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Which are the answers

Daniel Kevins

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1. According to our text, an increase in a country’s capacity to produce in the long run (outward shift of the production possibilities curve) is caused by:

Group of answer choices

an increase in a country’s macroeconomic demand.

an increase in a nation’s money supply.

an advance in technology.

a decrease in a nation’s unemployment rate.

2. Consider the following grading system for a hypothetical economics class. Students earn a letter grade depending on how many course points they earn (i.e. higher than 90 is an A, etc.). There is no required redistribution of grades, but students with a higher letter grade may voluntarily give up a letter grade to students with a lower letter grade. In terms of income distribution, which economic system is most comparable to the grading system described above?

Group of answer choices

Capitalism.

Communism.

Socialism, or a mixed economy.

Anarchy.

3. Which of the following is an example of the fallacy of composition?

Group of answer choices

If the annual nominal interest rate is 10%, and the annual inflation rate is 3%, then the real interest rate is 9%.

If the minimum wage increases, and shortly thereafter, the unemployment rate decreases, then we can automatically conclude that an increase in the minimum wage causes a decrease in the unemployment rate because the unemployment rate decrease immediately followed the minimum wage increase.

The sum of all cash, currency, and deposited money in banks’ checking accounts, equals a monetary measure called M1. M1 is a key variable in the economy, because it determines inflation and interest rates.

If we put import taxes (tariffs) on imported foreign cars, then the price of imported foreign cars increases relative to the price of domestic cars.

None of the above

4. Which of the following is an example of a positive economic statement?

Group of answer choices

The Fed should increase the money supply, because increasing the country’s price level is beneficial to the economy.

The Fed should increase the money supply each year by a fixed percentage.

The Fed should not increase the money supply by a fixed percentage each year.

It is not desirable for the Fed to change the money supply.

None of the above.

5. Let’s assume that you have only two “production possibilities” this semester: credits earned at a college, and earnings from a job. Let’s assume that you are working at your potential, and your current optimal choice is to earn $20,000 from your job, and take 12 credit hours in college. In the future, you want to take 10 credit hours in college? What can you conclude about this choice?

Group of answer choices

It is impossible to take 10 credit hours without giving up job earnings.

It is possible to take 10 credit hours only if I earn more money from my job.

It is possible to earn 10 credit hours only if I work fewer hours on the job.

It is NOT possible to earn 10 credit hours even if I work less, because I am at a point on the curve (maximum production) and therefore 12 credits is the maximum number of credits I can take.

If I take 10 credit hours, I can work more hours and earn more money.

6. Let’s say you are studying vanilla ice cream as a consumer product. According to the theory of demand and supply, how will the equilibrium price and quantity change if consumer incomes rise considerably? Select the price and quantity changes as a result of this change.

Group of answer choices

The equilibrium price change is indeterminate; the equilibrium quantity falls.

The equilibrium price falls; the equilibrium quantity rises.

The equilibrium price falls; the equilibrium quantity change is indeterminate.

The equilibrium price rises; the equilibrium quantity increases.

The equilibrium price change is indeterminate and the quantity change is indeterminate.

7. Let´s assume that the minimum wage in a certain area is $7.00 and let’s assume that the lowest wage that businesses pay workers in this free market is $9.00 (assume that this is the going market wage that all businesses pay for unskilled, minimum wage workers). Given these conditions, and assuming no other changes in the economy, what does the theory of demand and supply predicts regarding what will happen to unemployment if the minimum wage is raised from $7.00 to $10.00?

Group of answer choices

Unemployment will rise because minimum wage workers will see an increase in their hourly wage and the quantity demanded for labor will decrease.

Unemployment will fall because minimum wage earnings will decline and the quantity demanded for labor will increase.

Unemployment will be unaffected because people are already earning above the minimum wage at the new minimum wage.

Unemployment will rise in the short run, but fall in the long run because the government-established wage will fall in the long run.

8. Which is NOT true about the U-3 unemployment statistic?

Group of answer choices

It is considered the “official” unemployment rate, the one most typically reported in the media.

It is determined through the use of s statistical sampling methodology.

It is published monthly by the U.S. Department of Commerce.

It measures people who are without jobs and they have actively looked for work within the past four weeks.

9. Government price controls, such as rent controls and minimum wages:

Group of answer choices

are economically efficient.

lead to long term economic gains in production.

may have some social benefits, but lead to economic inefficiency, including shortages and surpluses.

have social benefits and lead to economic efficiency and increases in everyone’s standard of living.

10. Let’s assume that the cost of producing decreases so that supply increases. Let’s also assume that changing consumer preferences for this product have increased the demand for this product. What can you conclude about consumer surplus and producer surplus in the free market for this product after these two changes?

Group of answer choices

Both consumer surplus and producer surplus have increased.

Both consumer surplus and producer surplus have decreased.

Consumer surplus has increased and producer surplus has decreased.

Consumer surplus has decreased and producer surplus has increased.

The change in consumer surplus is indeterminate and the change in producer surplus is indeterminate.

The change in consumer surplus is indeterminate and the producer surplus has increased.

11. The following five products are produced in an economy in year Q: Corn – 8 dozens of ears @ $5 per dozen sold as a final product to consumers. Tractors – 1 @ $1,000 sold as a final product to farmers producing the corn. Ovens – 2 @ $200 each sold as a final product to bakers producing the bread. Bread – 40 loaves @ $1 per loaf sold as a final product to consumers. Dough to make the 40 loaves of bread – 5 bags @ $2 each sold as an intermediate product to bakers producing the bread. During this same year, depreciation of the capital goods (the tractor and the ovens), amounts to a total of $300. Assuming no other production, what is this economy’s Gross Domestic Product in year Q?

Group of answer choices

$1,180

$1,190

$1,480

$1,490

$1,790

$1,780

12. Which of the following is included in the calculation of Gross Domestic Product for year X?

Group of answer choices

The entire value of a car, if we know that the car was manufactured in November of the year before, but sold in January of year X.

The commission and profits of a car dealer who sold a used car in January of year X.

The payment for the tires, which were delivered by Goodyear to the car manufacturer in year X.

The value of 100 shares of General Motors stock sold on the New York Stock Exchange on January 1 of year X.

The welfare payments made by the government in year X for an unemployed used car dealer.

13. Which is NOT a type of unemployment?

Group of answer choices

Technological

Seasonal

Frictional

Cyclical

Structural

14. If production of final goods and services increases from year 1 to year 2, and prices decrease from year 1 to year 2, then we can conclude that:

Group of answer choices

Real Gross Domestic Product has increased from year 1 to year 2, and nominal Gross Domestic Product has decreased from year 1 to year 2.

Real Gross Domestic Product has decreased from year 1 to year 2, and nominal Gross Domestic Product has increased from year 1 to year 2.

The change in real Gross Domestic Product is indeterminate from year 1 to year 2, and nominal Gross Domestic Product has increased from year 1 to year 2.

Real Gross Domestic Product has decreased from year 1 to year 2, and the change in nominal Gross Domestic Product is indeterminate from year 1 to year 2.

Real Gross Domestic Product has increased from year 1 to year 2, and the change in nominal Gross Domestic Product is indeterminate from year 1 to year 2.

15. When prices ___?___ from one year to the next, then nominal GDP in the latter year is ___?___ than real GDP.

Group of answer choices

rise; smaller

fall; smaller

are constant; greater

are constant; smaller

16. Imagine a progressive taxation structure for taxable income as follows: $0-$16,500: 10.0%; $16,501-$42,750: 20.0%; $42,751-$85,500: 27.5%; $85,501-$126,000: 31.5%; and $126,001+: 35.0% For an individual with $141,750 in taxable income, the correct tax liability and effective tax rate equals:

Group of answer choices

$36,926 and 35.0%

$49,613 and 35.0%.

$36,926 and 26.1%.

$49,613 and 26.1%.

$34,211 and 27.5%.

$43,212 and 27.5%.

17. Which of these following statements is NOT true?

Group of answer choices

Prices are signals.

People respond to incentives.

A standard demand curve is upward sloping and to the right.

Competition always yields technological advancement, more consumer choices, and lower prices.

18. John Maynard Keynes was an economist who believed that:

Group of answer choices

the role of the government should be limited.

a government that encourages government spending and an active monetary policy causes recessions.

active fiscal and monetary policy by a government can help get an country out of a recession more quickly.

active fiscal and monetary policy by a government can prevent unemployment but not inflation.

19. Industries which sell luxury products and services, such as jewelry and expensive vacations, suffer mostly from which kind of unemployment during recessions?

Group of answer choices

Frictional.

Structural.

Cyclical.

Seasonal.

Nominal.

20. The unemployment rate as reported by the newspapers, radio and television, is measured by:

Group of answer choices

the number of people receiving government unemployment compensation.

The number of United States citizens who do not have a job divided by the total number of people in the population.

A survey. Only individuals 16 years or older who do not have a job, and who are looking for a job, are counted.

A computerized statistical model that is based on daily linear regression data from unemployment and welfare data. This method has been used since 1929. It’s not perfect but it’s the best one we have.

21. According to our text, and according to classical economists:

Group of answer choices

the more the private sector saves, the more the government spends. This increases taxes in the long run and hurts economic growth.

The more we save, the lower interest rates are. Lower interest rates lead to a housing boom which turns into a housing collapse and an economic financial crisis in the long run.

savings is another form of spending. When we save, the financial markets have more funds to loan out. These loans (to businesses) usually lead to research, development and business expansions. These are forms of spending which stimulate the economy.

savings has no beneficial effect on the economy; savings is a leakage from the economy, so it negatively affects GDP.

22. Classical and Austrian economists, such as Henry Hazlitt and Friedrich Von Hayek, believe that an increase in savings:

Group of answer choices

creates more leakages from the economy and causes a slowdown in spending.

means less spending in the private sector and hurts long-term economic growth.

leads the rich to become richer and the poor to become poorer.

lowers government tax revenue and therefore causes decreases in government and a slowdown in the economy.

None of these answers are correct..

23. According to our text:

Group of answer choices

In the long run, an increase in real spending, or purchasing power, is caused by increases in productivity.

Productivity increases occur as a result of advances in technology and/or increases in resources.

An increase in government spending, unless it encourages technology or capital formation, does not lead to an increase in real spending in the long run.

All of these answers are correct according to the CD.

24. During a recession, Keynes recommends:

Group of answer choices

An increase in government production and a decrease in the amount of regulation.

An increase in taxes and regulations.

An increase in government spending and/or a decrease in taxation and/or an increase in the nation’s money supply.

greater savings to encourage more available funds for greater technological advances and an increase in productivity.

25. According to the Keynesian model, if a country experiences a recessionary gap of $100 billion and the MPC is .8, which of the following do we need to get back to full employment?

Group of answer choices

An increase in government spending of $500 billion.

An increase in government spending of $20 billion.

An increase in government taxation of $400 billion.

A decrease in government taxation of $400 billion.

A decrease in government spending of $80 billion.

26. Classical economists criticized Keynesian discretionary fiscal policy because they believed that lags in policy could be counter-effective to the success of fiscal policy. Which of the following best describes the information lag, as discussed in Unit 6?

Group of answer choices

The information lag is the period of time it takes for Congress to make up their mind and come to a decision about how much to spend and what to spend it on.

The information lag is the period of time it takes from the moment Congress makes a decision to the time it takes for the funds to reach the public.

The information lag is the period of time it takes for economists and politicians to collect the data and to find out whether we really are having a recession.

The information lag is the period of time it takes for the Federal Reserve to print the money.

27. Most state and local governments’ single largest expenditure is:

Group of answer choices

Education.

Police protection.

Parks and recreation.

The court system.

28. According to Classical economic thought, falling (equilibrium) prices occur when:

Group of answer choices

The supply curve shifts to the left with a constant demand curve.

The demand curve shifts to the right with a constant supply curve.

The supply curve shifts to the right with a constant demand curve.

The demand curve shifts to the left with a constant supply curve.

29. As part of the immigration debate some people observe that illegal immigrants pay little or no federal taxes because they get paid under the table and don’t pay any income taxes. Which tax system proposes to eliminate or significantly lessen this disadvantage?

Group of answer choices

The national consumption tax system.

The proportional tax system.

The federal income tax system.

The flat tax system.

The property tax system.

30. If a country with a progressive income tax system approves a 10% tax cut to all income earners, then:

Group of answer choices

The higher income earners will receive a smaller dollar amount cut by virtue of the fact that they pay more income taxes.

The lower income earners will receive a smaller dollar amount cut by virtue of the fact that they pay less income taxes.

The middle class income earners will receive a bigger dollar amount cut than the higher income earners by virtue of the fact that they pay more income taxes.

The middle class income earners will receive a smaller dollar amount cut than the lower income earners because the middle class always gets “squeezed”.

31. When the money supply remains constant, then the absolute (nominal) dollar value of average incomes in the economy:

Group of answer choices

also remains constant (given a constant labor force). This means that people’s purchasing power does NOT improve.

also remains constant (given a constant labor force). If prices fall, it means that people’s purchasing power improves.

increases (given a constant labor force). This means that people’s purchasing power improves.

decreases (given a constant labor force). This means that people’s purchasing power does NOT improve.

32. Which of the following is a harmful effect of inflation?

Group of answer choices

inflation encourages people to invest in productive assets, such as the construction of houses and other buildings.

inflation leads to higher interest rates in the long run.

inflation leads to lower tax revenue for our government in a non-indexed progressive tax system

inflation discourages consumer spending and encourages saving.

all of these answers are harmful effects.

33. A falling price level is a symptom of an unhealthy economy, if prices have fallen due to _________. It is symptom of a healthy economy if prices have fallen due to _________.

Group of answer choices

A decrease in the money supply; an increase in the money supply.

An increase in the money supply; a decrease in the money supply.

A decrease in the demand for goods and services; an increase in the supply of goods and services.

An increase in the supply and production of goods and services; a decrease in the demand for goods and services.

34. According to Keynes, an increase in the money supply will:

Group of answer choices

in the long run raise interest rates and slow down economic growth.

lead to inflation and should be counteracted by expansive fiscal policy.

lower taxes and reduce the long term national debt.

lower interest rates in the short run and stimulate economic growth.

35. If the total money supply is $800 during period 1, and the economy produces a total of 20 products, what is the average equilibrium price of each product during period 1? If during period 2 the total money is $900, and total production remains the same, what is the average equilibrium price during period 2?

Group of answer choices

period 1: $10. period 2: $15.

period 1:$40. period 2:$45.

period 1:$80. period 2:$90.

period 1:$800. period 2:$900.

36. Which budget policy is economically most beneficial for a country, according to our text?

Group of answer choices

Balance the budget during every five year business cycle.

Cyclically balance the budget.

do not worry about balancing the budget. Be concerned only with achieving full employment.

Accumulate budget surpluses during healthy economic times, so that the country has the ability to spend more and tax less during adverse economic times without running up a national debt.

37. According to our text, in the long run, federal deficits lead to:

Group of answer choices

increases in real interest rates, because government deficits take funds (savings) away from the private sector. Higher real interest rates slow down economic growth.

decreases in real interest rates, because government deficits add funds (savings) to the private sector. Lower interest rates encourage economic growth.

increases in exports, because the government usually spends the deficit money on production of goods and services that other countries purchase.

lower inflation, because an increase in government demand and a decrease in government subsidies lowers prices on all final goods and services.

38. If a government runs a deficit, then, unless it is in a default state, it can obtain this borrowed money from:

Group of answer choices

the public, when the public buys bonds from the government.

its central bank(s) (indirectly), when the central bank buys bonds. The central bank prints money to pay for the bonds.

businesses, when businesses buy bonds from the government.

foreign investors, when foreign investors buy bonds from the government.

all of these answer groups.

39. Why is the budget philosophy Keynes supports politically difficult to achieve?

Group of answer choices

Keynes’s budget philosophy requires surpluses during recessions and deficits during expansions. This is difficult because during recessions governments usually don’t run surpluses.

Keynes’s budget philosophy states that a government should balance its budget each fiscal year. However, politically this is difficult, because during recessionary years tax revenue usually decreases.

It is not always clear what constitutes a business cycle. In some years, GDP rises, and we may still be in a recession.

Keynes recommends that government run surpluses during expansions. Politically, it is difficult to achieve a surplus. For a surplus to occur, we would need politicians to raise taxes and lower government spending. Politicians usually raise government spending, not lower it.

40. Let’s say that in year 1 our government spending is $300 and our revenue is $200. In year 2 our government spending is $450 and our revenue is $500. In year 3 our government spending is $550 and our revenue is $550. Assuming no other deficits and surpluses, what is our government’s national debt/surplus?

Group of answer choices

We have a debt of $100

We have a surplus of $200

We have a debt of $150.

We have a debt of $50.

We have a surplus of $150.

41. According to Classical and Austrian school economists, an increase in the money supply will:

Group of answer choices

increase inflation in the long run and eventually raise interest rates and slow down economic growth.

lead to inflation in the short run, but not in the long run.

lower taxes and reduce the long term national debt.

raise interest rates in the short run, but stimulate economic growth in the long run.

42. If a bank has $6,000 in demand deposits, the reserve requirement is 10 percent, and it has not made any loans, it can maximally loan out:

Group of answer choices

$1,200.

$4400.

$5,000.

$600.

$5,400

$60,000

43. If the Federal Reserve sells $4,000 in the open market, and the reserve requirement is 25%, then:

Group of answer choices

The nation’s money supply maximally increases by $1,000.

The nation’s money supply maximally decreases by $1,000.

The nation’s money supply maximally increases by $16,000.

The nation’s money supply maximally decreases by $16,000.

The nation’s money supply maximally increases by $4,000.

44. The main difference between the main three money supply measures (M1, M2, M3) is that:

Group of answer choices

only M1 includes funds which banks must keep as a percentage of their required reserves; M2 and M3 include forms of long and short term savings, which banks can fully loan out

the additional forms of money in the broader (higher numbered) measures are less liquid.

the broader (higher numbered) money supply measures include forms of money directly used to purchase goods and services; the narrower (M1) money supply represents only funds in savings accounts.

M1 includes cash only; M2 includes paper money; M3 includes electronic transfers; and L includes financial assets.

45. A small business transfers $1,000 from its checking account to its Money Market Mutual fund account. This has the following effect:

Group of answer choices

Velocity will increase.

Inflation will increase.

M1 will decrease and M2 will increase.

M1 will decrease and M2 will stay the same.

M1 will decrease and M3 will increase.

M1, M2 and M3 will all increase.

46. The capital account includes several accounts dealing with:

Group of answer choices

financial assets (stocks, bonds, etc.).

real estate.

foreign exchange (currency) transactions.

all of these answers.

47. Let’s assume that the Japanese Yen has decreased in value relative to most other foreign currencies. Which of the following is the most logical explanation for this decrease?

Group of answer choices

The demand for Japanese Yen has increased, and the supply has decreased.

The demand for Japanese Yen has decreased, and the supply has increased.

The demand for Japanese Yen has decreased, and the supply has decreased.

The demand for Japanese yen has increased, and the supply has increased.

48. If a country’s currency depreciates, then, ceteris paribus, the prices of its exports (the goods it sells to other countries):

Group of answer choices

decrease.

increase.

stay the same.

rise by the same amount as the prices of its imports.

49. A U.S. importer faces a price of 100 Mexican pesos per one bottle of Mexican wine. If the value of the U.S. dollar equals 4 Mexican pesos per dollar, then the price of the bottle of wine to the U.S. importer is _______ in year 1. If the value of the U.S. dollar changes to 5 Mexican pesos the following year, then the price of a bottle of wine is _______. Consequently, the U.S. importer faces a _______ price due to the __________ of the dollar.

Group of answer choices

$25; $20; lower; appreciation.

$16.67; $20; lower; depreciation.

$20; $25; higher; depreciation.

$400; $500; higher; appreciation.

$500; $400; lower; depreciation.

50. Many economists and politicians view a trade deficit as harmful to a country’s economy. Which of the following is a reason why this does NOT necessarily have to be the case?

Group of answer choices

a trade deficit could mean that the country’s domestic economy is strong relative to other economies; consequently imports are likely to exceed exports.

a merchandise trade deficit is just one component of the balance of payments; the other accounts could be positive.

if imports are higher because of low foreign prices, this could be beneficial, because it adds to our country’s wealth and provides consumers and businesses with more purchasing power.

all of these reasons.

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Daniel Kevins

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