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CHAPTER 1
1. Economics may best be defined as:
A) the interaction between macro and micro considerations.
B) the study of the behavior of people and institutions in the production, distribution, and consumption of scarce goods.
C) the empirical testing of value judgments through the use of induction and deduction.
D) the use of policy to refute facts and hypotheses.
Ans: B
2. The study of economics is primarily concerned with:
A) keeping private businesses from losing money.
B) demonstrating that capitalistic economies are superior to socialistic economies.
C) choices which are made in seeking to use scarce resources efficiently.
D) determining the most equitable distribution of society's output.
Ans: C
3. You should decide to go to a movie:
A) if the marginal cost of the movie exceeds its marginal benefit.
B) if the marginal benefit of the movie exceeds its marginal cost.
C) if your income will allow you to buy a ticket.
D) because movies are inherently good products.
Ans: B
4. Studying economics:
A) helps one become a better-informed citizen and voter.
B) is detrimental to good citizenship because economics emphasizes individualism.
C) is a waste of time since we all participate in the economy whether we understand it or not.
D) is important because economics is the "science of earning money."
Ans: A
5. Economic theories:
A) are useless because they are not based upon laboratory experimentation.
B) which are true for individual economic units are never true for the economy as a whole.
C) are generalizations based upon a careful observation of facts.
D) are abstractions and therefore of no application to real situations.
Ans: C
6. The term "ceteris paribus" means:
A) that if event A precedes event B, A has caused B.
B) that economics deals with facts, not values.
C) other things equal.
D) prosperity inevitably follows recession.
Ans: C
7. Macroeconomics can best be described as the:
A) analysis of how a consumer tries to spend income.
B) study of the large aggregates of the economy or the economy as a whole.
C) analysis of how firms attempt to maximize their profits.
D) study of how supply and demand determine prices in individual markets.
Ans: B
8. Microeconomics is concerned with:
A) the aggregate or total levels of income, employment, and output.
B) a detailed examination of specific economic units which comprise the economic system.
C) the concealing of detailed information about specific segments of the economy.
D) the establishing of an overall view of the operation of the economic system.
Ans: B
9. A normative statement is one which:
A) is based on the law of averages.
B) pertains only to microeconomics.
C) pertains only to macroeconomics.
D) is based upon value judgments.
Ans: D
10. A positive statement is one which is:
A) derived by induction.
B) derived by deduction.
C) subjective and is based on a value judgment.
D) objective and is based on facts.
Ans: D
CHAPTER 2
1. The study of economics exists because:
A) government interferes with the efficient allocation of scarce resources.
B) resources are scarce in relation to human material wants.
C) the market system is an obstacle to the efficient use of plentiful resources to satisfy constrained wants.
D) resources are overly abundant as compared to wants; thus, an allocation problem exists.
Ans: B
2. The scarcity problem:
A) persists only because countries have failed to achieve continuous full employment.
B) persists because material wants exceed available productive resources.
C) has been solved in all industrialized nations.
D) has been eliminated in affluent societies such as the United States and Canada.
Ans: B
A) free gifts of nature.
B) consumption goods.
C) units of money capital.
D) factors of production.
Ans: D
http://groups.google.com/group/vuZs 4. Which of the following will not entail an outward shift of the production possibilities curve?
A) an upgrading of the quality of a nation's human resources
B) the reduction of unemployment
C) an increase in the quantity of a society's labor force
D) the improvement of a society's technological knowledge
Ans: B
5. A production possibilities curve illustrates:
A) scarcity.
B) market prices.
C) consumer preferences.
D) the distribution of income.
Ans: A
6. Assume an economy is operating at some point on its production possibilities curve which shows civilian and military goods. If the output of military goods is increased, the output of civilian goods:
A) will remain unchanged.
B) may be either increased or decreased.
C) must be decreased.
D) must also be increased.
Ans: C
7. The typical production possibilities curve is:
A) an upsloping line which is concave to the origin.
B) a downsloping line which is convex to the origin.
C) a downsloping line which is concave to the origin.
D) a straight upsloping line.
Ans: C
8. The concept of opportunity cost:
A) is irrelevant in socialistic economies because of central planning.
B) suggests that the use of resources in any particular line of production means that alternative outputs must be forgone.
C) is irrelevant if the production possibilities curve is shifting to the right.
D) suggests that insatiable wants can be fulfilled.
Ans: B
9. The marginal benefit curve is:
A) upsloping because of increasing marginal opportunity costs.
B) upsloping because successive units of a specific product yield less and less extra utility.
C) downsloping because of increasing marginal opportunity costs.
D) downsloping because successive units of a specific product yield less and less extra utility.
Ans: D
10. The term "laissez faire" suggests that:
A) land and other natural resources should be privately owned, but capital should be publicly owned.
B) land and other natural resources should be publicly owned, but capital equipment should be privately owned.
C) government should not interfere with the operation of the economy.
D) government action is necessary if the economy is to achieve full employment and full production.
Ans: C
11. The simple circular flow model shows that:
A) households are on the demand side of both product and resource markets.
B) businesses are on the supply side of both product and resource markets.
C) households are on the supply side of the resource market and on the demand side of the product market.
D) businesses are on the demand side of the product market and on the supply side of the resource market.
Ans: C
12. Households and businesses are:
A) both buyers in the resource market.
B) both suppliers in the product market.
C) suppliers in the resource and product markets respectively.
D) suppliers in the product and resource markets respectively.
Ans: C
CHAPTER 3
1. A market:
A) reflects upsloping demand and downsloping supply curves.
B) entails the exchange of goods, but not services.
C) is an institution which brings together buyers and sellers.
D) always entails face-to-face contact between buyer and seller.
Ans: C
2. The demand curve shows the relationship between:
A) money income and quantity demanded.
B) price and production costs.
C) price and quantity demanded.
D) consumer tastes and the quantity demanded.
Ans: C
3. A demand curve:
A) shows the relationship between price and quantity demanded.
B) indicates the quantity demanded at each price in a series of prices.
C) graphs as a downsloping line.
D) has all of the above characteristics.
Ans: D
4. "When the price of a product rises, consumers shift their purchases to other products whose prices are now relatively lower." This statement describes:
A) an inferior good.
B) the rationing function of prices.
C) the substitution effect.
D) the income effect.
Ans: C
5. One reason why the quantity of a good demanded increases when its price falls is that the:
A) price decline shifts the supply curve to the left.
B) lower price shifts the demand curve to the left.
C) lower price shifts the demand curve to the right.
D) lower price increases the real incomes of buyers, enabling them to buy more.
Ans: D
6. A rightward shift in the demand curve for product C might be caused by:
A) an increase in income if C is a normal good.
B) a decrease in income if C is an inferior good.
C) an increase in the price of a product which is a close substitute for C.
D) a decrease in the price of a product which is complementary to C.
E) any one or more of the above.
Ans: E
7. Video cassette recorders and video cassettes are:
A) complementary goods.
B) substitute goods.
C) independent goods.
D) inferior goods.
Ans: A
8. If the price of K declines, the demand curve for the complementary product J will:
A) shift to the left.
B) decrease.
C) shift to the right.
D) remain unchanged.
Ans: C
9. If X is a normal good, a rise in money income will shift the:
A) supply curve for X to the left.
B) supply curve for X to the right.
C) demand curve for X to the left.
D) demand curve for X to the right.
Ans: D
10. A normal good is defined as one:
A) whose amount demanded will increase as its price decreases.
B) whose amount demanded will increase as its price increases.
C) whose demand curve will shift leftward as incomes rise.
D) the consumption of which varies directly with incomes.
Ans: D
11. An increase in the price of product A will:
A) reduce the demand for resources used in the production of A.
B) increase the demand for complementary product C.
C) increase the demand for substitute product B.
D) reduce the demand for substitute product B.
Ans: C
12. An "increase in the quantity demanded" means that:
A) given supply, the price of the product can be expected to decline.
B) price has declined and consumers therefore want to purchase more of the product.
C) the demand curve has shifted to the right.
D) the demand curve has shifted to the left.
Ans: B
13. The law of supply:
A) reflects the amounts which producers will want to offer at each price in a series of prices.
B) is reflected in an upsloping supply curve.
C) shows that the relationship between price and quantity supplied is positive.
D) is reflected in all of the above.
Ans: D
14. An improvement in production technology will:
A) increase equilibrium price.
B) shift the supply curve to the left.
C) shift the supply curve to the right.
D) shift the demand curve to the left.
Ans: C
15. Assume product A is an input in the production of product B. In turn product B is a complement to product C. We can expect a decrease in the price of A to:
A) increase the supply of B and increase the demand for C.
B) decrease the supply of B and increase the demand for C.
C) decrease the supply of B and decrease the demand for C.
D) increase the supply of B and decrease the demand for C.
Ans: A
http://groups.google.com/group/vuZs 16. A market is in equilibrium: A) provided there is no surplus of the product.
B) at all prices above that shown by the intersection of the supply and demand curves.
C) if the amount producers want to sell is equal to the amount consumers want to buy.
D) whenever the demand curve is downsloping and the supply curve is upsloping.
Ans: C
17. If there is a shortage of product X:
A) fewer resources will be allocated to the production of this good.
B) the price of the product will rise.
C) the price of the product will decline.
D) the supply curve will shift to the left and the demand curve to the right, eliminating the shortage.
E) the supply curve will shift to the right and the demand curve to the left, eliminating the shortage.
Ans: B
18. Assuming competitive markets with typical supply and demand curves, which of the following statements is correct?
A) An increase in supply with a decrease in demand will result in an increase in price.
B) An increase in supply with no change in demand will result in an increase in price.
C) An increase in supply with no change in demand will result in a decline in sales.
D) An increase in demand with no change in supply will result in an increase in sales.
Ans: D
CHAPTER 7
1. A nation's gross domestic product (GDP):
A) is the dollar value of the total output produced within the borders of the nation.
B) is the dollar value of the total output produced by its citizens, regardless of where they are living.
C) can be found by summing C + In + S + Xn.
D) is always some amount less than its C + Ig + G + Xn.
Ans: A
2. Which of the following is a final good or service?
A) diesel fuel bought for a delivery truck
B) fertilizer purchased by a farm supplier
C) a haircut
D) Chevrolet windows purchased by a General Motors assembly plant
Ans: C
3. Net exports are:
A) that portion of consumption and investment goods sent to other countries.
B) exports plus imports.
C) exports less imports.
D) imports less exports.
Ans: C
4. Economists define investment to include:
A) any increase in business inventories.
B) the addition of cash to a savings account.
C) the purchase of common or preferred stock.
D) the purchase of any durable good, for example, an automobile or a refrigerator.
Ans: A
5. Transfer payments are:
A) excluded when calculating GDP because they only reflect inflation.
B) excluded when calculating GDP because they do not reflect current production.
C) included when calculating GDP because they are a category of investment spending.
D) included when calculating GDP because they increase the spending of recipients.
Ans: B
6. The ZZZ Corporation issued $25 million in new common stock in 1998. It used $18 million of the proceeds to replace obsolete equipment in its factory and $7 million to repay bank loans. As a result, investment:
A) of $7 million has occurred.
B) of $25 million has occurred.
C) of $18 million has occurred.
D) has not occurred.
Ans: C
7. Consumption of fixed capital (depreciation) can be determined by:
A) adding indirect business taxes to NDP.
B) subtracting NDP from GDP.
C) subtracting net investment from GDP.
D) adding net investment to gross investment.
Ans: B
8. "Value added" refers to:
A) any increase in GDP which has been adjusted for adverse environmental effects.
B) the excess of gross investment over net investment.
C) the difference between the value of a firm's output and the value of the inputs it has purchased from others.
D) the portion of any increase in GDP which is caused by inflation as opposed to an increase in real output.
Ans: C
9. Assume a manufacturer of stereo speakers purchases $40 worth of components for each speaker. The completed speaker sells for $70. The value added by the manufacturer for each speaker is:
A) $110.
B) $30.
C) $40.
D) $70.
Ans: B
10. The total income earned in any year by U.S. resource suppliers is measured by:
A) DI.
B) NI.
C) PI.
D) GDP.
Ans: B
vuzs
11. Suppose nominal GDP was $360 billion in 1985 and $450 billion in 1995. The appropriate price index (1985 = 100) was 120 in 1985 and 125 in 1995. It can be concluded that between 1985 and 1995 real GDP:
A) increased by about $60 billion.
B) decreased by about $32 billion.
C) increased by about $100 billion.
D) increased by about $117 billion.
Ans: A
CHAPTER 8
1. The immediate determinant of the volume of output and employment is the:
A) composition of consumer spending.
B) ratio of public goods to private goods production.
C) level of total spending.
D) size of the labor force.
Ans: C
2. The phase of the business cycle in which real domestic output declines is called:
A) the peak.
B) a recovery.
C) a recession.
D) the trough.
Ans: C
3. The production of durable goods varies more than the production of nondurable goods because:
A) durables purchases are nonpostponable and the producers of durables are competitive.
B) durables purchases are postponable and producers of durables are competitive.
C) nondurables purchases are postponable and the producers of nondurables are competitive.
D) durables purchases are postponable and producers of durables have monopoly power.
Ans: D
4. A recession is a period in which:
A) cost-push inflation is present.
B) nominal domestic output falls.
C) demand-pull inflation is present.
D) real domestic output falls.
Ans: D
5. To be officially unemployed a person must:
A) be in the labor force.
B) be 21 years of age or older.
C) have just lost a job.
D) be waiting to be called back from a layoff.
Ans: A
6. The natural rate of unemployment is:
A) higher than the full-employment rate of unemployment.
B) lower than the full-employment rate of unemployment.
C) that rate of unemployment occurring when the economy is at its potential output.
D) found by dividing total unemployment by the size of the labor force.
Ans: C
7. Assuming the total population is 100 million, the civilian labor force is 50 million, and 47 million workers are unemployed, the unemployment rate:
A) is 3 percent.
B) is 6 percent.
C) is 7 percent.
D) is 9 percent.
E) cannot be determined from the information given.
Ans: B
8. Cyclical unemployment is a consequence of:
A) a deficiency of aggregate spending.
B) the decreasing relative importance of goods and the increasing relative importance of services in our economy.
C) the everyday dynamics of a free labor market.
D) technological change.
Ans: A
9. Structural unemployment:
A) is also known as frictional unemployment.
B) is the main component of cyclical unemployment.
C) is said to occur when people are waiting to be called back to previous jobs.
D) may involve a locational mismatch between unemployed workers and job openings.
Ans: D
10. Okun's law:
A) measures the tradeoff between the rate of inflation and the rate of unemployment.
B) indicates the number of years it will take for a constant rate of inflation to cause the price level to double.
C) quantifies the relationship between nominal and real incomes.
D) shows the relationship between the unemployment rate and the size of the GDP gap.
Ans: D
11. The consumer price index was 140.3 in 1992 and 144.5 in 1993. Therefore, the rate of inflation in 1993 was about:
A) 6.7 percent.
B) 3.0 percent.
C) 1.2 percent.
D) 13.6 percent.
Ans: B
12. Given the annual rate of inflation, the "rule of 70" allows one to:
A) determine whether the inflation is demand-pull or cost-push.
B) calculate the accompanying rate of unemployment.
C) determine when the value of a real asset will approach zero.
D) calculate the number of years required for the price level to double.
Ans: D
13. Cost-push inflation:
A) is caused by excessive total spending.
B) shifts the nation's production possibilities curve leftward.
C) moves the economy inward from its production possibilities curve.
D) is a mixed blessing because it has positive effects on real output and employment.
Ans: C
CHAPTER 9
1. The view that the market system will ensure full employment is associated with:
A) Keynesian economics.
B) GDP gap analysis.
C) classical economics.
D) the aggregate expenditures model.
Ans: C
2. Say's law indicates that:
A) a stable, inflexible interest rate will guarantee perpetual full employment.
B) falling prices will decrease the purchasing power of a declining level of total money demand.
C) supply creates its own demand.
D) those prices which rise most during prosperity are likely to fall least during depression.
Ans: C
3. The most important determinant of consumer spending is:
A) the level of household debt.
B) consumer expectations.
C) the stock of wealth.
D) the level of income.
Ans: D
4. With an MPS of .4, the MPC will be:
A) 1.0 minus .4.
B) .4 minus 1.0.
C) the reciprocal of the MPS.
D) .4.
Ans: A
5. As disposable income goes up the:
A) APC falls.
B) APS falls.
C) volume of consumption declines absolutely.
D) volume of investment can be expected to diminish.
Ans: A
6. Which of the following is correct?
A) APC + APS = 1.
B) APC + MPS = 1.
C) APS + MPC = 1.
D) APS + MPS = 1.
Ans: A
7. Which one of the following will cause a movement down along an economy's consumption schedule?
A) an increase in stock prices
B) a decrease in stock prices
C) an increase in consumer indebtedness
D) a decrease in disposable income
Ans: D
8. At the point where the consumption schedule intersects the 45-degree line:
A) the MPC is 1.00.
B) the APC is 1.00.
C) saving is equal to consumption.
D) the economy is in equilibrium.
Ans: B
9. (Advanced analysis) If the equation for the consumption schedule is C = 20 + 0.8Y , where C is consumption and Y is disposable income, then the average propensity to consume is 1 when disposable income is:
A) $80.
B) $100.
C) $120.
D) $160.
Ans: B
10. Which of the following is correct?
A) MPC + MPS = APC + APS
B) APC + MPS = APS + MPC
C) APC + MPC = APS + MPS
D) APC - APS = MPC - MPS
Ans: A
11. As aggregate income decreases, the APC:
A) and APS will both increase.
B) will decrease, but the APS will increase.
C) will increase, but the APS will decrease.
D) and APS will both decrease.
Ans: C
12. The relationship between the real interest rate and investment is shown by the:
A) investment-demand schedule.
B) consumption of fixed capital schedule.
C) saving schedule.
D) aggregate supply curve.
Ans: A
13. Investment and saving are, respectively:
A) income and wealth.
B) stocks and flows.
C) injections and leakages.
D) leakages and injections.
Ans: C
CHAPETR 10
1. The multiplier effect means that:
A) consumption is typically several times as large as saving.
B) a small change in consumption demand can cause a much larger increase in investment.
C) a small increase in investment can cause national income to change by a larger amount.
D) a small decline in the MPC can cause equilibrium GDP to rise by several times that amount.
Ans: C
2. The multiplier may be calculated as:
A) 1/(MPS + MPC)
B) MPC/MPS
C) 1/(1 - MPC)
D) 1 - MPC = MPS
Ans: C
3. If the MPS is only half as large as the MPC, the multiplier:
A) is 2.
B) is 3.
C) is 4.
D) cannot be determined from the information given.
Ans: B
4. The multiplier effect:
A) reduces the MPC.
B) magnifies small changes in spending into larger changes in output and income.
C) promotes stability of the general price level.
D) lessens upswings and downswings in business activity.
Ans: B
5. If the MPC is .6, the multiplier will be:
A) 4.0.
B) 6.0.
C) 2.5.
D) 1.67.
Ans: C
6. The multiplier effect indicates that:
A) a decline in the interest rate will cause a proportionately larger increase in investment.
B) a change in aggregate expenditures will change aggregate income by a larger amount.
C) a change in aggregate expenditures will increase aggregate income by the same amount.
D) a small increase in total income will generate a large change in aggregate expenditures.
Ans: B
7. If a $200 billion increase in investment spending creates $200 billion of new income in the first round of the multiplier process and $160 billion in the second round, the multiplier in the economy is:
A) 4.
B) 5.
C) 3.33.
D) 2.5.
Ans: B
8. Suppose that the level of GDP increased by $100 billion in an economy where the marginal propensity to consume is 0.5. Aggregate expenditures must have increased by:
A) $100 billion.
B) $50 billion.
C) $500 billion.
D) $5 billion.
Ans: B
9. At the equilibrium GDP for an open economy:
A) net exports may be either positive or negative.
B) imports will always exceed exports.
C) exports will always exceed imports.
D) exports and imports will be equal.
Ans: A
10. If the multiplier in an economy is 5, a $20 billion increase in net exports will:
A) increase GDP by $100 billion.
B) reduce GDP by $20 billion.
C) decrease GDP by $100 billion.
D) increase GDP by $20 billion.
Ans: A
11. In a mixed open economy the equilibrium level of GDP exists where:
A) Ca + Ig + Xn intersects the 45-degree line.
B) Ca + Ig = Sa + T + X .
C) Ca + Ig + Xn + G = GDP.
D) Ca + Ig + Xn = Sa + T .
Ans: C
12. The multiplier associated with a change in government purchases is:
A) always equal to 1.
B) smaller than that associated with an equal change in taxes.
C) the same as that associated with a change in investment.
D) less than that associated with a change in investment.
E) greater than that associated with a change in investment.
Ans: C
