question
As a subject matter, economics is most concerned with:
answer
the study of choice under conditions of scarcity.
question
Microeconomics differs from macroeconomics in that:
answer
microeconomics looks at the individual units in the economy, while macroeconomics studies the economy's overall performance.
question
In economics, "positive" statements are:
answer
statements of description that can be tested.
question
A production possibilities curve that is bowed-out from the origin illustrates the law of:
answer
increasing opportunity costs.
question
Economic growth in the economy can be portrayed in the production possibilities curve model as a:
answer
shift of the production possibilities curve away from the origin.
question
Absolute Advantage:
answer
the ability to make more of something using fewer resources than other producers would have to use.
question
Comparative Advantage:
answer
the ability to produce a good or service at a lower opportunity cost that others.
question
Opportunity Cost:
answer
the value of what you have to give up in order to get something; the value of the next best alternative.
question
According to Adam Smith's "invisible hand" doctrine:
answer
as individuals pursue their own interest, they also promote the good of the society as a whole.
question
Using the "Rule of 72" for purposes of making the estimate, if medical expenses are increasing at the rate of 8% per year, how long before such expenses double in size?
answer
9 years
Formula- 72/8
Formula- 72/8
question
Equilibrium price for the demand curve:
answer
P=a+bQ
a= vertical axis intercept
b= slope (Vertical/Horizontal)
a= vertical axis intercept
b= slope (Vertical/Horizontal)
question
Slope of the supply curve:
answer
Vertical over Horizontal
question
A leftward shift in the demand curve for new cars could be caused by:
answer
a decrease in per capita income
question
All of the following would shift the demand curve for pond-raised catfish EXCEPT:
answer
a reduction in the price of the catfish.
question
If a severe drought destroyed much of the hay crop,
answer
the price of hay would tend to rise.
question
If the demand increases and supply remains constant:
answer
the equilibrium price and quantity will rise.
question
If both supply and demand increase,
answer
the equilibrium quantity will rise, the equilibrium price will be indeterminate.
question
Suppose that the supply of personal computers increases. Which of the following is inconsistent with the model of supply and demand?
answer
The increased supply will lead to a temporary surplus, which will result in competition between suppliers. This competition will lower the equilibrium price.
question
Suppose that a tax of $1 a pack of cigarettes is imposed on cigarette producers. Which of the following would be TRUE?
answer
the price of a pack of cigarettes will rise by less than $1.
question
A tax on sellers has what effect on a market?
answer
1) supply curve shifts vertically upward(left) by the amount of the tax.
2) demand does not change
3) equilibrium price increases and equilibrium quantity decreases
2) demand does not change
3) equilibrium price increases and equilibrium quantity decreases
question
An inferior good is one for which an increase in income causes a:
answer
decrease in demand
question
If an increase in the price of blue jeans leads to an increase in the demand for tennis shoes, then the economists would classify blue jeans and tennis shoes as:
answer
substitute goods
question
The use of resources in the most productive way possible to produce the goods and services that have the greatest total economic value to society is called:
answer
efficiency
question
Which of the following would you most closely associate with the Grameen Bank?
answer
Muhammad Yunus
question
The label "Frictional Unemployment" is used to describe individuals who:
answer
are out of work while they are changing jobs
EX: looking for another job because they don't like current job, they are new to the labor force, college graduate.
EX: looking for another job because they don't like current job, they are new to the labor force, college graduate.
question
Cyclical Unemployment exists because:
answer
there are periodic reductions in the economy's total demand for goods and services.
EX: cars aren't selling so they shutdown the car dealership.
EX: cars aren't selling so they shutdown the car dealership.
question
Economist's describe individuals who are out of work because, due to technological innovation, their job skills are no longer in demand as being:
answer
structurally unemployed
question
The natural rate of unemployment is the rate that would exist in the absence of:
answer
cyclical unemployment
question
Since the 1970's, the natural rate of unemployment in the U.S. has been increasing, but economists suggest that the natural rate of unemployment may have actually decreased during the past decade because:
answer
the prison population has increased exponentially during this period, thereby removing individuals from the labor force who had a high probability of being unemployed.
question
Which of the following policies would increase the natural rate of unemployment in an economy?
answer
increasing the period of time unemployed workers could receive unemployment benefits.
question
France offers its citizens unemployment compensation that is more generous and that lasts longer than what the U.S. offers its citizens. Considering only this information, it is likely that the unemployment rate is:
answer
higher in France than in the U.S.
question
Unemployment Rate:
answer
The labor force is equal to the sum of employed plus unemployed people.
Formula-
number of unemployed/labor force x100
Formula-
number of unemployed/labor force x100
question
Labor Force participation rate:
answer
labor force/working-age population x100
question
Suppose 20 of the unemployed individuals simply give up looking for jobs and 15 of the employed individuals lose their jobs. When the Bureau of Labor Statistics conducts its next survey, what will be the unemployment rate?
answer
7%
question
GDP is defined as:
answer
the market value of all final goods and services produced within a country in a given period of time.
question
GNP is defined as:
answer
the market value of all goods and services produced domestically and abroad using resources supplied by the U.S.
question
Over time, people have come to rely more on market-produced goods and less on goods that they produce for themselves. For example, busy people with high incomes, rather than cleaning their own houses, hire people to clean their houses. By itself, this change has:
answer
caused measured GDP to increase
question
The local Chevrolet dealership has an increase in inventory of 25 cars in 2014. In 2015, it sells all 25 cars. Which of the following statements is correct?
answer
The value of the cars in inventory will be counted as part of 2014 GDP, and the value of the cars sold in 2015 will not increase 2015 GDP.
question
A transfer payment is:
answer
a form of government spending that is not made in exchange for a currently produced good or service.
question
If a U.S. citizen buys a television made in Korea by a Korean firm, then
answer
U.S. net exports decrease and U.S. GDP is unaffected.
question
In the economy of Wexington in 2014, consumption was $500, exports were $200, GDP was $1200, government purchases were $250, and investment was $300. What was Wexington's imports in 2014?
answer
$50
Formula-
GDP= C + I + G +(X-M)
1200=500 + 300 + 250 +(200- ?)
Formula-
GDP= C + I + G +(X-M)
1200=500 + 300 + 250 +(200- ?)
question
Which of the following is correct?
answer
Nominal GDP measures current production using current prices, whereas real GDP measures current production using base-year prices.
question
The GDP deflator is calculated as the ratio of:
answer
nominal GDP to real GDP multiplied by 100
question
In the economy of Wexington in 2014, real GDP was $6 trillion and the GDP deflator was 150. What was Wexington's nominal GDP in 2014?
answer
$9 trillion
Formula- $9/$6=1.5x100=150 the GDP deflator
Formula- $9/$6=1.5x100=150 the GDP deflator
question
Suppose an economy produces only cheese and fish. In 2014, 20 units of cheese are sold at $5 each and 8 units of fish are sold at $50 each. In 2013, the base year, the price of cheese was $10 per unit and the price of fish was $75 per unit. For 2014:
answer
nominal GDP is $500, real GDP is $800, and the GDP deflator is 62.5.
Formula 1: 20 x $5 = $100
8 x $50 = $400
Nominal GDP = $500
Formula 2: 20 x $10 = $200
8 x $75 = $600
Real GDP = $800
To get GDP deflator: $500/$800 x100 = 62.5
Formula 1: 20 x $5 = $100
8 x $50 = $400
Nominal GDP = $500
Formula 2: 20 x $10 = $200
8 x $75 = $600
Real GDP = $800
To get GDP deflator: $500/$800 x100 = 62.5
question
A country reported nominal GDP of $80 billion in 2014 and $75 billion in 2013. It also reported a GDP deflator of 125 in 2014 and 120 in 2013. Between 2013 and 2014,
answer
real output and the price level both rose.
question
The economy's inflation rate is the:
answer
percentage change in the price level from the previous period.
question
The price index was 320 in one year and 360 in the next year. What was the inflation rate?
answer
12.5%
Formula- CPIc-CPIp/CPIp x100
360-320/320 x100 =12.5%
Formula- CPIc-CPIp/CPIp x100
360-320/320 x100 =12.5%
question
In an imaginary economy, consumers buy only sandwiches and magazines. The fixed basket consists of 20 sandwiches and 40 magazines. In 2013, a sandwich cost $4 and a magazine cost $2. In 2014, a sandwich cost $6. The base year is 2013. If the consumer price index in 2014 was 125, then how much did a magazine cost in 2014?
answer
$2.00
Formula 1- Base year 2013:
$4 x 20 = $80
$2 x 40 = $80 (80+80=$160)
Formula 2- 2014:
$6 x 20 = $120
$2 x 40 = $80
$160 x 1.25 = 200 which equals $2.00
Formula 1- Base year 2013:
$4 x 20 = $80
$2 x 40 = $80 (80+80=$160)
Formula 2- 2014:
$6 x 20 = $120
$2 x 40 = $80
$160 x 1.25 = 200 which equals $2.00
question
One problem with the consumer price index stems from the fact that, over time, consumers tend to buy larger quantities of goods that have become relatively less expensive and smaller quantities of goods that have become relatively more expensive. This problem is called:
answer
substitution bias
question
You know that a candy bar costs $0.60 today. You also know that the CPI for 1962 and the CPI for today. Which of the following would you use to compute the price of the candy bar in 1962 prices?
answer
$0.60 x (1962 CPI/ today's CPI)
question
Mrs. Baker collected Social Security payments of $1,260 a month in 2014. If SSI payments are indexed with a one year lag, and if the price index rose from 90 to 108 between 2013 and 2014, then Mrs. Baker's monthly Social Security payments for 2015 should be:
answer
$1,512
Formula- $1,260 x 108/90
$1,260 x 1.2 = $1,512
Formula- $1,260 x 108/90
$1,260 x 1.2 = $1,512
question
Which of the following statements is correct about the relationship between the nominal interest rate and the real interest rate?
answer
the real interest rate is the nominal interest rate minus the rate of inflation.
question
The consumer price index(CPI) was 225 in 2013 and 234 in 2014. The real interest rate during this period was 4.0%. What was the nominal interest rate during this period?
answer
8.0%
Formula 1: inflation= CPIc-CPIp/CPIc x ln
=234-225/225 x ln
=9/225 x ln
=0.04 or 4%
Formula 2: In = Ir + rate of inflation
In= 4% + 4%
In= 8%
Formula 1: inflation= CPIc-CPIp/CPIc x ln
=234-225/225 x ln
=9/225 x ln
=0.04 or 4%
Formula 2: In = Ir + rate of inflation
In= 4% + 4%
In= 8%
question
Ms. Day borrowed $1,000 from her bank for one year at a interest rate of 10%. During that year, the price level went up by 15%. Which of the following statements is correct?
answer
Ms. Day's repayment will give the bank LESS purchasing power than it originally loaned her.
question
The key indicator of a nation's standard of living and economic well-being is:
answer
per-capita real GDP
question
In 2013, the imaginary nation of Freedonia had a population of 2,700 and real GDP of 16,200,000. In 2014 it had a population of 2,500 and real GDP of 14,640,000. What was the growth rate of real GDP per person in Freedonia between 2013 and 2014?
answer
-2.4%
Formula-
16,200,000/2,700= 6,000
14,640,000/2,500= 5,856
(6000-5856)/5856 x100= 2.4% but since the population got smaller it will be negative.
Formula-
16,200,000/2,700= 6,000
14,640,000/2,500= 5,856
(6000-5856)/5856 x100= 2.4% but since the population got smaller it will be negative.
question
Productivity is defined as:
answer
the quantity of goods and services produced per unit of labor input.
question
The one variable that stands out as the most significant explanation of large variations in living standards around the world is:
answer
productivity
question
Nathan owns a bakery that only bakes cakes. All of his bakers work 8 hours per day. In 2013, he employed 5 bakers and they produced 200 cakes each day. In 2014, he employed 6 bakers and they produced 249 cakes each day. In Nathan's bakery, productivity:
answer
increased by 3.75% between 2013 and 2014.
Formula- 200/5 =40
249/6 =41.5
1.5/40= 3.75%
Formula- 200/5 =40
249/6 =41.5
1.5/40= 3.75%
question
The traditional view of the production process is that capital is subject to:
answer
diminishing returns
question
In order to increase their rate of economic growth, most underdeveloped nations need to:
answer
establish better legal systems and more stable governments.
question
The standard of living of a nation is frequently measured by GDP per capita. GDP per capita is a function of two things: the proportion of the population that works and labor productivity as measured by output per worker. The united states has an aging population and many workers will be retiring in the next few years which will decrease the percent of the population that works. Mexico has a relative young population which means an increasing percent of its population will be working as its labor force expands. Given these circumstances, which of the following statements is TRUE?
answer
in the next few years, for U.S. GDP per capita to increase, its labor productivity will need to increase.
question
Today the population of Xenia is 1,000 inhabitants. If Xenia's population is expected to grow at a rate of 2% per year over the next 10 years, what would we expect Xenia's population to be in 10 years?
answer
<HINT: Ending value= Beginning value(1+g)^n>
1,000(1+.02)^10 = 1,219
1,000(1+.02)^10 = 1,219
question
Given the information in the previous problem, approximately how many years will it take for Xenia's population to grow to 10,000?
answer
<HINT: n=ln(end.value/beg.value)/ln(1+g)>
n=ln(10000/1000)/ln(1.02)
n=ln(10)/ln(1.02)
= 2.307.../0.019...
=116.3 years
n=ln(10000/1000)/ln(1.02)
n=ln(10)/ln(1.02)
= 2.307.../0.019...
=116.3 years
question
If productivity of the U.S. labor force increased, the:
answer
aggregate supply curve would shift to the right, increasing real GDP and reducing the price level.
question
Suppose that Congress increased government spending at the same time that the price of imported oil(which is used to manufacture gasoline and heating oil) increased. In the short run, this would:
answer
increase the price level, but the impact on real GDP is uncertain.
question
Suppose the economy is operating below potential GDP. According to the self-correcting model, the economy will ultimately return to potential GDP because:
answer
wages and resource prices will fall as contracts expire and are renegotiated.
question
When the overall price level rises:
answer
businesses have incentives to expand output because many costs are fixed by long-term contracts, thereby increasing profits.
question
Which of the following is the largest source of revenue to the Federal Government?
answer
personal income taxes
question
"Crowding Out" refers to:
answer
the reduction in investment spending that occurs when government borrowing pushes up interest rates.
question
Which of the following is NOT a component of the M1 money supply?
answer
certificates of deposit
question
Which of the following appears as a liability on the balance sheet of a depository institution?
answer
checkable deposits
question
If the reserve requirement is 12.5%, the "simple" deposit expansion multiplier is equal to:
answer
8%
Formula- 1/reserve ratio
1/12.5=0.08 or 8%
Formula- 1/reserve ratio
1/12.5=0.08 or 8%
question
The voting membership of the Federal Open Market Committee is composed of:
answer
the 7 members of the Fed's Board of Governors, the president of the New York Federal Reserve Bank, and 4 presidents of the other 11 district Federal Reserve Banks.
question
If banks hold checkable deposits of $300 million and reserves of $80 million, and if the reserve requirement is 20%, what is the money multiplier and what is the maximum potential expansion of the money supply?
answer
5; $100 million
Formula-
Money Multiplier- 1/20= 5
Maximum potential expansion-
300/5= 60
80-60=20 x5= 100
Formula-
Money Multiplier- 1/20= 5
Maximum potential expansion-
300/5= 60
80-60=20 x5= 100
question
Which of the following is NOT a function of the Federal Reserve?
answer
to insure deposits of customers
question
When the federal reserve buys government securities in the open market, the lending ability of banks:
answer
tends to increase, the money supply expands, and the interest rate tends to fall
question
Assume that all banks in the system are "loaned up"(i.e. have no excess reserves) and that they all face a reserve requirement of 20%. If a depositor deposits $100,000 of currency in bank A, what is the maximum possible expansion of the money supply following this deposit?
answer
$400,000 Formula- 1/20= 5 x 100,000= 500,000- 100,000= 400,000
question
Assume that all banks in the system are "loaned up" and that they all face a reserve requirement of 20%. If the federal reserve buys $100,000 in government securities from bank A, what is the maximum possible expansion of the money supply following the Fed's purchase?
answer
$500,000 Formula- 1/20= 5 100,000 x 5= 500,000
question
Assume an open economy in which net capital inflow(borrowing from foreigners) equals imports minus exports and the budget balance is calculated as taxes minus government spending. What is the amount of investment spending in an economy where private saving is $250 million, tax collections are $200 million, imports are $135 million, government spending is $100 million, and exports are $85 million?
[Hint: I=Spri+Sgovt+(M-X)]
[Hint: I=Spri+Sgovt+(M-X)]
answer
$400 million
Formula-
250+(200-100)+(135-85)
250+100+50
=400 million
Formula-
250+(200-100)+(135-85)
250+100+50
=400 million
question
To combat unemployment, the Federal Reserve could:
answer
decrease the reserve requirement, decrease the discount rate, and buy securities.
question
What is the IMMEDIATE impact on the M1 and M2 money supplies if coach Fraction walks into Frost Bank, withdraws a $100 bill from his wallet, and deposits it into his checking account?
answer
There is no change in either the M1 or M2 money supply.
question
Which of the following would cause the aggregate demand curve to shift to the left?
answer
a decline in housing prices
question
The short-run aggregate supply curve will shift to the right:
answer
when productivity increases
question
The Laffer Curve describes the relationship between:
answer
marginal tax rates and tax revenue
question
Which of the following best describes the size of the U.S. federal debt relative to GDP?
answer
The U.S. federal debt is approximately equal to annual GDP.
question
Which of the following are functions of money?
answer
1) money should serve as a store of value by retaining its purchasing power so that individuals can defer purchases,
2) money should serve as a unit of account so that the value of goods and services can be measured in a common unit,
3) money should serve as a medium of exchange by being generally acceptable to all parties in payment for goods and services.
2) money should serve as a unit of account so that the value of goods and services can be measured in a common unit,
3) money should serve as a medium of exchange by being generally acceptable to all parties in payment for goods and services.
question
The president of the United States who helped enact the Federal Reserve System as the central bank of the U.S. was:
answer
Woodrow Wilson
question
Which of the following is not a city in which a Federal Reserve bank is located?
answer
little rock
question
What is the relationship between interest rates and bond prices?
answer
As interest rates change, bond prices change in the opposite direction.
question
Assume the market for loanable funds is in equilibrium. Use the informations to determine the quantity of loanable funds supplied. (Recall that there are only three things you can do with income; spend it, save it, and pay taxes)
GDP= Y= $8.7 trillion
C= $3.5 trillion
T= $2.7 trillion
G= $3.0 trillion
GDP= Y= $8.7 trillion
C= $3.5 trillion
T= $2.7 trillion
G= $3.0 trillion
answer
$2.2 trillion
Formula-
Snational= Sprivate + Sgovernment
2.5+(T-G)
2.5+(2.7-3)
2.5+(-3)
=2.2
Formula-
Snational= Sprivate + Sgovernment
2.5+(T-G)
2.5+(2.7-3)
2.5+(-3)
=2.2
question
Suppose the government ran a budget surplus in 2013 and a larger surplus in 2014. The loanable funds model would predict that, as a result of the increase in the surplus:
answer
both the government debt and interest rates decreased between 2013 and 2014.
question
Sometimes On Time(SOT) Airlines is considering buying a new jet. SOT would be more likely to buy a new jet if there were either:
answer
a decrease in the price of a new jet and/or a decrease in the interest rate.
question
Most entrepreneurs do not have enough money of their own to start their business. When they acquire the necessary funds from someone else:
answer
their investment expenditures are being financed by someone else's saving.
question
If there is a surplus of loanable funds, then:
answer
neither curve shifts, but as the interest rates decreases toward an equilibrium rate, the quantity supplied of loanable funds decreases and the quantity demanded of loanable funds increases.
question
Fiat money:
answer
has no intrinsic value
question
Other things the same, if the long-run aggregate supply curve shifts left:
answer
prices will increase and output will decrease.
question
Initially, the economy is in long-run equilibrium. Then the aggregate demand curve shifts to the left creating a $40 billion recessionary gap. Government wants to change its spending to offset this decrease in aggregate demand and to eliminate the recessionary gap. The marginal propensity to consume is 0.8. By what amount must government change its SPENDING to eliminate the recessionary gap?
answer
increase government spending by $8 billion
question
Initially, the economy is in long-run equilibrium. Then the aggregate demand curve shifts to the left creating a $40 billion recessionary gap. Government wants to change its spending to offset this decrease in aggregate demand and to eliminate the recessionary gap. The marginal propensity to consume is 0.8. By what amount must government change its TAXES to eliminate the recessionary gap?
answer
reduce taxes by $10 billion
Formula-
-MPC/1-MPC
-0.8/1-0.8
-0.8/0.2= -4/40 =10
Formula-
-MPC/1-MPC
-0.8/1-0.8
-0.8/0.2= -4/40 =10
question
Albacore, Inc, in considering investing in a new technology that will make its fishing operations more efficient. The technology requires an initial investment today of $500,000, but because the firm will be more efficient, its after-tax profits will increase by $200,000 per year for the next three years. To the nearest whole dollar, what is the net present value of this investment if the interest rate is 10%?
Hint: NPV= CFo + CF1/(1+r)+CF2/(1+r)^2+CF3/(1+r)^3
Hint: NPV= CFo + CF1/(1+r)+CF2/(1+r)^2+CF3/(1+r)^3
answer
$-2,630
Formula-
-500,000+200,000/(1.10)+200,000/(1.10)^2+
200,000/(1.10)^3
=-2,630
Formula-
-500,000+200,000/(1.10)+200,000/(1.10)^2+
200,000/(1.10)^3
=-2,630
question
GDP per-capita= GDP/population
answer
GDP deflator=nominal GDP/real GDP x100
question
GDP growth rate=[GDPcurrent-pastGDP/pastGDP x100]
answer
Inflation Rate=[(CPIc-CPIp)/CPIp] x100
question
CPI=(cost in current year/cost in base year) x100
answer
years until income doubles= 70/real growth rate
question
Output per worker(labor productivity)= GDP/N(# of individuals employed)
answer
Portion of population that works= N/population
question
output gap= actual aggregate output- potential output/ potential output x100
answer
Money Multiplier-
1/(reserve ratio)
1/(reserve ratio)
question
Expenditure Multiplier-
Ke=1/(1-MPC)
Ke=1/(1-MPC)
answer
Tax Multiplier-
Kt=-MPC/(1-MPC)
Kt=-MPC/(1-MPC)
question
Budget Balance-
Sgov't= T-G
Private Saving-
Sprivate= Y-C-T
National Saving-
Snational=Sprivate+Sgov't
Y-C-T+(T-G)
Net Capital Inflow-
NCI= M-X
Sgov't= T-G
Private Saving-
Sprivate= Y-C-T
National Saving-
Snational=Sprivate+Sgov't
Y-C-T+(T-G)
Net Capital Inflow-
NCI= M-X
answer
Open Economy-
I= Snational +borrowing from foreigners
Closed Economy-
I=Snational
I= Snational +borrowing from foreigners
Closed Economy-
I=Snational
question
Capital Ratio- Capital/Assets
Leverage Ratio- Assets/Capital
Leverage Ratio- Assets/Capital
answer
...
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