofhomogeneityinthemarket.
D) seeifafirmqualifiesforfederalassistance.
Answer: A
Diff:1
Firm AnnualSales Firm AnnualSales

A $1000 G $800
B 800 H 1500
C 220 I 1050
D 75 J 90
E 50 K 75
F 40 L 300
65) Refertotheabovetable.Thefour-firmconcentrationratiois
A) 85.8percent. B) 75percent. C) 72.5percent. D) 59.2percent.
Answer: C
Diff:2
66) SupposethatIndustryXhastwofirmswithequalmarketshares,andIndustryYhasthreefirms
with65percent,30percent,and5percentmarketshares,respectively.Whichofthefollowingis
true?
A) TheHHIforIndustryXis50higherthantheHHIforIndustryY.
B) TheHHIforIndustryXis150lowerthantheHHIforIndustryY.
C) TheHHIforIndustryXis100higherthantheHHIforIndustryY.
D) TheHHIisthesamebetweenIndustryXandIndustryY.
Answer: B
Diff:2
QuestionStatus: New
67) Ina50-firmindustry,twoofthesmallestfirmsmerge.Yetthe4-firmconcentrationratioand
the8-firmconcentrationratiodidnotchange.Allthingsconsidered,wecansaythatthe
industryhas
A) movedclosertopurecompetitionbecausethenumberoffirmsdecreased.
B) movedfartherawayfromcompetitionbecausethenumberoffirmsdecreased.
C) experiencednochangeincompetitioneventhoughthenumberoffirmsdecreased.
D) tobeidentifiedfirst;otherwisethereisnowaytotell.
Answer: B
Diff:2
AnnualSales
Firm ($million)
1 350
2 200
3 150
4 100
5 75
6through30 50
Total 925
68) Refertotheabovetable.Thefour-firmconcentrationratiois
Answer: A
Diff:1
69) TheHerfindahl-Hirschmanindexisameasureof
A) theprofitmarginofanindustry.
B) marketsize.
C) thedegreeofcollusionamongfirmsinamarket.
D) thedegreeofconcentrationamongfirmsinamarket.
Answer: D
Diff:1
QuestionStatus: New
70) Supposetherearefourfirmsinanindustry.Themarketsharesofthefourfirmsare5percent,20
percent,35percent,and40percent.TheHerfindahl-Hirschmanindexforthatindustryis
A) 6,650. B) 3,250. C) 1,250. D) 100.
Answer: B
Diff:2
QuestionStatus: New
71) WhichofthefollowinghasthehighestHerfindahl-Hirschmanindex?
A) monopoly
B) monopolisticcompetition
C) oligopoly
D) anyoftheabove,dependingonthesizeoffirmsales
Answer: A
Diff:2
QuestionStatus: New
72) IndustryXhasfourfirms.ThelargestfirminIndustryXhasmorethan90percentofthemarket
share.IndustryYalsohasfourfirms,buteachofthosefourfirmsinIndustryYhas25percent
ofthemarketshare.TheHerfindahl-Hirschmanindexwillbe
A) thesameforbothindustries,butthefour-firmconcentrationwillbelargerforIndustryY
thanIndustryX.
B) thesameforbothindustries,butthefour-firmconcentrationwillbelargerforIndustryX
thanIndustryY.
C) largerforIndustryYthanIndustryX,butthefour-firmconcentrationwillbethesame.
D) largerforIndustryXthanIndustryY,butthefour-firmconcentrationwillbethesame.
Answer: D
Diff:3
QuestionStatus: New
73) Themarketpowerofafirmreferstoitsabilityto
A) erectentrybarriersintheindustry.
B) makeaprofitevenwhenotherfirmsintheindustryaremakinglosses.
C) controlitsownoutputlevelwhilekeepingitspricethesameasthepriceschargedbyother
firms.
D) affectthemarketpriceforitsindustrysoutput.
Answer: D
Diff:1
QuestionStatus: New
74) Amarketstructurecharacterizedbyasmallnumberofinterdependentsellersiscalleda(n)
A) monopoly. B) monopolisticcompetition.
C) monopsony. D) oligopoly.
Answer: D
Diff:1
75) Ifaretailfoodchainmergedwithameatpackingcompany,thiswouldbeanexampleofa
A) horizontalmerger. B) conglomeratemerger.
C) verticalmerger. D) diagonalmerger.
Answer: C
Diff:2
76) TherecentmergerofSouthwestBell(SBC)andAT&Tcompaniesisanexampleofa
A) horizontalmerger. B) verticalmerger.
C) consolidationmerger. D) cooperativemerger.
Answer: A
Diff:1
77) WhichofthefollowingisNOTacauseforanoligopolytoexist?
A) economiesofscale B) structuraldependence
C) barrierstoentry D) horizontalmergers
Answer: B
Diff:1
78) Whichofthefollowingwouldbethebestexampleofanoligopolisticindustry?
A) agriculture B) largeaircraftmanufacturing
C) confections D) retailconveniencestores
Answer: B
Diff:1
79) TherearefewerthanhalfasmanypublishersofcollegetextbooksintheUnitedStatesnowasa
generationago.Threecompaniesaloneaccountforalmosttwo-thirdsofthesaleofnew
textbooks.Thismarketsituationcharacterizedbyveryfewsellersisknownas
A) anoligopoly. B) perfectcompetition.
C) puremonopoly. D) monopolisticcompetition.
Answer: A
Diff:1
80) BetweenWorldWarIIandthe1970s,threefirmsGeneralMotors,Chrysler,andFord
producedandsoldnearlyalltheoutputoftheU.S.autoindustry.Thesethreefirmshad
A) anoligopoly. B) monopolisticcompetition.
C) colluded. D) apuremonopoly.
Answer: A
Diff:1
81) WhichdoesNOTcauseanindustrythatmightotherwisebecompetitivetotendtoward
oligopoly?
A) economiesofscale B) barrierstoentry
C) mergers D) strategicindependence
Answer: D
Diff:1
82) Thejoiningoffirmsthatareproducingorsellingasimilarproductis
A) competitionbymerger. B) averticalmerger.
C) ahorizontalmerger. D) ahostiletakeover.
Answer: C
Diff:1
83) Basedonthetablebelow,thefour-firmconcentrationratioequalswhatpercentageofannual
sales?
AnnualSales
Firm ($millions)
1 20
2 30
3 5
4 5
5through100 40
Total 100

Answer: C
Diff:2
AnnualSales
Firm ($millions)
1 70
2 30
3 28
4 22
5 10
6through25 40
Total 200
84) Usetheabovetable.Iffirms4and5merge,thefour-firmconcentrationratiowillbe
Answer: A
Diff:2
85) Ifacompanythatdrilledforandproducedoilacquiredafirmwhichrefinedoilintogasoline,
thiswouldbereferredtoasa
C) conglomeratemerger. D) reversemerger.
Answer: B
Diff:1
86) IfTargetweretomergewithWal-Mart,thiswouldbereferredtoasa(n)
C) conglomeratemerger. D) anti-competitivemerger.
Answer: A
Diff:1
87) Ifanindustryhas25firmsthatcollectivelyhave$150millionintotalsalesandthetopfourfirms
inthisindustryaccountfor$90millioninsales,whatistheconcentrationratioofthetopfour
firmsinthisindustry?
Answer: B
Diff:2
88) Ifanindustryhas25firmsthatcollectivelyhave$150millionintotalsalesandthetopthree
firmsinthisindustryaccountfor$78millioninsalesandthefifththroughtwenty-fifthfirms
accountfor$60millioninsales,whatistheamountofsalesforthefourthlargestfirm?
A) $12million B) $6million
C) $18million D) noneoftheabove.
Answer: A
Diff:2
89) WhichofthefollowingislikelyamongthemostconcentratedindustriesintheUnitedStates?
A) printingandpublishing B) softdrinks
C) tobaccoproducts D) householdvacuumcleaners
Answer: C
Diff:2
90) WhichofthefollowingislikelyamongthemostconcentratedindustriesintheUnitedStates?
A) printingandpublishing B) breakfastcereals
C) primaryaluminum D) computers
Answer: B
Diff:1
91) AllofthefollowingarecharacteristicsofanoligopolyEXCEPT
A) diseconomiesofscaleoverallrangesofoutput.
B) smallnumberoffirms.
C) highbarrierstoentry.
D) interdependence.
Answer: A
Diff:2
92) Thesituationofoligopolysuggests
A) manyfirmscompeteinanindustry. B) mergershavenotoccurred.
C) interdependenceamongfirms. D) nobarrierstoentryexist.
Answer: C
Diff:1
93) Oneofthestrongestreasonsthatoligopoliesexistisdueto
A) thehomogeneityoftheirproducts. B) marginalcostpricing.
C) lowestcostproduction. D) economiesofscale.
Answer: D
Diff:1
94) Economiesofscalemeansthat
A) theaveragefixedcostcurveslopesdownwardoveritsentirerange.
B) thefour-firmconcentrationratioisbelow80.
C) thelong-runaveragetotalcostcurveslopesdownwardoveritentirerange.
D) thelong-runtotalcostcurveslopesdownwardoveritentirerange.
Answer: C
Diff:2
95) Thehighertheconcentrationratioisinanindustry,themorelikelyitisthat
A) theindustryisperfectlycompetitive.
B) themarketshareofthesmallestfourfirmsislarger.
C) themarketshareofthelargestfourfirmsissmaller.
D) theindustryhasanoligopoly.
Answer: D
Diff:1
96) Thenumberoffirmsinanoligopolisticindustry
A) mustbelessthan10.
B) mustbelessthan20.
C) mustbesmallenoughthatfirmsareinterdependent.
D) mustbelargeenoughforfirmstobeindependent.
Answer: C
Diff:1
97) Theoutputsofanoligopolisticindustry
A) canbehomogeneousordifferentiated.
B) mustcostabove$100onthemarket.
C) alwayshaveexcisetaxesimposedonthem.
D) havenosubstitutesonthemarket.
Answer: A
Diff:1
98) Oligopolisticindustriesarecharacterizedbya
A) fewlargefirmsandnobarrierstoentry.
B) largenumberoffirmsandnobarrierstoentry.
C) fewlargefirmsandsubstantialbarrierstoentry.
D) largenumberoffirmsandsubstantialbarrierstoentry.
Answer: C
Diff:1
99) Economiesofscale
A) donotariseinoligopolisticindustries.
B) canexistbutarerareinoligopolisticindustries.
C) canexistbutfailtocreatebarrierstoentryinoligopolisticindustries.
D) arecommonplaceandoftenabarriertoentryinoligopolisticindustries.
Answer: D
Diff:1
100) Supposeanindustryiscomposedof10firms.Eachfirmsshareoftotalsalesintheindustryis10
percent.Iftwoofthefirmsmerge,thenthefour-firmconcentrationratiointheindustrywill
A) remainunchanged.
B) decreaseastherearefewerfirmsintheindustry.
C) increase.
D) dependonthemarketconditionfacedbytheindustry.
Answer: C
Diff:1
101) Supposeanindustryiscomposedof10firms.Eachfirmsshareoftotalsalesintheindustryis10
percent.Iftwoofthefirmsmerge,thenthefour-firmconcentrationratiointheindustryis
A) 40percent. B) 45percent.
C) 50percent. D) unabletodetermine.
Answer: C
Diff:1
102) Themergeroftwopizzarestaurantchainswouldbeanexampleof
C) aconglomeratemerger. D) anindependentmerger.
Answer: A
Diff:1
103) Ifthefour-firmconcentrationratioforanindustryis84percent,then
A) eachofthefirmsaccountfor21percentoftotalsales.
B) thefourlargestfirmsintheindustryaccountfor16percentofthetotalsales.
C) thefourlargestfirmsintheindustryaccountfor84percentofthetotalsales.
D) theremainingfirmsintheindustryaccountsfor84percentofthetotalsales.
Answer: C
Diff:2
104) Usingtheconcentrationratiotomeasurethedegreeofcompetition
A) mayunderstatethedegreeofcompetitionbecauseitignoresimportedgoods.
B) mayoverstatethedegreeofcompetitionbecauseitignoresimportedgoods.
C) mayoverstatethedegreeofcompetitionbecauseinter-industrycompetitionisignored.
D) mayunderstatethedegreeofcompetitionbecausemarketsharechangesannually.
Answer: A
Diff:3
105) AllofthefollowingcancreateanoligopolisticstructureEXCEPT
A) lowbarrierstoentry. B) economiesofscale.
C) governmentlicensingrules. D) mergers.
Answer: A
Diff:1
106) SupposeNabiscomergeswithbothawheatfirmandmillingfirm.Thisisanexampleofa
A) verticalmerger. B) horizontalmerger.
C) parallelmerger. D) diagonalmerger.
Answer: A
Diff:1
107) Whatisoligopoly?Howdoesoligopolydifferfromtheotherkindsofmarketstructure?
Answer: Oligopolyisanindustrycharacterizedbyasmallnumberoffirms.Thefirmsare
interdependent,andtheyrecognizethattheyareinterdependent.Thisleadstostrategic
dependence,whichmeansthatfirmsmustrecognizethattheiractionswillaffecttheother
firms,andtheymusttakeintoaccounttheactionsoftheotherfirms.
Diff:1
108) Whatismeantbytheconcentrationofanindustry?Howisconcentrationmeasured?Whatare
likelycausesofhighconcentration?
Answer: Industryconcentrationmeansthatarelativelylargeshareoftheindustrysoutputis
producedbythelargestfirmsintheindustry.Itisoftenmeasuredwithconcentration
ratios.Thefour-firmconcentrationratioisthepercentageoftotalindustrysales
generatedbythefourlargestfirmsintheindustry.Highconcentrationislikelytobe
associatedwitheconomiesofscale,barrierstoentry,andahistoryofmergers.
Diff:2
109) Distinguishbetweenahorizontalmergerandaverticalmerger.
Answer: Ahorizontalmergerisamergerbetweentwofirmssellingasimilarproduct.Avertical
mergerisamergerbetweentwofirmswhenonefirmpurchasestheoutputoftheother
firmasaninput.
Diff:1
110) Oligopolyistheonlymarketstructureinwhichrivalryamongfirmstakesplace.Doyouagree
ordisagree?Why?
Answer: Agree.Oligopolistsrecognizetheirstrategicdependenceandmusttakeinto
considerationlikelyreactionsbyrivalstoanydecisiontheymake.Thefirmsrealizethey
areincompetitionwithotherfirmsandmayactivelycompetewiththem.Underperfect
competitionandmonopolisticcompetition,thereisnorivalrybecausethefirmsaretoo
smalltohaveanyimpactontheotherfirms.Eachfirmactsindependentoftheother
firms.Bydefinitionthereisnorivalundermonopoly.So,oligopolyistheonlymarket
structurewherecompetitivebehavioractuallytakesplace.
Diff:3
111) Usingtheinformationinthetable,developthefour-firmconcentrationratio.Wouldyou
classifythisindustryasanoligopoly?Explainyouranswer.
AnnualSales
Firm ($millions)
1 350
2 200
3 150
4 100
5 40
6through20 20
810
Answer: Thefour-firmconcentrationratiois92.6percent(750/810multipliedby100).This
industrywouldbeclassifiedasanoligopolyifweusetheruleofthumbthatsaysthatan
oligopolyexistswhenthefour-firmconcentrationratioisatleast75%.
Diff:2
26.2StrategicBehaviorandGameTheory
1) Withinagametheorymodel,ifachangeindecision-makingraisescorporationAsprofitsby
$50andlowerscorporationBsprofitsby$50,thegameisa
A) negative-sumgame. B) zero-sumgame.
C) positive-sumgame. D) cooperativegame.
Answer: B
Diff:1
Topic: 26.2StrategicBehaviorandGameTheory
Answer: C
Diff:1
Answer: A
Diff:1
4) Gametheorywouldclassifyacartelunderthetopicof
A) zero-sumgames. B) cooperativegames.
C) noncooperativegames. D) dominant-strategygames.
Answer: B
Diff:2
5) Agameinwhichplayersasagrouploseattheendofthegameisreferredtoas
A) zero-sumgame. B) negative-sumgame.
C) positive-sumgame. D) tit-for-tatgame.
Answer: B
Diff:2
6) Agameinwhichplayersasagroupgainattheendofthegameisreferredtoas
A) zero-sumgame. B) negative-sumgame.
C) positive-sumgame. D) tit-for-tatgame.
Answer: C
Diff:2
7) Anoncooperativegamewouldrefertoasituationinwhicholigopolyfirms
A) aretoosmalltobeinterdependent.
B) donotengageincollusivebehaviortogether.
C) aremadeworseoffbytheiractions.
D) behaveasajointmonopoly.
Answer: B
Diff:2
8) Ingametheory,thestrategythatalwaysyieldsthehighestbenefitfortheplayerusingitisthe
A) dominantstrategy. B) cooperativestrategy.
C) prisonersstrategy. D) matrixstrategy.
Answer: A
Diff:1
9) Collusionalwaysinvolvesfirmsengagingina
A) verticalmerger. B) horizontalmerger.
C) cooperativegame. D) noncooperativegame.
Answer: C
Diff:2
10) Anoncooperativegamesituationmayoccurwhen
A) firmscollude. B) firmsfindcollusiontoocostly.
C) firmsmerge. D) firmsagreetopricefixing.
Answer: B
Diff:2
11) Thedominantstrategyallowsafirmto
A) obtainthehighestbenefit,regardlessofitsrivalsactions.
B) transformanegative-sumgameintoapositive-sumgame.
C) transformazero-sumgameintoapositive-sumgame.
D) escapefromaPrisonersDilemmasituation.
Answer: A
Diff:2
12) Supposeafirmcanchargearelativelylowpricetotrytocompeteactivelywithitsrivals,orit
canchargearelativelyhigh,collusiveprice.Ifitsstrategyistochargethelowpriceregardlessof
theotherfirmsdecisions,thislow-priceisthefirms
A) dependentstrategy. B) independentstrategy.
C) dominantstrategy. D) positivesumstrategy.
Answer: C
Diff:2
13) Inazero-sumgame
A) bothplayersarebetteroffattheendofthegame.
B) bothplayersareworseoffattheendofthegame.
C) oneplayerslossesareexactlyoffsetbyanotherplayersgains.
D) bothplayerscolludetomakebothofthembetteroff.
Answer: C
Diff:1
14) Whendecisionsareguidedstrictlybyshort-rungains,thisisknownas
A) opportunisticbehavior. B) theprisonersdilemma.
C) tit-for-tatstrategy. D) apositive-sumgame.
Answer: A
Diff:1
15) Atit-for-tatstrategyisoneinwhicholigopolies
A) cooperateaslongasothermemberscooperate,butifanyonecheats,theycuttheprice
untilthecheaterrevertstocooperation.
B) cooperatealmostallofthetime,butoccasionallydonotcooperateinordertofoolthe
antitrustauthorities.
C) keepcuttingpricestopunishrivalsuntilthecompetitivepriceisreached.
D) trytoavoidtheproblemsoftheprisonersdilemma,butactuallymakethemselvesworse
off.
Answer: A
Diff:1
16) Thedominantstrategyintheprisonersdilemmaisfor
A) neitherplayertoconfess. B) bothplayerstoconfess.
C) onlythedominantplayertoconfess. D) thedominantplayernottoconfess.
Answer: B
Diff:1
17) Theprisonersdilemmaisagameinwhich
A) thedominantstrategyforallparticipantsistochooseastrategythatmakesthemallworse
off.
B) thedominantstrategyistocooperate.
C) onlyoneofthefirmsisabletomakeabove-normalprofits.
D) eachfirm,inmakingdecisionsonthebasisofitsownself -interest,alsomakesdecisions
thatbenefitthegroupasawhole.
Answer: A
Diff:2
18)
Refertotheabovepayoffmatrix(inyearsofsentence)fortwopeople(BoandMax)chargedfor
robbery.Whichofthefollowingistheoutcomeofthedominantstrategywithoutcooperation?
A) BothBoandMaxconfess.
B) BothBoandMaxdonotconfess.
C) BoconfesseswhileMaxdoesnotconfess.
D) BodoesnotconfesswhileMaxconfesses.
Answer: A
Diff:2
19)
Refertotheabovepayoffmatrix(inyearsofsentence)fortwopeople(AandB)chargedfor
robbery.Whichofthefollowingistheoutcomeofthedominantstrategywithoutcooperation?
A) BothAandBconfess. B) BothAandBdonotconfess.
C) AconfesseswhileBdoesnotconfess. D) AdoesnotconfesswhileBconfesses.
Answer: A
Diff:2
20)
Refertotheabovepayoffmatrixfortheprofits(in$millions)oftwofirms(AandB)andtwo
pricingstrategies(highandlow).Whichofthefollowingistheoutcomeofthedominant
strategywithoutcooperation?
A) BothfirmAandfirmBchoosethelowprice.
B) BothfirmAandfirmBchoosethehighprice.
C) FirmAchoosesthelowpricewhilefirmBchoosesthehighprice.
D) FirmAchoosesthehighpricewhilefirmBchoosesthelowprice.
Answer: A
Diff:2
21)
Refertotheabovepayoffmatrixfortheprofits(in$millions)oftwofirms(AandB)andtwo
pricingstrategies(highandlow).Whichofthefollowingistheoutcomeofthedominant
A) BothfirmAandfirmBchoosethehighprice.
B) BothfirmAandfirmBchoosethelowprice.
C) FirmAchoosesthelowpricewhilefirmBchoosesthehighprice.
D) FirmAchoosesthehighpricewhilefirmBchoosesthelowprice.
Answer: B
Diff:2
22)
Refertotheabovepayoffmatrixfortheprofits(in$millions)oftwofirms(AandB)makinga
decisiontoadvertiseornot.Whichofthefollowingistheoutcomeofthedominantstrategy
withoutcooperation?
A) BothfirmAandfirmBchoosenottoadvertise.
B) BothfirmAandfirmBchoosetoadvertise.
C) FirmAchoosestoadvertisewhilefirmBchoosesnottoadvertise.
D) FirmAchoosesnottoadvertisewhilefirmBchoosestoadvertise.
Answer: B
Diff:2
23)
Refertotheabovepayoffmatrixfortheprofits(in$millions)oftwofirms(XandY)makinga
decisiontoadvertiseornot.Whichofthefollowingistheoutcomeofthedominantstrategy
withoutcooperation?
A) BothfirmXandfirmYchoosenottoadvertise.
B) BothfirmXandfirmYchoosetoadvertise.
C) FirmXchoosestoadvertisewhilefirmYchoosesnottoadvertise.
D) FirmXchoosesnottoadvertisewhilefirmYchoosestoadvertise.
Answer: B
Diff:2
24) Themutualinterdependenceofoligopolistsensuresthateacholigopolisthas
A) auniquedemandcurve.
B) aperfectlyelasticdemandcurve.
C) areactionfunction.
D) afundamentaldilemmaaboutwhethertocolludeornot.
Answer: C
Diff:1
25) Areactionfunctionis
A) companiescolludinginordertomakehigherthancompetitiveratesofreturn.
B) themannerinwhichoneoligopolistreactstoachangeinpricemadebyanother
oligopolistintheindustry.
C) agameinwhichfirmswillnotnegotiateinanyway.
D) whenplansmadebyfirmsareknownasgamestrategies.
Answer: B
Diff:1
26) Themannerinwhichoneoligopolistreactstoachangeinprice,output,orqualitymadeby
anotheroligopolistintheindustryis
A) acooperativegame. B) thereactionfunction.
C) azero-sumgame. D) theconcentrationratio.
Answer: B
Diff:1
27) Inagame,strategiesare
A) thereactionsoffirmstothechangesintheeconomy.
B) thelawsregulatingtheindustry.
C) theplansmadebytheparticipants.
D) thepotentialreturnstheparticipantsmayget.
Answer: C
Diff:1
28) Theanalyticalframeworkinwhichtwoormorefirmscompeteforcertainpayoffsthatdepend
onthestrategythattheothersemployis
A) gametheory. B) theconcentrationratio.
C) ahorizontalmerger. D) networkeffect.
Answer: A
Diff:1
29) Anoncooperativegameis
Answer: C
Diff:1
30) Acooperativegameis
Answer: A
Diff:1
31) Agameinwhichtheplayersexplicitlycoordinatetheirdecisionstomakethemselvesbetteroff
isa
A) cooperativegame. B) noncooperativegame.
C) zero-sumgame. D) negative-sumgame.
Answer: A
Diff:1
32) Refertotheabovefigure.Thefiguregivesthepayoffmatrixfortwoindividualswhoarebeing
accusedofrobbingabanktogether.IfBobconfesses,whatisthebeststrategyforHarry?
A) Confess. B) Dontconfess.
C) Flipacointodecidewhattodo. D) Thereisnobeststrategy.
Answer: A
Diff:3
accusedofrobbingabanktogether.IfBobdoesnotconfess,whatisthebeststrategyforHarry?
C) Flipacointodecidewhattodo. D) Thereisnobeststrategy.
Answer: A
Diff:3
accusedofrobbingabanktogether.WhatisdominantstrategyforBob?
C) Flipacointodecidewhattodo. D) Thereisnodominantstrategy.
Answer: A
Diff:3
accusedofrobbingabanktogether.Whichofthefollowingistheoutcomeofthedominant
A) Bothconfess.
B) Bothdontconfess.
C) BobconfesseswhileHarrydoesnotconfess.
D) HarryconfesseswhileBodoesnotconfess.
Answer: A
Diff:3
accusedofrobbingabanktogether.Whichofthefollowingistheoutcomewithcooperation?
A) Bothconfess.
B) Bothdontconfess.
C) BobconfesseswhileHarrydoesnotconfess.
D) HarryconfesseswhileBodoesnotconfess.
Answer: B
Diff:3
37) Refertotheabovefigure.AjaxandGreencoareoligopolists.Aboveyouaregiventhepayoff
matrixforthetwofirmsgivingthepayoffassociatedwithdifferentpricingstrategies.Whatis
thebeststrategyforGreencoifAjaxdecidesonchargingahighprice?
A) Highprice
B) Lowprice
C) Thereisnobeststrategy.
D) Notenoughinformationisgiventodeterminethebeststrategy.
Answer: B
Diff:3
thebeststrategyforGreencoifAjaxdecidesonchargingalowprice?
A) Highprice.
B) Lowprice.
Answer: B
Diff:3
thedominantstrategyforGreenco?
A) Highprice.
B) Lowprice.
Answer: B
Diff:3
40) Refertoabovefigure,whichrepresentsaduopolyindustry.Whatwouldbethelikelytotal
industrypayofforprofit?
A) $8million
B) $9million
C) $10million
D) $14million
E) zero
Answer: A
Diff:3
41) Supposetwofirmsareinagamesituation,andtheyeachmustdecideonastrategyregarding
whethertoselectahighpriceoralowprice.Profitsforafirmarehighestwhenitselectsalow
price,whiletheotherselectsahighprice;profitsarelowestifoneselectsahighprice,whilethe
otherselectsalowprice;profitsareinbetweenwhenbothselectlowprices;andprofitsare
slightlyhigherwhenbothselecthighprices.Intheabsenceofcollusionweexpect
A) oneofthefirmstoselectahighpriceandtheotheralowprice.
B) onefirmtoselectahighpriceandtheotheralowpriceinthefirstperiod,followedbya
reversalinthesecondperiod.
C) bothtoselecthighprices.
D) bothtoselectlowprices.
Answer: D
Diff:3
42) Agameinwhichtheplayersneithernegotiatenorcoordinateinanywayisa
A) cooperativegame. B) noncooperativegame.
C) zero-sumgame. D) negative-sumgame.
Answer: B
Diff:1
43) Anexampleofazero-sumgameis
A) exchange.
B) aconsumerpurchasingausedcarfromausedcardealer.
C) theprisonersdilemma.
D) poker.
Answer: D
Diff:2
44) Agameinwhichanygainswithinthegroupareexactlyoffsetbyequallossesbytheendofthe
gameisa
A) positive-sumgame. B) zero-sumgame.
C) strategy. D) negative-sumgame.
Answer: B
Diff:1
45) Anyrulethatisusedtomakeachoiceis
Answer: C
Diff:1
46) Yourteacherdecidestoplayagamewhereeverystudentmustcontributeadollar.Allmoney
collectedisdistributedattheendofthegameamongthestudents.Thisisanexampleofa
Answer: B
Diff:2
47) Adominantstrategyisonethat
A) yieldsapositionofthewinnersolongastheotherparticipantsactasplanned.
B) everyparticipantinthegamewillfollow.
C) turnsanegative-sumgameintoapositive-sumgame.
D) alwaysyieldsthehighestbenefitregardlessofwhattheotherplayersdo.
Answer: D
Diff:1
48) Actionsthatignorethepossiblelong-runbenefitsofcooperationandfocussolelyonshort-run
gainsare
A) azero-sumgame. B) anegative-sumgame.
C) tit-for-tatstrategicbehavior. D) opportunisticbehavior.
Answer: D
Diff:1
49) Cooperationthatcontinuesaslongastheplayerscontinuetocooperateis
A) azero-sumgame. B) anegative-sumgame.
C) tit-for-tatstrategicbehavior. D) opportunisticbehavior.
Answer: C
Diff:1
50) Peopledonotusuallybehaveinanoncooperativefashionevenwhenitisintheirimmediate
interesttodosobecause
A) theyrealizesuchbehaviorisimmoral.
B) theyknowtherecanbe2winners.
C) theyknowtheywillhaverepeateddealingswiththeotherpeople.
D) theyunderstandthedifficultieswithgametheory.
Answer: C
Diff:3
51) Whenoligopolisticcompaniesengageincollusion,thecompaniesareinvolvedina
A) noncooperativegame. B) negative-sumgame.
C) competitivegame. D) cooperativegame.
Answer: D
Diff:1
52) Whenaplayerinagameadoptsastrategywhichalwaysyieldsthehighestbenefitregardlessof
whattheotherplayerdoes,thatplayerisusinga(n)
A) opportunisticstrategy. B) dominantstrategy.
C) tit-for-tatstrategy. D) aggressivestrategy.
Answer: B
Diff:1
53) Agameinwhichalltheplayersarebetteroffattheendofthegameisa
A) tit-for-tatgame. B) dominantstrategygame.
C) positive-sumgame. D) noncooperativegame.
Answer: C
Diff:1
54) Agameinwhichalltheplayersareworseoffattheendofthegameisa
A) negative-sumgame. B) dominantstrategygame.
C) positive-sumgame. D) noncooperativegame.
Answer: A
Diff:1
55) Agameinwhichanygainsbythegroupareexactlyoffsetbyequallossesbytheendofthe
gameiscalledthe
Answer: B
Diff:2
56) Themannerinwhichoneoligopolistreactstoachangeinprice,output,orquantityonthepart
ofanotheroligopolistintheindustryisknownas
A) apositive-sumgame. B) thereactionfunction.
C) anoncooperativegame. D) azero-sumgame.
Answer: B
Diff:1
57) Theanalyticalframeworkinwhichtwoormoreindividuals,companies,ornationscompetefor
certainpayoffsthatdependonthestrategythatothersemployis
A) gametheory. B) opportunisticbehavior.
C) thedominantequilibrium. D) thetit-for-tatequilibrium.
Answer: A
Diff:1
58) Decisionmakersinoligopolisticfirmsmustdeviseastrategy.Onethatyieldsthehighest
benefit,regardlessofwhattheotherplayersdoisa
A) pricingstrategy. B) coherentstrategy.
C) dominantstrategy. D) revenuestrategy.
Answer: C
Diff:1
59) ThepayoffmatrixshowsallofthefollowingEXCEPT
A) ifbotholigopolistschooseahighprice,eachmakes$6million.
B) iftheybothchoosealowprice,eachmakes$4million.
C) ifonechoosesalowpriceandtheotherdoesnt,thelowpricedfirmwillmake$8million.
D) ifoneoligopolistchoosesahighpriceandtheotherdoesnt,thehigh -pricedfirmmakes
$8million.
Answer: D
Diff:1
60) Ingametheory,actionssuchascheatingthatfocussolelyonshort-rungainsarereferredtoas
A) territorialbehavior. B) tit-for-tatstrategicbehavior.
C) predatorybehavior. D) opportunisticbehavior.
Answer: D
Diff:2
61) Ingametheory,behaviorthatresultsincooperationaslongastheotherplayerscontinueto
cooperate,isreferredtoas
A) nicebehavior. B) tit-for-tatstrategicbehavior.
C) simplebehavior. D) opportunisticbehavior.
Answer: B
Diff:1
62) Thewayinwhichanoligopolistactsinresponsetoapricechangebyacompetitorisknownasa
A) zero-sumgame. B) positive-sumgame.
C) reactionfunction. D) cooperativegame.
Answer: C
Diff:1
63) WhenOPECmeetstosetproductionlevels,thisorganizationisplayinga
A) negativesumgame. B) cooperativegame.
C) non-cooperativegame. D) reactionfunctiongame.
Answer: B
Diff:2
64) WhenGoodyearincreasesitsproductionwhenMichelinreducesitsproduction,Goodyearis
playinga
A) negative-sumgame. B) cooperativegame.
C) non-cooperativegame. D) reactionfunctiongame.
Answer: C
Diff:2
65) Agameinwhichanygainsoneplayermakesareoffsetbyequallossesbyanotherplayeris
knownasa
C) negative-sumgame. D) cooperativegame.
Answer: A
Diff:1
66) Agameinwhichplayerscollectivelyloseisknownasa
Answer: C
Diff:1
67) Agameinwhichplayerscollectivelygainisknownasa
Answer: B
Diff:1
68) Gamescanbejudgedaccordingtothepayoffs
A) aszero-sum,negative-sum,andpositive-sumgames.
B) ascollusiveornoncollusivegames.
C) ascompetitiveornoncompetitivegames.
D) whetherallcompaniesparticipateornot.
Answer: A
Diff:1
69) Whichofthefollowingstatementsconcerningtheprisonersdilemmaistrue?
A) Theplayerwhomoveslastwillalwayswin.
B) Confessingisthedominantstrategyforbothplayers.
C) Neitherplayerwillpickthedominantstrategy.
D) Theplayerwhomovesfirstwillalwayswin.
Answer: B
Diff:2
70) Theprisonersdilemmashowsthat
A) playersarebetteroffiftheyactindependently.
B) monopoliesarebeneficialtosociety.
C) peoplewillalwayscheat.
D) playerswouldbebetteroffiftheycooperated.
Answer: D
Diff:2
71) Anactionthatisthebestchoiceunderallconditionsisknownasthe
A) profit-maximizingstrategy. B) prisonersdilemma.
C) tit-for-tatstrategy. D) dominantstrategy.
Answer: D
Diff:1
72) Whenacartelbreaksdownanditsmembersstartcheating,thebehaviorintheindustry
becomesa
A) noncooperativegame. B) zero-sumgame.
C) highstakesgame. D) positivesumgame.
Answer: A
Diff:1
73) Opportunisticbehaviorbyoligopoliesmeans
A) thatfirmscooperateinboththelongrunandintheshortruntopreventothersfrom
enteringtheindustry.
B) thatfirmscooperateintheshortrunforcurrentgains.
C) thatfirmsrefusetocooperateintheshortrun.
D) thatfirmsrefusetohonortheirproductguarantees.
Answer: B
Diff:2
74) Adominantstrategyisa
A) last-movestrategy.
B) losingstrategy.
C) playersbeststrategywhenhecanmakethefirstmove.
D) playersbeststrategyregardlesswhateverstrategiesareadoptedbyhisrivals.
Answer: D
Diff:2
75) Explainthebasicoperationsofaneconomicgame.
Answer: Gamescanbeeithercooperative,inwhichthefirmscollude,ornoncooperative.The
playersofthegamearethedecision-makersinoligopolisticfirms,andtheydevise
strategies,whicharerulesusedtomakeadecision.Payoffsaretheoutcomesofthe
strategiesemployedbyalloftheplayers.
Diff:1
76) Firmsfacedwithprisonersdilemmacanalwaysmakemoreprofitsbyengagingin
opportunisticbehavior.WhyisthistypeofbehaviorNOTcommonlyfoundeveninoligopolistic
markets?
Answer: Theprisonersdilemmadescribesnoncooperativebehavior,butinrealitymostbusinesses
engageinrepeattransactionssothatcooperationislikelytooccur.Onecooperative
strategyistit-for-tatbehavior.
Diff:2
77) Explainhowtheprisonersdilemmacanbeusedtoexaminepricingstrategiesinanoligopoly.
Answer: Theplayerscanchooseeitherahigh-pricestrategyoralow-pricestrategy.Ifbothchoose
high,theyeachmakesubstantialprofits.Ifbothchooselow,theyeachmakesmaller
profits.Ifonechooseshighandtheotherlow,theonewhochooseshighmakeslow
profitsandtheothermakesthemostprofitspossible.Eachfirmwillchooselowbecause
thatistheirdominantstrategyregardlessofwhattheotherfirmdoes,afirmhashigher
profitsifitchoosesthelow-pricestrategy.Whenbothchooselow,though,theirprofits
arelessthantheycouldhavebeen.
Diff:2
26.3TheCooperativeGame:ACollusiveCartel
1) Agroupoffirmsthattrytoworktogethertoearnmonopolyprofitsiscalleda(n)
A) patent. B) publicenterprise.
C) cartel. D) naturalmonopoly.
Answer: C
Diff:1
Topic: 26.3TheCooperativeGame:ACollusiveCartel
2) Accordingtogametheorists,acartelofseveralfirmsisanexampleofa(n)
A) zero-sumgame. B) uncooperativegame.
C) cooperativegame. D) noncooperativegame.
Answer: C
Diff:2
3) Anexampleofacooperativegamewouldbe
A) oligopoly. B) monopolisticcompetition.
C) acartel. D) perfectcompetition.
Answer: C
Diff:2
4) Anassociationofproducersinanindustrythatagreetosetcommonpricesandoutputquotasto
preventcompetitionis
A) atariff. B) apatent.
C) economiesofscale. D) acartel.
Answer: D
Diff:1
5) Whichofthefollowingisnottrueaboutacartel?
A) Membersearneconomicprofits.
B) Membersexperiencelargeeconomiestoscalerelativetoindustrydemand.
C) Cartelswillsetcommonpricesfortheirmembers.
D) Membersofacartelwillhaveproductionquotas.
Answer: B
Diff:2
6) Themainobjectiveofthemembersofacartelisto
A) earneconomicprofits. B) produceefficiently.
C) maketheindustrymorecompetitive. D) obtainapatent.
Answer: A
Diff:2
7) Agroupofproducersthatagreetocoordinatetheirproductioniscalleda
A) cartel. B) monopoly.
C) freemarketcompetition. D) verticalmerger.
Answer: A
Diff:1
8) Inacartel,firmsjointlyactas
A) amonopolisticcompetitivefirm. B) aperfectlycompetitivefirm.
C) amonopolyfirm. D) anoligopolisticfirm.
Answer: C
Diff:2
9) Anassociationofproducersthatfixescommonpricesandoutputquotasisknownasa
A) cartel. B) commonsellingorganization.
C) joint-marketingarrangement. D) tradeassociation.
Answer: A
Diff:1
10) WhichofthefollowingisLEASTlikelytobeareasonforfirmstoformacartel?
A) tomaximizeprofitsofthecartel
B) toraisecompetitionamongfirmsinthecartel
C) tocutbackoutputofthecartel
D) tosetcommonpricesamongfirmsinthecartel
Answer: B
Diff:2
11) Cheatinginacartelismorelikelytooccuriftheindustry
A) hasalargenumberoffirms. B) hashomogeneousproducts.
C) haseasilyobservableprices D) haslittlevariationinprices.
Answer: A
Diff:2
12) Acartelisaformof
A) collusion. B) verticalmerger.
C) noncooperativecompetition. D) negativesumgame.
Answer: A
Diff:1
13) Thesuccessofacartelrestsupon
A) inducingallmemberstolimittheircombinedoutputandchargethesameprice.
B) inducingallmemberstodifferentiatetheirproductsandchargedifferentprices.
C) makingexitfromthecartelasnearlycostlessaspossible.
D) discouragingsomefirmsinthemarketfromjoining.
Answer: A
Diff:1
14) WhichofthefollowingisLEASTlikelytobeanoutcomeofacartelascomparedtothesituation
beforethecartelwasformed?
A) Cartelmemberschargehigherprices.
B) Cartelmembersreduceproduction.
C) Cartelmembersmakefewerprofits.
D) Cartelmembersdonotcompetewitheachotherinpricingdecisions.
Answer: C
Diff:2
15) Afterparticipatingmembersofacartelformanagreementoncommonpricesandoutput
quotas,thenanindividualfirmcanincreaseitsownprofitsby
A) increasingproduction. B) increasingprices.
C) leavingthecartel. D) incurringhigherinputcosts.
Answer: A
Diff:2
16) Afterparticipatingmembersofacartelformanagreementoncommonpricesandoutput
quotas,thenanindividualfirmcanincreaseitsownprofitsby
A) decreasingproduction. B) decreasingprices.
C) advertising. D) payingitsemployeeshigherwages.
Answer: B
Diff:2
17) Whichofthefollowingisaconditionthathelpsenforceacartelagreement?
A) alargenumberoffirms B) relativelydifferentiatedproducts
C) easilyobservableprices D) largevariationinprices
Answer: C
Diff:2
18) WhichofthefollowingisNOTaconditionthathelpsenforceacartelagreement?
A) asmallnumberoffirms B) nearlyhomogeneousproducts
C) easilyobservableprices D) largevariationininputprices
Answer: D
Diff:2
19) Oneofthefundamentalproblemsacartelfacesis
A) todeterminehowmucheachproducerwilldecreaseitsoutput.
B) todeterminehowmucheachproducerwillincreaseitsoutput.
C) todeterminehowmucheachproducerwillloweritprice.
D) todeterminehowmucheachproducerwillloweritsprofit.
Answer: A
Diff:2
20) Cartelagreementsaremorelikelytobreakdownwhen
A) therearefewvariationsinmarketdemand.
B) newfirmsenterthemarket.
C) participatingfirmsearnhugeprofits.
D) noneoftheabove
Answer: B
Diff:2
21) Acartelislikelytolastlongerif
A) morenewfirmsenterthemarket.
B) theprofitsofparticipatingmembersarerelativelystable.
C) marketpricesvarymoreovertime.
D) therearemorefirmsintheindustry.
Answer: B
Diff:2
22) Thegoalofacartelisto
A) increasecompetitionamongmembers. B) maximizeindustryprofits.
C) increaseindustryproduction. D) alloftheabove
Answer: B
Diff:1
23) Acartelmostlikelyformsin
A) anoligopolisticmarket. B) aperfectlycompetitivemarket.
C) amonopolisticallycompetitivemarket. D) aheavilyregulatedindustry.
Answer: A
Diff:2
24) Amemberinacartelcanearnmoreprofitsby
A) chargingaslightlylowerpriceandraisingproduction.
B) producinglessthantheagreedrate.
C) sellinglessthantheagreedamount.
D) noneoftheabove.
Answer: A
Diff:2
25) Acartelwillbreakdownmoreeasilyif
A) thereareonlyafewmembers. B) industrydemandisverystable.
C) marketpricescanbeobservedeasily. D) therearemanyentrantsintheindustry.
Answer: D
Diff:2
26) Inacartel,participatingmemberscancheatby
A) lettingmoreentrantsjointhecartel.
B) leavingtheindustry.
C) producingalowerproductionlevelthanthecartelquota.
D) chargingaslightlylowerpriceandraisingproduction.
Answer: D
Diff:2
27) Acartelis
A) agroupofproducersthatagreetosetcommonpricesandoutputquotas.
B) agroupofconsumersthatbidagainsteachotherforthesameproduct.
C) agovernmentagencythatregulatesmarkets.
D) anarbitratortosettledisputesbetweenconsumersandproducers.
Answer: A
Diff:2
28) Between1986and1998theDeBeerscompanycontrolledtheworlddiamondmarket.DeBeers
anditsaffiliatedassociationofproducersrestricteddiamondsalestomaximizeprofits.DeBeers
anditsassociationwastheonlygameintownandhadwhatis
A) acartel. B) aduopoly.
C) monopolisticcompetitor. D) perfectcompetitor.
Answer: A
Diff:2
29) Acartelbehaveslike
A) amonopolisticcompetitivefirm. B) aperfectlycompetitivefirm.
C) amonopolist. D) anoligopolisticfirm.
Answer: C
Diff:2
30) Ifthreefirmsofsimilarsizesjointoformacartel,thenitismostlikelythat
A) theywillchargeacommon,highermarketprice.
B) theywillcollectivelyproducemorethanbefore.
C) allthreefirmswillstopproducing.
D) allthreefirmswillearnzeroprofits.
Answer: A
Diff:2
31) Iffivefirmsofsimilarsizesjointoformacartel,thenitismostlikelythat
A) theywillchargeacommon,lowermarketprice.
B) theywillcollectivelyproducelessthanbefore.
C) allfivefirmswillearnthesameprofitsasbefore.
D) allfivefirmsasagroupwillhavefallingprofits,butincreasedoutput.
Answer: B
Diff:2
32) Whenoligopolisticfirmsinanindustryformacartel,thenitismostlikelythat
A) bothindustryoutputandpriceswillincrease.
B) bothindustryoutputandpriceswilldecrease.
C) industryoutputwillincreasewhilepriceswilldecrease.
D) industryoutputwilldecreasewhilepriceswillincrease.
Answer: D
Diff:2
33) Anassociationofproducersinanindustrythatagreetosetcommonpricesandoutputquotasto
preventcompetitionis
A) anoligopolist. B) amonopolisticcompetitor.
C) aconstrainedmonopoly. D) acartel.
Answer: D
Diff:1
34) AnassociationofproducerssuchasOPECthatagreestosetcommonpricingoroutputgoalsis
referredtoasa
A) cartel. B) conglomerate. C) monopoly. D) partnership.
Answer: A
Diff:2
35) Whatisacartel?Cancartelsgeneratelong-termprofitswithouttheexistenceofbarriersto
entry?
Answer: Acartelisanassociationofproducersinanindustrythatagreetosetcommonpricesand
outputquotastopreventcompetition.Iftheysuccessfullyearnprofits,newfirmswill
enter,sobarrierstoentryarestillneeded.
Diff:1
36) Whydofirmsformacartel?Howdocartelsachievetheirgoals?
Answer: Firmsformacartelinordertomaximizetheircombinedprofitsbyactingasasingle
producer.Todoso,theyagreeonsettingcommonpricesandoutputquotasfor
participatingmembers.
Diff:2
37) Whatarethemaincharacteristicsthatmakeitmorelikelyforacarteltoenforceagreements
amongparticipatingmembers?
Answer: Acartelismoreeffectiveinenforcingagreementsifthereareasmallnumberoffirms,
relativelyhomogeneousproducts,easilyobservableprices,andlittlevariationinprices.
Diff:2
38) Whywouldamemberofacartelcheat?
Answer: Aftersettingacommonpriceorproductionquotas,amemberofacartelcanearnmore
profitsindividuallybycheating:settingaslightlylowerpricethanthecartelpriceand
producingandsellingmoreoutputthanspecifiedunderthecartelagreement.
Diff:2
39) Whydocartelsoftenbreakdown?
Answer: Cartelsoftenbreakdownbecauseoftheincentivesforeachindividualmemberofthe
carteltoreduceitsownpriceslightlyandincreaseitsproductioninordertoreapmore
profitsthanthoseunderacartelagreement.Also,economicprofitsduetothecartels
oftenprovideanincentivefornewfirmstoenterthemarketandactasacheatingcartel
member.
Diff:2
26.4NetworkEffects
1) Whenaconsumerswillingnesstobuyagoodorserviceisinfluencedbythenumberofpeople
whohavepurchasedthatgoodorservice,thisiscalled
A) aswitchingcost. B) anopportunitycost.
C) anetworkeffect. D) anadvertisinggimmick.
Answer: C
Diff:1
Topic: 26.4NetworkEffects
2) Foryears,yourneighborinsistedshehadnodesiretoownacomputer.Recently,however,she
purchasedoneandsaysshedidsobecauseallherrelativeshavecomputersandshewantsto
exchangee-mailwiththem.Yourneighborsbehaviorisanexampleof
A) aswitchingcost. B) theimpactofnegativemarketfeedback.
C) limited-pricingbehavior. D) anetworkeffect.
Answer: D
Diff:2
3) Foryears,yourparentsclaimedtheyhadnodesiretojoinasocialwebsite.Recently,however,
theyjoinedoneandsaidtheydidsobecausealltheirrelativeshavejoinedthesamesitewith
them.Yourparentsbehaviorisanexampleof
A) aswitchingcost. B) anetworkeffect.
C) theimpactofpositivemarketfeedback. D) theimpactofnegativemarketfeedback.
Answer: B
Diff:2
4) Anetworkeffectariseswhenever
A) firmsinanoligopolisticindustryengageinlimitpricing.
B) firmsinanoligopolisticindustryengageinazero-sumgame.
C) aconsumerswillingnesstopurchaseagoodorserviceisinfluencedbyhowmanyothers
alsobuyorhaveboughttheitem.
D) aproducerswillingnesstoproduceagoodorserviceisinfluencedbyhowmanyother
firmsalsoproduceorhaveproducedtheitem.
Answer: C
Diff:1
5) Whenthereisatendencyforaparticularproducttocomeintofavorwithadditionalconsumers
becauseotherconsumershavechosentopurchasetheproduct,
A) negativemarketfeedbackoccurs. B) positivemarketfeedbackoccurs.
C) thereisnodominantstrategy. D) apricewarmustresult.
Answer: B
Diff:1
6) Whenthereisatendencyforaparticularproducttofalloutfavorwithadditionalconsumers
becauseotherconsumershavechosennottopurchasetheproduct,
A) negativemarketfeedbackoccurs. B) positivemarketfeedbackoccurs.
C) thetit-for-tatstrategywillbegin. D) thenetworkeffectwillincrease.
Answer: A
Diff:1
7) Negativemarketfeedbackreferstoatendencyfor
A) oneortwofirmsinanoligopolisticindustrytorespondtopricedecreasesbyinitiating
effortstoengageinpriceleadership.
B) aparticularproducttofalloutoffavorwithadditionalconsumersbecauseother
consumershavestoppedpurchasingtheproduct.
C) thedominantfirminanoligopolisticindustrytoreacttocompetingfirmspriceincreases
bydecreasingthepriceofitsownproduct.
D) pricewarstobreakoutinoligopolisticindustriesinwhichfirmsproduceproducts
possessingcharacteristicsthatmakethempronetonetworkeffects.
Answer: B
Diff:1
8) Positivemarketfeedbackreferstoatendencyfor
A) potentialentrantstoanoligopolisticindustrytorespondtoentrydeterrencestrategiesby
contemplatingsettingtheirpricesabovepricesestablishedbyfirmsalreadyinthe
industry.
B) potentialentrantstoanoligopolisticindustrytorespondtoentrydeterrencestrategiesby
contemplatingproducingmoreoutputthanthequantitiesproducedbyfirmsalreadyin
theindustry.
C) aparticularproducttocomeintofavorwithadditionalconsumersbecauseother
consumershavechosentopurchasetheproduct.
D) priceleaderstorespondtoanincreaseinmarketdemandbyincreasingthepricesoftheir
products.
Answer: C
Diff:1
9) Anetworkeffectexistswhenever
A) afirmswillingnesstoproduceaparticulargoodorserviceisinfluencedbythecostsof
inputsitmustutilizeinordertomanufacturetheitem.
B) aconsumerswillingnesstopurchaseaparticulargoodorserviceisinfluencedbyhow
manyothersalsobuyorhaveboughttheitem.
C) afirmswillingnesstopurchaseaparticularfactorofproductiondependsontheother
typesofinputsitutilizestomanufactureanitem.
D) aconsumerswillingnesstopurchaseaparticulargoodorserviceisinfluencedbythe
pricesofothercomplementaryorsubstituteitems.
Answer: B
Diff:1
10) Asituationwhereaconsumerswillingnesstouseanitemdependsonhowmanyothersuseitis
A) apositive-sumgame. B) anetworkeffect.
C) price-leadership. D) averticalmerger.
Answer: B
Diff:1
11) Whennetworkeffectsareimportant,thenanindustrycanexperience
A) positivemarketfeedback. B) prince-leadership.
C) azero-sumgame. D) averticalmerger.
Answer: A
Diff:1
12) Whenanewproductisintroducedinthemarket,Lennyalwayswantstoseehowpopularthe
itembecomesbeforehepurchasesit.Lennysbehaviorisknownas
A) overtcollusion. B) limit-pricing.
C) anetworkeffect. D) priceleadership.
Answer: C
Diff:2
13) Whenafalloffinusageofaproductbysomeconsumerscausesotherstostoppurchasingthe
itemthereis
A) priceleadership. B) negative-sumgame.
C) positivemarketfeedback. D) negativemarketfeedback.
Answer: D
Diff:1
14) Atendencyforagoodtocomeintofavorwithconsumersbecauseotherconsumershavechosen
tobuytheitemis
A) price-leadership. B) negative-sumgame.
Answer: C
Diff:1
15) Janepurchasessnickle-deesonlybecauseherfriendsdo.Thisis
Answer: C
Diff:2
16) Stephanielistenstopunkrockbecauseherfriendsdo.Thisis
A) apositivesumgame. B) collusion.
Answer: C
Diff:2
17) SunilhasdecidednottopurchaseanothercanofStoshbecausehisfriendslaughedathimthe
lasttimehepurchasedsome.Stoshisnolongerapopularitem.Sunilsactionisknownas
Answer: D
Diff:2
18) Becauseallofhisfriendsstoppedexclusivelywearingblackclothes,Dougwearsanythingbut
blackclothes.Thisisknownas
A) anegativesumgame. B) collusion.
Answer: D
Diff:2
19) Inanindustrywithnetworkeffectsanddifferentiatedproducts,itispossiblefortheindustryto
becomeanoligopolyif
A) theyengageinazero-sumgame.
B) theyuseaprice-leadershipmodel.
C) theyuseakinkeddemandcurvemodel.
D) afewfirmsreapmostofthesalesgainsresultingfrompositivemarketfeedback.
Answer: D
Diff:1
20) Theideathatifenoughconsumerscutbackontheiruseofaproductitinducesotherconsumers
todothesameisreferredtoas
A) positivemarketfeedback. B) non-dynamicmarketfeedback.
C) negativemarketfeedback. D) elicitmarketfeedback.
Answer: C
Diff:2
21) PeopleswillingnesstobuythePCorMacformatofcomputersoftwaredependsonhow
popularthesoftwareformatisamongotherconsumers.Thisisanexampleof
A) acartel. B) anopportunitycost.
C) anetworkeffect. D) theprisonersdilemma.
Answer: C
Diff:1
22) WhichofthefollowingisNOTsubjecttoanetworkeffect?
A) thelayoutofthekeysonyourkeyboard
B) rotatingyourtireseverysixmonths
C) usingafaxmachine
D) purchasinganewhigh-definitionDVDplayer
Answer: B
Diff:2
23) Anexampleofapositivemarketfeedbackis
A) theemergenceoftheiPod.
B) routinemaintenanceonacar.
C) thedeclininguseofland-linetelephonesforlongdistancecalls.
D) theuseoftelegraphservicesinthetwenty-firstcentury.
Answer: A
Diff:2
24) Howcannetworkeffectsleadanindustrytobecomeanoligopoly?
Answer: Ifafewfirmssellingproductssubjecttonetworkeffectscandifferentiatethemfromother
products,andiftheproductsfromthesefewfirmsexperiencepositivemarketfeedback,
thenthatgroupoffirmswillcapturethebulkofindustrysales.Consequently,oligopoly
islikelytoemergeastheprevailingmarketstructure.
Diff:2
26.5Two-SidedMarkets,NetworkEffects,andOligopoly
1) Inatwo-sidedmarket,afirmthatprovidesservicesthatlinktogethergroupsofconsumersand
producersiscalleda(n)
A) enduser. B) platform. C) monopoly. D) tit-tat.
Answer: B
Diff:1
Topic: 26.5Two-SidedMarkets,NetworkEffects,andOligopoly
QuestionStatus: New
2) Inthetelevisionbroadcastingindustry,__________isanenduserand__________isaplatform.
A) anadvertiser;aTVserviceprovider B) anadvertiser;aTVregulatoryagency
C) aTVserviceprovider;aTVmaker D) aTVmaker;TVaudience
Answer: A
Diff:2
QuestionStatus: New
3) Arealtorintherealestatemarketisanexampleof
A) anenduserinashared-inputmarket. B) aplatforminashared-inputmarket.
C) aplatforminamatchmakingmarket. D) anenduserinamatchmakingmarket.
Answer: C
Diff:2
QuestionStatus: New
4) Creditcardcompaniesthatoperateasintermediaryfirmsbetweencreditcardholdersand
businessvendorsarebestdescribedas
A) platformsinashared-inputmarket.
B) endusersinashared-inputmarket.
C) platformsinatransaction-basedmarket.
D) endusersinatransaction-basedmarket.
Answer: C
Diff:2
QuestionStatus: New
5) Inthewirelesscommunicationindustry,firmsthatprovidebroadbandaccesstotheInternetare
bestregardedas
A) platformsinashared-inputmarket. B) endusersinashared-inputmarket.
C) platformsinamatchmakingmarket. D) endusersinamatchmakingmarket.
Answer: A
Diff:2
QuestionStatus: New
6) InthecableTVserviceindustry,endusersare
A) advertisersonly.
B) cableTVsubscribersonly.
C) bothadvertisersandcableTVsubscribers.
D) noone.
Answer: C
Diff:2
QuestionStatus: New
7) Aradiostationisbestdescribedas
A) anenduserinatransaction-basedmarket.
B) aplatforminanaudience-makingmarket.
C) anenduserinamatchmakingmarket.
D) aplatforminashared-inputmarket.
Answer: B
Diff:2
QuestionStatus: New
8) Anonlinedatingfirmis
A) aplatforminashared-inputmarket. B) anenduserinamatchmakingmarket.
C) aplatforminamatchmakingmarket. D) anenduserinashared-inputmarket.
Answer: C
Diff:2
QuestionStatus: New
9) Inatwo-sidedmarketwithnetworkeffects,theplatformwillmostlikely
A) setthesamepricesforthetwosidesofthemarket.
B) setdifferentpricesforthetwosidesofthemarket.
C) setapriceofzeroforbothsidesofthemarket.
D) combinethetwogroupsofthemarketbeforesettingitsprice.
Answer: B
Diff:2
QuestionStatus: New
10) Inatwo-sidedmarket,anintermediaryfirmthatlinksgroupsofproducersandconsumersis
called
A) anoperator. B) anoligopoly. C) aplatform. D) anenduser.
Answer: C
Diff:1
QuestionStatus: New
11) ThenetworkeffectintheTVbroadcastingindustryresultsin
A) apositivemarketfeedbackbetweenthenumberofadvertisersandthesizeofTV
audience.
B) anegativemarketfeedbackbetweenthenumberofadvertisersandthesizeofTV
audience.
C) apositivemarketfeedbackbetweenthenumberofadvertisersandthenumberofTV
channels.
D) anegativemarketfeedbackbetweenthenumberofadvertisersandthenumberofTV
channels.
Answer: A
Diff:2
QuestionStatus: New
12) Inatwo-sidedmarket,theplatformmaydifferentpricestodifferentgroupofendusersdueto
A) thebudgetconstraintsofendusers.
B) substitutioneffectsbetweentheendusersandtheplatform.
C) differentnetworkeffectsbetweengroupsofendusers.
D) alackofproductdifferentiationintheproductssold.
Answer: C
Diff:2
QuestionStatus: New
13) Inthemobiledeviceindustry,anexampleofaplatformfirmis
A) amobileappsdeveloper.
B) adeveloperofmobiledeviceoperationsystems.
C) aretailerofmobiledeviceaccessories.
D) anonlineretailer.
Answer: B
Diff:2
QuestionStatus: New
14) Inatwo-sidedmarketwithnetworkeffects,theplatformwilllikely
A) chargealowerpriceforendusersthataremoreaffectedbyapositivemarketfeedback.
B) chargeahigherpriceforendusersthataremoreaffectedbyapositivemarketfeedback.
C) chargeazeropriceforallendusersregardlessofthemarketfeedbackeffects.
D) randomlychargeendusers.
Answer: B
Diff:2
QuestionStatus: New
15) WhywouldApplesubsidizedevelopersofmobileapplicationsthatoperatewithitsiPhones
operatingsystem?
A) Thereisapositivemarketfeedbackfromthemobileapplicationstoconsumers
willingnesstobuyiPhones.
B) Appleattemptstoensurethatalldevelopersofmobileapplicationsareprofitable.
C) ApplethinksiPhonesaretoocheapforconsumers.
D) Appliesattemptstocreatecompetitionamongdevelopersofitsmobileapplications.
Answer: A
Diff:2
QuestionStatus: New
16) Howdoesthepresenceofnetworkeffectsinatwo -sidedmarketaffectsthepricingbehaviorin

themarket?
Answer: Inatwo-sidedmarket,platformfirmsmaysetdifferentpricesforgroupsofendusers
withdifferentnetworkeffects.Platformfirmsareintermediaryfirmsthatlinktogether
groupsofproducersandconsumersasendusers.Inatransaction-basedmarketfor
creditcards,forexample,creditcardissuersareplatformswhileretailersandcreditcard
holdersareendusers.Creditcardissuersmayfindnetworkeffectstobegreaterfor
retailersthanforcreditcardholders.Assuch,retailerswillingnesstoacceptcreditcards
respondstogreatercustomerusemorestronglythancustomerswillingnesstousethe
cardsrespondstoretailersacceptance.Ifbothretailersandcardholdersareequally
responsivetochangesincardfees,thencreditcardissuerswouldfinditmoreprofitable
tochargelowercard-usagefeestocardholdersthantoretailers.
Diff:2
QuestionStatus: New
26.6ComparingMarketStructures
1) Amarketsituationinwhichthereareafewlargefirmsiscalled
A) monopolisticcompetition. B) imperfectcompetition.
C) oligopoly. D) monopoly.
Answer: C
Diff:1
Topic: 26.6ComparingMarketStructures
2) Inindustriesinwhichstrongnetworkeffectsexist,whichindustrystructureislikelytoemerge?
A) Perfectcompetition B) Monopoly
C) Monopolisticcompetition D) Oligopoly
Answer: D
Diff:2
3) Gametheoryisusedtoexplainthepricingbehaviorof
A) monopolies. B) perfectcompetition.
C) monopolisticcompetition. D) oligopolies.
Answer: D
Diff:1
4) Strategicdependenceisfoundin
A) monopolymarkets. B) oligopolisticmarkets.
C) monopolisticcompetitivemarkets. D) perfectcompetitivemarkets.
Answer: B
Diff:1
5) Agivenindustry,Z,issuchthatthe1-firm,2-firm,4-firmand8-firmconcentrationratiosare
thesame.Basedonthis,wecanconcludethatIndustryZis
C) oligopoly. D) puremonopoly.
Answer: D
Diff:2
6) IndustryXcomprisesonlyveryfewlargefirmsengagedinstiffcompetitionwitheachother.
IndustryXcanbestbedescribedas
C) puremonopoly. D) oligopoly.
Answer: D
Diff:1
7) Interdependenceisthekeycharacteristicof
A) perfectcompetition. B) monopolisticcompetition.
Answer: C
Diff:1
8) Amarketsituationinwhichthereareafewfirmsthatrecognizetheirmutualinterdependence
is
A) monopolisticcompetition. B) oligopoly.
C) monopoly. D) regulatedmonopoly.
Answer: B
Diff:1
9) Amarketsituationinwhichthereareveryfewsellersis
A) oligopoly. B) perfectcompetition.
Answer: A
Diff:1
10) Forwhichmarketstructuredoeconomistshavetheleastprecisemodelofpricedetermination?
A) Perfectcompetitionintheshortrun B) Perfectcompetitioninthelongrun
C) Oligopoly D) Monopoly
Answer: C
Diff:1
11) Productdifferentiationexistsin
A) oligopoliesonly.
B) monopoliesonly.
C) monopolisticcompetitiononly.
D) allmarketstructuresexceptperfectcompetition.
Answer: D
Diff:1
12) Otherthingsbeingequal,whichmarketstructurewouldproducetheleastoutputandthe
highestaverageproductprice?
A) Monopoly B) Oligopoly
C) Monopolisticcompetition D) Perfectcompetition
Answer: A
Diff:1
13) Otherthingsbeingequal,whichmarketstructureismostlikelytoyieldthegreatestindustry
long-runeconomicprofit?
A) Monopolisticcompetition B) Oligopoly
C) Monopoly D) Perfectcompetition
Answer: C
Diff:1
14) InwhichmarketstructuredoesafirmhavetheLEASTinfluenceoverthemarketprice?
A) Monopoly B) Monopolisticcompetition
C) Oligopoly D) Perfectcompetition
Answer: D
Diff:1
15) Productdifferentiationalwaysexistsin
Answer: B
Diff:1
16) Firmsfacedownwardslopingdemandcurvesin
A) monopoliesonly.
B) monopoliesandoligopoliesonly.
C) monopoliesandoligopoliesthatcolludeonly.
D) allmarketstructuresexceptperfectcompetition.
Answer: D
Diff:2
17) Ifweobservefirmsearningzeroeconomicprofitsintheshortrun,weknowthat
A) theindustrymustbeperfectlycompetitive.
B) theindustrymustbeeitherperfectlycompetitiveormonopolisticallycompetitive.
C) theremustnotbeanybarrierstoentry.
D) anymarketstructureispossiblesincefirmsunderanymarketstructurecanearnzero
profitsatsometime.
Answer: D
Diff:3
18) Themarketstructureofoligopolyiswhen
A) thereareasmallnumberofinterdependentfirmsthatconstitutetheentiremarket.
B) thereisasingleproducerofaproduct.
C) therearemanyproducersofadifferentiatedproduct.
D) therearemanyproducersofahomogeneousproduct.
Answer: A
Diff:1
19) Themarketstructureofmonopolyexistswhen
C) therearemanyproducersofdifferentiatedproducts.
Answer: B
Diff:1
20) Themarketstructureofmonopolisticcompetitionexistswhen
Answer: C
Diff:1
21) Themarketstructureofperfectcompetitionexistswhen
Answer: D
Diff:1
22) Inwhichmarketstructuresisthefirmabletoearnlong-runeconomicprofits?
A) Perfectcompetitionandmonopolisticcompetition.
B) Monopolisticcompetitionandoligopoly.
C) Oligopolyandmonopoly.
D) Monopolisticcompetition,oligopolyandmonopoly.
Answer: C
Diff:1
23) Inwhichmarketstructuresdoesafirmhaveatleastsomeabilitytosetthemarketprice?
A) Perfectcompetitionandmonopolisticcompetition.
B) Monopolisticcompetitionandoligopoly.
C) Oligopolyandmonopoly.
D) Monopolisticcompetition,oligopolyandmonopoly.
Answer: D
Diff:1
24) Inwhichmarketstructuresdofirmsengageinnonpricecompetition?
A) Perfectcompetitionandmonopolisticcompetition
B) Monopolisticcompetitionandoligopoly
C) Oligopolyandmonopoly
D) Perfectcompetitionandmonopoly
Answer: B
Diff:1
25) Inwhichmarketstructuresdofirmsearnlong-termprofitsofzero?
Answer: A
Diff:1
26) Inwhichmarketstructuresisthereproductdifferentiation?
Answer: B
Diff:1
27) Monopolisticallycompetitivemarketsandoligopoliesaresimilarinthat
A) thenumberoffirmsisidentical.
B) thekinkeddemandcurvecanbeusedtoanalyzethefirmspricingdecisions.
C) thereismutualinterdependenceamongstthefirms.
D) nonpricecompetitionisatoolused.
Answer: D
Diff:2
28) Amarketwithmanysellers,noinfluenceoverprice,nobarrierstoentry,ahomogeneous
product,andanabsenceofnon-pricecompetitionisknownas
Answer: A
Diff:2
29) Amarketwithmanysellers,someinfluenceoverprice,lowbarrierstoentry,adifferentiated
product,andnon-pricecompetitionoftentakingtheformofadvertisingisknownas
Answer: B
Diff:2
30) Amarketwithfewsellers,someinfluenceoverprice,highbarrierstoentry,adifferentiated
product,andnon-pricecompetitionisknownas
Answer: C
Diff:1
31) Amarketwithoneseller,considerableinfluenceoverprice,highbarrierstoentry,a
homogeneousproduct,andnon-pricecompetitiontoallowforpricediscriminationisknownas
Answer: D
Diff:1
32) WhichisFALSEaboutperfectcompetition?
A) Therearenumeroussellers.
B) Marketentryandexitisunrestricted.
C) Thereisnoabilitytosetprice.
D) Thereisconsiderableproductdifferentiation.
Answer: D
Diff:1
33) AllofthefollowingaretrueregardingoligopolyEXCEPT
A) therearefewsellers. B) thereissomeabilitytosetprice.
C) thereisnocompetition. D) entryandexitispartiallyrestricted.
Answer: C
Diff:1
34) WhichofthefollowingisNOTacharacteristicofpuremonopoly?
A) manysellers B) considerablepricesettingability
C) restrictedabilitytoentermarket D) long-runeconomicprofitsarepossible
Answer: A
Diff:1
35) Long-runeconomicprofitsarepossibleunder
A) perfectcompetitionandoligopoly.
B) monopolisticcompetitionandmonopoly.
C) oligopolyandmonopoly.
D) monopolisticcompetitionandoligopoly.
Answer: C
Diff:2
36) Retailtradeisanexampleof
A) perfectcompetition. B) oligopoly.
Answer: D
Diff:1
37) Agricultureisanexampleof
Answer: A
Diff:1
38) Thecollegetextbooksmarketisanexampleof
Answer: B
Diff:1
39) Alocalutilityisanexampleof
Answer: C
Diff:1
40) Unrestrictedentryandexitintothemarketisfoundin
A) perfectcompetitionandmonopolisticcompetition.
B) perfectcompetitionandoligopoly.
C) monopolisticcompetitionandoligopoly.
D) perfectcompetition,monopolisticcompetitionandoligopoly.
Answer: A
Diff:2
Chapter27
RegulationandAntitrustPolicyinaGlobalizedEconomy
27.1FormsofIndustryRegulation
1) U.S.governmentregulationofsocialandeconomicactivity
A) onlybeganafterWorldWarII. B) costslessnowthanitdidinthe1980s.
C) hasincreasedsteadilysince1970. D) isconfinedtoantitrustlaw.
Answer: C
Diff:1
Topic: 27.1FormsofIndustryRegulation
2) TheFoodandDrugAdministration(FDA)isanagencythatwouldenforce
A) socialregulation. B) economicregulation.
C) antitrustlaws. D) pricediscrimination.
Answer: A
Diff:1
3) Thetwobasictypesofgovernmentregulationare
A) regulationofnaturalmonopoliesandregulationofcartels.
B) economicregulationandindustryregulation.
C) socialregulationandlaborlaw.
D) socialregulationandeconomicregulation.
Answer: D
Diff:1
4) TheSecuritiesandExchangeCommissionandtheFederalAviationAdministrationare
examplesofagenciesengagedin
A) theregulationofnaturalmonopolies.
B) theregulationofnonmonopolisticindustries.
C) socialregulation.
D) healthandsafetyregulation.
Answer: B
Diff:1
Chapter27RegulationandAntitrustPolicyinaGlobalizedEconomy775
5) WhichofthefollowingfederalagenciesisNOTengagedinsocialregulation?
A) EnvironmentalProtectionAgency B) FederalTradeCommission
C) FoodandDrugAdministration D) FederalDepositInsuranceCorporation
Answer: D
Diff:1
6) WhichofthefollowingfederalagenciesisNOTengagedineconomicregulation?
A) TheFederalReserve B) FederalAviationAdministration
C) FoodandDrugAdministration D) FederalDepositInsuranceCorporation
Answer: C
Diff:1
7) Whichtypeofregulationappliestoallfirmsintheeconomy,asopposedtoonlycovering
specificindustries?
A) Economicregulation B) Socialregulation
C) Rateregulation D) Statutoryregulation
Answer: B
Diff:1
8) CommonwealthEdisonistheonlyproviderofelectricitytomanyhouseholdsintheChicago
area.CommonwealthEdisonisregulatedbythegovernment.Thistypeofregulationisknown
as
A) theFederalRegister. B) socialregulation.
C) themarketsharetest. D) economicregulation.
Answer: D
Diff:2
9) Theregulationofthepriceschargedbyinsurancecompaniesisknownas
Answer: D
Diff:2
10) TheFederalTradeCommission(FTC)isaregulatoryagencythatisresponsibleforpreventing
firmsfromengaginginmisleadingadvertising.Thistypeofregulationisknownas
Answer: B
Diff:2
11) Whichofthefollowingprotectspeoplefromincompetentorunscrupulousproducers?
A) TheFederalRegister B) Socialregulation
C) Themarketsharetest D) Economicregulation
Answer: B
Diff:2
12) AccordingtoOSHAstandards,theairinthebuildingthatJohnworksinisunsafe.Thetypeof
regulationthatOSHAengagesinisknownas
Answer: B
Diff:2
13) Oneofthebasicdifferencesbetweensocialandeconomicregulationsisthat
A) economicregulationsonlyapplytofinancialinstitutionswhilesocialregulationsapplyto
agreatervarietyofinstitutions.
B) socialregulationsonlyapplytonon-profitorganizationswhileeconomicregulations
applyonlytofor-profitorganizations.
C) economicregulationscoveronlyparticularindustrieswhilesocialregulationsapplytoall
firmsintheeconomy.
D) economicregulationsfocusonthebankingindustrywhilesocialregulationsfocuson
monopolies.
Answer: C
Diff:3
14) Onekeypurposeofeconomicregulationis
A) toforceafirmtoproduceatthepointatwhichmarginalcostequalsmarginalrevenue.
B) tocontrolthequalityofserviceprovidedbyamonopolist.
C) tocontrolthepricethatregulatedenterprisesareallowedtocharge.
D) tofocusontheimpactofproductionontheenvironmentandsociety,theworking
conditionsunderwhichgoodsandservicesareproduced,andsometimesthephysical
attributesofgoods.
Answer: C
Diff:1
15) Whichofthefollowingfederalagenciesisengagedinsocialregulation?
A) EqualEmploymentOpportunityCommission
B) OfficeoftheComptrolleroftheCurrency
C) TheSecuritiesandExchangeCommission
D) FederalDepositInsuranceCorporation
Answer: A
Diff:1
16) Whichofthefollowingfederalagenciesisengagedineconomicregulation?
A) OccupationalSafetyandHealthAdministration
B) FederalMotorCarrierSafetyAdministration
C) FoodandDrugAdministration
D) ConsumerProductSafetyCommission
Answer: B
Diff:1
17) CabdriversoperatingfromJFKAirporttotheCityofNewYorklegallymustchargeaspecific
fare.Thisisanexampleof
A) socialregulation. B) economicregulation.
C) themarketsharetest. D) therateofreturntest.
Answer: B
Diff:1
18) Thegoalsofrateregulationhaveincludedthepreventionof
A) monopolyprofits. B) oligopolisticpricing.
C) marginalcostpricing. D) averagecostpricing.
Answer: A
Diff:2
19) Adifferencebetweeneconomicregulationandsocialregulationisthat
A) theformertendstoaffectthepricesatwhichproductsaresoldandthelatterdoesnot.
B) theformertendstoaffecttheprofitsoffirmsandthelatterdoesnot.
C) theformertendstobespecifictoanindustryandthelattertendstoaffectfirmsinall
industries.
D) theformertendstobedoneatthestatelevelandthelatteratthefederallevel.
Answer: C
Diff:2
20) Thepurposeofsocialregulationis
A) toforceafirmtoproduceatthepointwheremarginalcostequalsmarginalrevenue.
B) tocontrolthequalityofserviceprovidedbyamonopolist.
C) tocontrolthepricethatregulatedenterprisesareallowedtocharge.
D) tofocusontheimpactofproductionontheenvironmentandsociety,theworking
conditionsunderwhichgoodsandservicesareproduced,andsometimesthephysical
attributesofgoods.
Answer: D
Diff:1
21) Themajorgoalofsocialregulationis
A) abetterqualityoflifethroughalesspollutedenvironment,betterworkingconditions,and
saferandbetterproducts.
B) tomakesurethatfirmsarenotearningmonopolyprofits.
C) tomakesurethatpricesarekeptlowenoughsothateverypersoncanpurchasethegood.
D) tomakesurethatthefirmproducesatthesociallyoptimalpointofproduction.
Answer: A
Diff:1
22) AllofthefollowingareregulatoryagenciesEXCEPT
A) theNationalRifleAssociation.
B) theEnvironmentalProtectionAgency.
C) theFoodandDrugAdministration.
D) theOccupationalSafetyandHealthAdministration.
Answer: A
Diff:1
23) Thisagencyisresponsibleforpreventingbusinessesfromengaginginmisleadingadvertising,
unfairtradepractices,andmonopolisticactions,aswellasforprotectingconsumerrights.
A) EnvironmentalProtectionAgency
B) FoodandDrugAdministration
C) EqualEmploymentOpportunityCommission
D) FederalTradeCommission
Answer: D
Diff:1
24) Thisagencyisresponsibleforregulatingthequalityandsafetyoffoods,healthandmedical
products,pharmaceuticals,cosmetics,andanimalfeed.
Answer: B
Diff:1
25) Thisagencyisresponsibleforinvestigatingcomplaintsofdiscriminationbasedonrace,religion,
sexorageinhiring,promotion,firing,wages,testing,andallotherconditionsofemployment.
Answer: C
Diff:1
26) Thisagencydevelopsandenforcesenvironmentalstandardsforair,water,toxicwaste,and
noise.
B) ConsumerProductSafetyCommission
D) OccupationalSafetyandHealthAdministration
Answer: A
Diff:1
27) Thisagencyregulatesworkplacesafetyandhealthconditions.
Answer: D
Diff:1
28) Thisagencyisresponsibleforprotectingconsumersfromproductsposingfire,electrical,
chemical,ormechanicalhazardsordangerstochildren.
Answer: B
Diff:1
A) monopolyandoligopolyregulation. B) laborandenvironmentalregulation.
C) federalandstateindustrialregulation. D) economicandsocialregulation.
Answer: D
Diff:1
A) economicregulationandmonopolyregulation.
B) economicandsocialregulation.
C) socialregulationandhealthandsafetyregulation.
D) socialregulationandfinancialregulation.
Answer: B
Diff:1
31) Whileeconomicregulationappliesto________industries,socialregulationappliesto________
firms.
A) particular;individual B) particular;all
C) all;individual D) utility;healthcare
Answer: B
Diff:1
32) Whichofthestatementsbestdescribesthedifferencebetweeneconomicregulationandsocial
regulation?
A) Therearenosignificantdifferencesbetweeneconomicandsocialregulation,social
regulationisamoremodernwayofregulatinganeconomy.
B) Economicregulationfocusesonoutputandprice;socialregulationfocusesonimproving
thequalityoflife.
C) Socialregulationfocusesonoutputandprice;economicregulationfocusesonqualityof
lifeissues.
D) Socialregulationtargetsindustriesliketransportation,whileeconomicregulationtargets
utilities.
Answer: B
Diff:1
33) Since1970,federalexpendituresbyregulatoryagencieshave
A) remainedconstant. B) decreasedslightly.
C) increaseddramatically. D) increasedslightly.
Answer: C
Diff:2
34) AllofthefollowingareformsofsocialregulationEXCEPT
A) theFoodandDrugAdministrationregulatingthequalityofdrugs.
B) thePublicUtilityCommissionregulatingthepriceoftelephoneservice.
C) theEnvironmentalProtectionAssociationregulatingautomobileemissions.
D) theOccupationalSafetyandHealthAdministrationregulatingworkplacesafety.
Answer: B
Diff:2
35) RegulationimposedbysuchorganizationsastheFoodandDrugAdministrationorthe
EnvironmentalProtectionAgencyseekingtoprotectthewelfareofpeopleinournationis
referredtoas
A) moralregulation. B) naturalregulation.
C) rate-of-returnregulation. D) socialregulation.
Answer: D
Diff:2
36) Thefederalregulatoryagencywhosemissionistoregulateworkplacehealthandsafetyisthe
A) AFL-CIO. B) FTC. C) OSHA. D) SEC.
Answer: C
Diff:2
37) Whichofthefollowingisconcernedwithsocialregulation?
A) FederalReserveBoard B) ShermanCommission
C) FoodandDrugAdministration D) BoardofEducation
Answer: C
Diff:1
38) Anagencythatregulatesproductmarketsisthe
A) EqualEmploymentOpportunityCommission.
B) EnvironmentalProtectionAgency.
C) FederalTradeCommission.
D) OccupationalSafetyandHealthAdministration.
Answer: C
Diff:1
39) Anagencythatregulateslabormarketsisthe
A) EqualEmploymentOpportunityCommission.
B) EnvironmentalProtectionAgency.
C) FederalTradeCommission.
D) ConsumerProductSafetyCommission.
Answer: A
Diff:1
40) SocialregulationisfocusedonallofthefollowingEXCEPT
A) theimpactofproductionontheenvironmentandsociety.
B) betterworkingconditions,andsaferandbetterproducts.
C) abetterqualityoflifethroughalesspollutedenvironment.
D) ensuringcostsareminimizedandbenefitsaremaximized.
Answer: D
Diff:2
41) TheFederalRegister
A) itemizesstateandlocalgovernmentspending.
B) isusedtotrackimmigration.
C) publishesallthenewfederalregulatoryrules.
D) hasdecreasedinsize.
Answer: C
Diff:1
42) Financialmarketsareregulatedby
A) theSecuritiesandExchangeCommission.
B) theStockandBondExchangeCommission.
C) theSecurityandProtectionCommission.
D) theStockandExchangeCommission.
Answer: A
Diff:2
43) Whatisthemaindifferencebetweeneconomicregulationandsocialregulation?
Answer: Economicregulationinvolvesonlyparticularindustries,includingpoliciesaimingat
controllingpricesorinfluencingthecharacteristicsofspecificproducts.Incontrast,social
regulationappliestoallfirmsintheeconomyandaimsatimprovingthequalityoflifeby,
forexample,regulatingproductsafety,advertisingandenvironmentaleffects.
Diff:2
27.2RegulatingNaturalMonopolies
1) Intheabovefigure,ifthisnaturalmonopolistwereforcedtousemarginalcostpricing,itwould
produce
A) atQ1 outputrate. B) atQ2 outputrate.
C) atQ3 outputrate. D) pasttheQ3 outputrate.
Answer: C
Diff:1
Topic: 27.2RegulatingNaturalMonopolies
2) Intheabovefigure,ifthisnaturalmonopolistwereunregulated,theprofitmaximizingfirm
wouldproduce
Answer: A
Diff:1
3) Intheabovefigure,ifthisnaturalmonopolistwereregulatedandallowedtoearnafairrateof
return,itwouldproduce
Answer: B
Diff:1
4) Intheabovefigure,ifthisnaturalmonopolistwereforcedtousemarginalcostpricing,itwould
selltheproductattheprice________.
A) A B) C C) E D) F
Answer: D
Diff:1
5) Intheabovefigure,ifthisnaturalmonopolistwereunregulated,theprofitmaximizingfirm
wouldselltheproductattheprice________.
A) A B) B C) C D) F
Answer: A
Diff:1
6) Intheabovefigure,ifthisnaturalmonopolistwereregulatedandallowedtoearnafairrateof
return,itwouldselltheproductattheprice________.
A) A B) C C) B D) F
Answer: B
Diff:1
7) Ifregulatorsforceanaturalmonopolytopriceasaperfectlycompetitivefirmwould,thenatural
monopolist
A) willearnhighereconomicprofits.
B) willearnaneconomicloss.
C) willexpanditsoutput.
D) willexperienceariseinlong-termaveragecosts.
Answer: B
Diff:1
8) Ifapublicservicecommissionrequiresanaturalmonopolytosetitspriceequaltothelong-run
marginalcost,thiswillresultin
A) excessiveeconomicprofitstothemonopoly.
B) normaleconomicprofitstothemonopoly.
C) lossestothemonopoly.
D) eithereconomicprofitsorlosses,dependingontheefficiencyofthemonopoly.
Answer: C
Diff:1
9) Supposethataregulatoryagencyhasimposedmarginalcostpricingonanaturalmonopolist.
Weexpectthat
A) thefirmwillearnonlyanormalprofit.
B) thefirmsaveragetotalcostofproductionisrisingovertherelevantrangeofproduction.
C) thefirmwillearneconomicprofits.
D) thefirmwilleventuallygooutofbusiness.
Answer: D
Diff:1
10) Regulatorsusuallyencouragenaturalmonopoliststoengagein
A) marginalcostpricing.
B) averagecostpricing.
C) marginalcostpricing,withsubsidiesfromthegovernmentoffsettingthelosses.
D) inefficientpricing.
Answer: B
Diff:1
11) Inanaturalmonopolysituation,
A) therearelargeeconomiesofscalerelativetodemand.
B) thefirmhasanupwardslopingaveragecostcurve.
C) producerstrytodifferentiatetheirproductwithadvertising.
D) thereisnoneedforgovernmentregulation.
Answer: A
Diff:1
12) Inaveragecostpricing,thenaturalmonopolywouldhavetosetpriceequalto
A) AFC. B) AVC. C) ATC. D) MC.
Answer: C
Diff:1
13) Inmarginalcostpricing,thenaturalmonopolywouldhavetosetpriceequalto
A) AFC. B) AVC. C) ATC. D) MC.
Answer: D
Diff:1
14) Anaturalmonopolyowesitsexistenceto
A) controlofakeyinput.
B) persistentlydeclininglong-runaveragecostsasscaleincreases.
C) patents.
D) increasingmarginalreturnsandtheabilitytoobtainquantitydiscountsfromsuppliers.
Answer: B
Diff:1
15) Afirmthathastakenadvantageofeconomiesofscaleandexpandedtobecometheonly
producerinthemarketis
A) acartel. B) anaturalmonopoly.
C) amonopolisticcompetitor. D) anoligopolist.
Answer: B
Diff:1
16) Foranaturalmonopoly,long-runaveragecosts
A) fallasoutputincreases. B) riseasoutputincreases.
C) fallasoutputfalls. D) riseasoutputfalls.
Answer: A
Diff:2
17) Thepricechargedbyamonopolistissociallyinefficientbecausetheprice
A) exceedsthetruemarginalcostoftheresourcesused.
B) islessthantheopportunitycostoftheresourcesused.
C) putsthemonopolistintoahighertaxbracket.
D) istoolow.
Answer: A
Diff:1
18) Anunregulatednaturalmonopolistwouldproducetothepointatwhich
A) P=AC. B) MR= AC. C) MR= MC. D) P=MR.
Answer: C
Diff:1
19) Aregulatednaturalmonopolistallowedtoearnafairrateofreturnwouldproducetothe
pointatwhich
A) P=LAC. B) MR= LAC. C) MR= MC. D) P=MR.
Answer: A
Diff:1
20) Withoutanyregulation,thenaturalmonopolistwill
A) notproduceanyoutput.
B) producetothepointatwhichP= ATC.
C) producelessoutputthanitwouldiftheindustrywaspurelycompetitive.
D) haveanupward-shiftingaveragecostcurve.
Answer: C
Diff:1
21) Anaturalmonopolythatisnotregulatedwillchoosetoproduceatthe
A) minimumpointofthelong-runaveragecostcurve.
B) pointatwhichmarginalcostisaboveaveragetotalcost.
C) pointatwhichthedemandcurveintersectsthelong -runaveragecostcurve.
D) pointatwhichmarginalrevenueequalsmarginalcost.
Answer: D
Diff:2
22) Intheabovefigure,whichofthefollowingstatementsisFALSEifthefirmisoperatingatoutput
levelQ2 ?
A) Theoutputisequivalenttoanunregulatedmonopolist.
B) Economicprofitsarepositive.
C) ThepriceislowerthanatanequivalentfirmforcedbyregulatorstochargeATCpricing.
D) Averagecostswouldbeloweredbyexpandingoutput.
Answer: C
Diff:1
23) Onegoalofrate-of-returnregulationisthepreventionof
A) freemarketentry. B) positiveeconomicprofits.
C) poorqualityservice. D) environmentaldegradation.
Answer: B
Diff:2
24) Theprimarypurposeofeconomicregulationofanindustryisto
A) controlthepriceschargedbytheregulatedindustry.
B) increasetaxesacrosstheboard.
C) reduceoutput.
D) controlhiringandfiringwithintheindustry.
Answer: A
Diff:1
25) Ifregulatorsdisallowpriceincreasesrequestedbyanaturalmonopolythatiscurrentlyearning
aneconomicloss,qualityofservicewill
A) increaserapidly. B) likelyfall.
C) remainunchanged. D) noneoftheabove.
Answer: B
Diff:1
26) WhichofthefollowingstatementsregardingeconomicregulationisTRUE?
A) Economicregulationhasfailedbyinsistingthatfirmsmustbeallowedtoearnanormal
rateofreturn.
B) Rate-of-returnregulationhasbeenmuchmoreeffectivethancost-of-serviceregulation.
C) Economicregulationdealsonlywithratesofreturn,andnotwithprices.
D) Economicregulationdealsmainlywithpricesfirmscharge,butfirmscanaltertheirreturn
byalteringqualityofservice,effectivelyraisingthepriceperconstant-quality-unit.
Answer: D
Diff:3
27) Withaveragecostpricing,themonopolist
A) earnsnoaccountingprofit.
B) produceswhereP=MC.
C) earnsanormalrateofreturnforitsshareholders.
D) doesnotcoveropportunitycosts.
Answer: C
Diff:1
28) Whenpromotingaveragecostpricing,regulators
A) includewhattheyconsidertobeanormalrateofreturnoninvestment.
B) encouragefirmstoproduceattheoutputlevelwherepriceequalsmarginalcost.
C) failtoconsiderareturntoinvestors,soregulatedfirmsoftenhaveahardtimeraising
investmentfunds.
D) inflatecostssomuchthatpriceendsupaslargeaswouldprevailunderunregulated
monopoly.
Answer: A
Diff:2
29) Regulatorsemployaveragecostpricinginsteadofmarginalcostpricingbecause
A) averagecostpricingismoreefficientthanmarginalcostpricing.
B) pricemustbehighenoughtocoverallopportunitycostsifthefirmistostayinbusiness.
C) thepriceislowerwithaveragecostpricing.
D) averagecostpricingissimplertocomputethanmarginalcostpricing.
Answer: B
Diff:3
30) Anaturalmonopolyexistswhen
A) controlofakeyinputleadstoasingle-firmindustry.
B) increasingmarginalreturnsandtheabilitytoobtainquantitydiscountsfromsuppliers
leadstoasingle-firmindustry.
C) economiesoflarge-scaleproductionaresubstantial,leadingtoasingle-firmindustry.
D) thegovernmentrestrictsentrythatleadstoasingle-firmindustry.
Answer: C
Diff:1
31) Whenproductionischaracterizedbypersistentlydeclininglong-runaveragecostsasoutput
increases,
A) thecostsofproductionaregreaterwhencompetitionexiststhanwhenasinglefirm
producesagood.
B) itisimpossiblefortwofirmstocompeteinthemarket.
C) thecostsarelowerifasinglefirmexists,andevenifthefirmisunregulated,pricewillstill
belowerwithasinglefirm.
D) thereisnoneedforthegovernmenttolimitcompetitionbylicensingrequirements.
Answer: A
Diff:2
32) Anunregulatednaturalmonopolistwillproducethequantityatwhich
A) averagetotalcostsareminimized.
B) marginalcostequalsmarginalrevenue.
C) marginalcostequalsthelongrunaveragecostcurve.
D) thelong-runaveragecostcurveintersectsthedemandcurve.
Answer: B
Diff:2
33) Whichofthefollowingstatementsaboutnaturalmonopolyiscorrect?
A) Governmentsregulatenaturalmonopoliesinordertoensurethatcostsofproductionare
minimized.
B) Governmentsregulatenaturalmonopoliesinordertoensurethatthefirmearnsanormal
profit.
C) Governmentsregulatenaturalmonopoliesinordertopreventthemfrommakingprofits.
D) Governmentsregulatenaturalmonopoliesinordertokeeptheirworkersfromearning
wagesthataretoohigh.
Answer: B
Diff:2
34) Ifanaturalmonopolistisunregulated,then
A) themonopolywillproduceefficientlyfromsocietyspointofview.
B) themonopolywillproduceinefficientlyfromsocietyspointofview.
C) themonopolistwillbeearningjustanormalrateofreturnoninvestment.
D) themonopolistwilldeterminetheprofitmaximizingquantitybyequatingmarginalcostto
thedemandcurve.
Answer: B
Diff:1
35) Thereasonanunregulatednaturalmonopolistwillproduceataneconomicallyinefficient
quantityis
A) duetothefactthatthemonopolistwillequatemarginalcostwithpricetodeterminethe
outputlevel.
B) duetothefactthatthemonopolistwillequateaveragetotalcostwithpricetodetermine
theoutputlevel.
C) thatthepricedoesnotequalthetruemarginalcostofproducingthegood.
D) thatthemonopolistwillproduceaquantitygreaterthantheminimumoftheaveragetotal
costcurve.
Answer: C
Diff:1
36) Forafirmtobeeconomicallyefficientfromsocietyspointofview,itshouldproducetothe
pointatwhich
A) marginalcostequalsmarginalrevenue. B) marginalcostequalsaveragetotalcost.
C) marginalcostequalsprice. D) averagetotalcostequalsprice.
Answer: C
Diff:1
37) Refertotheabovefigure.Anunregulatednaturalmonopolistwouldchoose
A) outputrateofQ1 andpriceP2 . B) outputrateQ1 andpriceP5 .
C) outputrateQ3 andpriceP3 . D) outputrateQ4 andpriceP1 .
Answer: B
Diff:2
38) Refertotheabovefigure.Ifthegovernmentrequiresthenaturalmonopolisttochargethe
efficientprice,itwillchargeprice
A) P5 andsellQ1 units. B) P2 andsellQ1 units.
C) P3 andsellQ3 units. D) P1 andsellQ4 units.
Answer: D
Diff:3
39) Refertotheabovefigure.Ifthegovernmentuses rate-of-returnregulationforthenatural

monopolist,thefirmwillchargeprice
A) P5 andsellQ1 units. B) P2 andsellQ1 units.
C) P3 andsellQ3 units. D) P1 andsellQ4 units.
Answer: C
Diff:3
40) Refertotheabovefigure.Supposethegovernmentrequiresthenaturalmonopolisttochargethe
efficientprice.Thenprofitsforthefirmwillbe
A) zero. B) lossesequaltoQ4 timesdistancef-g.
C) lossesequaltoQ3 timesdistanced-e. D) profitsequaltoQ1 timesdistancea-b.
Answer: B
Diff:2
41) Refertotheabovefigure.Anunregulatednaturalmonopolistsprofitswillbe
A) profitsequaltoQ1 timesdistancea-c. B) lossesequaltoQ4 timesdistancef-g.
C) lossesequaltoQ3 timesdistanced-e. D) profitsequaltoQ1 timesdistancea-b.
Answer: D
Diff:2
42) Refertotheabovefigure.Regulatorscannotforcenaturalmonopoliestooperateinthelongrun
ataloss.Therefore,theyusuallyrequirethefirmstochargeapriceequalto
A) marginalcost,whichisP1 . B) marginalcost,whichisP2 .
C) averagecost,whichisP3 . D) averagecost,whichisP4 .
Answer: C
Diff:2
43) Refertotheabovefigure.Whatarethepriceandquantityifthismonopolistisrequiredtouse
averagecostpricing?
A) P5 ,Q1 B) P3 ,Q3 C) P2 ,Q1 D) P1 ,Q4
Answer: B
Diff:2
44) Refertotheabovefigure.Fromthestandpointofsociety,theoptimaloutputis
A) Q1 B) Q2 C) Q3 D) Q4
Answer: D
Diff:2
45) Refertotheabovefigure.Fromthestandpointofsociety,theoptimalpriceis
A) P1 B) P2 C) P3 D) P5
Answer: A
Diff:2
46) Ifgovernmentregulatorsmakethenaturalmonopolistsetpriceequaltomarginalcost
A) thenaturalmonopolistwillmakezeroeconomicprofits.
B) thenaturalmonopolistwillmakenormalprofits.
C) thenaturalmonopolistwillmakelossesandgooutofbusiness.
D) thenaturalmonopolistwillmakepositiveeconomicprofitslargerthanifitwasnt
regulatedatall.
Answer: C
Diff:2
47) Whenregulatinganaturalmonopoly,averagecostpricingisusuallyusedratherthanmarginal
costpricingbecause
A) averagecostpricingallowsthefirmtoearnanormalrateofreturnoninvestment,while
marginalcostpricingleadstoeconomiclosses.
B) averagecostpricingismoreeconomicallyefficientthanmarginalcostpricing.
C) averagecostpricingleadstolowerprofitsthanmarginalcostpricing.
D) averagecostpricingleadstoalowermarketpricethanmarginalcostpricing.
Answer: A
Diff:1
48) Underrate-of-returnregulation,naturalmonopoliesmustuse
A) marginalcostpricing. B) averagecostpricing.
C) efficientpricing. D) monopolypricing.
Answer: B
Diff:1
49) Underrate-of-returnregulation,averagecostpricing
A) isinflatedsothefirmcanmakeeconomicprofits.
B) includesvariablecostsbutnotacostforcapital.
C) includeswhattheyconsidertobeafairrateofreturnoninvestment.
D) includesacostforcapitalthatgeneratesanabovenormalrateofreturn.
Answer: C
Diff:2
50) Cost-of-service-regulationsetspricesbyconsidering
A) theactualvariablecostofprovidingtheservicetothecustomer.
B) theactualtotalcostofprovidingtheservicetothecustomer.
C) theactualaveragecostofprovidingtheservicetothecustomer.
D) theactualmarginalcostofprovidingtheservicetothecustomer.
Answer: C
Diff:2
51) Underrate-of-returnregulation,thepriceissetsothat
A) priceequalsthemarginalcostofproduction.
B) thefirmearnsapositiveeconomicprofit.
C) thefirmearnsamonopolyprofit.
D) thefirmearnsanormalrateofreturnoninvestment.
Answer: D
Diff:1
52) Whichofthefollowingbestdescribesthedifferencebetweencost-of-serviceregulationand
rate-of-returnregulation?
A) Costsdeterminepricesincost-of-serviceregulationandpricesdeterminecostsin
rate-of-returnregulation.
B) Costsdeterminepricesincost-of-serviceregulationandpricesaresetinrate-of-return
regulationsothefirmcanmakeanormalrateofreturn.
C) Variablecostsdeterminepricesincost-of-serviceregulationandpricesaresetin
rate-of-returnregulationsothefirmcanmakeaneconomicprofit.
D) Regulatorsdeterminepricesincost-of-serviceregulationandmarketforcesdetermine
pricesinrate-of-returnregulation.
Answer: B
Diff:3
53) Usetheabovefigure.Aregulatorycommissionsetsthemaximumpricethismonopolistcan
chargeatP 1 .Ifthismonopolistweretoproduce,it
A) wouldproduceQ4 outputandgeneratelosses.
B) wouldproduceQ4 outputandgenerateprofits.
C) wouldproduceQ2 outputandgeneratelosses.
D) wouldproduceQ2 outputandgenerateprofits.
Answer: A
Diff:2
54) Usetheabovefigure.Ifacommissionregulatestheabovemonopolyusingfair -return(average

costpricing),thentheindustrysoutputwillbe________andtheproductspricewillbe
________.
A) Q1 ;P1 B) Q2 ;P3 C) Q3 ;P2 D) Q4 ;P1
Answer: C
Diff:2
55) Usetheabovefigure.Ifacommissionregulatestheabovemonopolyusingmarginalcost
pricing,thentheindustrysoutputwillbe________andtheproductspricewillbe________.
A) Q2 ;P1 B) Q2 ;P3 C) Q3 ;P2 D) Q4 ;P1
Answer: D
Diff:2
56) Usetheabovefigure.Ifthismonopolistwasnotregulated,theprofit -maximizingquantityand

pricewouldbe
A) Q2andP1. B) Q2andP3. C) Q3andP2. D) Q4andP1.
Answer: B
Diff:2
57) Usetheabovefigure.Supposethataregulatoryagencyrequiresthisnaturalmonopolistto
engageinmarginalcostpricing.Thiswouldleadto
A) losses,whichwoulddrivethemonopolistoutofbusinessinthelongrun.
B) profits,whichwouldencouragenewproducerstoentertheindustryinthelongrun.
C) profits,butnewfirmscannotentertheindustryinthelongrunduetohighbarriersto
entry.
D) losses,whichwouldencouragethemonopolisttolowercostsinthelongrun.
Answer: A
Diff:3
58) Intheabovefigure,whatwouldbetheprofit-maximizingoutputandpriceforthisnatural
monopolist?
A) 1,200;$3 B) 900;$7 C) 700;$7 D) 700;$10
Answer: D
Diff:2
59) Intheabovefigure,whatwouldbetheprofitorlossattheprofit-maximizingoutputforthis
naturalmonopolist?
A) -$300 B) $2,700 C) $2,100 D) -$1,200
Answer: C
Diff:3
60) Intheabovefigure,ifthemonopolistengagesinmarginalcostpricing,whatareitsoutputand
price?
A) 1,200,$3 B) 900,$7 C) 700,$7 D) 700,$10
Answer: A
Diff:2
61) Intheabovefigure,whatwouldbetheprofitorlossatthemarginalcostpricingpointforthis
naturalmonopolist?
A) -$300 B) $2,700 C) $2,100 D) -$1,200
Answer: D
Diff:2
62) Intheabovefigure,whatwillbetheoutputlevelproducedifaveragecostpricingisused?
A) 1,200 B) 900
C) 700 D) somewherebetween900and1,200
Answer: D
Diff:2
63) Naturalmonopolies
A) haveonelowest-costproducerinanindustry.
B) arenotregulated.
C) havelong-runaveragecostsequaltozero.
D) donotexperienceeconomiesofscale.
Answer: A
Diff:1
64) WhichofthefollowingistheBESTexampleofanaturalmonopoly?
A) bookpublisher B) electricutility
C) tobaccoproductscompany D) airline
Answer: B
Diff:2
65) IfaregulatorforcedanaturalmonopolisttosetP= MC,

A) themonopolistwouldearneconomicprofits.
B) themonopolistwouldsuffereconomiclosses.
C) themonopolistwouldbreakeven.
D) themonopolistwouldearnmonopolisticprofits.
Answer: B
Diff:2
66) Whenaregulatorallowsamonopolisttosetitspriceequaltolong-runaveragecost,the
regulatorispracticing
A) marginalcostpricing. B) operatingcostpricing.
C) averagecostpricing. D) optimalcostpricing.
Answer: C
Diff:2
67) Thefollowingtabledepictsthecostanddemandstructureanaturalmonopolyfaces.Provided
thatthefirmoperatesasamonopolist,whatisthepricechargedandquantityproducedinorder
tomaximizeprofits?
Total Marginal Total Marginal

Quantity Price($) Revenue Revenue Cost Cost
0 1,000 0 0 0 0
1 900 900 900 800 800
2 800 1,600 700 1,400 600
3 700 2,100 500 1,900 500
4 600 2,400 300 2,400 500
5 500 2,500 100 2,800 400
6 400 2,400 100 3,200 400
A) pricechargedof$900andquantityproducedof1
B) pricechargedof$800andquantityproducedof2
C) pricechargedof$700andquantityproducedof3
D) pricechargedof$600andquantityproducedof4
Answer: C
Diff:2
68) Regulationofanaturalmonopolythatforcesittopriceandproduceasifitwereacompetitive
firmresultsin
A) themarketbeinginstantlycompetitive. B) higherprofitsforthemonopoly.
C) economiclossesforthemonopoly. D) ahighlyunstablemarketplace.
Answer: C
Diff:2
69) Usingthefigureasaguide,whichofthefollowingisFALSEwithrespecttoprofitmaximization
andthemonopolist?
A) Amonopolist(likeanyotherfirm)willselectanoutputrateatwhichmarginalrevenueis
equaltomarginalcost,attheintersectionofthemarginalrevenuecurveandthemarginal
costcurve.
B) ThemonopolistwillproducequantityQm andchargeapriceofPm .
C) Whencomparedtoacompetitivesituation,consumerspayahigherpricetothe
monopolist,andconsequentlyareforcedtopurchasemoreofaproductaspricevaries
directlywithquantitydemanded.
D) Profitsarethepositivedifferencebetweentotalrevenuesandtotalcosts.
Answer: C
Diff:2
70) Regulationofmonopoliesthatallowspricestoreflectonlytheactualcostofproductionandno
monopolyprofitsisreferredtoas
A) cost-of-serviceregulation. B) rate-of-returnregulation.
C) service-opportunityregulation. D) naturalregulation.
Answer: A
Diff:2
71) Thetypeofregulationthatattemptstokeeppricesandtherateofreturninanindustryata
competitivelevelisreferredtoas
C) service-opportunityregulation. D) naturalregulation.
Answer: B
Diff:2
72) Regulationthatisbasedonallowingpricestoreflectonlytheactualoperatingcostof
productionisknownas
A) averagecostregulation. B) marginalcostregulation.
C) rate-of-returnregulation. D) cost-of-serviceregulation.
Answer: D
Diff:1
73) Regulationthatisbaseduponthecostofprovidingthegoodorserviceisknownas
A) rate-of-returnregulation. B) cost-of-serviceregulation.
C) socialregulation. D) deregulation.
Answer: B
Diff:1
74) Regulationthatkeepstherateofreturnintheindustrycompetitiveisknownas
A) rate-of-returnregulation. B) cost-of-serviceregulation.
C) socialregulation. D) deregulation.
Answer: A
Diff:1
75) WhichofthefollowingisNOTanobjectiveofeconomicregulation?
A) toregulatethepricesenterprisesareallowedtocharge
B) tofixpricessothattheyareneverallowedtorise
C) tokeepratesofreturninanindustryatacompetitivelevel
D) topreventmonopolyprofits
Answer: B
Diff:1
76) Intheabovefigure,aregulationrequiringaveragecostpricingwouldforcethefirmtoproduce
atoutputlevel
A) Q1 . B) Q2 . C) Q3 . D) Q4 .
Answer: D
Diff:1
77) Intheabovefigure,anunregulatednaturalmonopolistwillproduceoutputlevel
A) Q1 . B) Q2 . C) Q3 . D) Q4 .
Answer: B
Diff:1
78) Cost-of-serviceregulationallowsregulatedcompaniestochargepricesthat
A) reflectthecostofregulatingtheindustry,plusthemarginalcostoftheproduct.
B) allowmonopolyprofitstotheproducer.
C) reflecttheactualaveragecostofprovidingtheservicestothecustomer.
D) aredeterminedbycompetitioninothergeographicmarkets.
Answer: C
Diff:2
79) Thedifferencebetweencost-of-serviceregulationandrate-of-returnregulationisthat
A) theformersetspricesbasedonactualcosts,andthelatterfocusesonsettingpricessuch
thatthefirmearnsanormalrateofreturn.
B) thelattersetspricesfirst,andthenthefirmmustkeepcostsinlineifitwantstoearna
profit,andtheformersetspricehighenoughtocovercosts.
C) theformerusesmarginalcostpricingandthelatterusesaveragecostpricing.
D) theformerusesaveragecostpricingandthelatterusesmarginalcostpricing.
Answer: A
Diff:3
80) OnetypeofeconomicregulationoftenusedintheUnitedStatesbyvariouspublicutility
commissionsallowspricestoreflectonlytheactualcostofproductionandnomonopolyprofits.
Thistypeofeconomicregulationisknownas
A) rate-of-returnregulation.
B) cost-of-serviceregulation.
C) priceperconstant-quality-unitregulation.
D) creativeresponseregulation.
Answer: B
Diff:1
81) Whatistheproblemwithmarginalcostpricinginthenaturalmonopolysituation?Howdo
regulatoryagenciesintheUnitedStatesusuallyhandletheproblem?
Answer: Ifthefirmisanaturalmonopoly,thenlong-runaveragecostsaredownwardsloping
overtheentirerangeofdemand,whichimpliesmarginalcostliesbelowaveragecost.If
priceequalsmarginalcost,pricewillbebelowaveragecostandthefirmwillearn
economiclosses.Inthelongrun,itwillgooutofbusiness,somarginalcostpricingisnot
feasible.Mostregulatoryagenciesstriveforaveragecostpricingsothattheowners
receiveanormalrateofreturnoninvestment.
Diff:2
82) Whydogovernmentregulatorsnotenforcemarginalcostpricingfornaturalmonopolies?What
arethecommonregulatorysolutions?
Answer: Ifgovernmentregulatorsenforcemarginalcostpricingfornaturalmonopolies,thenthe
firmswillfacelossesandeventuallygooutofbusiness.Instead,thecommonregulatory
solutionsincludeallowingfirmstochargeapricethatcoverstheaveragecostof
productionortosetapricethatensureanormalreturnoninvestment.
Diff:2
83) Usingagraph,showtheprice-outputcombinationofanaturalmonopolywithoutregulation
andtheprice-outputcombinationifthegovernmentrequiresthemonopolytoearnanormal
rateofreturn.Whatareeconomicprofitsineachsituation?
Answer:
Intheabovefigure,theprofit-maximizingpriceisPm andtheoutputisQm .Profitsare

Pm ABC.Underrate-of-returnregulation,priceisequaltoaveragetotalcost,H,and Qr
istheoutputatthisprice.Thefirmearnszeroeconomicprofits.
Diff:3
84) Distinguishbetweencost-of-serviceregulationandrate-ofreturnregulation.Whatproblemis
inherentinbothtypesofregulation?
Answer: Cost-of-serviceregulationallowstheregulatedcompaniestochargeonlypricesthat
reflecttheactualaveragecostofprovidingtheservicestothecustomers.Rate-of-return
regulationallowsregulatedcompaniestosetpricesthatensureanormalrateofreturnon
investment.Aproblemwithbothtypesisqualityofservice.Firmschargearegulated
pricebutifqualitydeterioratesthepriceperconstant-qualityincreases.Qualityishardto
measuresoitishardfortheregulatorstocontrol.
Diff:2
85) TodaytheU.S.telecommunicationsindustryremainsheavilyregulatedbythegovernmentasit
wassome30yearsago.Doyouagreeordisagree?Why?
Answer: Disagree.Thetelecommunicationsindustrytodayisfarfromanaturalmonopolyasit
wassome30yearsago,becauseconsumershaveincreasinglysubstitutedcellularand
Web-basedphoneservicesforthetraditionalwiredphoneservices.Inaddition,multiple
wired-serviceoperatorscompetetodayinmanylocales.AllthesefactorsmaketheU.S.
telecommunicationsindustrymorecompetitivetoday.
Diff:2
27.3RegulatingNonmonopolisticIndustries
1) Whichofthefollowingisapossiblemarketsolutiontothelemonsproblem?
A) Producersmightofferproductguaranteesandwarranties.
B) Producersmightberequiredtomeetcertainlegalstandardstoobtainlicensesgrantingthe
righttoselltheirproducts.
C) Governmentagenciesmightbechargedwithdirectlyoverseeingproductionand
distributionofcertainproducts.
D) Liabilitylawsmightbeestablishedtoensurethatfirmssellingcertainproductsmustface
penaltiesintheeventtheproductsfunctionpoorly.
Answer: A
Diff:1
Topic: 27.3RegulatingNonmonopolisticIndustries
2) Oneproblemthatmightoccurasaresultofeconomicregulationis
A) thefirmmaybeearningmorethananormalrateofreturnoninvestment.
B) thequalityofservicemightbelowered.
C) thatsocialregulationmayfollow.
D) thedemandforthegoodmaybegreaterthanthesupply.
Answer: B
Diff:1
3) Thepotentialforasymmetricinformationtobringaboutageneraldeclineinproductqualityin
anindustryisknownasthe________problem.
A) moralhazard B) liability C) capture D) lemons
Answer: D
Diff:1
4) Whenconsumershavelessinformationaboutaproductthandosellers,thenthisisthesituation
of
A) asymmetricinformation. B) symmetricinformation.
C) caveatemptor. D) amarketfailure.
Answer: A
Diff:1
5) Whichofthefollowingistheoutcomeofthelemonsproblemintheused-carmarket?
A) Onlylow-qualitycarswillbetradedinthemarket.
B) Onlyhigh-qualitycarswillbetradedinthemarket.
C) Bothlow-qualityandhigh-qualitycarswillbetradedinthemarket.
D) Nocarswillbetradedinthemarket.
Answer: A
Diff:1
6) Thelemonsproblemisasituationof
A) perfectcompetition. B) asymmetricinformation.
C) creativeresponse. D) anaturalmonopoly.
Answer: B
Diff:1
7) WhichofthefollowingisNOTalikelymarketsolutiontothelemonsproblem?
A) averagecostpricing B) productwarranty
C) industrystandard D) productcertification
Answer: A
Diff:1
8) Credencegoodsareparticularlysusceptibletothelemonsproblembecause
A) theyhavequalitiesthataredifficultforproducerstofullyassess.
B) theyhavequalitiesthataredifficultforconsumerstofullyassess.
C) creativeresponsesamongproducerscreatevolatilityinmarketsupply.
D) creativeresponsesamongconsumerscreatevolatilityinmarketdemand.
Answer: B
Diff:1
9) Themainrationaleforgovernmentregulatoryfunctionsis
A) toregulatefor-profitinstitutions.
B) tomakesurethatfirmsaremaximizingprofits.
C) toexpandthescopeofthegovernment.
D) toprotectconsumerinterests.
Answer: D
Diff:1
10) WhichofthefollowingisNOTareasonforthegovernmenttoregulateanonmonopolistic
industry?
A) Toallowfirmstoachievetheprofitmaximizingoutput.
B) Asymmetricinformation.
C) Toprotectconsumerinterests.
D) Marketfailures.
Answer: A
Diff:1
11) DuringtheproductionprocessAjaxCorporationreleasespollutionintotheair.Ajax
Corporationoperatesinamonopolisticcompetitiveindustry.Whichofthefollowingstatements
addressesthepollutionsituation?
A) Ajaxistakingadvantageofasymmetricinformation.
B) Thisisanexampleofamarketfailureandisareasonforthegovernmenttoregulatethe
industry.
C) Thequalityoftheproductcouldbeimprovediftheamountofpollutioncanbereduced.
D) Thisisknownasthelemonsproblem.
Answer: B
Diff:1
12) Asymmetricinformationis
A) whenamarketfailureoccurs.
B) anexternality.
C) whentheproducerhasinformationontheproductthattheconsumerlacks.
D) theregulatorypriceforanaturalmonopoly.
Answer: C
Diff:1
13) Thelemonsproblemoccursmainlybecauseof
A) asymmetricinformation. B) amarketfailure.
C) negativeexternality. D) amonopoly.
Answer: A
Diff:1
14) Theproblemofexcesspollutionmainlyoccursbecauseof
A) asymmetricinformation. B) apositiveexternality.
C) anegativeexternality. D) amonopoly.
Answer: C
Diff:1
15) Theproblemofasymmetricinformationthatbringsaboutageneraldeclineinproductqualityin
anindustryis
A) amarketfailure. B) theresultofgovernmentregulation.
C) creativeresponse. D) thelemonsproblem.
Answer: D
Diff:1
16) Apossiblemarketsolutionthatareputablefirmcanengageinwhenfacedwiththelemons
problemis
A) toofferawarranty. B) toengageinexternalities.
C) tocreateasymmetricinformation. D) touseaveragecostpricing.
Answer: A
Diff:1
17) WhichofthefollowingisNOTagovernmentresponsetoasymmetricinformation?
A) Liabilitylaws B) Socialregulation
C) Manufacturerswarranties D) Governmentlicensing
Answer: C
Diff:1
18) Whichofthefollowingisagovernmentresponsetoasymmetricinformation?
A) Productguarantees B) Externalproductcertification
C) Manufacturerswarranties D) Governmentlicensing
Answer: D
Diff:1
19) Whichofthefollowingismostsubjecttothelemonsproblem?
A) credencegoods B) homogeneousgoods
C) searchgoods D) inferiorgoods
Answer: A
Diff:1
20) Thetwomostimportantrationalesforgovernmentinterventioninnon-monopolisticmarkets
are
A) marketfailureandasymmetricinformation.
B) substandardproductsandjobcreationforpublicemployees.
C) jobcreationandincomemaintenance.
D) unfairpricingandusury.
Answer: A
Diff:1
21) Thepotentialforadeclineinproductqualityduetoasymmetricinformationiscommonly
referredtoas
A) thelemonsproblem. B) plannedobsolescence.
C) diminishingmarginalproduct. D) theexternalityproblem.
Answer: A
Diff:2
22) Whatarethemajorrationalesforconsumerprotectioninnonmonopolisticindustries?
Answer: Themainrationalesforconsumerprotectioninnonmonopolisticindustriesare:(1)the
presenceofmarketfailures,whichinducegovernmentstocorrecttheexternalities;and
(2)thepresenceofasymmetricinformationforcertainproductssothatthegovernment
canensureconsumersareprotected.
Diff:2
23) Whatisthelemonsproblem?Howdofirmstrytoaddressthisproblem?
Answer: Thelemonsproblemoccurswhenasymmetricinformationleadstoageneraldeclinein
productqualityinanindustry.Firmstrytoaddressthisproblembyofferingproduct
guaranteesandwarranties,providingindustrystandardsandofferingproduct
certification,allofwhichhelpconsumersseparatehigh-qualityproductsfrom
low-qualityproducts.
Diff:2
27.4IncentivesandCostsofRegulation
1) Thebenefitsofsocialregulationusuallyare
A) small.
B) obvioustopeoplewhilethecostsarehidden.
C) lessthanthecostsofsocialregulation,reducingoverallwelfare.
D) difficulttomeasure.
Answer: D
Diff:2
Topic: 27.4IncentivesandCostsofRegulation
2) AllofthefollowingarepossiblecriticismsofsocialregulationEXCEPT
A) thatthecostsmayoutweighthebenefits.
B) thatsocialregulationmaycreateanticompetitiveeffects.
C) thattheregulationshavenotresultedinsaferworkingconditions.
D) thattheregulationsleadtohigherproductioncosts.
Answer: C
Diff:1
3) Afirmthatrespondstoaregulatoryruleinawaythatpermitstechnicalcompliancewhile
allowingthefirmtoviolatethespiritoftheregulationhas.
A) reducedthescopeofthelemonsproblem.
B) sharedthegainsandpainsofregulation.
C) engagedinacreativeresponsetoregulation.
D) becomeacapturedregulator.
Answer: C
Diff:1
4) Accordingtothetext,thefederalgovernmentspendsthemosttaxpayer -providedfunds
regulatingwhichareaoftheeconomy?
A) Theenvironment B) Financeandbanking
C) Consumersafetyandhealth D) Transportation
Answer: D
Diff:1
5) Apotentialbenefitthatcomesfromsocialregulationswouldbe
A) highercosts. B) acleanerenvironment.
C) highertaxcollections. D) morelayoffs.
Answer: B
Diff:2
6) Accordingtothetext,criticspointoutthatthecostsincurredbyfirmsduetoregulations
A) increaseproductioncosts.
B) lowerproductioncoststotheshutdownpoint.
C) reducetaxestoofar.
D) noneoftheabove.
Answer: A
Diff:2
7) Thebenefitsofsocialregulationare
A) easytomeasurebythemarginalvaluemethod.
B) oftendifficulttomeasure.
C) obvioustoalmosteveryone,butthecostsareusuallyhidden.
D) greaterthanthecostsofsocialregulationineveryexampleinthecountrytoday.
Answer: B
Diff:2
8) Regulationfocusedontheimpactofproductionontheenvironmentandsociety,theworking
conditionsunderwhichproductionoccurs,orthephysicalattributesofgoods,isknownas
C) socialregulation. D) monopolyregulation.
Answer: C
Diff:1
9) Whichofthefollowingisanexampleofanagencyconcernedwithsocialregulation?
A) FederalCommunicationsCommission B) SecuritiesandExchangeCommission
C) ConsumerProductSafetyCommission D) FederalEnergyRegulatoryCommission
Answer: C
Diff:1
10) Whichofthefollowingstatementscancorrectlybemadeaboutsocialregulation?
I. Extensivesocialregulationmayhaveananticompetitiveeffect.
II. Thebenefitsofsocialregulationareeasiertomeasurethanarethecostsofsocialregulation.
Answer: A
Diff:1
11) Acreativeresponsetoregulationscanbedescribedas
A) conformingtotheletterofthelawbutunderminingitsspirit.
B) totallyconformingtothelaw.
C) completelyignoringthelaw.
D) noneoftheabove.
Answer: A
Diff:1
12) Insomecases,socialregulationmayalterindividualsbehavior.Forexample,thereisevidence
toindicatethatasmoreautomobilesafetyregulationshavebeenintroduced,moreindividuals
havebeguntodriverecklessly.Thisphenomenonisknownas
A) thefeedbackeffect. B) theshare-the-gainseffect.
C) theshare-the-painseffect. D) thecaptureeffect.
Answer: A
Diff:1
13) Whichofthefollowingreferstothecapturehypothesisofregulation?
A) Theabilityofthegovernmenttocapturemonopolyprofits
B) Thecontrolofregulatoryagenciesbyfirmsinanindustry
C) Consumercostsavingscapturedthroughregulation
D) Horizontalmergers
Answer: B
Diff:1
14) Thenotionthatregulatedindustrymembersthemselves,soonerorlater,areabletocontrol
regulatorybodiesisreferredtoas
A) consumerism. B) cartelization.
C) thecapturetheory. D) thecontroltheory.
Answer: C
Diff:1
15) Thecapturehypothesissuggeststhat
A) marginalcostregulationissuperiortoaveragecostregulation.
B) thewell-focusedinterestsofconsumerswillleadtotheover-regulationofmost
industries.
C) thefirmsbeingregulatedwillundulyinfluencetheregulators.
D) regulationwillleadtoover-entryandeventuallossesforfirmsintheindustry.
Answer: C
Diff:1
16) Thecaptureinthecapturehypothesisoccursbecause
A) regulatorstrytopromoteeveryonesbestinterest.
B) societydoesntcareforregulatoryagencies.
C) regulatorsalwaysknowwhatisinsocietysbestinterest.
D) regulatorsusuallyhavebeenorwillbeassociatedwiththeindustriestheyregulate.
Answer: D
Diff:1
17) Accordingtothecapturehypothesis,
A) regulatorseventuallysupporttheviewsofconsumersinsteadofthefirmsorthe
taxpayers,regardlessofthereasonswhytheregulatoryagencywasestablished.
B) regulatorssupporttheviewoftheregulatedfirmsallalongbecausethatisthereasonthe
regulatoryagencywasestablished.
C) regulatorseventuallysupporttheviewsoftheregulatedfirmsinsteadoftheconsumersor
taxpayers,regardlessofwhytheregulatoryagencywasestablished.
D) regulatorseventuallysupporttheviewsofeitherthefirmsortheconsumers,butatthe
expenseofthetaxpayers,regardlessofthereasonswhytheregulatoryagencywas
established.
Answer: C
Diff:2
18) Accordingtothecapturehypothesis,itappearsthatregulatorseventuallyendup
A) adoptingpoliciesthatbenefitthefirmsbeingregulated.
B) adoptingpoliciesthatbenefitconsumersattheexpenseoftheregulatedfirms.
C) adoptingpoliciesthatbenefitnoone.
D) satisfyingneitherproducersnorconsumers,butstrivingtocontrolasmuchaspossible.
Answer: A
Diff:2
19) Thehypothesisthatregulatorseventuallyarecontrolledbytheregulatedfirmsandtheirspecial
interestsisthe
A) share-the-gains,share-the-painshypothesis.
B) capturehypothesis.
C) publicinteresttheory.
D) control-grouphypothesis.
Answer: B
Diff:1
20) Thebehaviorofregulatorswhentryingtowinapprovalfortheiractionsfromtheirentire
constituencyisbestdescribedbythe
A) capturehypothesis.
B) lawofincreasingsocialwell-being.
C) share-the-gains,share-the-painshypothesis.
D) marginalbenefitpricinghypothesis.
Answer: C
Diff:1
21) Theargumentthatsuggeststhatregulatorsbalancetheinterestsoffirms,consumers,and
legislatorsiscalled
A) thecapturehypothesis.
B) thecreativeresponsetheory.
C) theshare-the-gains,share-the-painstheory.
D) thetheoryofoptimalregulation.
Answer: C
Diff:1
22) Atheoryofregulatorybehavior,whichstatesthatregulatorsmusttakeintoaccountthe
preferencesoflegislators,producers,andconsumers,isthe
A) capturetheory.
B) share-the-gains,share-the-painstheory.
C) publicinteresttheory.
D) generalintereststheory.
Answer: B
Diff:1
23) Accordingtoyourtext,theannualcostofregulation(federal,stateandlocal)intheUnited
Statesisestimatedtoexceed________peryear.
A) $500million B) $900million C) $50billion D) $1trillion
Answer: D
Diff:1
24) Thefeedbackeffectcanbethoughtofasatypeof
A) socialregulation.
B) economicregulation.
C) creativeresponse,whichreducesthelawseffectiveness.
D) regulatorylag.
Answer: C
Diff:1
25) Supposeadangerousworkplaceismadesaferthroughtheinstallationofguardsandother
equipmentthatreducethephysicalhazardsoftheworkenvironment.Ifweobserveno
reductionininjuries,wemightconcludethat
A) thesafetyequipmentisntadequateandbetterequipmentshouldbeinstalled.
B) thefirmhasrespondedbyloweringwagesandhiringlesscapablepeoplewhoaremore
likelytobeinjured.
C) theinjuryratebeforeinstallationofthesafetyequipmenthadbeenunderreported.
D) workersrespondedtothesaferenvironmentbynotexercisingasmuchcarethemselves,
generatingmoreinjuriesthaniftheyhadnotchangedtheirbehavior.
Answer: D
Diff:3
26) Regulatorsoftenadoptpoliciesthatbenefit
A) consumersandinjureproducers.
B) thefirmsregulatedratherthanconsumers.
C) onlythegovernment.
D) noone.
Answer: B
Diff:2
27) Thehypothesisthatregulatorseventuallyadoptpoliciesthatbenefittheproducersinthe
industryisknownasthe
A) capturehypothesis.
B) producershypothesis.
C) share-the-gains,share-the-painshypothesis.
D) its-a-rip-offhypothesis.
Answer: A
Diff:1
28) UndertheU.S.systemofregulation,mostregularsareselectedfrom
A) politiciansandtheirfriends.
B) theindustrythatistoberegulated.
C) consumeradvocacygroups.
D) universityprofessorswhounderstandthenatureoftheindustryandwhounderstandthe
trueinterestsofconsumers.
Answer: B
Diff:2
29) Accordingtothecapturehypothesisofregulation,
A) regulationfavorsproducersoverconsumersbecausetheproducerswereabletopayoff
theregulators.
B) regulationeventuallyfavorsproducersoverconsumersbecausetheproducershavemore
atstakethanindividualconsumers.
C) regulationbenefitstheregulatorsandthelegislatorswhosupporttheregulationby
enablingthemtoobtainfavorsfrombothproducersandconsumers.
D) regulationbenefitstheconsumersoverproducersbecausethenumberofconsumersis
greaterthanthenumberofproducers,givingtheconsumersmorepoliticalclout.
Answer: B
Diff:2
30) Economistswhothinkthecapturetheoryexplainsregulatorybehaviorwillsupporttheirclaims
bynotingthat
A) regulationascarriedoutinthiscountrygenerateslargerprofitsforthefirmsanddoesnot
generatelowerpricesforconsumers.
B) consumersactuallydominateregulatoryhearingsthroughtheinfluenceofconsumer
advocacygroups.
C) Congressensuredthatconsumershavemoreinfluenceonthedecisionsofregulatorsby
settinguptheagenciesinwaysthatinsulatedtheregulatorsfromtheregulatedfirms.
D) thefirmsthatareregulatedhavegreaterincentivetotrytoinfluenceregulatorsthando
consumers.
Answer: D
Diff:3
31) Accordingtothe________theoryofregulation,regulatorsmusttakeintoaccountthe
preferencesoflegislators,consumers,andproducers.
A) capture B) generalinterest
C) publicinterest D) share-the-gains,share-the-pains
Answer: D
Diff:1
32) Theprimarymotiveofregulators,accordingtotheshare-the-gains,share-the-painstheory,is
to
A) maximizetheirincomethroughacceptingmonetarypayoffsfromgroups.
B) ensurethateverygroupgetswhatitwants.
C) ensurethatallcustomerssharethebenefitsofregulation,andnotjustthewealthiest
consumers.
D) keeptheirjobs.
Answer: D
Diff:1
33) Supposetechnicalchangemakesitcheaperforcabletelevisionsupplierstosupplytheirservice.
Thecapturetheorywouldpredictthattheregulatorswould
A) allowthefirmstocapturethesavingsandwouldlowerpriceonlyifthefirmsaskedthem
to.
B) forcethefirmstopassthesavingsontoconsumersintheformoflowerprices.
C) forcethefirmstopassthesavingsontoconsumersintheformofbetterservice.
D) forcethefirmstopasssomeofthesavingsontoconsumersandpermitthemtokeepsome
ofthesavingsforthemselves.
Answer: A
Diff:2
34) Supposetechnicalchangepermitscabletelevisioncompaniestoprovidetheirservicesatlower
rates.Theshare-the-gains,share-the-painstheorywouldpredictthattheregulatorswould
A) permitthefirmstokeepthesavingsandwouldlowerpricesonlyifthefirmswere
pressuredtodoso.
B) forcethefirmstopassallthesavingsontoconsumersintheformoflowerprices.
C) forcethefirmstopassthesavingsontoconsumersintheformofbetterservice.
D) forcethefirmstopasssomeofthesavingsontoconsumersandtopermitthefirmstokeep
someofthesavingsthemselves.
Answer: D
Diff:2
35) Supposethataregulatedindustryexperiencesanincreaseinthepriceofinputsusedtoproduce
thegood.Accordingtothecapturetheory,wewouldexpect
A) pricestoincreasebyalittleimmediatelyandprofitstodecreasebyalot.
B) therewillbesomeincreaseinpricebutnotimmediately.
C) noincreaseinprice.
D) aquickincreaseinpricemaintainsprofitsintheindustry.
Answer: D
Diff:1
36) Anautomobilemanufacturervoluntarilyrecallscertainmodelstofixadefectivepartatnocost
totheowners.Thisactionhastheeffectof
A) thelemonproblem. B) amanufacturerswarranty.
C) amarketfailure. D) noneoftheabove
Answer: B
Diff:1
thegood.Accordingtotheshare-the-gains,share-the-paintheory,wewouldexpect
A) pricestoincreasebyalittleimmediatelyandprofitstodecreasebyalot.
B) therewillbesomeincreaseinpricebutnotimmediately.
C) noincreaseinprice.
D) aquickincreaseinpricemaintainsprofitsintheindustry.
Answer: B
Diff:1
thegood.Whichofthefollowingstatementsistrue?
A) Underboththecapturetheoryandtheshare-the-gains,share-the-paintheoryprofitswill
decrease.
B) Anincreaseinpricewilloccurquickerintheshare-thegains,share-the-paintheorythan
thecapturetheory.
C) Anincreaseinpricewilloccurquickerinthecapturetheorythantheshare-the-gains,
share-the-paintheory.
D) Inthecapturetheorytherewillbeanincreaseinpricebutnotintheshare-the-gains,
share-the-paintheory.
Answer: C
Diff:1
39) Thecostsofregulation
A) includeincreasedtaxesandincreasedpricesoftheproductsbeingregulated.
B) arepaidentirelybytheregulatedindustries.
C) aremorethancoveredbythebenefitsgainedfromtheregulation.
D) arerelativelysmall.
Answer: A
Diff:1
40) Thetotalcostsofregulation
A) includeincreasedtaxesandincreasedpricesoftheproductsbeingregulated.
B) arepaidentirelybytheregulatedindustries.
C) muchhigherthanjusttheexplicitgovernmentoutlaystofundtheadministrationof
variousregulations.
D) arepaidentirelybytheconsumersofregulatedindustries.
Answer: C
Diff:1
41) Thetotalcostsoffederalregulation
A) encompassesonlyexplicitcostsofsatisfyingregulatorydemands.
B) alsoincludestheexplicitcostsassociatedwithregulationsissuedby50differentstate
governments.
C) encompassesonlyopportunitycostsofsatisfyingregulatorydemands.
D) encompassesbothexplicitandopportunitycostsofsatisfyingregulatorydemands..
Answer: D
Diff:1
42) Oneundesirableeffectofsocialregulationisthatit
A) affectssmallerfirmsdisproportionately,creatinganticompetitiveeffects.
B) destroysincentivesforfirmstoengageinmarginalcostpricing.
C) raisespricesofgoodstoconsumers,whileloweringpricestobusinessandspecialinterest
groups.
D) reducestheeffectivenessofeconomicregulation.
Answer: A
Diff:3
43) TheInterstateCommerceCommission(ICC)regulatesrailroads,bargesandtrucks.Suppose
technicalchangelowersthecostsofrailroads.Asaresult,theICCpermitsrailroadstolower
pricessomebutalsoalterstheratesofbargesandtruckssotheygetadditionalbusiness.The
ICCwouldbeactingconsistentlywith
A) thecapturetheoryofregulation.
B) thepublicinteresttheoryofregulation.
C) theshare-the-gains,share-the-painstheoryofregulation.
D) Noneofthetheoriespresentedinthetextsinceeconomicregulationisspecifictoasingle
industryandnottoagenciesthatcovermorethanoneindustry.Thatistheprovinceof
socialregulation.
Answer: C
Diff:3
44) Behavioronthepartofthefirmthatallowsittocomplywiththeletterofthelawbutviolatethe
spiritreducingthelawseffectis
A) asymmetricinformation. B) creativeresponse.
C) thelemonsproblem. D) onlyaprobleminamonopoly.
Answer: B
Diff:1
45) WhichofthefollowingisFALSEwithrespecttoregulation?
A) Regulatedfirmscommonlytrytoavoidtheeffectsofregulationwhenevertheycan.
B) Firmsengageincreativeresponseswhichconformtotheletterofthelawbutundermine
itsspirit.
C) Regulationhasresultedinstatelawsthathavemadecreativeresponseillegalinmany
states.
D) Recentregulationshavegeneratedfeedbackeffectsthatunderminedthekeyaimofthe
rules.
Answer: C
Diff:2
46) Thetheoryofregulatorybehaviorthatpredictsthattheregulatorseventuallywillbecome
controlledbytheregulatediscalled
A) thecapturehypothesis.
B) thetheshare-the-gains,share-the-painshypothesis.
C) theasymmetricinformationhypothesis.
D) themarketfailurehypothesis.
Answer: A
Diff:2
47) U.S.securitiesfirmsrecentlyagreedtopayarecordamountof$1.4billioninsettlementcharges
broughtbygovernmentregulators.Regulatorsclaimedthatfirmshadabusedinvestorsduring
themarketboomofthe1990s.Abusesincludedanalyststailoringtheirresearchreportsand
ratingsonthestockstheycoveredinordertowinmorebusinessfortheirfirm.Ifthissettlement
causesWallStreetfirmstocomplywiththeletterofthelawbuttheyviolatethespiritofthelaw,
thefirmsareengagingin
A) eliminationofconflictsofinterest. B) creativeresponse.
C) thecapturehypothesis. D) deregulation.
Answer: B
Diff:1
48) AcmeInc.foundatrickywaytoconformtotheletterofthelawwithrespecttonewEPA
regulations,eventhoughtheyviolatedthespiritofthelaw.Thisiscalled
A) thecapturetheory.
B) collusiveresponse.
C) share-the-gains,share-the-painstheory.
D) creativeresponse.
Answer: D
Diff:2
49) Thetheoryofregulatorybehaviorthatsuggeststhatregulatorsmustconsiderthedemandsof
legislators,consumers,andmembersoftheregulatedagencyiscalled
A) thecapturetheory.
B) share-the-gains,share-the-painstheory.
C) thenaturaltheory.
D) thecreativetheory.
Answer: B
Diff:2
50) Whenregulatorsidentifywiththespecialinterestsoftheindustrytheyregulate,thisbehavior
conformswiththe
A) share-the-gains,share-the-painshypothesis.
B) rate-of-returnhypothesis.
C) lemonmarkethypothesis.
D) capturehypothesis.
Answer: D
Diff:1
51) Thetheorythatregulatorsbehaviorwilleventuallybecompromisedbythespecialinterests
theyregulateisknownasthe
A) capitulationhypothesis. B) creativehypothesis.
C) captivehypothesis. D) capturehypothesis.
Answer: D
Diff:2
52) Whenthefoxisguardingthehenhouse,thatisanexampleofthe
A) share-the-gains,share-the-painstheory.
B) regulatoryhypothesis.
C) capturehypothesis.
D) creativetheory.
Answer: C
Diff:2
53) Whenaregulatorisconcernedaboutpleasingdifferentgroupsinordertokeepemployed,this
isknownasthe
A) share-the-gains,share-the-painstheory.
B) regulatoryhypothesis.
C) capturehypothesis.
D) creativetheory.
Answer: A
Diff:2
54) Thecostofcomplyingwithregulation
A) shiftstheATCcurveupward.
B) shiftstheMCcurvedownward.
C) shiftsthedemandcurvetotheright.
D) increasestheproductspriceelasticityofdemand.
Answer: A
Diff:1
55) Regardingthecostsofregulation,whichisaFALSEstatement?
A) Airlinesafetystandardshaveincreasedthepriceofairtravel.
B) Automobilesafetystandardsraisethepriceofcars.
C) Regulatoryspendingbyfederalagencieshasdecreasedsince1970.
D) Pharmaceuticalmanufacturingsafetystandardsraisethepriceofdrugs.
Answer: C
Diff:1
56) Thetotalcostoffederalregulationincludes
A) thefundingofgovernmentagenciesoverseeingcompliance,thecompliancecostforthe
regulatedfirms,andtheopportunitycostofregulationforthefirms.
B) thefundingofgovernmentagenciesoverseeingcompliance less thecompliancecostfor
theregulatedfirmsandtheopportunitycostofregulationforthefirms.
C) onlythecostofcompliancebytheregulatedfirms.
D) onlythefundingoftheregulatoryagencies.
Answer: A
Diff:2
57) Howdoessocialregulationdifferfromeconomicregulation?
Answer: Socialregulationfocusesontheimpactofproductionontheenvironment,working
conditions,andthesafetyofgoods.Economicregulationisconcernedwiththepricesand
outputsofspecificgoodsorservices.Socialregulationcoversfirmsinallindustrieswhile
economicregulationusuallyinvolvesparticularindustries.Socialregulationcanhavea
muchbroaderimpactontheeconomyasawholethaneconomicregulation.
Diff:2
58) SupposeOSHArequiresafactorytoinstallspecificsafetyequipmenttoreducethenumberof
injuriesinthefactory.Wouldthenumberofaccidentsnecessarilydecline?Whyorwhynot?
Answer: No.Ifthefeedbackeffectisthatworkerswhofeelsafertakefewerprecautionsorare
morecareless,thenumberofinjuriescouldstaythesameorevenincrease.
Diff:2
59) Explaintheshare-the-gains,share-the-painstheory.Howdoesitdifferfromthecapture
hypothesis?
Answer: Theshare-the-gains,share-the-painstheorydiffersfromthecapturehypothesisinthatit
arguesconsumersaretakenintoconsideration,atleasttosomeextent,bytheregulators.
Iftheiractionsharmconsumerstoomuch,regulatorsknowtheywillcomplainto
legislators,andtheregulatorsmaybeoutofajob.So,theytrytobalancetheinterestsof
theproducersandtheconsumers,andnotgiveallthebenefitstoonegroupormakeone
groupbearallthecosts.Theregulatoryagencyisnotcompletelycapturedbythe
industry,butalsotakesintoaccountconsumersandlegislators.
Diff:2
60) Explainthecapturehypothesis.
Answer: Thecapturehypothesisisatheoryofregulatorybehaviorthatpredictsthattheregulators
eventuallywillbecapturedbythespecialinterestsoftheindustrybeingregulated.Itis
observedthatmanytimesregulatorscomefromtheregulatedindustry.Further,thefirms
havemoreatstakethanconsumersandaremorelikelytoorganizeandlobbyforfavors
thanaretheconsumers.Hence,overtime,theregulatorswilltendtodowhatthe
regulatedfirmswantratherthanwhattheconsumerswant.
Diff:2
61) Acommonfeatureofregulatedindustriesiscross-subsidization,whichisasituationwhenone
groupofcustomerspayspricesabovecostswhileanothergroupofcustomerspayspricesbelow
costs.Theonegroupissubsidizingtheothergroup.Isthispracticemoreconsistentwiththe
capturehypothesisortheshare-the-gains,share-the-painstheory?Explain.
Answer: Cross-subsidizationismoreconsistentwiththeshare-the-gains,share-the-painstheory.
Thecapturehypothesiscanexplainwhythefirmswouldbeabletochargepricesabove
coststotheonegroupbutnotwhytheyhavetochargepricesbelowcoststoanother
group.Buttheshare-the-gains,share-thepainstheoryexplainsthisbysayingthe
subsidizedgroupofcustomershasbeenabletoinfluencetheregulatorssothattheircosts
arenotsogreattothemselves.
Diff:3
62) Regulationsdonotalwayshavetheintendedresult.Doyouagreeordisagree?Why?
Answer: Agree.Firmsoftentrytoavoidtheeffectsofregulation.Firmsengageincreative
response,whichisaresponsetoaregulationthatconformstotheletterofthelawbut
underminesitsspirit.Further,individualsmayaltertheirbehaviorinwaysthatrun
countertothegoalsoftheregulation.Forexample,peoplemaydrivelesscarefullyin
safercars,causingasmanyinjuriesaswhenthecarswerelesssafe.
Diff:3
63) Ascomparedtothebenefitsofeconomicandsocialregulation,thecostsareminimal.Doyou
Answer: Disagree.Thetotalcostsofregulationaresubstantial.First,thedirectcostsofregulation,
whichareultimatelypaidforbytaxpayers,includethecoststostaffregulatoryagencies
andtofundtheirvariousactivities.Second,therearesocialcosts,whichincludethe
explicitcostsandtheopportunitycostsofcomplyingwiththeregulations.
Diff:2
27.5AntitrustPolicy
1) Governmentpolicythatattemptstopreventcollusionamongthesellersofaproductand
attemptstopreventrestraintoftradeisknownas
A) socialpolicy. B) antitrustpolicy.
C) inherentpolicy. D) goodwillpolicy.
Answer: B
Diff:1
Topic: 27.5AntitrustPolicy
2) Thefirstmajorlawcreatedtocontrolthegrowthofmonopolypowerwasthe
A) ShermanAct. B) ClaytonAct.
C) FTCAct. D) Robinson-PatmanAct.
Answer: A
Diff:1
3) WhichofthefollowingisNOTanantitrustlaw?
A) TheRobinson-PatmanAct B) TheSmoot-HawleyAct
C) TheFTCAct D) TheShermanAct
Answer: B
Diff:1
4) OneweaknessoftheShermanActisthat
A) itfailstoclearlydefinerestraintoftrade.
B) itappliesonlytoforeignmonopolies.
C) itappliesonlytothesteelandrailroadindustries.
D) noneoftheabove
Answer: A
Diff:2
5) TheU.S.JusticeDepartmentprosecutedMicrosoftunderthetermsof
A) theShermanAct.
B) theKefauveramendment.
C) the1933amendmenttotheFederalTradeCommissionAct.
D) noneoftheabove.
Answer: A
Diff:2
6) AmajorshortcomingoftheShermanActwasthat
A) whenitwaspassed,therewerenoviolations,sotheSupremeCourtruleditunnecessary.
B) itfailedtoexplicitlystatewhichspecificactivitieswereillegal.
C) violatorsoftheActwereforcedoutofbusiness.
D) itwasnotenforcedbythecourts.
Answer: B
Diff:1
7) ThefirstantitrustlawintheUnitedStateswasthe
A) FTCAct. B) ClaytonAct.
C) ShermanAct. D) Robinson-PatmanAct.
Answer: C
Diff:1
8) TheprimaryantitruststatuteintheUnitedStatesisthe
A) NLRAof1935. B) SECActof1933.
C) ShermanAntitrustActof1890. D) FederalReserveActof1913.
Answer: C
Diff:1
9) Whichofthefollowingwouldmostlikelypromotecompetitivepricingofproducts?
A) Robinson-PatmanAct B) Wheeler-LeaAct
C) FederalTradeCommissionAct D) ClaytonAct
Answer: D
Diff:1
10) TheFederalTradeCommissionregulateswhichofthefollowing?
A) Unfairtradepracticesbybusinesses B) Financialmarkets
C) Tradewiththirdworldcountries D) Thebankingindustry
Answer: A
Diff:2
11) TheFederalTradeCommissionActwasdesignedto
A) prohibitbundling.
B) increaseforeigntrade.
C) prohibitcutthroatpricing.
D) limitcompanyprofitsfromforeignsales.
Answer: C
Diff:2
12) TheFederalTradeCommissionAct,asamended,prohibits
A) horizontalmergers.
B) price-fixingagreements.
C) unfaircompetitivepracticesanddeceptiveacts.
D) pricediscrimination.
Answer: C
Diff:2
13) TheFederalTradeCommissionwasestablishedin1914to
A) regulatetradeofpublicgoods.
B) promotecompetitionininterstatecommerce.
C) investigateunfaircompetitivepractices.
D) preventnon-pricecompetition.
Answer: C
Diff:1
14) Theregulatoryagencymostconcernedwithfalseadvertisingisthe
A) AntitrustDivisionoftheJusticeDepartment.
B) NationalLaborRelationsBoard.
C) FederalDepositInsuranceCorp.
D) FederalTradeCommission.
Answer: D
Diff:1
15) Whichantitrustactwaspassedtoprotectindependentretailersfromunfairdiscriminationby
chainstores?
A) FederalTradeCommissionAct B) Robinson-PatmanAct
C) ShermanAct D) Wheeler-LeaAct
Answer: B
Diff:2
16) WhichantitrustlawissometimescalledtheChainStoreAct?
A) ShermanAct B) ClaytonAct
C) Robinson-PatmanAct D) FederalTradeAct
Answer: C
Diff:1
17) AllofthefollowingareexemptfromantitrustlawsEXCEPT
A) laborunions. B) professionalbaseball.
C) oilcompanies. D) publicutilities.
Answer: C
Diff:2
18) WhichofthefollowingisNOTexemptfromantitrustlaws?
A) Professionalbaseball B) Laborunions
C) Airlines D) Publictransitsystems
Answer: C
Diff:1
19) Whichofthefollowingisexemptfromantitrustlaws?
A) Professionalfootball B) Petroleumcompanies
C) Airlines D) Hospitals
Answer: D
Diff:1
20) Whichofthefollowingisexemptfromantitrustlaws?
A) Professionalbasketball B) Suppliersofmilitaryequipment
C) Telephonecompanies D) Automobilecompanies
Answer: B
Diff:1
A) ClaytonAct. B) ContestableMarketsAct.
C) theFederalTradeCommissionAct. D) ShermanAntitrustAct.
Answer: D
Diff:1
22) Theideabehindantitrustlegislationisto
A) promotecompetitioninthemarket. B) justifyderegulationofindustries.
C) implementcontestablemarkets. D) createlargerfirms.
Answer: A
Diff:1
23) Ifantitrustlegislationissuccessful,then
A) firmswillproducethequantityatwhichmarginalcostequalsmarginalrevenue.
B) mostfirmswillbeearningapositiveeconomicprofit.
C) thepriceofeachitemwillequalitsmarginalsocialopportunitycosts.
D) naturalmonopolywillbeeliminated.
Answer: C
Diff:1
24) Ifantitrustlegislationissuccessful,thenthemonopolisticfirmwill
A) decreaseoutputandchargealowerpricethanbefore.
B) increaseoutputandchargeahigherpricethanbefore.
C) increaseoutputandchargealowerpricethanbefore.
D) decreaseoutputandchargeahigherpricethanbefore.
Answer: C
Diff:1
25) Whyisantitrustlegislationnecessary?
A) Monopoliestendtomisallocateresources.
B) AllmonopoliesareunlawfulintheUnitedStates.
C) Monopoliestendtoallocateresourcesinasociallyoptimalmanner.
D) Monopolieswillalwaysmakeaprofitinthelongrun.
Answer: A
Diff:2
26) WhichofthefollowingwillNOTbetrueiftheantitrustlawsaresuccessful?
A) Producerswillearnzeroeconomicprofitsinthelong-run.
B) Firmswillnotrestrictoutput.
C) Firmswillproducethecompetitiveoutput.
D) Firmswillproducethequantityatwhichmarginalcostequalsmarginalrevenueand
chargeapricethatisgreaterthanmarginalcost.
Answer: D
Diff:1
27) TheShermanAntitrustActwaspassedto
A) protectcompaniesfromforeigncompetition.
B) protectthemonopolyprofitsoffirms.
C) controlthegrowthofmonopoliesintheU.S.
D) preventmarketpricefromequalingmarginalcost.
Answer: C
Diff:1
28) Section1oftheShermanAntitrustActmakesitillegalto
A) formamonopolisticallycompetitivefirm.
B) restraintrade.
C) pricediscriminate.
D) haveanoligopoly.
Answer: B
Diff:1
29) AsaresultofaconvictionundertheShermanAntitrustAct,StandardOilofNewJersey
A) wasfinedforitsextensivepricediscriminatingactivity.
B) wasrestrainedfromoilexplorationfortwenty-fiveyears,whichenabledotheroilfirmsto
assumeleadershipintheindustry.
C) wasbrokenupintomanysmallercompanies.
D) wentbankruptandnolongerisinexistence.
Answer: C
Diff:2
30) WhatistherelationshipbetweentheShermanAntitrustActandtheClaytonAct?
A) TheClaytonActwasthefirstactpassedandtheShermanAntitrustActwasthesecond.
B) TheShermanAntitrustActencouragedcompetitionamongfirmsintheU.S.whilethe
ClaytonActencouragedcompetitionamongforeignfirms.
C) TheClaytonActstrengthenedtheShermanAntitrustActbylimitingsomeveryspecific
businesspractices.
D) BothActsdealwithissuesofsettingpriceandquantityforregulatedindustries.
Answer: C
Diff:1
31) Itisillegaltopricediscriminateexceptincasesinwhichthepricedifferencesareduetoactual
costdifferences.Thissituationisduetowhichantitrustact?
A) ClaytonAct B) ContestableMarketAct
C) FederalTradeCommissionAct D) ShermanAntitrustAct
Answer: A
Diff:1
32) TheChainStoreActisanamegiventothe
A) ClaytonAct. B) FederalTradeCommissionAct.
C) Robinson-PatmanAct. D) ShermanAntitrustAct.
Answer: C
Diff:1
33) Unfairordeceptiveactsorpracticesincommercewereprohibitedbythe
A) ClaytonAct.
B) ClaytonActasamendedbytheRobinson-PatmanAct.
C) FederalTradeCommissionAct.
D) 1938amendmenttotheFederalTradeCommissionAct.
Answer: D
Diff:2
34) TheFTCis
A) theactthatpreventsproducersfromdrivingoutsmallercompetitorsbymeansofselected
discriminatorypricecuts.
B) thecommissionthatinvestigatesunfaircompetitivepracticessuchasmisleading
advertising.
C) anagencywhichhasbeensetuptoregulatethefederalgovernment.
D) theagencysetuptoregulatehospitals.
Answer: B
Diff:1
35) AjaxCorporationhasjuststartedadvertisingthatthereare16ouncesineverypackage.In
realitythepackagescontainonly14ounces.Thismisleadingadvertising
A) isinviolationoftheRobinson-PatmanAct.
B) isexemptfromtheantitrustlaws.
C) couldbesubjecttoaninvestigationbytheFederalTradeCommission.
D) couldbesubjecttoaninvestigationbytheShermanCommission.
Answer: C
Diff:2
36) Whichofthefollowingareexemptfromtheantitrustlaws?
A) Collegesanduniversities B) Allprofessionalathletes
C) Laborunions D) Deregulatedindustries
Answer: C
Diff:1
37) AllofthefollowingareexemptfromantitrustenforcementEXCEPT
A) professionalbaseball. B) laborunions.
C) hospitals. D) televisionandradiostations.
Answer: D
Diff:2
A) Glass-SteagallAct. B) Robinson-PatmanAct.
C) ClaytonAct. D) ShermanAct.
Answer: D
Diff:1
39) Therearemanyexemptionsfromantitrustlaws.WhichofthefollowingisNOToneofthem?
A) laborunions B) publicutilities C) hospitals D) publishers
Answer: D
Diff:1
40) ThestatementEverycontract,combinationintheformofatrustorotherwise,orconspiracy,in
restraintoftradeorcommerce...isfoundinthe
A) ShermanAntitrustAct. B) ClaytonAntitrustAct.
C) Robinson-PatmanAct. D) InterstateCommerceCommissionAct.
Answer: A
Diff:2
41) InacourtdecisioninJune2001,theFederalDistrictCountofAppealsinWashington,D.C.
foundthatMicrosofthadviolatedthe
A) ClaytonAct. B) Robinson-PatmanAct.
C) ShermanAct. D) Celler-KefauverAct.
Answer: C
Diff:2
42) Theantitrustlegislationthatforbidsacompanyfromsellinggoodsontheconditionthatthe
purchasermustdealexclusivelywiththatcompanyisthe
A) ShermanAct. B) Robinson-PatmanAct.
C) FairTradeCommissionAct. D) ClaytonAct.
Answer: D
Diff:2
43) Theagencythatdealswithissuesofunfairanddeceptiveactsorpracticesincommerceisthe
A) FederalTradeCommission. B) FederalProductsCommission.
C) FederalConsumerProtectionAgency. D) FederalAdvertisingCommission.
Answer: A
Diff:2
44) OneorganizationintheUnitedStatestodaythatisexemptfromantitrustlawsis
A) theautomobileindustry. B) professionalbaseball.
C) theoilindustry. D) thesteelindustry.
Answer: B
Diff:2
45) TheShermanAntitrustActof1890prohibited
A) exporttariffs. B) attemptstorestraintrade.
C) allexistingmonopolies. D) interstatecommerce.
Answer: B
Diff:2
46) TheShermanAntitrustActwasenforcedin1906byarulingoftheSupremeCourtregardingthe
monopolizationoftheoilindustryby
A) GettyOilofOklahoma. B) TexacoOilofTexas.
C) GulfOilofPennsylvania. D) StandardOilofNewJersey.
Answer: D
Diff:2
47) ThelawpassedbyCongressin1914thatwasdesignedtosharpenordefinefurtherthe
vaguenessoftheShermanActiscalled
A) theRobinson-PatmanAct. B) theWheeler-LeaAct.
C) theClaytonAct. D) theFederalTradeCommissionAct.
Answer: C
Diff:2
48) TheactofCongresswhichprohibitedunfairordeceptiveactsorpracticesincommerceis
called
A) theFederalTradeCommissionActof1914.
B) theClaytonAct.
C) theChainStoreAct.
D) theRobinson-PatmanAct.
Answer: A
Diff:2
49) AnothernamefortheChainStoreActis
A) theShermanAntitrustActof1890.
B) theClaytonActof1914.
C) theFederalTradeCommissionActof1914.
D) theRobinson-PatmanActof1936.
Answer: D
Diff:2
50) WhichofthefollowingorganizationsisexemptfromprosecutionundertheShermanAntitrust
Act(1890)?
A) retailers B) bookpublishers
C) laborunions D) televisionstations
Answer: C
Diff:2
51) TheShermanAct
A) prohibitedbanksfromcrossingstateslines.
B) prohibitedrailroadsfromtransportingexplosives.
C) providedfortheregulationofnaturalmonopolies.
D) declaredthatmonopolizationandrestraintoftradewereillegal.
Answer: D
Diff:1
52) Whichofthefollowingisillegalaccordingtotheantitrustlaws?
A) theuseofcoupons
B) pricediscriminationbasedoncostdifferences
C) verticalmergers
D) pricefixing
Answer: D
Diff:1
53) TheSupremeCourtsdecisionintheStandardOilofNewJerseycasewas
A) toforcethecompanytosendrefundcheckstocustomers.
B) toforcethecompanytopay$10billioninfines.
C) toincreasethefineimposedbyalowercourt.
D) tobreakupthecompany.
Answer: D
Diff:1
54) Supposethatsmartphoneproducersmeetsecretlyandagreetoissuethesmartphonesoftheir
mostsuccessfulmodelssequentiallyandatthesamepricethatmaximizestheirprofits.After
hearingaboutthesecretmeetingtheU.S.JusticeDepartmentismostlikelytofilechargesunder
the
A) ShermanAct. B) Wheeler-LeaAct.
C) Robinson-PatmanAct. D) FTCAct.
Answer: A
Diff:2
55) Whichofthefollowingactsoutlawedsellingproductsatunreasonablylowpriceswiththe
intentofreducingcompetition?
A) ShermanAct B) FTCAct
C) Robinson-PatmanAct D) Wheeler-LeaAct
Answer: C
Diff:2
56) AllofthefollowingareexemptedfromantitrustlawsEXCEPT
A) laborunions. B) MicrosoftWindows.
C) professionalbaseball. D) hospitals.
Answer: B
Diff:2
57) AllofthefollowingareexemptfromantitrustlawsuitsEXCEPT
A) laborunions. B) professionalbaseball.
C) publictransportation. D) softwaredevelopers.
Answer: D
Diff:1
58) ThefirstantitrustlawthattheU.S.Congressenactedwas
A) theClaytonAntitrustAct. B) theShermanAntitrustAct.
C) theRobinson-PatmanAct. D) theFederalTradeCommissionAct.
Answer: B
Diff:1
59) Aretailstorecutsthepricesoftheproductsitsellstoforceitscompetitortoleavethemarket.
Thisisprohibitedbythe
A) ShermanAct B) Robinson-PatmanAct
C) AldrichAct. D) FTCAct
Answer: B
Diff:1
60) AntitrustlawsintheUnitedStates
A) areanattempttofostercompetition.
B) arenotnecessaryinthetwenty-firstcentury.
C) havenotbeenusedinthepasttwenty-fiveyears.
D) arethesameasthelawsintheEuropeanUnion.
Answer: A
Diff:1
61) DiscusstheClaytonActandtheFederalTradeCommissionAct,andrelevantamendmentsto
them.
Answer: TheClaytonActwaspassedtoprohibitorlimitanumberofspecificbusinesspractices
thatwerefelttobeunreasonableattemptsatrestrainingtrade.Includedareprice
discrimination,exclusivedealingcontracts,andmergers.TheRobinson -PatmanAct
amendedtheClaytonActtostrengthentheprohibitionsonpricediscrimination.The
FederalTradeCommissionActestablishedtheFederalTradeCommission(FTC),and
authorizedtheFTCtocontrolunfairmethodsofcommerce,includingdeceptive
advertising.
Diff:2
62) DiscusstheimportantprovisionsoftheShermanAntitrustActof1890.
Answer: TheShermanAntitrustActprohibitscontractsandcombinationsinrestraintoftradeand
prohibitsmonopolization.Neitherrestraintoftradenormonopolizationaredefinedin
theAct.TheActwouldappeartoprohibitcollusionandcertainmethodsofobtaininga
monopolyposition.
Diff:1
27.6AntitrustEnforcement
1) TheSupremeCourthasdefinedtheoffenseofmonopolizationasinvolvingallofthefollowing
elementsEXCEPT
A) thepossessionofmonopolypowerintherelevantmarket.
B) thewillfulacquisitionofmonopolypower.
C) theabilitytogrowabusinessasaconsequenceofasuperiorproduct.
D) themaintenanceofmonopolypower.
Answer: C
Diff:1
Topic: 27.6AntitrustEnforcement
2) Whichofthefollowingdefinesmonopoly?
A) ShermanAct B) ClaytonAct
C) FederalTradeCommissionAct D) noneoftheabove
Answer: D
Diff:1
3) Whichofthefollowingdefinesmonopolization?
A) TheSecuritiesandExchangeCommission
B) TheFederalReserve
C) U.S.SupremeCourt
D) FederalTradeCommissionAct
Answer: C
Diff:1
4) Theactofsellinganiteminslightlyalteredformsatdifferentpricesandtodifferentgroupsof
consumersisknownas
A) bundling. B) versioning.
C) tie-insales. D) lemonsmarketing.
Answer: B
Diff:3
5) Theactofofferingtwoormoreproductsforsaleasasetiscalled
A) bundling. B) versioning. C) tie-insales. D) branding.
Answer: A
Diff:3
6) AccordingtotheJusticeDepartmentandtheFederalTradeCommission,amergerwouldlikely
bechallengedif
A) thepost-mergerindustryhasanHHIabove1,000andtheHHIrisesbymorethan100.
B) thepost-mergerindustryhasanHHIabove500andtheHHIrisesbymorethan50.
C) thenumberoffirmsinthepost-mergerindustryisverylarge.
D) thefirmsmarketsareverylarge.
Answer: A
Diff:2
QuestionStatus: New
7) AccordingtoU.S.antitrustenforcementguidelines,amergerislikelytobechallengedif
A) theHHIdecreasesafterthemerger.
B) theindustryafterthemergerhasanHHIabove1,800andtheHHIrisesbymorethan50.
C) theindustryafterthemergerhasanHHIabove1,800andtheHHIfallsbymorethan100.
D) theindustryafterthemergerhasanHHIabove1,000andtheHHIrisesbymorethan10.
Answer: B
Diff:1
QuestionStatus: New
8) TheU.S.antitrustenforcersdeterminewhetheramergerviolatesantitrustlawsbyexamining
A) boththeresultingchangeintheHHIandthelevelofpost-mergerHHI.
B) onlytheresultingchangeintheHHIbutnotthelevelofHHIafterthemerger.
C) boththesizeofthemarketafterthemergerandtheprofitsofthemergers.
D) whetherthemergersaremonopoliesbeforetheymerge.
Answer: A
Diff:1
QuestionStatus: New
9) Definingtherelevantmarketinvolveslookingattwocomponents.Theyare
A) thecompetitivemarketandthedominantmarket.
B) thelocalmarketandthenationalmarket.
C) thegeographicmarketandtheproductmarket.
D) thegoodsmarketandtheservicesmarket.
Answer: C
Diff:1
10) TheSudsySodaCompanywillnotsellitssoftdrinkstoarestaurantunlessthatbusinessalso
buyspapercupsfromSudsy.Thisrequirementisanexampleof
A) productversioning. B) tie-insales.
C) pricedifferentiation. D) complementarypricing.
Answer: B
Diff:1
11) Oneoftheelementsofmonopolizationis
A) havingamonopoly.
B) wantingtobeamonopolyandwantingtoearnmonopolyprofits.
C) monopolypricing.
D) thewillfulacquisitionofmonopolypower.
Answer: D
Diff:1
12) Oneoftheelementsofmonopolizationis
A) havingasuperiorproductorhavingasuperiorbusinessacumen..
B) thepossessionofmonopolypowerintherelevantmarket.
C) whenonlyonefirmexistsinanindustry.
D) havingasignificantpricingpowerduetoanaccidentintherelevantmarket.
Answer: B
Diff:1
13) Thepossessionofmonopolypowerandthewillfulacquisitionofthatpoweris
A) definedintheShermanAntitrustActasmonopolization.
B) definedbytheSupremeCourtasmonopolization.
C) notdefinedasmonopolizationuntilastatementaboutprofitsisincluded.
D) notthedefinitionofmonopolization.
Answer: B
Diff:3
14) TheSupremeCourthasdefinedtheoffenseofmonopolizationto
A) bewhenonlyonefirmexistsinanindustry.
B) occurwhenasymmetricinformationexists.
C) includethepossessionofmonopolypowerandthewillfulmaintenanceofthatpower.
D) beunfairactsinthepracticeofcommerce.
Answer: C
Diff:1
15) Supposethatinanindustry,firmXhas50percentmarketshare,firmYhas35percentmarket
share,andfirmZhas10percentmarketshare.WhichofthefollowingmergersisNOTlikelyto
bechallengedbytheFederalTradeCommission?
A) AmergerbetweenfirmsXandY
B) AmergerbetweenfirmsYandZ
C) AmergerbetweenfirmsXandZ
D) Anymergeroftwofirmsamongthosefirmsislikelytobechallenged.
Answer: D
Diff:3
QuestionStatus: New
16) ThetypeofmergersthattheFederalTradeCommissionwillmostlikelychallengeare
A) mergersoffirmswithinarelevantmarket.
B) mergersoffirmsindifferentmarkets.
C) mergersoffirmsthatwillgenerateeconomiesofscale.
D) mergersoffirmsindifferentgeographicallocations.
Answer: A
Diff:1
QuestionStatus: New
17) IntheUnitedStates,antitrustenforcementfocuseson
A) theprofitabilityoftheleadingfirmsinanindustry.
B) thedegreeofmarketconcentrationwithinamarket.
C) theaveragelevelofpriceschargedbyfirms.
D) theprice-costmarginofanindustry.
Answer: B
Diff:2
QuestionStatus: New
18) Thekeyissueindeterminingtherelevantproductmarketis
A) thedegreeofinterchangeabilitybetweenproducts.
B) thespecificgeographicareainwhichcompetingproductsoverlap.
C) theproductionprocessesusedtoproducethegoods.
D) themarketsharetest.
Answer: A
Diff:2
19) Offeringtwoormoreproductsforsaleasasetisknownas
A) bundling. B) versioning.
C) monopolizing. D) productsharing.
Answer: A
Diff:2
20) TheUnitedStatesasawholewouldbeinappropriateastherelevantgeographicmarketwhen
anantitrustcaseinvolved
A) ABCandNBC. B) twoautoproducers.
C) twosteelproducers. D) twoconcreteproducers.
Answer: D
Diff:3
21) Ifbottledwater,softdrinksandjuicesareincludedinthedefinitionofthebeveragemarket,
thentherelevantdefinitionofthemarketisdefinedby
A) thelocationsofproductsthatareproduced.
B) thelowdegreesofsubstitutionbetweenproductsinthemarket.
C) thehighdegreesofsubstitutionbetweenproductsinthemarket.
D) alowlevelofcompetitionamongfirmsproducingthoseproducts.
Answer: C
Diff:2
QuestionStatus: New
22) Themaingoalofantitrustpolicyisto
A) encouragefirmstoproduceattheMR= demandlevel.
B) regulatenaturalmonopolies.
C) preventthemonopolizationofindustries.
D) preventthenationalizationofindustries.
Answer: C
Diff:1
23) Thefirststepinenforcinganyantitrustpolicyisto
A) winthesupportofthepublic.
B) wincongressionalapproval.
C) wintheapprovalofthestatesenatorsfromthestatewherethecompanyisheadquartered.
D) definethemarket.
Answer: D
Diff:2
24) ClarkesgasstationinPodunkonlysellsgasolineifcustomersalsopurchaseoil.
A) Thisiscalledatie-insaleandisinviolationofantitrustlaws.
B) Thisisnotinviolationofantitrustlaws,ascarsneedbothoilandgas.
C) Thisisnotinviolationofantitrustlaws,asconsumersgettheoilbelowmarketprices.
D) ThisisinviolationoftheRobinson-PatmanAct.
Answer: A
Diff:2
25) Whencompaniessellslightlydifferentformsofaproducttodifferentgroupsofcustomers,this
isknownas
A) markettesting. B) editions. C) adaptations. D) versioning.
Answer: D
Diff:2
26) TheU.S.antitrustenforcerswilllikelyblockamergerif
A) themergingfirmsalreadyearnexcessiveprofits.
B) themergingfirmsareindifferentmarkets.
C) themergerwillsubstantiallyincreasemarketpower.
D) thedegreeofconcentrationdeclinesasaresultofthemerger.
Answer: C
Diff:2
QuestionStatus: New
27) WhichofthefollowingmergerswouldmostlikelybechallengedbytheFederalTrade
Commission?
A) Tworestaurantsinalargemetroarea
B) TwolargestwirelessserviceprovidersintheU.S.wirelesscommunicationindustry
C) Anautomakerandaninsurancecompany
D) OneoilrefineryintheU.S.andanotheroilrefineryinCanada
Answer: B
Diff:2
QuestionStatus: New
28) Oneoftheagenciesresponsibleforenforcementofantitrustpolicyis
A) theTrustDivisionofCongress. B) theFederalTradeCommission.
C) theWorldTradeOrganization. D) theFoodandDrugAdministration.
Answer: B
Diff:1
29) Enforcementofantitrustpolicyistheresponsibilityof
A) theTrustDivisionofCongressandtheWorldTradeOrganization.
B) theFederalTradeCommissionandtheAntitrustDivisionoftheDepartmentofJustice.
C) theWorldTradeOrganizationandtheFDA.
D) theFoodandDrugAdministrationandCongress.
Answer: B
Diff:1
30) Ameasureofmonopolypowerusedbythegovernmentisthe
A) percentageshareoftherelevantmarketormarketsharetest.
B) profitofthefirmcomparedtootherfirmsintheindustry.
C) pricechargedbythefirmforgoodsandservices.
D) percentagedifferencebetweenpriceandmarginalcost.
Answer: A
Diff:2
31) WhenMicrosoftputtogetherasetofproductswiththeWindowsoperatingsystem,itwas
practicing
A) bundling. B) tie-insales. C) versioning. D) compacting.
Answer: A
Diff:1
32) Whatisthedifferencebetweenproductversioningandproductbundling?Whichofthesetwo
businesspracticeshaveantitrustauthoritiesbeenmorelikelytoregardtobetheformofprice
discriminationcalledtie-insales?Why?
Answer: Versioningentailssellingaproductinslightlyalteredformstodifferentgroupsof
consumers.Fromonestandpoint,versioningmightbeseenameansofengaginginprice
discriminationbychargingdifferentpricestodifferentconsumersforverynearlythe
sameproduct.Fromanotherpointofview,however,versioningcanberegardedas
imperfectlysubstitutableproductssoldinseparatemarkets,inwhichcasethereisno
pricediscriminationassociatedwiththisbusinesspractice.Productbundlingentails
offeringtwoormoreproductsforsaleasaset.Ifabundlingarrangementlimitsa
consumersabilitytobuyoneproducttothesimultaneouspurchaseofanotherproduct,
thenthisisaformoftie-insalethatantitrustauthoritiessometimesregardasameansof
practicingpricediscrimination.
Diff:2
33) Whatisthedifferencebetweenholdingamonopolyandmonopolization?Whichisillegal?
Explain.
Answer: Monopolizationinvolveshavingamonopolyplusshowingawillfulacquisitionor
maintenanceofthepowerthatgoesbeyondgrowththatresultsfromsuperiorproduct,
businessacumen,orhistoricalaccident.Monopolizationisillegalwhileholdinga
monopolyisnot.Notallmonopoliescanbestopped.Forexample,asmallruraltown
mayhaveonlyonegasstation,givingthegasstationsomemonopolypower.But,ifthe
townistoosmalltosupportasecondstation,nothingcanbedoneaboutthemonopoly.
Further,patentsprovidelegalmonopolies.
Diff:3
Chapter28
TheLaborMarket:Demand,SupplyandOutsourcing
28.1LaborDemandforaPerfectlyCompetitiveFirm
1) Foraperfectlycompetitivefirm,thevalueofthemarginalproductoflaborfallsasmore
workersarehiredbecauseofthediminishing
A) outputprice. B) marginalphysicalproductoflabor.
C) priceoflabor. D) marginalcostofproduction.
Answer: B
Diff:1
Topic: 28.1LaborDemandforaPerfectlyCompetitiveFirm
2) Theadditionalrevenueearnedfromhiringonemoreworkerisknownasthe
A) marginalphysicalproductoflabor. B) marginalrevenueproductoflabor.
C) marginalfactorcostoflabor. D) marginalutilityoflabor.
Answer: B
Diff:1
3) Theadditionalcostassociatedwiththehiringofonemoreunitoflaborisknownasthe
A) marginalphysicalproductoflabor. B) marginalrevenueproductoflabor.
C) marginalfactorcostoflabor. D) marginalutilityoflabor.
Answer: C
Diff:1
4) Supposeatthecurrentleveloflaborused,MRP= $100andMFC= $50.Tomaximizeprofits,

thefirmshould
A) hiremorelabor. B) reducetheleveloflabor.
C) maintainthecurrentleveloflabor. D) shutdown.
Answer: A
Diff:1
Chapter28TheLaborMarket:Demand,SupplyandOutsourcing851

thefirmshould
C) maintainthecurrentleveloflabor. D) expandproduction.
Answer: B
Diff:1

thefirmshould
C) maintainthecurrentleveloflabor. D) shutdown.
Answer: C
Diff:1
7) Deriveddemandmeans
A) thelabordemandcurvewillbeupwardsloping.
B) labordemandisderivedfromdemandfortheproductitproduces.
C) labordemandwillshiftaboutinarandomfashion.
D) labordemandisdeterminedbythesupplyoflabor.
Answer: B
Diff:1
8) Theadditionalproductionresultingfromhiringonemoreworkeris
A) marginalphysicalproduct. B) marginalcost.
C) marginalproduction. D) additionalproduction.
Answer: A
Diff:1
9) Holdingotherthingsconstant,anincreaseintheuseofcapitalinproductionwould
A) increasethemarginalproductivityoflabor.
B) decrease,butnotproportionately,themarginalproductivityoflabor.
C) notchangethemarginalproductivityoflabor.
D) decreaseproportionatelythemarginalproductivityoflabor.
Answer: A
Diff:1
10) Ifafirmemploysanextraunitoflabor,theadditionalproductgeneratedbyemployingthe
extraunitoflaboris
A) themarginalphysicalproductoflabor. B) thediminishedmarginalproduct.
C) theoutsideedge. D) totalproduct.
Answer: A
Diff:1
11) Thechangeintotaloutputduetothechangeinonevariableinput,whileholdingallother
inputsconstant,isthe
A) marginalrevenueproduct. B) deriveddemandforlabor.
C) marginalphysicalproduct. D) marketdemandcurveforlabor.
Answer: C
Diff:1
12) Themarginalphysicalproductoflaboristhe
A) totaloutputdividedbythenumberoflaboremployed.
B) wagethatmustbepaidtolabor.
C) valueofsalesdividedbyadditionallaborused.
D) changeinoutputgeneratedbyaunitchangeinlabor.
Answer: D
Diff:1
13) Weassumethatwhenafirmhiresadditionalworkers,themarginalphysicalproductoflabor
will
A) increasebecausemoreworkerscanalwaysgetmoreworkdone.
B) decreasebecausethenewworkersarelikelytobelessablethanthepreviouslyhiredones.
C) decreasebecauseeachworkernowhaslesscapitalandotherresourcestoworkwith.
D) increasebecauselargefirmsaremoreefficient.
Answer: C
Diff:1
14) Asmoreworkersarehired,themarginalphysicalproductoflaboreventuallydeclinesbecause
A) lessefficientworkersarehiredasthenumberofworkersincreases.
B) workersdonotworkwelltogetherwhenthenumberofworkersincreases.
C) theamountofcapitaleachworkerhastoworkwithdeclinesasthenumberofworkers
increases.
D) ofdiseconomiesofscale.
Answer: C
Diff:2
15) Marginalrevenueproductis
A) marginalphysicalproductmultipliedbymarginalrevenue.
B) marginalphysicalproductmultipliedbyaveragevariablecostoftheproduct.
C) thepriceoftheproduct.
D) thetotalrevenuefromthesaleoftheproductsales.
Answer: A
Diff:1
16) Thecontributiontototalrevenuescomingfromthenextworkerhiredis
A) marginalproduct. B) marginalrevenueproduct.
C) totalproduct. D) totalrevenues.
Answer: B
Diff:2
17) Afirmsmarginalfactorcostdescribes
A) theincreaseinthefirmstotalrevenueasonemoreunitofoutputissold.
B) thechangeintotalfixedcostthatresultsfromhiringonemoreunitofinput.
C) thechangeintotalvariablecostthatresultsfromtheproductionofanextraunitofoutput.
D) thechangeintotalcostthatresultsfromusingonemoreunitofaninput.
Answer: D
Diff:1
18) Ifafirmisaperfectlycompetitivepurchaseroffactorinputsandthewagerateis$5,the
marginalfactorcostforlaboris
A) greaterthan$5. B) lessthan$5.
C) $5. D) indeterminate.
Answer: C
Diff:1
19) Whenmarketwagesincreaseinaperfectlycompetitivemarket,then
A) themarginalfactorcostincreases. B) themarginalproductincreases.
C) themarginalfactorcostdecreases. D) themarginalproductdecreases.
Answer: A
Diff:1
20) Themarginalrevenueproductis
A) thechangeintotaloutputresultingfromaone-unitchangeinvariableoutput.
B) thechangeinmarginaloutputresultingfromaone-unitchangeinvariableinput.
C) thechangeintotalrevenueresultingfromaone-unitchangeinvariableinput.
D) thechangeinmarginalrevenueresultingfromaone-unitchangeinvariableinput.
Answer: C
Diff:1
21) Themarginalrevenueproductoflaboris
A) themarginalphysicalproductmultipliedbymarginalrevenue.
B) themarginalrevenueofoutputmultipliedbythepriceoftheinput.
C) totalsalesdividedbytotallaboremployed.
D) totallaboremployeddividedbytotalsales.
Answer: A
Diff:1
22) When4unitsoflaborareemployed,totalproductis6units;when5unitsoflaborare
employed,totalproductis9unitsofoutput.Ifthepriceofoutputis$5perunit,whatisthe
marginalrevenueproductofthe5thunitoflabor?
A) $3 B) $5 C) $15 D) $45
Answer: C
Diff:1
23) When5unitsoflaborareemployed,totalproductis9units;when6unitsoflaborare
employed,totalproductis11unitsofoutput.Ifthepriceofoutputis$5perunit,whatisthe
marginalrevenueproductofthe6thunitoflabor?
A) $10 B) $5 C) $15 D) $55
Answer: A
Diff:1
24) Marginalfactorcostis
A) thechangeinthevalueofoutputfromusinganadditionalunitofthefactor.
B) thecostofanadditionalunitofoutput.
C) thetotalvalueoffactorcostdividedbytheonecostthatisbeingheldconstant.
D) thecostofusinganadditionalunitofaninput.
Answer: D
Diff:1
25) Themarginalrevenueproductrepresents
A) themarginalphysicalproductoflabordividedbythepriceofthegoodproduced.
B) theworkerscontributiontothefirmstotalrevenues.
C) theworkerscontributiontothefirmsoutput.
D) thevalueofeachadditionalunitofoutput.
Answer: B
Diff:1
26) Thefirmsdemandcurveforlaboris
A) themarginalrevenueproductcurveforlabor.
B) thedemandcurveforthegoodproduceddividedbythepriceofthegood.
C) themarginalphysicalproductcurveforlabordividedbythepriceofthegood.
D) themarginalphysicalproductcurveforlabormultipliedbythepriceoflabor.
Answer: A
Diff:1
27) Afirmwillnothireadditionalworkersonce
A) itearnsaccountingprofits.
B) theadditionalcostofaworkerequalstheadditionalrevenuefromtheworker.
C) totalproductisrising.
D) thecompanyreachesitsbreakevenoutputlevel.
Answer: B
Diff:1
28) WhenMFC=MRP,afirminacompetitivemarketwill
A) stophiring. B) hiremoreworkers.
C) earnadditionalprofits. D) layoffworkers.
Answer: A
Diff:1
29) WhenMFC<MRP,afirminacompetitivemarketwill
C) earnfewerprofits. D) layoffworkers.
Answer: B
Diff:1
30) WhenMFC>MRP,afirminacompetitivemarketwill
C) earnadditionalprofits. D) layoffworkers.
Answer: D
Diff:1
31) Aprofit-maximizingfirminacompetitivemarketwillcontinuetohiremoreworkerswhen
A) themarginalfactorcostexceedsthemarginalrevenueproductoftheadditionalworkers.
B) themarginalfactorcostequalsthemarginalrevenueproductoftheadditionalworkers.
C) themarginalfactorcostislessthanthemarginalrevenueproductoftheadditional
workers.
D) themarginalfactorcostislessthanzero.
Answer: C
Diff:2
32) Whichofthefollowingstatementsaboutaperfectlycompetitivemarketaretrue?
I. Theperfectlycompetitiveindustryfacesanupwardslopinglaborsupplycurve.
II. Theindividualfirminaperfectlycompetitiveindustryfacesaperfectlyelasticlaborsupply
curve.
Answer: C
Diff:1
33) Themarketdemandcurveforlabor
A) slopesdownward.
B) slopesupward.
C) isverticalattheexistingsupplyoflabor.
D) ishorizontalatthegoingwagerate.
Answer: A
Diff:1
34) Afirmsmarginalrevenueproductoflaborcurveisalso
A) itslabordemandcurve. B) itsmarginalcostcurve.
C) itstotalrevenueline. D) itslong-runinputcostfunction.
Answer: A
Diff:1
35) Thedemandforlaboris
A) derivedfromthesatisfactionthathiringtheinputsprovidestheownerormanagerofthe
firmmoremoney.
B) derivedfromthedemandforthefinalproductbeingproduced.
C) derivedfromautilitymaximizingprocesssimilartothatusedtoderivethedemandcurve
forgoodsandservices.
D) totallyunrelatedtothedemandcurveforthefinalproduct.
Answer: B
Diff:1
36) Whenthepriceofaproductincreases,themarginalrevenueproductcurveinaperfectly
competitivemarket
A) doesnotchange. B) becomesflatter.
C) shiftstotheright. D) shiftstotheleft.
Answer: C
Diff:1
37) Whenthepriceofaproductdecreases,themarginalrevenueproductcurveinaperfectly
competitivemarket
Answer: D
Diff:1
38) Whenthemarginalproductivityoflabordecreases,thedemandcurveforlaborinaperfectly
competitivemarket
Answer: D
Diff:1
39) Whenincreaseddemandraisesthepriceoftheproduct,the
A) marginalrevenueproductwillalsoincrease.
B) marginalrevenueproductwillfall.
C) marginalrevenueproductwillremainunchanged.
D) saleswillfall.
Answer: A
Diff:2
40) Themarginalrevenueproductcurveshiftswhen
A) wagesfall.
B) thereisachangeintheproductpriceworkersareproducing.
C) wagesrise.
D) thewagespaidexceedtheprice.
Answer: B
Diff:2
41) Aperfectlycompetitivefirmwillhireworkersuptothequantityatwhichthewagerateequals
the
A) marginalrevenueproductoflabor. B) marginalfactorcostoflabor.
C) priceoftheextraoutputproduced. D) averagephysicalproductoflabor.
Answer: A
Diff:1
42) Adecreaseindemandforaproduct,holdingotherthingsconstant,will
A) increasethemarginalrevenueproductoflabor.
B) decreasethemarginalrevenueproductoflabor.
C) notchangethemarginalrevenueproductoflabor.
D) haveanundeterminedeffectuponthemarginalrevenueproductoflabor.
Answer: B
Diff:1
43) Thedemandforlaborisconsideredaderiveddemandsinceitdependson
A) thesupplyoflabor.
B) themarketforcapital.
C) theconsumerdemandfortheoutputproduced.
D) competitivemarkets.
Answer: C
Diff:1
44) Anoutwardshiftintheconsumerdemandforwheatwill
A) raisethepriceofwheatandshiftinwardthemarginalrevenueproductoflaborproducing
wheat.
B) leadtomorecapitalandlesslaborusedinproducingwheat.
C) raisethepriceofwheatandshiftoutthemarginalrevenueproductoflaborproducing
wheat.
D) leadtodownwardpressureonthewagesofthoseproducingwheat.
Answer: C
Diff:1
45) Afirmisapricetakerinthelabormarketif
A) theskillsofavailableworkersdonotmatchtherequirementsforthejob.
B) thereisascarcityoflaborinthemarket.
C) thehiringofmoreworkerswilldrivetheexistingwagerateup.
D) thehiringofmoreworkerswillleavetheexistingwagerateunchanged.
Answer: D
Diff:1
46) Ifthesupplyoflabortoafirmisperfectlyelasticatthegoingwagerateestablishedbytheforces
ofsupplyanddemandthen
A) thefirmispricetaker.
B) thefirmcanonlyhireadditionalunitsoflaborbydrivingthewagerateup.
C) thewageratehasbeendecreasing.
D) fullemploymentexistsinthelabormarket.
Answer: A
Diff:1
47) Forafirminaperfectlycompetitivelabormarket,thesupplycurveoflaboris
Answer: C
Diff:1
48) Afirminacompetitiveinputmarketcan
A) hireworkersatthegoingwage.
B) hireadditionalworkersonlybyraisingwages.
C) hireadditionalworkersatlowerwagesbecausethosewhoarestillunemployedare
anxioustowork.
D) hireadditionalworkersonlyafteralongsearchprocess.
Answer: A
Diff:2
49) Foraworkertobepotentiallyavailable,heorshemust
A) knowaboutthejobsavailableataparticularfirm.
B) beintherelevantgeographicmarketandbewillingtoworkforminimumwage.
C) havemostoftheskillsrequiredbythefirmonly.
D) havetheskillsrequiredbythefirmandbeintherelevantgeographicmarket.
Answer: D
Diff:1
50) Theincreaseinoutputthatresultswhenonemoreunitofavariableinputishirediscalled
A) totalphysicalproduct. B) marginalphysicalproduct.
C) averagephysicalproduct. D) marginalrevenue.
Answer: B
Diff:1
51) Themarginalphysicalproductoflaboris
A) theoutputofthefirmdividedbythenumberofworkers.
B) thechangeintotalrevenuesresultingfromtheadditionofonemoreworker,while
increasingoneotherfactorofproduction.
C) thechangeinoutputresultingfromtheadditionofonemoreworker,holdingotherfactors
ofproductionconstant.
D) thechangeinoutputresultingfromtheadditionofonemoreworker,adjustingthelevelof
thecapitalstockaccordingly.
Answer: C
Diff:1
52) Asafirmhiresmoreworkers,holdingtheamountsofcapitalandotherinputsconstant,
A) outputincreasesatadecreasingrate.
B) outputincreasesataconstantrate.
C) outputincreasesforawhileandthendecreases.
D) outputincreases,butwecantbecertainwhetheroutputincreasesatanincreasingora
decreasingrate.
Answer: A
Diff:2
53) Otherthingsheldconstant,aftersomepointhiringadditionalunitsoflaborwillcausethe
marginalphysicalproductoflabortodeclinebecause
A) thefirmisapricetaker.
B) thewagerateincreaseswhenadditionalworkersarehired.
C) ofthelawofdiminishingmarginalproduct.
D) thesupplyoflaborisperfectlyelastic.
Answer: C
Diff:1
54) Asafirmhiresmoreworkers,holdingcapitalandotherfactorsconstant,themarginalphysical
productoflabordeclinesbecause
A) therearediseconomiesofscale.
B) lessefficientworkersarehiredasthenumberofworkersincrease.
C) workersdontperformwellinteams.
D) theamountofotherinputseachworkerhastoworkwithdeclinesasthenumberof
workersincreases.
Answer: D
Diff:2
55) ThemarginalphysicalproductoflaborforthemostrecentworkerhiredbyAjaxis286.IfAjax
weretohireanadditionalworkerwewouldexpectthemarginalphysicalproductoflaborto
A) remainat286. B) bebelow286.
C) beabove286byasmallamount. D) beabove286byalargeamount.
Answer: B
Diff:3
LaborInput TotalPhysicalProduct
(workers/day) (output/day)
10 500
11 600
12 690
13 760
14 800
56) Refertotheabovetable.Whatdoesthemarginalphysicalproductequalwhentheamountof
laborgoesfrom10to11units?
A) 600 B) 500 C) 100 D) 54.5
Answer: C
Diff:1
57) Refertotheabovetable.Ifthepriceofthegoodproducedis$7,themarginalrevenueproduct
ofthe11thworkeris
A) $700 B) $4200 C) $630 D) $3500
Answer: A
Diff:1
A) 600 B) 90 C) 100 D) 690
Answer: B
Diff:1
ofthe12thworkeris
A) $720 B) $800 C) $5520 D) $560
Answer: A
Diff:1
A) 58.5 B) 70 C) 690 D) 760
Answer: B
Diff:2
ofthe13thworkeris
A) $810 B) $360 C) $6840 D) $630
Answer: D
Diff:1
62) Refertotheabovetable.Supposethepriceofthegoodsoldis$10andthemarginalfactorcost
oflaboris$700,howmanyunitsoflaborwillthefirmhire?
A) 10 B) 11 C) 12 D) 13
Answer: D
Diff:1
63) Refertotheabovetable.Foreachlevelofemploymentoflaborshown
A) marginalproductdeclines.
B) marginalproductholdsconstant.
C) marginalproductrises.
D) marginalproductfallsforallemployeesbeyondthe10thunitoflabor.
Answer: D
Diff:2
64) Refertotheabovetable.Whichofthefollowingstatementsiscorrect?
A) Thetablefollowseconomicprinciplesbecauseinanincreasingcostindustry,increasesina
variableinputwillleadtoincreaseinoutput.
B) Thetabledoesnotfolloweconomicprinciplesbecauseinanincreasingcostindustry,
increasesinavariableinputwillleadtodecreaseinoutput.
C) Thetablefollowseconomicprinciplesbecausethelawofdiminishingmarginalproduct
predictsthatincreaseinavariableinputwilleventuallyleadtoadecreaseinthemarginal
physicalproduct.
D) Thetabledoesnotfolloweconomicprinciplesbecausethelawofdiminishingmarginal
productpredictsthatincreaseinavariableinputwilleventuallyleadtoanincreaseinthe
marginalphysicalproduct.
Answer: C
Diff:2
LaborInput TotalPhysicalProduct
(workers/day) (output/day)
10 500
11 600
12 690
13 760
14 800
65) Refertotheabovetable.Ifthepriceoftheproductis$1.50,whatisthemarginalrevenue
productofthe11thworker?
A) $1.50 B) $13.64 C) $150 D) $900
Answer: C
Diff:1
66) Refertotheabovetable.Ifthepriceoftheproductis$1.50,whatisthemarginalrevenue
productofthe12thworker?
A) $1035 B) $135 C) $90 D) $1.50
Answer: B
Diff:1
67) Refertotheabovetable.Ifthepriceoftheproductis$1.50,andthemarginalfactorcostofan
additionalunitofaninputis$135,howmanyunitsoflaborshouldbehired?
A) 11 B) 12 C) 13 D) 14
Answer: B
Diff:1
68) Refertotheabovetable.Ifthepriceoftheproductis$1.50,andthemarginalfactorcostofan
additionalunitofaninputis$105,howmanyunitsoflaborshouldbehired?
A) 11 B) 12 C) 13 D) 14
Answer: C
Diff:1
69) Ifafirmhires215workersitwillproduce3,016unitsofoutput.Ifithires216workersitwill
produce3,128unitsofoutput.Themarginalphysicalproductoflaborequals
A) 1 B) 112 C) 216 D) 3,128
Answer: B
Diff:2
70) Ifafirmhires312workersitwillproduce4,522unitsofoutput.Ifithires313workersitwill
produce4,786unitsofoutput.Themarginalphysicalproductoflaborequals
A) 4,786 B) 313 C) 264 D) 1
Answer: C
Diff:2
71) Ifafirmhires312workersitproduces4,522computers.Ifithires313workersitproduces4,786
computers.Ifcomputerssellataconstantpriceof$1andlaborishiredataconstantwagerate
of$65perworker
A) thefirmshouldhireandretaintheadditionalworker.
B) themarginalfactorcostoflaboris$65.
C) themarginalrevenueproductoftheaddedworkeris$264.
D) alloftheabove
E) theadditionalemployeebringsintothefirmaNETrevenueof$112.
Answer: D
Diff:2
72) Theadditionalrevenueobtainedbyafirmwhenithiresanadditionalworker,holdingother
inputsconstant,is
A) themarginalphysicalproductoflabor.
B) themarginalrevenueproductoflabor.
C) themarginalcostoflabor.
D) equaltototalrevenuedividedbythenumberofworkers.
Answer: B
Diff:1
73) Themarginalrevenueproductgives
A) thechangeintotalproductforanadditionalunitofavariableinput.
B) theamountthatotherinputsmustincreasebywhenlaborincreasebyoneunit.
C) theadditionstototalcostwhenanadditionalunitofavariableinputishired.
D) theadditionalrevenueobtainedwhenanadditionalunitofavariableinputishired.
Answer: D
Diff:1
74) Themarginalrevenueproduct
A) representstheincrementalcontributiontothefirmstotalrevenuesobtainedfroman
increaseinavariableinput.
B) alwaysincreaseswhenthereisanincreaseinavariableinput.
C) givestheincreaseincostwhenthereisanincreaseinavariableinput.
D) givesthechangeintotalproductwhenanadditionalunitofagoodishired.
Answer: A
Diff:1
75) Theadditiontorevenueobtainedfromfiringanadditionalunitoflaboris
A) totalproduct. B) marginalrevenueproduct.
C) marginalfactorcost. D) marginalphysicalproductoflabor.
Answer: B
Diff:1
76) Themarginalrevenueproductoflabordeclinesasthenumberofworkersincreasesbecause
A) firmshirethemostefficientworkersfirstandtheleastefficientworkerslast.
B) firmsmustlowerpricesforthefinalproductwhentheywanttosellmoreunits.
D) ofdiseconomiesofscale.
Answer: C
Diff:2
77) Foraperfectlycompetitivefirm,thevalueofthemarginalproductis
A) thesamethingasmarginalfactorcost.
B) thesamethingasmarginalphysicalproduct.
C) marginalphysicalproducttimestheproductprice.
D) marginalphysicalproducttimesthewagerate.
Answer: C
Diff:1
Numberof Total Numberof Total

Workers Output Workers Output
0 0 6 945
1 200 7 1000
2 420 8 1025
3 620 9 1035
4 770 10 1040
5 870
78) Refertotheabovetable.Ifthepriceofthegoodproducedis$5,themarginalrevenueproductof
the5thworkeris
A) $3350. B) $670. C) $500. D) $100.
Answer: C
Diff:2
79) Refertotheabovetable.Ifthepriceofthegoodproducedis$5,themarginalrevenueproductof
the7thworkeris
A) $125. B) $385. C) $5000. D) $55.
Answer: B
Diff:2
80) Refertotheabovetable.Supposethemarginalrevenueproductofthe7thworkeris$1100.This
impliesthat
A) thepriceofthegoodis$1.
B) thepriceofthegoodis$8.
C) thepriceofthegoodis$20.
D) wecannottellwhatthepriceofthegoodiswithoutmoreinformation.
Answer: C
Diff:3
81) Refertotheabovetable.Supposethemarginalrevenueproductofthe5thworkeris$800.This
impliesthat
A) thepriceofthegoodis$5.33.
B) thepriceofthegoodis$8.
C) thepriceofthegoodis$70.
D) wecannottellwhatthepriceofthegoodiswithoutmoreinformation.
Answer: B
Diff:3
82) Refertotheabovetable.Themarginalfactorcostoflaboris$200.Togetthefirmtohire8
workers,the
A) firmmustbeabletoreducewagesbelowthemarginalfactorcost.
B) priceofthegoodmustbe$8.
C) eighthworkermustbeatleastasproductiveastheseventhworkerwas.
D) wageratemustbeafractionofthemarginalfactorcostoflabor.
Answer: B
Diff:3
83) Refertotheabovetable.Supposethefirmhires5workersandthepriceofthegoodsoldis$3.
Themarginalfactorcostoflabormustbe
A) $3. B) $100. C) $300. D) $900.
Answer: C
Diff:2
84) Refertotheabovetable.Supposethepriceofthegoodsoldis$3andthemarginalfactorcostof
laboris$300,howmanyunitsoflaborwillthefirmhire?
A) 4. B) 5. C) 6. D) 3.
Answer: B
Diff:2
85) Refertotheabovetable.Supposethefirmhires4workersandthepriceofthegoodsoldis$4.
Themarginalfactorcostoflabormustbe
A) $4. B) $150. C) $3080. D) $600.
Answer: D
Diff:2
86) Refertotheabovetable.Supposethepriceofthegoodsoldis$4andthemarginalfactorcostof
laboris$600,howmanyunitsoflaborwillthefirmhire?
A) 4. B) 5. C) 6. D) 3.
Answer: A
Diff:2
87) Thecostofusinganadditionalunitofaninputiscalledthe
A) marginalrevenueproduct. B) marginalphysicalproductcost.
C) marginalfactorcost. D) marginalproductoflabor.
Answer: C
Diff:1
88) Themarginalfactorcostisthe
A) additionalrevenueobtainedfromaone-unitchangeinlaborinput.
B) additionalrevenueobtainedfromaone-unitchangeinoutput.
C) changeinoutputresultingfromtheadditionofonemoreworker.
D) costofusinganadditionalunitofaninput.
Answer: D
Diff:1
89) Whenthesupplyoflabortoafirmisperfectlyelasticthemarginalfactorcostwillequalthe
A) marketpriceoftheproduct. B) wagerate.
C) marginalphysicalproduct. D) wageratetimesthenumberofworkers.
Answer: B
Diff:3
90) Aprofit-maximizingfirmwillhireadditionalunitsoflaboruntil
A) theadditionalcostofhiringthelastworkerequalstheadditionalrevenuegeneratedby
thatworker.
B) theadditionalcostofhiringthelastworkerequalsthemarginalfactorcostoftheworker.
C) theextrarevenuefromhiringthelastworkerequalsthemarginalphysicalproductof
labor.
D) theextracostfromhiringthelastworkerequalsthecostoftheproduct.
Answer: A
Diff:2
91) Ajaxhasjustdiscoveredthatthemarginalrevenueproductgeneratedbythelastworkerhired
was$125whilethemarginalfactorcostwas$85.WhatshouldAjaxdo?
A) Leavethelevelofproductionunchanged.
B) Increasetheamountproduced.
C) Reducetheamountproduced.
D) Collectmoreinformationbeforemakingadecision.
Answer: B
Diff:3
Answer: C
Diff:3
Answer: A
Diff:3
94) Ifthemarginalrevenueproductofthelastworkerhiredexceedsthemarginalfactorcostofthe
worker,thefirmwouldbebetterservedifit
A) hiresadditionalworkers.
B) maintainsitscurrentlevelofworkersalreadyhired.
C) laysoffthelastworkerhired.
D) Noneoftheaboveisagoodoptionforaprofit-seekingfirm.
Answer: A
Diff:3
95) IfMFC>MRPL,thefirmshould
A) hiremoreworkers. B) lowerwages.
C) getridofsomecapital. D) reducethenumberofworkers.
Answer: D
Diff:3
96) Afirmshouldhireworkersuptothepointwhere
A) MP=P. B) MFC= P. C) MFC= MRP. D) MP=MRP.
Answer: C
Diff:1
97) IfMFC<MRPL,thefirmshould
A) hiremoreworkers. B) lowerwages.
C) getridofsomecapital. D) reducethenumberofworkers.
Answer: A
Diff:3
98) Iftheadditionalrevenuefromhiringanadditionalworkerequalstheadditionalcostsfrom
hiringtheextraworker,thenweknowthat
A) MFC=MPPL. B) MFC/MPPL=wage.
C) MFC/MRPL=1. D) MRPL/P= MFC.
Answer: C
Diff:3
99) Thedemandcurveforlaboristhe
A) marginalfactorcostcurveforlabor.
B) marginalphysicalproductcurveforlabor.
C) marginalphysicalproductcurveforlabortimesthewagerate.
D) marginalrevenueproductcurveforlabor.
Answer: D
Diff:1
100) Thedemandcurveforlaborslopesdownbecause
A) firmsvaluelessefficientworkerslessthantheyvaluemoreefficientworkers.
B) firmsmustlowerpricestoselltheadditionalunitsofitsproductthattheextraworkers
produce.
D) ofprofitmaximizingbehavior.
Answer: C
Diff:2
101) Anincreaseinthemarginalfactorcostoflaborwill
A) leadtoanincreaseinthequantitydemandedoflabor.
B) induceafirmtohirefewerworkers.
C) leadtoanincreaseinthevalueofanadditionalworker.
D) causethevalueofthemarginalproductoflabortoincrease.
Answer: B
Diff:2
102) Adecreaseinthemarginalfactorcostoflaborwill
A) leadtoandecreaseinthequantitydemandedoflabor.
B) induceafirmtohirefewerworkers.
C) induceafirmtohiremoreworkers.
D) causethevalueofthemarginalproductoflabortodecrease.
Answer: C
Diff:2
103) Thewagerateforwidgetmakersiscurrently$25perhourandAjaxhires20widgetmakers.If
thewagerateweredecreasedto$20,whatwouldhappentothemarginalrevenueproductfor
laboratAjax?
A) Itwouldremainthesame.
B) ItwouldincreasesinceAjaxsdemandforlaborcurvewillshift.
C) Itwouldincreasesincethepriceofwidgetswoulddecrease.
D) ItwoulddecreasesinceAjaxwillhiremoreworkers.
Answer: D
Diff:3
104) Whenthedemandcurveforaninputisaderiveddemandthismeansthat
A) thedemandcurveisderivedfromthedemandforthefinalproductbeingproduced.
B) thedemandcurvedependsupontheMFC.
C) thelawofdiminishingmarginalproductdoesnothold.
D) thedemandcurveslopesupward.
Answer: A
Diff:1
105) Thedemandforlaboris
A) derivedfromthedemandforthefinalproductofthefirm.
B) derivedfromthesatisfactionthathiringlaborprovidestheownerofthefirm.
C) derivedfromthesatisfactionworkersgetforbeingemployed.
D) derivedfromautility-maximizingprocesssimilartothatusedtoderivethedemandcurve
forallworkersinagivenindustry.
Answer: A
Diff:1
106) Thedemandcurveforlaborwillshiftwhenever
A) thewageratechanges. B) themarginalfactorcostchanges.
C) demandforthefinalproductchanges. D) thesupplyoflaborchanges.
Answer: C
Diff:2
107) Whichofthefollowingwillnotcausethemarginalrevenueproductoflaborcurveforafirmto
shift?
A) Anincreaseintheproductivityofworkers.
B) Anincreaseindemandfortheproduct.
C) Adecreaseinthepriceoftheproduct.
D) Anincreaseinthewagerate.
Answer: D
Diff:2
108) Anincreaseinproductpriceimpliesthat
A) thefirmsmarginalfactorcostwillincrease.
B) thewageratethefirmpayswillincrease.
C) thefirmsdemandforlaborincreases.
D) thefirmsdemandforlabordecreases.
Answer: C
Diff:3
109) Anincreaseintheproductivityoflaborinduces
A) anincreaseinthedemandforlabor.
B) anincreaseinthecostoflabor.
C) afirmtohirefewerworkerssincefewerworkersareneededwiththeincreasein
productivity.
D) afirmtoofferahigherwageforworkerssincetheworkersarenowmoreproductive.
Answer: A
Diff:2
110) Ifthewageratedoesntchangebutaprofit-maximizingcompetitivefirmhiresfewerworkers,
weknowthat
A) thepriceoftheproductincreased.
B) technicalchangeoccurredthatincreasedlaborproductivity,reducingthefirmsdemand
forlabor.
C) demandfortheproductfellortherehasbeenareductioninlaborproductivity.
D) marginalfactorcostincreased.
Answer: C
Diff:2
111) Refertotheabovefigure.MRP0 represents

A) thesupplycurvefortheproduct. B) thesupplycurveforlabor.
C) thedemandcurvefortheproduct. D) thedemandcurveforlabor.
Answer: D
Diff:3
112) Refertotheabovefigure.ThefirmisoperatingusingMRP0 .Anincreaseindemandforthe

producthasoccurred.Therelevantcurveforthefirmaftertheincreaseinprice
A) isMRP0 .
B) isMRP1 .
C) isMRP2 .
D) couldbeMRP1 orMRP2 dependinguponwhetherthefirmwasearningapositiveprofit.
Answer: C
Diff:3
113) Refertotheabovefigure.ThefirmisoperatingusingMRP0 .Anincreaseinproductivityhas

occurred.Therelevantcurveforthefirmaftertheincreaseinproductivity
A) isMRP0 .
B) isMRP1 .
C) isMRP2 .
D) couldbeMRP1 orMRP2 dependinguponwhetherthefirmwasearningapositiveprofit.
Answer: C
Diff:3
114) Sam,whoownsacarpentryshop,discoveredthatwith4laborershecouldproduce18cabinets
perday.With5laborersheproduced25cabinetsandwith6laborersheproduced36cabinets.
WhatwastheMPPofthe5thlaborer?
A) 8cabinets B) 7cabinets C) 6cabinets D) 4cabinets
Answer: B
Diff:1
115) Sam,whoownsacarpentryshop,discoveredthatwith4laborershecouldproduce18cabinets
perday.With5laborersheproduced25cabinetsandwith6laborersheproduced36cabinets.
WhatwastheMPPofthe6thlaborer?
A) 11cabinets B) 7cabinets C) 36cabinets D) 9cabinets
Answer: A
Diff:1
116) Thechangeinoutputresultingfromtheadditionofonemoreworkeris
A) marginalphysicalproduct. B) marginalrevenueproduct.
C) averagephysicalproduct. D) averagerevenueproduct.
Answer: A
Diff:1
117) Themarginalphysicalproduct(MPP)iscalculatedby
A) dividingtotalphysicalproductbylabor.
B) dividingthechangeintotalphysicalproductbythechangeintheinput.
C) dividingthechangeintotalcostbythechangeinlabor.
D) thedifferencebetweentheoutputofskilledandunskilledworkers.
Answer: B
Diff:1
118) Thedownwardslopingmarginalrevenueproductoflaboris
A) thefirmssupplyoflabor.
B) thefirmsshort-rundemandforlabor.
C) thefirmsmarginalcostoflabor.
D) anothertermforthemarginalrevenueproductoflabor.
Answer: B
Diff:1
119) Afirmsdemandcurveforlaborisequaltothe
A) totalrevenueproduct. B) marginalrevenueproduct.
C) marginalfactorcost. D) marginalwage.
Answer: B
Diff:1
120) Marginalrevenueproductis
A) marginalphysicalproducttimesmarginalfactorcost.
B) marginalphysicalproducttimesmarginalrevenue.
C) averagephysicalproducttimesmarginalrevenue.
D) marginalphysicalproducttimesthewagerate.
Answer: B
Diff:2
121) Ifthepriceofaproductbeingsoldinaperfectlycompetitivemarketincreases,
A) theMRPcurveshiftstotheright. B) theMPPcurveshiftstotheright.
C) theMFCcurveshiftstotheright. D) theMFCcurveshiftstotheleft.
Answer: A
Diff:2
122) Theadditionalrevenueassociatedwithhiringoneadditionalunitofsomefactorinput,suchas
labor,iscalled
A) marginalcost. B) marginalrevenueproduct.
C) marginalfactorcost. D) marginalphysicalproduct.
Answer: B
Diff:2
123) Marginalfactorcostiscomputedas
A) totalcostoftheresource/totalamountoftheresourcebeingused.
B) changeinthetotalcostoftheresource/totalamountoftheresourcebeingused.
C) totalcostoftheresource/changeintheamountoftheresourcebeingused.
D) changeinthetotalcostoftheresource/changeintheamountoftheresourcebeingused.
Answer: D
Diff:2
124) Thecostofhiringonemoreworker,ceterisparibus,isknownas
A) marginalrevenueproduct. B) marginalphysicalproduct.
Answer: C
Diff:1
125) Theadditionalcostassociatedwithhiringoneadditionalunitofsomefactorinput,suchas
labor,isreferredtoas
A) marginalphysicalproductoflabor. B) marginalrevenuecost.
C) marginalfactorcost. D) marginalrevenueproduct.
Answer: C
Diff:2
126) Thefirmsdemandforlaborcurveisits
A) averageproductoflaborcurve.
B) marginalproductoflaborcurve.
C) marginalrevenueproductoflaborcurve.
D) averagerevenueproductoflaborcurve.
Answer: C
Diff:1
127) TheMRPoflaborwillshifttotherightif
A) laborproductivityincreases. B) laborproductivitydecreases.
C) wagesincrease. D) wagesdecrease.
Answer: A
Diff:1
128) TheMRPoflaborwillshifttotheleftif
A) laborproductivityincreases. B) laborproductivitydecreases.
C) wagesincrease. D) wagesdecrease.
Answer: B
Diff:1
129) Theadditionalrevenueafirmobtainswhenithiresanadditionalworker(holdingotherinputs
constant)isthe
A) marginalrevenueproduct(MRP)oflabor.
B) totalfactorcost(TFC)perworker.
C) generalruleforhiring.
D) marginalphysicalproduct(MPP)oflabor.
Answer: A
Diff:1
130) Theadditionaloutputfromonemoreworkerisknownas
A) marginalrevenueproduct. B) marginalphysicalproduct.
Answer: B
Diff:1
131) Allofthefollowingstatementsregardingthemarginalrevenueproduct(MRP)curveandthe
demandforlaboraretrueEXCEPT
A) anindividualfirmsdemandforlaborisitsMRPcurve.
B) underconditionsofperfectcompetition,MRPequalsmarginalphysicalproduct
multipliedbytheproductsprice.
C) anincreaseinthemarketdemandforagivenproductdecreasestheproductsprice.
D) thedemandforlaborisaderiveddemand.
Answer: C
Diff:2
132) TheMRPis
A) thesupplycurveoflaborforanindividualfirm.
B) thedemandcurveforlaborforanindividualfirm.
C) thedemandcurveforlaborfortheentiremarket.
D) thesupplycurveoflaborfortheentiremarket.
Answer: B
Diff:1
133) Whichofthefollowingrepresentsthegeneralruleofhiringforafirm?
A) TPP=TFC B) APP= W C) MC= MR D) MRP= MFC
Answer: D
Diff:2
134) Ifthemarginalfactorcostofhiringanadditionalworkeris$10whilethemarginalrevenue
productis$15,thenthefirmshould
A) hiremoreworkers.
B) stophiringmoreworkers.
C) firesomeworkers.
D) noneoftheabove:insufficientinformationtoanswerthequestion
Answer: A
Diff:2
135) Deriveddemandis
A) aderivativeofthedemandcurve.
B) thedemandforgoodsandservicesproducedbycompaniesusingscarceresources.
C) thedemandforadvertisingtoincreasethesalesoftheproduct.
D) thedemandforthefactorsofproductionthatareusedtoproducegoodsandservices.
Answer: D
Diff:1
136) Sincethedemandforlabordependsuponthedemandforthefinalproduct,wesaythatlaboris
A) aderiveddemand. B) aninversedemand.
C) apositivedemand. D) areversedemand.
Answer: A
Diff:2
137) Thedemandsforlaborandotherinputfactorsarecalled
A) deriveddemands,becausethedemandfortheseinputsdependsonthedemandforgoods
andservicestheyareemployedtoproduce.
B) developeddemands,becausethedemandfortheseinputsisdevelopedfromananalysis
ofthecostsofadvertisingproducts.
C) indirectdemands,becausethedemandfortheseinputsisindirectlyrelatedtothecostsof
advertisingproducts.
D) reversedemands,becausethedemandfortheseinputsvariesinverselywiththedemand
forgoodsandservicestheyareemployedtoproduce.
Answer: A
Diff:1
Quantity Total Marginal Marginal

ofWorkers Product PhysicalProduct RevenueProduct
0 0 - -
1 7
2 18
3 30
4 40
5 48
138) Intheabovetable,whatisthemarginalphysicalproductofworker4?
A) 10 B) 40 C) 11 D) 12
Answer: A
Diff:2
139) Intheabovetable,whatisthemarginalphysicalproductofworker2?
A) 10 B) 40 C) 11 D) 12
Answer: C
Diff:2
140) Intheabovetable,ifthisisaperfectlycompetitivefirmandthemarketpriceoftheproductis
$10,whatisthemarginalrevenueproductofworker4?
A) $210 B) $100 C) $411 D) $120
Answer: B
Diff:2
141) Intheabovetable,ifthisisaperfectlycompetitivefirmandthemarketpriceoftheproductis
$8,whatisthemarginalrevenueproductofworker3?
A) $96 B) $88 C) $80 D) $240
Answer: A
Diff:2
142) Intheabovetable,ifthisisaperfectlycompetitivefirmandthemarketpriceoftheproductis$5
andthemarginalfactorcostoflaboris$60,howmanyunitsoflaborwillthefirmhire?
A) 2 B) 3 C) 4 D) 6
Answer: B
Diff:2
LaborInput TotalPhysicalOutput
(workersperweek) (computersperweek)
10 100
11 190
12 270
13 340
14 400
143) Theabovetabledepictstheoutputofafirmthatmanufacturescomputers.Thecomputerssell
for$1,000each.Whatisthemarginalphysicalproduct(MPP)oftheeleventhworkerperweek?
A) 90units B) 80units C) $7,000 D) $6,000
Answer: A
Diff:1
144) Theabovetabledepictsoutputfromafirmthatmanufacturescomputers.Thecomputerssellfor
$1,000each.Whatisthemarginalrevenueproduct(MRP)forthefourteenthworkerperweek?
A) 90units B) 80units C) $70,000 D) $60,000
Answer: D
Diff:2
145) Anincreaseinthepriceofaproduct
A) automaticallyincreaseswages.
B) raisesthefirmsdemandforlabor.
C) wouldprobablydecreasetotalrevenues.
D) increasesproductivity.
Answer: B
Diff:1
146) Iflaborproductivityincreases,
A) laborcostsrisebyequalincrements. B) thedemandforlaborincreases.
C) someworkerswillbelaidoff. D) jobswillrelocate.
Answer: B
Diff:2
147) Anincreaseinlaborproductivitywillshift
A) MRPcurvetotheleft. B) MFCcurvetotheright.
C) MRPcurvetotheright. D) MFCcurvetotheleft.
Answer: C
Diff:2
148) Ataperfectlycompetitivefirm,allofthefollowingistrueoftheMRPcurveEXCEPT
A) theMRPcurveisthederivedsupplyoflabor.
B) theMRPcurveshiftsleftwardwhenlaborproductivityfalls.
C) theMRPcurveshiftsrightwardwhentheproductpricerises.
D) theMRPcurveshiftsleftwardwhenthedemandforthefinalproductfalls.
Answer: A
Diff:2
149) Ifthedemandforonlinebankingincreases,wewouldexpecttoseethe
A) supplyofworkersthatproduceonline-bankingservicestoincrease.
B) supplyofworkersthatproduceonline-bankingservicestodecrease.
C) demandforworkersthatproduceonline-bankingservicestodecrease.
D) demandforworkersthatproduceonline-bankingservicestoincrease.
Answer: D
Diff:1
150) Ifworkersinanindustrybecomelessproductive,wewouldexpectthe
A) supplyofworkerstoincrease. B) supplyofworkerstodecrease.
C) demandforworkerstodecrease. D) demandforworkerstoincrease.
Answer: C
Diff:2
151) Iflaborersbecomemoreefficientovertime,andiftheAjaxCompanywouldwanttoexpand
production,theywould
A) substitutecapitalforlabor. B) hiremorelaborers.
C) hirefewerlaborers. D) producelessproduct.
Answer: B
Diff:2
152) Intheabovefigure,themarginalrevenueproductisrepresentedbyline
A) a. B) b. C) c. D) d.
Answer: B
Diff:2
153) Theindividualdemandcurveforaninputsuchaslabortoafirmwouldbethedownward
slopingportionofthefirms
A) marginalphysicalproductcurve. B) marginalrevenueproductcurve.
C) marginalrevenuecurve. D) totalrevenuecurve.
Answer: B
Diff:3
154) Supposethatinacomputerfactory,ifthereis1worker,80computersareproducedperweek.
Ifthereare2workers,150computersareproducedperweek.Ifthereare3workers,210
computersareproducedperweek.Giventhisinformation,there
A) isdiminishingmarginalproduct. B) aretoomanyworkers.
C) arenotenoughworkers. D) isincreasingmarginalproduct.
Answer: A
Diff:2
computersareproducedperweek.Giventhisinformation,themarginalproductofthethird
workeris
A) 210computersperweek. B) 70computersperweek.
C) 60computersperweek. D) 50computersperweek.
Answer: C
Diff:2
computersareproducedperweek.Giventhisinformationandthefactthatthefirmreceives
$200percomputer,themarginalrevenueproductofthethirdworkeris
A) $4,200. B) $12,000. C) $10,000. D) $14,000.
Answer: B
Diff:2
Numberof Total Numberof Total

Workers Output Workers Output
0 0 6 540
1 100 7 600
2 220 8 650
3 320 9 690
4 400 10 700
5 475
157) Refertotheabovetable.Ifthepriceofthegoodproducedis$10andthewagerateis$500,then
themarginalrevenueproductofthe5thworkeris________.
A) $10 B) $50 C) $750 D) $4,750
Answer: C
Diff:2
158) Accordingtotheabovetable,ifthepriceofthegoodproducedis$5andthewagerateis$400,
thenthemarginalrevenueproductofthe7thworkeris
A) $300. B) $60. C) $12. D) $400.
Answer: A
Diff:2
159) Accordingtotheabovetable,ifthewagerateis$400aweekandthepriceofthegoodproduced
is$5,theperfectlycompetitivefirmshouldhire
A) 3workers. B) 4workers. C) 5workers. D) 6workers.
Answer: B
Diff:3
160) Ifthedemandforhamburgersincreases,itislikelythatthedemandforfast -foodemployees

will
C) staythesame. D) increaseatfirstbutthenfallrapidly.
Answer: A
Diff:2
161) SupposetheMRPofthe49thworkeratafirmis$25andthatthemarketwagerateis$15.We
knowthatifthisfirmoperatesinperfectlycompetitiveproductandlabormarkets,
A) thefirmispayingwagesabovetheminimumwages.
B) thefirmsprofitswouldincreaseifitfiredsomeworkers.
C) thefirmwouldbemoreprofitableifithiredmoreworkers.
D) thefirmshouldusemorecapital.
Answer: C
Diff:2
162) WhichofthefollowingisFALSEregardingthegeneralruleforhiring?
A) Virtuallyeveryoptimizingruleineconomicsinvolvescomparingmarginalbenefitswith
marginalcost.
B) Thebenefitfromaddedworkersisextraoutputandconsequentlymorerevenues.
C) Thefirmhiresworkersuptothepointatwhichtheadditionalcostassociatedwithhiring
thelastworkerisequaltotheadditionalrevenuegeneratedbythatworker.
D) Ifanyfirmhiredfewerworkersovertime,profitswoulddefinitelyincreaseatthatfirm.
Answer: D
Diff:1
163) Afirmshouldcontinuetohiremoreworkersaslongaswagesarelow.Doyouagreeor
disagree?Why?
Answer: Disagree.Thefirmshouldhireworkersuptothepointatwhichtheadditionalcost
associatedwithhiringthelastworkerisequaltotheadditionalrevenuegeneratedby
hiringthatworker.Whatisignoredinthestatementistherevenueassociatedwith
hiringanadditionalworker:Evenifwagesarelow,theadditionalrevenueassociated
withtheadditionalworkermaynotbeenoughtocovertheadditionalcostsassociated
withthewages.
Diff:2
164) Whatisthemarginalrevenueproductoflabor(MRP)?WhatshapedoestheMRPcurvehave?
Why?
Answer: Marginalrevenueproductoflaboristhemarginalphysicalproductoflabortimes
marginalrevenueofsellingthegoodproduced.Itgivestheadditionalrevenuefrom
hiringonemoreunitoflabor.Thecurveslopesdownbecauseofthelawofdiminishing
marginalproduct.
Diff:2
165) Whatismarginalfactorcost?Howisitrelatedtothesupplycurveofaninput?
Answer: Marginalfactorcostisthecostofusinganadditionalunitofaninput.Inthecaseoflabor,
thisequalsthewage.Forapricetakerininputmarkets,themarginalfactorcostequals
thepriceoftheinputandisthesupplycurveoftheinputtoo.
Diff:1
28.2TheMarketDemandforLabor
1) Themarketdemandforlaborwillbe
A) insensitivetothewagerateintheshortrun.
B) downwardsloping.
C) theinverseofthemarketdemandforoutput.
Answer: B
Diff:1
Topic: 28.2TheMarketDemandforLabor
2) Iflaboris80percentoftotalcostsinindustryAand20percentinindustryB,thenotherthings
equal,wewouldexpecttheelasticityofdemandforlabortobe
A) greaterinindustryAthaninindustryB.
B) greaterinindustryBthaninindustryA.
C) thesameinbothindustries.
D) uncertainsincenogeneralrelationshipexistsbetweencostsharesandelasticities.
Answer: A
Diff:1
3) Inthelongrun,inputdemandbecomesmore
A) elastic. B) inelastic. C) unit-elastic. D) costefficient.
Answer: A
Diff:2
4) Wheneveraninputmakesupalargepercentageofagoodsfinalcost,anincreaseinthatinputs
pricewill
A) affecttotalcostrelativelymore. B) notaffecttotalrevenues.
C) affectonlyaccountingprofits. D) causethefirmtoshutdown.
Answer: A
Diff:3
5) Asnewsubstitutesforofficeproductivitysoftwarearedeveloped,thedemandforworkersin
officeproductivitysoftwareproductionshould
A) becomemoreelastic. B) becomelesselastic.
C) beunchanged. D) changeinanundeterminedway.
Answer: A
Diff:1
6) Supposeanewtechnologyallowsfirmstosubstitutemechanicaltomatopickersforfarm
laborers.Asaresult,thedemandcurveforfarmlaborerswill
A) becomelesselastic. B) becomemoreelastic.
C) shifttotheright. D) notbeaffected.
Answer: B
Diff:1
7) Themoreinelastictheconsumerdemandforthefinalproduct,the
A) greaterwillbetheeconomicprofitinacompetitivemarket.
B) greatertheimpactonemploymentfromachangeinthewagerate.
C) moreinelasticthedemandforlaborproducingtheproduct.
D) moreresponsivetheoutputdemandtoachangeinthepriceoflabor.
Answer: C
Diff:1
8) Ifthepriceelasticityofdemandisgreaterthan1,thenconsumerdemandis
A) unrelatedtotheelasticityofdemand. B) inelastic.
C) elastic. D) unitaryelastic.
Answer: C
Diff:1
9) Ifthepriceelasticityofdemandislessthan1,thenthenconsumerdemandis
A) unrelatedtotheelasticityofdemand. B) inelastic.
C) elastic. D) unitaryelastic.
Answer: B
Diff:1
10) Whenaninputrepresentsasmallproportionofafirmstotalcosts,then
A) demandfortheinputwilltendtobelesselastic.
B) theinputdemandwillvarysignificantlywithachangeininputprice.
C) theusageoftheinputcannotbevariedintheproductionfunction.
D) outputdemandwillbehighlyelastic.
Answer: A
Diff:1
11) Whenaninputrepresentsalargerproportionofafirmstotalcosts,then
A) demandfortheinputwilltendstobelesselastic.
B) theinputdemandwillnotvarysignificantlywithachangeininputprice.
C) theusageoftheinputcannotbevariedintheproductionfunction.
D) demandfortheinputwilltendstobemoreelastic.
Answer: D
Diff:1
12) Thepriceelasticityofdemandforavariableinputwillbegreater
A) thefewersubstitutesthereareforthefinalproduct.
B) theeasieritisforaparticularinputtobesubstitutedforbyotherinputs.
C) thelowerthepriceelasticityofsupplyofallotherinputs.
D) thesmallertheproportionoftotalcostsaccountedforbyaparticularvariableinput.
Answer: B
Diff:2
13) Aluminumcannotbeproducedwithoutbauxite.Hence,thepriceelasticityofdemandfor
bauxitebyaluminummanufacturerswillbe
A) perfectlyelastic. B) elastic.
C) inelastic. D) unitaryelastic.
Answer: C
Diff:2
14) Supposetherearefourindustries.Laborcostsare80percentoftotalcostsinindustryA,60
percentinB,45percentinC,and10percentinD.Inwhichoftheseindustrieswilla10percent
increaseinthepriceoflaborreducequantitydemandedoflaborbythelargestproportion?
A) A B) B C) C D) D
Answer: A
Diff:2
15) Wewouldexpectthatafallinlaborsupplywillhaveaproportionatelylargereffectonthe
marketwageratewhen
A) capitalgoodsexistthatcanreplacemanyoftheworkers.
B) theproductproducedintheindustryhasseveralclosesubstitutes.
C) theproductproducedintheindustrymakesupalargeportionofmostfamiliesbudgets.
D) laborrepresentsarelativelysmallportionoftotalcosts.
Answer: D
Diff:3
16) Wewouldexpectthatariseinlaborsupplywillhaveaproportionatelylargereffectonthe
marketwageratewhen
A) thedemandforlaborisunitaryelastic. B) thedemandforlaborisinelastic.
C) thesupplyforlaboriselastic D) thedemandforlaboriselastic.
Answer: B
Diff:2
17) Wewouldexpectthatafallinlaborsupplywillhaveaproportionatelysmallereffectonthe
marketwageratewhen
A) workerscaneasilybereplacedbycapitalgoods.
B) theproductproducedintheindustryhasveryfewsubstitutes.
C) theproductisproducedinaperfectlycompetitiveindustry.
D) laborrepresentsarelativelysmallportionoftotalcosts.
Answer: A
Diff:3
18) Whathasbeentheimpactofthewidespreadadoptionofautomatedtellermachines(ATMs)on
thedemandforbanktellers?
A) Thedemandfortellershasincreased.
B) Thedemandforbanktellershasbecomemoreinelastic.
C) Thedemandforbanktellershasbecomemoreelastic.
D) TherehasbeennochangebecausetheATMsandtheemployeesprovidecompletely
differentservices.
Answer: C
Diff:2
A) Afirmcannotincreasequantitydemandforlaborwhenthewageratefallswithout
causingtheproductpricetodecline.
B) Amovementalongthemarketdemandcurveforlabordoesnotrequireachangeinthe
productprice.
C) Afirmcanincreasequantitydemandedforlaborwhenthewageratefallswithout
affectingtheproductpricebuttheindustrycannothiremoreworkerswithoutcausingthe
productpricetofall.
D) Bothafirmandtheindustrycanmovedowntheirdemandcurvesforlaborwithout
causingproductpricetochange.
Answer: C
Diff:3
20) Whichofthefollowingwillcauseashiftinthedemandcurveoflabor?
A) Anincreaseordecreaseintheproductivityoflabor.
B) Anincreaseordecreaseinthedemandfortheproductlaborproduces.
C) Adeclineinthepriceofacomplementaryinput.
D) alloftheabove
Answer: D
Diff:3
21) Whichofthefollowingstatementsistrueaboutthemarketdemandcurveforlabor?
A) Themarketdemandcurveisthesumoftheindividualfirmsdemandcurve.
B) Themarketdemandcurvewillbeperfectlyinelasticsincefirmsneedlabor.
C) Themarketdemandcurveshowsthequantitiesoflabordemandedbyallfirmsinthe
industryatvariousmarginalproducts.
D) Themarketdemandcurvedependsuponlaborproductivity,thewagerateandtheprice
ofthefinalproduct.
Answer: D
Diff:3
22) Supposethereare1000firmsinamarketandallareidentical.FirmAwillhire20workerswhen
thewagerateis$10,25workerswhenthewagerateis$9,and30workerswhenthewagerateis
$8.Theequilibriumwagerateforanumberofyearshasbeen$9.Ifthewageratefallsto$8,we
knowthat
A) thequantitydemandedforthemarketwillincreaseto30,000workers.
B) thequantitydemandedforthemarketwillincreasetomorethan30,000workers.
C) thequantitydemandedforthemarketwillincreasetolessthan30,000workers.
D) thequantitydemandedforthemarketwillincrease,butwecanttellwhichoftheabove
answersiscorrect.
Answer: C
Diff:3
23) Thepriceelasticityofdemandforlaborwilldependuponallbutthe
A) priceelasticityofdemandforthefinalproduct.
B) priceelasticityofsupplyforthefinalproduct.
C) timeperiodbeingconsidered.
D) availabilityofsubstitutesforinputs.
Answer: B
Diff:1
24) AllofthefollowingmakethedemandforlabormoreelasticEXCEPT
A) greaterelasticityofdemandforthefinalproduct.
B) thelongerthetimeperiodunderconsideration.
C) thesmallertheproportionoftotalcostsaccountedforbylabor.
D) theeasieritistosubstituteanotherinputforlabor.
Answer: C
Diff:1
25) Thepriceelasticityofdemandforlaborequals
A) thepercentagechangeinthepriceoflabordividedbythepercentagechangeinthesupply
oflabor.
B) thechangeinthequantitydemandedoflabordividedbythechangeinthepriceoflabor.
C) theslopeofthedemandcurveforlabor.
D) thepercentagechangeinthequantitydemandedoflabordividedbythepercentage
changeinthepriceoflabor.
Answer: D
Diff:1
26) Theelasticityofdemandforlaborwillbeless the

A) longerthetimeperiod.
B) easieritistosubstituteoneinputforanother.
C) lessthedemandelasticityforthefinalproduct.
D) largertheshareoftotalcostsaccountedforbylabor.
Answer: C
Diff:2
27) Coalisrequiredtomakesteel.Hence,thepriceelasticityofdemandforcoalbysteel
manufacturerswillbe
C) elastic. D) perfectlyelastic.
Answer: B
Diff:2
28) Supposetherearefourindustries.Laborcostsare20percentoftotalcostsinA,40percentinB,
60percentinC,and80percentinD.Atenpercentincreaseinthepriceoflaborwillcause
industry________toreducequantitydemandedoflaborbythelargestproportion.
A) A B) B C) C D) D
Answer: D
Diff:1
29) Wewouldexpectunionstohaveamoredifficulttimenegotiatinghigherwagesfortheir
memberswhen
A) laborrepresentsasmallportionoftotalcosts.
B) theproductproducedmakesupasmallportionoffamiliesbudgets.
C) theproductproducedhasseveralclosesubstitutes.
D) therearenotgoodsubstitutesforlaborintheproductionprocess.
Answer: C
Diff:2
30) A20percentincreaseinthewagerateinducesfirmsinanindustrytoreducequantity
demandedforlaborby5percentinthefirstyear.Fiveyearslaterwewouldexpect,otherthings
constant,
A) thereductioninthequantitydemandedoflabortobemuchgreaterthan5percent.
B) thereductioninthequantitydemandedoflabortobelessthan5percent.
C) thereductioninthequantitydemandedoflabortobeabout5percent.
D) thequantitydemandedoflabortobebacktoitsoriginallevel.
Answer: A
Diff:2
31) Thepriceelasticityofdemandforlaborwillbegreater,the
A) greateristhepriceelasticityofdemandforthefinalproduct.
B) moredifficultitistoemploysubstituteinputsinproduction.
C) smalleristheproportionofwagecostsinthetotalcostofproduction.
D) shorteristhetimeperiodunderexamination.
Answer: A
Diff:1
32) Thepriceelasticityofdemandforlaborwillbegreater,the
A) smalleristhepriceelasticityofdemandforthefinalproduct.
B) easieritistoemploysubstituteinputsinproduction.
D) shorteristhetimeperiodunderexamination.
Answer: B
Diff:1
33) Thepriceelasticityofdemandforlaborwillbesmaller,the
A) smalleristhepriceelasticityofdemandforthefinalproduct.
C) largeristheproportionofwagecostsinthetotalcostofproduction.
D) longeristhetimeperiodunderexamination.
Answer: A
Diff:1
34) Thepriceelasticityofdemandforlaborwillbesmaller,the
A) greateristhepriceelasticityofdemandforthefinalproduct.
D) longeristhetimeperiodunderexamination.
Answer: C
Diff:1
35) Thegreatertheelasticityofdemandforafinalproduct,wefind________thedemandforthe
factorinputs.
A) thegreaterwillbe B) thelowerwillbe
C) thatitwillnotimpact D) Theanswercannotbedetermined.
Answer: A
Diff:2
36) Thepriceelasticityofdemandforavariableinputwillbemoreelasticinallthefollowingcases
EXCEPT
A) thegreaterthepriceelasticityofdemandforthefinalproduct.
B) theeasieritisforaparticularvariableinputtobesubstitutedforbyotherinputs.
C) thelargertheproportionoftotalcostsaccountedforbyaparticularvariableinput.
D) theshorterthetimeperiodbeingconsidered.
Answer: D
Diff:2
37) Thedemandforaninputwillbemoreinelasticwhen
A) thedemandfortheproductbeingproducediselastic.
B) thecostoftheinputisarelativelylargepercentageoftotalproductioncosts.
C) thetimeperiodbeingconsideredisrelativelylong.
D) itisdifficulttosubstituteotherinputsforthisinput.
Answer: D
Diff:2
38) AllofthefollowingaffectthedemandelasticityforlaborEXCEPT
A) finalproductincomeelasticity.
B) easeofsubstitutionoflaborforotherinputs.
C) finalproductpriceelasticity.
D) laborcostsasaportionoftotalcost.
Answer: A
Diff:2
39) Whichofthefollowingwouldcausethepriceelasticityofdemandforavariableinputtobe
greater?
A) Thesmallerthepriceelasticityofdemandforthefinalproduct
B) Thelongerthetimeperiodbeingconsidered
C) Thesmallertheproportionoftotalcostsaccountedforbythevariableinput
D) Theharderitisforavariableinputtobesubstitutedforbyotherinputs
Answer: B
Diff:2
40) WhichwillNOTaffecttheelasticityofdemandforlabor?
A) thelaborintensityoftheproductionprocess
B) theelasticityofsupplyforlabor
C) theelasticityofdemandforthegood
D) thesubstitutabilityofcapitalforlabor
Answer: B
Diff:2
41) Themarketdemandcurveforlaboristhehorizontalsummationofthelabordemandcurvesof
allfirms.Doyouagreeordisagree?Why?
Answer: Disagree.Areductioninthewageratecauseseachfirmtomovedowntheirdemand
curvesforlaborandhiremoreworkers.Industryoutputincreases,whichmeansproduct
pricefalls.Thefallintheproductpricecausestheindividualfirmsdemandcurvefor
labortoshifttotheleft.Themarketdemandcurveforlaborreflectsnotonlytheshapeof
theindividualdemandcurves,butalsothisshiftintheMRPcurve.
Diff:2
42) Whatwouldmakethedemandforlabormoreelastic?
Answer: Thedemandforlaborwillbemoreelasticthegreaterthedemandforthefinalproduct,
theeasieritisforlabortobesubstitutedforbyotherinputs,thelargertheproportionof
totalcostsaccountedforbylabor,andthelongerthetimeperiod.
Diff:1
43) SupposethepriceelasticityofdemandforiPodsisinelastic.Whatwouldyouexpectaboutthe
demandelasticityforworkersproducingiPods?Explain.
Answer: BecausethedemandforworkersproducingiPodsisderivedfromthedemandforiPods,
thedemandelasticityfortheworkersispositivelyrelatedtothepriceelasticityof
demandforthefinalproducts.Thismeansthatthedemandelasticityforworkers
producingiPodsisalsoinelastic.
Diff:2
28.3WageDeterminationinaPerfectlyCompetitiveLaborMarket
1) Inaperfectlycompetitivelabormarket,thelaborsupplycurvefacingthefirmwillbe
Answer: C
Diff:2
Topic: 28.3WageDeterminationinaPerfectlyCompetitiveLaborMarket
2) Whichofthefollowingwouldcausethelabordemandcurvetoshifttotheright?
A) Adecreaseindemandfortheproductthelaborisusedtoproduce
B) Anincreaseinlaborproductivity
C) Adecreaseinthepriceofacomplimentaryresource
D) Alloftheabove
Answer: B
Diff:2
3) Inaperfectlycompetitivelabormarket,theindustrydemandcurveis________andtheindustry
supplycurveis________.
A) perfectlyelastic;upwardsloping B) downwardsloping;upwardsloping
C) upwardsloping;downwardsloping D) vertical;perfectlyelastic
Answer: B
Diff:1
4) Anindustrysequilibriumwagerateisestablished
A) bytheindustrysupplycurveforlaboralone.
B) bytheslopeoftheindustrydemandcurveforlaboralone.
C) bytheLaborDepartmentandbasedonthecostoflivinginthearea.
D) bytheintersectionoftheindustrysupplyanddemandcurvesforlabor.
Answer: D
Diff:1
5) Whenthereisanincreaseinthewagesthebankingindustryoffersaccountants,whathappens
tothesupplyofaccountantsavailabletootherindustries?
A) Thesupplytootherindustriesincreases.
B) Thesupplytootherindustriesfalls.
C) Thesupplycurveforotherindustriesshiftstotheright.
D) nochange
Answer: B
Diff:1
6) Inaperfectlycompetitiveindustry,anindividualfirmfaces
A) aperfectlyinelasticlaborsupplycurve. B) aperfectlyverticallaborsupplycurve.
C) aperfectlyelasticlaborsupplycurve. D) noneoftheabove.
Answer: C
Diff:1
7) Thesupplyoflabortotheindividualfirminaperfectlycompetitivemarketis
A) perfectlyinelasticatthecurrentequilibriumemploymentlevel.
B) perfectlyelasticatthecurrentmarketclearingwagerate.
C) downwardsloping.
D) equaltothemarginalrevenueofoutput.
Answer: B
Diff:1
8) Theindividualfirmoperatinginaperfectlycompetitivelabormarket
A) canhiremorelaboronlybyofferingahigherwage.
B) facesaninelasticdemandforlabor.
C) willpaylesstotheadditionallaboremployed.
D) canbuyallthelaboritwantsatthegoingmarketwagerate.
Answer: D
Diff:1
9) Intheabovefigure,thecompetitivefirmwillemploythequantityoflabor
A) equaltoL c. B) equaltoL b.
C) lessthanL b. D) greaterthanLc.
Answer: B
Diff:1
10) Intheabovefigure,thelinelabeledMRP Lalsorepresentsthefirms

A) supplycurve. B) marginalphysicalproductcurve.
C) totalphysicalproductcurve. D) demandcurve.
Answer: D
Diff:1
11) Intheabovefigure,ifthewageratefellbelowW b,intheshortrunthefirmwould

A) hiremoreworkers.
B) fireseveralworkers.
C) reduceitslevelofoutput.
D) keepallitsinputlevelsthesameastheywerebefore.
Answer: A
Diff:1
12) Thelaborsupplycurvefacedbyanindividualfirminaperfectlycompetitivemarketis
A) upwardsloping. B) horizontal.
C) vertical. D) downwardsloping.
Answer: B
Diff:1
13) Whenhiringadditionalworkers,afirmoperatinginaperfectlycompetitivelabormarketwill
A) havetoofferhigherwagestohireadditionalworkers,buttheoldworkersdonotgetthe
higherwage.
B) havetoofferhigherwagestohireadditionalworkers,andtheoldworkerswillalso
receivethenew,higherwage.
C) beabletohireadditionalworkerswithoutofferinghigherwages.
D) beabletohireadditionalworkersatlowerwagesbecausethenewworkershavebeen
unemployed.
Answer: C
Diff:2
14) Theequilibriumwagerateinanindustryisdeterminedby
A) findingwherethemarketsupplycurveindicatesthatthesubstitutioneffectandincome
effectofawageincreaseareoffsetting.
B) theintersectionofthemarketdemandcurveforlaborandthemarketsupplycurvefor
labor.
C) thestrengthofthesubstitutioneffectrelativetotheelasticityofdemandforlabor.
D) whetherworkersormanagementarebetteratnegotiating.
Answer: B
Diff:2
15) Asthewageraterises,otherthingsconstant,perfectlycompetitivefirmswillemploy
A) moreworkers. B) lesscapital.
C) thesamenumberofworkers. D) fewerworkers.
Answer: D
Diff:1
16) Ifthepriceoflaborincreases,thetypicalperfectlycompetitivefirmintheshortrunwill
A) producemoreoutput.
B) hirelesslabor.
C) hirethesamelaborandproducethesameoutput.
D) hiremorelabor.
Answer: B
Diff:1
17) Ashort-runincreaseinthepriceofafirmsoutputwilltypically
A) leadtoamovementalongthefirmsdemandforlaborcurve.
B) leadtomoreemploymentinthecompetitivefirm.
C) notimpactthehiringoflabor.
D) makethedemandforlabormoreinelastic.
Answer: B
Diff:1
18) Whichofthefollowingwillleadtoanoutwardshiftinthefirmsshort-rundemandforlabor?
A) Anincreaseinthepriceofoutput
B) Lesscapitalperunitoflabor
C) Adeclineinlaborproductivity
D) Areductioninaverageconsumerincome
Answer: A
Diff:1
19) Whichofthefollowingwillleadtoadecreaseinthefirmsshort -rundemandforlabor?

A) Anincreaseinthepriceofthefinalproduct
B) Anincreaseinpriceofthefinalproductssubstitutegood
C) Adeclineinlaborproductivity
D) Anincreaseinthenumberofbuyersforthefinalproduct
Answer: C
Diff:1
20) GoodsXandYaresubstitutes.IfthepriceofgoodYfalls,themarginalrevenueproductofgood
X
A) willnotchange. B) willshiftout.
C) willbecomemoreinelastic. D) willshiftin.
Answer: D
Diff:2
21) Thedemandcurveforlaborwillshiftwhenever
A) thedemandforthefinalproductchanges.
B) thewageratechanges.
C) thesupplycurveoflaborshifts.
D) themarginalfactorcostchanges.
Answer: A
Diff:2
22) Afallinthepriceofthefinalproductproducedbyafirmwillcause
A) adeclineinthepriceofaninputusedtoproducethegood.
B) amovementdownthedemandcurveforaninputusedtoproducethefinalproduct.
C) areductionindemandforaninputusedtoproducethefinalproduct.
D) areductioninthesupplyofaninputusedtoproducethefinalproduct.
Answer: C
Diff:3
23) Assumethatthelabormarketisperfectlycompetitive.Anincreaseintheproductivityoflabor
A) causesthemarginalfactorcostoflabortodecrease.
B) generatesalowerwagerate.
C) causesanincreaseinthedemandforlabor.
D) causesareductioninthedemandforlaborsinceeachworkerisnowmoreproductive.
Answer: C
Diff:2
24) Anindustryutilizescapitalandtwotypesoflabor.Unskilledlaborisasubstituteforcapital
whiletheskilledlaboriscomplementarytocapital.Anincreaseinthepriceofcapitalwill
A) causethedemandforlabortoincrease,raisingwagesofbothskilledandunskilledlabor.
B) causethewageofunskilledlabortoriserelativetothepriceofskilledlabor.
C) inducethefirmsintheindustrytocutbackonalllevelscapital,unskilledandskilled
labor.
D) causethedemandforskilledlabortoriseandthedemandforunskilledlabortofall.
Answer: B
Diff:3
25) Ifthemarginalproductivityoflabordecreases,then
A) thequantityoflabordemandedateverypossiblewageratewillbeless.
B) thequantityoflabordemandedateverypossiblewageratewillbehigher.
C) thequantityoflabordemandedwillnotbeaffected.
D) thedemandcurveforlaborwillshiftupwardandtotheright.
Answer: A
Diff:1
26) Inlabormarkets,thesubstitutioneffectoccurswhen
A) asubstitutegoodalsofunctionsasacomplement.
B) thecostofproductionfallsenoughthatthefirmwillproducealargeramountofoutput.
C) achangeinthepriceofasubstituteinputcausesthedemandforlabortochangeinthe
samedirection.
D) achangeinthepriceofasubstituteinputreducesthecostofcapital.
Answer: C
Diff:2
27) WhichofthefollowingwouldNOTshiftanindustryssupplyoflaborcurve?
A) Thewagerateintheparticularindustryfalls.
B) Wageratesinindustriesusingsimilarlaborrise.
C) Workingconditionswithintheindustrybecomelessdesirable.
D) Wageratesinotherindustriesfall.
Answer: A
Diff:1
28) Anincreaseinthesupplyoflaborgenerates
A) increasedunemployment.
B) lowerwages.
C) anoffsettingincreaseinthedemandforlabor.
D) adecreaseinthequantitydemandedoflabor.
Answer: B
Diff:1
29) Thesupplyoflabortoanindustrywilldecreasewhen
A) thepriceofleisurefalls.
B) theincomeeffectdominatesthesubstitutioneffect.
C) thedemandforlaborfallsintheindustry.
D) workersreceivebetteremploymentopportunitiesinotherindustries.
Answer: D
Diff:2
30) Thedemandforcomputersincreases.Asaresult,
A) thequantitydemandedofworkersincreases,thewageraterises,andthesupplyoflabor
increases.
B) thedemandforworkersincreases,hiringincreases,butwagesstaythesamesinceeach
firmfacesahorizontalsupplycurveoflabor.
C) thewagerateincreasesintheindustryandthequantitydemandedofworkersfalls.
D) thewagerateincreasesintheindustryandthequantitysuppliedofworkersincreases.
Answer: D
Diff:3
31) Theequilibriumwagerateinanindustry isfoundby

A) theintersectionofthemarketdemandcurveforlaborandthemarginalrevenueproduct
curveoflabor.
B) theintersectionofthefirmsdemandcurveforlaborandthefirmssupplycurveoflabor.
C) theintersectionofthemarketdemandcurveforlaborandthemarketsupplycurveof
labor.
D) negotiationsbetweentheunionleadershipandthemanagersofthefirms.
Answer: C
Diff:2
32) Thewageratefoundbytheintersectionofthemarketdemandandsupplycurvesforlaborthen
determinesthe
A) firmsdemandcurveforlabor. B) firmssupplycurveforlabor.
C) laborssupplycurveoflabor. D) laborsdemandcurveforjobs.
Answer: B
Diff:2
33) Whichofthefollowingstatementsistrueaboutthemarketandindividualfirmssupplycurve
forlabor?
A) Themarketsupplycurveisperfectlyelasticandtheindividualfirmssupplycurveis
perfectlyinelastic.
B) Themarketsupplycurveisperfectlyinelasticandtheindividualfirmssupplycurveis
perfectlyelastic.
C) Themarketsupplycurveismoreelasticthanthefirmssupplycurve.
D) Themarketsupplycurveismoreinelasticthanthefirmssupplycurve.
Answer: D
Diff:1
34) Afirmpurchasesmorecapitalequipment.Wewouldexpecttoobserve
A) adecreaseinthesupplycurveoflabortothisfirm.
B) anincreaseinthesupplyoflaborforthisfirm.
C) anincreaseinthedemandforlaborbythisfirm.
D) anincreaseinthewageratepaidforlaborbythisfirm.
Answer: C
Diff:2
35) Whichofthefollowingwillnot leadtoachangeinthedemandforlabor?

A) Achangeindemandforthefinalgood.
B) Achangeinthesupplyoflabor.
C) Achangeinthepriceofasubstituteinput.
D) Achangeinlaborproductivity.
Answer: B
Diff:1
36) AnincreaseindemandforDVDmachinesoccurs.Whichofthefollowingstatementsistruefor
individualfirmsthatproduceDVDmachines?
A) ThepriceofDVDmachineswilldecreaseleadingtoanincreaseinthedemandforlaborby
thefirm.
B) ThepriceofDVDmachineswillincreaseleadingtoanincreaseinthedemandforlaborby
thefirm.
C) ThepriceofDVDmachineswillincreaseleadingtoadecreaseindemandbycustomers
leadingtoadecreaseinthedemandforlaborbythefirm.
D) Achangeindemandattheindustryleveldoesnotinfluenceanindividualfirmsdemand
curveforlabor.
Answer: B
Diff:1
37) Supposethemarketforautoworkersisinitiallyinequilibrium,butthentheautomakers
purchasecapitalgoodsthatareasubstituteforworkers.Whathappensinthemarketfor
autoworkers?
A) Theequilibriumwageratewillincreaseandtheequilibriumquantityoflaborwill
decrease.
B) Theequilibriumwagerateandtheequilibriumquantityoflaborwillbothincrease.
C) Theequilibriumwagerateandtheequilibriumquantityoflaborwillbothdecrease.
D) Theequilibriumwageratewilldecreaseandtheequilibriumquantityoflaborwill
increase.
Answer: C
Diff:1
38) Supposethemarketforautoworkersisinitiallyinequilibrium,butthensupposetheautomakers
improveworkingconditionsattheplants.Whathappensinthemarketforautoworkers?
decrease.
B) Theequilibriumwagerateandtheequilibriumquantityoflaborwillbothincrease.
increase.
Answer: D
Diff:1
39) Supposethemarketforautoworkersisinitiallyinequilibrium,butthenthedemandfor
automobilesincreasesandsimultaneouslytheautomakersallowautoworkersworkersless
flexibilityworkingattheplants.Whathappensinthemarketforautoworkers?
increase,decreaseorstaythesame.
B) Theequilibriumwageratewillincrease,decreaseorstaythesameandtheequilibrium
quantityoflaborwillincrease.
increase.
Answer: A
Diff:3
40) Supposethemarketforpizzamakersisinitiallyinequilibrium,butthentheequilibriumwage
rateandtheequilibriumquantityoflaborbothincreased.Whathappenedinthemarketfor
pizzamakers?
A) Thedemandforpizzamakersincreased.
B) Thedemandforpizzamakersdecreased.
C) Thesupplyforpizzamakersincreased.
D) Thesupplyforpizzamakersdecreased.
Answer: A
Diff:1
41) Supposethemarketforpizzamakersisinitiallyinequilibrium,butthentheequilibriumwage
rateincreasedandtheequilibriumquantityoflaborwilldecreased.Whathappenedinthe
marketforpizzamakers?
A) Thedemandforpizzamakersincreased.
B) Thedemandforpizzamakersdecreased.
C) Thesupplyforpizzamakersdecreased.
D) Thesupplyforpizzamakersincreased.
Answer: C
Diff:1
42) ThedemandforDVDsincreases.Asaresult,
A) thewagerateintheDVDindustryincreasesandthequantitydemandedofworkers
increases.
B) thewagerateintheDVDindustryincreasesandthequantitysuppliedofworkers
increases.
C) thedemandforlaborincreasesandthesupplyoflaboralsoincreases,leavingwages
unchanged.
D) thedemandforlaborincreases,butsincethesupplycurveoflaborisperfectlyelastic,the
wageratedoesnotchange.
Answer: B
Diff:3
43) Whenmanufacturingacar,partsmustbesolderedtogether.Thisworkcanbedonebylaboror
byarobot(capital).Morerobotswillbehiredwhenthepriceoflaborincreases.Thisisknown
as
A) theeffectofchanginglaborproductivity.
B) marginalrevenueproduct.
C) thecomplementaryeffect.
D) thesubstitutioneffect.
Answer: D
Diff:1
44) Coalandironorearecomplementsinthemanufactureofsteel.Anincreaseinthepriceofcoal
wouldleadto
A) anincreaseinthedemandforironoreasproducerssubstitutemoreironoreforcoalinthe
productionprocess.
B) adecreaseinthedemandforironoreassteelmanufacturersreduceproductionofsteel.
C) anincreaseinthesupplyofironoreasironoreproducersseeanopportunitytoexpand
theirmarkets.
D) nochangeinthedemandforironoresincethesteelmakersmustusebothironoreand
coaliftheyaretomakesteel.
Answer: B
Diff:2
45) Supposefirmsinanindustryhireunskilledlaborandskilledlabor.Unskilledlaborisa
substituteforcapitalandskilledlaborisacomplementwithcapital.Adecreaseintherealprice
ofcapitalwould
A) causethedemandforlabortoincrease,raisingwagesofbothskilledandunskilledlabor.
B) causethedemandforunskilledlabortoincreaseandthedemandforskilledlaborto
decrease.Thewageofunskilledlaborwouldriserelativetothewageofskilledlabor.
C) causethedemandforunskilledlabortodecreaseandthedemandforskilledlaborto
increase.Thewageofunskilledlaborwoulddecreaserelativetothewageofskilledlabor.
D) causethedemandforbothkindsoflabortodecrease.Wagesratesofbothkindsoflabor
woulddecreasetoo.
Answer: C
Diff:3
46) Whichofthefollowingwillnotleadtoanincreaseinthedemandforlaborforafirmproducing
automobiles?
A) Adecreaseinlaborproductivity.
B) Adecreaseinthepriceofrobotsthatareusedtosolderpartsofthecartogether.
C) Anincreaseinthedemandforautomobiles.
D) Adecreaseinthepriceofautomobiles.
Answer: A
Diff:1
47) Adecreaseinthesupplyoflaborcouldbecausedby
A) wageratesfallinginanotherindustry.
B) betterworkingconditions.
C) morejobflexibility.
D) increasedwageratesinanotherindustry.
Answer: D
Diff:2
48) Whichofthefollowingwillnotcausethesupplyoflaborcurvetoshiftintheeconomics
professorindustry?
A) AdecreaseinthewagerateforPh.D.economistsinthebankingindustry.
B) Adecreaseinthenumberofcoursesaprofessormustteach.
C) Universitieshavediscoveredawaytomakeprofessorsmoreproductive.
D) Universityprofessorsaregoingtoberequiredtospendmoretimeintheiroffices.
Answer: C
Diff:2
49) Anincreaseinthesupplyoflabortoanindustrycouldbecausedby
A) higherwages.
B) increasedproductivityoflabor.
C) anincreaseinjobflexibilityintheindustry.
D) anincreaseofwagesinanotherindustry.
Answer: C
Diff:2
50) AjaxCorporationhasjustdecidedtoletmanagersworkfromhomeonedayaweek.This
decisionwillmakeworkingconditionsbetterandwill
A) causethedemandcurveforlaborformanagerstoincrease.
B) increasetheelasticityofdemandforlaborformanagers.
C) leadtoanincreaseinthesupplycurveoflaborformanagers.
D) leavethesupplycurveoflaborunchanged.
Answer: C
Diff:2
51) Intheperfectlycompetitivemarket,thelaborsupplycurvefacedbytheindividualfirmis
________,whilethatofthemarketis________.
A) perfectlyelastic;perfectlyinelastic B) perfectlyinelastic;perfectlyelastic
C) perfectlyelastic;upwardsloping D) perfectlyinelastic;upwardsloping
Answer: C
Diff:2
52) Asinglefirminacompetitivelabormarkethasalaborsupplycurvethatis
A) upwardsloping. B) perfectlyinelastic.
C) perfectlyelastic. D) downwardsloping.
Answer: C
Diff:2
53) Inaperfectlycompetitivelabormarket,thewageratepaidbytheindividualfirmis
A) theequilibriummarketwagerate.
B) dependentonthedemandfortheproduct.
C) belowtheequilibriummarketwagerate.
D) afunctionofthetaxsystem.
Answer: A
Diff:1
54) Absentgovernmentinterference,thewagerateforlaborinacompetitivemarketisestablished
A) solelybythefirmsdemandforlabor.
B) solelybythemarketsupplyoflabor.
C) byboththedemandforandsupplyoflaborateachindividualfirm.
D) bythethemarketsupplyandmarketdemandforlabor.
Answer: D
Diff:2
55) Achangeinapriceofasubstituteinputforlaborwillcause
A) achangeinthedemandforlaborintheoppositedirectionofthepricechange.
B) nochangeinthedemandforlabor.
C) achangeinthesupplyoflaborintheoppositedirectionofthepricechange.
D) achangeinthedemandforlaborinthesamedirectionofthepricechange.
Answer: D
Diff:2
56) Ifanincreaseinthepriceofoneinputcausesanincreaseindemandforlabor,thetwoinputsare
A) complementary. B) substitutes.
C) interchangeable. D) flexible.
Answer: B
Diff:2
57) WhichofthefollowingwouldNOTareasonforashiftinthelabordemandcurve?
A) Achangeindemandforthefinalproduct
B) Achangeinlaborproductivity
C) Achangeinthemarketwagerate
D) Achangeinthepriceofarelatedinput
Answer: C
Diff:2
58) Thereareanumberofreasonswhylaborsupplycurveswillshiftinaparticularindustry.
WhichoneofthefollowingisNOToneofthem?
A) Changesinworkingconditionsinanindustryaffectthelaborsupplycurve.
B) Jobflexibilitythatdeterminesthepositionofthelaborsupplycurve.
C) Thereisachangeinthemarketwagerate.
D) Taxesonlaboraffectthelaborsupplycurve.
Answer: C
Diff:1
59) Ifthepriceofgolfballsincreases,whatwilllikelyhappentothedemandforgolfclub
manufacturingemployees?
A) Itwillincrease. B) Itwilldecrease.
C) Itwillstaythesame. D) Nothing,thetwoarenotrelated.
Answer: A
Diff:2
60) Whenthepriceoflaborincreases,thesubstitutioneffectwill________thequantityoflabor
demandedandtheoutputeffectwill________it.
A) increase;increase B) increase;decrease
C) decrease;increase D) decrease;decrease
Answer: D
Diff:2
61) WhichofthefollowingwillNOTshifttheMRPcurveforlabor?
A) achangeintheproductivityoflabor
B) achangeinthepriceoftheproductbeingsold
C) achangeinthewagerateinthemarket
D) achangeinthedemandfortheproductbeingproduced
Answer: C
Diff:3
62) AllofthefollowingshiftthelabordemandcurveEXCEPTchangesin
A) fringebenefitsofferedtoemployees. B) thedemandforthefinalproduct.
C) laborproductivity. D) pricesofrelatedfactors.
Answer: A
Diff:2
63) AllofthefollowingshiftanindustryslaborsupplycurveEXCEPTchangesin
A) marketwagesofferedinotherindustries.
B) thedemandforthefinalproduct.
C) jobflexibility.
D) workingconditions.
Answer: B
Diff:2
64) Supposethemarketpriceofzincdoubles.Whichofthefollowingscenariosismostlikely?
A) Thedemandforzincminerswillincrease,raisingthemarketwagerate.
B) Thedemandforzincminerswilldecrease,reducingthemarketwagerate.
C) Thedemandforzincwillincrease,raisingthemarketpricefurther.
D) Thedemandforzincminerswilldecrease,reducingthemarketpricebacktoitsoriginal
price.
Answer: A
Diff:2
65) Whatdoesitmeanforafirmtobeapricetakerinthelabormarket?
Answer: Apricetakerinthelabormarketcanhireasmanyworkersasitwantswithouthavingto
offerahigherwage.Thesupplycurveoflaborfacedbytheindividualfirmishorizontal
atthemarketwage.
Diff:1
66) Whatisthegeneralruleforhiringforaperfectlycompetitivefirm?Showitonagraph.Whatis
thedemandcurveforlaboronthegraph?Explain.
Answer:
Thefirmhiresworkersuptothepointatwhichtheadditionalofhiringthelastworkeris
equaltotheadditionalrevenuegeneratedbythatworker.Intheabovefigure,thesupply
curveoflaborishorizontalatthemarketwageW,sotheadditionalcostofhiringa
workerisW.TheadditionalrevenueistheMRP,sothefirmhiresLworkers.TheMRP
curveisthefirmsdemandcurvesinceitindicatesthemaximumwagethatthefirmis
willingtopayforeachworkeritwishestohire.
Diff:2
67) Supposethemarketforautoworkersisinitiallyinequilibrium,butthentheautomakers
purchasecapitalgoodsthatareasubstituteforworkers.Whathappensinthemarketfor
autoworkers?Explain.Now,supposetheautomakersimproveworkingconditionsattheplants.
Whataretheeffects?Explain.
Answer: Thepurchaseofcapitalthatisasubstituteforlaborcausesthedemandforautoworkers
tofall.Fewerworkersarehiredandthewageratefalls.Whenthefirmsmakethe
workplacebetter,thesupplyofautoworkersincreases,causinganincreaseinquantity
demandedandafurtherloweringofthewagerate.Whethermoreorlessworkersare
hiredthanbeforebothchangesoccurdependsonwhicheffectwasgreater.
Diff:3
68) Explaintheefficiencywagetheory.
Answer: Theefficiencywagetheorysaysthatfirmsmayofferabovemarketwageswiththegoalof
increasinglaborproductivity.Laborproductivitywouldincreaseifthehigherwage
reducedturnover,attractedmoreproductiveworkers,andencouragedcurrentworkers
toworkhardersotheywontlosetheirjobs.
Diff:2
69) Whatcancausethedemandcurveforlabortoshift?Explain.
Answer: Thedemandcurveforlaboristhemarginalrevenueproductcurve,whichismarginal
physicalproductmultipliedbymarginalrevenue.Foraperfectlycompetitivefirm,
marginalrevenueequalsprice.Whenevertheproductpricechanges,thedemandcurve
forlaborshifts.Whenevermarginalphysicalproductchangesduetochangesin
productivity,thedemandcurveforlaborshifts.Thechangesinthepricesofrelated
factors(substitutesandcomplements)willalsoshiftdemand.Thedemandforlaborisa
deriveddemand,soanincreaseinthedemandfortheproductproducedcausesthe
demandforlaborandothervariablesinputstochange.
Diff:2
70) Explainhowtheequilibriumwagerateisdeterminedforaperfectlycompetitiveindustryand
howafirminthatindustrydeterminesitsprofitmaximizingemploymentlevel.
Answer:
Intheabovefigure,theright-handfigureshowsindustryslabormarket.Themarket
wageisattheintersectionofmarketlaborsupplyandlabordemand.Themarketwageis
W,andequilibriumemploymentbyallfirmsisL 1 workers.Thewagedeterminesthe
supplycurvethattheperfectlycompetitivefirmfaces.Thefirmsdemandcurveforlabor
isthemarginalrevenueproductcurve,andthefirmhiresl 1 workers.
Diff:2
28.4LaborOutsourcing,Wages,andEmployment
1) WhenU.S.computercompanieshireworkersinIndiatostafftheircustomerservicecallcenters,
theyareengagingin
A) predatorypricing. B) unfairtradepractices.
C) outsourcing. D) laborengagement.
Answer: C
Diff:1
Topic: 28.4LaborOutsourcing,Wages,andEmployment
2) Afirmsemploymentoflaboroutsidethecountryinwhichthefirmislocatediscalled
A) featherbedding. B) alockout.
C) outsourcing. D) dumping.
Answer: C
Diff:1
3) Thepracticeofoutsourcinghasbeengivenaboostby
A) advancesintelecommunicationsandcomputernetworking.
B) supportfromorganizedlabor.
C) firmsthatarebecomingmorerisk-averse.
D) sharpincreasesinthecostofoverseaslabor.
Answer: A
Diff:1
4) Outsourcingisbeingpracticedby
A) U.S.firmsthatwanttokeepjobsathomeintheUnitedStates.
B) overseasfirmshiringintheU.S.labormarketandbyU.S.firmshiringinforeignlabor
marketswithlowerwages.
C) U.S.firmsonly.
D) governmentsbutprivatefirmsarenotallowedtooutsourcework.
Answer: B
Diff:1
5) Whichofthefollowingisanexampleofoutsourcing?
A) AU.S.firmmovesamanufacturingplantfromtheU.S.toThailandwherethefirmcan
hirecheaperlabor.
B) AGermanfirmhiresanaccountantintheU.S.tomanageitspayrolls.
C) Alltheaboveareexamplesofoutsourcing.
D) Noneoftheaboveisanexampleofoutsourcing.
Answer: C
Diff:2
6) SupposethatU.S.firmsoutsourceplanemanufacturingjobstoChina,itisexpectedthat
A) thewagerateforworkersmanufacturingplaneswilldecreaseintheU.S.butincreasein
China.
B) thewagerateforworkersmanufacturingplaneswillincreaseintheU.S.butdecreasein
China.
C) thewagerateforworkersmanufacturingplaneswillincreaseinboththeU.S.andChina.
D) thewagerateforworkersmanufacturingplaneswilldecreaseinboththeU.S.andChina.
Answer: A
Diff:2
7) WhenCanadianfirmsoutsourceaccountingservicestotheUnitedStates,inmarketsforthe
laborofaccountants,
A) equilibriumemploymentandthemarketclearingwageratewillbothincreaseinCanada,
butequilibriumemploymentandthemarketclearingwageratewillbothdecreaseinthe
UnitedStates.
B) equilibriumemploymentandthemarketclearingwageratewillbothdecreaseinCanada,
butequilibriumemploymentandthemarketclearingwageratewillbothincreaseinthe
UnitedStates.
C) equilibriumemploymentandthemarketclearingwageratewillbothincreaseinCanada
andintheUnitedStates.
D) equilibriumemploymentandthemarketclearingwageratewillbothdecreaseinCanada
andtheUnitedStates.
Answer: B
Diff:2
8) Afirmsemploymentoflaboroutsidethecountryinwhichthefirmislocated
A) isoutsourcing.
B) shiftsthesupplyoflaborintheoriginalcountry.
C) isthemarginalrevenueproduct.
D) shiftsthesupplyoflaborintheothercountry.
Answer: A
Diff:1
9) Outsourcingis
A) oneofthefactorsthatshiftsthesupplyoflaborcurve.
B) whenafirmemployslaboroutsidethecountryinwhichthefirmislocated.
C) whenthechangeinthepriceofacomplementaryinputcausesthedemandforlaborcurve
toshiftintheoppositedirection.
D) thecostofusinganadditionalunitofaninput.
Answer: B
Diff:1
10) Outsourcingis
A) onlybeneficialtoafewselectcountries.
B) anotherwayforresidentsofdifferentnationstoconducttradewithoneanother.
C) notbeneficialtoanycountry.
D) notbeneficialtotheconsumerswhopurchaseoutsourcedgoods.
Answer: B
Diff:1
11) SomecompaniesarehavingtheirtechnicalsupportcallsansweredbypeoplelocatedinIndia.
Thisisanexampleof
A) afactorthatshiftsthesupplyoflaborcurveintheU.S.
B) insourcing.
C) outsourcing.
D) achangeinthedemandforthefinalproductthatlaborproduces.
Answer: C
Diff:1
12) Whataretheshort-runeconomiceffectswhenU.S.firmssubstitutelaboroutsideoftheU.S.for
laborinsidetheU.S.?
A) ThewagerateintheU.S.willremainthesame,andthewagerateintheforeigncountry
willdecrease.
B) ThewagerateintheU.S.willincrease,andthewagerateintheforeigncountrywill
decrease.
C) ThewagerateintheU.S.willdecrease,andthewagerateintheforeigncountrywill
decrease.
D) ThewagerateintheU.S.willdecrease,andthewagerateintheforeigncountrywill
increase.
Answer: D
Diff:2
13) Whataretheshort-runeconomiceffectswhenU.S.firmssubstitutelaboroutsideoftheU.S.for
laborinsidetheU.S.?
A) ThedemandcurveforlaborintheU.S.decreases,andthedemandcurveintheforeign
countrywillincrease.
B) ThedemandcurveforlaborintheU.S.increases,andthedemandcurveintheforeign
countrywilldecrease.
C) ThedemandcurveforlaborintheU.S.decreases,andthedemandcurveintheforeign
countrywilldecrease.
D) ThedemandcurveforlaborintheU.S.increases,andthedemandcurveintheforeign
countrywillincrease.
Answer: A
Diff:2
14) Refertotheabovefigure.WhichpanelrepresentswhathappensintheU.S.jobmarketinthe
short-runwhenU.S.firmssubstitutelaboroutsideoftheU.S.forlaborinsidetheU.S.?
Answer: A
Diff:2
15) Refertotheabovefigure.Whichpanelrepresentswhathappensintheforeignjobmarketinthe
short-runwhenU.S.firmssubstitutelaboroutsideoftheU.S.forlaborinsidetheU.S.?
Answer: B
Diff:2
16) Whichofthefollowingstatementsdescribesthelong-runeffectsofglobaloutsourcing?
A) WagesforU.S.workerswilldecreasebutwagesinothercountrieswillincrease.
B) Wagesinallcountrieswillremainthesameasbeforetheoutsourcing.
C) Wagesandemploymentwillincreaseglobally.
D) Wageswillincreasegloballyandemploymentwillstaythesame.
Answer: C
Diff:1
17) WhichofthefollowingstatementsisFALSEaboutthelong -runeffectsofoutsourcing?

A) Outsourcingallowscountriestospecializeinproducingwhattheycanproducemost
efficiently.
B) Moregoodsandservicescanbeproducedthanintheabsenceofoutsourcing.
C) Globallywageswillincreasebecauseofoutsourcing.
D) Employmentlevelswilldecreasegloballyastheresultofoutsourcing.
Answer: D
Diff:2
18) Employmentoflaborinacountryotherthanthefirmshomecountryiscalled
A) employingguestworkers. B) outsourcing.
C) employingnon-naturalizedworkers. D) employingillegalaliens.
Answer: B
Diff:1
19) Economicanalysisindicatesthenetlong-runeffectofoutsourcingfortheUnitedStatesislikely
tobe
A) anincreaseddemandforlaborduetoeconomicgrowth.
B) adecreasedinthedemandforlaborintheUnitedStatesintheshortrun.
C) anincreaseinthesupplyoflabor.
D) adecreaseinthesupplyoflabor.
Answer: A
Diff:1
20) WhenfirmsinaU.S.industryoutsourcesomeoftheirproduction,
A) bothU.S.labordemandandU.S.wagesintheindustryfall
B) U.S.labordemandfalls,butU.S.wagesarenotaffected.
C) U.S.labordemandremainsunchanged,butU.S.wagesfall.
D) U.S.labordemandfalls,butU.S.wagesincrease.
Answer: A
Diff:1
21) SupposeaU.S.computercompanyoutsourcesitstechnical-supportservicestoIndia.Thiswill
cause
A) thedemandforlaborintheUnitedStatestofall,loweringU.S.wagerates,andthe
demandforlaborinIndiatoincrease,increasingIndianwagerates.
B) thedemandforlaborintheUnitedStatestoincrease,loweringU.S.wagerates,andthe
demandforlaborinIndiatofall,increasingIndianwagerates.
C) thedemandforlaborintheUnitedStatestofall,loweringU.S.wagerates,andthe
demandforlaborinIndiatofall,decreasingIndianwagerates.
D) thedemandforlaborintheUnitedStatestoincrease,increasingU.S.wagerates,andthe
demandforlaborinIndiatofall,decreasingIndianwagerates.
Answer: A
Diff:2
22) Explaintheimplicationsofoutsourcingforemploymentandwagesinthedomesticandforeign
labormarkets.
Answer: Ifdomesticfirmsoutsourcetheirjobsabroad,thentherewillbeadecreaseinthedemand
fordomesticworkersandanincreaseinthedemandforforeignworkersthatare
substitutableforthedomesticworkers.Asaresult,thedomesticlabordemandcurve
shiftsleftward,soequilibriumdomesticemploymentandthemarketclearingdomestic
wagewilldecrease.Theforeignlabordemandcurveshiftsrightward,soequilibrium
foreignemploymentandthemarketclearingforeignwagewillincrease.
Diff:2
28.5MonopolyintheProductMarket
1) Otherthingsbeingequal,thebehaviorofamonopolistdiffersfromthatofacompetitive
industryinthat
A) themonopolistdoesnotattempttomaximizeeconomicprofit.
B) themonopolisthiresmorelabor.
C) themonopolistrestrictsoutputandhireslesslabor.
D) themonopolistmustconsiderfixedcostsindecidingtheoptimallevelofoutputto
produceintheshortrun.
Answer: C
Diff:1
Topic: 28.5MonopolyintheProductMarket
2) Whichofthefollowingwouldbethemostlikelyoutcomeifallperfectlycompetitivefirmsina
productmarketjointogethertoformamonopoly?
A) Boththerateofoutputandthequantityoflaborinputemployedwilldecrease.
B) Boththerateofoutputandthequantityoflaborinputemployedwillincrease.
C) Therateofoutputinthemarketwillincreasebutthequantityoflaborinputwilldecrease.
D) Therateofoutputinthemarketwilldecreasebutthequantityoflaborinputwillincrease.
Answer: A
Diff:1
3) Themonopolistsinputdemandcurveisequaltoits
A) variablecostcurve. B) marginalcostcurve.
C) averagecostcurve. D) marginalrevenueproductcurve.
Answer: D
Diff:1
4) Otherthingsbeingequal,themonopolistwill
A) hiremoreworkersthaniftheindustrywereperfectlycompetitive.
B) hirethesamenumberofworkersasaperfectlycompetitiveindustrywould.
C) hirefewerworkersthaniftheindustrywereperfectlycompetitive.
D) havelowerprofitsthaniftheindustrywereperfectlycompetitive.
Answer: C
Diff:2
5) Amonopolisthiresfewerworkersthanaperfectlycompetitiveindustry,otherthingsbeing
equal,because
A) amonopolisthastopayhigherwagesinordertoattractadditionalworkers.
B) themonopolistsubstitutesmorecapitalforlaborwhencomparedtoacompetitive
industry.
C) themonopolistproducerhastodealwithunionsandfacehigherwagesthando
competitiveindustries.
D) themonopolistproduceslessoutputthanacompetitiveindustry.
Answer: D
Diff:2
6) Amonopolistwillhirefewerworkersthanacompetitivefirm,otherthingsbeingequal,because
A) themonopolistexploitslaborandothertypesofproducersdonot.
B) themonopolistmusttakeaccountofthedecliningproductpricethatmustbechargedin
ordertosellmoreunitsoftheproduct.
C) themonopolistismoreefficient.
D) diminishingmarginalproductivityoflaborismoresevereforamonopolist.
Answer: B
Diff:1
7) Ifafirmsellsitsproductinamonopolisticmarket,eventhoughthefirmoperatesinaperfectly
competitivelabormarket,thefirmwillemployworkersuptothepointwhere
A) TR=TC.
B) theMRP=thewagerate.
C) theMRP=themarginalphysicalproductoflabor.
D) theMRP=theoutputprice.
Answer: B
Diff:1
8) Afirmwantingtomaximizeprofitsshouldoperateinsuchawaythat
A) theMRPofeachinputisequaltoorgreaterthanitsMFC.
B) MRPequalMFCintheinputmarketbutMCmustexceedMRintheoutputmarket.
C) marginalrevenuemustbeequaltothemarginalrevenueproduct.
D) noneoftheabove
Answer: A
Diff:1
9) Ifamonopolisthasanoutputpriceof$10,marginalrevenueequalto$4,andfacesafixedwage
of$6,heorsheshouldhirelaboruntilthemarginalrevenueproductisequalto
A) $10. B) $4. C) $6. D) $2.
Answer: C
Diff:1
10) Thedemandcurveforlaborofamonopolist
A) ishorizontaleventhoughthedemandcurveforlaborforacompetitivefirmisdownward
sloping.
B) slopesdownforthesamereasonasthedemandcurveforlaborofaperfectlycompetitive
firm.
C) slopesdownbecauseofthelawofdiminishingmarginalproductandbecausethe
monopolistmustlowerpricestoselladditionalunitsofthegood.
D) slopesupwardbecausemonopolistsusemorecapitalthandoperfectlycompetitivefirms.
Answer: C
Diff:2
11) Themonopolistsinputdemandcurveisthe
A) marginalrevenuecurve. B) marginalrevenueproductcurve.
C) marginalphysicalproductcurve. D) marginalfactorcost.
Answer: B
Diff:1
12) Comparedtotheperfectlycompetitivefirm,themonopolistsinputdemandcurveis
A) moreelastic.
B) moreinelastic.
C) duetoaconstantper-unitpriceoftheproduct.
D) marginalfactorcost.
Answer: B
Diff:1
13) Amonopolistwillhireanadditionalunitoflaboraslongas
A) theadditionalcostoftheworkerisoutweighedbytheadditionalrevenuesmadefrom
sellingtheoutputofthesesworkers.
B) themarginalrevenuecurveisabovethedemandcurve.
C) themarginalrevenueproductislargerthanthemarginalfactorcost.
D) themarginalrevenueproductislessthanthemarginalfactorcost.
Answer: A
Diff:1
14) Aprofitmaximizingmonopolistwillhirelaboruptothepointwhere
A) marginalrevenueproductequalsthepriceoftheproduct.
B) marginalrevenueproductisgreaterthanthewagerate.
C) marginalrevenueproductequalsthanthewagerate.
D) marginalrevenueproductislessthanthewagerate.
Answer: C
Diff:1
15) Aruleofthumbintheemploymentofresourcesistoset
A) marginalrevenueproduct(MRP)equaltomarginalfactorcost(MFC).
B) marginalrevenue(MR)equaltomarginalcost(MC).
C) marginalphysicalproductequaltomarginalresourcecost.
D) noneoftheabove
Answer: A
Diff:1
16) Otherthingsequal,amonopolistwillhire
A) moreworkersthanaperfectlycompetitiveindustry.
B) fewerworkersthanaperfectlycompetitiveindustry.
C) moreworkersthanaperfectlycompetitivefirm.
D) thesamenumberofworkersasaperfectlycompetitiveindustrywould.
Answer: B
Diff:2
17) Amonopolistwillhirefewerworkersthanaperfectlycompetitivefirmbecause
A) themarginalproductcurvedecreasesasadditionalunitsoflaborarehiredforamonopoly
butnotforacompetitivefirm.
B) thereisavarietyofemployersinacompetitivemarketandonlyoneinamonopoly.
C) marginalrevenueisgreaterthanpriceforamonopolywhilemarginalrevenueisequalto
priceforacompetitivefirm.
D) tosellanadditionalunitofthegoodthecompetitivefirmwillkeepthepricethesame
whilethemonopolistmustloweritonallunitssold.
Answer: D
Diff:1
Marginal Marginal
LaborInput PhysicalProduct Revenue
(workersperweek) (outputperweek) MR
25 150 9.00
26 140 8.50
27 130 8.00
28 120 7.50
29 110 7.00
18) Refertotheabovetable.Whatdoesthemarginalrevenueproductequalwhen26workersare
hiredaweek?
A) $8.50 B) $26 C) $221 D) $1190
Answer: D
Diff:1
hiredaweek?
A) $1040 B) $216 C) $16.25 D) $8
Answer: A
Diff:1
hiredaweek?
A) $1040 B) $900 C) $210 D) $7.50
Answer: B
Diff:1
21) Refertotheabovetable.Howmanyworkerwillthisfirmhireiftheweeklywagerateis$1350?
A) 28 B) 25 C) 26 D) 27
Answer: B
Diff:1
22) Refertotheabovetable.Howmanyworkerswillthisfirmhireiftheweeklywagerateis$770?
A) 26 B) 27 C) 28 D) 29
Answer: D
Diff:1
23) Refertotheabovetable.Howmanyworkerswillthisfirmhireiftheweeklywagerateis$900?
A) 26 B) 27 C) 28 D) 29
Answer: C
Diff:1
24) Refertotheabovetable.Howdoweknowthatthisisnotacompetitivefirm?
A) Themarginalphysicalproductdecreasesastheamountoflaborhiredincreases.
B) Themarginalrevenuechangesasoutputchanges.
C) Themarginalrevenueproductdecreasesastheamountoflaborincreases.
D) Marginalphysicalproductcannotbecomputedforcompetitivefirms.
Answer: B
Diff:1
25) Ifweassumecompetitivelabormarkets,thesupplycurveoflaborwhenthefirmisamonopoly
is
A) upwardsloping. B) vertical.
Answer: C
Diff:1
26) Inanimperfectlycompetitivelabormarket,thefirmisfacedwitha(n)________MPPcurveand
a(n)________MRcurve.
A) downwardsloping;upwardsloping B) downwardsloping;downwardsloping
C) upwardsloping;downwardsloping D) downwardsloping;horizontal
Answer: B
Diff:1
Quantityof MarginalPhysical Priceof Marginal

Workers TotalProductProduct FinalProductRevenueProduct
1 7 $10
2 18 9
3 30 8
4 40 7
5 48 6
6 52 5
27) Intheabovetable,whatisthemarginalrevenueproductofthe4thworker?
A) $92 B) $70 C) $40 D) $8
Answer: B
Diff:3
28) Intheabovetable,whatisthemarginalrevenueproductofthe1stworker?
A) $92 B) $70 C) $40 D) $8
Answer: B
Diff:3
29) Intheabovetable,whatisthemarginalrevenueproductofthe2ndworker?
A) $99 B) $70 C) $110 D) $9
Answer: A
Diff:3
30) Intheabovetable,ifthemarginalfactorcostis$20,howmanyworkerswouldbehired?
A) 3 B) 4 C) 5 D) 6
Answer: D
Diff:3
A) 3 B) 4 C) 5 D) 6
Answer: C
Diff:3
A) 3 B) 4 C) 5 D) 2
Answer: A
Diff:3
33) Inconstructingthemonopolistsinputdemandcurve,whichofthestatementsisFALSE?
A) Thedemandcurvehasanegativeslopeduetothelawofdiminishingmarginalproduct.
B) Marginalrevenueisalwayspositive.
C) Amonopolyrestrictsoutputandhiresfewerunitsoflaborthanaperfectlycompetitive
firm.
D) Thesupplycurveamonopolyfacesishorizontalbecausethemonopolyisapricetaker.
Answer: B
Diff:2
34) TheMRPcurveforamonopolistintheproductmarketis
A) thesameastheMRPcurveforaperfectlycompetitivefirmintheproductmarket.
B) totheleftandbelowtheMRPcurveforaperfectlycompetitivefirmintheproductmarket.
C) totherightandabovetheMRPcurveforaperfectlycompetitivefirmintheproduct
market.
D) upwardslopingandbelowtheMFCcurveforaperfectlycompetitivefirmintheproduct
market.
Answer: B
Diff:2
35) Whenafirmhasmonopolypower,it
A) hiresfewerworkersbecauseitsmarginalrevenueliesbelowthedemandcurve.
B) hiresmoreworkersbecauseitsmarginalrevenueliesbelowthedemandcurve.
C) hiresfewerworkersbecauseitsmarginalrevenueliesabovethedemandcurve.
D) hiresmoreworkersbecauseitsmarginalrevenueliesabovethedemandcurve.
Answer: A
Diff:1
36) Ifthedemandforamonopolistsproductincreases,its
A) marginalrevenueincreases,makingitmoreprofitabletohiremoreworkers.
B) marginalrevenueincreases,makingitmoreprofitabletohirefewerworkers.
C) marginalrevenuedecreases,makingitmoreprofitabletohiremoreworkers.
D) marginalrevenuedecreases,makingitmoreprofitabletohirefewerworkers.
Answer: A
Diff:2
37) Otherthingsbeingequal,themonopolisthiresfewerworkersthanwouldbehiredthana
perfectlycompetitiveindustry.Doyouagreeordisagree?Why?
Answer: Agree.Forcompetitivefirms,marginalrevenueproductequalsmarginalphysical
productmultipliedbyproductprice.Foramonopoly,marginalrevenueproductequals
marginalphysicalproductmultipliedbymarginalrevenue.Sincemarginalrevenuefalls
fasterthanprice,MRPofamonopolistfallsfasterthanthepriceinacompetitive
industry.Marginalfactorcostisthesameforboth,sotheequilibriumquantityoflaboris
lessformonopolythanforperfectcompetition.
Diff:3
38) Whatdoesamonopolistsdemandcurveforlaborlooklike?Howdoesitcomparetothemarket
demandcurveforacompetitiveindustry?Whatdoesthesupplycurveoflabortoamonopolist
looklike?Explain.
Answer: Thedemandcurveforlaborforamonopolyisdownwardslopingbecauseofthelawof
diminishingmarginalproduct.Themarginalrevenueproductcurvefallsfasterinthe
caseofmonopolythaninperfectcompetitionbecausemarginalrevenuefallsfasterthan
pricefallsasmoreunitsaresold.So,themonopolywilltendtohirefewerworkersthanif
theindustrywascompetitive.Thisisconsistentwiththefactthatmonopoliesrestrict
output.Thesupplycurvefacingamonopolyishorizontalbecausethemonopolyisstilla
pricetakerininputmarkets.
Diff:3
28.6TheUtilizationofOtherFactorsofProduction
1) Inaperfectlycompetitivelabormarket,theleast-costcombinationruleforresourceuse
A) requiresthatresourcesbeusedincombinationssuchthatmarginalproductsareequal.
B) requiresthatthemarginalphysicalproductperdollarspentforeachresourceisequalized.
C) assuresthefirmaneconomicprofit.
D) assuresthefirmanormalprofit.
Answer: B
Diff:1
Topic: 28.6TheUtilizationofOtherFactorsofProduction
2) Intheemploymentofanyresource,afirmshould
A) equatemarginalrevenueproductwiththecostoftheadditionalresource.
B) hireeachinputunitthataddsmoretorevenuethanitaddstocosts.
C) hireeachinputunitprovideditsmarginalphysicalproductisgreaterthanzero.
D) AandBarebothcorrect.
Answer: D
Diff:2
3) Assumethataperfectlycompetitivefirmfacesafixedwagerateof$4andaconstantper -unit
costofcapitalof$2.Ifthemarginalproductoflaborandcapitalare16and6,respectively,then
tomaximizeprofitsthefirmshould
A) userelativelymorecapital. B) userelativelylesscapital.
C) increaseallinputsproportionately. D) decreaseallinputsproportionately.
Answer: B
Diff:1
4) Assumethataperfectlycompetitivefirmfacesafixedwagerateof$4andaconstantper -unit
costofcapitalof$2.Ifthemarginalproductoflaborandcapitalare16and6,respectively,then
tomaximizeprofitsthefirmshould
A) userelativelymorelabor. B) userelativelylesslabor.
Answer: A
Diff:1
5) Ifafirmfacesperfectlycompetitiveproductandfactormarketsandthemarginalproductof
laborandcapitalare4and9,respectively,whilethewagerateis$2andtherentalrateon
capitalis$4,thefirmshould
A) userelativelymorecapital. B) userelativelylesscapital.
Answer: A
Diff:1
6) Ifafirmfacesperfectlycompetitiveproductandfactormarketsandthemarginalproductof
laborandcapitalare4and9,respectively,whilethewagerateis$2andtherentalrateon
capitalis$4,thefirmshould
A) userelativelymorelabor. B) userelativelylesslabor.
Answer: B
Diff:1
7) Afirmwillhireaunitofinputuptothepointwhere
A) themarginalcostoftheinputequalsthemarginalcostofoutput.
B) themarginalrevenueproductoftheinputisequaltothemarginalfactorcostoftheinput.
C) thepriceoftheinputisequaltothepriceofoutput.
D) themarginalphysicalproductoftheinputisequaltothepriceofoutput.
Answer: B
Diff:1
8) Ifthemarginalrevenueproductofaninputexceedsthemarginalfactorcostoftheinput,the
firm
A) shouldhirelessoftheinput. B) ismaximizingprofit.
C) isnotonitsmarginalcostcurve. D) shouldincreaseitsuseoftheinput.
Answer: D
Diff:1
9) Whenafirmishiringaninputsuchthatthemarginalrevenueproductoftheinputisequalto
themarginalfactorcostoftheinput,thefirm
A) shouldbeexpandingoutput. B) ishiringtoolittleoftheinput.
C) ismaximizingeconomicprofit. D) isproducingtoomuchoutput.
Answer: C
Diff:1
10) Aprofitmaximizingfirmwillhireadditionalworkersuntil
A) theadditionalcostassociatedwithhiringthelastworkerequalstheaveragewagerateof
theworkers.
B) theadditionalcostassociatedwithhiringthelastworkerequalstheadditionalrevenue
generatedbythatworker.
C) theextrarevenuegeneratedbythelastworkerhiredequalszero.
D) theextracostassociatedwithhiringthelastworkerequalsthepriceofthegoodproduced.
Answer: B
Diff:2
11) Profitmaximizationrequiresthat
A) themarginalfactorcostofeveryinputequalsthatinputsmarginalphysicalproduct.
B) themarginalfactorcostofeveryinputequalsthatinputsmarginalrevenueproduct.
C) theamountofoneinputhireddividedbytheamountofanotherinputhiredequalsthe
totalcostsofthefirstinputhireddividedbythetotalcostsofthesecondinput.
D) equalamountsofeachinputareemployed.
Answer: B
Diff:2
12) Theprofitmaximizingcombinationofresources
A) usuallyinvolvesmoreofeachinputhiredthanthecostminimizingcombinationof
resources.
B) usuallyinvolveslessofeachinputhiredthanthecostminimizingcombinationof
resources.
C) usuallyinvolveshiringmoreofsomeresourcesandlessofotherresourcesthanthecost
minimizingcombinationofresources.
D) isalsothecostminimizingcombinationofresources.
Answer: D
Diff:2
13) Profitmaximizationoccurswhere
A) eachfactorisuseduptothepointwhereitsmarginalrevenueproductisequaltoits
marginalfactorcost.
B) eachfactorisuseduptothepointwhereitsmarginalphysicalproductisequaltoits
marginalfactorcost.
C) averagevariablecostequalsmarginalcost.
D) averagevariablecostequalsaveragetotalcost.
Answer: A
Diff:1
14) Ifaperfectlycompetitivefirmiscurrentlyemployingworkerstothepointwherethevalueof
thelastworkersmarginalproductisequaltothewagerate,andthegovernmentimposesa
minimumwagehigherthanthevalueoftheworkersmarginalproduct,wecanpredictthat
A) thefirmwillpaythehigherwagerateandnotchangethenumberofworkershired.
B) thefirmwillnolongeremploythemarginalworker.
C) thefirmwillincreaseitsprice.
D) thefirmwillemploymoreworkers.
Answer: B
Diff:1
15) Tominimizetotalcostsforaparticularrateofoutput,afirmwillequate
A) theaveragecostofeachfactor.
B) themarginalrevenueofeachfactor.
C) themarginalphysicalproductperdollarspentoneachfactor.
D) themarginalrevenueproductandvariablemarginalrevenueforeachfactor.
Answer: C
Diff:1
16) Costminimizationsuggeststhattwoinputsshouldbeemployedtothepointwhere
A) themarginalcostofeachinputisidentical.
B) themarginalrevenueproductofeachinputisidentical.
C) themarginalphysicalproductperdollarspentoneachinputisidentical.
D) theextracontributiontophysicaloutputoftheinputsisidentical.
Answer: C
Diff:1
17) Ifthemarginalphysicalproduct(MPP)ofthelastdollarspentonlaborisonlyhalfaslargeas
theMPPfromthelastdollarspentoncapital,thisfirmshould
A) increaseitsuseoflaborandsellemploylesscapital.
B) employmorecapital.
C) increaseitsuseofbothlaborandcapital.
D) maintainitscurrentfactorutilizationpattern.
Answer: B
Diff:1
18) Ifafirmusesonlycapitalandlaborasinputs,thenwhatshouldthefirmdoatagivenrateof
productionifthemarginalphysicalproductoflaborperlastdollarspentishigherthanthe
marginalphysicalproductofcapitalperlastdollarspent?
A) Thefirmshouldincreaseboththequantityofcapitalandthequantityoflabor.
B) Thefirmshoulddecreaseboththequantityofcapitalandthequantityoflabor.
C) Thefirmshouldincreasethequantityofcapitalandreducethequantityoflabor.
D) Thefirmshoulddecreasethequantityofcapitalandincreasethequantityoflabor.
Answer: D
Diff:2
19) Ifafirmusesonlycapitalandlaborasinputs,thenwhatshouldthefirmdoatagivenrateof
productionifthemarginalphysicalproductoflaborperlastdollarspentislowerthanthe
marginalphysicalproductofcapitalperlastdollarspent?
A) Thefirmshouldincreaseboththequantityofcapitalandthequantityoflabor.
B) Thefirmshoulddecreaseboththequantityofcapitalandthequantityoflabor.
C) Thefirmshouldincreasethequantityofcapitalandreducethequantityoflabor.
D) Thefirmshoulddecreasethequantityofcapitalandincreasethequantityoflabor.
Answer: C
Diff:2
20) AperfectlycompetitivefirmdiscoversthatitsMRPL dividedbythewageequals1.25.Thefirm

should
A) checktheMRPoftheotherinputsanddividethembytheirprices.Iftheyareallequalto
1.25itismaximizingprofits.
B) hiremorelabor.
C) purchasemorecapital.
D) trytopayalowerwagerate.
Answer: B
Diff:2
21) Afirmthatwantstomaximizeprofitsshouldhireeachinputtothepointwhere
A) itsmarginalrevenueproductdividedbythepriceoftheinputequalsone.
B) itsmarginalrevenueproductdividedbyitsmarginalphysicalproductequalsthewage.
C) itsmarginalrevenueproductdividedbytheproductpriceequalsone.
D) itsmarginalphysicalproductdividedbythepriceoftheinputequalstheproductprice.
Answer: A
Diff:2
22) Ifafirmwantstomaximizeprofitsitshould
A) hirelotsofcapitalandverylittlelaborsincelaborneedstobetrained.
B) hireunskilledlaborratherthanskilledlaborsinceunskilledlaborischeaper.
C) equatethemarginalphysicalproductforeachinputtothepriceoftheinput.
D) equatethemarginalrevenueproductforeachinputtothepriceoftheinput.
Answer: D
Diff:1
23) Afirmthatmaximizesprofitsalso
A) isinefficient.
B) cutscornersinproductionprocessessothatitsproductsaremadetoocheaply.
C) usestheleast-costcombinationofresources.
D) paysinputpriceslowerthanotherfirmsdo.
Answer: C
Diff:2
24) Ifafirmwantstomaximizeprofitsitshould
A) hireeachfactorofproductionuptothepointatwhichthemarginalphysicalproductper
lastdollarspentisequalized.
B) hireeachfactorofproductionuptothepointatwhichthemarginalrevenueproductper
lastdollarspentisequalized.
C) hireeachfactorofproductionuptothepointatwhichthemarginalfactorcostperlast
dollarspentisequalized.
D) hirethesamenumberofunitsofallinputs.
Answer: A
Diff:1
25) Thecost-minimizingruleisthatafirmshouldutilizeinputssuchthatthemarginalphysical
productofaninputdividedbythepriceoftheinputisthesameforallinputs.Thisisalsothe
profit-maximizingrulebecause
A) weobtaintheprofit-maximizingrulebymultiplyingeachratiobythemarginalrevenue
produced.
B) weobtaintheprofit-maximizingrulebymultiplyingeachratiobytheproductprice,
whichisthesameforeachinput.
C) theprofit-maximizingruleisjusttheinverseofthecost-minimizingrule.
D) theyareexactlythesame.
Answer: B
Diff:3
26) Aprofit-maximizingfirmwillhireworkersuptothepointatwhich
A) MRP<MFC. B) MRP= MFC. C) MRP> MFC. D) MRP=MPP.
Answer: B
Diff:2
27) Forafirminaperfectlycompetitivelabormarket,
A) W>MFC. B) W<MFC. C) W> MRP. D) W=MFC.
Answer: D
Diff:2
28) Ifafirmwantstomaximizeprofits,itshouldhireworkersuptothepointatwhich
A) totalfactorcost=totalrevenue.
B) marginalfactorcost=marginalrevenueproduct.
C) marginalutility=marginalcost.
D) totalsocialbenefit=totalsocialcosts.
Answer: B
Diff:1
29) Profit-maximizingemploymentisthequantityoflaboratwhich
A) marginalrevenueproductisequaltomarginalfactorcost.
B) marginalrevenueproductisequaltoproductprice.
C) marginalfactorcostisequaltomarginalrevenue.
D) marginalfactorproductisequaltoproductprice.
Answer: A
Diff:2
30) Inaperfectlycompetitivesituation,theprofit-maximizinghiringsituationforallinputsbeing
usediswhere
A) theMRPofeachinputisequaltothepriceofeachinput.
B) theMRPofeachinputisgreaterthanthepriceofeachinput.
C) theMRPofeachinputislessthanthepriceofeachinput.
D) ThereisnorelationshipbetweenMRPandthepricesoftheinputs.
Answer: A
Diff:1
31) Theprofit-maximizingcombinationofresourcesinaperfectlycompetitivesituationoccursat
thepointatwhich
A) MRPoflabor=priceoflabor(wagerate).
B) MRPofland=priceofland(rentalrateperunit).
C) MRPofcapital=priceofcapital(costperunitofservice).
Answer: D
Diff:1
32) Thefollowingtabledepictsboththeproductandlabormarketsforimportedcoffee.Whatisthe
totalrevenuewhen15workersperdayarehired?
LaborInput Total Product

(workersperday) PhysicalProduct Price($)
10 100 50
11 110 49
12 120 48
13 130 47
14 140 46
15 150 45
A) $5,000 B) $6,750 C) $7,350 D) $7,500

Answer: B
Diff:2
33) AperfectlycompetitivefirmishiringvariableresourcesMandN.Itwillminimizetotalcosts
A) MRPm /MFCm =MRPn /MFCn . B) MRPm MFCm = MRPn MFCn .
C) Pm /MPPm =Pn /MPPn . D) MPPm /Pm = MPPn /Pn .
Answer: D
Diff:2
34) Whenafirmhasmaximizedprofits,
A) ithasalsominimizedtotalcosts.
B) themarginalproductofeachinputisalsomaximized.
C) themarginalphysicalproductisgreaterthantheinputpriceforallinputs.
D) itsmarginalcostiszero.
Answer: A
Diff:2
35) Forafirmthatusesland,laborandcapitalasinputs,howshouldtheinputsbeutilizedinorder
tominimizetotalcosts?
Answer: Givenaparticularrateofproduction,thefirmcanminimizetotalcostsbyhiringeachof
thethreeinputsuptothepointatwhichthemarginalphysicalproductperlastdollar
spentoneachinputisequalizedacrossthethreeinputs.
Diff:2
36) Showhowtheprofit-maximizingruleforhiringresourcesisequivalenttothecost-minimizing
rule.
Answer: Thecost-minimizingruleforhiringresourcesistohireresourcestothepointatwhich
themarginalphysicalproductperlastdollarspentoneachinputisequalized.Thatis:
(MPPoflabor/priceoflabor)=(MPPofcapital/priceofcapital)=(MPPofland/priceof
land),andsoon.Theprofit-maximizingrulesubstitutesMRPforMPPintheequations.
However,sinceMRPistheMPPmultipliedbythepriceoftheproduct,whichisthesame
foralltheinputs,thetwoconditionsareexactlythesame.
Diff:3
37) Explainwhattheprofit-maximizingcombinationofresourcesisfortheperfectlycompetitive
firm.
Answer: Thefirmhireseachinputsuchthatthemarginalrevenueproductoftheinputequalsthe
priceoftheinput.Thiscanalsobeexpressedas:(MRPoflabor/Priceoflabor) =(MRPof
capital/Priceofcapital)=(MRPofland/Priceofland),andsoon.
Diff:2
38) Supposeafirmemploysonlycapitalandlaborasinputs.Explainhowthefirmshouldallocate
itsinputsinordertomaximizeprofitsinaperfectlycompetitivemarket.
Answer: Tomaximizeprofits,thefirmshouldallocatethetwoinputssothatthemarginalrevenue
product(MRP)ofeachofthetwoinputsequalsitsinputprice,i.e.,theMRPofcapital
equalsthepriceofcapital(costperunitofservice),andtheMRPoflaborequalstheprice
oflabor(wagerates).
Diff:2
Chapter29
UnionsandLaborMarketMonopolyPower
29.1IndustrializationandLaborUnions
1) TheearliestunionsintheUnitedStateswere
A) industrialunions. B) craftunions.
C) public-sectorunions. D) militaryunions.
Answer: B
Diff:1
Topic: 29.1IndustrializationandLaborUnions
2) Laborunionscomposedofworkerswhoengageinaparticulartradeorskill,suchascarpentry,
arecalled
A) craftunions. B) industrialunions.
C) collectiveunions. D) closedunions.
Answer: A
Diff:1
3) Laborunionsthatconsistofworkersfromaparticularindustry,suchasautomobile
manufacturing,arecalled
A) craftunions. B) industrialunions.
C) collectiveunions. D) closedunions.
Answer: B
Diff:1
4) Abusinessenterpriseinwhichemployeesmustbelongtotheunionbeforetheycanbehiredis
calleda(n)
A) craftunion. B) industrialunion.
C) closedshop. D) unionshop.
Answer: C
Diff:1
Chapter29UnionsandLaborMarketMonopolyPower947
5) WhichofthefollowingcorrectlydescribesthetrendinU.S.unionmembership?
A) Unionmembershiphasbeendecreasingsteadilysincethe1930s.
B) Unionmembershipdecreasedfrom1930- 1960,buthasbeenincreasingsteadilysince.
C) Unionmembershippeakedinthe1960sandhasbeendecreasingsteadilysince.
D) Unionmembershipdeclineduntilthe1980s,buthasbeenincreasingsteadilysince.
Answer: C
Diff:1
6) WhichofthefollowingisthelargestunionintheUnitedStates?
A) InternationalBrotherhoodofTeamsters
B) InternationalBrotherhoodofElectricalWorkers
C) NationalEducationAssociation
D) AmericanFederationofState,County,andMunicipalEmployees
Answer: C
Diff:1
7) WorkersintheUnitedStatesweregrantedthelegalrighttoengageincollectivebargainingby
the
A) NationalLaborRelationsAct. B) Taft-HartleyAct.
C) Landrum-GriffinAct. D) KnightsofLaborAct.
Answer: A
Diff:2
8) Collectivebargainingrefersto
A) negotiationsbetweenworkersandhealthofficials.
B) negotiationsbetweenmanagementofacompanyandalaborunion.
C) farmingmethodsinMarxiststates.
D) theprocessofelectingunionleaders.
Answer: B
Diff:1
9) WhichofthefollowingisacorrectstatementaboutunionsintheUnitedStates?
A) Thetrendawayfrommanufacturingandthederegulationofcertainindustrieshas
promotedunionizationoftheU.S.workforce.
B) HalfofthetoptenU.S.unionsnowhavememberswhoworkinserviceandgovernment
occupations.
C) Sincethe1960s,therehasbeenagradualincreaseintheproportionofU.S.workerswho
aremembersofunions.
D) HalfofallU.S.workersareunionmembers.
Answer: B
Diff:1
10) TheUnitedAutoWorkersisanexampleof
A) apublic-sectorunion. B) acraftunion.
C) anindustrialunion. D) asocialistunion.
Answer: C
Diff:1
11) WhichofthefollowingtypesofunionsdidtheCIOpromote?
A) Craftunions B) Publicsectorunions
C) Industrialunions D) Militaryunions
Answer: C
Diff:1
12) TheUnitedSteelWorkersUnionisanexampleof
A) acraftunion. B) anautounion.
C) anindustrialunion. D) abluecollarunion.
Answer: C
Diff:1
13) TheAFLandCIOmergedbecauseitwasthoughtthat
A) organizedlaborwouldgrowfasterasaresult.
B) unionpensionfundswouldshrinkasaresult.
C) strikescouldbeaverted.
D) managerswouldbemoresympathetictounions.
Answer: A
Diff:1
14) Whenworkersboycottacompanybecauseitdoesbusinesswithafirmwhoseemployeesareon
strike,thatisa
A) secondaryboycott. B) primaryboycott.
C) strike. D) sympathystrike.
Answer: A
Diff:2
15) Ifafirmisaunionshop,then
A) aworkermayelecttoeitherjoinornotjointheunion.
B) onlyworkerswhohavebeenunionmembersfortwoyearsmaybeemployed.
C) onlyunionmembersmaybeemployedbythefirm.
D) anon-unionworkermaybehiredbutmustjointheunionwithinacertaintimeperiod.
Answer: D
Diff:1
16) Aright-to-worklawmakesitillegalfor
A) employerstorefusetohireunionworkers.
B) unionmembershiptobearequirementforcontinuedemploymentinanyestablishment.
C) unionmembershiptobedeniedonthebasisofrace,gender,ornationalorigin.
D) auniontoexistinastate.
Answer: B
Diff:1
17) Aclosedshopisabusinessenterpriseinwhich
A) employeescannotbelongtoaunionwhentheyareemployed,andcannotjoinaunionand
keepworkingthere.
B) employeesmustjointheuniontomaintainemployment.
C) employeesmustbelongtotheunionbeforetheycanbeemployed.
D) employeescannotbelongtotheunionwhentheyarehired,butmayjointheunionlater
andkeeptheirjobs.
Answer: C
Diff:2
18) Lawsthatmakeitillegaltorequireunionmembershipasaconditionofcontinuingemployment
inafirmare
A) unionshoplaws. B) right-to-worklaws.
C) closed-shoplaws. D) jurisdictionallaws.
Answer: B
Diff:1
19) Alegalarrangementwherebyafirmcanhireonlyunionlaboriscalled
A) aunionshop. B) aclosedshop. C) asweatshop. D) anopenshop.
Answer: B
Diff:1
20) Thetypeoflaboragreementthatrequiresworkerstobeunionmemberspriortobeing
consideredforemploymentisa
A) right-to-workagreement. B) closed-shopagreement.
C) unionshopagreement. D) open-shopagreement.
Answer: B
Diff:1
21) Acompanycanhirenon-unionworkers,butaconditionoftheiremploymentisthattheymust
jointheunionwithintheirfirst90daysonthejob.Thisisanexampleofa
A) right-to-worklaw. B) closed-shop.
C) unionshop. D) voluntarycraftunion.
Answer: C
Diff:1
22) ThepercentageofU.S.workersintheprivatesectorwhobelongtounionsiscurrently
A) greaterthan50percent. B) approximately20percent.
C) approximately12percent. D) approximately8percent.
Answer: D
Diff:1
23) Whichpieceoflegislationallowedstatestopassright-to-worklaws?
A) WagnerAct B) Landrum-GriffinAct
C) Taft-HartleyAct D) NationalIndustrialRecoveryAct
Answer: C
Diff:1
24) Astatewithright-to-worklawswouldmostlikelyhave
A) higheremploymentlevelsthanneighboringstateswithoutsuchlaws.
B) moreworkersbenefitsthanneighboringstateswithoutsuchlaws.
C) moreunionworkersthanneighboringstateswithoutsuchlaws.
D) moreworkersafetyrequirementsthanneighboringstateswithoutsuchlaws.
Answer: A
Diff:1
25) TheTaft-HartleyActof1947outlawed
A) strikes.
B) make-workrulesandforcingunwillingworkerstojoinaunion.
C) right-to-workstates.
D) noneoftheabove.
Answer: B
Diff:1
26) Aboycottofproductssoldbycompaniesthataredealingwithacompanywhoseworkersare
onstrikeisa
A) jurisdictionaldispute. B) sympathystrike.
C) right-to-boycottlaw. D) secondaryboycott.
Answer: D
Diff:1
27) Aclosedshopisoneinwhich
A) aunionisprohibited.
B) somemembersbelongtotheunionwhileothersdonot.
C) belongingtoaunionisaconditionofemployment.
D) theunionisaco-manageroftheday-to-dayoperationsofthefirm.
Answer: C
Diff:1
28) TheTaft-HartleyAct
A) permitsstatestooutlawunions.
B) permitsstatestopassright-to-worklaws.
C) encouragesunionstoengageinsympathystrikes.
D) encouragesunionstoengageinsecondaryboycotts.
Answer: B
Diff:1
29) Aright-to-workstateisoneinwhich
A) unionsareillegal.
B) thereisguaranteedemploymentforallcitizens.
C) theunionshopisprohibited.
D) theclosedshopispermitted.
Answer: C
Diff:1
30) Aunionisstrikingasteelcompany,andthen,toputmorepressureonthesteelcompany,also
promotesaboycottagainstanautocompanythatbuyssteelfromthesteelcompany.Thislatter
actionis
A) asympathystrike,andisillegalundertheTaft -HartleyAct.
B) asecondaryboycott,andislegalundertheLandrum -GriffinAct.
C) asecondaryboycott,andisillegalundertheTaft-HartleyAct.
D) asympathystrike,andislegalundertheWagnerAct.
Answer: C
Diff:2
31) ThepresidentoftheUnitedStatescanobtainacourtinjunctionthatwillstopastrikeforan
80-daycooling-offperiodifthestrikeisexpectedtoimperilnationalsafetyorhealth.This
powerisgrantedinthe
A) WagnerAct. B) Landrum-GriffinAct.
C) NationalIndustrialRecoveryAct. D) Taft-HartleyAct.
Answer: D
Diff:2
32) WhichofthefollowingislegalundertheTaft-HartleyAct?
A) Closedshops B) Collectivebargaining
C) Secondaryboycotts D) Sympathystrikes
Answer: B
Diff:2
33) Unionmembership,intermsofpercentageoftheU.S.civilianlaborforce,
A) hasincreasedsteadilysincethepassageoftheWagnerAct.
B) peakedabout1960andhassincedeclined.
C) wasover50percentin1987.
D) hasincreaseddramaticallysince1970.
Answer: B
Diff:1
34) Deregulationhascontributedto
A) anincreaseinunionmembership. B) declinesinunionmembership.
C) higherwagesinunions. D) anincreaseinunionpower.
Answer: B
Diff:1
35) Accordingtothetext,privatesectorunionmembershipintheUnitedStatesis
A) about8percentoftheprivate-sectorlaborforce.
B) zero.
C) about25percentofallU.S.workers.
D) about12percentoftheentireworkforce.
Answer: A
Diff:1
36) CollectivebargainingintheUnitedStatestypicallyinvolvesnegotiationsbetween
A) thegovernmentandmanagementovertheminimumwagelaw.
B) themanagementofacompanyandtheleadersoftheunionoverthewagesandfringe
benefitstobeoffered.
C) anindividualandherbossovertheappropriatesalarylevel.
D) unionandnonunionemployeesregardingworkrules.
Answer: B
Diff:1
37) Whichofthesenationshasthehighestrateofunionmembership(asashareoftotal
employment)?
A) India B) TheUnitedStates
C) Japan D) Sweden
Answer: D
Diff:1
38) Forthepastseveraldecades,unionmembershipintheUnitedStateshasbeendeclining.What
hasbeenhappeningintherestoftheworld?
A) Unionmembershiphasbeenincreasinginalmosteveryothercountry.
B) Inalmosteveryothernation,unionmembershiphasheldconstant.
C) Inmostcases,unionmembershipinothernationshasalsobeenfalling.
D) Wedonotknowbecauseothernationsdonotkeepthesestatistics.
Answer: C
Diff:1
39) Acraftlaborunionismadeupof
A) groupsofworkersinanindividualtrade.
B) alltheworkersinafirmsuchasGeneralMotors.
C) firmsthatemploysimilarlaborskills.
D) anorganizationthatcontrolsthelabormarketinaparticularindustry.
Answer: A
Diff:1
40) ThefirstlaborunionsintheUnitedStateswere
A) public-sectorunions. B) industrialunions.
C) guilds. D) craftunions.
Answer: D
Diff:1
41) Laborunionsareorganizationsthat
A) trytosecuremoreopportunitiesformoreworkersintheeconomy.
B) trytosecureeconomicimprovementsforallworkers.
C) trytosecureeconomicimprovementsfortheirmembers.
D) trytomakelabormarketsmorecompetitive.
Answer: C
Diff:1
42) Aprimaryobjectiveoflaborunionsisto
A) secureequalpayforitsmembers.
B) haveequalpowerwiththeiremployer.
C) seekbetterpayandimprovedworkconditions.
D) alloftheabove
E) noneoftheabove
Answer: C
Diff:1
43) AlaborunionislikelytoseekallofthefollowingEXCEPT
A) economicimprovementsfortheirmembers.
B) saferworkingconditions.
C) increasedcompetitivenessinthelabormarket.
D) increasedjobsecurityforitsmembers.
Answer: C
Diff:3
44) Negotiationsbetweenthemanagementofacompanyandthemanagementofaunionforthe
purposeofsettingamutuallyagreeablecontractonwages,fringebenefitsandworking
conditionsforallemployeesinaunionisknowas
A) aclosedshop. B) aunionshop.
C) collectivebargaining. D) anindustrialunion.
Answer: C
Diff:1
45) Bargainingbetweenthemanagementofacompanyandthemanagementofaunionis
A) aclosedshop. B) abilateralmonopoly.
C) acraftunion. D) collectivebargaining.
Answer: D
Diff:1
46) TheKnightsofLaborwas
A) acraftunionthattriedtorestrictimmigrationintotheUnitedStates.
B) anorganizationofskilledlaborthattriedtoincreasetechnicaltrainingaftertheGerman
model.
C) anorganizationofbothunskilledandskilledworkersthatpushedforaneight-hour
workdayandequalpayformenandwomen.
D) anindustrialunioncomposedofmilitarypersonnelthattriedtoimprovemilitarylife.
Answer: C
Diff:2
47) SamuelGompersservedasthefirstleaderofthe
A) KnightsofLabor. B) AmericanFederationofLabor.
C) CongressofIndustrialOrganizations. D) UnitedSteelWorkers.
Answer: B
Diff:1
48) PriortoWorldWarI,theU.S.governmentsattitudetowardslaborunionswasoneof
A) indifference.
B) support.
C) hostility.
D) support,exceptwhenitcametounionsofpublicemployees.
Answer: C
Diff:2
49) Anindustrialunionis
A) aunioncomposedofpublicemployees.
B) aunioncomposedofworkerswhoareinaspecificgeographicarea.
C) aunioncomposedofworkerswhoareemployedinaparticularindustry.
D) aunioncomposedofworkerswhoengageinaparticulartradeorskill.
Answer: C
Diff:1
50) Alaborunionthatconsistsofworkersfromaparticularindustryisa(n)
A) closedshop. B) industrialunion.
C) unionshop. D) bilateralmonopoly.
Answer: B
Diff:1
51) TheCIOwasformedasa(n)
A) closedshop. B) associationofindustrialunions.
C) unionshop. D) bilateralmonopoly.
Answer: B
Diff:1
52) TheUnitedSteelworkersisanexampleofa(n)
A) craftunion. B) industrialunion.
C) public-sectorunion. D) guild.
Answer: B
Diff:2
53) TheServiceEmployeesInternationalUnionisanexampleofa(n)
A) guild. B) craftunion.
C) industrialunion. D) public-sectorunion.
Answer: C
Diff:2
54) TheAmericanFederationofState,County,GovernmentandMunicipalEmployees isanexampleof

a(n)
A) guild. B) craftunion.
C) industrialunion. D) public-sectorunion.
Answer: D
Diff:2
55) TheWagnerAct
A) permittedunionstoengageincollectivebargaining.
B) permittedstatestopassright-to-worklaws.
C) restrictedactivitiesofheadsofunionsthatwerenotbeneficialtounionmembers.
D) mandatescompulsoryarbitrationinsomekeyindustries.
Answer: A
Diff:2
56) TheCIOwasfoundedby
A) SamuelGompers. B) JimmyHoffa.
C) JohnL.Lewis. D) GeorgeMeany.
Answer: C
Diff:1
57) Abusinessenterpriseinwhichemployeesmustbelongtotheunionbeforetheycanbehiredis
C) ajurisdictionaldispute. D) anindustrialunion.
Answer: A
Diff:1
58) TheUnitedAutoWorker(UAW)wouldbestbeclassifiedas
A) acraftunion.
B) anindustrialunion.
C) aguild.
D) closedshopunion.
E) noneoftheabove
Answer: B
Diff:1
59) Aclosedshopisa
A) strikebyaunioninsympathywithanotherunionsstrikeorcause.
B) disputeinvolvingtwoormoreunionsoverwhichshouldhavecontrolofaparticular
jurisdiction.
C) businessenterpriseinwhichemployeesmustbelongtotheunionbeforetheycanbehired
andmustremainintheunionaftertheyarehired.
D) legalenvironmentinwhichbusinessesmayhirenonunionmembersconditionalontheir
joiningtheunionbysomespecifieddateafteremploymentbegins.
Answer: C
Diff:1
60) Abusinessenterprisethatallowsthehiringofnonunionmembersconditionalontheirjoining
theunionis
Answer: B
Diff:1
61) Aunionshopisa
jurisdiction.
D) businesswhichmayhirenonunionmembersconditionalontheirjoiningtheunionby
somespecifieddateafteremploymentbegins.
Answer: D
Diff:1
62) Adisagreementinvolvingtwoormoreunionsoverwhichshouldhavecontroloveraparticular
firmorindustryis
Answer: C
Diff:1
63) Ajurisdictionaldisputeisa
jurisdiction.
D) legalenvironmentinwhichbusinessesmayhirenonunionmembersconditionalontheir
joiningtheunionbysomespecifieddateafteremploymentbegins.
Answer: B
Diff:1
64) TheemployeesofAjaxcookiesareonstrike.Janehasdecidednottoshopatanystorethatis
stillsellingAjaxcookies.Thisisknownas
C) asympathystrike. D) asecondaryboycott.
Answer: D
Diff:1
65) TheweldersunionatAjaxisonstrike.Themaintenanceunionhasdecidedtowalkoutin
supportoftheweldersunion.Thisisknownas
C) asympathystrike. D) asecondaryboycott.
Answer: C
Diff:1
66) Aright-to-worklawmakesitillegal
A) topreventunionmembersfromworkinginanyfirm.
B) tofireaworkerwhohasjoinedaunionorwhotriestoorganizeaunionatanyfirm.
C) toinquirewhetheraprospectiveemployeeisamemberofaunionornot.
D) forunionmembershiptobearequirementforcontinuedemploymentinanyfirm.
Answer: D
Diff:1
67) Legislationthatmakesitillegaltorequireunionmembershipasaconditionofcontinuing
employmentisthe
A) NationalLaborRelationsAct. B) WagnerAct.
C) CongressofIndustrialOrganizations. D) collectionofright-to-worklaws.
Answer: D
Diff:1
68) TheTaft-HartleyActmadeallofthefollowingillegalEXCEPT
A) jurisdictionaldisputes.
B) theCongressofIndustrialOrganizations.
C) make-to-worklaws.
D) closedshops.
Answer: B
Diff:1
69) TheTaft-HartleyActof1947made
A) unionshopsillegal. B) closedshopsillegal.
C) sympathystrikeslegal. D) secondaryboycottslegal.
Answer: B
Diff:2
70) TheUnitedAutoWorkersisstrikingagainstFord.TheTeamstersrefusetodeliversteeltoFord.
Thisisanexampleof
A) ajurisdictionaldisputeandisillegalundertheTaft-HartleyAct.
B) asecondaryboycottandisillegalundertheTaft -HartleyAct.
C) asympathystrikeandisillegalundertheTaft-HartleyAct.
D) aclosedshopandisillegalundertheWagnerAct.
Answer: C
Diff:2
71) WhichstatementconcerningpowersgrantedthePresidentoftheUnitedStatesbythe
Taft-HartleyActistrue?
A) ThePresidentcanobtainaninjunctionthatwillstopastrike,ifthestrikeinvolves
governmentworkersonly.
B) ThePresidentcanrequiremanagementtonegotiatewithaunionandifthefirms
managementrefuses,thePresidentcanappointanarbitratortoresolvetheconflict.
C) ThePresidentcanobtainaninjunctionthatwillstopastrikeforaneighty-daycooling
offperiodifthestrikeisexpectedtoimperilnationalsafetyorhealth.
D) ThePresidentcanobtainaninjunctionthatwillstopastrikeindefinitely.
Answer: C
Diff:2
72) Sincethe1970s,unionmembershipintheU.S.hasbeen
A) rising. B) remainingconstant.
C) declining. D) erratic.
Answer: C
Diff:1
73) WhichofthefollowinghasbeenthelargestorganizedgroupofU.S.unionsduringthepast50
years?
A) AFL-CIO B) AFL C) CIO D) ChangetoWin
Answer: A
Diff:1
74) In2005,whichunionorganizationwasformedoutoftheAFL -CIOmembership?

A) NationalBrotherhoodofTeamsters B) ServiceEmployeesInternationalUnion
C) AmericanFederationofWorkers D) ChangetoWin
Answer: D
Diff:1
75) Recently,twoconstructionindustryunionsalsolefttheAFL-CIOandjoinedwithironworkers
andbricklayersunionstoform
A) theNationalBrotherhoodofTeamsters. B) theNationalConstructionAlliance.
C) theAmericanFederationofWorkers. D) ChangetoWin.
Answer: B
Diff:1
76) WhichofthefollowingisNOToneofthereasonsfordecliningunionmembershipintheUnited
States?
A) Theeconomyhasshiftedawayfrommanufacturing.
B) TheAFL-CIOmergerandcreationoftheChangetoWinFederationreducedcompetition
amongunions.
C) Someindustrieshavebeenderegulated.
D) Laborforceparticipationbywomenhasincreased.
Answer: B
Diff:2
77) WhichofthefollowingisoneofthereasonsfordecliningunionmembershipintheUnited
States?
A) Muchoftheunskilled,nonunionizedworkintheUnitedStatesisdonebyimmigrant
workerswhoareundocumented.
B) TheAFL-CIOmergerandcreationoftheChangetoWinFederationreducedcompetition
amongunions.
C) TherepealoftheTaft-HartleyAct.
D) Laborforceparticipationbywomenhasdecreased.
Answer: A
Diff:2
78) TheU.S.labormovementstarted
A) withlocalcraftunionscomposedofworkerswhoengagedinaparticulartradeorskill,
suchasbaking,carpentryorplumbing.
B) duringtheCivilWar.
C) afterWorldWarI.
D) withtheKnightsofLabor,anorganizedgroupofbothskilledandunskilledworkers.
Answer: A
Diff:1
79) TheU.S.labormovementstartedwith
A) aerospaceworkersunions. B) industrialunions.
C) craftunions. D) depressionunions.
Answer: C
Diff:1
80) TheAmericanFederationofLaborwasformedin1886asadissidentgroupfromthe
A) KnightsofLabor. B) KnightsofPythias.
C) MasonicLodge. D) KnightsofColumbus.
Answer: A
Diff:1
81) ThefounderoftheAmericanFederationofLaborwas
A) JohnL.Lewis. B) SamuelGompers.
C) WalterReuther. D) RalphNader.
Answer: B
Diff:1
82) TheothernamefortheNationalLaborRelationsActof1935is
A) theWagnerAct. B) theTaft-HartleyAct.
C) theClaytonAct. D) theWheeler-LeaAct.
Answer: A
Diff:1
83) TheCongressofIndustrialOrganizations(CIO)wasformedin1938by
A) JohnL.Lewis. B) SamuelGompers.
C) WalterReuther. D) RalphNader.
Answer: A
Diff:1
84) Whichofthefollowinglawsmadeclosedshopsunlawful?
A) Taft-HartleyAct B) NationalIndustrialRecoveryAct
C) NationalLaborRelationsAct D) RailwayWorkersAct
Answer: A
Diff:1
85) WhichofthefollowingtypeofshopsisunlawfulundertheprovisionsoftheTaft -HartleyAct?

A) unionshops B) closedshops
C) modifiedunionshops D) openshops
Answer: B
Diff:1
86) Lawsthatoutlawunionshopsandwhichmaybepassed(ornot)byindividualstatesarecalled
A) Smoot-Hawleylaws. B) pro-scablaws.
C) free-riderlaws. D) right-to-worklaws.
Answer: D
Diff:1
87) ThefirsttypeoflaborunionsthatemergedintheUnitedStateswere
A) industrialunions. B) craftunions.
C) professionalunions. D) transportationunions.
Answer: B
Diff:1
88) Ifyougetajobandarerequiredtojointheunionwithinamonth,thisisknownasa(n)
A) closedshop. B) openshop. C) agencyshop. D) unionshop.
Answer: D
Diff:1
89) Ifyougetajobandareneverrequiredtojointheunion,thisisknownasa(n)
Answer: B
Diff:1
90) Ifyouwanttobecomeanactor,andyoumustjointheScreenActorsGuildafteryourfirstjob,
theScreenActorsGuildisa(n)
Answer: D
Diff:1
91) TheNationalLaborRelationsAct(WagnerAct)
A) prohibitedthecreationofcompanyunions.
B) guaranteedworkerstherighttoorganize.
C) settheminimumwageat$5.15anhour.
D) setthelengthoftheworkweekat40hours.
Answer: B
Diff:1
92) Whichtypeofcollectivebargainingagreementrequiresworkerstobeunionmemberspriorto
beingconsideredforemployment?
A) right-to-work B) unionshop C) openshop D) closedshop
Answer: D
Diff:1
93) Ajurisdictionaldisputemeansthat
A) membersofauniondisagreeontheoutcomeofunionelections.
B) ahighercourtreversedthedecisionofalowercourtinacasebroughtbyaunion.
C) aunionleadershipandmembershipcannotagreeonanissue.
D) twounionsdisagreeonwhichshouldrepresentworkersinaparticularindustry.
Answer: D
Diff:1
94) Asecondaryboycottis
A) illegalaccordingtotheTaft-HartleyAct.
B) alegalwaytosupportstrikingworkers.
C) illegalaccordingtotheWagnerAct.
D) legalaccordingtotheShermanAct.
Answer: A
Diff:1
95) Alaborunioncomposedofworkersinthesameoccupationiscalled
A) acraftunion. B) anindustrialunion.
C) acompanyunion. D) aclosedshop.
Answer: A
Diff:1
96) Craftunionsexertmarketcontrolby
A) limitingthedemandforlabor. B) limitingthesupplyoflabor.
C) settingminimumwages. D) settingmaximumwages.
Answer: B
Diff:1
97) Alaborunioncomposedofworkersinthesameindustryiscalled
A) acraftunion. B) anindustrialunion.
C) acompanyshop. D) aguild.
Answer: B
Diff:1
98) TheTaft-HartleyActoutlawedallofthefollowingpracticesEXCEPT
A) secondaryboycotts. B) unionshops.
C) closedshops. D) sympathystrikes.
Answer: B
Diff:1
99) Aplumbersunionisanexampleof
A) anindustrialunion. B) acraftunion.
C) skilledworkersunion. D) auxiliaryunion.
Answer: B
Diff:1
100) Aunionofallworkersfromaparticularindustryisa(n)
A) craftunion. B) conglomerateunion.
C) industrialunion. D) expansiveunion.
Answer: C
Diff:2
101) Asituationinwhichunionmembershipisrequiredbeforeapersoncanbehiredisa
A) closedshop. B) unionshop.
C) agencyshop. D) restrictedshop.
Answer: A
Diff:1
102) The1935Actgrantingworkerstherighttoformunionsandbargaincollectivelyisknownas
A) theNationalLaborRelationsActorWagnerAct.
B) theWheelerAct.
C) theTaft-HartleyAct.
D) theModernizationAct.
Answer: A
Diff:1
103) Asituationinwhichaworkercanbehiredwithoutbeinginaunionbuthastojoinaunionafter
aspecifiedperiodoftimeisa
A) closedshop. B) unionshop.
C) openshop. D) restrictedshop.
Answer: B
Diff:1
104) Aright-to-worklawis
A) afederallawmakingtheclosedshopillegal.
B) afederallawmakingtheunionshopillegal.
C) astatelawmakingtheunionshopillegal.
D) astatelawmakingtheopenshopillegal.
Answer: C
Diff:1
105) SupposethatunderitscollectivebargainingagreementtheXYZCorp.canhirenonunion
workers,buttheseworkersmustjointheunionwithin60days.Thisagreementisanexampleof
A) anopenshop. B) aclosedshop.
C) acompanyunion. D) aunionshop.
Answer: D
Diff:1
106) Right-to-worklaws
A) makeitillegaltorequireunionmembershipasaconditionofcontinuingemploymentina
particularfirm.
B) makeitillegaltorequireaunionmembertoworkabroad.
C) makeitillegalforastatetopassanylawsregardingunionmembership.
D) makeaclosedshoparrangementalegalconditionthatallowsemployeestoobtaina
particularjob.
Answer: A
Diff:1
107) Supposethatunderitscollectivebargainingagreement,theXYZCo.canonlyhireunion
membersingoodstandingatthetimeofhiring.XYZCo.is
A) aunionshop. B) aclosedshop.
C) anopenshop. D) acompanyunion.
Answer: B
Diff:2
108) WhichofthefollowingisFALSEregardingunions?
A) TheAmericanFederationofLabor(AFL),composedofcraftunions,wasformedin1886
undertheleadershipofSamuelGompers.
B) ForaperiodafterWorldWarIthegovernmenttemporarilystoppedprotectinglabors
righttoorganize.
C) DuringtheGreatDepression,legislationwaspassedthatmadecollectivebargaining
illegal.
D) TheAFLandtheCIOmergedin1955.
Answer: C
Diff:1
109) Stateright-to-worklaws
A) prohibitdiscriminationinhiring.
B) forcecompaniestosubmittoEqualEmploymentOpportunitiesCommissionarbitrationin
disputes.
C) encouragecompaniestohireminorities.
D) makecompulsoryunionmembershipillegal.
Answer: D
Diff:1
110) AllofthefollowingaretrueregardingthecurrentstatusoflaborunionsEXCEPT
A) organizedlaborsheydayoccurredfromthe1940sthroughthe1970s.
B) partoftheexplanationforthedeclineinunionmembershiphastodowiththeshiftaway
frommanufacturing.
C) thederegulationofcertainindustrieshasalsocontributedtoadeclineinunionism.
D) recentlaborlawshavediminishedworkersrights.
Answer: D
Diff:1
111) CurrentlyaboutwhatpercentageofthecivilianlaborforceisunionizedintheUnitedStates?
Answer: B
Diff:2
112) WhattimeperiodinU.S.historydowegenerallyrecognizeasthepeakoflaborunion
membership?
A) 1900s-1920s B) 1920s-1940s C) 1940s-1970s D) 1970s-2000s
Answer: C
Diff:2
113) WhichofthefollowingisNOTcorrectregardingthestatusofU.S.laborunions?
A) Todayfewerthanoneineightworkersisaunionmember.
B) Akeyreasonforthedeclineinunionmembershipistherelativedeclineinmanufacturing
jobsasashareoftotalemployment.
C) Greaterdomesticandglobalcompetitionhashadapartinbringingaboutadeclinein
unions.
D) GlobaltradehasincreasedthenumberofunionmembersintheUnitedStates.
Answer: D
Diff:1
114) Aworkstoppagebyaunioninsolidaritywithanotherunionscauseisknownasa
A) secondaryboycott. B) sympathystrike.
C) jurisdictionaldispute. D) primaryboycott.
Answer: B
Diff:1
115) Sincethe1960s,theshareofthelaborforcethatisunionizedintheUnitedStateshas
A) increasedexceptforthegovernmentsector.
B) increased.
C) declined.
D) declinedexceptintheprivatesector.
Answer: C
Diff:2
116) ThelargestlaborunionintheUnitedStatesisthe
A) NationalEducationAssociation.
B) InternationalBrotherhoodofTeamsters.
C) UnitedFoodandCommercialWorkersInternationalUnion.
D) ServiceEmployeesInternationalUnion.
Answer: A
Diff:1
117) Collectivebargaining
A) hasnothingtodowithfringebenefits.
B) isbargainingbetweenunionsandmanagement.
C) isillegalinmanystates.
D) ispracticedinnon-unionrelateddisputes.
Answer: B
Diff:1
118) Distinguishbetweencraftunionsandindustrialunions.
Answer: Craftunionsarecomposedofworkerswhoengageinaparticulartradeorskillsuchas
carpentryandplumbing,andindustrialunionsarecomposedofworkersfroma
particularindustrysuchasautosorsteel.
Diff:1
119) DiscussthesignificantlawspassedsincetheGreatDepressionthataffectlabor -management

relations.
Answer: TheTaft-HartleyActof1947allowedstatestopassright -to-worklawsandgavethe
presidentpowertoobtainaninjunctionthatwillstopastrikeforan80 -daycooling-off
period.Italsomadeclosedshopsillegal,aswellasjurisdictionaldisputes,sympathy
strikesandsecondaryboycotts.Ajurisdictionaldisputeinvolvestwoormoreunions
strikingoverwhichshouldhavecontrol.Asympathystrikeiswhenoneunionstrikesin
sympathywithanotherunion.Asecondaryboycottisaboycottofproductssoldby
companiesthataredealingwithacompanybeingstruck.
Diff:1
120) Distinguishbetweenaclosedshopandaunionshop.Areeitherorbothshopslegal?Explain.
Answer: Aclosedshopisasituationinwhichapersonmustbelongtotheunionbeforetheycan
behiredwhileaunionshopisoneinwhichanonunionworkermustjointheunionafter
beginningemployment.ClosedshopsareillegalintheUnitedStates,andunionshops
areillegalinstatesthathaveright-to-worklaws.
Diff:2
121) WhatwastheoveralltrendofU.S.unionmembershipbeginningthe1960s?Whatwasthemain
reasonbehindthattrend?
Answer: Sincethe1960s,unionmembershipintheUnitedStateshasdeclinedasapercentageof
thelaborforce,reachingabout12percenttoday.Theabsolutenumberofunionmembers
hasalsodeclinedrecently.Themainreasonforthedeclineinunionmembershipisthe
declineinmanufacturingemployment,whichhastraditionallyaccountedforalarge
shareoftotalunionmembership.
Diff:1
29.2UnionGoalsandStrategies
1) Theimpactofastrikeislimitedtotheabilityoftheunionto
A) preventreplacementworkersfromcontinuingtheirwork.
B) loweritswagedemandsofnon-unionmembers.
C) controlthepensionfund.
D) noneoftheabove.
Answer: A
Diff:1
Topic: 29.2UnionGoalsandStrategies
2) Whichofthefollowingwouldincreasethedemandforunionlabor?
A) Increasingworkerproductivity
B) Increasingthedemandforunionmadegoods
C) Decreasingthedemandfornon-union-manufacturedgoods
D) Alloftheabove
Answer: D
Diff:1
3) Themostpowerfultoolunionshaveattheirdisposalwhenbargainingwithmanagementis
A) theTaft-HartleyAct. B) theabilitytostrike.
C) thesecondaryboycott. D) thepowerofpurecompetition.
Answer: B
Diff:1
4) Ifaunionsucceedsinforcingemployersinaperfectlycompetitiveproductmarkettoincrease
wagesabovetheequilibriumlevel,thenthelevelofunemployment
A) willincrease. B) willremainconstant.
C) willdecrease. D) mayincreaseordecrease.
Answer: A
Diff:1
5) Onemethodunionsusetorationavailablejobsamongexcessworkersis
A) lengthyapprenticeships. B) tohireonlywhitecollarworkers.
C) collectivebargaining. D) refusetounionize.
Answer: A
Diff:1
6) Unionsfaceatrade-offbetweenhigherwagesand
A) feweravailablepositions. B) moreavailablepositions.
C) equipment. D) noneoftheabove.
Answer: A
Diff:1
7) Ifaunionnegotiatesandobtainsawagerateabovethecompetitivewagerate,
A) itmustfindawaytomakeworkersmoreproductive.
B) employmentintheunionsectorwillincreaserelativetoemploymentinthenonunion
sector.
C) itmustfindawaytorationjobsamongtheexcessivenumberofworkerswhowishto
workintheunionsector.
D) unemploymentwillincreaseinthenonunionsectorrelativetotheunionsector.
Answer: C
Diff:1
8) Ifaunionestablishesbycollectivebargainingawageratethatisaboveacompetitivemarket
equilibriumwagerate,then
A) anexcessquantityoflaborwillbesupplied.
B) ashortageoflaborwillresult.
C) therewillbeanincreaseintotalemployment.
D) managementwillwanttosubstitutelaborformachinery.
Answer: A
Diff:1
9) Ifaunionsetsthewageratetomaximizethetotalwagereceiptsofitsmembers,theprice
elasticityofdemandforlaborwouldbe
A) zero. B) numericallyequalto1.
C) finite,butgreaterthan-1. D) positive,butlessthan1.
Answer: B
Diff:2
10) Ifaunionsetsthewageratetomaximizethetotalwagereceiptsofitsmembers,themarginal
revenuewouldbe
A) zero. B) negative.
C) positive,butgreaterthan1. D) positive,butlessthan1.
Answer: A
Diff:2
11) Aunioncaninduceariseinequilibriumwagesinaunionizedindustryby
A) notstriking.
B) successfullyincreasingthedemandforunionlabor.
C) successfullydecreasingthedemandforunionlabor.
D) reducingthemarginalrevenueproductoffirmsemployingunionlabor.
Answer: B
Diff:2
12) Whenagroupofworkersformsaunion,theyintroduceanelementof
A) purecompetitionintothelabormarket. B) monopolyintothelabormarket.
C) monopolyintotheproductmarket. D) monopsonyintotheproductmarket.
Answer: B
Diff:1
13) Ifaunionsucceedsinincreasingthewageratebyrestrictinglaborsupply,then
A) allofitsmemberswillbebetteroff. B) somemembersmaylosetheirjobs.
C) allofitsmemberswillbeworseoff. D) moreofitsmemberswillbeemployed.
Answer: B
Diff:1
14) Ifaunionwishestomaximizethenumberofunionmembersemployed,itwill
A) acceptthecompetitivewage.
B) setawagebelowthecompetitivewage.
C) setawagewheretheelasticityofdemandforlaborequalsone.
D) setawageabovethecompetitivewage.
Answer: A
Diff:1
15) Considertheabovefigure,whichdisplaysthesituationfacedbyaunionemployedbyafirm
withthelabordemandcurveD.ThisunionhastotalmembershipofQ 3 workers,butitssingle
wagesettinggoalistomaximizewagesfortheQ 1 memberswiththemostseniority.Ifthe
unionmanagersaccomplishthisgoal,whatoccurs?
A) AlloftheunionmemberswillbeemployedatthewagerateW 3 .
B) AlloftheunionmemberswillbeemployedatthewagerateW 1 .
C) TheseniormembersoftheunionwillreceiveawageequaltoW 3 ,butQ3 unionmembers
willbeunemployed.
D) TheselectgroupofseniorunionmemberswillhaveworkandreceiveawageofW 3 ,but
Q3 -Q1 unionmemberswillnotbeemployedbythefirm.
Answer: D
Diff:2
16) Intheabovefigure,iftheunionhasQ 2 membersandwantstoensurethatallmembershave

jobs,itwillsetwageequalto
A) W1 . B) W2 .
C) W3 . D) noneoftheabove.
Answer: B
Diff:2
17) Lookattheabovefigure.Aunionwishestomaximizewageincomeforemployedunion
members,soitshouldaimforawagerate________andanumberofemployedmembersequal
to
A) W1 ,Q3 B) W2 ,Q2 C) W3 ,Q1 D) W4 ,Q3
Answer: B
Diff:3
18) Whenunionsraisewagesbeyondwhatproductivityincreaseswouldpermit,
A) moreunionworkersareemployed.
B) therearehigherwagesforallunionmembers.
C) thereisaredistributionofincomefromlow- tohigh-seniorityworkers.
D) nonunionworkerswagesintheeconomyalsoincrease.
Answer: C
Diff:3
19) Ifaunionlimitsitssizetothenumberofemployedmembersithadwhentheunionwasfirst
formed,overtimetherewillbe
A) anincreaseinthesupplyofunionlabor.
B) fallingwagesasdemandforworkersincreases.
C) risingwagesasdemandforworkersincreasesandthesupplyincreasesproportionally.
D) risingwagesasdemandforworkersincreasesbutsomepotentialworkersaredenieda
placeintheunion.
Answer: D
Diff:1
20) Atariffonimportedgoodsproducedbyanunlimitedindustrycouldbenefitthemembersofthe
domesticunionsincethetariffwouldmostlikely
A) lowerthepriceoftheoutputthatworkerspurchase.
B) lowerthedomesticproductionofthegoodandincreasewages.
C) increasethedemandfordomestic,union-madegoods.
D) decreasethecostoftheimportedgoods.
Answer: C
Diff:1
21) Methodsthataresometimesusedbyunionstoincreasewagesofunionworkersinclude
I. advertisingtoincreasethedemandforunion-madegoods.
II. campaigningagainstimports.
Answer: C
Diff:2
22) Unionscanincreaselaborproductivityby
A) maximizingthenumberofworkersintheunion.
B) reducingthesupplyofworkersovertime.
C) reducingconflictsbetweenworkersandmanagement.
D) reducingthequantityofpoorlymadeimportsintothecountry.
Answer: C
Diff:2
23) Aunion-sponsoredtelevisioncampaignurgingU.S.consumerstoLookfortheunionlabelis
designedto
A) increasetheproductivityofunionlabor.
B) increasethederiveddemandforunionlaborbyshiftingconsumerpreferencesinfavorof
union-madegoods.
C) raisewagesbyrestrictingthesupplyofunionworkers.
D) remindconsumersthatiftheydonotbuyunion-madegoods,unionswillstrike.
Answer: B
Diff:2
24) AllofthefollowingcanraisewagesofunionmembersEXCEPT
A) increasingthedemandfornon-unionmadegoods.
B) increasingthedemandforunion-madegoods.
C) limitingunionmembershipovertime.
D) increasingtheproductivityofunionworkers.
Answer: A
Diff:2
25) Inananalyticalsense,unionscanbethoughtofas
A) settersofminimumwages. B) monopolybuyersofworkers.
C) generatorsofinflation. D) monopsonies.
Answer: A
Diff:2
26) Collectivebargainingcontractsbetweenmanagementandtheunionnegotiators
A) alsoapplytotheworkerswhoarenotmembersoftheunion.
B) usuallyaresettledonlyafterastrike.
C) coverwagesonly.
D) coverwagesandfringebenefitsonly.
Answer: A
Diff:2
27) Theultimatethreatofaunionis
A) thelockout.
B) thePresidentspowergrantedbytheTaft-HartleyAct.
C) theunityofspiritoftheunionmembership.
D) thestrike.
Answer: D
Diff:1
28) Astrikebreakeris
A) atemporaryworkerhiredbyacompanytoreplaceaunionmemberwhoisstriking.
B) whenthePresidentimposesacooling-offperiod.
C) someonewhoengagesinfeatherbedding.
D) asecondaryboycott.
Answer: A
Diff:1
29) Thepurposeofastrikeis
A) toobtainhigherwagesforunionmembersonly.
B) tosolvejurisdictionaldisputes.
C) toobtainaclosedshop.
D) toforcemanagementtoaccepttheunionsproposedcontractterms.
Answer: D
Diff:1
30) Otherthingsequal,grantingunemploymentbenefitsorwelfarebenefitstostrikingworkers
A) reducesthelikelihoodofastrikesincemanagementwillbemorecooperative.
B) reducesthecostsofastriketoworkersandwillincreasetheirwillingnesstostrike.
C) reducesthelikelihoodofastrikesinceunionworkersmakewagessignificantlyabove
unemploymentbenefitsorwelfarepayments.
D) increasesthewillingnessofmanagementtopermitastrike.
Answer: B
Diff:3
31) Strikesoccurinabout________percentofthelabor-managementnegotiations.
A) 2 B) 16 C) 25 D) 40
Answer: A
Diff:1
32) Supposeaunionsuccessfullynegotiatesawagerateforitsmembersthatisabovethe
competitivewagerate,then
A) employmentintheunionsectorwillincrease.
B) theunionmustfindawaytomakeunionworkersmoreproductive.
C) theunionmustalsonegotiateafringe-benefitpackagethatthemembershipwilllike.
D) theunionmustfindawaytorationjobsamongtheexcessivenumberofworkerswho
wishtoworkatthenegotiatedwage.
Answer: D
Diff:2
A) thequantityoflabordemandedwillbegreaterthanthequantitysupplied.
B) thequantityoflabordemandedwillbelessthanthequantitysupplied.
C) thelabormarketwillbeinequilibrium.
D) itisimpossibletotellwhetherornotthelabormarketwillbeinequilibriumwithoutmore
information.
Answer: B
Diff:2
A) therewillbedownwardpressureonthewagerateuntilequilibriumisestablished.
B) right-to-worklawsbecomeeffective.
C) thereisashortageofjobs.
D) thereisexcessdemandforlabor.
Answer: C
Diff:2
35) Supposeaunionsuccessfullynegotiatesforitsmembersawageratethatisabovethe
A) therewillbeasurplusofjobs.
B) antitrustlawsbecomeeffective.
C) therewillbedownwardpressureonthewagerateuntilequilibriumisestablished.
D) therewillbeanexcesssupplyoflabor.
Answer: D
Diff:2
36) Unionscanrationtheexcesssupplyoflaborgeneratedbytheestablishmentofawagethatis
abovethecompetitivewageby
A) lengtheningthetimeperiodforapprenticeshipprograms.
B) loweringuniondues.
C) encouragingolderworkerstotakeearlyretirement.
D) havingmoreintensivemembershipdrivestoensurealargerproportionofworkersare
coveredbytheunioncontract.
Answer: A
Diff:2
37) Ifaunionissuccessfulinnegotiatingawageratewhichisabovethemarketclearingwage,then
whichofthefollowingwouldnotoccur?
A) Thehigherwagesattractmoreworkersleadingtoashortageofjobs.
B) Managementmayreplacepartoftheworkforcewithmachinery.
C) Tohandlethesurplusoflabortheunionwillformaclosedshop.
D) Theunionmayshiftthesupplyoflaborcurvebydevelopingmethodstorationjobs.
Answer: C
Diff:1
38) Theleadershipofunionsmustrecognizethattheyface
A) aneconomicsystemthatishostiletotheinterestsofworkers.
B) ano-winsituationwhenevertheythinkastrikeisnecessary.
C) afundamentaltrade-offbetweenhigherwagesformembersandhighertaxesfor
members.
D) afundamentaltrade-offbetweenhigherwagesformembersandfewerjobsformembers.
Answer: D
Diff:2
39) Aunionthatpursuedapolicyofrestrictingentryovertimeintotheunionwould
A) seerealwagesholdconstantovertimeatwhateverpremiumtheycouldgetinitially.
B) alsohavetonegotiatetobesurethatallthememberswereabletofindjobs.
C) generaterisingrealwagesforitsmembershipovertimeaslongasdemandforunion
workersincreasedovertime.
D) failtoobtainbenefitsfortheirworkersinexcessofwhattheworkerswouldgetunder
openmarkets.
Answer: C
Diff:2
40) Whichofthefollowingisnotawageoremploymentstrategythataunionwouldfollow?
A) Setamaximumwageratesuchthatashortageofworkerswillresult.
B) Setawageratesuchthatallworkersthatwanttofindajobcanfindajob.
C) Setawageratethatwillmaximizetheincomeofitsmembers.
D) Setawageratethatwillmaximizetheincomeofonlysomeofitsmembers.
Answer: A
Diff:1
41) Iftheunionwantstofollowthestrategyofmaximizingmembersincome,wagesshouldbeset
A) abovethemarketclearingwagerate.
B) suchthatallthatwantedtoworkcouldwork.
C) atthemarketclearingwagerate.
D) atthepointatwhichthepriceelasticityofdemandequals1.
Answer: D
Diff:1
42) Ifthegoaloftheunionistomaximizememberincome,then
A) awageratewillbesetintheinelasticportionofthedemandcurve.
B) awageratewillbesetatthepointatwhichtheelasticityofdemandequals1andmarginal
revenueispositive.
C) awageratewillbesetatthepointatwhichmarginalrevenueequalzero.
D) thesupplyoflabormustbeinelastic.
Answer: C
Diff:1
43) Refertotheabovefigure.Iftheunionwantstomaximizethetotalincomeofitsmemberswho
work,itwillsetwagesat
A) W1 . B) W2 . C) W3 . D) W4 .
Answer: B
Diff:2
44) Refertotheabovefigure.SupposethereareL4 workersintheunion,andtheunionwantsallof

itsworkerstohaveajob.Itwillsetthewagerateat
A) W1 . B) W2 . C) W3 . D) W4 .
Answer: A
Diff:2
45) Refertheabovefigure.Anincreaseinlaborproductivityislikelytostimulateandshiftthe
labordemandcurveto
A) therightandhenceincreaseunionwagesperyear.
B) totheleftandhenceincreaseunionwagesperyear.
C) therightandhencelowerunionwagesperyear.
D) Noneoftheaboveislikelytohappen.
Answer: A
Diff:2
46) Refertheabovefigure.Supposetheunionsetsthewageratethatwillmaximizethetotalincome
forthememberswhowork.Thetotalwageswillbe
A) W1 iL4 O. B) W2 aL3 O. C) W3 bL2 O. D) W3 bhW1 .
Answer: B
Diff:3
47) Refertotheabovefigure.SupposethereareL4 workersintheunion.Iftheunionwantstoseta

wagerateofW3 ,itmust
A) determinewhichofitsmemberswillearnW3 andwhichwillearnW1 .
B) acceptthatL4 -L2 memberswillnotbeabletofindworkintheindustry.
C) acceptthatL3 -L2 workerswillhavetogetalowerwageequaltoW2 andL4 -L3
workerswillhavetogetawageofW1 .
D) determinethemostefficientwaytogetthefirmstoacceptthewageandhireall L4
workers.
Answer: B
Diff:3
48) Aunioncanachievehigherwageswithoutacceptinglowerlevelsofemploymentofmembers
by
A) striking.
B) increasingtheproductivityofitsmembers.
C) increasingtheamountsofimports.
D) increasingthedifficultyofitsapprenticeshipprogram.
Answer: B
Diff:2
49) Aunioncanachievehigherwageswithoutacceptinglowerlevelsofemploymentofmembers
by
A) promotingright-to-worklaws.
B) increasingthedemandforsubstituteproductsmadebynon-unionlabor.
C) increasingconflictswithmanagement.
D) beginningacampaignagainstbuyingforeignimports.
Answer: D
Diff:2
50) Unionstendtowantimportrestrictionsbecause
A) importsareusuallyofinferiorquality.
B) theycanincreasethewagesforunionworkersbyincreasingtheproductivityofunion
workerswhentheworkersarentworriedaboutforeigncompetition.
C) therestrictionsalsoreducethenumberofimmigrantsthatcanenterthecountryand
decreasethesupplyofnonunionlabor.
D) therestrictionsdecreasethedemandfornon-unionmadegoods,increasingthedemand
forunionmadegoods.
Answer: D
Diff:2
51) Theprimarypurposeofastrikebylaborunionsisto
A) forcethefirmoutofbusiness.
B) extractfromthefirmbetterandimprovedconditionsofworkorcontractterms.
C) securealargermarketshareforthefirm.
D) ensuretheygetpaidforstriking.
Answer: B
Diff:3
52) Strikebreakers
A) canreducethebargainingpowerofaunion.
B) canstrengthenthebargainingpowerofaunion.
C) makeaunionnegotiationinvalid.
D) makeastrikepermanent.
Answer: A
Diff:1
53) ThefigureillustratesallofthefollowingEXCEPT
A) iftheunionestablishesbycollectivebargainingawageratethatexceedsequilibriumat
pointWuanexcessquantityoflaborwillbesupplied.
B) iftheunionestablishesbycollectivebargainingawageratethatexceedsequilibrium,an
excessquantityoflaborwillbedemanded.
C) thereisatrade-offunionleadershipfaces:Higherwagesinevitablymeanareductionin
totalemploymentasmallernumberofpositions.
D) athigherwages,moreworkerswillseektoentertheindustry,therebyaddingtothe
surplusofworkerswhereQSisgreaterthenQD.
Answer: B
Diff:2
54) WhichofthefollowingisNOTaunionwageandemploymentstrategy?
A) ensuringemploymentforallmembersofaunion
B) maximizingaggregateincomeofworkers
C) maximizingwageratesforsomeworkers
D) minimizingtheadjustedgrossincomeofnon-members
Answer: D
Diff:1
55) Theultimatebargainingtoolforunionsis
A) thestrike. B) laborsMagnaCarta.
C) theTaft-HartleyAct. D) thesympathystrike.
Answer: A
Diff:1
56) Intheabovefigure,whichwagerateyieldsthehighestunionemployment?
A) W1 B) W2 C) W3 D) W2 -W1
Answer: A
Diff:2
57) Intheabovefigure,whichwageratewillmaximizeunionmembersincome?
A) W1 B) W2 C) W3 D) W3 -W1
Answer: B
Diff:2
58) Intheabovefigure,whichwageratewillyieldthehighestwageratesforparticularworkers?
A) W1 B) W2 C) W3 D) W3 -W2
Answer: C
Diff:2
59) Ifaunionnegotiatedawageabovethemarketequilibriumwage,wewouldfind
A) asurplusoflaborersatthenegotiatedwage.
B) ashortageoflaborersatthenegotiatedwage.
C) higherefficiencyoflaboratthenegotiatedwage.
D) lowerworkerproductivityatthenegotiatedwage.
Answer: A
Diff:2
60) WhenyouseeacommercialonTVaskingyoutolookfortheunionlabel,theunionistrying
to
A) increaseworkerproductivity.
B) increasethedemandfornonuniongoods.
C) increasethedemandforuniongoods.
D) decreasethedemandfornonuniongoods.
Answer: C
Diff:2
61) Toreducelaborsurplusabovetheequilibriumunionwagelevel,aunionmaydoallofthe
followingEXCEPT
A) lengthenapprenticeshipperiod.
B) assignjobsbasedonseniority.
C) limitthenumberofnewmembersaccepted.
D) encouragenonunionmemberstojointheunion.
Answer: D
Diff:1
62) AllofthefollowingarebenefitsoflaborunionsEXCEPT
A) unionsreducewageinequity.
B) unionsincreasethestabilityoftheworkforce.
C) unionsgiveworkersapoliticalvoice.
D) unionsmaximizeemploymentforallworkers.
Answer: D
Diff:2
63) Temporaryorpermanentworkershiredtoreplacestrikingunionworkersareknownas
A) strikebreakers. B) backbreakers. C) rationers. D) strikeaiders.
Answer: A
Diff:1
64) Supposedyouarehiredtobeacheckeratalocalgrocerystore.Afterninetydaysofprobation
youbecomeamemberoftheunion.Asaresultyoufeelmoresecureaboutyourjobandwork
hardertobepartoftheteam.Thisisabenefitofunionmembershipthat
A) increasesdemandforunion-madegoods.
B) decreasesthedemandfornonunion-madegoods.
C) increasesworkerproductivityofunionmembers.
D) increasesuniondues.
Answer: C
Diff:2
65) Whenunionsexistinmarkets,
A) firmsmusthavemarketpowerintheiroutputmarkets.
B) therenolongerisaperfectlycompetitivelaborsupply.
C) individualworkersnolongermakelabor-leisuretrade-offdecisions.
D) employershavemarketpowerinlabormarkets.
Answer: B
Diff:2
66) Supposeaunionnegotiatesforitsmembersawagethatisabovethemarket -clearingwage.

Whatproblemsdoestheunionhavetosolvenow?Explain.
Answer: Thehigherwageimpliestherewillbeanexcessoflaborsotheunionmustfindawayto
rationthejobs.Theexcesssupplyisduetotwofactorsthefirmsquantitydemandedfor
workersdecreasesandnewworkersareattractedintotheindustryduetothehigher
wage.Further,thehigherlaborcostsarelikelytoencouragemanagementtofindwaysto
substituteotherfactorsofproductionforlabor.
Diff:2
67) Aunioncouldraisewageswithoutcausingunemploymentofunionmembersifitcanincrease
demandforunionlabor.Howmightthisgoalbeachieved?
Answer: Ifunionscanincreasethelaborproductivityoftheworkers,thenthedemandforlabor
wouldincrease.Perhapstheunionworkersaremoreproductivebecausetheydonthave
toworryaboutbeingfiredfornocausesincetheunionislookingoutfortheirinterests.
Perhapstheunionscaninduceconsumerstodemandunion-madegoodsthrough
advertisingcampaigns,orcandecreasedemandfornonunionmadegoodsbygetting
tarifflegislationpassed.
Diff:2
68) Whatisthepurposeofastrike?Whatarethecoststoworkersandtomanagement?
Answer: Thepurposeofastrikeistoimposecostsonmanagementtoforcethemtoacceptthe
unionsproposedcontractterms.Thestrikedisruptsthefirmsproductionscheduleand
maycostthefirmsalesandprofits.Thestrikecoststheworkersinthattheydonotget
paidduringthestrike.
Diff:1
69) Aunioncanbeviewedasamonopolysellerofaservice.Whatarethethreewageand
employmentstrategiestheunionmightuse?
Answer: Theunionmighttrytoemployallmembers,buttheonlywayitcandothisistoaccept
themarketclearingwage.Themarketwoulddothiswithouttheunion,sotheunionwill
probablynotpursuethisstrategy.Itcanmaximizemembersincome.Thisisfoundby
findingthemarginalrevenuecurvethatgoeswiththedemandcurveforlaborand
findingthewagewhenmarginalrevenuewouldbezero.Finally,itcanmaximizewages
forcertainworkers,whichwouldmeanmoreofthemembersgowithoutjobs.
Diff:2
70) Whatcanauniondoinordertoraisethewagesofitsmembers?
Answer: Aunioncanestablishawagerateabovethemarketclearingwageratebynegotiating
withfirmmanagementandthenrationtheavailablejobsamongunionmembers.Itcan
alsoindirectlyraisewagesbylimitingsupplyovertime,raisingthedemandforunion
workersthroughraisingtheirlaborproductivity,orbyincreasingthedemandfor
union-madegoods.
Diff:2
71) Whymightaunionfindthatattainingthegoalofemployingallitsmembersandthegoalof
maximizingtotalunionwagereceiptstobeincompatibleobjectives?
Answer: Toensurethatallofitsmembersareemployed,aunionmustbewillingtosettlefora
wageratesufficientlylowtoinduceemployerstohireallthoseindividuals.Incontrast,to
maximizetotalunionwagereceipts,aunionmustfindawaytoattainasufficientlyhigh
wagerate(atwhichtheelasticityofthedemandforlaborequals1),whichtypicallywill
notequalthewageraterequiredtoinduceemployerstohireallunionmembers.
Diff:2
72) Howcanrestrictingentryintoaunionhelpboostmemberswageswithouttheunion
specificallysettingwages?
Answer: Withunionmembershiplimited,thequantityoflaboravailabletoemployersislimitedto
thatquantitysupplied.Then,ifthedemandforlaborincreasesovertime,sowillthe
wagespaidtotheunionsmembers.
Diff:3
29.3EconomicEffectsofLaborUnions
1) Supposeunionworkersareearningmorethansimilarlyqualifiednonunionworkers.Fromthis,
wecanconcludethat
A) unemploymentofunionworkersmusthaveincreased.
B) unemploymentofnonunionworkersmusthaveincreased.
C) productivityofunionworkersmustbegreaterthantheproductivityofnonunionworkers.
D) Anyoftheabovearepossibleandwecannottellwhichwithouthavingmoreinformation.
Answer: D
Diff:3
Topic: 29.3EconomicEffectsofLaborUnions
2) WhichisNOToneofthepotentialbenefitsoflaborunions?
A) Unionismraisessocialefficiency.
B) Unionsappeartoreducewageinequality.
C) Unionsmayreduceacompanysprofits.
D) Unionsmayhavecontributedtosaferworkingconditions.
Answer: C
Diff:1
3) Whichofthefollowingistrueaboutunions?
A) Unionsinsomesettingsareassociatedwithincreasedproductivity.
B) Unionsinsomesettingshavebeeneffectiveinpromotinggeneralsociallegislation.
C) BothAandBarecorrect.
D) NeitherAnorBiscorrect.
Answer: C
Diff:2
4) WhichofthefollowingbestdescribestheeffectsofunionsintheUnitedStatestoday?
A) Theaverageunionworkerworksmorehoursbutearnsalowerannualincomethanthe
averagenonunionworker.
B) Theaverageunionworkerworksfewerhoursbutearnsahigherannualincomethanthe
C) Theaverageunionworkerworksmorehoursandearnsahigherannualincomethanthe
D) Theaverageunionworkerworksfewerhoursandearnsalowerannualincomethanthe
Answer: D
Diff:2
5) IntheUnitedStatesthedifferentialbetweenunionandnon-unionwages
A) doesnotexist.
B) currentlyaveragesabout50-60percent.
C) hasbeennarrowing.
D) tendstofallduringarecessionbecauseunionmemberstypicallyhaveshorter-term
contractsthandononunionemployees.
Answer: C
Diff:1
6) WhichstatementismostTRUEabouttheimpactofunionsonwagelevelsintheUntiedStates?
A) Unionshavehadnoimpactonthewagelevelsoftheirworkers.
B) Unionshavetendedtoincreasethehourlywageratesoftheirmembersrelativeto
nonunionworkersbyanaverageofabout$2.25.
C) UnionshavecontributedtoincreasedincomeinequalityintheUnitedStatesbyraising
corporateprofits.
D) Theunion/nonunionwagedifferentialtendstodecreaseduringarecession.
Answer: B
Diff:1
7) Theunionwagedifferential
A) variessubstantiallyacrossemploymentsectors.
B) increasesduringexpansions.
C) hasremainedfairlyconstantoverthepast30years.
D) isgreaterforprivatesectoremployeesthanforgovernmentsectorworkers.
Answer: A
Diff:2
8) Thepracticeofforcingemployerstousemorelaborthantheywouldotherwiseuseiscalled
A) railroading. B) featherbedding.
C) dumping. D) bootstrapping.
Answer: B
Diff:1
9) Theattempttoforceemployerstousemorelaborthantheyotherwisewould,ortoforce
employerstouselaborinefficiently,isknownas
A) asecondaryboycott. B) asympathystrike.
C) amonopsony. D) featherbedding.
Answer: D
Diff:1
10) Aunioncontractrequiringelevatoroperatorsinabuildingwithautomaticelevatorsisan
exampleof
A) aclosedshop. B) featherbedding.
C) alockout. D) aright-to-workrequirement.
Answer: B
Diff:1
11) Featherbeddingrefersto
A) thepracticeoflayingoffunionactivists.
B) increasedinternationalcompetitionanditsnegativeimpactontradeunions.
C) unionleadersarguingforhigherwageswhentheyknowthattheywillnotbecome
unemployedgiventheirseniority.
D) thepracticeofinducingafirmtousemorethanthecost-minimizingleveloflabor.
Answer: D
Diff:1
12) Featherbeddingisthetermfor
A) anypracticethatforcesemployerstousemorelaborthantheywouldotherwise.
B) trainingprogramsinitiatedbyunionstomaketheirless-skilledmembersmore
productive.
C) thepracticeoftryingtorecruitunionmembersamongpublicemployees.
D) attemptsbymanagementtoeliminateaunion.
Answer: A
Diff:1
13) Anexampleoffeatherbeddingis
A) theunionpracticethatrequiresyoungerworkerstobelaidofffirstinarecession.
B) arequirementthatallconstructionworkersworkingongovernment -fundedconstruction
projectsmustbepaidunionwages.
C) employer-paiddentalinsurancenegotiatedbytheunion.
D) arequirementonrailroadstokeepafiremanonboardaftertheintroductionofdiesel
engines.
Answer: D
Diff:2
14) Ifweweretocomparetheannualearningsofunionandnonunionworkersinrecentyears,we
wouldfindthat
A) unionshavenotsucceededinraisingtheannualincomesoftheirmembers.
B) unionshavesucceededinraisingtheannualincomesoftheirmembers.
C) thedataisincompletetotellwhetherunionshavebeensuccessfulinraisingtheannual
incomeoftheirmembers.
D) unionmembershaveannualincomessubstantiallybelownonunionmembers.
Answer: A
Diff:1
15) Ifweweretocomparethehourlyearningsofunionandnonunionworkersinrecentyears,we
wouldfindthat
A) unionshavenotsucceededinraisingthehourlyincomesoftheirmembersabove
nonunionmembers.
B) unionshavesucceededinraisingthehourlyincomesoftheirmembersabovenonunion
members.
C) stategovernmentunionizedemployeeshaveearnedlessinhourlywagesthannonunion
governmentemployee.
D) unionmembershaveincreasedtheirhourlyincomes,butarestillbelowthehourly
incomesofnonunionmembers.
Answer: B
Diff:1
16) Sometimesunionscanraisewagesabovewhatproductivityincreaseswouldpermit.Whenthis
happens,wecanbesurethat
A) theemploymentofunionworkersisincreasing.
B) someunionworkersenduplosingtheirjobs.
C) thereisaredistributionofincomefromunionworkerstononunionworkers.
D) featherbeddingwilloccur.
Answer: B
Diff:2
17) Featherbeddingrefersto
A) trainingprogramsinitiatedbytheunionstomaketheless -skilledworkersmore
productive.
B) attemptsbymanagementtoreduceworkersinterestinaunion.
C) thepracticethatforcesemployerstousemorelaborthantheywouldotherwise.
D) theamountoftheunionpremium.
Answer: C
Diff:1
18) Anypracticethatforcesemployerstousemorelaborthantheywouldotherwiseuseis
A) closedshop. B) monopolisticexploitation.
C) acraftunion. D) featherbedding.
Answer: D
Diff:1
19) Anexampleoffeatherbeddingis
A) advertisingthatencouragesconsumerstobuyunion-madegoods.
B) unionrequirementsthatforbidtheuseofcertainlaborsavingequipment.
C) lobbyingCongresstogethighertariffs.
D) therequirementthatallconstructionworkerswhoworkonagovernment-financedproject
receivetheunionwagerateregardlessiftheyareintheunionornot.
Answer: B
Diff:2
20) Whenitcomestoproductivity,someeconomistsarguethat
A) unionshavecausedadecreaseinproductivitybyexcessivestaffingandmakework
requirements.
B) throughtheuseoffeatherbeddingunionshavebeenresponsibleforproductivity
increases.
C) thepassageoftheTaft-HartleyActhasledtoasignificantdecreaseinproductivity.
D) theunionsinsistenceonprofitabilitylaborsavingdeviceshasledtoanincreasein
productivity.
Answer: A
Diff:1
21) Evidenceinsupportofthehypothesisthatunionsincreasetheproductivityofunionworkersis
A) thefactthatunionwagesaregreaterthannonunionwages.
B) thereisanexcesssupplyoflaborattheunionwagerate.
C) thatunionizedfirmsfacelowerturnoverratesthannonunionfirmsdo.
D) thatmostcontractsaresettledwithoutastrike.
Answer: C
Diff:2
22) Criticsofunionstendtofocusonthefactthatunions
A) tendtogeneratehigherwages. B) reduceprofits.
C) arepoliticallyactive. D) engageinrestrictivelaborpractices.
Answer: D
Diff:3
23) Abenefitofunionsisthatthey
A) increasefirmprofits. B) increasethestabilityoftheworkforce.
C) increasewageinequality. D) restrictthelabormarket.
Answer: B
Diff:2
24) Economistsarguethattheunionwageadvantage
A) hasbeenestimatedtobe100%intheprivatesector.
B) intheprivatesectorisa4%increaseinwagesforunionworkersovernonunionworkers.
C) reacheditsheightin2000intheprivatesector.
D) hasbeenclosetozerosinceWorldWarIIintheprivatesector.
Answer: B
Diff:1
25) Researchindicatesthatonaverage,stategovernmentunionshave
A) raisedwagesto20percentabovenonunionizedgovernmentworkers.
B) raisedwages25to30percentabovenonunionizedprivate-sectorandgovernment
workers.
C) raisedwagesabout100percentabovesimilarworkersinthenonunionprivatesector.
D) havenotsignificantlyraisedwagesabovesimilarworkersinthenonunionsector.
Answer: A
Diff:1
26) Featherbeddingmeansthat
A) companymanagementreceivesacutfromthecollectedunionwages.
B) employersareforcetohireapprentices.
C) employersareforcedtohiremoreworkersthantheywantto.
D) aunioncanjoinasympathystrike.
Answer: C
Diff:1
27) Aunionrequirementthatafiremanhastobehiredtoworkinadiesellocomotivewouldbean
exampleof
A) workexpansion. B) featherbedding.
C) workrequirements. D) workstabilization.
Answer: B
Diff:2
28) Apracticewhichmightforceemployerstousemorelaborthantheywouldotherwiseisreferred
toas
A) wallpropping. B) featherbedding.
C) mothballing. D) yellow-dogging.
Answer: B
Diff:2
29) WhichofthefollowingisNOTconsideredtobeabenefitofunionism?
A) increasedfeatherbedding
B) greaterworkplacesafety
C) higherworkforcestability
D) provisionofarbitrationandgrievanceprocedures
Answer: A
Diff:3
30) Inrecentdecades,theunion-nonunionhourlywagedifferentialhas
A) increasedsubstantially. B) increasedslightly.
C) stayedthesame. D) fallensignificantly.
Answer: D
Diff:2
31) Canunionsincreaseproductivity?Explain.
Answer: Unionscanincreaseproductivity,buttheycanalsodecreaseproductivity.
Featherbeddingisapracticethatreduceslaborproductivity.However,ifunionscreate
greaterjobsatisfactionorreducelaborturnover,itispossiblethatproductivitywillbe
increased.
Diff:2
32) Haveunionsbeensuccessfulatraisingwagesfortheirmembers?Whataboutraisingwagesfor
allworkers?
Answer: Yes,theyhavebeensuccessfulatraisingwagesfortheirmembers.Totheextentthat
higherunionwagescomebygeneratinganexcesssupplyofworkers,someofthose
workersunabletogetjobsmaygointothenonunionsectorlookingforwork.Thiswould
tendtodecreasewagesfornonunionworkers.Hence,itislikelythatunionshavecaused
nonunionworkerstoreceivelowerwagesthantheywouldiftherewerenounions.
Diff:3
33) Discussthebenefitsofunions.
Answer: Someeconomistsarguethatunionsprobablyraisesocialefficiencybyincreasing
productivity.Theyalsoreducewageinequality,reduceprofits,andincreasestabilityin
thelaborforcebyprovidingarbitrationproceedingsandgrievanceprocedures.Theyalso
argueunionsprovideapoliticalvoiceforunionmembers,andthatunionshave
effectivelypromotedgeneralsociallegislation.
Diff:1
34) UnionsintheUnitedStateshavehelpedraisetheincomesofunionworkersascomparedto
nonunionworkers.Doyouagreeordisagree?Why?
Answer: Disagree.Thehourlywageearnedatypicalunionworkerisabout$2.25higherthanthe
hourlywageearnedatypicalnonunionworker.However,theeffectofahigherhourly
wagerateonannualincomeismorethanoffsetbytheeffectoffewerhoursthatthe
averageunionemployeeworksascomparedtotheaveragenonunionworker.Asa
result,theannualincomeofatypicalunionworkerislowerthanthatoftheaverage
nonunionworker.
Diff:2
29.4Monopsony:ABuyersMonopoly
1) Amonopsonyhasanupwardslopingsupplycurvebecause
A) diminishingmarginalproducttoscaledoesnotexistinamonopsony.
B) eachadditionalunitoflaborcostsless.
C) whenmoreunitsoflaborarehired,alllaborersmustreceivethehigherwage.
D) whenmoreunitsoflaborarehired,onlythenewworkersreceivethehigherwage.
Answer: C
Diff:1
Topic: 29.4Monopsony:ABuyersMonopoly
2) Amonopsonistis
A) asinglebuyer.
B) asingleseller.
C) oneofafewfirmsthatfaceaunionizedlabormarket.
D) anon-profit-maximizingfirm.
Answer: A
Diff:1
3) Ifthelaborsupplycurvefacedbyafirmisrising,themarginalfactorcostcurveoflabormustbe
A) risingandbelowthesupplycurve. B) risingandabovethesupplycurve.
C) equaltothesupplycurve. D) horizontal.
Answer: B
Diff:1
4) Amonopsonistinthelabormarkethas
A) aperfectlyelasticlaborsupply.
B) adecreasingaveragevariablecost.
C) anupwardslopinglaborsupplycurve.
D) adownwardslopingmarginalrevenueproductcurve.
Answer: C
Diff:1
5) Foramonopsonist,marginalfactorcostexceedsthewageratesince
A) moreworkershavetobepaidtheprevailingwagerate.
B) thesupplyoflaborisperfectlyelastic.
C) whennewworkersarehiredthewageratemustbeincreasedforallworkersandnotjust
fortheadditionalworkers.
D) thelabordemandisdownwardsloping.
Answer: C
Diff:1
6) Themaindifferencebetweenamonopsonistandacompetitivebuyeroflaboristhat
A) thecompetitorcanhireasmanyworkersasitwantsatthegoingwagewhilea
monopsonistcanforcewagesdownwhenhiringadditionalworkers.
B) thecompetitorcanhireasmanyworkersasitwantsatthegoingwagewhilea
monopsonistmustraisewagestohireadditionalworkers.
C) thecompetitorisasmallfirmwhilethemonopsonistisalargefirm.
D) thecompetitorisalsoacompetitorinproductmarketswhilethemonopsonistisalsoa
monopolyinproductmarkets.
Answer: B
Diff:2
7) Marginalfactorcostis
A) thechangeintotalcostsduetoaone-unitchangeinthequantityofthegoodproduced.
B) thechangeintotalcostsduetoaone-unitincreaseinthevariableinput.
C) thechangeinthepriceofaninputwhenanadditionalunitoftheinputishired.
D) themarginalcostofchangingtherateofproductioninthelongrun.
Answer: B
Diff:1
8) Undermonopsony,marginalfactorcost
A) isdownwardsloping.
B) islessthanthewagerate,althoughitincreasesasmoreworkersarehired.
C) equalsthewagerate.
D) isgreaterthanthegoingwagerate.
Answer: D
Diff:2
9) Undermonopsony,themarginalfactorcostofaworkerisequalto
A) theadditionalworkerswagerateonly.
B) theadditionalworkerswagerateplustheincreaseinthewagesofallotherexisting
workers.
C) theincreaseinthewagesofallotherexistingworkers.
D) thedifferencebetweentheworkerswagerateandthelowerwageratereceivedby
workerswhohavealreadybeenhired.
Answer: B
Diff:2
Quantityof Required
LaborSupplied WageRate
1 $6.00
2 9.00
3 12.00
4 15.00
5 18.00
6 21.00
7 24.00
8 27.00
9 30.00
10 33.00
10) Accordingtotheabovetable,themarginalfactorcostofthefifthworkeris
A) $30.00. B) $45.00. C) $60.00. D) $90.00.
Answer: A
Diff:2
11) Accordingtotheabovetable,themarginalfactorcostoftheeighthworkeris
A) $27.00. B) $48.00. C) $168.00. D) $216.00.
Answer: B
Diff:2
12) Accordingtotheabovetable,themarginalfactorcostoftheseventhworkeris
A) $24.00. B) $126.00. C) $42.00. D) $168.00.
Answer: C
Diff:2
13) Accordingtotheabovetable,ifthemarginalrevenueproductis$48,howmanyworkerswill
theprofitmaximizingmonopsonisthire?
A) 5 B) 6 C) 7 D) 8
Answer: D
Diff:2
14) Accordingtotheabovetable,ifthemarginalrevenueproductis$24,howmanyworkerswill
theprofitmaximizingmonopsonisthire?
A) 4 B) 5 C) 6 D) 7
Answer: A
Diff:2
15) Fromtheinformationintheabovetable,calculatethemarginalfactorcostofthethirdworker.
A) $24.00 B) $36.00 C) $18.00 D) $12.00
Answer: C
Diff:2
16) Exploitationduetoasinglebuyerintheinputmarketisknownas
A) monopolyexploitation. B) monopsonisticexploitation.
C) Marxianexploitation. D) theresultofclosedshops.
Answer: B
Diff:1
17) Intheabovefigure,themonopsonistwillemploy
A) L2 atawageofW2 . B) L2 atawageofW3 .
C) L1 atawageofW1 . D) L1 atawageofW3 .
Answer: D
Diff:1
18) Themonopsonistwillemploylabortothepointatwhichthe
A) marginalfactorcostequalsthemarginalrevenueproductoflabor.
B) marginalrevenueproductequalsthewagerate.
C) marginalcostofoutputequalsthemarginalrevenue.
D) demandequalsthesupplyoflabor.
Answer: A
Diff:1
19) Whichstatementbestdescribesthebehaviorofthemonopsonistinthelabormarket?
A) Itrestrictsitsoutputtokeeptheproductpricehigh.
B) Ithireslesslaborbutpaystheperfectlycompetitivewagerate.
C) Itmustpaydifferentamountstoeachunitoflaborhired.
D) Ithireslesslaborandpaysalowerwageratethanintheperfectlycompetitivecase.
Answer: D
Diff:1
20) Themonopsonisticexploitationoflaborrefersto
A) thereductionintotaloutputfrommonopolyintheproductmarket.
B) theunionwagedifferential.
C) workersbeingpaidawagelessthantheirmarginalrevenueproduct.
D) thereductioninemploymentresultingfromunionwagesetting.
Answer: C
Diff:1
21) Amonopsonistfindsitsprofitmaximizingquantityoflaboremployedatthepointatwhich
A) marginalrevenueproductiszero.
B) marginalrevenueproductequalsmarginalfactorcost.
C) marginalfactorcostiszero.
D) totalcostequalstotalrevenue.
Answer: B
Diff:1
22) Afirmthatisamonopolistintheoutputmarketandamonopsonistintheinputmarket
A) willhirethesameamountoflaborasifperfectcompetitionprevailedinbothmarkets,but
payalowerwage.
B) willrestrictthelevelofoutputbutnotthatofemploymentcomparedtotheperfectly
competitivecase.
C) willhirelesslaborbutpaythesamewagecomparedtotheperfectlycompetitivecase.
D) willhirelesslaborandpayalowerwagecomparedtotheperfectlycompetitivecase.
Answer: D
Diff:1
23) Bilateralmonopolyexistswhen
A) asinglebuyerconfrontsasingleseller.
B) therearetwomonopolisticbuyerstryingtobuyresources.
C) twolaborunionsaretryingtorepresentthesamegroupofworkers.
D) afirmisbothamonopolyinitsoutputmarketandamonopsonistinitsinputmarket.
Answer: A
Diff:1
24) Amonopsonistis
A) afirmwithmonopolypowerinthelocalarea.
B) afirmthathasaunionizedlaborforce.
C) asinglesellerofaninput.
D) asinglebuyerofaninput.
Answer: D
Diff:1
25) Whenthereisonlyonebuyerinthemarket,
A) aclosedshopexists.
B) amonopsonyexists.
C) thenthemarketwillbeperfectlycompetitive.
D) thesupplycurveforthegoodwillbeperfectlyelastic.
Answer: B
Diff:1
26) Thesupplycurveoflabortoamonopsonistis
A) upwardsloping.
B) downwardslopingbecauseofthelawofdiminishingmarginalreturns.
C) downwardsloping,butnotbecauseofthelawofdiminishingmarginalreturns.
D) horizontal.
Answer: A
Diff:1
27) Amonopsonistthatwantstohiremorelabormustpaymoreforthenewlaborthanitis
currentlypayingandincreasethewagerateofallexistingemployeesbecause
A) thedemandcurveforlaborisinelastic. B) oflaborunions.
C) thesupplyoflaborisupwardsloping. D) ofcompetitioninthelabormarket.
Answer: C
Diff:1
28) Amonopsonistwantstopurchasemorelabor.Whichofthefollowingstatementsistrue?
A) Thewageratethatthemonopsonisthastopayfutureworkersislowerthanitpayscurrent
workerssincethereisnootherplacetowork.
B) Thewageratethatthemonopsonisthastopayfutureworkerswillbethesamerateitpays
currentworkers.
C) Thewageratethatthemonopsonisthastopayfutureworkersishigherthanwhatitwill
continuetopaycurrentworkers.
D) Themonopsonistwillhavetoraisethewagerateforcurrentandadditionalemployees.
Answer: D
Diff:1
29) Foramonopsonist,themarginalfactorcostcurvewillbeabovethesupplyoflaborcurve.The
marginalfactorcostcurveisabovethesupplycurvebecause
A) themonopsonistwilltakeadvantageoflaborandofferthemlowerwages.
B) inorderforthemonopsonisttosellanadditionalunitofthegood,thepriceofthegood
mustbelowered.
C) inorderforthemonopsonisttohiremorelaborthemonopsonistmustalsopurchasemore
capital.
D) themonopsonistwillhavetopayallworkersahigherwageratethanthecurrentwage
rateifitwantstohiremoreworkers.
Answer: D
Diff:1
QuantityofLabor RequiredHourly
SuppliedtoManagement WageRate
0
1 $17
2 $19
3 $21
30) Refertotheabovetable.Whatisthemarginalfactorcostwhenthefirmemploysthesecondunit
oflabor?
A) $19 B) $21 C) $36 D) $38
Answer: B
Diff:1
31) Refertotheabovetable.Whatisthemarginalfactorcostwhenthefirmemploysthethirdunit
oflabor?
A) $62 B) $57 C) $25 D) $21
Answer: C
Diff:1
32) Refertotheabovetable.Ifthemarginalrevenueproductis$21,howmanyworkerswillthe
profitmaximizingmonopsonisthireandwhatwagewilltheypayeachworker?
A) 1;$17 B) 2;$19 C) 2;$21 D) 3;$21
Answer: B
Diff:1
33) Themarginalfactorcostofamonopsonistis
A) upwardslopingandthesameasthesupplycurve.
B) downwardslopingwhenthesupplycurveoflaborisupwardsloping.
C) upwardslopingandrisesfasterthanthesupplycurve.
D) horizontal.
Answer: C
Diff:2
34) Foramonopsonistthemarginalcostofincreasingitsworkforcewillalwaysbegreaterthanthe
wageratebecause
A) thereisnotgoodfactorsubstitutioninamonopsony.
B) thewagerateofferedthenewestemployeemustbepaidtoallworkers.
C) theindustrywillbeaclosedshop.
D) anormalrateofreturnmustbepaidtotheowner.
Answer: B
Diff:1
35) Themaindifferencebetweenamonopsonistandacompetitivebuyeroflaboristhat
A) themonopsonistcanhireasmanyworkersasitwantsatthegoingwagewhilethe
competitivefirmmustraisewagestohireadditionalworkers.
B) thecompetitivefirmcanhireasmanyworkersasitwantsatthegoingwagewhilethe
monopsonistcanhiremoreworkersatlowerwages.
C) thecompetitorcanhireasmanyworkersasitwantsatthegoingwagewhilethe
monopsonistmustraisewagestohireadditionalworkers.
D) themonopsonistcanforcewagesdownandstillhireasmanyworkersasitwantswhile
thecompetitivefirmmustincreasethewageratetohireadditionalworkers.
Answer: C
Diff:3
36) Amonopsonistiscurrentlyemploying50workersat$10anhour.Itwantstohireanadditional
worker,butwillhavetopaytheworker$10.10.Themarginalfactorcostis
A) tencents. B) $10.00. C) $10.10. D) $15.10.
Answer: D
Diff:3
37) Undermonopsony,marginalfactorcostis
A) equaltothewagerate.
B) belowthewageratebutincreasesasmoreworkersarehired.
C) greaterthanthewagerate.
D) downwardsloping.
Answer: C
Diff:2
38) Refertotheabovefigure.Undermonopsony,thewageratewillbe
A) W1 . B) W2 . C) W3 . D) W5 .
Answer: D
Diff:3
39) Refertotheabovefigure.Thewagerateunderperfectcompetitionis
A) W2 . B) W3 . C) W4 . D) W5 .
Answer: C
Diff:3
40) Refertotheabovefigure.Themonopsonisticexploitationis
A) W2 -W5 . B) W1 -W5 . C) W2 -W4 . D) W2 -W3 .
Answer: A
Diff:3
41) Monopsonisticexploitationis
A) measuredbytheareaabovethesupplycurvebutbelowthewagepaid.
B) thedifferencebetweenthemarginalrevenueproductofaworkerandthewagereceived
bytheworker.
C) measuredbytheheightofthesupplycurveoflabor.
D) thecosttosocietyfromunions.
Answer: B
Diff:1
42) Whatisitcalledwhenthepricepaidforavariableinputislessthanitsmarginalrevenue
product?
A) Bilateralmonopoly B) Monopsonisticexploitation
C) Monopolisticexploitation D) Featherbedding
Answer: B
Diff:1
43) Bilateralmonopolyexistswhen
A) thereiseitheramonopolyoramonopsonyinthemarket.
B) therearetwocompetinglaborunionsinalabormarket.
C) thereisamonopolyandamonopsonyinamarket.
D) afirmisbothamonopolistinitsoutputmarketandamonopsonistintheinputmarket.
Answer: C
Diff:1
44) WhichofthefollowingisFALSEregardingamonopsonist?
A) Themonopsonististheonlybuyerinamarket.
B) Themonopsonistfacesanupwardslopinglaborsupplycurve.
C) Themonopsonistfacesanupwardslopinglabordemandcurve.
D) Themonopsonistfacestheentiremarketlaborsupplycurve.
Answer: C
Diff:2
45) SincetheNationalBasketballAssociationistheonlysignificantemployerofprofessional
basketballplayers,itmightbereferredtoasa(n)
A) oligopsony. B) monopoly. C) monopsony. D) oligopolist.
Answer: C
Diff:2
46) Whenthereisonlyonebuyerinamarket,thereisa
A) buyersmonopoly. B) monopoly.
C) monopsony. D) buyerscooperative.
Answer: C
Diff:1
47) Whenthereisonlyonebuyeroflaborinacommunity,wetalkofa
A) monopoly. B) monopsony.
C) monopolisticmarket. D) laborcooperative.
Answer: B
Diff:1
48) Acompanytowninthelumberorminingindustryisanexampleofa
A) monopoly. B) bilateralmonopoly.
C) buyersmonopoly. D) monopsony.
Answer: D
Diff:2
49) Aprofit-maximizingmonopsonistwillhireworkersuptothepointatwhich
A) W=MRP. B) MRP= MFC.
C) W=MFC. D) W= MRP= MFC.
Answer: B
Diff:2
50) Attheprofit-maximizinglevelofemployment,themonopsonist
A) paysawageequaltoMRP. B) paysawagegreaterthanMRP.
C) paysawagelessthanMRP. D) paysawageequaltoMFC.
Answer: C
Diff:2
51) Inamonopsonisticmarket,
A) employmentislowerbutwagesarehigherthaninacomparablecompetitivemarket.
B) employmentishigherbutwagesarelowerthaninacomparablecompetitivemarket.
C) bothemploymentandwagesarehigherthaninacomparablecompetitivemarket.
D) bothemploymentandwagesarelowerthaninacomparablecompetitivemarket.
Answer: D
Diff:2
52) Thefiguresupportsallofthefollowingstatementsregardingthemarginalfactorcostcurvefora
monopsonistEXCEPT
A) themonopsonistfirmlooksatamarginalcostcurve,MFC,whichslopesupwardandis
aboveitslaborsupplycurve.
B) themarginalbenefitofhiringadditionalworkersisgivenbythefirmsMRPcurve.
C) theintersectionofMFCwithMRP,atpointE,determinesthenumberofworkershired.
D) amonopsonistcannotfindtheprofit-maximizingquantityoflabordemandedatE.
Answer: D
Diff:3
53) Inordertohireadditionallaborers,amonopsonymust
A) lowerthesupplyoflabor. B) raisethewagerate.
C) advertiseforthelabor. D) donothing.
Answer: B
Diff:2
54) Amonopsonisticemployerfacesa
A) perfectlyelasticlaborsupplycurve.
B) perfectlyinelasticlaborsupplycurve.
C) MFCcurvethatisgreaterthanthewagerateateachquantityoflabor.
D) MFCcurvethatislessthanthewagerateateachquantityoflabor.
Answer: C
Diff:2
55) Payingawagetoanemployeethatislowerthantheemployeesmarginalrevenueproductis
sometimesreferredtoas
A) illegalinmoststates. B) monopolisticexploitation.
C) monopsonisticexploitation. D) totalexploitation.
Answer: C
Diff:2
56) Monopsonisticexploitationrefersto
A) thepaymenttotheresourceequaltoMFC.
B) thepaymenttoaresourcelessthanMRP.
C) thepaymenttoaresourceequaltoMRP.
D) thepaymenttoaresourceaboveMRP.
Answer: B
Diff:2
57) Whenworkersarepaidawagethatislessthantheircontributiontoamonopsonistsrevenues,
A) thisissometimesreferredtomonopsonisticexploitation.
B) thisissometimesreferredtoasanincentive.
C) theyseekparttimeemployment.
D) theyfileagrievancewiththeirunionrepresentative.
Answer: A
Diff:2
58) Ifasinglesupplieroflabor,suchasaunion,weresupplyinglabortoasinglemonopsonistic
employer,thisisreferredtoasa(n)
A) bilateralmonopoly. B) trilateralmonopoly.
C) totalmonopsony. D) collectivemonopoly.
Answer: A
Diff:2
59) WhichofthefollowingisFALSEregardingbilateralmonopoly?
A) Bilateralmonopolyisamarketstructureconsistingofamonopolistandamonopsonist.
B) Bilateralmonopolyisdefinedasamarketstructureinwhichasinglebuyerfacesasingle
seller.
C) Anexampleofbilateralmonopolyisastateeducationemployerfacingasingleteachers
unioninthelabormarket.
D) Thepriceoutcomeiseasilydetermined.
Answer: D
Diff:1
60) Abilateralmonopolymeans
A) thatamonopsonisticemployerbargainswithtwounions.
B) thatamonopsonisticemployerbargainswithbothanindustrialandacraftunion.
C) thatamonopsonisticemployerbargainswithamonopoly.
D) thatanindustrialunionbargainswithatwo-firmoligopoly.
Answer: C
Diff:1
61) Abilateralmonopolyexistswhenthereisa
A) singlebuyerandmanysellersinthemarket.
B) singlesellerandmanybuyersinthemarket.
C) largenumberofbuyersandsellersinthemarket.
D) singlebuyerandasinglesellerinthemarket.
Answer: D
Diff:2
62) TheMFCcanbecalculatedbythe
A) changeintotalwages/changeinlabor. B) totalwages/totallabor.
C) changeinlabor/changeintotalwages. D) totalwages/changeinlabor.
Answer: A
Diff:1
63) Thelabormarketinprofessionalbaseballisanexampleof
A) abilateralmonopoly. B) amonopsonisticlabormarket.
C) amonopolisticlabormarket. D) aperfectlycompetitivelabormarket.
Answer: A
Diff:2
64) TheMFCcurve
A) liesbelowthelaborsupplycurve,whenthelaborsupplycurveisupwardsloping.
B) liesabovethelaborsupplycurve,whenthelaborsupplycurveisupwardsloping.
C) isthelaborsupplycurve.
D) isparalleltothelaborsupplycurve,whenthelaborsupplycurveisdownwardsloping.
Answer: B
Diff:2
65) Inabilateralmonopoly,thewageratethatisdeterminedinthemarket
A) isequaltoMFC.
B) isequaltoMRP.
C) isindeterminate.
D) isthesameasinaperfectlycompetitivemarket.
Answer: C
Diff:3
Quantity Hourly Total Marginal

ofLabor WageRate WageBill FactorCost
0 - - -
1 $10
2 12
3 14
4 16
5 18
6 20
66) Intheabovetable,whatisthemarginalfactorcostofthe4thworker?
A) $16 B) $30 C) $64 D) $22
Answer: D
Diff:3
67) Intheabovetable,whatisthemarginalfactorcostofthe2ndworker?
A) $24 B) $14 C) $64 D) $12
Answer: B
Diff:3
A) $22 B) $18 C) $90 D) $26
Answer: D
Diff:3
A) $30 B) $18 C) $120 D) $20
Answer: A
Diff:3
70) Intheabovetable,ifthemarginalrevenueproductis$18,howmanyworkerswilltheprofit
maximizingmonopsonisthire?
A) 2 B) 3 C) 4 D) 5
Answer: B
Diff:3
A) 2 B) 3 C) 4 D) 5
Answer: A
Diff:3
maximizingmonopsonisthireandwhatwagewilltheypayeachworker?
A) 5;$18 B) 3;$14 C) 3;$18 D) 4;$16
Answer: B
Diff:3
A) 5;$18 B) 3;$14 C) 4;$22 D) 4;$16
Answer: D
Diff:3
A) 5;$18 B) 5;$16 C) 4;$16 D) 6;$30
Answer: A
Diff:3
75) Atanyquantity,themarginalfactorcostisalways
A) paralleltothemarginalrevenueproduct.
B) belowthelaborsupplycurve.
C) abovethelaborsupplycurve.
D) abovethelabordemandcurve.
Answer: C
Diff:2
76) Afirmthatisamonopsonistinthelabormarketandamonopolistintheproductmarketwill
hirelabortothepointatwhich
A) MFC=MRPm .
B) aperfectlyelasticlaborsupply= MRP.
C) aperfectlyinelasticlaborsupply= perfectlyinelasticlabordemand.
D) wheresupplyoflabor= demandforlabor.
Answer: A
Diff:2
77) Intheabovefigure,whatisthewageratethemonopsonistwillpay?
A) W1 B) W2 C) W3 D) W4
Answer: B
Diff:3
78) Intheabovefigure,whatisthewageratefortheperfectlycompetitivemarket?
A) W1 B) W2 C) W3 D) W4
Answer: C
Diff:3
79) Intheabovefigure,whatisthequantityofworkersthatwouldbehiredbyamonopsonist?
A) Q1 B) Q2 C) Q3 D) Q4
Answer: B
Diff:3
80) Intheabovefigure,whatisthequantityofworkersthatwouldbehiredinaperfectly
competitivemarket?
A) Q1 B) Q2 C) Q3 D) Q4
Answer: C
Diff:3
81) WhichofthefollowingistheBESTexampleofamonopsonist?
A) ahouseholdhiringagardener
B) aturnipfarmerhiringseasonalhelp
C) HersheysChocolateFactoryinHershey,PA
D) VinakaCoffeeShopinCarlsbad,CA
Answer: C
Diff:1
82) Amonopsonisticemployerwillpayawagerate
A) lessthanthelaborsMRP. B) greaterthanthelaborsMRP.
C) equaltothelaborsMRP. D) equaltoMFC.
Answer: A
Diff:2
Quantityof
WageRate LaborSupplied
$10 1
$15 2
$20 3
$25 4
83) Usetheabovetable.TheMFCofthe3rdworkeris
A) $5. B) $30. C) $20. D) $6.7.
Answer: B
Diff:2
84) Usetheabovetable.TheMFCofthe4thworkeris
A) $5. B) $6.25. C) $25. D) $40.
Answer: D
Diff:2
85) Usetheabovetable.Ifthemarginalrevenueproductis$10,howmanyworkerswilltheprofit
A) 1 B) 2 C) 3 D) 4
Answer: A
Diff:2
A) 1 B) 2 C) 3 D) 4
Answer: B
Diff:2
A) 1;$10 B) 2;$15 C) 3;$20 D) 4;$25
Answer: C
Diff:2
88) Usetheabovetable.Thedatashowsthatthefirm
A) ishiringinaperfectlycompetitivelabormarket.
B) issellingitsoutputinaperfectlycompetitivemarket.
C) isamonopsonist.
D) issellingitsoutputinanimperfectlycompetitivemarket.
Answer: C
Diff:1
89) Ifaminimumwageisestablished,amonopsonistfaces
A) anupwardslopingsupplyoflaboratallquantitiesoflabor.
B) adownwardslopingsupplyoflaboratallquantitiesoflabor.
C) ahorizontalsupplyoflaborattheminimumwageandtheupwardslopingportionofthe
laborsupplycurveaboveminimumwage.
D) ahorizontalsupplyoflaborattheminimumwageandthedownwardslopingportionof
thelabordemandcurvebelowminimumwage.
Answer: C
Diff:2
90) Whatisamonopsonyandhowdoesamonopsonisticfirmdeterminethewageratetopayits
employees?
Answer: Monopsonyisthesituationwhenthereisasinglebuyerofaninput,suchaslabor,sothat
italonefacesthemarketinputsupplycurve.Foramonopsonist,hiringadditional
employeesrequiresraisingthewagerateforallworkers,soitsmarginalfactorcostcurve
liesabovethelaborsupplycurve.Themonopsonistemploysworkerstothepointat
whichmarginalrevenueproductequalsmarginalfactorcostandthenpaysthewagerate
thatthoseworkerswillacceptfortheirlaborservices.Asaconsequence,the
monopsonistswagerateislowerthanthemarginalrevenueproductoflabor.
Diff:2
91) Usingagraph,comparethelabor-marketequilibriumunderperfectcompetitionand
monopsony.Explain.
Answer:
Refertotheabovefigure.Underperfectcompetition,thewageisWcwithLcunitsof
laborhired.Amonopsonysmarginalfactorcostcurveliesabovethesupplycurve the
monopsonyhastoincreasewagestohiremoreworkers.Themonopsonisthires Lm
workersMFC=MRPatthisamountoflabor.ThewagerateisWm andthemonopsonist
hiresfewerworkersandpaysalowerwagethaninacompetitivesituation.The
differencebetweentheworkersmarginalrevenueproductandthewageisthe
monopsonisticexploitationoflabor.
Diff:3
Chapter30
Income,Poverty,andHealthCare
30.1Income
1) TheLorenzcurveshows
A) thedemandforjobs. B) thesupplyofjobs.
C) theelasticityofjobs. D) thedistributionofincome.
Answer: D
Diff:1
Topic: 30.1Income
2) Thegraphwhichrepresentsthedistributionofincomeinaneconomyiscalledthe
A) Laffercurve. B) Lorenzcurve.
C) distributioncurve. D) aggregatedemandcurve.
Answer: B
Diff:1
Topic: 30.1Income
3) Accordingtothetext,todaysLorenzcurveis
A) astraightline. B) averticalline.
C) morebowedthanin1929. D) lessbowedthanin1929.
Answer: D
Diff:1
Topic: 30.1Income
4) Accordingtothetext,thelowerhalfofU.S.householdsearnaboutwhatpercentageoftotal
income?
Answer: D
Diff:1
Topic: 30.1Income
Chapter30Income,Poverty,andHealthCare 1025
5) TheLorenzcurveshowswhatportionoftotalmoneyincomeisaccountedforby
A) differentproportionsofacountryshouseholds.
B) onlythewealthiestcitizens.
C) onlypoorpeople.
D) taxpayingcitizensonly.
Answer: A
Diff:2
Topic: 30.1Income
6) InaLorenzcurve,perfectincomeequalityisrepresentedby
A) averticalline.
B) ahorizontalline.
C) arectangularhyperbola.
D) a45-degreelineoriginatingfromtheorigin.
Answer: D
Diff:1
Topic: 30.1Income
7) ThemorebowedouttheLorenzcurve,the
A) lessequaltheincomedistribution.
B) moreequaltheincomedistribution.
C) greatertheoverallwealthintheeconomy.
D) lesstheoverallwealthintheeconomy.
Answer: A
Diff:1
Topic: 30.1Income
8) ThelessbowedtheLorenzCurve,the
A) moreequaltheincomedistribution.
B) lessequaltheincomedistribution.
C) greaterthenumberoflow-incomepeople.
D) greaterthenumberofhigh-incomepeople.
Answer: A
Diff:2
Topic: 30.1Income
9) Astraight-lineLorenzcurveshows
A) anequaldistributionofmoneyincome.
B) agreaterthanproportionateshareofincomegoingtomiddle-incomehouseholds.
C) ahighincidenceofabsolutepoverty.
D) ahighlyunequaldistributionofincome.
Answer: A
Diff:1
Topic: 30.1Income
10) Themorebowed(skewed)theLorenzcurve,
A) themoreequalthedistributionofincome.
B) thegreaterthenumberofhouseholdsinthesociety.
C) themoreunequalthedistributionofmoneyincome.
D) thegreaterthetotalincomeofthesociety.
Answer: C
Diff:1
Topic: 30.1Income
11) TheLorenzcurveisageometricrepresentationof
A) theprofileofearningsforatypicalfamilyovertime.
B) thestandardoflivingexperiencedbythepoorinacountry.
C) thedifferencebetweenpre-taxandpost-taxincome.
D) thedistributionofincome.
Answer: D
Diff:1
Topic: 30.1Income
12) ThemorebowedtheLorenzcurve,the
A) richerthesociety.
B) moreunequalthedistributionofmoneyincome.
C) poorerthesociety.
D) moreequalthedistributionofincome.
Answer: B
Diff:2
Topic: 30.1Income
13) Suppose10percentofthefamiliesreceive10percentoftheincome,20percentofthefamilies
receive20percentoftheincome,andsoforth.TheLorenzcurvewouldbe
A) astraightlineata45-degreeanglefromtheorigin.
B) astraightlineata30-degreeanglefromtheorigin.
C) themostbowedcurvepossible.
D) thehorizontalaxis.
Answer: A
Diff:2
Topic: 30.1Income
14) Themostunequaldistributionofincomeintheabovefigureexistsin
A) country4. B) country1. C) country5. D) country3.
Answer: B
Diff:1
Topic: 30.1Income
15) Thecountryreflectingperfectincomeequalityintheabovefigureis
A) country4. B) country1. C) country5. D) country3.
Answer: C
Diff:1
Topic: 30.1Income
16) Whichofthefollowingwouldbeconsideredincomeinkind?
A) taxrefunds B) foodstamps
C) yardsales D) reductioninthetaxrates
Answer: B
Diff:2
Topic: 30.1Income
17) OnereasonsomeeconomistsarecriticaloftheLorenzcurveisbecause
A) itreflectsincomebeforetaxes.
B) itreflectsincomeaftertaxes.
C) itreflectsonlythetopbracketoftaxpayers.
D) itreflectsonlythepoorinthecountry.
Answer: A
Diff:2
Topic: 30.1Income
18) WhichofthefollowingisNOTacorrectcriticismoftheLorenzcurve?
A) Itdoesnotincludepaymentsinkind.
B) Itdoesnotdealwithdifferencesinfamilysize.
C) Itignorestheimpactofagedistributiononincomedistribution.
D) Itreferstomoneyincomeaftertaxes.
Answer: D
Diff:1
Topic: 30.1Income
19) IncalculatingincomefortheLorenzcurve,onefactorthatisomitted,is
A) capitalgainsincome.
B) dividendpayments.
C) in-kindtransferpaymentsfromthegovernment.
D) pureeconomicrent.
Answer: C
Diff:1
Topic: 30.1Income
20) SomeeconomistscriticizetheLorenzcurvebecauseit
A) includestoomanythingsinmeasuringincome,suchasfoodstamps,housingaid,and
othergovernmentprograms.
B) doesnotaccountfortheeffectofageonafamilysincome.
C) measuresunreportedincomeearnedintheundergroundeconomy.
D) usesafter-taxincomewhenpre-taxincomeismoreappropriate.
Answer: B
Diff:2
Topic: 30.1Income
21) SomeeconomistscriticizetheLorenzcurvebecauseit
A) accountsfordifferencesinthesizeofhouseholdswhenitshouldnot.
B) doesnotincludethecumulativepercentageofhouseholds.
C) doesnotincludeunreportedincomeearnedintheundergroundeconomy.
D) representstheinequalityoflifetimeincomewhenitshouldjustlookataspecifictime
period.
Answer: C
Diff:2
Topic: 30.1Income
22) SinceWorldWarII,theshareoftotalincomegoingtothebottom20percentofU.S.households
has
A) fallenby20percent. B) increasedby10percent.
C) remainedconstant. D) morethandoubled.
Answer: D
Diff:1
Topic: 30.1Income
23) Comparedtoasamplingofotherdevelopednations,theU.S.incomedistributionismore
unequalthanmanyothers.Whataccountsforthis?
A) Thelowest-incomefamiliesintheUnitedStatesearnmuchlessthanthelowest -income
householdsinothernations.
B) MarginalincometaxratesaremuchhigherintheUnitedStatesthaninanyothernation.
C) Thehighest-incomefamiliesintheUnitedStatesearnmuchmorethanthehighest-income
householdsinothernations.
D) Othernationsmanipulatetheirdatatolookbetter.
Answer: C
Diff:1
Topic: 30.1Income
24) Whenexaminingthefinancialstatusofhouseholds,wealthis
A) synonymouswithincome.
B) aflowvariablewhereasincomeisastockvariable.
C) astockvariableandincludesbothtangibleassetsandhumancapital.
D) notasimportantasincomebecausewealthdoesnotchangeovertime.
Answer: C
Diff:1
Topic: 30.1Income
25) Thewayincomeisallocatedamongthepopulationiscalledthe
A) incomecurve. B) incomespread.
C) distributionofincome. D) Giniallocation.
Answer: C
Diff:1
Topic: 30.1Income
26) Whichofthefollowingisthebestdefinitionofwhateconomistsdefineas total income?

A) Paymentforlaborservices.
B) Paymentforlaborservicesandforownershipofotherfactorsofproduction.
C) Paymentforlaborservices,foruseofotherfactorsofproduction,andgiftsand
governmenttransfers.
D) Inheritance.
Answer: C
Diff:1
Topic: 30.1Income
27) TheLorenzcurve
A) showswhatportionofthepopulationarelivinginpovertyandwhatportionarelivingin
wealth.
B) showswhatportionoftotalmoneyincomeisaccountedforbydifferentproportionsofthe
nationshouseholds.
C) showswhatportionofthepopulationisworkingasprofessionals,white-andblue-collar,
workersandworkersatmenialtasks.
D) breaksdowntheincomelevelsofeachgroupintheeconomy.
Answer: B
Diff:1
Topic: 30.1Income
28) ThemorebowedouttheLorenzcurveis,the
A) moreequalthedistributionofincome. B) lessequalthedistributionofincome.
C) richerthesociety. D) poorerthesociety.
Answer: B
Diff:1
Topic: 30.1Income
29) ALorenzcurvethatrepresentsanunequalincomedistributionis
A) astraightlinestartingattheorigin. B) astraightlinestartingat100%
C) abowedcurved. D) alinethathasakinkinthemiddleofit.
Answer: C
Diff:1
Topic: 30.1Income
30) ALorenzcurvethatisperfectlystraightindicates
A) thatsocietyisveryrich.
B) thatasmallportionofthepopulationaccountsformostoftheincome.
C) thatalargeportionofthepopulationaccountsformostoftheincome.
D) completeincomeequality.
Answer: D
Diff:1
Topic: 30.1Income
31) Ifeveryoneearnedthesameincome,theLorenzcurvewouldbe
A) arectangularhyperbola.
B) astraightlinefromtheoriginata45-degreeangle.
C) thehorizontalaxis.
D) verybowedfromthediagonal.
Answer: B
Diff:2
Topic: 30.1Income
32) Theabovefiguredisplays
A) income-inequalitycurves. B) GiniCoefficients.
C) Lorenzcurves. D) Laffercurves.
Answer: C
Diff:2
Topic: 30.1Income
33) Refertotheabovefigure.Whichcurveshowsthemostunequaldistributionofincome?
A) A B) B C) C D) D
Answer: D
Diff:2
Topic: 30.1Income
34) Refertotheabovefigure.Whichcurveshowsthesecond mostunequaldistributionofincome?

A) A B) B C) C D) D
Answer: C
Diff:2
Topic: 30.1Income
35) Refertotheabovefigure.ForwhichLorenzcurvedoestherichest25percentmake50percentof
thenationsmoneyincome?
A) A B) B C) C D) D
Answer: C
Diff:2
Topic: 30.1Income
36) Refertotheabovefigure.ForwhichLorenzcurvedoestherichest40percentmake50percentof
thenationsmoneyincome?
A) A B) B C) C D) D
Answer: B
Diff:2
Topic: 30.1Income
37) Refertotheabovefigure.Perfectincomeequalityisshownby
A) thehorizontalaxis. B) theverticalaxis.
C) curveA. D) curveD.
Answer: C
Diff:2
Topic: 30.1Income
38) Refertotheabovefigure.Wherearethepooresthouseholdsrepresentedonthegraph?
A) Thepooresthouseholdsaretotheleftalongthehorizontalaxis.
B) Thepooresthouseholdsaretotherightalongthehorizontalaxis.
C) Thepooresthouseholdsareallalongthehorizontalaxis.
D) Thepooresthouseholdsareconcentratedinthemiddle.
Answer: A
Diff:1
Topic: 30.1Income
39) Refertotheabovefigure.Whichoftheabovepanelsrepresentscompleteincomeequality?
Answer: B
Diff:1
Topic: 30.1Income
40) Refertotheabovefigure.Whichoftheabovegraphsrepresentsanunequalincome
distribution?
Answer: D
Diff:1
Topic: 30.1Income
41) ChangesintheLorenzcurvesince1929intheUnitedStatesindicatethat
A) thedistributionofincometodayisidenticaltowhatitwasin1929.
B) thedistributionofincomeisslightlylessequaltodaythanin1929.
C) thedistributionofincomeisslightlymoreequaltodaythanin1929.
D) thedistributionofincomeismuchmoreequaltodaythanitwasin1929.
Answer: C
Diff:2
Topic: 30.1Income
42) AllofthefollowingarecriticismsoftheLorenzcurveEXCEPT
A) TheLorenzcurvedoesnotincludein-kindtransfers.
B) TheLorenzcurvedoesnotaccountforagedifferences.
C) TheLorenzcurvedoesnotaccountfordifferencesinthesizesoffamilies.
D) TheLorenzcurvedoesnotaccountfordifferencesineducationlevels.
Answer: D
Diff:2
Topic: 30.1Income
43) Incomeinkindisdefinedas
A) incomereceivedintheformofapaycheck.
B) paymentforservicesintheformofcash.
C) tips.
D) incomereceivedintheformofgoodsandservices.
Answer: D
Diff:1
Topic: 30.1Income
44) Incomeintheformofgoodsandservicesis
A) knownasmoneyincome. B) knownasincomeinkind.
C) notconsideredincomebyeconomists. D) notpartofwealth.
Answer: B
Diff:1
Topic: 30.1Income
45) AllofthefollowingareincomeinkindEXCEPT
A) governmentprovidedhousing. B) governmentprovidededucation.
C) tipsreceivedbyawaitress. D) goodsproducedinthehome.
Answer: C
Diff:1
Topic: 30.1Income
46) AllofthefollowingareincomeinkindEXCEPT
A) incomereceivedfromfamilymembers. B) servicesproducedinthehome.
C) governmentprovidedfoodstamps. D) governmentprovidedmedicalaid.
Answer: A
Diff:1
Topic: 30.1Income
47) WhichofthefollowingisnotatruestatementabouttheLorenzcurve?
A) TheLorenzcurveincludesbothmoneyincomeandincomeinkind.
B) TheLorenzcurvedoesnotincludeunreportedincomeobtainedfromtheunderground
economy.
C) TheLorenzcurvedoesnotconsiderdifferentsizesofhouseholds.
D) TheLorenzcurvedoesnotconsideragedifferencesamongwageearners.
Answer: A
Diff:1
Topic: 30.1Income
48) Comparedtothedistributionofmoneyincome,thedistributionofwealthis
A) aboutthesame. B) muchmoreequal.
C) muchlessequal. D) alittlemoreequal.
Answer: C
Diff:2
Topic: 30.1Income
49) Thereturnonwealth(bothhumanandnonhuman)is
A) astockvariable.
B) income.
C) measuredintheformofbonds.
D) astockorflowvariabledependinguponwhetherthewealthisintheformofbondsor
otherfinancialassets.
Answer: B
Diff:1
Topic: 30.1Income
50) Whichofthefollowingstatementsistrueaboutincomeandwealth?
A) Incomeisaflowmeasureandwealthisastockmeasure.
B) Incomeisastockmeasureandwealthisaflowmeasure.
C) Bothincomeandwealthareflowmeasures.
D) Bothincomeandwealtharestockmeasures.
Answer: A
Diff:1
Topic: 30.1Income
51) Wealthismeasuredas
A) onlytangibleobjects.
B) onlybuildings,machinery,land,cars,stocksandbonds.
C) onlynonhumanwealth.
D) nonhumanandhumanwealth.
Answer: D
Diff:1
Topic: 30.1Income
52) Whencomparingthedistributionofwealthtothedistributionofincome,itcanbenotedthat
A) thedistributionsareaboutthesame.
B) themeasurementofincomeismuchlessaccuratethanthemeasurementofwealth.
C) themeasurementofwealthismuchlessaccuratethanthemeasurementofincome.
D) wealthdoesnotgenerateincome.
Answer: C
Diff:1
Topic: 30.1Income
53) Allofthefollowingwouldshowamoreequaldistributionthanthedistributionofmoney
incomeEXCEPT
A) totalincome. B) after-taxincome.
C) wealth. D) lifetimeearnings.
Answer: C
Diff:2
Topic: 30.1Income
54) Thecommonmeasureofwealthusedincalculatingthedistributionofwealthincludes
A) workersclaimsontheSocialSecuritysystem.
B) workersclaimsonprivatepensionfunds.
C) financialassets.
D) humancapital.
Answer: C
Diff:2
Topic: 30.1Income
55) Therichest10percentofU.S.housesholdmorethantwo -thirdsofallwealth.Theproblemwith

thisstatementisthat
A) itdoesnotconsideranindividualscurrentincome.
B) itdoesnotconsiderprivateandpublicpensionplans.
C) itisbasedentirelyonnonhumanwealth.
D) itisbasedentirelyonhumanwealth.
Answer: B
Diff:1
Topic: 30.1Income
56) Eachofthecurvesplottedinthegraphshownintheabovefigureisknownasa
A) Laffercurve. B) Phillipscurve.
C) Keynesiancurve. D) Lorenzcurve.
Answer: D
Diff:1
Topic: 30.1Income
57) Intheabovefigure,thecurvethatrepresentsthemostincomeinequalityis
A) a. B) b. C) c. D) d.
Answer: D
Diff:2
Topic: 30.1Income
58) Intheabovefigure,thecurvethatrepresentsthemostincomeequalityis
A) a. B) b. C) c. D) d.
Answer: A
Diff:2
Topic: 30.1Income
59) Intheabovefigure,thecurvethatrepresentsthesecond mostincomeequalityis

A) a. B) b. C) c. D) d.
Answer: B
Diff:2
Topic: 30.1Income
60) AllofthefollowingarecriticismsoftheLorenzcurveanalysisEXCEPT
A) income-in-kindisnotfiguredin.
B) theinequalitygapisnotanissuethateconomistsstudy.
C) differentsizesofhouseholdsareignored.
D) itdoesnottakeintoconsiderationlifetimeearnings.
Answer: B
Diff:2
Topic: 30.1Income
61) WhichofthefollowingstatementsregardingtheLorenzcurveisFALSE?
A) ALorenzcurveisageometricrepresentationofthedistributionofincome.
B) ALorenzcurvethatisperfectlystraightrepresentscompleteincomeequality.
C) ThelessbowedisaLorenzcurve,thelessequallyincomeisdistributed.
D) ThemorebowedisaLorenzcurve,themoreunequallyincomeisdistributed.
Answer: C
Diff:1
Topic: 30.1Income
62) IfanationsLorenzcurveliesonthe45degreelineofincomeequality,then
A) moreofthenationsincomeisreceivedbythelowest20percentoffamiliesthanbythe
highest20percent.
B) incomeisunequallydistributed.
C) moreofthenationsincomeisreceivedbythehighest20percentoffamiliesthanbythe
lowestpercent.
D) theincomereceivedbyeach20percentoffamiliesis20percentofthetotalincome.
Answer: D
Diff:1
Topic: 30.1Income
63) Income-in-kindis
A) moneyincome.
B) receivedintheformofgoodsandservices.
C) incomeindollars.
D) usedtobuygoodsandservices.
Answer: B
Diff:1
Topic: 30.1Income
64) Incomeisconsideredtobea
A) nontaxablestreamoffunds. B) flow.
C) stock. D) resource.
Answer: B
Diff:1
Topic: 30.1Income
65) Wealthisconsideredtobea
A) nontaxablestreamoffunds. B) flow.
C) stock. D) resource.
Answer: C
Diff:1
Topic: 30.1Income
66) TheLorenzcurveshows
A) howpovertyrateschangeovertime.
B) thepercentageofpopulationbelowthepovertyline.
C) thedegreeofinequalityintheincomedistribution.
D) theratioofcashincometopayments-in-kind.
Answer: C
Diff:1
Topic: 30.1Income
67) Themostwidelyusedmeasureofincomeinequalityis
A) theBureauofLaborStatisticscost-of-livingindex.
B) theLaffercurve.
C) theLorenzcurve.
D) theGeminicoefficient.
Answer: C
Diff:1
Topic: 30.1Income
68) ALorenzcurvemeasuresthe________onthehorizontalaxis.
A) cumulativepercentageoffamilyincome B) cumulativepercentageoffamilywealth
C) cumulativepercentageoffamilies D) demandoffamiliesonwelfare
Answer: C
Diff:1
Topic: 30.1Income
69) ALorenzcurvemeasuresthe________ontheverticalaxis.
A) cumulativepercentageofmoneyincome
B) cumulativepercentageoffamilywealth
C) cumulativepercentageoffamilies
D) demandoffamiliesonwelfare
Answer: A
Diff:1
Topic: 30.1Income
70) TheLorenzcurveiscriticizedforallofthefollowingEXCEPT
A) thatitexcludestransfers-in-kindincome.
B) thatitdoesnotaccountforthesizedifferencesofhouseholds.
C) thatitdoesnotaccountforagedifferencesofhouseholds.
D) thatitdoesnotaccountfortheimpactoftradeonthestandardofliving.
Answer: D
Diff:2
Topic: 30.1Income
71) Usetheabovefigure.Refertotheabovediagramwherecurves(a)through(d)areforfour
differentcountries.Incomeisequallydistributedin
A) CountryA. B) CountryB. C) CountryC. D) CountryD.
Answer: A
Diff:2
Topic: 30.1Income
differentcountries.Incomeismostunequallydistributedin
Answer: D
Diff:2
Topic: 30.1Income
differentcountries.Incomeisthirdmostunequallydistributedin
Answer: B
Diff:2
Topic: 30.1Income
Name(s) Income/Person
Al,Bert $3,000
David,Jamal $2,000
Eve,Eric,Lucy,Cecil $1,500
Fran,George $1,000
74) Usetheabovetable.Whatpercentageofincomeisreceivedbytherichest20%ofthe
population?
Answer: A
Diff:2
Topic: 30.1Income
75) Usetheabovetable.Whatpercentageofincomeisreceivedbythepoorest60%ofthe
population?
Answer: C
Diff:2
Topic: 30.1Income
76) Usetheabovetable.Whatpercentageofincomeisreceivedbythepoorest20%ofthe
population?
A) 20percent B) 13.3percent C) 11.1percent D) 7.0percent
Answer: C
Diff:2
Topic: 30.1Income
77) Usetheinformationintheabovetable.Thetop40percentofthepopulationearn
A) 66.7percentoftheincome. B) 55.5percentoftheincome.
C) 50.0percentoftheincome. D) 44.4percentoftheincome.
Answer: B
Diff:2
Topic: 30.1Income
78) Usetheinformationintheabovetable.IfIncomewasevenlydistributed,eachpersonwould
receive
A) $9,000. B) $2,500. C) $1,800. D) $1,000.
Answer: C
Diff:1
Topic: 30.1Income
79) Thedistributionofmoneyincomecanberepresentedgraphicallyusing
A) supplyanddemanddiagrams. B) aLorenzcurve.
C) aKeynesiancurve. D) aDistributioncurve.
Answer: B
Diff:1
Topic: 30.1Income
80) AdiagonalstraightlineonaLorenzcurverepresents
A) aperfectlyunequaldistributionofincome(onepersonhaseverything).
B) aperfectlyequaldistributionofincome.
C) ahighlevelofinequalityinthedistributionofincome.
D) anobliquedistributionofincome.
Answer: B
Diff:2
Topic: 30.1Income
81) Since1929,thedistributionofmoneyincomeintheUnitedStateshas
A) becomeslightlymoreunequal.
B) notdramaticallychanged.
C) becomemoreequal.
D) shiftedtowardthepoorer20percentawayfromthericher20percent.
Answer: C
Diff:1
Topic: 30.1Income
82) IntheUnitedStates,thedistributionofwealth
A) isthesameasthedistributionofincome.
B) ismoreunequalthanthedistributionofincome.
C) ismoreequalthanthedistributionofincome.
D) isequalforallfamilies.
Answer: B
Diff:1
Topic: 30.1Income
83) Thewealthiest10percentofthepopulationownsabout
A) 30percentofallthewealthintheUnitedStates.
B) 50percentofallthewealthintheUnitedStates.
C) 70percentofallthewealthintheUnitedStates.
D) 90percentofallthewealthintheUnitedStates.
Answer: C
Diff:1
Topic: 30.1Income
84) Ageometricrepresentationofthedistributionofincomeisreferredtoas
A) thelaborsupplycurve. B) theLorenzcurve.
C) thePhillipscurve. D) theKeynesiancross.
Answer: B
Diff:2
Topic: 30.1Income
85) The45lineonaLorenzcurverepresents
A) completeincomeequality. B) completeincomeinequality.
C) completewealthequality. D) completewealthinequality.
Answer: A
Diff:2
Topic: 30.1Income
86) RecentincomedistributionfiguresintheUnitedStatesshow
A) slightlymoreinequality. B) lessinequality.
C) greaterequity. D) lessequity.
Answer: A
Diff:1
Topic: 30.1Income
87) Regardingincomedistributionandthedistributionofwealth,
A) wealthisastockconceptandincomeaflowconcept.
B) astockisevaluatedatagivenmomentintime;aflowisevaluatedduringaperiodoftime.
C) income,aflow,canbeviewedasareturnonwealth.
Answer: D
Diff:1
Topic: 30.1Income
88) Wealth
A) isthesameasincome.
B) includesassetssuchashouses,stocks,andbonds.
C) doesnotincludetangibleobjects.
D) isaflowandnotastock.
Answer: B
Diff:1
Topic: 30.1Income
89) WithrespecttowealthintheUnitedStates,wepresentlyfindthattherichestonepercentof
Americansownapproximatelyhowmuchofthenationswealth?
Answer: B
Diff:2
Topic: 30.1Income
90) DrawandexplainaLorenzcurve.
Answer:
Intheabovefigure,thecurvedisplayingtheactualmoneyincomedistributionisthe
Lorenzcurve.ThefarthertheLorenzcurveisfromthe45 -degreelinethatshowswhat
thecurvewouldbeifmoneyincomewereequallydistributed,themoreunequalisthe
actualdistributionofincome.
Diff:2
Topic: 30.1Income
91) HowdoesthedistributionofwealthdifferfromthedistributionofincomeintheUnitedStates?
Answer: Asconventionallymeasured,thedistributionofwealthismoreunequallydistributed
thanthedistributionofincome.However,thewealthfiguresusuallydonotinclude
workersclaimsonpensionplansorhumancapital.Ifthesewereincluded,the
distributionofwealthwouldbelessunequalthanreported.
Diff:2
Topic: 30.1Income
92) WhatarethemajorcriticismsoftheLorenzcurve?
Answer: TheLorenzcurvetypicallyispresentedintermsofthedistributionofmoneyincomeand
ignoresincomeinkind.Italsodoesnotaccountfordifferencesinfamilysizes,the
numberofincomeearnersinthefamily,ortheagesofthefamilies.TheLorenzcurvealso
reflectsincomebeforetaxesratherthandisposableincome,andfailstomeasureincome
fromtheundergroundeconomy.
Diff:2
Topic: 30.1Income
93) Supposethereisahighinequalityinhouseholdincomebetweenthehighestandthelowest
incomegroupsinonecountry.Inresponse,thegovernmentraisestheincometaxforthe
highestincomegroupandprovidessubsidiestothelowest-incomegroup.Whatwouldhappen
totheLorenzcurveasaresultofthegovernmentprograms?Explain.
Answer: ThegovernmenttaxandsubsidypolicieswouldnotchangetheLorenzcurvebecauseit
doesnotaccountfortheincometaxandincomeinkindprovidedbythegovernment.
Diff:2
Topic: 30.1Income
30.2DeterminantsofIncomeDifferences
1) Ageisadeterminantofincomebecause
A) withagetypicallycomeexperience,education,andtrainingthatcanincreaseincome.
B) agecontributestocostsasmedicalexpensesincrease.
C) olderworkershaveaccumulatedmorewealth.
D) olderworkershaveaccumulatedlesswealth.
Answer: A
Diff:1
Topic: 30.2DeterminantsofIncomeDifferences
2) Whichofthefollowingaredeterminantsofdifferencesinincome?
A) age B) marginalproductivity
C) discrimination D) alloftheabove
Answer: D
Diff:1
3) WhichfactorlistedbelowdoesNOThelpaccountfortheage-earningcycle?
A) productivity B) numberofhoursworkedeachweek
C) effectsofaging D) racialdiscrimination
Answer: D
Diff:1
4) Theage-earningcycleshowsanindividualtypicallyearning
A) aconstantincome(adjustedforinflation)overtheentireworkinglifeoftheworker.
B) anincomethatcyclesupwardanddownwardasanindividualages.
C) anincomethatincreaseswithage,peaks,andthenfallsasretirementapproaches.
D) anincomethatdeclinesuntilage30-35andthenincreasesrapidly.
Answer: C
Diff:1
5) Theage-earningsprofilepredictsthatearningswillpeakat
A) the35-40agelevel. B) the45-50agelevel.
C) the60-65agelevel. D) retirement.
Answer: B
Diff:1
6) Theage-earningcycle
A) isanearningsprofileofanindividualthroughouthisorherlifetime.
B) showstheearningsdifferencesbyageandbygender.
C) depictsdifferencesintherelationshipbetweenageandearningsacrosscountries.
D) showstheaverageincomesofpeoplebrokendownbyagecategories.
Answer: A
Diff:1
7) Theage-earningcycleusuallybegins
A) atrelativelyhighincomelevels.
B) atrelativelylowincomelevels.
C) onceaworkerreaches25yearsofage.
D) onlywhenaworkerisemployedfulltime.
Answer: B
Diff:2
8) Theage-earningcycleshowsdecliningincomeasapersonapproachesretirementagebecause
A) workerproductivityisincreasingrapidly.
B) workerandhoursworkeddiminish.
C) companieschoosetopromotetheseworkersfaster.
D) companiesadd-inSocialSecuritypaymentsasasupplement.
Answer: B
Diff:2
9) Theage-earningcyclepredictsthatatypicalpersonwill
A) beearning$50,000intheyear2010.
B) beearningthelowestincomerightbeforeretirement.
C) beearningthehighestincomerightbeforeretirement.
D) beearningthehighestincomeatabouttheage45-50.
Answer: D
Diff:1
10) Thelearningcurvesuggeststhatanindividualwill
A) receivethesameincomethroughoutacareer.
B) gainexperienceandincreaseproductivityovertime.
C) besubjecttofrequentspellsofunemployment.
D) haveanincomethatfallsovertime.
Answer: B
Diff:1
11) WhichofthefollowingdoesNOTaffectaworkersmarginalproductivity?
A) Education B) Training
C) Talent D) Inheritanceofmoney
Answer: D
Diff:1
12) WhichofthefollowingisNOTconsideredtobeafactorinthedeterminationofapersons
marginalproductivity?
A) Innateabilitiessuchashighintelligence
B) Investmentinhumancapitalsuchaseducation
C) On-the-jobtraining
D) Theelasticityofsupplyoflabor
Answer: D
Diff:1
13) Muchofapersonsincreasedproductivitycanbelinkedto
A) on-the-jobtraining.
B) theprevalentmarginaltaxrate.
C) thepriceelasticityofdemandfortheproduct.
D) theincomeelasticityofdemandfortheproduct.
Answer: A
Diff:2
14) Marginalproductivitytheorywouldsuggestthat
A) allworkersshouldbepaidthesamewage.
B) higherproductivitywillincreasethemarketwageofanindividual.
C) labordemandwillhavenoimpactonthewagepaid.
D) workerscannotdoanythingtoimprovetheirwageprospectsforthefuture.
Answer: B
Diff:1
15) Whichofthefollowingdeterminantsofmarginalproductivitycannotbeacquiredbysomeone
whowantstoincreasefutureproductivity?
A) Education B) Training C) Talent D) Experience
Answer: C
Diff:1
16) Withahumancapitalinvestment(suchastheinvestmentingoingtocollege),themost
importantcosttendstobe
A) foregoneleisure. B) booksandequipment.
C) theopportunitycostofnotworking. D) taxes.
Answer: C
Diff:1
17) Ingeneral,asindividualsundertakeadditionalyearsofschooling,
A) theirstockofhumancapitalincreases.
B) themarginalproductivityofindividualsasworkersdeclines.
C) themarginalbenefittosocietyoftheextrayearsofeducationincreases.
D) themarginalproductivityofindividualsasworkersbecomesnegative.
Answer: A
Diff:1
18) Themostcommontypeofinvestmentinhumancapitalis
A) havingmorechildrenperfamily.
B) themigrationoflaborinsearchofbetterjobs.
C) expandedyearsofschooling.
D) improvedhealthcareandmaintenance.
Answer: C
Diff:1
19) Whatistypicallythemaincostofpursuingacollegeeducation?
A) Tuition B) Roomandboard
C) Booksandsupplies D) Incomeforgonebynotworking
Answer: D
Diff:2
20) Intheabsenceofdiscrimination,ashumancapitalinvestmentsincrease,wageswillgenerally
A) decrease. B) increase.
C) notchange. D) increaseordecrease.
Answer: B
Diff:1
21) Investmentinhumancapital
A) isquitedifferentfromandhasamuchlowerreturnthaninvestmentinphysicalcapital.
B) isjustlikeinvestmentinphysicalcapitalandhasareturnsimilartothatearnedfromother
investments.
C) isjustlikeinvestmentinphysicalcapitalbuthasamuchgreaterreturnthandoother
investments.
D) isnotcomparabletootherinvestmentsinanywaysincehumancapitalisembodiedinthe
person.
Answer: B
Diff:2
22) IntheUnitedStates,inheritanceaccountsforroughly________ofincomeinequality.
Answer: D
Diff:1
23) ThefollowingarealldeterminantsofincomedifferencesexaminedinthetextEXCEPT
A) age. B) marginalproductivity.
C) inheritance. D) height.
Answer: D
Diff:1
24) Mostindividualsincomepeakswhentheyareabout
A) 30. B) 40. C) 50. D) 60.
Answer: C
Diff:1
25) Theage-earningscycleis
A) thedistributionofmoneyincomebyage.
B) thedistributionofwealthbyage.
C) therelationshipbetweenearningswhileworkingandretirementbenefitsforan
individual.
D) theregularearningsprofileofanindividualthroughouthisorherlifetime.
Answer: D
Diff:1
26) Theregularearningsprofileofanindividualthroughouthisorherlifetimeis
A) theLorenzcurve. B) theage-earningscycle.
C) wealth. D) income-in-kind.
Answer: B
Diff:1
27) Whichofthefollowingstatementsarecorrectabouttheage-earningscycle?
A) Earningsgenerallyincreaseuptillage30andthensteadilydecrease.
B) Earningsincreasethroughoutaprisonslifetimeuntiltheyreachretirement.
C) Earningsincreasewithagebecauseworkersbecomemoreproductiveastheyageuntil
around50years.Around50theeffectsofagingoutweighsthefurtherincreasesin
productivity.
D) Sinceeverypersonisdifferentwecanreachnogeneralconclusionsaboutthe
age-earningscycle.
Answer: C
Diff:1
28) Theearningsofmostpeople
A) increasesteadilyuntilretirement.
B) increasewithageuntilaroundage50duetoincreasedexperience,training,andhours
worked.
C) increasewithageuntilaroundage40duetoincreasedexperienceandhoursworked.
D) increasewithageuntilaroundage60duetoincreasedexperience,training,andhours
worked,thenleveloffashoursworkedlevelsoff.
Answer: B
Diff:2
29) Supposeallpeoplehavethesameage-earningsprofileandthepercentofthepopulationineach
agecategoryisthesame.Thedistributionofincomeatanypointintimewillbe
A) equalbecauseallhavethesameprofile.
B) equalbecauseincomesandwealthlevelsmustthenbethesame.
C) unequalbecauseothersourcesofincomewilldiffer.
D) unequalbecauseincomesdifferbyage.
Answer: D
Diff:3
30) Onereasonearningstendtofallbeforeretirementageisthat
A) theexperienceofpeopleisnolongervaluableaftertheyare50or55.
B) peopletendtoreducethenumberofhourstheyworkafterage50.
C) peopleareretiringearlier.
D) firmsdiscriminateagainstolderworkers.
Answer: B
Diff:2
31) Refertotheabovefigure.Whichofthegraphsareconsistentwiththeage-earningsprofile?
Answer: C
Diff:3
32) Inacompetitiveeconomy,workerswillbepaidaccordingtotheir
A) status. B) age.
C) marginalproductivity. D) need.
Answer: C
Diff:1
33) Whichofthefollowingisnotadeterminantofanindividualsmarginalproduct?
A) talent B) moneyincome
C) experience D) educationallevel
Answer: B
Diff:1
34) Whichofthefollowingsourcesofproductivityisthemostdifficulttoacquire?
A) education B) experience C) talent D) training
Answer: C
Diff:1
35) Thereturnonhumancapital
A) tendstobemuchgreaterthanthereturnonphysicalcapital.
B) tendstobemuchlowerthanthereturnonphysicalcapital.
C) issimilartothereturnonphysicalcapital.
D) cannotberelatedtothereturnonphysicalcapitalsincehumancapitalandphysicalcapital
aresodifferent.
Answer: C
Diff:2
36) Themaincostofacollegeeducationis
A) tuitionifonegoestoaprivatecollegeandroomandboardifonegoestoapubliccollege.
B) dependentuponwhetheronesparentspayforthecollegeornot.
C) thelackofpracticalexperiencefromspendingtimeincollege.
D) theopportunitycostofnotworking.
Answer: D
Diff:2
37) Whenmeasuringthebenefitsfrominvestinginhumancapital
A) theonlybenefitscomefromtheincreaseinsalarybecauseofgoingtoschool.
B) inadditiontothemonetarybenefits,thebenefitfromexpandinghorizonsshouldbe
included.
C) wemustincludethecostsoftuitionandbooksbutnotthemoneymadefrompart -time
jobs.
D) wemustincludetheforegoneearningsinthebenefitcalculation.
Answer: B
Diff:1
38) Inheritanceisresponsibleforabout________percentoftheincomeinequalityintheUnited
States.
A) 10 B) 25 C) 40 D) 60
Answer: A
Diff:2
39) Economicdiscriminationexistswhen
A) thereisanunequaldistributionofincomeinacountry.
B) bothincomeandwealthareunequallydistributedinacountry.
C) thereisunequalaccesstoeducation.
D) workerswiththesamemarginalrevenueproductsarepaiddifferentwages.
Answer: D
Diff:1
40) Economicdiscriminationagainstminoritiesexistswhen
A) minoritieshavelesseducationandtrainingthanwhites.
B) minoritiesarepaidlessthanwhitesonaverage.
C) minoritiesarepaidlessthanwhiteswiththesameeducation,experience,andtraining.
D) minoritiesareindifferentoccupationsthanwhites.
Answer: C
Diff:1
41) Unequalpaythatiscausedbyeconomicdiscriminationwillbedueto
A) anoneconomicfactor.
B) differencesinthemarginalrevenueproduct.
C) amonopolisticlabormarket.
D) differenceinhumancapital.
Answer: A
Diff:1
42) Whichofthefollowingisareasonforeconomicdiscriminationtooccur?
A) differencesinaccesstoeducation
B) differencesingender
C) differencesinthequalityofeducation
D) barrierstoentryinhigher-payingoccupations
Answer: B
Diff:1
43) Theage-earningsprofileformostpeopleindicates
A) earningsrisecontinuallyuntilapersonretires.
B) earningsinitiallydeclineandthenrisecontinuallyuntilretirement.
C) thatwhenyouadjustforinflation,earningsareconstantthroughouttheentireworkplace
experience.
D) earningsriseuntiltheageofabout50andthenbegintofalluntilretirement.
Answer: D
Diff:1
44) WhichofthefollowingisNOTconsideredadeterminantofincomedifferences?
A) productivity B) age
C) discrimination D) equityorfairness
Answer: D
Diff:2
45) WhichofthefollowingdoesNOTcontributetothemarginalproductivityofworkers?
A) discrimination B) talent C) experience D) education
Answer: A
Diff:2
46) Inheritanceaccountsforabout
A) 5percentofincomeinequality. B) 10percentofincomeinequality.
C) 15percentofincomeinequality. D) 30percentofincomeinequality.
Answer: B
Diff:2
47) WhichofthefollowingwouldNOTbeconsideredadeterminantofmarginalproductivity?
A) talent B) gender C) experience D) training
Answer: B
Diff:2
48) DeterminantsofincomedifferencesincludeallofthefollowingEXCEPT
A) age. B) marginalproductivity.
C) moralhazard. D) discrimination.
Answer: C
Diff:1
49) Typically,themajorcostofacollegeeducationis
A) tuition. B) books.
C) foregoneincome. D) housing.
Answer: C
Diff:1
50) DeterminantsofthemarginalproductivityoflaborincludeallofthefollowingEXCEPT
A) talent. B) education. C) experience. D) location.
Answer: D
Diff:1
51) Goingtocollegetogetmoreknowledgeandskillsisconsideredtobeanincreasein
A) physicalcapital. B) consumption.
C) humancapital. D) netexports.
Answer: C
Diff:1
52) AllofthefollowingleadtoadifferenceinincomeEXCEPT
A) salestax. B) discrimination.
C) theage-earningscycle. D) marginalproductivity.
Answer: A
Diff:2
53) Onaveragetheproductivityofanindividualusuallypeakswhentheindividualisabout
A) 20. B) 30. C) 50. D) 60.
Answer: C
Diff:1
54) Ifagoalofanationsresidentsistoincreasemarginalproductivity,theyshouldincrease
A) expendituresoneducation. B) theinheritancetax.
C) exports. D) themarginalpropensitytoconsume.
Answer: A
Diff:1
55) AllofthefollowingcontributetoincomeinequalityEXCEPT
A) differencesineducationandtraining. B) differencesinjobtastes.
C) differencesintalent. D) governmenttransferprograms.
Answer: D
Diff:1
56) Thetypicalage-earningscycleshowsthat
A) thereisapositiverelationshipbetweenageandearningsthateventuallyturnsintoa
negativerelationship.
B) thereisaconstantpositiverelationshipbetweenageandearnings.
C) thereisaconstantnegativerelationshipbetweenageandearnings.
D) thereisnorelationshipbetweenageandearnings.
Answer: A
Diff:1
57) Theage-earningscycleisanearningsprofileofanindividualthroughoutthepersonslifetime.
Theprofileshowsthat
A) earningsusuallypeakatage25andthendecline.
B) earningsgraduallyriseuntiltheypeakaroundage50.
C) earningsandagehavenoparticularcorrelation.
D) youngerworkershavethemostproductivity.
Answer: B
Diff:2
58) Theopportunitycostofgoingtocollegeforastudentreceivingascholarship
A) istheincomethatshewouldhaveearnedifshedidnotgotocollege.
B) istheriskofdroppingout.
C) isthefoodandlivingexpensesthatshehastopurchasewhileincollege.
D) iszerobecauseshedoesnothavetopaytuition.
Answer: A
Diff:1
59) Whydoesnttheage-earningcyclecontinuouslyincreaseuntilretirementage?
Answer: Thetypicalworkerseesadeclineinearningsasheorsheapproachesretirementbecause
peopletendtoreducetheirhoursworked,andhavelowerstaminaandstrength.The
detrimentaleffectsofagingtendtoovercometheincreasesinproductivitydueto
experienceandtraining.
Diff:2
60) Whatistheage-earningscycle?Whatisthetypicalage-earningsprofileforaU.S.resident?
Answer: Theage-earningscycleistheregularearningsprofileofanindividualthroughouthisor
herlifetime.Itusuallystartswithalowincome,buildsgraduallytoapeakataroundage
50,andthengraduallycurvesdownuntilretirementage,atwhichtimeitapproaches
zero.
Diff:1
61) Earningsusuallyreflectapersonsproductivity.Whatarefactorsthatcausedifferencesin
productivityacrosspeoplesothatearningsdiffertoo?
Answer: Productivitydifferencesreflectdifferencesintalent,training,experience,andhuman
capital.Peoplewithmoretrainingorexperienceearnmore,asdopeoplewithmore
humancapital.Finally,somepeoplejusthaveagreaterabilityforcertainthingsandthis
makesthemmoreproductive.
Diff:1
62) Thetypicalage-earningcycleprovidesevidenceofeconomicdiscriminationbyage.Doyou
Answer: Disagree.Thetypicalage-earningcyclestartswithalowincome,buildsgraduallytoa
peakataroundage50,andthengraduallydropsuntilitapproacheszeroatretirement.
Thevariationsofearningbyage,however,reflectmanyeconomicfactorsotherthanage,
includingworkexperienceandproductivity,andthenumberofhoursperweekthatare
worked.Therefore,theage-earningcyclealoneisnotevidenceofagediscrimination.
Diff:2
30.3TheoriesofDesiredIncomeDistribution
1) Theproductivitystandardforthedistributionofincomecanbethoughtofas
A) rewardingpeopleaccordingtotheirabilitytoproduceusefulgoods.
B) benefitingonlytheleastproductiveworker.
C) provingthategalitariansarecorrect.
D) rewardingonlythewealthy.
Answer: A
Diff:2
Topic: 30.3TheoriesofDesiredIncomeDistribution
2) Oneproductivitystandardforincomedistributionstatedinthetextis
A) incomedistributionshouldbebasedoncontributiontosocietystotaloutput.
B) taxpaymentsarehigherforhigherincomepeople.
C) poorpeoplepaytoomuchintaxes.
D) thepoorshouldcontributemoretosociety.
Answer: A
Diff:2
3) Thecontributivestandard(meritstandard)fordistributingincomeimpliesthat
A) incomeshouldbedistributedequally.
B) incomeshouldbedistributedaccordingtoneed.
C) incomeshouldbedistributedaccordingtothemarginalproductivityofworkers.
D) atransfershouldbecontributedtoanindividualabovehisorhercontributiontonet
output.
Answer: C
Diff:1
4) Thecontributivestandardofincomedistributionismetby
A) settingwagesaccordingtomarginalproductivity.
B) havingahighlyprogressiveincometax.
C) havingthegovernmentdetermineallwages.
D) usinglocalcommitteestodeterminetheneedsoffamiliesinthearea.
Answer: A
Diff:3
5) Theegalitarianprincipleofincomerefersto
A) eachpersonbeingpaiddifferently.
B) eachpersonreceivingthesameincome.
C) eachpersonreceivingtaxbreaks.
D) eachpersonworkingthesamenumberofhours.
Answer: B
Diff:1
6) Toeachexactlythesamerefersto
A) theproductivitystandard. B) thefreemarketdoctrine.
C) theegalitarianprinciple. D) theLorenzcurve.
Answer: C
Diff:1
7) Amajorproblemwithusingtheegalitarianprincipletodistributeincomeisthat
A) itwouldeliminatetheincentivesthatrewardsprovideinaneconomicsystem.
B) itisdifficulttoknowwhenanequaldistributionofincomehasbeenachieved.
C) itwouldnotbefairtothewealthy.
D) thereexistnomechanismstocarryoutsuchascheme.
Answer: A
Diff:2
8) Ifincomeweredistributedaccordingtotheegalitarianprincipleoftoeachexactlythesame,
thenoneproblemwouldbethat
A) therewouldbelittleornoincentiveforindividualstotakerisky,hazardous,orunpleasant
jobs.
B) individualswouldhaveanexcessdesiretoinvestintheirownhumancapital.
C) toomanyindividualswouldwanttotakeriskyjobs.
D) productivitylevelswouldprobablybecometoohigh.
Answer: A
Diff:1
9) Theproductivitystandardsays
A) thateveryoneshouldhaveexactlythesameincome.
B) thattheage-earningscycleshoulddetermineincome.
C) thatpeopleshouldbecompensatedonthebasisofwhattheyproduce.
D) thatpeopleshouldbecompensatedonthebasisoftheirneed.
Answer: C
Diff:1
10) Theegalitarianprinciplerefersto:
A) Toeachaccordingtoherneed. B) Toeachexactlythesame.
C) Toeachaccordingtoherproductivity. D) Toeachaccordingtohisability.
Answer: B
Diff:1
11) Themeritstandardrefersto:
A) Toeachaccordingtoherneed. B) Toeachexactlythesame.
C) Toeachaccordingtoherproductivity. D) Toeachaccordingtohisability.
Answer: C
Diff:1
12) Theegalitarianprinciplesays
A) thateveryoneshouldhaveexactlythesameincome.
B) thattheage-earningscycleshoulddetermineincome.
C) thatpeopleshouldbecompensatedonthebasisofwhattheyproduce.
D) thatpeopleshouldbecompensatedonthebasisoftheirneed.
Answer: A
Diff:1
13) Thebeliefthateveryoneshouldhaveexactlythesameamountofincomeis
A) meritstandard. B) comparable-worthdoctrine.
C) egalitarianprinciple. D) Lorenzprinciple.
Answer: C
Diff:1
14) Ifweweretopayeveryoneexactlythesameincome
A) therewouldbealargeamountofeconomicgrowth.
B) therewouldbenoincentivetoinvestinhumancapital.
C) morepeoplewouldseekaneducation.
D) productivitywouldincrease.
Answer: B
Diff:1
15) Whichofthefollowingisconsideredacontributivestandardforthedistributionofincome?
A) rewardingworkersaccordingtotheirproductivity
B) rewardingworkersaccordingtotheirneeds
C) rewardingworkersaccordingtothenumberoftheirdependents
D) alloftheabove
Answer: A
Diff:2
16) Ifanemployerpaysemployeesaccordingtothevolumeofbusinessrevenuetheyindividually
generate,thentheemployerisapplyingthe
A) productivitystandard. B) meritstandard.
C) contributivestandard. D) alloftheabove
Answer: A
Diff:2
17) Meritisjudgedbyonesabilitytoproduce
A) whatisconsideredusefulbysociety. B) whatisconsideredvaluablebysociety.
C) whatisconsideredbeneficialtosociety. D) alloftheabove
Answer: D
Diff:1
18) Wemeasureapersonsproductivecontributioninamarketsystemby
A) themarginalfactorcosttheoryofthefirm.
B) theprofitmaximizationtheoryofthefirm.
C) themarginalrevenueproducttheoryofwagedetermination.
D) theegalitariantheoryofwagedetermination.
Answer: C
Diff:1
19) WhichofthedistributivestandardsdoesNOT involveavaluejudgment?

A) Productivitystandard
B) Egalitarianstandard
C) Meritstandard
D) Allofthestandardsinvolvevaluejudgments.
Answer: D
Diff:2
20) WhichofthefollowingisNOTanormativestandardforincomedistribution?
A) theproductivitystandard
B) theegalitarianprinciple
C) rewardingpeopleaccordingtomerit
D) Alloftheabovearenormativestandards.
Answer: D
Diff:2
21) Ifyoubelievethataworkershouldbepaidonthebasisofwhatheorsheproduced,youbelieve
in
A) theegalitarianprinciple. B) theproductivitystandard.
C) thebenefitsstandard. D) thecomparativeworthprinciple.
Answer: B
Diff:2
22) Ifyoubelievethatallworkersshouldbepaidthesame,youbelieveinthe
A) egalitarianprinciple. B) productivitystandard.
C) benefitsstandard. D) comparativeworthprinciple.
Answer: A
Diff:2
23) TheideathattheLorenzcurveshouldbealongthe45degreelineisconsistentwith
A) theproductivitystandard. B) theegalitarianprinciple.
C) theconservativeprinciple. D) noneoftheabove.
Answer: B
Diff:2
24) WhichofthefollowingisNOTcorrectregardingthetheoriesofincomedistribution?
A) Dealingwithhowincomeought tobedistributedisanormativeissue.
B) Theproductivitystandardforthedistributionofincomeisstatedtoeachaccordingto
whattheyproduce.
C) Theegalitarianprincipleofincomedistributionistoeachexactlythesame.
D) Dealingwithhowincomeshould bedistributedisapositiveeconomicissue.
Answer: D
Diff:2
25) Toeachaccordingtowhatheorsheproducesdescribesthe________theoryofincome
determination.
A) productivity B) egalitarian C) equity D) needs
Answer: A
Diff:2
26) Apersonsproductivecontributioninacapitalistsocietyismeasuredbydeterminingthe
A) marketvalueoftheindividualsoutput.
B) comparableoutputofotherworkersinsimilarjobs.
C) totalnumberofgoodsproducedbytheindividual.
D) indexofoccupationalvalues.
Answer: A
Diff:2
27) Explainthetwotheoriesofdesiredincomedistribution:theegalitarianprincipleandthe
productivitystandard.
Answer: Theegalitarianprinciplesuggeststhatincomeshouldbedistributedequallyacrossall
individualsinsociety.Theproductivitystandardsuggeststhatpeopleshouldbe
rewardedaccordingtomerit,withmeritbeingjudgedbyonesabilitytoproducewhatis
consideredvaluedbysociety.
Diff:2
28) Compareandcontrastthetwonormativestandardstoincomedistributiondiscussedinthetext:
Theproductivitystandardandtheegalitarianprinciple.
Answer: Theproductivitystandardisalsocalledthecontributivestandardorthemeritstandard.
Peoplearerewardedaccordingtomerit,wheremeritisdeterminedbyonesabilityto
producewhatisconsideredusefulbysociety.Theegalitarianprinciplewoulddistribute
incomeequally.Thetwoprinciplesareverydifferentsincetheformerwillgeneratean
unequaldistributionofincomeandthelatteranequaldistributionofincome.Theyalso
differgreatlyinincentivestructure.Theegalitarianprincipleprovidesnoincentivesfor
doingworkthatisunpleasantorforbearingrisk.
Diff:2
30.4PovertyandAttemptstoEliminateIt
1) ThelowestpercentageoftheU.S.populationinpovertyisfoundwhenusingwhich
measurementofhouseholdresources?
A) Privateincomeonly
B) Privateincomepluscashbenefits
C) Privateincomewithcashandin-kindbenefits
D) PrivateincomewithSocialSecuritypaymentssubtracted
Answer: C
Diff:1
Topic: 30.4PovertyandAttemptstoEliminateIt
2) TheSocialSecuritysystemisfinancedby
A) ataxonindividualretirementaccounts.
B) apayrolltaxpaidonlybyemployers.
C) apayrolltaxpaidbybothemployersandemployees.
D) ataxonluxurygoods.
Answer: C
Diff:2
3) TheSocialSecuritysystemisa(n)
A) advaloremsystem. B) abilitytopaysystem.
C) progressivetaxsystem. D) pay-as-you-gosystem.
Answer: D
Diff:1
4) ThegovernmentfinancesSocialSecuritythrough
A) excisetaxes. B) payrolltaxes.
C) thesaleofgoodsandservices. D) statetaxes.
Answer: B
Diff:1
A) TheSocialSecurityprogramfunnelstransfersfromretiredindividualstotheyoungest
childrenoflow-incomefamilies.
B) SocialSecurityisanentitlementwhichisavailabletoeveryone,includingthosewhohave
notcontributedtothefundduringtheiractiveworkyears.
C) SocialSecuritybenefitsarereceivedbypeoplewhohadcontributedtothefundduring
theiractiveworkyears.
D) Asapublictransferpayment,SocialSecuritybenefitisavailableonlytothepoor.
Answer: C
Diff:2
6) TheSocialSecurityFundisdesignedas
A) apay-as-you-gosystem.
B) aninvestmentportfoliothatindividualcontributorscanmakeperiodicpaymentsinto.
C) anaccountthatallowsperiodicwithdrawalsbycontributors.
D) anindividualaccountwithafederalreservebank.
Answer: A
Diff:1
7) SocialSecurityisapuretransferprogrambecause
A) ittransfersfundsfromcurrentworkerstothepoor.
B) thegovernmenttransfersfundsfrommiddle-incomeworkerstowelfarerecipients.
C) currentpayrolltaxesareusedtopaytheeligibleretirees.
D) thegovernmentsubsidizesthemedicalbillofthepoor.
Answer: C
Diff:2
8) SinceSocialSecurityisapay-as-you-goprogram,thefundsforthepeopleretiringtoday
A) comefromthoseofusworkingtodayandinthefuture.
B) comefromtheFederalReserve.
C) comefromimporttaxes.
D) comefromforeignsalesofgold.
Answer: A
Diff:2
9) TheoriginalimpetusforSocialSecuritywas
A) toprovideretirementfundforallpersons.
B) topreventfuturedepressions.
C) theresultofsocialengineeringbypoliticians.
D) aproperresponsetothestockmarketcrashof1929.
Answer: A
Diff:1
10) Theofficialpovertylevelisbasedon
A) totalnetworth.
B) pretaxincome,andincludescashsubsidiesbutdoesnotincludein -kindsubsidiessuchas
foodstamps.
C) after-taxincome,andincludesbothcashandin -kindgovernmentsubsidies.
D) wagesandsalaries,plusanyunreportedamountsofincomefromtheunderground
economy.
Answer: B
Diff:1
11) Thethresholdincomeleveloriginallyusedtodetermineofficialpovertystatisticswasbasedon
A) anincomethreetimestheamountofmoneyneededtopurchaseanutritionallyadequate
diet.
B) standardsprovidedbytheUnitedNationsbasedonstudiesdoneinpoorcountriesaround
theworld.
C) thehighestincomeofthelowestone-fifthoffamiliesinthecountry.
D) apercapitaincomeof$1,000in1958prices.
Answer: A
Diff:1
12) WhichofthefollowingCANNOTbeeliminatedinagrowingeconomysuchastheU.S.
economy?
A) absolutepoverty
B) relativepoverty
C) bothabsoluteandrelativepoverty
D) Neitherabsolutenorrelativepovertycanbeeliminated.
Answer: B
Diff:2
13) Whenpovertyisdefinedbyanabsoluterealincomelevel,whatwillhappentothepovertyrate
ifincomepercapitainacountrycontinuestogrow?
A) Thepovertyratewillincreaseforever.
B) Thepovertyratewilleventuallybezero.
C) Thepovertyratewillincreaseandthendecrease.
D) Thepovertyratewillneverchange.
Answer: B
Diff:2
14) Whenpovertyisdefinedbyanrelativerealincomelevel,whatwillhappentothepovertyrateif
thedistributionofincomeisnotperfectlyequal?
A) Thepovertyratewillincreaseforever.
B) Thepovertyratewilleventuallybezero.
C) Thepovertyratewillalwaysremainconstant.
D) Thepovertyratewillchange,butalwaysexist.
Answer: D
Diff:2
15) Relativepoverty
A) hasbeeneliminatedintheUnitedStates.
B) willalwaysbewithus.
C) hasneverexistedintheUnitedStates.
D) canbeeliminatedinthenext20years.
Answer: B
Diff:1
16) Relativepovertyrefersto
A) howafamilysincomecomparestotheincomesofthosearoundthem.
B) povertylevelsatastatedincomecutoff.
C) thenumberofpoorinonestaterelativetoanother.
D) Noneoftheabove.
Answer: A
Diff:2
17) Ifweincludecashbenefitsandin-kindbenefitsavailabletolow-incomepeople,theshareofthe
U.S.populationinpoverty
A) dropsdramatically. B) increasessomewhat.
C) increasesdramatically. D) doesnotchange.
Answer: A
Diff:2
18) Ifanindividualreceivesin-kindtransfersfromthegovernmentintheformoffoodstamps,
publichousing,andsoon,hismoneyincomeis
A) lessthanhistotalincome.
B) greaterthanhistotalincome.
C) thesameashistotalincome.
D) equaltohisin-kindincomeplushiswages.
Answer: A
Diff:1
19) WhichofthefollowingstatementsabouttheSocialSecurity(OASDI)programisFALSE?
A) Benefitsarepaidtoindividualswhowouldbefinanciallysecureintheirabsence.
B) Benefitsarebasedonneed.
C) Benefitsareanintergenerationaltransferprogramfromthosewhoworktothosewho
dontwork.
D) Whenaninsuredworkerdies,benefitscontinueforwidowsorotherdependents.
Answer: B
Diff:1
20) WhichofthefollowingstatementsisanaccuratestatementabouttheSocialSecurity(OASDI)
program?
A) Theprogramisfinancedbyvoluntarycontributions.
B) Only50percentofworkersarecoveredbyOASDI.
C) Benefitsarebasedonfinancialneed.
D) Theprogramtransfersincomefromthosewhoworktothosewhodonotwork.
Answer: D
Diff:1
21) WhichofthefollowingstatementsaboutSocialSecurityisFALSE?
A) SocialSecurityisanintergenerationaltransferwherethebenefitspaidareonlyroughly
relatedtopastearnings.
B) Over90percentofallemployedworkersintheUnitedStatesarecoveredbySocial
Security.
C) BenefitpaymentsunderSocialSecurityarebasedontherecipientsneed.
D) BenefitpaymentsunderSocialSecurityredistributeincomefromyoungtoold.
Answer: C
Diff:1
22) WhichofthefollowingstatementsabouttheSupplementalSecurityIncome(SSI)programis
FALSE?
A) Itisdesignedtoestablishnationwideminimumincomesfortheaged,theblind,andthe
disabled
B) Benefitsarebasedonneed.
C) RecipientswhoreceivebenefitpaymentsunderSocialSecurityarealsoeligibleforSSI.
D) Itcoverschildrenandindividualswithmentaldisabilities,includingdrugaddictsand
alcoholics.
Answer: C
Diff:1
23) WhichofthefollowingstatementsabouttheEarnedIncomeTaxCreditProgram(EITC)
programisFALSE?
A) OnnettheEITCdiscouragesworkbylow- ormoderate- incomeearnersmorethanit
rewardswork.
B) ItprovidesrebatesofSocialSecuritytaxestolow-incomeworkers.
C) RecipientswhoreceivebenefitpaymentsunderSocialSecurityarealsoeligibleforSSI.
D) ItisthelargestpovertyreductionprogramintheU.S..
Answer: C
Diff:1
24) AllofthefollowingaresocialinsuranceprogramsdesignedtoattackpovertyEXCEPT
A) SocialSecurity. B) temporaryassistancetoneedyfamilies.
C) foodstamps. D) tuitionassistance.
Answer: D
Diff:2
25) Whichofthefollowingincomemaintenanceprogramsisdesignedtoestablishnationwide
minimumincomesfortheaged,theblind,andthedisabled?
A) TheOld-AgeSurvivorsandDisabilityInsurance(OASDI)program
B) TheSupplementalSecurityIncome(SSI)program
C) TheTemporaryAssistancetoNeedyFamilies(TANF)program
D) Thefoodstampsprogram
Answer: B
Diff:1
26) UndertheSocialSecurityprogramcurrentlyinexistence,
A) benefitsarebasedonneed.
B) benefitsaredeterminedbywhetherornotonecontributedtothesystem.
C) benefitsareprovidedtoeveryonewhocontributedtothesystemEXCEPTthoseunder
privateretirementprogramsthatprovideanannualincomeinexcessof$13,500.
D) benefitsareguaranteedtobenolowerforfutureretireesthanforcurrentretirees.
Answer: B
Diff:3
27) ThefundspaidtothegovernmenttodayforSocialSecuritytaxesare
A) investedtoprovideforthefuturebenefitsofthetaxpayers.
B) savedtoensuresufficientresourcesinthefuturetopaythebenefitsofworkerstoday
whentheyreachretirementage.
C) usedbythegovernmenttopurchasegoodsandservicesthatwillenhancethefuture
productivityofbusinessinthecountry.
D) usedtopaythebenefitsofthosewhoarecurrentlyretired.
Answer: D
Diff:2
28) ThepurposeoftheSupplementalSecurityIncomeprogramis
A) toprovideaminimumincomeforallhouseholdswithchildren.
B) toprovideaguaranteedminimumincomeforallAmericans.
C) toprovideaminimumincomefortheaged,blind,andthedisabled.
D) tosupplementSocialSecurityfortheelderlywithmedicalproblems.
Answer: C
Diff:2
29) ThepurposeoftheTemporaryAssistancetoNeedyFamiliesprogramis
A) toproviderebatesofSocialSecuritytaxestolow-incomeworkers.
B) toprovidecashassistanceandsupportiveservicestoassistthefamily,helpingthem
achieveeconomicself-sufficiency.
C) toprovideaminimumincomefortheaged,blind,andthedisabled.
D) tosupplementSocialSecurityfortheelderlywithmedicalproblems.
Answer: B
Diff:2
30) Currentincomemaintenanceprograms
A) oftenprovidebenefitstopeoplewhoareworkingandearningsubstantiallymorethanthe
povertylevel.
B) reducetheincentiveofrecipientstowork.
C) havesafeguardstoensurethatrecipientsworkwheneverphysicallyable.
D) failtomaketheincomedistributionmoreequal.
Answer: B
Diff:2
31) ThepurposeoftheEarnedIncomeTaxCreditProgram(EITC)isto
A) providerebatesofSocialSecuritytaxestolow-incomeworkers.
B) encouragelow-andmoderate-incomeworkerstotakesecondjobstoincreasetheir
income.
C) providein-kindservicessuchasfoodstampsandpublichousingtothoseindividualswho
havepoorcredit.
D) givetaxcreditstolow-incomeindividualswhodovolunteerworkintheircommunities.
Answer: A
Diff:1
32) TheofficialnumberofpoorintheUnitedStates
A) ishighertodaythanatanyothertimeinourhistory.
B) hasrisensteadilysince1981.
C) waslowestinthelate1960s.
D) islowesttoday.
Answer: C
Diff:1
33) Originally,thethresholdincomelevelusedtodetermineofficialpovertystatisticswasbasedon
A) apercapitaincomeof$3000in1955prices.
B) thelowestincomeofthesecondquartileoffamiliesinthecountry.
C) anincomethreetimesgreaterthannecessarytopurchaseanutritionallyadequatediet.
D) figuresdevelopedbyacommitteeintheAmericanEconomicAssociation.
Answer: C
Diff:1
A) Agrowingeconomyshouldseeadeclineinrelativepovertybutnotinabsolutepoverty.
B) Agrowingeconomyshouldseeadeclineinabsolutepovertybutnotinrelativepoverty.
C) Agrowingeconomyshouldseeadeclineinbothabsoluteandrelativepoverty.
D) Agrowingeconomyisusuallyunrelatedtochangesineitherabsoluteorrelativepoverty.
Answer: B
Diff:2
A) TheofficialabsolutepovertylevelintheUnitedStatesisfarabovetheaverageincomeof
manycountriesintheworld.
B) Inarelativesense,theproblemofpovertywillalwaysexist.
C) Anequaldistributionofincomewouldeliminaterelativepoverty.
D) Anequaldistributionofincomewouldeliminateabsolutepoverty.
Answer: D
Diff:3
36) Manyarguethepooraregettingpoorer,atleastinarelativesense.Evidencethatcontradicts
thisisthat
A) householdincomeofthelowesttwentypercentofhouseholdsrelativetothehighest
twentypercentofhouseholdshasfallenoverthelastthirtyyears.
B) theofficialpovertylevelofincomehasincreasedovertheyears.
C) householdspendingofthelowesttwentypercentofhouseholdsrelativetothehighest
twentypercentofhouseholdshasheldconstantoverthelastthirtyyears.
D) thepretaxdistributionofincomeismoreequalthantheafter-taxdistributionofincome.
Answer: C
Diff:3
37) Theofficialpovertylevelisbasedonpretaxincomeincludingcash.Whichofthefollowing
statementsiscorrectregardingthisofficialspecificationofpoverty?
A) Thisisagooddefinitionofpovertysinceitismadeupoftheincomefromproductive
resources.
B) Thisisnotagooddefinitionofpovertybecauseourtaxstructureconsistsofdifferenttax
bracketsbasedonincome.
C) Thisisnotagooddefinitionofpovertybecauseitdoesnotincludein-kindsubsidies.
D) Thisisagooddefinitionofpovertybecauseitiseasytomeasure.
Answer: C
Diff:1
38) SocialSecurityis
A) aninsuranceprogramoperatedbythefederalgovernment.
B) aretirementprogramthatinveststhepersonscontributionsintointerest-earningfinancial
assetssotheproceedscanfundthepersonsretirement.
C) asocialinsuranceprogramthatguaranteesthatanelderlypersonwillneverfallbelowthe
povertylevel.
D) anintergenerationaltransferprogramthatonlyvaguelyrelatestopastearnings.
Answer: D
Diff:1
39) TheincometransfersthatapersonreceivesfromSocialSecurity
A) isnotrelatedtotheamountthattheyhavecontributed.
B) isayearlyproportionoftheamountcontributed.
C) isthesameforeveryonewhethertheycontributedtothesystemornot.
D) dependsentirelyontheamountreceivedfromprivatepensions.
Answer: A
Diff:1
40) Whichprogramprovidesassistancetotheaged,blindanddisabled?
A) SocialSecurityProgram B) SupplementalSecurityIncomeprogram
C) TANF D) EarnedIncomeTaxCredit
Answer: B
Diff:2
41) Thegovernmentprogramthatprovidesaidtofamiliesinneedis
A) TANF.
B) SocialSecurityprogram.
C) SupplementalSecurityIncomeprogram.
D) EarnedIncomeTaxCredit.
Answer: A
Diff:1
42) Whichincomemaintenanceprogramwasstartedtosupportthenationsfarmers?
A) SupplementalSecurityIncome B) FoodStamps
C) EarnedIncomeTaxCreditProgram D) AFDC
Answer: B
Diff:2
43) TheprogramthatwascreatedtoproviderebatesofSocialSecuritytaxestolow -incomeworkers

is
A) SupplementalSecurityIncome. B) FoodStamps.
C) EarnedIncomeTaxCreditProgram. D) TANF.
Answer: C
Diff:2
44) SincetheWaronPovertywasstartedin1965,theUnitedStateshasspentmorethan$12trillion
onincomemaintenanceprograms.Theeffecthasbeento
A) reducepovertylevelssubstantially.
B) reducepovertylevelsmoderately.
C) havevirtuallynoeffectonpovertylevels.
D) increasepovertysubstantially.
Answer: C
Diff:2
45) Inanattempttoreducethepovertyrate,therehasrecentlybeenamovementawayfromincome
maintenanceprogramsto
A) SupplementalSecurityIncomeprograms.
B) reducingtheageapersoncanretireat.
C) encouragingpeopletogetjobs.
D) incorporatingtheLorenzpolicyindecisions.
Answer: C
Diff:1
46) TheUSDAthresholdincomelevelwasoriginallybasedonthecostof
A) housing. B) transportation.
C) basicclothing. D) anutritionallyadequatefoodplan.
Answer: D
Diff:1
47) WhichofthefollowinggroupsofU.S.residentswouldlikelyqualifyforSSIbenefits?
A) collegestudents B) incarceratedmurderers
C) thedisabled D) newfederalretirees
Answer: C
Diff:2
48) The________programwascreatedin1975toproviderebatesofSocialSecuritytaxesto
low-incomeworkers.
A) foodstamp B) SSI C) TANF D) EITC
Answer: D
Diff:1
49) WhichofthefollowingstatementsisFALSEregardingthedefinitionofpoverty?
A) Athresholdincomelevelisusedtodefinepoverty.
B) AdjustmentstothepovertylevelaremadeonthebasisofchangesintheConsumerPrice
Index.
C) RealincomesintheUnitedStateshavebeengrowingatacompoundedannualrateof
almost2percentpercapita.
D) Povertycannotbedefinedinrelativeterms.
Answer: D
Diff:1
50) Inagrowingeconomy,itispossibletoeliminate
A) absolutepoverty. B) relativepoverty.
C) bothabsoluteandrelativepoverty. D) eitherabsolutenorrelativepoverty.
Answer: A
Diff:2
51) AllofthefollowingaregovernmentaleffortstodecreasepovertyEXCEPT
A) SupplementalSecurityIncome B) theearnedincomeprogram.
C) transferpayments. D) tariffs.
Answer: D
Diff:1
52) TheofficialpovertyrateintheUnitedStatesincludes
A) lessthan5percentofthepopulation.
B) between10and15percentofthepopulation.
C) between20to25percentofthepopulation.
D) over35percentofthepopulation.
Answer: B
Diff:2
53) ThepovertyincomethresholdintheUnitedStateswasoriginallycalculatedby
A) multiplyinganutritionallyadequatefoodplanforemergencyuseby4.
B) multiplyinganutritionallyadequatefoodplanforemergencyuseby2.
C) multiplyinganutritionallyadequatefoodplanforemergencyuseby3.
D) multiplyinganutritionallyadequatefoodplanforemergencyuseby5.
Answer: C
Diff:2
54) WhichofthefollowingisNOTaprogramdesignedtoattackpoverty?
A) SupplementarySecurityIncome B) foodstamps
C) SocialSecurity D) federalcorporateincometax
Answer: D
Diff:1
55) Officialpovertyratesinthelast40yearshave
A) fallendramatically. B) risendramatically.
C) stayedroughlythesame. D) beeneliminated.
Answer: C
Diff:2
56) Theofficialdefinitionofpovertyis
A) exactlythe12percentofU.S.residentswiththelowestincomes.
B) exactlythe20percentofU.S.residentswiththelowestincomes.
C) anabsolutemeasure.
D) arelativemeasure.
Answer: D
Diff:1
57) Thefederalgovernmentbeganofficiallymeasuringpovertyinthe
A) 1860s. B) 1900s. C) 1930s. D) 1960s.
Answer: D
Diff:1
58) Theincidenceofabsolutepovertyisreducedby
A) annualrecalculationsofthepovertyline.
B) governmentwelfareprograms.
C) economicgrowth.
D) thesizeofthebudgetdeficit.
Answer: C
Diff:1
59) AllofthefollowingaimtoreduceincomeinequalityEXCEPT
A) SocialSecuritypayments. B) earnedincometaxcredits.
C) regressivetaxes. D) foodstampprograms.
Answer: C
Diff:1
60) Attemptstoalleviatepovertyhaveincludedallofthefollowingincome -maintenanceprograms

EXCEPT
A) SocialSecurity. B) temporaryassistancetoneedyfamilies.
C) 401(k)plans. D) foodstamps.
Answer: C
Diff:1
61) Someeconomistsarguethattheofficialpovertyfiguresoverstatepovertyinthiscountry.Why?
Answer: Officialpovertyfiguresdonotincludein-kindsubsidies,whichwouldliftsomepeople
abovetheofficialpovertycutoff.Theyalsodonotincludeincomefromtheunderground
economy.Someonewhoworksforcashanddoesnotreportittothegovernmenthasa
higherincomethanofficialstatisticsindicate.
Diff:2
62) Howcanabsolutepovertybeeliminated?Howcanrelativepovertybeeliminated?Doesthe
eliminationofoneleadtotheeliminationoftheother?Explain.
Answer: Absolutepovertycanbeeliminatedbyeconomicgrowththatliftsallfamiliesabovethe
povertylevel.Relativepovertycanbeeliminatedbyaperfectlyequaldistributionof
income.Eliminatingonedoesnoteliminatetheother.Ifincomesrisesothatnooneis
belowthepovertylevel,buthigherincomesrisefaster,relativepovertymayincrease.If
everyoneearnsasubsistenceincome,thereisnorelativepovertybuteveryone
experiencesabsolutepoverty.
Diff:2
63) DescribefourofthefivemajorincomemaintenanceprogramsintheUnitedStatesthatwere
discussedinthetext.
Answer: TheSocialSecurityprogramhashelpedmaintainincomefortheelderly,whilethe
SupplementalSecurityIncomeandTemporaryAssistancetoNeedyFamilieshave
providedbenefitsforthosewhodonotqualifyforSocialSecurity.Foodstampssubsidize
foodconsumptionformanypeople,andtheEarnedIncomeTaxCreditProgramprovides
rebatesofSocialSecuritytaxestolow-incomeworkers.
Diff:1
30.5HealthCare
1) Whichofthefollowingisconsideredathirdpartywithinthemedicalservicesindustry?
A) Thepatient B) Theprivateinsurancecompany
C) Thefor-profithospital D) Themedicalprovider,i.e.physician
Answer: B
Diff:1
Topic: 30.5HealthCare
2) Accordingtothetext,governmentspendingaccountsforabout________percentofallU.S.
healthcareexpenditures.
A) 70 B) 10 C) 30 D) 40
Answer: D
Diff:1
3) AnimportantcontributortorisingU.S.healthcarecostsinrecentyearsis
A) lessinterestonthepartofAmericanstostayphysicallyfit.
B) theincreasingproportionofthepopulationthatsmokes.
C) aneasingofstandardsatmedicalschoolsthathaspermittedunqualifiedpeopletobecome
physicians.
D) theagingofthepopulation.
Answer: D
Diff:2
4) Thepercentageofnationalincomespentonhealthcare
A) hassteadilydecreasedsince1965.
B) hassteadilyincreasedsince1965.
C) increaseduntiltheendofthe1970sandthendecreasedinthe1980sand1990s.
D) decreaseduntiltheendofthe1970sandthenincreasedinthe1980sand1990s.
Answer: B
Diff:1
5) Theimpactoftechnologicalchangeinthehealthcareareahasbeento
A) reducethequalityofhealthcarewhileraisingthecosts.
B) reducethecostofhealthcare.
C) increasethequalityofhealthcarewhiledecreasingthecosts.
D) increaseboththequalityofhealthcareandthecostsofhealthcare.
Answer: D
Diff:2
6) Aproblemwiththird-partyfinancingofsomuchofhealthcareisthat
A) itreducesthequalityofhealthcarereceivedbymostpeople.
B) itdiscouragesphysiciansfromgettingsecondopinionsandrunningenoughteststobe
suretherightprocedureisfollowed.
C) itcausesthedemandformedicalservicestoincrease,whichcauseshealthcarecoststo
increase.
D) itdiscouragespeoplefromrelyingonthejudgmentsofphysiciansinmakingdecisions
abouthealthcare.
Answer: C
Diff:3
7) AmongthereasonsthathealthcareexpenditureshavegrownsorapidlyintheUnitedStates
overthelasttwodecadesareallofthefollowingEXCEPT
A) anemphasisonwellnessprogramsandpreventivemedicine.
B) theagingoftheU.S.population.
C) expensivenewmedicaltechnologies.
D) third-partyfinancing.
Answer: A
Diff:1
8) Anindividualwithnodeductibleonhisorherhealthinsurancepolicywilltendtoengageina
lifestylethatislesshealthythanapersonwitha$2,000insurancedeductible.Thisissaidtobea
problemof
A) healthyselection. B) moralhazard.
C) wellnesstraining. D) blue-zoning.
Answer: B
Diff:1
9) Thetop5percentofhealthcareusersintheUnitedStatesaccountfor
A) 30percentofallhealthcosts. B) over50percentofallhealthcosts.
C) over75percentofallhealthcosts. D) almost90percentofallhealthcosts.
Answer: B
Diff:2
10) Whichofthefollowingisnot areasonforrisinghealthcareexpendituresintheUnitedStates

overthelast40years?
A) Agingofthepopulation
B) Technologicalchange
C) Third-partyfinancingofhealthcareexpenditures
D) Discoveryofnewdiseases
Answer: D
Diff:2
11) Theimpactoftechnologicalchangeinthehealth-careareahasbeento
A) increaseboththequalityofhealthcareandthemonetarycostsofhealthcare.
B) increasethemonetarycostsofhealthcareanddecreasethequalityofhealthcare.
C) decreasethemonetarycostsofhealthcarewhiledecreasingthequalityofhealthcare.
D) increaselongevitybutdecreasequalityoflife.
Answer: A
Diff:2
12) Risinghealthcarespendingisaproblemconfrontingthefederalgovernmentbecause
A) itisthegovernmentsjobtomakesureeveryonereceivesthehealthcaretheyneed.
B) federalspendingonhealthcarehasincreasedrapidlyoverthelastthirtyyears.
C) thefederal-fundedVAhospitalshavebeenexpandingfasterthangovernmentrevenues
canprovidefor.
D) themedicalexpensesoffederalemployeeshasbeenrisingataratemuchfasterthanfor
non-federalworkers.
Answer: B
Diff:2
13) Anexampleofthird-partyfinancingofhealthcareis
A) patientspayingfortheirvisittothedoctor.
B) patientsnotgoingtothedoctorinordertosavemoney.
C) apatientgoingtoanotherdoctorforasecondorathirdopinion.
D) Medicare.
Answer: D
Diff:1
14) Oneproblemwiththird-partyfinancingofhealthcareisthat
A) peoplehavemoreincentivetoutilizehealthcare.
B) demandfallssothatsupplierscannottakeadvantageofeconomiesofscale.
C) itreducesthequalityofhealthcarepeoplereceive.
D) itdiscouragespeoplefromrelyingontheirphysiciansadviceinmakinghealthcare
decisions.
Answer: A
Diff:2
15) WhatimpactdoprivateinsurancecompaniesandMedicarehaveonnationalmedicalcosts?
A) Medicalcostsgoupbecauseinsuranceleadstoanincreaseinthequantitydemandedof
medicalservices.
B) Medicalcostsgoupbecauseinsurancewillleadtothereductioninthesupplyofmedical
servicesduetotheamountofpaperworkrequired.
C) Medicalcostareunaffectedbyinsurancecompanies.
D) Medicalcostsgodownbecausetheinsurancecompanypaysthebill.
Answer: A
Diff:1
16) Otherthingsbeingequal,anationalhealthinsuranceprogramwould
A) generatehigherlifeexpectanciesandlowerinfantmortalityrates.
B) generatelowerlifeexpectanciesandhigherinfantmortalityrates.
C) increasetotalhealthcareexpenditures.
D) increasethequalityoflife.
Answer: C
Diff:3
17) Otherthingsbeingequal,anationalhealthinsuranceprogramwould
A) decreasethedemandforhealthcare.
B) decreasemoralhazard.
C) decreasetotalhealthcareexpenditures.
D) reduceindividualsincentivestomakedecisionsthatpromotebetterhealth.
Answer: D
Diff:3
18) Risinghealthcarecostsareattributableto
A) peoplelivinglongeranddesiringmorecare.
B) relianceonexpensivetechnologytosupportandprolonglife.
C) third-partyfinancingofhealthcarecosts.
D) alloftheabove
Answer: D
Diff:3
19) Abenefitofdeductiblesandhealthsavingsaccountsisthatthey
A) reducethemoralhazardproblemassociatedwiththird-partypayers.
B) increasethequalityofhealthcare.
C) reducetheuseofexpensivetechniquesforhopelesscases.
D) reducetheincomesofphysicians.
Answer: A
Diff:2
20) ThepercentageoftotalnationalincomespentonhealthcareintheUnitedStateshas
A) declinedrapidlysince1965.
B) remainedbelowthelevelofinflation.
C) risensteadilysince1965.
D) remainedconstantoverthelastfewyears.
Answer: C
Diff:1
21) TheabovefiguresupportsallofthefollowingstatementsregardinghealthcareEXCEPT
A) thedemandforhealthcareisinsensitivetopricechanges;asthepricegoesup,sodoesthe
quantitydemanded.
B) ifallmedicalexpenseswerepaidforbythirdparties,thequantitydemandedwould
increasetremendously.
C) duetothirdpartypayments,patientsdemandahigherquantityofhealthcareservicesper
year.
D) thelowerthedeductible,thegreateristhequantitydemandedofhealthcareservicesper
year.
Answer: A
Diff:2
22) Healthcarecostshavebeenrisingdueto
A) anagingpopulation. B) newtechnologies.
C) third-partyfinancing. D) Alloftheabovearecorrect.
Answer: D
Diff:1
23) ApproximatelyhowmuchofaggregatenationalincomeintheUnitedStatesisspentonhealth
careeveryyearsince2000?
Answer: C
Diff:1
24) Theuseofhospitalstodayisdominatedby
A) theelderly. B) immigrants.
C) obstetricalcare. D) thewealthy.
Answer: A
Diff:2
25) Theimpactoftechnologyonhealthcarehas
A) providedforahigherqualityoflife.
B) increasedhealthcarecosts.
C) contributedtoincreasedlifeexpectancy.
Answer: D
Diff:1
26) Allofthefollowingarereasonsthathealthcarecostshaverisensomuchinthepastfew
decadesEXCEPT
A) theagingpopulation. B) higherimports.
C) newtechnologies. D) thirdpartypayments.
Answer: B
Diff:1
27) Theideathatsomepeopleengageinriskybehaviorduetothefactthattheyhavegoodhealth
careisknownas
A) moralhazard. B) riskaversion.
C) zero-sumgame. D) risk-takingbehavior.
Answer: A
Diff:2
28) ThetwineconomicproblemsoftheU.S.healthcareindustryarethe
A) risinghealthcarecostsandthedecliningqualityofhealthcareservices.
B) risinghealthcarecostsandtherisingmalpracticeinsurancecosts.
C) risinghealthcarecostsandthemoralhazardprobleminhealthcareservices.
D) decliningrateofimmunizationratesandtherisingmalpracticeinsurancecosts.
Answer: C
Diff:2
29) Intheyear2010,theUnitedStatesspentabout
A) 16percentofGDPonhealthcare. B) 100percentofGDPonhealthcare.
C) 6percentofGDPonhealthcare. D) 2percentofGDPonhealthcare.
Answer: A
Diff:2
30) Currentlylessthan________ofallhealthcarespendingispaidbyindividuals.
Answer: C
Diff:2
31) WhichofthefollowingisNOTareasonfortheincreaseinhealthcarecosts?
A) theagingofthepopulation B) theimplementationofnewtechnologies
C) theincreaseinthirdpartypayments D) thedecreaseinthefertilityrate
Answer: D
Diff:1
32) Thefederalgovernmentandinsurancecompaniesareexamplesofthirdparty
A) payersforhealthcare. B) usersofhealthcare.
C) providersofhealthcare. D) observersofhealthcare.
Answer: A
Diff:1
33) Sincethe1930s,out-of-pocketpaymentsforhealthcarehave
A) declinedfromabout50to30percentoftotalpayments.
B) declinedfromabout95to20percentoftotalpayments.
C) declinedfromabout70to30percentoftotalpayments.
D) notchangedandremainat70percentoftotalpayments.
Answer: B
Diff:2
34) Whichcountryhasthehighestpercapitahealthcareexpendituresintheworld?
A) Canada B) France C) UnitedStates D) Japan
Answer: C
Diff:1
35) ThehealthcaremarketintheUnitedStatesischaracterizedby
A) considerablegovernmentinvolvement.
B) third-partypaymentofhealthcarecosts.
C) asymmetricinformationbetweenprovidersandconsumers.
D) alloftheabove
Answer: D
Diff:1
36) JosephdecidestojointheBigStateUniversitysfootballteamwhenhelearnsthathishealth
insurancewillpayforanysubsequentinjury.Thisillustrates
A) amoralhazardproblem. B) monopolisticbehavior.
C) asymmetricinformationproblem. D) oligopolisticbehavior.
Answer: A
Diff:1
37) Amajorbenefitofahealthsavingsaccountisthatit
A) combatsmoralhazard.
B) meansmorehealthcareserviceswillbedemanded.
C) eliminatesrisinghealthcarecosts.
D) createstheincentivetoseeadoctorregularly.
Answer: A
Diff:2
38) Ininsurancemarkets,moralhazardoccurswhenthebehaviorof
A) theinsuredpersonchangesinawaythatraisescostsfortheinsurer,sincetheinsured
personnolongerbearsthefullcostsofthatbehavior.
B) theinsurerchangesinawaythatraisescostsfortheinsuredperson,sincetheinsurerno
longerbearsthefullcostsofthatbehavior.
C) theinsuredpersonchangesinawaythateliminatesrisinghealthcarecostsfortheinsurer,
sincetheinsuredpersonnolongerbearsthefullcostsofthatbehavior.
D) theinsuredpersonhasanincentivetounderconsumemedicalservices,simplybecause
theinsuredpersonnolongerbearsthefullcostofmedicalservices.
Answer: A
Diff:2
39) Asaresultofmoralhazard,
A) bothphysiciansandhospitalsordermoreprocedures.
B) physiciansandhospitaladministratorshavenoincentivetoraisecosts.
C) patientsincreasinglyhavetoworryabouttheexpenseofoperationsandothermedical
procedures.
D) bothphysiciansandhospitalshaveafinancialinterestintryingtokeephospitalcosts
down.
Answer: A
Diff:2
40) Allofthefollowingarekeyfeaturesofthenewthefederalgovernmentsnationalhealthcare
programEXCEPT
A) peoplemusteitherpurchasehealthinsuranceorpayafinetothefederalgovernment.
B) ayoungpersoningoodhealthcanoptnottopurchasehealthinsurancewithoutpenalty.
C) firmswithatleast50employeesmusteitherprovidehealthinsuranceorpayfineswhen
uninsuredemployeesreceivetaxsubsidiestopurchaseinsurance.
D) Government-directedexchangeswillassistinmatchingindividualsandsmallbusinesses
withhealthinsurancepoliciesthatsatisfygovernmentrequirements.
Answer: B
Diff:1
41) Whichofthefollowingisanindividual mandateinthenewthefederalgovernmentsnew

nationalhealth
careprogram?
A) Underthenewprogram,thefederalgovernmentwillcoordinatetheestablishmentof
healthinsuranceexchanges.
B) Firmswithatleast50employeesmusteitherprovidehealthinsuranceorpayfineswhen
C) Ataxrateof3.8percentwillbeassessedonnearlyallearningsabove$200,000peryearfor
individualsandabove$250,000peryearformarriedcouples.
D) NearlyallU.S.residentsmusteitherpurchasehealthinsurancecoverageorpayafineof
upto$750peryearforanindividual(upto$2,250peryearforafamily).
Answer: D
Diff:1
42) Whichofthefollowingisanemployer mandateinthenewthefederalgovernmentsnew

nationalhealth
careprogram?
A) Underthenewprogram,thefederalgovernmentwillcoordinatetheestablishmentof
healthinsuranceexchanges.
B) Ataxrateof3.8percentwillbeassessedonnearlyallearningsabove$200,000peryearfor
C) Firmswithatleast50employeesmusteitherprovidehealthinsuranceorpayfineswhen
D) NearlyallU.S.residentsmusteitherpurchasehealthinsurancecoverageorpayafineof
upto$750peryearforanindividual(upto$2,250peryearforafamily).
Answer: C
Diff:1
43) Howwillthenewfederalgovernmentsnewnationalhealthcareprogrambefunded?
A) Thefederalgovernmentwillchargeallparticipantsofhealthinsuranceexchanges3.8%.
B) Firmswithatleast50employeesmustpay anannualfineofupto$750peremployee
regardlessofcoverage.
C) Ataxrateof3.8percentwillbeassessedonnearlyallearningsabove$200,000peryearfor
D) NearlyallU.S.residentswillpayafineofupto$750peryearforanindividual(upto
$2,250peryearforafamily)regardlessofcoverage.
Answer: C
Diff:1
44) Thenewfederalgovernmentsnationalhealthcareprogramimposesthefollowingregulations
onhealthcareinsurersEXCEPT
A) healthinsurersmustcoverallwhoapply,includingpeoplewhoalreadyhavehealth
problems.
B) allnewplansmustcovercertainpreventiveservicessuchasmammogramsand
colonoscopiesbutmustbepaid100%bypatients.
C) aceilingisimposedontherateofincreaseinhealthinsurancepriceschargedtoelderly
people.
D) insurancecompanieswillbeprohibitedfromimposinglifetimedollarlimitsonessential
benefits,likehospitalstays.
Answer: B
Diff:1
45) Governmentagenciestowhichthenationalhealthcareprogramassignsthetaskofassisting
individuals,families,andsmallbusinessesinidentifyinghealthinsurancepoliciestopurchase
areknownas
A) healthcareexchanges. B) marketsforhealthcare.
C) healthinsuranceregulations. D) healthinsurancemandates.
Answer: A
Diff:1
46) WhichofthefollowingisNOTasubsidyinthenewthefederalgovernmentsnewnational
healthcareprogram?
A) Familieswithincomesupto133%ofthefederalpovertylevelareeligibleforfederal
Medicaidcoverage.
B) Familieswithincomesupto400%ofthefederalpovertylevelareeligibleforthousandsof
dollarsintaxsubsidiesperyear(amountsvarywithfamilyincomes).
C) Taxcreditsareavailabletobusinessesprovidinghealthinsuranceto25orfewerworkers
andpayingannualsalariesaveragingnomorethan$50,000.
D) Aspecialsubsidyrateof3.8%isappliedtonearlyallincomeearningsabove$200,000for
individualsor$250,000formarriedcouples.
Answer: D
Diff:1
47) Oncethenationalhealthcareprogramgoesintoeffectandmorepeoplewillpayfeweroftheir
healthcareexpensesoutoftheirownpocketsthantheydidpreviously,wecanexpect
A) thequantityofhealthcareservicesdemandedwillincrease.
B) thequantityofhealthcareservicesdemandedwilldecrease.
C) thequantityofhealthcareservicessuppliedwillincrease.
D) thequantityofhealthcareservicessuppliedwilldecrease.
Answer: A
Diff:1
48) Oncethenationalhealthcareprogramgoesintoeffect,wecanexpect
A) totalexpendituresonhealthcarewilldecrease.
B) moreindividualswillhavemoreincentivestomakedecisionsthatpromotebetterhealth.
C) totalexpendituresonhealthcarewillincrease.
D) moralhazardwilldecrease.
Answer: C
Diff:1
49) Oncethenationalhealthcareprogramgoesintoeffect,wecanexpect
A) thequantityofhealthcareservicessuppliedwillincrease.
B) totalexpendituresonhealthcarewilldecrease.
C) moreindividualswillpaymoreoutofpocketexpenses.
D) moralhazardwillincrease.
Answer: D
Diff:1
50) Theeffectsofthenationalhealthcareprogramonlabormarketswill
A) lowertheeffectivewageratethattheymustpayforeachunitoflabor.
B) decreasethemarginalrevenueproductoflabor.
C) increasethemarginalrevenueproductoflabor.
D) moveupwardalongtheirdownward-slopingmarginal-product-of-laborcurve.
Answer: D
Diff:1
51) Theeffectsofthenationalhealthcareprogramonlabormarketswill
A) increasethequantitysuppliedoflabor.
B) decreasethequantitysuppliedoflabor.
C) increasethequantitydemandedforlabor.
D) decreasethequantitydemandedforlabor.
Answer: D
Diff:1
52) Theeffectsofthenationalhealthcareprogramongoodsandservicesmarketswill
A) increasethemarginalcostofthefirm.
B) increasethequantityproducedofthefirm.
C) consumerswillpaylowerpricesformanygoodsandservices.
D) decreasethequantitydemandedforallgoodsandservices.
Answer: A
Diff:1
53) Basedonmostobservations,whataretheeffectsongovernmentbudgetsfromthenational
healthcareprogram?
A) Taxrevenueswillnotflowintothenewprogramimmediately.
B) Thefederalgovernmentultimatelywillhavetosearchforwaystoreduceitshealthcare
expenditures.
C) Federalgovernmentexpendituresontheprogramarebeingphasedinimmediately.
D) thefederalgovernmentultimatelywilllowertaxessincetheprogramscostwilldecline
overtime.
Answer: B
Diff:1
54) Whyhavehealthcarecostsrisensomuchinrecentyears?
Answer: Theelderlyuseadisproportionateamountofhealthcare,andthepopulationisgetting
older,sothereisarisingdemandforhealthcare.Furthermore,newtechnologieshave
contributedtohigherprices.Third-partyfinancingforhealthcarealsoencourages
peopletodemandmoreservicesthantheywouldotherwise,causinghigherprices.
Diff:2
55) Itisdifficulttocompareovertimehealthcareexpenditures,costs,andoutput.Doyouagreeor
disagree?Why?
Answer: Agree.First,expendituresandcostsarenotthesamething.AsystemlikeBritainshas
lowerexpendituresbutnotnecessarilylowercostssincepeoplespendmoretimewaiting
forservices.Yearsago,expendituresweremuchlower,partiallybecausepeoplesuffered
anddiedfromailmentsthatnowcanbecured.Further,asimprovementsinhealthcare
permitlongerlives,healthcareexpenditureswillincrease.Theinterrelationshipsbetween
healthcare,technology,costs,andexpendituresareextremelycomplicated.
Diff:3
56) Howismoralhazardrelatedtohealthcare?
Answer: Moralhazardisaffiliatedwithmanyinsurancesystems.Apersonwhoisinsuredwilluse
healthcareservicesmorethanonewhoisnotinsuredandmayengageinalifestylethat
islesshealthfulthanonewithlessinsurance.Thesecreategreatercoststotheinsurance
companiesandthehealthcaresystem.Physiciansalsoaremorelikelytorequiretests
wheninsurancecompaniespickupthecosts.
Diff:2
Chapter31
EnvironmentalEconomics
31.1PrivateversusSocialCosts
1) Whichofthefollowingstatementsbestdefinesprivatecosts?
A) Theyareinternalinthesensethatthefirmorhouseholdmustexplicitlytaketheminto
account.
B) Theyarecostsbornebypeopleotherthanthosewhocommittheaction.
C) Theyaresynonymouswithsocialcosts.
D) Theyrepresentexplicitcostsincurredbybusinessfirmsintheprivatesector.
Answer: A
Diff:1
Topic: 31.1PrivateversusSocialCosts
2) Coststhatarebornesolelybytheindividualswhoincurthemarecalled
A) privatecosts. B) publiccosts. C) socialcosts. D) externalcosts.
Answer: A
Diff:1
3) Whenthecostsofanactionarenotfullybornebythetwopartiesengagedinatransaction,this
iscalleda(n)
A) externality. B) equilibrium. C) propertyright. D) internalcost.
Answer: A
Diff:1
4) Pollutioncreatedbyautoexhaustfumesisanexampleofasituationinwhich
A) socialcostsaregreaterthanprivatecosts.
B) socialcostsarelessthanprivatecosts.
C) socialcostsareequaltoprivatecosts.
D) socialcostsareapproachingtheshutdownpoint.
Answer: A
Diff:2
Chapter31EnvironmentalEconomics 1099
5) Anindividualwhopaysforpersonalautorepairhasincurreda
A) socialcost. B) privatecost.
C) negativeexternality. D) positiveexternality.
Answer: B
Diff:1
6) Privatecostsarethesameas
A) implicitcosts. B) externalcosts. C) publiccosts. D) internalcosts.
Answer: D
Diff:1
7) AllofthefollowingareprivatecostsofoperatinganautomobileEXCEPT
A) gasolineforthecar.
B) depreciationofthevehicle.
C) carinsurance.
D) harmtotheenvironmentfromemissions.
Answer: D
Diff:1
8) Internalcostsare
A) costsbornesolelybytheindividualswhoincurthem.
B) costsbornebypeopleinthesamesocietyasthosewhoincurthem.
C) costsbornebypeopleworkinginthefirmthatincursthem.
D) allcostsincurredinthemarketplace.
Answer: A
Diff:1
9) Tofindthesocialcostofanaction,addtogether
A) theexternalandaccountingcosts.
B) theprivatecostsandtheinternalcosts.
C) theexternalcostsandtheinternalcosts.
D) theinternalcostsandtheprivateopportunitycosts.
Answer: C
Diff:1
10) Societymustpaythefullopportunitycostofanyactivity
A) thatusesscarceresources. B) thatcausescoststorise.
C) thatincreasesrevenues. D) noneoftheabove.
Answer: A
Diff:2
11) Socialcostsare
A) costsbornebysocietywheneveraresource-usingactiontakesplace.
B) costsincurredbygovernmentandbornebyalltaxpayers.
C) costsincurredingovernmentalwelfareprograms.
D) externalcostsminusinternalcosts.
Answer: A
Diff:1
12) Thetotalsocialcostofproductionisequalto
A) externalcostminusinternalcost. B) internalcostminusexternalcost.
C) externalcostplusinternalcost. D) internalcostplusopportunitycost.
Answer: C
Diff:1
13) Thereistoomuchsteelproductionifthe
A) socialcostsofsteelproductionaresignificantlylowerthantheprivatecosts.
B) socialbenefitsofsteelproductionaredeclining.
C) socialcostsofsteelproductionaresignificantlyhigherthantheprivatecosts.
D) socialcostsofsteelproductionaredeclining.
Answer: C
Diff:1
14) Socialcostsare
A) privatecostsplusanyexternalcosts.
B) thecostsoftheexternalityonly.
C) costsincurredwhencommonpropertyisused.
D) thecostsassociatedwithreachingandenforcingagreements.
Answer: A
Diff:1
15) Asocialcostthatisnotfullypaidbytheindividualusinganautomobileis
A) trafficcongestion. B) gasolineandoil.
C) insurance. D) depreciationofthevehicle.
Answer: A
Diff:1
16) Whenthesocialcostsexceedtheprivatecosts,economistsstatethatthereis
A) apositiveexternality. B) anunderproductionofoutput.
C) anegativeexternality. D) socialappreciationofresources.
Answer: C
Diff:1
17) Whensocialandprivatecostsdiffer,economistsstatethat
A) therewillbeeconomicprofitinthesociety.
B) thesocietywillproduceinsidetheproductionpossibilitiesfrontier.
C) thereisanexternality.
D) thereisnotanefficiencyproblembutanequityproblem.
Answer: C
Diff:1
18) Anexternalitythatisnotfullypaidbytheindividualusinganautomobileis
A) insuranceforthevehicle. B) gasolineforthevehicle.
C) airpollutionfromthevehicle. D) operationofthevehicle.
Answer: C
Diff:1
19) Ifsocialcostexceedsprivatecost,thereis
A) underproductionofagood. B) anegativeexternality.
C) apositiveexternality. D) toolittleeconomicprofitintheactivity.
Answer: B
Diff:1
20) Wherepollutionisconcerned,ifanautomobiledriverconsidersonlytheinternalcostsofhis
actions,heisaptto
A) useresourcesverycarefullyandinsmallquantities.
B) garagehiscaranddriveveryseldom.
C) bemakingapositivecontributiontothegreatercommunity.
D) drivetoomuchanduseupmorescarceresourcesthanhewouldifhehadtocoverallhis
costs.
Answer: D
Diff:1
21) Ifapersondoesnotpayallcostsassociatedwithaparticularresource -usingactivity,then

A) theexternalcostsoftheactivityaregreaterthantheprivatecostsoftheactivity.
B) thesocialcostsoftheactivityaregreaterthantheprivatecostsoftheactivity.
C) theexternalcostsoftheactivityaregreaterthantheinternalcostsoftheactivity.
D) thefullcostsoftheactivityarethesumofprivatecostsplusinternalcosts.
Answer: B
Diff:2
22) Ifthesocialcostsofrefiningoilaregreaterthantheprivatecostsofoilrefining,then
A) theexternalcostsofoilrefiningaregreaterthanthesocialcostsofoilrefining.
B) usersofproductsthatuserefinedoilarepayingtoomuchfortheproducts.
C) thereistoomuchoilrefining.
D) theamountofoilrefiningneedstoincreaseinordertobringsocialcostsandprivatecosts
inlinewitheachother.
Answer: C
Diff:2
23) Whenapersondoesnothavetopaythefullcostsforusingascarceresource,then
A) theuseoftheresourceisnotaffectedsincesocietypaysfortheresource.
B) moreoftheresourcewillbeused.
C) theinternalcostsofusingtheresourcearetoohigh.
D) thesocialcostsoftheresourcearelessthantheywouldbeifthecorrectamountofthe
resourcewerebeingused.
Answer: B
Diff:2
24) Supposetherearetwofactoriesonariver,andbothneedcleanwaterfortheirproduction
processes.Theupstreamfactorytakesincleanwateranddumpsdirtywaterbackintotheriver.
Thedownstreamfirmmustcleanupthewateritgetsfromtheriverbeforeusingit.Inthis
situation,
A) theprivatecostsofthedownstreamfactoryaremorethantheprivatecostsofthe
upstreamfactory,butforbothfactoriesprivatecostsandsocialcostsarethesame.
B) thesocialcostsaregreaterthantheprivatecostsfortheupstreamfirm,whilethesocial
costsarelessthantheprivatecostsforthedownstreamfirm.
C) theupstreamfactorysprivatecostsarelessthanitssocialcosts,anditsexternalcostsare
bornebythedownstreamfactory.
D) theinternalcostsoftheupstreamfactoryareexternalizedbythedownstreamfactory,
whichthenpassesthemontoitscustomers.
Answer: C
Diff:3
25) Whenapersondoesnothavetopaythefullcostsforusingascarceresource,thenthereis
A) anunderproductionofagood. B) anegativeexternality.
C) apositiveexternality. D) toolittleeconomicprofitintheactivity.
Answer: B
Diff:1
26) Whensocialcostsforusingascarceresourceareincluded,thenthereis
A) adecreaseintheproductionofthegood.
B) anegativeexternality.
C) adecreaseinthepriceofthegood.
D) apositiveexternality.
Answer: A
Diff:1
27) Whenbothinternalandexternalcostsforusingascarceresourceareincluded,thenthereis
A) anincreaseintheproductionofthegood.
B) anegativeexternality.
C) anincreaseinthepriceofthegood.
D) apositiveexternality.
Answer: C
Diff:1
28) Whichofthefollowingisanexampleofanexternalcost?
A) Thecostoflabortoafirm
B) Thepollutioncausedbyautomobileexhaust
C) Thecostoftiresforyourcar
D) Theopportunitycostofgettingacollegeeducation
Answer: B
Diff:1
29) Ifcoal-burningelectricalutilitycompaniesfullyinternalizedpollutioncosts,thenwecould
expect
A) anincreaseinelectricityprices.
B) adecreaseinelectricityprices.
C) nochangeinelectricityprices.
D) agreateruseofcoaltoproduceelectricity.
Answer: A
Diff:1
30) Externalitiesexistbecause
A) privatecostsdifferfromsocialcosts. B) privatecostsareequaltosocialcosts.
C) governmenthascreatedthem. D) theyareafunctionofsocialism.
Answer: A
Diff:2
31) Iftheexternalcostsofproductionarenottakenintoaccount,thenproductionwill
A) belessthansociallydesirable.
B) bemorethansociallydesirable.
C) bethesamesinceonlypricesareaffectedbyexternalities.
D) cease.
Answer: B
Diff:1
32) Ifcropdustingonyourfarmcausesyourneighborstohavesorethroats,thencropdustingis
creating
A) onlyexplicitcosts. B) opportunitycosts.
C) externalcosts. D) internalcosts.
Answer: C
Diff:1
33) Iffirmswereforcedtotakeintoaccountthefullsocialcostsofproduction,then
A) outputwoulddecreasebutpollutionlevelswouldprobablyremainatthesamelevels.
B) outputwouldbeunaffectedbutpollutionlevelswouldcomedown.
C) outputandpollutionlevelswoulddecrease.
D) outputcouldbeincreasedandpollutionlevelswoulddecrease.
Answer: C
Diff:1
34) IfthemarketpriceofagooddoesNOTincludeallofthecostsandbenefitsthatarisefromthe
productionorconsumptionofthegood,then
A) themarketisperfectlycompetitive.
B) anexternalityispresent.
C) societyisconsumingandproducingtheoptimalamountofthegood.
D) resourcesareproperlyallocated.
Answer: B
Diff:1
35) Ineconomicanalysis,airpollution,waterpollution,andscenerydestructionareconsideredto
be
A) externalities. B) internalities.
C) privatecosts. D) marginalbenefits.
Answer: A
Diff:1
36) Ifagoodisproducedbyfirmsthatgenerateexternalcosts,thepriceconsumerspay
A) willbeefficientaslongasitequalsthemarginalcostsofthefirms.
B) willbetoolow.
C) willbetoohighbecausetheconsumersenduppayingthecostsinsteadofthefirm.
D) willbethecorrectprice,butthequantitysoldofthegoodwillbetoolarge.
Answer: B
Diff:2
37) Ifagoodisproducedbyfirmsthatincurallprivateandexternalcosts,thepriceconsumerspay
A) willbeefficientsinceitincludesallsocialcosts.
B) willbetoolow.
C) willbetoohighbecausetheconsumersenduppayingallofthecostsinsteadofthefirm.
D) willbethecorrectprice,butinefficient.
Answer: A
Diff:2
38) TheBlackAshSteelCompanysplantbelcheslargequantitiesofnoxiousfumesandblackash
intotheair.ResidentsinthesurroundingareahavehighermedicalbillsbecauseofBlackAshs
pollution.Theseadditionalmedicalcostsrepresent
A) apositiveexternality. B) anegativeexternality.
C) thecompanysprivatecosts. D) theneighboringfamiliesexternalcosts.
Answer: B
Diff:2
pollution.AslongasBlackAshisallowedtoemitpollutionandignoreanyexternalities,the
firmwill
A) overproduce.
B) underproduce.
C) chargetoohighapriceforitsoutput.
D) beabsorbingthefullvalueofitssocialcosts.
Answer: A
Diff:2
pollution.Ifthefirmisforcedtopaythesocialcostsofitsproduction,
A) theamountofsteelitproduceswillincreaseinordertopaytheadditionalcosts.
B) thepriceitchargesforitssteelwilldecrease.
C) itssupplycurvewillshifttotheright.
D) itwillproducelessandchargemoreforitssteel.
Answer: D
Diff:2
41) Refertotheabovefigure.ItrepresentssupplyanddemandforTheBlackAshSteelCompanys
output.Thefirmsplantbelcheslargequantitiesofsmellyfumesandblackashintotheair.
Residentsinthesurroundingareahavehighermedicalbillsasaresult.Ifthefirmisforcedto
paythefullsocialcostofitsproduction,whatwilloccur?
A) BlackAshssupplycurvewillshiftfromS A toSB.
B) Demandforthefirmssteelwillshifttotheleft.
C) ThecompanyssupplycurvewillshiftfromS B toSA.
D) BlackAshwillincreaseitsownoutputtocoverthecostincrease.
Answer: C
Diff:2
42) Privatecostsare
A) externalcostsbornebyprivatefirms.
B) explicitcostsratherthanimplicitcosts.
C) costsbornebyprivatemembersofsocietyratherthangovernmentalbodies.
D) costsbornesolelybytheindividualswhoincurthem.
Answer: D
Diff:1
43) Costsbornesolelybytheindividualswhoincurthemare
A) privatecosts. B) socialcosts.
C) internality. D) commonproperty.
Answer: A
Diff:1
44) Whichofthefollowingisnotaprivatecost?
A) Thehealthinsurancecostsafirmmustpayforitsemployees.
B) Thepollutioncausedbyafirmdumpingitswastesintotheriver.
C) ThecoffeepotthatJandroppedandbrokethismorning.
D) Theamountthatafirmmustpayforrawmaterialstomakeitsproduct.
Answer: B
Diff:1
45) Johnraisesbeestopollinatehisappletrees.Oneofthebeesjuststunghim.Thisisa(n)
A) privatecost. B) socialcost.
Answer: A
Diff:1
46) Johnraisesbeestopollinatehisorchard.Acoupleofbeeswhichescapedendeduppollinating
hisneighborsorchard,so
A) JohnsneighborhasreceivedaninternalcostofJohnsbee-keeping.
B) JohnsneighborhasreceivedanexternalcostofJohnsbee-keeping.
C) JohnsneighborhasreceivedanexternalbenefitofJohnsbee-keeping.
Answer: C
Diff:1
47) Externalcostsare
A) bornebyindividualsotherthanthosewhoincurredthem.
B) anothertermforimplicitcosts.
C) bornebythepublicbutincurredbythegovernment.
D) bornebythegovernmentbutincurredbythepublic.
Answer: A
Diff:1
48) Thesumofinternalandexternalcostsis
Answer: B
Diff:1
49) Socialcostsare
A) coststhatarebornebythegovernment.
B) thefullcostbornebysocietywheneveraresourceuseoccurs.
C) bornebyindividualswhoincurthem.
D) anothertermforexternalcosts.
Answer: B
Diff:1
50) Thetotalcostsofusingaresourcearemadeupof
A) privatecostsonly. B) externalcostsonly.
C) socialcostsonly. D) internalandprivatecostsonly.
Answer: C
Diff:2
51) Thesumofinternalandexternalcostsis
A) externalities. B) socialcosts. C) internalities. D) privatecosts.
Answer: B
Diff:1
52) Whenapersondrivesanautomobile,thatindividualiscreating
A) internalcostsonly.
B) privatecostsonlybecausetheindividualpaysfortheinsurance,gasetc.
C) externalcostsonly.
D) socialcosts.
Answer: D
Diff:1
53) Whichofthefollowingstatementsistrueabouttherelationshipamongexternal,internaland
socialcosts?
A) Socialcostswillalwaysbehigherthanexternalcosts.
B) Socialcostswillalwaysbehigherthaninternalcosts.
C) Internalcostswillalwaysbehigherthanexternalcosts.
D) Internalcostswillneverequalexternalcosts.
Answer: A
Diff:1
54) Whichofthefollowingstatementsistrueabouttherelationshipamongexternal,internaland
socialcosts?
A) Externalcostisthedifferencebetweensocialandinternalcosts.
B) Internalcostisthesumofsocialandexternalcosts.
C) Socialcostisthedifferencebetweeninternalandexternalcosts.
D) Noneoftheabove.
Answer: A
Diff:1
55) Thesocialcostsofanactivityaregreaterthantheprivatecostsoftheactivitywhen
A) apersondoesnotpayallcostsassociatedwithaparticularresource -usingactivity.
B) theinternalcostsoftheresource-usingactivityarelessthantheexternalcostsofthe
activity.
C) theinternalcostsoftheresource-usingactivityarepositive.
D) theexternalcostsoftheresource-usingactivityarezero.
Answer: A
Diff:2
56) Whensocialcostsofanactivityexceedprivatecosts
A) thereisatendencyforresourcestobeunder-utilized.
B) thismeansthatresourcesarebeingefficientlyused.
C) thereisatendencyforresourcestobeover-utilized.
Answer: C
Diff:2
57) Whensocialcostsofanactivityexceedprivatecosts
A) amarketfailureexists.
B) thereisatendencyforresourcestobeunder-utilized.
C) thismeansthatresourcesarebeingefficientlyused.
D) theactualpriceisabovetheefficientprice.
Answer: A
Diff:2
58) Ifthesocialcostsofdrivinganautomobilearegreaterthantheprivatecostsofdrivingan
automobile,then
A) theexternalcostsofautodrivingexceedthesocialcostsofautodriving.
B) theexternalcostsofautodrivingexceedtheinternalcosts.
C) thepriceofautomobiledrivingistoohigh.
D) eitherpeopledrivetheirautostoomuchormorefundsshouldbespentonreducingair
pollution.
Answer: D
Diff:2
59) Anexampleofasituationinwhichthesocialcostsaregreaterthantheprivatecostswouldbe
A) anewrestauranttakesbusinessawayfromanestablishedrestaurant.
B) hand-heldcalculatorsputtingsliderulemanufacturersoutofbusiness.
C) whenamemberofarockbandsabilitytoheardeterioratesfromperforminginsomany
loudconcerts.
D) aphysicianwhocannotexaminepatientswithastethoscopeinanexaminationroom
adjacenttoanairport.
Answer: D
Diff:3
60) Supposetherearetwoidenticalfactoriesonariver.Bothrequirecleanwaterfortheir
productionprocesses.Theupstreamfirmgetscleanwaterfromtheriveranddumpsdirtywater
intotheriver.Thedownstreamfirmmustcleanthewateritgetsfromtheriverbeforeitcanuse
thewaterandlateritdumpsdirtywaterintotheriver.Inthissituation
A) theprivatecostsofthetwofirmsarethesamesincebothdumpdirtywaterintotheriver.
B) theupstreamfactorysprivatecostsarelowerthanitssocialcostssinceitpassesthecosts
ofthedirtywaterontothedownstreamfirm.Forthedownstreamfirms,privatecosts
equalsocialcosts.
C) theprivatecostsofthedownstreamfirmaregreaterthantheprivatecostsoftheupstream
firmandthesocialcostsarelessthantheprivatecostsforbothfirms.
D) theprivatecostsoftheupstreamfirmarelessthanitssocialcostswhilethesocialcostsof
thedownstreamfirmarelessthanitsprivatecosts.
Answer: B
Diff:3
61) Supposetherearetwofirmsonariverandtheproductionprocessesofbothrequirecleanwater.
Theupstreamfirmsprocessdirtiesthewater,whichitdumpsbackintotheriver.The
downstreamfirmmustcleanthewaterbeforeusingitinitsproductionprocess.Ifthetwofirms
wouldmerge,
A) theexternalcostsofthemergedfirmwouldequaltheexternalcostsoftheupstreamfirm,
whichwouldthenbepassedontoitscustomers.
B) thetotalcostsofproductionfallsincetheexternalcostsdisappear.
C) theexternalcostsoftheupstreamfirmareprivatecostsafterthemerger.
D) theinternalcostsofthedownstreamfirmbecomeexternalcostsofthemergedfirm.
Answer: C
Diff:3
62) Anexampleoftheexternalcostsduetoautomobiledrivingis
A) wearandtearontollroads.
B) theopportunitycostofthedriverstime.
C) airpollutionduetoexhaustfumes.
D) thecostofwashingdirtycars.
Answer: C
Diff:1
63) Whenapersoncanpasssomeofhercostsofusingaresourceontosomeoneelse,
A) theuseoftheresourceisnotaffectedbyheractions.
B) theinternalcostsofusingtheresourceexceedtheprivatecosts.
C) sheusestoomuchoftheresource.
D) sheusestoolittleoftheresource.
Answer: C
Diff:2
64) Apersonremovestheanti-pollutiondevicesonhisautomobile.Anexternalcostassociated
withthisis
A) thefeelingofguiltthepersonfeelsforviolatingthelaw.
B) thetickethegetswhenahighwaypatrolofficerpullshimover.
C) themansneighborwasheshiscarmoreoftenbecauseofincreasingsmog.
D) themanbuyslessgasoline,reducingtheincomeoflocalgasstations.
Answer: C
Diff:3
65) Airpollutionisaproblembecause
A) peoplearegreedy.
B) peoplearenotenvironmentallyconscious.
C) peoplemakeuseofairwithouthavingtobearallthecostsoftheiractions.
D) amarketeconomydoesnotprovideasstronganincentiveforenvironmentalcleanupasa
socialisteconomy.
Answer: C
Diff:2
66) IfpollutantsfromsmokestacksinacitysuchasNewarkcausespeopletopainttheirhomesand
carsmorefrequently,thisimplies
A) externalbenefitstothehomeandcarowners.
B) externalcostsonhomeandcarowners.
C) internalcosttohomeandcarowners.
D) noneoftheabove
Answer: B
Diff:2
67) Byaddinginternalcoststoexternalcosts,wedeterminethetotal
C) psychologicalcost. D) marginalcost.
Answer: B
Diff:1
68) Anothernameforinternalcostis
C) psychologicalcost. D) marginalcost.
Answer: A
Diff:1
69) Whichofthefollowingconstitutesanexternalcostofdrivinganautomobile?
A) insurance B) fuel C) pollution D) wearandtear
Answer: C
Diff:2
70) Inasituationinwhichinternalcostsdifferfromsocialcosts,wesaythatthereexistsa(n)
A) welfareloss. B) welfarebenefit.
C) internality. D) externality.
Answer: D
Diff:2
71) Whenapersonsmokesacigaretteinhiscarandthrowsthebuttoutofthewindow,thisisa(n)
A) marginalcost. B) externalcost.
C) averagetotalcost. D) publiccost.
Answer: B
Diff:2
72) Coststhatarebornesolelybytheindividualswhoincurthemare
C) externalcosts. D) transactioncosts.
Answer: A
Diff:1
73) Tofindsocialcosts,
A) internalandprivatecostshavetobeaddedtogether.
B) internalandexternalcostshavetobeaddedtogether.
C) internalandimplicitcostshavetobeaddedtogether.
D) internalandproductioncostshavetobeaddedtogether.
Answer: B
Diff:1
74) Whenthetotalexternalandinternalcostsofatransactionaretakenintoconsideration,thisis
knownas
A) publiccosts. B) averagetotalcosts.
C) socialcosts. D) marginalcosts.
Answer: C
Diff:1
75) Whentherearenoexternalities,
A) socialcostsaregreaterthanprivatecosts.
B) socialcostsarelessthanprivatecosts.
C) privatecostsaregreaterthansocialcosts.
D) privatecostsequalsocialcosts.
Answer: D
Diff:2
76) WhichofthefollowingisFALSE?
A) Socialcostsdonotincludeprivatecosts.
B) Privatecostsdonotincludeexternalcosts.
C) Ifsocialcostsaregreaterthanprivatecosts,toomuchofagoodisbeingproduced.
D) Pollutionisasocialcost.
Answer: A
Diff:2
77) Anexternality
A) maybepositiveornegative.
B) meansarapidlyrisingcostbornebyconsumers.
C) isthecostofproducingagoodoutsidetheUnitedStates.
D) istheindirectcost,theoverhead,ofproducingaproduct.
Answer: A
Diff:1
78) WhichofthefollowingstatementsistruefortheU.S.economy?
A) Supplyofservicesalwaysreflectsallsocialcosts.
B) Demandforservicesalwaysreflectsallsocialcosts.
C) Privatecostsarenotalwaysequaltosocialcosts.
D) Socialbenefitsarealwaysemphasizedinadvertising.
Answer: C
Diff:1
79) WhentheprivatecostsandthesocialcostsareNOTthesame,thereisa(n)
A) externality. B) internality. C) publicgood. D) monopoly.
Answer: A
Diff:1
80) Agoodthathasexternalcostsassociatedwithitsproductionwillbe
A) producedattheoptimallevel. B) underproduced.
C) overproduced. D) notproduced.
Answer: C
Diff:1
81) Intheabovefigure,S1 representsthesupplycurvewhichincludesprivatecosts,andS2 isthe

supplycurvewhichincludessocialcosts.Ifthefirmisproducingaproductthathasexternal
coststhatthefirmdoesNOThavetopay,whatwillbetheequilibriumpriceandquantity?
A) P1 ,Q4 B) P2 ,Q3 C) P4 ,Q1 D) P3 ,Q2
Answer: B
Diff:3
82) Intheabovefigure,S1 representsthesupplycurvewhichincludesprivatecosts,andS2 isthe

supplycurvewhichincludessocialcosts.Ifthefirmisproducingaproductthathasexternal
coststhatthefirmdoeshavetopay,whatwillbetheequilibriumpriceandquantity?
A) P1 ,Q4 B) P2 ,Q3 C) P4 ,Q1 D) P3 ,Q2
Answer: D
Diff:3
83) Anexternalityoccurswhenever
A) privatecostsarethesameassocialcosts.
B) privatecostsarethesameasinternalcosts.
C) privatecostsdivergefromsocialcosts.
D) privatecostsplusinternalcostsequalsocialcosts.
Answer: C
Diff:1
84) Agoodthathasexternalbenefitsassociatedwithitsproductionwillbe
A) producedattheoptimallevel. B) underproduced.
C) overproduced. D) notproduced.
Answer: B
Diff:2
85) Alargefarmusesfertilizerthatnearbylandownerscomplainmaycontaminatetheirwater.
Testsareconductedandcontaminantsarefound.Thecostsresultingfromthisdecisionare
referredtoas
A) implicitcosts. B) factorcosts.
C) externalcosts. D) opportunitycosts.
Answer: C
Diff:1
86) AllofthefollowingareexamplesofgoodsforwhichexternalcostscommonlyexistEXCEPT
A) cigarettes. B) automobiles.
C) vaccinations. D) oiltransportation.
Answer: C
Diff:1
87) Whichofthefollowingisthemainreasonforexternalities?
A) Thefullcostofatransactionisnotbornebythebuyer/selleroftheproduct.
B) Policeenforcementofscalpingisnotuniformlyenforced.
C) thelackoforganizedexchangesforallgoodsandservices
D) Theproductionofpublicgoodsusesupscarceresources.
Answer: A
Diff:1
88) Whichoneofthefollowingisanexampleofanexternalcost?
A) thecosttoattendcollege B) laborcoststoafirm
C) emissionsfromafactory D) ahousepaymentowedbyafriend
Answer: C
Diff:1
89) Youenteraclassroom,whichislitteredwithnewspapers.Thisisbecause
A) studentsaretoolazytocleanup.
B) maintenancepeopleonlycleanonceaday.
C) itisawaytoprotestagainstthetuitionrates.
D) studentsdonotpayforlittering.
Answer: D
Diff:1
90) Socialcostsofagoodareequalto
A) externalcostsminusprivatecosts.
B) privatecostsminusexternalcosts.
C) privatecostsplusexternalcosts.
D) externalcostsdividedbytheprivatecosts.
Answer: C
Diff:1
91) Thereisanexternalitypresentonlywhen
A) privatecostsdivergefromsocialcosts.
B) privatebenefitsdivergefromsocialbenefits.
C) privatecostsorbenefitsdivergefromsocialcostsorbenefits.
D) privatecostsequalsocialcosts.
Answer: C
Diff:2
92) Anexternalityexistswhen
A) thereareprivatecosts. B) thereareinternalcosts.
C) thereareexternalcosts. D) thereareopportunitycosts.
Answer: C
Diff:1
93) Asituationinwhichaprivatecostdivergesfromasocialcostis
A) internalcosts. B) anexternality.
C) aninternality. D) atransactionscost.
Answer: B
Diff:1
94) Asituationinwherethecostsofanactionarenotfullybornebythetwopartiesengagedin
exchangeis
A) anexternality. B) aninternality.
C) internalcosts. D) atransactionscost.
Answer: A
Diff:1
95) Anexternalityisasituationinwhich
A) privatecostsdivergefromsocialcosts.
B) internalcostsdivergefromprivatecosts.
C) therearenosocialcosts.
D) thecostbornebytheconsumerisgreaterthanthemonetaryprice.
Answer: A
Diff:1
96) Refertotheabovefigure.S1 isthesupplycurvethatincludesonlyprivatecosts.S2 isthesupply

curvethatincludessocialcosts.Ifthefirmsetsoutputbyfocusingonprivatecosts,theper-unit
externalcostwillequal
A) P2 . B) P4 - P2 . C) P4 - P1 . D) P2 - P1 .
Answer: C
Diff:3
97) Refertotheabovefigure.S1 isthesupplycurvethatincludesonlyprivatecosts.S2 isthe

supplycurvethatincludessocialcosts.Thefreemarketrateofoutputis________andthe
corrected,sociallyoptimalamountofoutputis________.
A) Q4 ;Q1 B) Q2 ;Q1 C) Q4 ;Q2 D) Q2 ;Q4
Answer: C
Diff:2
98) Refertotheabovefigure.S1 isthesupplycurvethatincludesonlyprivatecosts.S2 isthe

supplycurvethatincludessocialcosts.Fromthisfigureweknowthat
A) anexternalbenefitexists.
B) privatecostsarelessthansocialcosts.
C) privatecostsequalsocialcosts.
D) privatecostsaregreaterthansocialcosts.
Answer: B
Diff:1
99) Themarginalcostcurveofafirmmeasures
A) externalcosts. B) pollutioncosts.
C) privatecosts. D) socialcosts.
Answer: C
Diff:1
100) Agoodwhichhassocialcoststhatexceedprivatecostshasaprice
A) equaltomarginalsocialcost.
B) thatistoolow.
C) thatistoohigh.
D) thatisinefficientbecausepriceexceedsmarginalsocialcost.
Answer: B
Diff:2
101) Agoodthathassocialcoststhatexceedprivatecostshasaquantitythatis
A) toohigh. B) toolow.
C) justright. D) thebestsocietycando.
Answer: A
Diff:1
102) Agoodthathassocialcoststhatareequaltoprivatecostshasapricethatis
A) toohigh. B) toolow.
C) justright. D) equaltomarginalcost.
Answer: C
Diff:1
103) Agoodthathassocialcoststhatarelessthanprivatecostshasaquantitythatis
A) toohigh. B) toolow. C) justright. D) equaltozero.
Answer: B
Diff:1
104) Theinclusionofexternalcostsinthedecisionmakingprocessdeterminingequilibriumprice
andquantityleadsto
A) lowerpriceditemsandincreasedquantity.
B) lowerpriceditemsandadeclineinquantity.
C) higherpriceditemsandincreasedquantity.
D) higherpriceditemsandadeclineinquantity.
Answer: D
Diff:1
105) Theinclusionofexternalbenefitsinthedecisionmakingprocessdeterminingequilibriumprice
andquantityleadsto
A) lowerpriceditemsandincreasedquantity.
B) lowerpriceditemsandadeclineinquantity.
C) higherpriceditemsandincreasedquantity.
D) higherpriceditemsandadeclineinquantity.
Answer: A
Diff:3
106) Whataresocialcosts?Howdotheydifferfromprivatecosts?
Answer: Socialcostsarecostsbornebysocietywheneveraresourceuseoccurs.Socialcosts
includeprivatecostsplusexternalcosts,sowhenexternalcostsarezero,socialcostsare
thesameasprivatecosts.
Diff:1
107) Whatisanexternality?
Answer: Anexternalityisasituationinwhichprivatecostsdivergefromsocialcostsbecausethere
areexternalcosts.Externalcostsarecostsnotbornebythepartiesengagedinthe
exchangeorbyanindividualengagedinaresource -usingactivity.
Diff:1
108) Whydontpeopletakeintoconsiderationtheexternalcostsoftheiractionsandreducethe
amountofexternalities?
Answer: Peoplehavenoincentivetotakeintoconsiderationtheexternalcostsoftheiractions.
Sincetheirutilityorincomewouldbeloweriftheyboreallthecostsassociatedwiththeir
activities,mostpeoplewillnotdosovoluntarily.
Diff:2
109) Whataretheprivatecostsofdrivinganautomobile?Whataretheexternalcosts?
Answer: Theprivatecostsincludegas,maintenance,repair,depreciation,andinsurance.External
costsincludethecostsassociatedwithairpollution,whichincludecoststocleancarsand
painthousesmoreoften,increasedhealthcarecosts,andthedisutilityoftheairpollution.
Diff:2
110) Privatecostsarebornebyindividualswhilesocialcostsarebornebysociety.Doyouagreeor
disagree?Why?
Answer: Disagree.Socialcostsareprivatecostsplusexternalcosts,andexternalcostsareborneby
peoplewhoarenotpartoftheexchange.Theyarestillbornebyindividualsthough.
Diff:2
31.2CorrectingforExternalities
1) WhichofthefollowingisNOTapossiblesolutiontotheproblemofpollution?
A) Subsidizingthecostsofproductionofactivitiesthatgeneratepollution
B) Convertingaresourcethatiscommunallyownedintoaprivatelyownedresource
C) Regulatingthequantityofpollutionthatcanbegenerated
D) Imposingapollutiontaxonproducers
Answer: A
Diff:1
Topic: 31.2CorrectingforExternalities
2) Ifexternalcostsareincludedandaddedtoafirmsprivatecosts,then
A) thedemandcurvewillshifttotheright. B) thedemandcurvewillshifttotheleft.
C) thesupplycurvewillshifttotheright. D) thesupplycurvewillshifttotheleft.
Answer: D
Diff:1
3) Amethodofforcingacompanytointernalizethetotalcostofproductionis
A) toimposeataxonthecompanytoreduceproduction.
B) toprovideasubsidytoencourageproduction.
C) forgovernmentnottointerfereinthecompanysactivities.
D) toforcethecompanytoreducethewagesitpaystoitsemployees.
Answer: A
Diff:1
4) Ifafirmisforcedtotakeexternalcostsintoaccount,itwill
A) reduceproductionandchargeahighermarketprice.
B) increaseproductionandchargealowermarketprice.
C) reducepricesandhiremoreworkers.
D) reducepricesandhirefewerworkers.
Answer: A
Diff:2
5) Ifafirmisnotforcedtopayforexternalcosts,itwill
A) continuetooverproducethegood. B) continuetounderproducethegood.
C) requestasubsidyfromthegovernment. D) raiseprices.
Answer: A
Diff:2
6) Economiststypicallysuggestthreechoicesthatallowapollutertodecidehowtoabsorbmost,
orperhapsall,ofthesocialcostsofitsactions,whichare
A) continuingtooverproducethegood,loweringthepriceofthegood,orcuttingoutput.
B) reducingthepollution-causingactivity,changingproductiontechniques,orpayingaprice
topollute.
C) installingpollutionabatementequipment,payingtopollute,orjustignoringtheissue.
D) payingapollutiontax,continuingtouseexistingproductiontechniques,orcontinuingthe
pollutingbehaviorwithoutregardtothesocialimplications.
Answer: B
Diff:2
7) WhichofthefollowingstatementsaboutpollutionorpollutioncontrolisTRUE?
A) Anationwideuniformtaxonemissionsistheappropriatewaytoreducepollutionlevels.
B) Ataxtoreducepollutionlevelsshouldbebasedontheeconomicdamagesratherthanon
theabsoluteamountofpollution.
C) Privatecostsofpollutionusuallyexceedsocialcosts.
D) Theoptimumamountofpollutionabatementiswherethetotalbenefitsofpollution
abatementequalthetotalcostsofpollutionabatement.
Answer: B
Diff:1
8) Therearetwocoal-burningelectricalutilitiesoneintiny,ruralWanunu,Montana,andanother
inmetropolitanDetroit,Michiganandeachproducesthesameamountofpollutionperunitof
output.Ifapermittaxisgoingtobeusedtoforcethesefirmstointernalizepollutioncosts,the
taxleviedshouldbe
A) thesameineachcity. B) higherinWanunuthaninDetroit.
C) higherinDetroitthaninWanunu. D) lessthanzeroineachcity.
Answer: C
Diff:1
9) Adifficultywithusingauniformper-unittaxtoaddressanegativeexternalityisthat
A) thetaxwillreduceoutput.
B) thetaxwillincreaseprice.
C) thesocialcostofpollutionmightvaryacrossgeographicregions.
D) thesocialcostofpollutionshouldnotbeassessedontheconsumers,butshouldbe
assessedonthefirms.
Answer: C
Diff:1
10) Inordertointernalizetheexternalityduetopollution,thegovernmentshouldimposeatax
basedon
A) theeconomicdamageassociatedwiththepollution.
B) thephysicalamountofpollution.
C) thesizeofthefirmcausingthepollution.
D) thevalueofthepollution-causingbusinessactivity.
Answer: A
Diff:2
11) Tototallyinternalizeanexternality,agovernmentcanlevyataxrelatedonlytothephysical
quantityofpollutionif
A) theeconomicdamagesassociatedwiththepollutionaredifferentacrossdifferent
locations.
B) theeconomicdamagesaretoolargetobedetermined.
C) theeconomicdamagesassociatedwiththepollutionarethesameacrossdifferent
locations.
D) theeconomicdamagesarezero.
Answer: C
Diff:2
12) Tocorrectforanegativeexternality,agovernmentmightimposeauniformtaxrelatedonlyto
thephysicalquantityofpollutionif
A) theadministrativecostsarehigh.
B) thecostofascertainingtheactualeconomiccostsarerelativelysmall.
C) theeconomicdamagesarezero.
D) theeconomicdamagesassociatedwiththepollutionaredifferentacrossdifferent
locations.
Answer: A
Diff:2
13) Anexternalityreferstotheideathat
A) explicitcostsdifferfromimplicitcosts.
B) decision-makersdonotinternalizeallthecosts.
C) wecannotdoanythingthatdoesnotaffectotherpeople.
D) privateandinternalcostsdiffer.
Answer: B
Diff:2
14) Yourneighborhasjustplantedsomefragrantflowers.Thewonderfulscentdriftsintoyour
roomandmakesyouhappy.
A) Thisscentisaninternalcosttoyou.
B) Thiscannotbeanexternalitysinceyouareenjoyingthescent.
C) Thisisanexternalitysinceyougetabenefitfromyourneighborsflowers.
D) Thesocialcostofthisactivityisentirelybornebyyouneighbor.
Answer: C
Diff:1
15) Ifallfirmshadtobearallthesocialcostsoftheiractions,weshouldobservemarginalcost
curves
A) ofallfirmsshiftingup.
B) ofsomefirmsshiftingup,ofsomeothersshiftingdown,andoftherestnotshiftingatall.
C) ofallfirmsthathadgeneratedexternalitiesshiftingupwhiletherewouldbenochangefor
therestofthefirms.
D) ofsomefirmsshiftingupandoftherestshiftingdown.
Answer: B
Diff:3
16) Inordertocorrecttheproblemsassociatedwithexternalcosts,
A) thesignalsgiventotheeconomymustchangesothatdecision-makerswilltakeinto
accountallthecostsoftheiractions.
B) thegovernmentmusttakeoverproductionofindustriesthatareresponsibleformostof
thepollution.
C) standardsmustbeestablishedthatmakeitillegaltopollute.
D) thepricesofallgoodsmustberaisedsopeoplewillconsumelessoftheworldsresources.
Answer: A
Diff:2
17) Whichofthefollowingmethodscouldbeusedtocorrectforexternalcosts?
A) Imposeataxoraneffluentfeeontheoffenders.
B) Havetheoffendercleanupthepollutionitcaused.
C) Requirefirmsintheindustrytoinstallpollutioncontroldevices.
D) Alloftheabovewouldbeappropriate.
Answer: D
Diff:2
18) Supposecarsaretaxedaccordingtotheamountofpollutiontheyemitpergallonofgasoline
consumed.WewouldexpecttoobserveallofthefollowingEXCEPT
A) anincreaseinquantitydemandedofless-pollutingautomobilesandareductionin
quantitydemandedofmore-pollutingautomobiles.
B) anincreaseinquantitydemandedofmorefuel-efficientcars.
C) anincreaseinproductionofautomobilesthatwerelesspolluting.
D) anincreaseinthemilesdriven.
Answer: D
Diff:2
19) Themostefficientwaytogetfirmstoreducepollutionisto
A) setuniformemissionstandardsandrequireallfirmstomeetthestandards.
B) maketheworstpollutersshutdownandgooutofbusiness.
C) makethempayforthesocialcostsofproductionandletthemdecidehowtorespondto
thehighercosts.
D) providefirmsandconsumerswiththeinformationabouttheeffectsoftheiractionsand
encouragethemtobehaveresponsibly.
Answer: C
Diff:2
20) Whenapolluterhastobearthefullsocialcostoftheiractions,theywill
A) weighthecostsandbenefitsofeachpotentialactionandmightdecidetonotstop
pollutingbypayingafine.
B) gooutofbusinesssincepollutionabatementisexpensive.
C) willalwaysdecidetoreducetheamountofpollutionbyreducingthequantitythey
produce.
D) increasethepriceoftheproductandthequantityproducedtopayfortheadditionalcosts.
Answer: A
Diff:1
21) Toefficientlyimproveenvironmentalquality,itisusually
A) bettertofocusonthehardestareastocleanupfirstsincetheseusuallyarethebiggest
problems.
B) moreappropriatetoconcentrateonthephysicalquantitiesofpollutionratherthanon
economiccosts.
C) besttosetupstringentemissionstandardsthatmustbefollowedbyeveryone.
D) bettertofocusoneconomicdamagesratherthanphysicalquantitiesofpollution.
Answer: D
Diff:3
22) Auniformtaxaccordingtothephysicalquantitiesofpollutionmaynotbetheappropriateway
tocorrectforanexternalitybecause
A) itplacesaunfairburdenonsmallproducers.
B) auniformtaxcanonlyaccountforsocialcostsandnotexternalcosts.
C) afirmwillreduceproduction.
D) itmaynotadequatelyaccountforeconomicdamages.
Answer: D
Diff:1
23) Whichofthefollowingmightbeawaythatanautomobiledriverspollutioncostscouldbe
internalized?
A) Thedrivercouldpurchaseabatementequipmentforhercar.
B) Thestatecouldeliminatethegastax.
C) Thestatecouldpayagassubsidyforeveryonewhodrives.
D) ThestatecouldallowhertodriveintheHOVlane.
Answer: A
Diff:2
24) WhenanexternalcostexiststhatisNOTtakenintoaccountintheproductionofaproduct,
A) thelevelofoutputistoolow,andthesupplycurveshouldshifttotherighttoaccountfor
theexternality.
B) thelevelofoutputisoptimal,andthereshouldbenochangeinthesupplycurve.
C) thepriceoftheproductistoohigh,andproductionshouldbeexpandedtolowertheprice.
D) thelevelofoutputistoohigh,andthesupplycurveshouldshifttothelefttoaccountfor
theexternality.
Answer: D
Diff:2
Output/Hour PrivateMC MarginalBenefit ExternalMarginalCosts

1 $10 $20 0.20
2 10.40 18.50 0.40
3 10.90 17 0.70
4 11.50 16.50 1.20
5 12.20 14.00 1.80
6 13.00 13.00 2.80
7 14.40 12.00 4.00
25) Usetheabovetable.Ifthelevelofproductionwasdeterminedbythemarket,itwouldbe
A) 4. B) 5. C) 6. D) 7.
Answer: C
Diff:2
26) Usetheabovetable.Whatwillthepricebebeforeexternalcostsareinternalizedwithatax?
A) $14 B) $13 C) $12.20 D) $1.80
Answer: B
Diff:2
27) Usetheabovetable.Whatwilltheoutputlevelbewhenexternalcostsareinternalizedwitha
tax?
A) 4 B) 5 C) 6 D) 7
Answer: B
Diff:2
28) Usetheabovetable.Whatwillthepricebewhenexternalcostsareinternalizedwithatax?
A) $14 B) $13 C) $12.20 D) $1.80
Answer: A
Diff:2
29) Usetheabovetable.Whatwillthetaxbewhenexternalcostsareinternalized?
A) $14 B) $13 C) $12.20 D) $1.80
Answer: D
Diff:2
30) Usetheinformationintheabovetable.Theexternalmarginalcostsare
A) increasing. B) decreasing.
C) constant. D) inversetoquantityproduced.
Answer: A
Diff:1
31) Thegovernmentimposesataxonanindustrythatproducesgoodscreatinganegative
externality.Yettheindustryproducesmorethantheoptimumquantityofoutput.Thismeans
A) thetaxismorethantheexternalcostassociatedwiththeproduct.
B) thetaxislessthantheexternalcostassociatedwiththeproduct.
C) thecompanyshouldadvertisetheproductmore.
D) thecompanyshouldincreasetheproductionoftheproduct.
Answer: B
Diff:2
32) Themarginalcosttosocietyofreducingpollutionincreaseswiththeincreaseduseofpollution
abatementbecause
A) ofthediminishingmarginalutilityofabatement.
B) ofthereduceddemandforabatement.
C) ofthediminishingreturnsfromabatement.
D) ofthehighcostofabatement.
Answer: C
Diff:2
33) Allofthefollowingarechoicesforthepolluterwhenfacedwithadditionalcoststoabatethe
externalityEXCEPT
A) ignorethegovernmentregulations. B) installpollutionabatementequipment.
C) reducethepollution-causingactivity. D) paythepricetopollute.
Answer: A
Diff:2
34) Thegovernmentisconsideringlevyingataxonthepollutiongeneratedfromtwoelectricpower
plants(PlantAandPlantB).PlantAislocatedinacitywithahighdensityofpopulation,and
PlantBislocatedintheruralareawithalowdensityofpopulation.Thegovernmentshould
A) levythesametaxperunitofpollutiononbothplants.
B) levyahighertaxperunitofpollutiononPlantAbecauseofitshighereconomicdamage.
C) levyahighertaxperunitofpollutiononPlantBbecauseofitslowereconomicdamage.
D) taxonlyPlantAbutnotPlantBbecausePlantBgenerateslessrevenue.
Answer: B
Diff:2
35) Tocorrectforthesocialimpactofpollution,thegovernmentshouldlevyaper-unittax
A) thatisthesameforallpollutersregardlessoftheirlocationsorsizes.
B) accordingtotheeconomicdamageofthepollution.
C) accordingtothebusinessactivityofthepolluter.
D) onlytothosepollutersthatcanaffordtopayforthetax.
Answer: B
Diff:1
36) Supposethatthenationwideaveragecostofairpollutiongeneratedbyacaris$1,000.Woulda
taxof$1,000oneverycarinducepeopletotakeexternalcostsintoconsiderationandbring
abouttheoptimalpriceandoutputforautos?Explain.
Answer: Notnecessarily.The$1,000isanaverage.Somecarscausemorepollutionandsomeless.
CarsinWyomingimposefewerexternalcoststhancarsinLosAngeles,andcarsthatare
drivenmoremilespollutemore.Asystemofpollutionfineswouldbemoreeffectivein
reducingpollutionifthetaxesdiffereddependingonthemake,withhigh-pollutingcars
taxedmore,andifpartofthetaxwereongasolinetoreflectcarsdrivenmore.Wealso
wouldwanttaxestodifferdependingonwherethecarwaslocated.
Diff:3
37) Usingagraph,showtheeffectsofanegativeexternality.Whereisthesociallyoptimumpointof
output?Howcanitbeachieved?
Answer:
Seetheabovefigure.Eistheequilibriumwhenpeopleonlytakeintoconsideration
privatecosts,withoutputQ1 andpriceP1 .Whenexternalcosts(EC)areaddedtoprivate
costs,theoptimalpointisE,withoutputQandpriceP.Thatis,thesocialoptimum
withexternalitiesistoproducelessandchargeahigherpricethanprivatecostsalone
indicates.IfataxisimposedthatcausedpricetoincreasetoP ,oroutputwererestricted
toQ,theoptimumcouldbeachieved.
Diff:2
38) Isauniformper-unittaxonfirmsthatcauseanexternalityanoptimalpolicyforcorrectingthe
externality?Explain.
Answer: No.Theconceptofexternalityisabouttheeconomiccostsratherthantheamountof
externality.Theeconomiccostsordamagescanvaryacrossdifferentlocationssothatthe
optimaltaxonpollutionshouldalsovaryfromlocationtolocation,dependingonthesize
ofeconomicdamages.
Diff:1
31.3Pollution
1) Assumingthatpollutioncannotberemovedfromtheenvironmentatzerocost,theoptimal
levelofpollution
A) willbezero. B) willbenegative.
C) willbepositive. D) cannotbedetermined.
Answer: C
Diff:1
Topic: 31.3Pollution
2) Asweapproachtotalpollutionabatement
A) themarginalbenefittosocietydeclines.
B) themarginalbenefittosocietyincreases.
C) themarginalbenefittosocietyincreases,butatadecreasingrate.
D) themarginalcosttosocietydeclines.
Answer: A
Diff:1
3) Asweapproachtotalpollutionabatement
A) themarginalcosttosocietyfalls.
B) themarginalcosttosocietyrises.
C) themarginalcosttosocietyequalsthemarginalbenefittosociety.
D) themarginalcosttosocietyfallsbutthenrises.
Answer: B
Diff:1
4) Itisassumedthatthemarginalbenefitofaircleanlinessfallswiththedegreeofcleanlinesssince
A) themarginalcostofaircleanlinessincreases.
B) aircleanlinessisapublicgoodandnotaprivategood.
C) themarginalutilityofaircleanlinessfallswiththedegreeofcleanliness.
D) thegenerationofpollutionshouldbeconsideredanexternality.
Answer: C
Diff:1
5) Themarginalcostofpollutionabatementisrepresentedby
C) ahorizontalcurve. D) averticalcurve.
Answer: A
Diff:1
6) Themarginalbenefitofpollutionabatementisrepresentedby
C) ahorizontalcurve. D) averticalcurve.
Answer: B
Diff:1
7) Attaininghigherandhigherlevelsofaircleanlinesscauses
A) additionalcoststorisetoincreasinglyhighlevels.
B) largerandlargerincreasesinpercapitaincomes.
C) additionalcoststofalltolowerandlowerlevels.
D) largerandlargermarginalbenefitstosociety.
Answer: A
Diff:1
8) Accordingtoeconomicanalysis,theoptimallevelofpollutionis
A) alwayszero.
B) atthepointatwhichthemarginalbenefitsofpollutioncontrolexceedthemarginalcost.
C) atthepointatwhichthemarginalbenefitsofpollutioncontrolarelessthanthemarginal
cost.
D) atthepointatwhichthemarginalbenefitsfrompollutioncontrolareequaltothemarginal
cost.
Answer: D
Diff:1
9) Intheprocessofreducingpollutantsinourenvironment,weare
A) achievingacleanerenvironmentatnorealcost.
B) causinghigherlevelsofunemployment.
C) reallocatingresourcesinaninefficientmanner.
D) tradingofflessofothergoodsandservicesforacleanerenvironment.
Answer: D
Diff:1
10) Ingeneral,wewouldexpectthemarginalcostofpollutionabatementtobe
A) zero. B) decreasing. C) increasing. D) constant.
Answer: C
Diff:1
11) Themarginalbenefitfrompollutionabatement
A) increasesaspollutionabatementincreasesbecausepeoplelearntowantanevencleaner
environmentastheenvironmentgetscleaner.
B) decreasesaspollutionabatementincreasesbecauseofthelawofdiminishingmarginal
product.
C) isconstantaspollutionabatementincreasesbecausepollutionabatementisvaluedforits
ownsakeandnotfortheutilityitprovides.
D) decreasesaspollutionabatementincreasesbecauseofthelawofdiminishingmarginal
utility.
Answer: D
Diff:2
12) Thetotalbenefitstosocietyfrompollutionabatement
A) increaseatanincreasingratewiththeincreaseofpollutionabatement.
B) increaseatadecreasingratewiththeincreaseofpollutionabatement.
C) decreaseatanincreasingratewiththeincreaseofpollutionabatement.
D) decreaseatadecreasingratewiththeincreaseofpollutionabatement.
Answer: B
Diff:2
13) Theoptimalquantityofairpollutionis
A) whateveramountofpollutionisproducedbytheprofitmaximizingfirm.
B) foundbyequatingthemarginalbenefitsfromfurtherreductionsinpollutionandthe
marginalcostsoffurtherreductionsinpollution.
C) foundbysettingthequantityofairpollutionequaltothequantityofwaterpollution.
D) ameaninglessconceptsincemonetaryvaluescannotbeattachedtoproblemsassociated
withpollution.
Answer: B
Diff:2
14) Whichofthefollowingstatementsconcerningpollutioniscorrect?
A) Economicefficiencyrequiresthatpollutionbecompletelyeliminated.
B) Economicefficiencydictatesthattheoptimalamountofpollutionarisesatthepointat
whichpriceequalsprivatemarginalcost.
C) Pollutionshouldbereducedtothepointatwhichthemarginalbenefitfromfurther
reductionequalsthemarginalcostoffurtherreduction.
D) Pollutionshouldbereducedtotheextentnecessarytoreturnproductiontotheproduction
possibilitiesfrontier.
Answer: C
Diff:1
15) Ineconomicanalysis,theoptimallevelofpollution
A) isalwayszero.
B) arisesatthepointatwhichthemarginalbenefitfromfurtherreductionequalsthe
marginalcostoffurtherreduction.
C) occursatthepointatwhichdemandcrossestheprivatecostsupplycurve.
D) shouldbedeterminedbytheprivatemarketwithoutanygovernmentintervention.
Answer: B
Diff:1
16) Fromaneconomicstandpoint,theamountofpollutionshouldbe
A) zero.
B) theamountthatallowsfirmstomaximizeprofits.
C) theamountwherefirmsareearninganormalrateofreturnoninvestment.
D) atthepointatwhichthemarginalbenefitfromfurtherreductionequalsthemarginalcost
offurtherreduction.
Answer: D
Diff:1
17) Theoptimalamountofpollutionisnotzerobecause
A) ithasbeenfoundthatpollutioninmoderateamountsactuallyhaspositivebenefits.
B) therearenobenefitstoanyonefromhavingzeropollution.
C) zeropollutionwouldbetoocostly.
D) wedonthavethepoliticalstructurethatcouldaccomplishthegoal.
Answer: C
Diff:2
18) Themarginalbenefitofpollutionabatement
A) increasesatanincreasingrateasabatementincreases.
B) decreasesaspollutionabatementincreasesbecauseofthelawofdiminishingmarginal
utility.
C) increasesaspollutionabatementincreasesbecauseofthelawofincreasingmarginal
returns.
D) isconstantaspollutionabatementincreases.
Answer: B
Diff:2
19) Thecostsofpollutionabatement
A) increaseatanincreasingratewiththeincreaseinpollutionabatement.
B) increaseatadecreasingratewiththeincreaseinpollutionabatement.
C) decreaseatanincreasingratewiththeincreaseinpollutionabatement.
D) decreaseatadecreasingratewiththeincreaseinpollutionabatement.
Answer: A
Diff:2
20) Refertotheabovefigure.Themarginalcostofpollutionabatementiscurve
A) (1). B) (2). C) (3). D) (4).
Answer: B
Diff:2
21) Refertotheabovefigure.Themarginalbenefitofpollutionabatementiscurve
A) (1). B) (2). C) (3). D) (4).
Answer: D
Diff:1
22) Refertotheabovefigure.Ifthemarginalcostcurveforpollutionabatementshiftstotheright,
everythingconsidered,the
A) degreeofairqualityorcleanlinesswillalsodecrease.
B) thedegreeofairqualityorcleanlinesswillstayunchanged.
C) thedegreeofairqualitywillimprove.
D) themarginalcostofpollutionabatementhasnothingtodowithairquality.
Answer: C
Diff:1
23) Refertotheabovefigure.Supposethemarginalbenefitandthemarginalcostcurvesof
pollutionabatementarenormallyshaped.Technologicalchangethatmadeiteasiertoproduce
inacleanerfashionwouldcause
A) curve(4)toshiftout,increasingtheoptimalamountofpollutionabatement.
B) curve(3)toshiftup,raisingthemarginalbenefitsandcostsandreducingtheamountof
pollutionabatement.
C) curve(2)toshiftout,increasingtheoptimalamountofpollutionabatement.
D) curve(1)toshiftout,increasingtheoptimalamountofpollutionabatement.
Answer: C
Diff:2
24) Refertotheabovefigure.Supposethemarginalbenefitandthemarginalcostcurvesof
pollutionabatementarenormallyshaped.SupposetheequilibriumisforafactoryinLos
Angeles.WhatwouldhappenifthesamefactorywereinthemiddleofNevada?
A) Themarginalcostcurve(1)wouldshiftto(2)andtherewouldbenodifferenceinthelevel
ofabatement.
B) Themarginalcostcurve(2)wouldshifttotheleftandtherewouldbelessabatementin
Nevada.
C) Themarginalbenefitcurve(4)wouldshifttotheleftandtherewouldbelessabatementin
Nevada.
D) Themarginalbenefitcurve(2)wouldshifttotherightandtherewouldbemoreabatement
inNevada.
Answer: C
Diff:3
25) Themarginalcostcurveofpollutionabatementis
Answer: B
Diff:1
26) Technologicalchangethatmakesiteasiertoproduceinacleanerfashionwouldcause
A) themarginalcostcurveofpollutionabatementtoshiftleft,increasingthedegreeofair
quality.
B) themarginalcostcurveofpollutionabatementtoshiftright,increasingthedegreeofair
quality
C) themarginalbenefitcurveofpollutionabatementtoshiftright,increasingthedegreeofair
quality
D) themarginalbenefitcurveofpollutionabatementtoshiftleft,increasingthedegreeofair
quality
Answer: B
Diff:1
27) Supposepeoplevaluecleanairmoreastheirincomesincrease,then
A) themarginalcostcurveofpollutionabatementtoshiftleft,increasingthedegreeofair
quality.
B) themarginalcostcurveofpollutionabatementtoshiftright,increasingthedegreeofair
quality
C) themarginalbenefitcurveofpollutionabatementtoshiftright,increasingthedegreeofair
quality
D) themarginalbenefitcurveofpollutionabatementtoshiftleft,increasingthedegreeofair
quality
Answer: C
Diff:1
28) Themarginalcostcurveofpollutionabatement
A) slopesupwardbecauseofthelawofdiminishingproduct.
B) slopesupwardbecausefirmswillmaximizeprofits.
C) slopesdownwardbecauseofthelawofdiminishingmarginalutility.
D) slopesdownwardbecauseofthelawofdiminishingreturns.
Answer: A
Diff:1
29) Theoptimalamountofairpollutionis
A) foundbyequatingthemarginalbenefitsfromreducingpollutionbyonemoreunitwith
themarginalcostsofreducingpollutionbyanadditionalunit.
B) foundbyequatingthetotalbenefitsfromreducingpollutionbyonemoreunitwiththe
totalcostsofreducingpollutionbyanadditionalunit.
C) foundbysettingthemarginalbenefitsfromreducingpollutionbyonemoreunitequalto
zero.
D) ameaninglessconceptsincewecannotmonetizetheenvironment.
Answer: A
Diff:2
30) Whichofthefollowingstatementsistrueabouttheoptimalquantityofpollution?
A) Itequalszero.
B) Pollutionabatementshouldcontinueuptothepointwheremarginalcostequalsthe
averagetotalcost.
C) Trade-offsexistbetweenproducingacleanerenvironmentandproducingothergoods
andservices.
D) Firmsshouldbeallowedtodeterminetheprofit-maximizingamountofpollution
abatement.
Answer: C
Diff:1
31) Whyistheoptimalquantityofpollutionnotlessthanthepointatwhichthemarginalbenefit
equalsthemarginalcost?
A) Thepointofintersectionoccursatalowlevelofpollution.
B) Therearenoexternalcostsbelowthatlevel.
C) Belowthatpointfirmswillhavetoreducethequantitythattheyarecurrentlyproducing
andlowertheprice.
D) Belowthatpointthevaluethatpeopleplaceonlesspollutionislessthanthecostof
reducingthepollution.
Answer: D
Diff:1
32) Intheabovefigure,theoptimallevelofpollutioncleanupis
A) Q1 . B) Q2 . C) Q3 . D) Q4 .
Answer: C
Diff:2
33) Intheabovefigure,ifafirmiscleaningupQ4 unitsofpollution,itisan

A) efficientsolution,becausemarginalsocialbenefitsaregreaterthanmarginalsocialcosts.
B) efficientsolution,becausemarginalsocialbenefitsareequaltomarginalsocialcosts.
C) inefficientsolution,becausemarginalsocialbenefitsaregreaterthanmarginalsocialcosts.
D) inefficientsolution,becausemarginalsocialcostsaregreaterthanmarginalsocialbenefits.
Answer: D
Diff:3

A) efficientsolution,becausemarginalsocialbenefitsaregreaterthanmarginalsocialcosts.
B) efficientsolution,becausemarginalsocialbenefitsareequaltomarginalsocialcosts.
C) inefficientsolution,becausemarginalsocialbenefitsaregreaterthanmarginalsocialcosts.
D) inefficientsolution,becausemarginalsocialcostsaregreaterthanmarginalsocialbenefits.
Answer: C
Diff:3

A) efficientsolutionbecausemarginalsocialbenefitsaregreaterthanmarginalsocialcosts.
B) efficientsolutionbecausemarginalsocialbenefitsareequaltomarginalsocialcosts.
C) inefficientsolutionbecausemarginalsocialbenefitsaregreaterthanmarginalsocialcosts.
D) inefficientsolutionbecausemarginalsocialcostsaregreaterthanmarginalsocialbenefits.
Answer: B
Diff:3
36) Accordingtoeconomicanalysis,theoptimalquantityofpollutionexistsatthepointatwhich
the
A) totalbenefitofpollutioncontrolisequaltothetotalcost.
B) marginalbenefitofpollutioncontrolisequaltothemarginalcost.
C) levelofpollutionisatzero.
D) levelofpollutionisacceptabletothesociety.
Answer: B
Diff:2
37) Pollution
A) createsanegativeexternality.
B) isincreasedwhenpropertyrightsaredefined.
C) istheresultofcapitalism.
D) existsbecauseairandwaterareprivatelyownedresources.
Answer: A
Diff:1
38) Theideathatittakes90percentofyourtimetocleanupthelast10percentofyourhouse
illustratesthat
A) themarginalcostofcleaningupslopesdownward.
B) themarginalcostofcleaningupslopesupward.
C) themarginalbenefitofcleaningupisconstant.
D) themarginalbenefitofcleaningupslopesupward.
Answer: B
Diff:2
39) Themarginalbenefitofthepollutionabatementcurve
A) hasazeroslope. B) hasapositiveslope.
C) slopesupward. D) slopesdownward.
Answer: D
Diff:1
40) Voluntaryagreementsaboutcleaninguppollutionattemptto
A) internalizeexternalities. B) internalizeprivatecosts.
C) externalizesocialcosts. D) externalizeprivatecosts.
Answer: A
Diff:2
41) Generally,aslevelsofpollutionarereduced,
A) marginalbenefitsfromthereductiondecrease.
B) marginalbenefitsfromthereductionincrease.
C) marginalcostsfromthereductiondecrease.
D) marginalcostfromthereductionareconstant.
Answer: A
Diff:2
42) Generally,aslevelsofpollutionarereduced,
A) marginalbenefitsfromthereductionincrease.
B) marginalcostsfromthereductionincrease.
C) marginalcostsfromthereductionstaythesame.
D) marginalcostsfromthereductiondecrease.
Answer: B
Diff:2
43) Thelevelofpollutionatwhichthemarginalbenefitsequalthemarginalcostofcleaningupis
always
A) thezeropollutionlevel. B) theoptimalquantityofpollution.
C) thepollutionmaximum. D) thepollutionminimum.
Answer: B
Diff:2
44) Intheabovefigure,
A) theoptimaldegreeofaircleanlinessislessthan100percent.
B) themarginalcostcurveslopesupbecauseofthelawofdiminishingreturns.
C) NeitherAnorBarecorrect.
Answer: D
Diff:2
45) Theoptimalquantityofpollutionintheabovefigure
A) isdefinedasthelevelwherethemarginalbenefitisatamaximum.
B) iswheretheoptimaldegreeofaircleanlinessis100percent.
C) isthelevelofpollutionatwhichthemarginalbenefitequalsthemarginalcost.
D) cannotbedetermined.
Answer: C
Diff:2
Quantityof Marginal Marginal

CleanAir(%) Cost($) Benefit($)
0 10,000 100,000
25 25,000 50,000
50 37,500 37,500
75 75,000 25,000
100 Infinite 0
46) Theabovetableshowsmarginalcostsandmarginalbenefitsofcleanairinaparticular
industrialarea.Inthetable,whenthequantityofcleanairisat25percent,
A) thequantityofpollutedairis25percent.
B) themarginalbenefitofcleanairexceedsthemarginalcost.
C) themarginalbenefitofcleanairislessthanthemarginalcost.
D) thequantityofcleanairisoptimal.
Answer: B
Diff:1
47) Theabovetableshowsmarginalcostsandmarginalbenefitsofcleanairinaparticular
industrialarea.Inthetable,whenthequantityofcleanairisat75percent,
A) thequantityofpollutedairis75percent.
B) themarginalbenefitofcleanairexceedsthemarginalcost.
C) themarginalbenefitofcleanairislessthanthemarginalcost.
D) thequantityofcleanairisoptimal.
Answer: C
Diff:1
48) Intheabovetable,theoptimalquantityofcleanairis
Answer: B
Diff:1
49) Themarginalcostofpollutionabatementisthe
A) additionalcosttocleanupanadditionalunitofpollution.
B) additionalbenefitfromcleaningupanadditionalunitofpollution.
C) totalsocialcostsofpollutionclean-updividedbytotalsocialbenefits.
D) totalsocialcostsofpollutionclean-updividedbythetotalunitsofclean-up.
Answer: A
Diff:1
50) Themarginalbenefitofpollutionabatementisthe
A) additionalcosttocleanupanadditionalunitofpollution.
B) additionalbenefitfromcleaningupanadditionalunitofpollution.
C) totalsocialcostsofpollutionclean-updividedbytotalsocialbenefits.
D) totalsocialcostsofpollutionclean-updividedbythetotalunitsofclean-up.
Answer: B
Diff:1
51) Explainhowtheoptimalquantityofairpollutionisdetermined.
Answer: Astheairbecomescleaner,themarginalbenefitofaircleanlinessdiminishes,reflecting
thefactthatthemorecleanairwebreathe,thelesswevalueanadditionalunitof
cleanliness.Themarginalcostofaircleanlinessincreasesasairbecomescleaner,however,
reflectingthefactthatattainingeachadditionalunitofaircleanlinessrequiresincurring
higheradditionalcosts.Theoptimalamountofaircleanliness(ortheoptimalamountof
pollution)arisesatthepointatwhichthemarginalbenefitofcleanairequalsthe
marginalcost.
Diff:2
52) Theoptimallevelofpollutioniszero.Doyouagreeordisagree?Why?
Answer: Disagree.Therearecoststocleaninguppollution.Therefore,theoptimallevelof
pollutionarisesatthepointatwhichthemarginalbenefitfromfurtherreducingpollution
equalsthemarginalcostoffurtherreducingpollution.
Diff:1
53) Supposepeoplevaluecleanairmoreastheirincomesincrease.Whatwouldhappentothe
optimalamountofcleanairasacountrydevelopseconomically?Isthereaneconomic
predictionwecanmakefromthis?
Answer: Theoptimalamountofcleanairwouldincreasebecausethemarginalbenefitcurveof
cleanairwouldshiftoutasincomesrose.Wewouldexpectrichercountriestospend
moreonairpollutioncleanupthanpoorercountries.
Diff:3
54) Whydoeconomistsbelievethatitissociallyoptimaltohavesomeamountofpollution?
Answer: Economistsrecognizethetrade-offbetweenproducingacleanerenvironmentand
producingothergoodsandservices.Zeropollutioncouldbeachievedonlyifpeoplegive
upresourcesforproducingothergoodsandservices.Theoptimalamountofpollutionis
thereforedeterminedbyequatingthemarginalcostandmarginalbenefitofreducing
pollutionatveryhighlevelsofpollutionabatement,andthemarginalcostforzero
pollutionismuchhigherthanitsmarginalbenefit.
Diff:1
31.4CommonProperty
1) Whennegativeexternalitiesexist,avoluntaryagreementcanbenegotiated.Whichofthe
followingstatementsistrue?
A) Voluntaryagreementsusuallydonotworksincetheownerhasnoincentivetonegotiate.
B) Transactionscostsmustbelowrelativetotheexpectedbenefitsofreachinganagreement.
C) Voluntaryagreementsaredifficulttonegotiatebecausetheyusuallyinvolvegovernment
intervention.
D) Voluntaryagreementsalwaysleavetheownerworseoff.
Answer: B
Diff:1
Topic: 31.4CommonProperty
2) Whichofthefollowingwouldbeviewedasacommonpropertyproblem?
A) Yourpropertyisburglarized.
B) Vandalsdamageyourproperty.
C) Peoplepickalloftheflowersinapublicpark.
D) Tobesafeyoumustlockyourdooratnight.
Answer: C
Diff:1
3) Allthecostsassociatedwithmaking,reaching,andenforcingagreementsarecalled
A) privatecosts. B) internalcosts.
C) transactioncosts. D) socialcosts.
Answer: C
Diff:1
4) Theexclusiverightsofownershipthatallowtheuse,transfer,andexchangeofpropertyare
called
A) commonpropertyrights. B) privatepropertyrights.
C) externalities. D) socialbenefits.
Answer: B
Diff:1
5) Economictheorysuggeststhatifnaturalresourcescanbeheldasprivateproperty,then
A) conservationwillbenonexistent.
B) ownerswillhaveanincentivenottoabusethem.
C) naturalresourceswillbesoldoffforimmediateuse.
D) peoplewillsimplyholdthemandrefusetomakethemavailable.
Answer: B
Diff:1
6) Commonpropertyownershipmostlikelyleadsto
A) anefficientallocationofresources.
B) productionatarateatwhichpriceislessthansocialcost.
C) adecreaseofexternalities.
D) anincreaseinpollution.
Answer: D
Diff:1
7) Whennopropertyrightsexist,
A) noonehasaneconomicincentivetocareforcommonproperty,andanexternalitymay
welloccur.
B) therewillbenoproduction.
C) externalitieswillbeinternalizedbyvoluntaryarrangementsamongasmallgroupof
parties.
D) societywillproducebeyondtheproductionpossibilitiesfrontier,buttheallocationof
resourcesisnotapttobeoptimal.
Answer: A
Diff:1
8) Privatepropertyrightsinvolve
A) exclusiverightstouse,transfer,andexchangetheproperty.
B) exclusiverightstouseproperty,butnottoexchangetheproperty.
C) rightstoenjoythepropertyinanywaydesiredbutnottotransferorexchangethe
property.
D) rightsgrantedbythegovernmentforrenewabletermsof100yearsormore.
Answer: A
Diff:1
9) Commonpropertyis
A) propertythathasmineraloroildeposits.
B) aresourcethateveryoneisfreetouseasmuchastheywant.
C) propertyownedbyagroupsuchasaclub.
D) propertythathaslittleeconomicvalue.
Answer: B
Diff:1
10) BuffalointheUnitedStatesalmostbecameextinctwhilecattlehaveneverbeencloseto
extinction.Thedifferenceisdueto
A) thegreatermarginalvalueofabuffalorelativetoaheadofcattle,leadingtogreater
harvestingofbuffalo.
B) theuseofprivatepropertyrightsoncattleandcommonpropertyrightsonbuffalo.
C) thegreatermarginalvalueofaheadofcattlerelativetobuffalo,leadingtoover -hunting
ofbuffalo.
D) thedifferencesinsizebetweenthetwoanimals,andtheeffectofsizedifferencesonthe
costsofhuntingthem.
Answer: B
Diff:2
11) Governmentinterventionwillnotbenecessarywhenvoluntarycontractinginternalizesan
externality.WhichofthefollowingisNOTanecessaryconditionforthistooccur?
A) Well-definedprivatepropertyrights
B) Lowtransactioncosts
C) Largenumbersofindividualsinvolvedinthetransactions
D) Lowcontractenforcementcosts
Answer: C
Diff:2
12) Thecostsassociatedwithreachingandenforcingagreementsarecalled
A) privatepropertycosts. B) commonpropertycosts.
C) transactioncosts. D) publiccosts.
Answer: C
Diff:1
13) Withdefinedpropertyrights,anexternality
A) canonlybecorrectedwithgovernmentintervention.
B) willnotleadtoamisallocationofresources.
C) maybeinternalizedwithvoluntarycontracting,undercertaincircumstances.
D) mustleadtosocietyproducinginsideitsproductionpossibilitiesfrontier.
Answer: C
Diff:1
14) Afarmernoticesthataneighboringrancherscattlearewanderinganddestroyingsomeofhis
crops.Thefarmerdecidestoofferapaymenttotherancheriftherancherwillreducethesizeof
hisherd.Bydoingso,thefarmer
A) canbesurethatthesizeoftheherdwillbereducedandthesizeofhisownharvestwillbe
increased.
B) indicatestotherancherthatthereisanopportunitycosttothewanderingofthecattle,and
therebyinternalizestheexternality.
C) inadvertentlybearsthecostsoftheexternalitywhentheranchershouldbeliableforthe
costs.
D) informstherancherthatthecattlehavedestroyedcrops,whichshouldinducethefarmer
tobuildafenceinordertomaintaingoodrelations.
Answer: B
Diff:2
15) Onedifficultyinusingvoluntarytransactionstointernalizeexternalitiesisthat
A) peoplearemotivatedbyself-interestandareoftenunwillingtoengageinatransaction
thatmightmakeanotherpersonbetteroff.
B) thegovernmentusuallywillnotenforcecontractsofthistype.
C) transactioncostsofcomingtoanagreementcanbeverylargewhennumerouspeopleare
involved.
D) peopleusuallydontunderstandwhattherealopportunitycostsarethattheyface.
Answer: C
Diff:2
16) Transactioncostsare
A) thecosts,suchassalestaxes,thatareimposedbythegovernment.
B) equaltothehourlycostofalawyerusedtowriteacontract.
C) thecostsassociatedwithmaking,reaching,andenforcingagreements.
D) nottruecostsbecausetheyrelatetotimeratherthanrealresources.
Answer: C
Diff:1
17) Ingeneral,pollutionexistsif
A) peopleareunconcernedaboutthehazardsassociatedwithpollution.
B) therearepoorlydefinedprivatepropertyrights.
C) therearepoorlydefinedcommonpropertyrights.
D) profit-makingactivityistakentoanextreme.
Answer: B
Diff:2
18) Thecruxoftheproblemofpollutionis
A) apoorlyrunEnvironmentalProtectionAgency.
B) greedonthepartofconsumers.
C) greedonthepartofproducers.
D) poorlydefinedpropertyrightsareexpensivetoenforce.
Answer: D
Diff:1
19) Changingtheownershipoftheoceanfromcommonpropertytoprivatepropertywould
A) ensurethatthisresourcewouldbeallocatedinamoreefficientmanner.
B) ensurethatthisresourcewouldbeallocatedinalessefficientmannerthanundercommon
propertyrights.
C) notbeeconomicallydesirable.
D) resultinnoappreciablechangeinefficiencyofutilizationofthisresource.
Answer: A
Diff:1
20) Exclusiverightsofownershipthatallowtheuse,transfer,andexchangeofpropertyarecalled
A) commonpropertyrights. B) nonexclusivepropertyrights.
C) privatepropertyrights. D) publicpropertyrights.
Answer: C
Diff:1
21) Whennooneownsaparticularresource,
A) propertyrightsareclearlydefined.
B) individualshavelegalrecourseforanydamagescausedtotheirresource.
C) noonehasanyincentivetoconsiderexternalityspilloversassociatedwiththatresource.
D) positiveexternalitieswillarise.
Answer: C
Diff:1
22) Privatepropertyrightsare
A) anexternality.
B) asocialcost.
C) propertythatisownedbyeveryoneandthereforebynoone.
D) exclusiverightsofownership.
Answer: D
Diff:1
23) Commonpropertyis
A) anexternality.
B) asocialcost.
C) propertythatisownedbyeveryoneandthereforebynoone.
D) exclusiverightsofownership.
Answer: C
Diff:1
24) Commonpropertyoftenresultsin
A) anegativeexternality. B) asocialbenefit.
C) aprivatecost. D) exclusiverightsofownership.
Answer: A
Diff:1
25) Commonpropertyis
A) aresourcethateveryoneisfreetouseasmuchastheywant.
B) propertythatbelongstobothspousesinamarriage.
C) propertyownedbyagroupsuchasacluborachurch.
D) genericpropertyasopposedtospecificproperty.
Answer: A
Diff:1
26) Ingeneral,pollutionexistsinsituationsinwhich
A) peopleareselfish.
B) peoplerefusetotakesocialresponsibilityseriously.
C) therearepoorlydefinedprivatepropertyrights.
D) thereexistspublicproperty.
Answer: C
Diff:2
27) Joehasbrokenthemirrorofmycar.Ihavelegalrecoursetosuefordamagesbecauseof
A) socialcosts. B) transactionscosts.
C) commonpropertyrights. D) privatepropertyrights.
Answer: D
Diff:1
28) BuffalointheUnitedStatesalmostbecameextinctwhilecattle,ananimalthatprovidessimilar
products,neverhasbeenclosetoextinction.Thedifferenceisdueto
A) thegreatermarginalvalueofaheadofcattlerelativetobuffalo,leadingtoover -hunting
ofbuffalo.
B) thegreatermarginalvalueofabuffalorelativetoasteer,leadingtotheoverharvestingof
buffalo.
C) cattleexistinginEuropealsowhilebuffalowerespecifictoNorthAmerica.
D) theuseofprivatepropertyrightsoncattleandcommonpropertyrightsonbuffalo.
Answer: D
Diff:3
29) Transactioncostsare
A) thecostsassociatedwithmakingatransactionthatisrequiredbythegovernment.
B) nottruecostssincetheyareoftennotpaid.
C) thecostsassociatedwithexchangesintheservicearea.
D) thecostsassociatedwithmaking,reachingandenforcingagreements.
Answer: D
Diff:1
A) Externalitiescannotbesolvedbymarketsolutionsandalwaysrequiregovernmentaction.
B) Externalitieswouldneverbeaproblemifpeoplewerewillingtocomplywithgovernment
regulations.
C) Voluntaryagreementscansolveexternalitysituationsbymakingthepartyincurringthe
costsbearthecostsofhisorheractions.
D) Externalitiescanonlybehandledbygovernmentregulationandemissiontaxescannot
workeffectively.
Answer: C
Diff:2
31) Yourneighborinanapartmentcomplexplayshismusicveryloudlylateatnight,whichmakes
itdifficultforyoutogettosleep.Youoffertheneighbor$50,themonetaryvalueyouputon
yoursleep,toneverplayhismusicbetweenmidnightand7AM.Bydoingso,
A) youhavefailedtobringaboutanefficientsolutionsinceyoushouldhavecomplainedto
thepolice.
B) youhaveindicatedthecostoftheexternality.Theexternalityisnotinternalizedevenifhe
acceptsyouroffer.
C) youhaveindicatedthecostoftheexternality,whichinternalizestheexternality.
D) youhaveindicatedawillingnesstomaketheexternalcostasocialcost.
Answer: C
Diff:3
A) Anypropertyrightsystemwillyieldasituationinwhichallexternalitiesareinternalized.
B) Voluntaryagreementscanalwaysyieldasituationinwhichallexternalitiesare
internalized.
C) Opportunitycostsalwaysexistwithwhoeverhaspropertyrights.
D) Opportunitycoststurnexternalcostsintosocialcosts.
Answer: C
Diff:2
33) Voluntaryagreementsmaynotbeafeasiblemethodtointernalizeanexternalitywhen
A) thedollarvalueoftheexternalityislarge.
B) theexternalityisnegativeratherthanpositive.
C) therearesignificanttransactioncosts.
D) therearehightaxesonthefirmsthatcausetheexternalities.
Answer: C
Diff:2
34) Inwhichofthefollowingexternalitysituationswoulditbemostlikelythatvoluntary
agreementscouldbeusedtointernalizeanexternality?
A) Litteringonhighways
B) OverharvestingofalligatorsinLouisiana
C) PoachingofelephantsinAfrica
D) Treesofoneneighborblockingaviewofanother
Answer: D
Diff:2
35) WhichofthefollowingisNOTapossiblesolutiontotheproblemofpollution?
A) Convertingaresourcethatiscommunallyownedintoaprivatelyownedresource.
B) Imposingataxonpollutersthatisrelatedtotheamountofpollution.
C) Regulatingtheamountofpollutionthatafirmcanproduce.
D) Subsidizingthecostsofproductionofactivitiesthatgeneratepollution.
Answer: D
Diff:2
36) Thebestmethodtoreducepollutionis
A) toneverstartpolluting.
B) toestablishprivatepropertyrights.
C) dependentuponthecharacteristicsoftheresourcesandthetransactioncosts.
D) dependentuponthequalityofgovernmentbureaucratsandthelevelofgreedinthe
society.
Answer: C
Diff:2
37) Whenthereisaresourceforwhichpropertyrightsarenotwelldefinedandthereisadifference
betweenprivatecostsandsocialcosts,thenallbutwhichofthefollowingisawaytoclosethe
difference?
A) Thefreemarketsystem B) Taxation
C) Subsidization D) Regulation
Answer: A
Diff:1
38) Commonproperty
A) isownedbyeveryone. B) isownedbynoone.
C) NeitherAnorBarecorrect. D) BothAandBarecorrect.
Answer: D
Diff:1
39) Theexclusiverightsofownershipofpropertyaregenerallyreferredtoas
A) levelpropertyrights. B) privatepropertyrights.
C) publicpropertyrights. D) commonpropertyrights.
Answer: B
Diff:1
40) Aresourcethatisacommonpropertyis
A) oilonlandownedbyadrillingandrefiningcompany.
B) naturalgasonlandownedbyanenergyproducer.
C) timberonlandownedbyalumbercompany.
D) waterinapubliclyownedriver.
Answer: D
Diff:1
41) Propertythatisownedbyeveryoneandthereforebynooneinparticularisreferredtoas
A) commonproperty. B) socialproperty.
C) privateproperty. D) commercialproperty.
Answer: A
Diff:1
42) Propertyownedbyeveryone(andthusnooneinparticular)isgenerallyreferredtoas
A) socialproperty. B) privateproperty.
C) commonproperty. D) naturalproperty.
Answer: C
Diff:1
43) WhichofthefollowingisNOTanexampleofcommonproperty?
A) atrampoline B) air C) gravity D) sunshine
Answer: A
Diff:2
44) Whichtypeofpropertywouldbethemostlikelytoexperiencepollution?
A) commonproperty B) privateproperty
C) propertyheldinpartnership D) corporateproperty
Answer: A
Diff:1
45) Forvoluntaryactiontocorrectanexternality,
A) transactioncostshavetobehigh.
B) transactioncostshavetobelow.
C) transactioncostshavetobesplitevenlybetweenallofthepartiesinvolved.
D) transactioncostsareirrelevant.
Answer: B
Diff:1
46) Allofthecostsassociatedwithmakingandenforcingcontractsarereferredtoas
A) alternativecosts. B) opportunitycosts.
C) marginalcosts. D) transactionscosts.
Answer: D
Diff:1
47) Inasituationinwhichpropertyrightsarenotwell -definedandsocialcostsexceedprivate

costs,governmentcanuseallofthefollowingtoinduceproducerstobringprivatecostsinto
alignmentwithsocialcostsEXCEPT
A) taxingproduction. B) coercivelimitsonproduction.
C) subsidizationofproduction. D) regulationofproduction.
Answer: C
Diff:1
48) SupposealargetreeonAdamspropertyblocksEvesviewoftheocean.Adamaccepts

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Contents

Year CurrentWidget BaseWidget

Market Quantity 2009 2010

68) Usingtheabovetable,thefollowingistheoutputofatwo -producteconomy.Thepriceindexin

CommodityMarket 2010Price CostofMarket2015PriceCostofMarket

12) Whichofthefollowingisincluded indeterminingGrossDomesticProduct?

StageofProduction DollarValueofSale ValueAdded

35) IfC=consumption,G=governmentexpenditures,andI= grossprivateinvestment

15) Ifdisposablepersonalincome(DPI)= $800andpersonalincometaxes= $80,thenwhatis

Year NominalGDP PriceDeflator

Nominal Price Real

11) AssumethataGMcarsellsfor$20,000intheUnitedStatesandthattheexchangerateis$1 = 1.3

2012 2013 2012 2013

2012 2013 2012 2013

Years 3% 4% 5% 6% 8% 10% 20%

30) Agoodestimateoftheworldspopulationthatlivesonlessthananinflation -adjusted$1.5per

42) ItcanbearguedthatThomasMalthus AnEssayonthePrincipleofPopulationstatementthat

15) Ifanationsproductionpossibilitiescurveshiftsoutward,weshouldexpectitslong -run

20) Asthecapitalstockgrowsandtechnologyimproves,wewouldexpectthelong -runaggregate

59) Whatismeasuredontheverticalaxiswhenwedrawagraphoflong -runaggregatesupply?

62) Whatismeasuredonthehorizontalaxiswhenwedrawagraphofthelong -runaggregate

34) Anindividualholds$10,000inanon -interest-earningcheckingaccount,andtheoverallprice

27) Whentheaggregatedemandcurveshifts________thanthelong -runaggregatesupplyshifts

136) Classicaleconomistssuggestthatunemploymentisashort -livedphenomenonbecause

15) AccordingtoKeynes,onceasystemattainsaneconomy -wideequilibrium,

27) InthesimpleKeynesianportionoftheupwardslopingshort -runaggregatesupplycurve,

58) Refertotheabovefigure.WhichofthegraphsisconsistentwiththeKeynesianshort -run

10) Intheshortrun,realGDPcanincreasebeyondalevelconsistentwiththelong -rungrowthpath

11) ThereasonthatitispossiblefortheeconomyintheabovefiguretobeatE 2 ratherthanatE 1 is

12) Intheabovefigure,theeconomywouldmostlikelymovefromAD 1 toAD2 becauseof

17) Refertotheabovefigure.Whichpointorpointsrepresent(s)ashort -runequilibrium?

38) Intheshortrun,ifaggregatedemandshiftstotheleftwhilethepositionoftheshort -run

40) Intheabovefigure,iftherelevantaggregatedemandcurveisAD 2 ,whataretheshort-run

41) Intheabovefigure,iftherelevantaggregatedemandcurveisAD 2 ,whattypeofgapexistsand

42) Intheabovefigure,whatcouldcausetheshiftofaggregatedemandfromAD1 toAD2 ?

47) Considertheabovefigure.IftheaggregatedemandfellfromAD 1toAD2 ,ournationwouldbe

48) Considertheabovefigure.IftheaggregatedemandcurverosefromAD 1toAD3 ,ournation

49) Considertheabovefigure.IftheaggregatedemandwentfromAD 2toAD3 ,ournationwould

20) Refertotheabovefigure.SupposeweareatE andthedollarweakens.Whichaggregatesupply

36) Theexchangeratelastmonthwas$1= 3.2Swissfrancs.Thismonthitis$1=3.12Swissfrancs.

37) Theexchangeratelastmonthwas$1= 1.15euros.Thismonthitis$1=1.35euros.Wecansay

41) Refertotheabovefigure.IftheaggregatedemandcurveshiftsbeyondAD 5 ,whichofthe

42) Refertotheabovefigure.IftheaggregatedemandcurveshiftsbeyondAD 5 ,thentheeconomy

Planned Planned Planned Real

33) Ifsavingequals$200whenrealdisposableincomeequals$1,000,thebreak -evenincomeis

55) Ifdisposableincome=$200billionandtheAPS= 0.9,then

65) Ifthemarginalpropensitytosave(MPS)= 0.1,then

74) Thearithmeticvalueof(1- MPC)equals

83) WhatcanwesayaboutAPC+APSandMPC+ MPS?

168) AssumingthatYd=$20,000andC= $22,000,wewouldfindthattheaveragepropensityto

169) AssumingthatYd=$20,000andC= $22,000,wewouldfindthattheaveragepropensitytosave

173) Considertheabovefigure.AtincomelevelYd = $30,theAPCisequalto

174) Considertheabovefigure.AtincomelevelYd = $110,theAPSisequalto

23) Supposethatthereisnogovernmentandnointernationaltrade.WhenC +Iislessthanthelevel

35) Theabovefigureshowsaconsumptionfunctionanda45 -degreeline.Realconsumptionisa

11) Intheabovefigure,atanincomelevelofY 3 andplannedexpendituresof(C+ I)1 ,

12) Intheabovefigure,atanincomelevelofY 1 andplannedexpendituresof(C+I)1 ,thelevelof

16) ThefollowingwouldcauseanupwardshiftintheC+ I+ G+ XcurveEXCEPT

Real Real Real Real Real Real Real TotalReal