"Macro Chapter 1 5 Multiple Choice Revised"
Chapter 1 Multiple Choice – Macro 1.A rational decision maker will take only those actions for which the expected marginal benefit a. is positive b. is at its maximum level c. is greater than or equal to the expected marginal cost d. is less than the expected marginal cost e. exactly equals the expected marginal cost 2. You currently subscribe to two magazines and are trying to decide whether you should subscribe to a third. What should determine your decision, if you are rational? a. the total cost of the magazines compared to the total satisfaction you would receive b. the total amount of satisfaction you would get from the magazines c. the enjoyment you would get from the third magazine d. the cost of the third magazine, including the time it takes to read it e. the cost of the third magazine compared to the additional enjoyment you would get from it 3. Microeconomics is the study of a. marginal or inferior products b. the economic behavior of individual decision makers c. the behavior of the economy as a whole d. how to use the fewest natural resources to produce goods and services e. government's role as a producer in the economy 4. Macroeconomics is the study of a. the behavior of large firms in the marketplace b. the economic behavior of individual decision makers c. the behavior of the economy as a whole d. how to use the fewest natural resources to produce goods and services e. government's role as a stabilizing influence on the economy 5.A good economic theory a. has realistic assumptions b. contains as much detail as possible c. cannot be proven false d. predicts well e. can only be presented in mathematical terms 6 . The basic purpose of economic models is to a. construct simplifying assumptions about the real world b. explain reality in all its complexity c. collect empirical data to support the facts d. construct situations where controlled experiments can be carried out e. provide explanations for, and predictions of, economic events 7. Which of the following is an accurate list, in order, of the steps of the scientific process? a. define variables; state assumptions; form a hypothesis; test b. state assumptions; define variables; form a hypothesis; test c. identify variables; state assumptions; test; form a hypothesis d. identify variables; form “other things equal” assumptions; form behavioral assumptions; test e. form “other things equal” assumptions; form behavioral assumptions; form hypothesis; test 8 Which of the following is an example of a positive statement? a. Workers with families should be paid at least the minimum wage. b. If crime rates were reduced, the world would be a better place in which to live. c. Marginal tax rates should be reduced for individuals in the highest tax brackets. d. An increase in the price of gasoline will cause a reduction in the amount purchased. e. Corrupt politicians ought to be voted out of office. 9. A normative economic statement a. is a hypothesis used to test economic theory b. is a statement of fact c. is a statement of what ought to be, not what is d. indicates what will occur if certain assumptions are true e. enables economists to test hypotheses 10.Which of the following is a normative statement? a. The U.S. rate of unemployment was lower in 2004 than it was in 1994. b. Savings accounts earn interest, whereas checking accounts do not. c. Congress must recognize that the growing national debt is the most serious problem that the country faces. d. The unemployment rate increases when the percentage of the labor force without jobs increases. e. The unemployment rate among teenagers is higher than the rate among adults. 11.The problem of scarce resources a. means that in some cities there are not enough jobs b. could be solved if the unemployment rate fell c. is that there are not enough resources to satisfy people's unlimited wants d. is that resources are used inefficiently e. can be solved by lowering taxes 12.Scarcity is best defined as a. unlimited resources b. a shortage -- when buyers cannot obtain the goods they want c. a surplus -- when sellers cannot sell the goods they produce d. insufficient resources to satisfy unlimited wants e. the private ownership of society's resources 13.Which of the following statements regarding the basic economic problem of scarcity is correct? a. The problem only exists in countries that are not highly industrialized. b. The problem is likely to disappear as production increases. c. The problem is sure to disappear as technology improves. d. The problem will exist as long as resources are available in limited amounts. e. The problem will disappear as a person's income falls. 14.Economics is the study of a. how the human race differs from other species b. how individuals amass personal fortunes in the stock market c. how individuals and nations deal with the problem of scarcity d. role that money plays in the economy e. how goods and services are distributed throughout the world 15.A resource is something that a. is used to produce goods and services b. is provided by nature, not made by society c. exists in unlimited quantities d. must be produced by a firm e. consumes goods and services 16.In economics, capital is defined as a. natural resources, such as water, oil, and iron ore b. the natural, unskilled abilities of people c. human creations used in the production process d. money and other financial assets e. the willingness of business owners to take risks 17.Which of the following would an economist classify as capital? a. 100 shares of Microsoft stock b. a $50 bill c. a credit card d. a lawyer's personal computer e. a bauxite mine in Jamaica 18.Economists classify all of the following as capital, except one. Which one is not capital? a. a $20 bill in a firm's petty cash drawer b. the building where our economics class meets c. a plumber's wrench d. a railroad car e. a factory 19.The respective payments for the resources of natural resources, labor, capital, and entrepreneurial ability are a. interest, wages, profit, and rent b. profit, rent, interest, and wages c. rent, wages, profit, and interest d. interest, profit, wages, and rent e. rent, wages, interest, and profit 20.An entrepreneur a. always makes a profit b. generally avoids risky situations c. claims the residual (i.e., whatever is left over) after other resource suppliers are compensated d. is a parasite that benefits by not paying other resources for their services e. is the manager who runs an enterprise and keeps the customers happy 21.If a business produces and sells only one unit of a good, its profit would be the a. price received for the good b. price of the product minus the cost of the resources used to produce the product c. return paid to the firm's bank on its outstanding loans d. price of the product minus the wages paid for the labor used to produce it e. wages paid for the labor used to produce the product minus the price 22.Resources are divided into the following broad categories: a. people, money, and machines b. saving, spending, investment, and capital c. human, technological, and government d. natural resources, labor, capital, and entrepreneurial ability e. free, scarce, abundant, and unlimited 23."Natural resources" refers a. bodies of water b. trees c. oil reserves d. minerals e. All of the answers are correct. 24.Goods and services are exchanged in a. product markets b. resource markets c. inventory markets d. classified markets e. government markets 25.Which of the four types of decision makers in the U.S. economy plays the largest role? a. U.S. firms and government because they produce the products that households consume b. U.S. households because they supply goods to the product markets and are demanders in resource markets c. foreign households, firms, and governments because they greatly outnumber those of the United States d. U.S. firms and government because they create employment for domestic households and produce goods and services e. U.S. households, as buyers in product markets and sellers in resource markets 26.Households a. own and sell resources b. play a very minor role in the economy c. supply goods and services d. are the largest purchasers of resources e. none of the above 27.The assumption that individuals act rationally implies that a. people think only of themselves and disregard the well-being of others b. people undertake all those activities that yield benefits to themselves c. people only consider the costs of an activity to decide whether it is worthwhile d. the greater the cost of a charitable deed to a benefactor, the more likely he or she is to perform that deed e. people implicitly calculate the costs and benefits of an activity to decide if it is worthwhile 28.Rational economic decision makers will make a change only if a. the change is free of risk b. there are no costs involved c. their expectations are correct d. there is no uncertainty about the results of the change e. the expected marginal benefit exceeds expected marginal cost 29.In economics, the term "marginal" usually refers to a. a small change in an economic variable b. a low-quality product or resource c. an unimportant and irrelevant economic variable d. an all-or-nothing economic decision e. a footnote or minor point 30.Economists believe that people respond in a predictable way to changes in costs and benefits. The term that best describes this phenomenon is a. opportunity cost b. scarcity c. innovation d. marginal analysis e. other things equal (or ceteris paribus) 31. "There should be less discrimination against the elderly." This is an example of a a. normative statement b. positive statement c. forecast d. hypothesis e. prediction 32.The difference between a positive economic statement and a normative statement is that a. a positive statement must be true; a normative statement is often not true b. a normative statement must be true; a positive statement is often not true c. a positive statement can be verified; a normative statement cannot d. a normative statements can be verified; a positive statement cannot e. a positive economic statement is a moral judgment; a normative economic statement is not a moral judgment 33.When labor is relatively expensive, as it is in Japan, a. manufacturers will employ lots of labor b. the unemployment rate will be high c. vending machines displace labor, causing unemployment d. businesses will substitute capital -- such as vending machines -- in place of labor e. alcohol and cigarettes must be sold through vending machines 34. One of the difficulties with an economic policy such as rent control is that a. politicians do not consider its secondary effects b. economists disagree about the impacts of the policy c. it is difficult to enforce antidiscrimination laws in the rental housing market d. it makes landlords wealthy at the expense of renters e. pressure from landlords resulted in its repeal in many cities 35.As a scientist, an economist's main professional objective is to a. become wealthy b. control the government's decision-making processes c. understand how the economy works d. discover which stock prices will decrease e. understand the psychology of participants in markets 36.Which of the following is the fundamental resource that is the basis of labor? a. capital b. natural resources c. time d. money e. entrepreneurial ability 37.Which of the following is true about entrepreneurs? a. They have the talent required to dream up a new product or find a better way to produce an existing one. b. They are rewarded by profits. c. They sometimes suffer losses. d. They benefit from what’s left over after paying other resource suppliers. e. All of the answers are correct. 38.In a circular-flow model, households supply all of the following except a. labor b. goods and services c. capital d. entrepreneurial ability e. natural resources 39.Step one in the scientific method is a. formulate a hypothesis b. reflect an opinion c. specify assumptions d. identify the question and define relevant variables e. test the hypothesis 40.Someone who committed the association-is-causation fallacy might conclude that a. event B, which follows event A, was caused by the event A b. event B, which follows event A, was not necessarily caused by event A c. the simplest model is the best predictor d. what is true for the individual is also true for the group e. what is true for the individual is not necessarily true for the group Chapter 2 1.Because of specialization and comparative advantage, most people a. consume only what they produce themselves b. consume the products produced by their family and friends c. consume the products of many other specialists d. do not use money as a medium of exchange e. share whatever they produce 2.The "division of labor" refers to a. discrimination in labor markets b. separating a job into smaller tasks completed by different people c. one worker who divides his time among different jobs and duties d. defining a job according to the appropriate sex e. the fact that two 20-year-olds are more productive than one 40-year-old 3.Which of the following is an example of division of labor? a. an author writing a book one chapter at a time b. a firm trying to get rid of a labor union c. separating resources into four categories: land, labor, capital, and entrepreneurial ability d. allocating revenue among a firm's resource suppliers e. dividing an assembly process into separate steps 4.At various points along the production possibilities frontier, a. the greatest achievable output levels are illustrated b. resources are not fully employed c. more of one good can be obtained without giving up more of the other d. more efficient output levels are possible e. society is equally well off 5.Society's production possibilities frontier a. helps explain the immense complexity of the real economy b. demonstrates that, although resources are scarce for individuals, there is no problem of scarcity for society as a whole c. is based on unrealistic assumptions and therefore has no value as an economic tool d. is based on simplifying assumptions, but is still useful for illustrating scarcity, opportunity cost, and economic growth e. is based on the assumption that technology is constantly changing 6."Efficiency" refers to a. producing output using the least amount of labor b. producing output using the least amount of capital c. producing as far inside the production possibilities frontier as possible d. producing only one out of many possible commodities e. getting the maximum possible output from available resources 7.If all resources are used efficiently to produce goods and services, a nation will find itself producing a. inside its production possibilities frontier b. somewhere on its production possibilities frontier c. outside of its production possibilities frontier d. at one extreme end of its production possibilities frontier e. more of one product with no decrease in the production of any other product 8 A point outside the production possibilities frontier a. represents unemployment of resources b. represents full employment of resources c. would not represent an efficient combination of goods d. cannot be reached using the available technology e. is less desirable than one that lies inside the frontier Exhibit 2-3 9.In Exhibit 2-3, if all the economy's resources are used efficiently to produce good B, then the economy is at point a. g b. b c. h d. i e. e 10.In Exhibit 2-3, if all the economy's resources are used efficiently to produce good A, then the economy is at point a. h b. e c. d d. i e. c 11.Opportunity cost is defined a. only in terms of money spent b. as the value of all alternatives not chosen c. as the value of the best alternative not chosen d. as the difference between the benefits from a choice and the benefits from the next best alternative e. as the difference between the benefits from a choice and the costs of that choice 12.Suppose you have an hour before your next class starts. You can either read a book, get something to eat, or take a nap. The opportunity cost of getting something to eat is a. the cost of what you eat b. the value of reading and sleeping c. the loss of value from not reading or sleeping d. the net benefit of sleeping for another hour e. impossible to determine because the most preferred alternative is not known 13.The opportunity cost of going to college is best measured by the a. cost of room and board b. cost of tuition c. cost of room and board plus tuition d. income forgone by not working, plus tuition e. income forgone by not working, plus tuition and room and board 14.Suppose you have a choice of working full-time during the summer or going full-time to summer school. Summer tuition and books are $2,200. If you worked, you could make $7,000. Your rent is $1,000 for the summer, regardless of your choice. The opportunity cost of going to summer school is, therefore, a. $2,200 b. $7,000 c. $8,000 d. $9,200 e. $10,200 15.The opportunity cost of going to college includes the costs of tuition, books, fees, and a. nothing else b. housing c. housing and food d. earnings forgone by not working full-time e. housing, food, and earnings forgone by not working full-time 16.Which economic concept does the expression "time is money" reflect? a. opportunity cost b. specialization c. market exchange d. comparative advantage e. efficiency 17 Sunk costs a. can only be measured in monetary terms b. are opportunity costs c. should influence a person’s choice if that person is a marginal decision maker d. lower the efficiency of production e. should not be considered when making economic decisions 18.The law of comparative advantage says that a person should produce a good if she a. has the greatest desire to consume that good b. has the lowest opportunity cost of producing that good c. has an absolute advantage in a related activity d. has a comparative advantage in a related activity e. is equally good at producing this good as someone else is 19.If Monica has a comparative advantage in baking and George has a comparative advantage in sewing, then a. Monica must have an absolute advantage in baking b. Monica must have an absolute advantage in sewing c. George must have an absolute advantage in baking d. George must have an absolute advantage in sewing e. we can conclude nothing about absolute advantage 20.A country has an absolute advantage in the production of a good if that country a. can produce the good using fewer resources than another country would require b. has the lowest opportunity cost of producing the good and can produce it with the fewest resources c. has the lowest opportunity cost of producing the good regardless of whether it is produced with the fewest resources d. has the greatest opportunity cost of producing the good regardless of whether it is produced with the fewest resources e. has the greatest opportunity cost of producing the good and produces it with the fewest resources 21.If Sam can chop up more carrots per minute than Joe can, then a. Joe has an absolute advantage in carrot chopping b. Joe must have a comparative advantage in carrot chopping c. Sam has an absolute advantage in carrot chopping d. Sam must have a comparative advantage in carrot chopping e. we can conclude nothing about absolute advantage 22.If Daniel produces one pair of shoes in 4 hours and Sarah produces one pair of shoes in 3 hours, then a. Sarah has a comparative advantage in shoemaking b. Daniel has a comparative advantage in shoemaking c. Sarah has an absolute and a comparative advantage in shoemaking d. Daniel has an absolute and a comparative advantage in shoemaking e. Sarah has an absolute advantage in shoemaking 23.In one week, Mohammed can knit 5 sweaters or bake 240 cookies. The opportunity cost per sweater for Mohammed is a. $240 b. 240 cookies c. 48 sweaters d. 1/48 of a cookie e. 48 cookies 24.Barter occurs when a. two people share everything b. one product is exchanged directly for another product c. money is used to buy goods d. money is exchanged directly for other money e. goods are used to buy money 25.Money facilitates trade because a. it eliminates the need for specialization b. it prevents people from taking advantage of each other c. it serves as a medium of exchange d. division of labor allows money to be produced at a lower cost e. people do not benefit from barter unless money is used 26.A medium of exchange must be a. approved by the government b. socially acceptable in exchange for goods and services c. easy to reproduce d. used to eliminate specialization and the division of labor e. used when a system of barter exists 27.Which of the following provide the best evidence of specialization? a. a firm that produces a line of related products, such as eight kinds of breakfast cereal b. an architect who is willing to practice in only one geographic area c. a physician that practices in a specialty area such as cardiology or orthopedic surgery d. a family that eats at Wendy's every Thursday night e. a retailer that sells goods but provides no services 28.The division of labor a. allows more people to be employed b. allows tasks to be performed more efficiently c. makes people happier on the job d. means that less management is required e. means that less equipment will be used 29 Which of the following is not a gain from division of labor? a. Workers' abilities are matched to tasks. b. Workers gain experience from the repetition of the tasks. c. Workers save time by not moving to different tasks. d. Workers' morale increases as tasks become more specialized. e. The introduction of labor-saving machinery is possible. 30.Division of labor increases productivity because a. tasks can be assigned according to individual tastes and abilities b. workers who repeatedly perform the same tasks become bored c. each worker must learn each of the numerous tasks in the total production process d. specialization of labor allows for the introduction of cheaper, less sophisticated production techniques e. managers can force workers to produce goods that are valued more highly than the costs of producing them. 31 Which of the following points in Exhibit 2-3 is unattainable, given the quantity of resources and level of technology? a. h b. g c. f d. i e. e 32.Which of the following points in Exhibit 2-3 represents an inefficient use of the economy's resources? a. g b. i c. f d. d e. h Exhibit 2-4 33. In Exhibit 2-4, what is the opportunity cost of moving from point c to point b? a. 3 units of food b. 22 units of education c. 1 unit of food d. 12 units of education e. 62 units of education 34.Increases in resources or improvements in technology will cause the production possibilities frontier to a. shift outward b. shift inward c. become a straight line d. become horizontal e. become vertical 35.An outward shift of the production possibilities frontier a. reflects economic stability b. reflects economic growth c. reflects economic decline d. does not relate to the state of the economy e. is always a parallel shift 36 Which economic question does the decision to produce butter instead of guns answer? a. What to produce? b. How to produce? c. For whom to produce? d. Who has a comparative advantage in gun production? e. Who has an absolute advantage in butter production? 37.If dairy farmers use automatic milking machines instead of milking by hand, which economic question does their decision answer? a. What to produce? b. How to produce? c. For whom to produce? d. Who has a comparative advantage in milking? e. What is the price of milk? 38.Which economic question does the decision to give all of the butter the economy produces to the homeless answer? a. What to produce? b. How to produce? c. For whom to produce? d. Who has a comparative advantage in butter production? e. Who has an absolute advantage in butter production? 39.Every economy must answer each of the following questions except one. Which is the exception? a. Which goods will be produced? b. Why are these particular goods produced? c. Which resources should be used? d. How should resources be combined to produce each product? e. Who will actually consume the goods produced? 40.The set of mechanisms and institutions that resolve the basic economic questions is called the a. economic system b. production possibilities dilemma c. business resolution device d. absolute advantage determination e. comparative advantage determination Chapter 3 1.The corporate form of business organization a. is chosen by more firms than any other form of organization in the United States b. gives firm owners limited liability c. generates less than half of the output in the U.S. economy d. combines the limited liability of the partnership with the personal control of the sole proprietorship e. is the least complex form of business organization 2.Which of the following is a disadvantage of the corporation compared to the sole proprietorship? a. limited liability b. difficulty raising start-up money c. lack of profitability d. corporate income is taxed twice e. corporations are more vulnerable in the case of the death of an owner 3.Contracts are enforced by a. the firms that make the contracts through buy-out clauses b. law firms that specialize in contract enforcement c. corporations specializing in contract writing and enforcement d. the government through the judicial system e. both households and firms through customer relations departments 4.Natural monopolies occur when a. government antitrust laws are too weak or not enforced b. negative externalities are present c. firms collude to set prices and divide the market among themselves d. one firm can service the market more cheaply than two or more firms can e. a public good is produced by a private firm 5.Which of the following is a defining characteristic of a public good? a. It is produced and distributed by the government. b. The decision to produce it is made by the public through the voting process. c. It is produced and distributed by private firms according to government regulations. d. It is freely available to everyone once it is produced. e. It is purchased by one government agency from another government agency. 6.The funds to pay for police protection are usually raised through taxation because a. police protection would be hard to provide exclusively to those who voluntarily pay for it b. people would not voluntarily pay salaries to officials who might arrest them c. police protection is a basic necessity d. goods financed through taxation can be guaranteed to all who pay for it e. the government believes that those who receive the benefits from the service should pay for it 7.A public good is one that is supplied to a. only people who pay for it b. only people who do not pay for it c. all people, regardless of whether they pay or not d. the government from private firms e. foreign governments from our federal government 8.Externalities are defined as a. any transaction external to the firm b. costs or benefits that fall on third parties c. policies that firms undertake to sell products outside the country d. managers' dealings with stockholders outside the firm e. costs of maintaining plant and equipment to avoid the scrutiny of external auditors 9.An example of a positive externality is a. pollution because it affects people not directly involved with producing it b. a homeowner's maintenance of a beautiful lawn because this creates a benefit for neighbors c. creating a monopoly d. driving a car that emits pollution e. cigarette smoking because this imposes an indirect cost on people around the smoker 10.Which of the following is not a government transfer program? a. unemployment compensation b. Social Security c. food stamps d. Medicare e. movement of soldiers to a different military base 11.Which of the four types of economic decision makers is most important? a. firms, because they produce all goods and services in the economy b. households, because they demand goods and services and supply resources c. government, because it ultimately sets and enforces the "rules of the game" d. government, because it steps in when there is market failure e. the rest of the world, because there are over 150 countries 12.Households act as demanders when they demand a. that corporate executives and government officials be held accountable for their actions b. dividends from the stocks they hold c. interest and capital gains from the bonds they hold d. goods and services from firms and the government e. payment for the goods and services they sell to firms and governments 13.In the United States since World War II, there has been a. a dramatic increase in the population living in rural areas b. a decline in the number of women in the labor force c. a decrease in the opportunity cost of working in the home d. more specialization of production within households e. a dramatic increase in the number of married women in the labor force 14.The term "utility" means a. satisfaction b. a low-valued good c. productivity d. adaptability e. efficiency 15.Economists generally assume that a. firms act to maximize the dividends paid to stockholders b. households act to maximize their wealth c. households act to maximize utility d. firms act to maximize revenue e. both households and firms act to minimize expenditures 16.Which resource generates the largest share of the income in the United States? a. labor b. land c. capital d. entrepreneurial ability e. money 17.Which of the following is an example of an in-kind transfer? a. welfare payments b. most Social Security benefits c. unemployment compensation payments d. food stamps e. charitable contributions 18.Luigi owns and operates a small restaurant. The income he receives from the restaurant is classified as a. saving b. proprietor's income c. wages and salaries d. rental income e. dividends 19.Households supply four basic types of resources. They include all of the following except a. natural resources b. final goods and services c. capital d. entrepreneurial ability e. labor 20.Household income is spent on all of the following except one. Which is the exception? a. services b. tax payments c. durable goods d. nondurable goods e. dividends 21.Which of the following is an example of a durable good? a. food prepared at home b. food eaten at a restaurant c. high-fashion clothing d. binoculars e. motor oil 22.Which component of U.S. household spending has grown the most over the past ten years? a. taxes b. savings c. spending on services d. spending on nondurable goods e. spending on durable goods 23.A cottage industry is one that a. produces rural housing b. takes advantage of the division of labor c. uses highly specialized resources in a complex production process d. produces cottage cheese e. carries out production in workers' homes 24.Which of the following is a major advantage of the sole proprietorship? a. separation of ownership and control b. limited liability for business debt c. transferability of ownership and firm continuity over time d. ease of start-up e. ease of obtaining financing 25.Which form of business organization is the most common in the United States? a. sole proprietorship b. partnership c. corporation d. nonprofit organization e. S-corporation 26.Which of the following is most likely to be a partnership? a. Uncle Mort's Red Wrigglers b. the accounting firm of Hope and Williams c. General Motors d. the Boston Symphony Orchestra e. the U.S. Post Office 27.All of the following are advantages of partnerships except one. Which is the exception? a. they are relatively easy to start b. their profits are taxed once as personal income c. their liability is limited by each partner's share of the business d. a greater opportunity for specialization by the owners e. a continuation of the firm if one partner dies 28.Suppose you form a legal partnership with your best friend, and she purchases consulting services calling for a $100,000 fee. Your business is broke, and you never wanted the consultants to work for you -- only your partner did. For how much of this debt are you legally liable? a. none of it b. all of the $100,000 c. the proportion reflected by the proportion of the business owned d. only an amount equal to the assets of the business e. $50,000 29.Owners of corporations are referred to most frequently as a. entrepreneurs b. lien holders c. limited partners d. managers e. stockholders 30.Stockholders share in the profits of a corporation a. in proportion to their years of stock ownership b. in proportion to their ownership of stock c. equally regardless of number of shares owned d. only if they participate in firm management decisions e. only if they attend stockholders' meetings 31.The term "fiscal policy" refers to a. the amount of physical output produced by firms b. the means by which government policy makes firms more productive c. the avenue by which government influences credit markets d. spending and taxing by governments e. a tool of government that works in the opposite direction of monetary policy 32.The difference between fiscal policy and monetary policy is that a. fiscal policy is macroeconomic policy and monetary policy is microeconomic policy b. monetary policy is macroeconomic policy and fiscal policy is microeconomic policy c. fiscal policy involves regulation of natural monopolies and monetary policy involves the provision of public goods d. monetary policy involves regulation of the money supply and fiscal policy involves government spending and taxing e. fiscal policy involves the promotion of competition and monetary policy involves collecting money to pay for taxes 33.When the social cost of production is greater than the private cost, we have a a. positive externality b. negative externality c. public good d. private good e. positive spillover 34.A common assumption that economists make about the behavior of elected officials is that they try to a. maximize the size of their government salaries b. maximize the size of their control over the budget process c. maximize the number of votes they receive in the next election d. minimize the government's expenditures in order to balance the budget e. conform to the wishes of special interest groups so that the government behaves as a single, consistent decision maker 35.Gross Domestic Product is the market value of a. all exchanges made during the course of a year b. all final goods produced during the course of a year c. all monetary transactions during the course of a year d. all the goods produced during the course of a year over and above what is required to maintain the population and the stock of capital e. all final goods sold during the course of a year 36.What part of federal government spending has grown the most rapidly in recent years? a. national defense b. welfare c. interest on the national debt d. social security and Medicare e. all other forms of federal government spending 37.The main source of revenue for the U.S. federal government is a. personal income taxes b. corporate income taxes c. sales taxes d. borrowing on financial markets e. revenue from the sale of government goods and services 38.Which of the following taxes is most clearly based on the benefits-received principle of taxation? a. corporate income tax b. gasoline tax c. personal income tax d. payroll tax e. value added tax 39.The incidence of a tax refers to a. who receives the benefits from the revenue generated by the tax b. the changes in the marginal tax rate as income increases c. whether the tax is regressive, proportional, or progressive d. who bears the burden of the tax e. whether the tax is based on the ability-to-pay principle 40.A progressive tax means a. people who make more money pay less total taxes b. the marginal tax rate increases as income increases c. the percentage of income paid out decreases as income increases d. people who are poor receive the proceeds of the tax e. the same thing as a flat-rate tax Chapter 4 1.Which of the following best defines supply? a. the amount of a good that producers want to sell at a particular price b. the amount of a good that consumers will buy c. the amount of a good that producers are willing and able to sell at each possible price, other things constant d. the amount of a good that producers are willing to sell at each possible price, other things constant e. the amount of a good that producers are willing and able to buy at each possible price, other things constant 2.Which of the following is true of an increase in quantity supplied of a given good? a. It is represented by a rightward shift in the supply curve. b. It could result from a technological improvement. c. The price of a key resource used to produce the good may have decreased. d. It is caused by an increase in the price of the good. e. The price of an alternative good has increased. 3.The market supply curve of a particular product indicates the total quantities a. that are actually sold during a given time period b. that buyers are willing to purchase at alternative prices c. that sellers are willing and able to offer at alternative prices d. that sellers are willing to offer for sale e. of complements offered for sale 4.Larger quantities of any good will be supplied at higher prices because a. consumers will be more satisfied b. higher prices attract resources from other uses c. people are naturally lazy and have to be bribed to give up their leisure d. price and quantity supplied are inversely related e. of the law of decreasing opportunity cost 5.Supply and demand curves both a. have negative slopes b. have positive slopes c. relate quantities to prices d. reflect the actions of producers e. reflect the actions of consumers 6.As the price of milk increases, producers are normally willing to supply greater quantities. This is known as the law of a. demand b. gravity c. variable proportions d. profitability e. supply 7.Which of the following would shift the supply curve for a product to the right? a. an increase in the price of a resource used in the good's production b. the expectation of a higher price in the near future c. an increase in the price of the product d. an increase in the price of an alternative good e. an improvement in the technology for producing the good 8.An improvement in technology would shift a. the demand curve leftward b. the demand curve rightward c. the supply curve leftward d. neither the supply nor the demand curve; instead, there is movement along both of them e. the supply curve rightward 9.Which of the following would shift the supply curve for a good to the left? a. an increase in the price of that good b. a decrease in the price of an alternative good c. an improvement in technology for producing that good d. an increase in the cost of an important resource used to make that good e. an increase in the number of producers 10.An increase in the price of a good normally increases the a. demand for its substitutes b. supply of complements for the good c. purchasing power of consumers’ dollar incomes d. money income of the consumer e. quantity demanded of all goods that are unrelated to the good in question 11.The demand for a product is the amount that a. buyers purchase in the market b. buyers are willing to purchase at a given price c. sellers are willing to sell at a particular price d. buyers are willing and able to purchase at alternative prices e. buyers are able to purchase at a specific price 12.The law of demand says that the lower the price of a good, other things constant, a. the smaller the demand for that good b. the larger the demand for that good c. the smaller the quantity demanded of that good d. the larger the quantity demanded of that good e. the smaller the real income of consumers and the lower the quantity demanded of that good 13.The law of demand assumes that as the price of a good increases, a. people recognize that its price may be even higher in the future, so they buy now rather than later b. consumers tend to shift their purchases to relatively cheaper substitutes c. people will buy less of it in the hope that the good will be cheaper in the future d. the consumer’s money income increases, and he or she is less able to buy all goods, including the good whose price has increased e. the consumer’s money income decreases, and if the product is a normal good, more will be purchased 14.In what way is consumer demand different from consumer wants? a. Demand is only for necessities. b. Demand is only for luxuries. c. Demand takes into account the ability to pay. d. Consumer wants are only for luxuries. e. Consumer wants are only for necessities. 15.Movements along a demand curve are called changes in a. demand b. opportunity costs c. quantity demanded d. the substitution effect e. preferences 16.Suppose you drink more tea because the price of coffee has increased. Which of the following best explains your action? a. the law of supply b. tea and coffee are complements c. the substitution effect d. the income effect e. your nominal income has increased 17.The law of demand is illustrated by a demand curve that is a. horizontal b. vertical c. upward sloping d. constant e. downward sloping 18.For which of the following would the income effect of a price change be greatest? a. ballpoint pens b. air travel to Australia c. chewing gum d. haircuts e. college textbooks 19.The income effect of a decrease in the price of legal services (a normal good) is a(n) a. decrease in the demand for legal services b. decrease in the quantity demanded of legal services c. increase in the demand for legal services d. increase in the quantity demanded of legal services e. new demand curve because everything else is no longer constant 20.Which of the following statements about demand is true? a. Since most college students want a Mercedes sports coupe, their demand for it is high. b. If price increases, the demand curve shifts to the right. c. The demand curve for bacon will not shift when the price of bacon changes. d. If a supply curve shifts, thereby changing the price, the demand curve will shift as well. e. If a demand curve shifts, the supply curve will shift as well, whether or not the price changes. 21 If we say that demand has increased, we mean that there has been a. a leftward movement along the demand curve b. a rightward movement along the demand curve c. a leftward shift of the demand curve d. a rightward shift of the demand curve e. an increase in the slope of the demand curve 22 A change in income will a. affect the demand for candy through the income effect of a price change b. affect the quantity demanded of candy through the income effect of a price change c. shift the demand curve for candy d. have no effect on the demand for candy, because income is assumed constant along a demand curve e. affect quantity demanded only if candy is a normal good 23.Which of the following is most likely to be an inferior good? a. airline travel b. restaurant meals c. a subscription to the Wall Street Journal d. soft drinks e. used clothing 24.If demand for personal computers increases as a result of an increase in income, a. personal computers must be a normal good b. personal computers must be an inferior good c. personal computers must be a complement d. the substitutes for personal computers must be inferior goods e. the substitution effect is larger than the income effect 25.The difference between normal and inferior goods is that a. normal goods are of better quality than inferior goods b. an increase in price will shift the demand curve for a normal good rightward and the demand curve for an inferior good leftward c. if the price of a normal good increases, individuals who buy it are poorer; for inferior goods, the opposite is true d. an inferior good is something that will not be demanded until quantities of the normal good have been exhausted e. an increase in income will shift the demand curve for a normal good rightward and the demand curve for an inferior good leftward 26.Which of the following is the best example of substitutes? a. coffee and cream b. videotapes and VCRs c. money and biscuits d. tortillas and salsa e. hiking boots and athletic shoes 27.Two goods are considered substitutes only if a(n) a. decrease in the demand for one leads to a decrease in the supply of the other b. increase in the demand for one leads to a decrease in the supply of the other c. increase in the price of one leads to an increase in the demand for the other d. decrease in the price of one leads to an increase in the demand for the other e. decrease in the supply of one leads producers to switch to production of the other 28.Which of the following is the best example of complements? a. milk and cheese b. coffee and tea c. CDs and DVDs d. hiking boots and athletic shoes e. film and film processing (developing) 29.If the price of potato chips increases, other things constant, demand for potato-chip dip will a. not change; only quantity demanded will change b. increase because the goods are substitutes c. decrease because the goods are substitutes d. decrease because the goods are complements e. increase because the goods are complements 30.If a certain type of clothing becomes more fashionable, we would expect that its price a. will decrease and quantity will remain constant b. and quantity will both decrease c. will increase and quantity will decrease d. will decrease and quantity will increase e. and quantity will both increase 31.Which of the following will not shift the market supply curve for corn? a. a change in the price of corn b. a change in the price of soybeans c. a change in the price of herbicides and pesticides d. a change in storage technology e. a change in the number of acres planted in corn 32.Markets reduce transactions costs a. by decreasing the time spent searching for information about goods and services b. only when they have a highly structured set of rules like the New York Stock Exchange c. because each market uses the same set of rules for buying and selling goods and services d. only when the government can coordinate the plans of many buyers and sellers e. when prices are set by the sellers and are not determined by negotiation between the buyers and the sellers 33.When quantity demanded of a good is less than the quantity supplied at the prevailing market price, a. the market is in equilibrium b. the price of the good tends to rise c. the price of the good tends to fall d. the demand curve shifts rightward until the surplus is eliminated e. the supply curve shifts leftward until the shortage is eliminated 34.A surplus of shoes will cause a. a decrease in the supply of shoes b. a decrease in the demand for shoes c. both a decrease in the supply of shoes and an increase in the demand for shoes d. a decrease in the price of shoes, through a shift of either the supply curve or the demand curve e. a decrease in the price of shoes 35.Suppliers recognize there is a shortage in the market for their product when they notice that a. the quantity supplied exceeds the quantity demanded b. the quantity demanded is falling c. inventories are falling d. production exceeds new orders for the product e. government economists announce a shortage exists 36.A shortage of textbooks will cause a. a decrease in the supply of textbooks b. a decrease in the demand for textbooks c. both an increase in the supply of textbooks and a decrease in the demand for textbooks d. an increase in the price of textbooks, caused by a shift of either the supply curve or the demand curve e. an increase in the price of textbooks Exhibit 4-1 Quantity Quantity Price demanded supplied $1.00 100 10 1.20 90 30 1.40 80 50 1.50 70 70 1.60 60 90 37. If the price of the good described in Exhibit 4-1 is $1.20, then there is a a. shortage of 30 units b. surplus of 30 units c. shortage of 60 units d. surplus of 60 units e. surplus of 20 units 38.If the price of the good described in Exhibit 4-1 is $1.40, then there is a a. shortage of 30 units b. surplus of 30 units c. shortage of 20 units d. surplus of 20 units e. surplus of 10 units 39.The most important characteristic of the equilibrium price is that it a. guarantees that producers earn profit b. clears the market, leaving neither a surplus nor a shortage c. maximizes the quantity demanded d. minimizes the quantity demanded e. guarantees that all buyers who desire the product will get it 40.An increase in demand will cause a(n) a. increase in supply b. decrease in supply c. decrease in quantity supplied d. increase in quantity supplied e. decrease in equilibrium price Chapter 5 1.Adam Smith's "invisible hand" explains a. why people act in their own best interests b. why the government intervenes to overcome failures in private markets. c. how people, acting out of self-interest, unintentionally promote the general good d. how comparative advantage and specialization promote international trade e. how the creation of goods and services (supply) generates its own demand by creating employment and income 2.An increase in the price level a. means that the aggregate demand curve has shifted leftward b. means that inflation occurred c. means the employment level has decreased d. will shift both the aggregate supply curve and the aggregate demand curve leftward e. will shift both the aggregate supply curve and the aggregate demand curve rightward 3.An increase in government spending, other things constant, would cause a a. leftward shift of the aggregate supply curve b. rightward shift of the aggregate supply curve c. leftward shift of the aggregate demand curve d. rightward shift of the aggregate demand curve e. movement toward equilibrium, along curves that do not shift 4.Which is true of John Maynard Keynes? a. He believed that serious economic contractions were natural phases in an otherwise healthy system. b. He provided a model that closely resembled that of Adam Smith. c. He advocated a decrease in the money supply to stabilize the economy. d. He argued that increased government demand should offset reduced private sector demand to prevent depression. e. He advocated tax increases to balance the federal government's budget during the Great Depression. 5.Which of the following best describes the Keynesian approach to economic policy? a. supply-side b. classical c. demand-side d. mercantilist e. laissez-faire 6.The Keynesian approach to fiscal policy calls for a. budget deficits during periods of inflationary pressure b. budget surpluses during periods of high unemployment c. a balanced budget despite the state of the economy d. tax cuts during recession e. spending increases during inflation 7.The Employment Act of 1946 a. guaranteed full employment b. obliged the federal government to hire as many people as it could to achieve full employment c. gave the federal government the power to levy an income tax d. imposed a responsibility on the federal government to foster full employment e. obligated the federal government to run budget surpluses to achieve full employment . 8.Fine-tuning the economy means a. making government economic policy more "people oriented" b. using government policies to adjust the economy and promote economic stability c. tinkering with microeconomic problems such as externalities and losing sight of the big picture d. placing fewer regulations on the private sector, thereby eliminating the need for government intervention e. designing policies based exclusively on the leading economic indicators 9.In the 1960s, government policy makers believed that they could a. stabilize the economy by letting the market system solve all problems b. reduce unemployment by running federal budget surpluses c. eliminate government's role in stabilization policy d. use changes in the money supply to virtually eliminate business cycles e. use taxation and government spending to fine-tune the economy 10.Inflation is .a. a rise in the value of money b. a decline in nominal income c. a sustained increase in the price level d. a general reduction in prices e. an economic problem only for the retired population 11.The ultimate objective of macroeconomics is to a. reduce the unemployment rate b. stabilize the economy's growth rate c. develop and test theories about how the overall economy works d. improve the international competitiveness of the U.S. financial markets e. maximize the efficiency of government intervention in the marketplace 12.Which of the following statements regarding Gross Domestic Product is not true? a. It is a stock variable. b. It is measured for a particular time period, usually one year. c. It is perhaps the most effective means of viewing the same economy over time. d. It is a measure of the economy's performance. e. It is a flow variable, not a stock variable. 13.Which of the following is a stock variable? a. business spending on capital equipment b. consumer income c. the federal government's debt d. the federal government's budget deficit e. total expenditure 14 Which of the following best describes a flow (rather than a stock)? a. you own $5,000 worth of government bonds b. you own a $100,000 house c. you own a coin collection valued at $10,000 d. you earn $500 per week e. you own a $45,000 automobile 15.While economic expansions average about three and one half years in duration, economic contractions average about a. one year in duration b. two years in duration c. three years in duration d. four years in duration e. five years in duration 16.A recession is best defined as a period during which a. the percentage of the population employed is declining b. employment, output, and income decline c. the price level is declining d. more resources are used e. the budget deficit and trade deficfit are both growing 17.Long-term growth in production can be partially explained by a. trade surpluses that lead to accumulations of precious metals b. a gradual but consistent increase in the price level c. general optimism about the future and the pioneering spirit of America d. improvements in technology e. federal government budget deficits 18.A period of sustained growth of output in the economy is referred to as a(n) a. expansion b. contraction c. peak d. trough e. recession 19.A period of sustained decline of output in the economy is known as a(n) a. expansion b. growth phase c. peak d. trough e. contraction 20.By a leading economic indicator, economists mean a. an indicator of future economic activity b. an indicator that measures current economic activity c. a highly accurate indicator that is easily measured d. an indicator that is accurate most of the time e. any variable that can measure either past or present economic activity 21.When economists refer to the economy’s price level, they mean a. the rate of inflation b. the price of goods and services relative to consumers' incomes c. a general measure of prices of all goods and services d. a period of level, or steady, prices e. the prices of a specific consumer good 22 Which of the following explains why the aggregate demand curve slopes downward? a. If the price level increases, we feel poorer and therefore buy less. b. If the price level increases, we feel richer and therefore buy more. c. If domestic prices increase, we substitute domestic goods for imported ones. d. If the price of a particular good increases, we substitute away from that good. e. A decrease in the price of a particular good is like an increase in income and therefore we buy more. 23 Which of the following is true of the aggregate supply curve? a. It portrays an inverse relationship between the price level and quantity of aggregate output. b. Resource utilization is constant along the curve. c. A decrease in the price level encourages firms to expand production because the cost of production decreases. d. The curve is upward-sloping. e. As average prices in the United States rise relative to average prices in other countries, U.S. producers find export markets more attractive than domestic markets. 24.An increase in the price level will cause a. an increase in the quantity of aggregate output supplied b. a decrease in the quantity of aggregate output supplied c. a leftward shift of the aggregate supply curve d. a rightward shift of the aggregate supply curve e. a leftward or rightward shift of the aggregate supply curve, depending on the reason for the price change 25.A decrease in the price level will cause a. an increase in the quantity of aggregate output supplied b. a decrease in the quantity of aggregate output supplied c. a leftward shift of the aggregate supply curve d. a rightward shift of the aggregate supply curve e. a leftward or rightward shift of the aggregate supply curve, depending on the reason for the price change 26.Equilibrium of aggregate supply and aggregate demand is best described as a situation in which a. the slope of aggregate demand equals the slope of aggregate supply b. quantity demanded exceeds quantity supplied c. quantity demanded equals quantity supplied at a unique price level d. quantity supplied exceeds quantity demanded at a unique price level e. quantity supplied equals quantity demanded at all price levels 27.Given the following aggregate demand and aggregate supply schedules, determine the equilibrium level of prices and output. Aggregate Demand Aggregate Supply (quantity demanded (quantity supplied in billions of dollars) Price Level in billions of dollars) $ 100 150 $1,200 200 125 1,000 400 100 800 600 75 600 800 50 400 1,000 25 200 a. equilibrium output $1,000 and equilibrium price level 25 b. equilibrium output $800 and equilibrium price level 50 c. equilibrium output $200 and equilibrium price level 125 d. equilibrium output $400 and equilibrium price level 25 e. equilibrium output $600 and equilibrium price level 75 28.If the economy were initially in equilibrium and the aggregate demand curve shifted to the left, a. employment would fall b. the price level would rise c. the aggregate supply curve would shift rightward d. the aggregate supply curve would shift leftward e. the economy would experience an expansion period 29.The laissez-faire approach popular before the Great Depression influenced the U.S. government to see business downturns as a. natural phases in an otherwise healthy system, and therefore to take short-term deficit spending measures to help recovery b. natural phases in an otherwise healthy system, and therefore to wait for recovery to occur naturally c. serious maladies in an otherwise healthy system, and therefore to work to redesign the system to avoid such failure in the future d. failures of the type of system Adam Smith envisaged, and therefore to work to move toward a modern, more managed economy e. failures of the system to achieve the form that Adam Smith envisaged, and therefore to work to decrease government interference at the micro level 30.According to Adam Smith's The Wealth of Nations, in order to get an economy out of a depression, the government should a. increase spending b. decrease spending c. reduce taxes d. increase taxes e. allow the economy to correct itself 31.If spending by the federal government exceeds revenue, a. the price level tends to fall b. the money supply must increase c. the aggregate demand curve shifts leftward d. the aggregate supply curve shifts rightward e. there is a federal budget deficit 32.Suppose the economy is initially in equilibrium and then an energy shock occurs, such as when OPEC raised oil prices. Which of the following is likely to result? a. Both the price level and aggregate output will rise. b. Both aggregate output and the price level will fall. c. Employment will rise. d. Stagflation. e. The price level will fall. 33.Stagflation refers to a. a simultaneous reduction in output and the price level b. a simultaneous increase in output and the price level c. a decline in the price level accompanied by increases in real output and employment d. an increase in the price level accompanied by decreases in real output and employment e. a simultaneous increase in both the trade deficit and the budget deficit 34.To control inflation, President Nixon a. ordered wage and salary reductions for all government employees b. increased government spending c. dramatically reduced transfer payments such as Social Security d. applied price floors to all goods and services e. froze wages and prices 35.On an aggregate demand and aggregate supply graph, the stagflation of the 1970s can be represented as a a. leftward shift of the aggregate supply curve b. rightward shift of the aggregate supply curve c. rise in the price level that caused an excess demand for output d. rightward shift of the aggregate demand curve e. decrease in the price level that caused an excess supply of output 36.Keynesian policies are ineffective at combating stagflation because stagflation is caused by a. budget surpluses b. decreases in aggregate supply c. trade deficits d. trade surpluses e. budget deficits 37.An increase in aggregate supply will result in a. lower levels of employment b. a rightward shift of the aggregate demand curve c. a higher price level d. a leftward shift of the aggregate demand curve e. an economic expansion 38.If the government owes $3,500 billion and then borrows $300 billion more this year, a. the debt is $300 billion and the deficit is $3.8 trillion b. the debt is $3,800 billion and the deficit is $300 billion c. the debt is $4,100 billion d. the deficit is $3,800 billion e. both the debt and the deficit are $3.8 trillion 39.Which of the following statements is correct? a. A budget deficit is a flow variable; debt is a stock variable. b. A budget deficit is a stock variable; debt is a flow variable. c. A budget deficit and the debt are both stock variables. d. The budget deficit decreases when debt increases. e. Debt increases when the budget deficit decreases. 40.The aim of supply-side economics is to a. increase government spending to stimulate aggregate supply b. stimulate exports to increase the balance of payments c. decrease wages to make production cheaper d. lower taxes to increase the supply of resources e. reduce both the inflation and unemployment problems through an increase in taxes