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Sample Exam #31. According to Emerson: "Want is a growing giant whom the coat of Have was never large enough to cover."

According to economists, "Want" exceeds "Have" because:A) people are greedy.B) productive resources are limited.C) human beings are inherently insecure.D) people are irrational.

2. Marginal costs exist because: A) the decision to engage in one activity means forgoing some other activity. B) wants are scarce relative to resources. C) households and businesses make rational decisions. D) most decisions do not involve sacrifices or tradeoffs.

3. Suppose an economist says that "Other things equal, the lower the price of bananas, the greater the amount of bananas purchased." This statement indicates that:

A) the quantity of bananas purchased determines the price of bananas. B) all factors other than the price of bananas (for example, consumer tastes and incomes) are assumed

to be constant. C) economists can conduct controlled laboratory experiments. D) one cannot generalize about the relationship between the price of bananas and the quantity

purchased. 4. Which of the following is a normative statement?

A) The temperature is high today. B) The humidity is high today.C) It is too hot to play tennis today.

D) It will cool off later this evening. 5. The economizing problem is one of deciding how to make the best use of:

A) virtually unlimited resources to satisfy virtually unlimited wants. B) limited resources to satisfy virtually unlimited wants. C) unlimited resources to satisfy limited wants. D) limited resources to satisfy limited wants. Answer: B

Use the following to answer the next question:

6. An increase in money income: A) shifts the consumer’s budget line to the right. C) increases the slope of the budget line. B) shifts the consumer’s budget line to the left. D) has no effect on the budget line.

7. Which of the following is a land resource?A) a computer programmerB) a computerC) silicon (sand) used to make computer chipsD) a piece of software used by a firm

8. The process of producing and accumulating capital goods is called: A) money capital. B) depreciation. C) investment. D) consumption.

9. A nation's production possibilities curve is bowed out from the origin because:A) resources are not equally efficient in producing every good.B) the originator of the idea drew it this way and modern economists follow this convention.C) resources are scarce.D) wants are virtually unlimited.

10.Refer to the above table. A total output of 3 units of capital goods and 4 units of consumer goods: A) is irrelevant because the economy is capable of producing a larger total output. B) will result in the maximum rate of growth available to this economy. C) would involve an inefficient use of the economy's scarce resources. D) is unobtainable in this economy.

11.If the production possibilities curve were a straight downsloping line, this would suggest that: A) resources are perfectly shiftable between the production of these two goods. B) it is possible to produce more of both products. C) both products are equally capable of satisfying consumer wants. D) the two products have identical prices. Answer: A


12.Refer to the above diagram. Which of the following is a normative statement? A) Point C is superior to point B because it is important to enhance the future of society. B) If society is initially at point C, it must sacrifice 6 units of bread to obtain one more unit of tractors. C) If society produces 2 units of tractors and 12 units of bread, it is not using its available resources with

maximum efficiency. D) Other things equal, the combination of outputs represented by point D will result in more rapid

economic growth than will the combination represented by point C.

Answer the next question on the basis of the following production possibilities tables for two countries, North Cantina and South Cantina:

13.Refer to the above tables. If South Cantina is producing at production alternative D, the opportunity cost of the third unit of capital goods will be:

A) 3 units of consumer goods. B) 4 units of consumer goods.C) 5 units of consumer goods.

D) 6 units of consumer goods. 14.The law of increasing opportunity costs states that:

A) if society wants to produce more of a particular good, it must sacrifice larger and larger amounts of other goods to do so.

B) the sum of the costs of producing a particular good cannot rise above the current market price of that good.

C) if the sum of the costs of producing a particular good rises by a specified percent, the price of that good must rise by a greater relative amount.

D) if the prices of all the resources used to produce goods increase, the cost of producing any particular good will increase at the same rate.

15.Refer to the above diagram for athletic shoes. The optimal output of shoes is:A) Q1. B) Q2. C) Q3. D) greater than Q3.

16.The basic difference between consumer goods and capital goods is that A) consumer goods are produced in the private sector and capital goods are produced in the public

sector. B) an economy that commits a relatively large proportion of its resources to capital goods must accept a

lower growth rate. C) the production of capital goods is not subject to the law of increasing opportunity costs. D) consumer goods satisfy wants directly while capital goods satisfy wants indirectly.

17.All of the following could immediately or eventually lead to an inward shift of a nation's production possibilities curve, except:

A) emigration of skilled workers from the nation. B) a decline in the birth rate. C) an increase in the average skill level of all occupational groups. D) depletion and reduced availability of major energy resources.

18.The "after this, therefore because of this" fallacy states that: A) because event A precedes event B, A is necessarily the cause of B. B) the very attempt to accomplish a certain objective may create conditions that prohibit the

achievement of that goal. C) events may drastically alter plans; one's intentions and actual accomplishments may differ

considerably. D) generalizations that are accurate at the level of microeconomics may be inaccurate at the level of

macroeconomics. 19.An economic system:

A) requires a grouping of private markets linked to one another.B) is a particular set of institutional arrangements and a coordinating mechanism used to respond to the

economizing problem.C) requires some sort of centralized authority (such as government) to coordinate economic activity.D) is a plan or scheme that allows a firm to make money at some other firm's expense.

20.The pursuit of self-interest:A) is highly detrimental to the market system.B) means the same as "selfishness."C) is reflected in the behavior of firms, but not in the behavior of consumers.D) gives direction to the market system.

21.Specialization in production is economically beneficial primarily because it: A) allows everyone to have a job which they like. B) permits the production of a larger output with fixed amounts of resources. C) facilitates trade by bartering. D) guarantees full employment.

22.From society's point of view the economic function of profits and losses is to: A) promote the equal distribution of real assets and wealth. B) achieve full employment and price level stability. C) contribute to a more equal distribution of income. D) reallocate resources from less desired to more desired uses.

23.If a competitive industry is neither expanding nor contracting, we would expect: A) total revenue to be zero. B) economic profits to be zero. C) total opportunity cost to be zero. D) more resources to flow to that industry.

Answer the next question using the following data which show all available techniques for producing 20 units of a particular commodity:

24.Refer to the above data. If a new production technique is developed that enables a firm to produce 20 units of output with 3 units of land, 3 of labor, 1 of capital, and 2 of entrepreneurial ability, this technique would:

A) not be adopted because, although it reduces production costs, it does not increase profit. B) be adopted because it would lower production costs and increase economic profit. C) not be adopted because it entails higher production costs than other available techniques. D) be adopted, even though economic profits would be reduced slightly.

25.The market system's answer to the fundamental question "How will the system promote progress?" is essentially:

A) "Through government funded research programs."B) "Through the redistribution of income to promote greater equality."C) "Through training and retraining programs."D) "Through the profit potential that encourages development of new technology."

26.The invisible-hand concept suggests that: A) market failures imply the need for a national economic plan. B) big businesses are inherently more efficient than small businesses. C) the competitiveness of a capitalistic market economy invariably diminishes over time. D) assuming competition, private and public interests will coincide.

27.Innovation lagged in the centrally planned economies because: A) there was too much domestic business competition. B) there was too much competition from foreign firms. C) enterprises resisted innovation in fear that their production targets would be raised. D) exports had to equal imports for the plan to work.

28.In terms of the circular flow diagram, households make expenditures in the _____ market and receive income through the _____ market.

A) product; financial B) resource; product C) product; resource D) capital; product

29.The income and substitution effects account for:A) the upward sloping supply curve.B) the downward sloping demand curve.C) movements along a given supply curve.D) the "other things equal" assumption.

30.An increase in consumer incomes will: A) increase the demand for an inferior good. B) increase the supply of an inferior good.C) increase the demand for a normal good.

D) decrease the supply of a normal good.

Use the following to answer:

31.A decrease in quantity demanded (as distinct from a decrease in demand) is depicted by a:A) move from point x to point y.B) shift from D1 to D2.C) shift from D2 to D1.

D) move from point y to point x.32.The law of supply:

A) reflects the amounts that producers will want to offer at each price in a series of prices. B) is reflected in a downsloping supply curve. C) shows that the relationship between producer revenue and quantity supplied is negative. D) reflects the income and substitution effects of a price change.


33.Refer to the above table. If demand is represented by columns (3) and (2) and supply is represented by columns (3) and (5), equilibrium price and quantity will be:

A) $10 and 60 units. B) $9 and 50 units. C) $8 and 60 units. D) $7 and 50 units.

Answer the next question on the basis of the given supply and demand data for wheat:

34.Refer to the above data. If price was initially $4 and free to fluctuate, we would expect: A) quantity supplied to continue to exceed quantity demanded. B) the quantity of wheat supplied to decline as a result of the subsequent price change. C) the quantity of wheat demanded to fall as a result of the subsequent price change. D) the price of wheat to rise.

35.There will be a surplus of a product when: A) price is below the equilibrium level. B) the supply curve is downward sloping and the demand curve is upward sloping. C) the demand and supply curves fail to intersect. D) consumers want to buy less than producers offer for sale.

36.An unusually large crop of coffee beans might:A) increase the supply of coffee. B) increase the price of coffee.C) decrease the quantity of coffee consumed.

D) increase the price of tea. Use the following to answer the next question:

Q u an tity Q u an tity D em an d ed P rice S up p lied

5 2 $ 5 0 73 62 45 62 72 40 51 82 35 42 92 30 33

37.In the above market, economists would call a government-set minimum price of $50 a:

A) price ceiling.B) price floor. C) equilibrium price. D) fair price.

38.A market-based system of buying and selling human organs for transplant would:A) reduce total health care spending.B) create a surplus of organs.C) increase the quantity of organs available for transplant.D) reduce the price of organs.

39.The distribution of income among the owners of land, labor, capital, and entrepreneurial ability is known as: A) income differentials. B) the personal distribution of income.C) the functional distribution of income.

D) the concentration ratio. 40.An industry is best defined as a group of firms that:

A) compete for labor.B) produce identical or similar products.C) use identical production techniques.D) are located in the same city or geographic area.

41.The U.S. Food Stamp program, which provides coupons that allow low-income individuals to buy food, is an illustration of:

A) public provision of a suitable legal framework for the market system. B) the redistributional function of government. C) a government action designed to enhance competition.D) the stabilization function of government.

42.Suppose the production of a certain good creates substantial positive externalities. If government adopts a policy that adjusts demand to take these benefits into account, then:

A) firms in this industry will go out of business. B) the output of the product will increase.C) the output of the product will decrease.

D) the price of the product will decrease.

43.Which of the following is a public good?A) chewing gum B) bread C) a professional baseball game D) street lights in a city

44.Government transfer payments: A) have been virtually eliminated by Federal revenue sharing. B) have virtually no effect on the distribution of income. C) make the distribution of income less equal. D) make the distribution of income less unequal.

45.An income tax is progressive if the: A) absolute amount paid as taxes varies directly with income. B) percentage of income paid as taxes is the same regardless of the size of income. C) percentage of income paid as taxes increases as income increases. D) tax rate varies inversely with income.

The following data represent a personal income tax schedule. Answer the next question on the basis of this information.

46.Refer to the above table. If your taxable income is $8,000, your average tax rate is: A) 25 percent and the marginal rate on additional income is also 25 percent. B) 25 percent and the marginal rate on additional income is 50 percent. C) 25 percent and the marginal rate on additional income cannot be determined from the information

given. D) 20 percent and the marginal rate on additional income is 30 percent.

47.In the 1990s, corporations attempted to address the principal-agent problem by:A) providing stock or stock options as part of executive compensation.B) hiring additional managers to oversee potentially unscrupulous agents.C) supporting increased government oversight of corporate boards of directors.D) firing a significant number of managers believed to be acting contrary to the owners’ interests.

48.About half of United States international trade is with: A) other industrially advanced capitalist countries. B) the OPEC countries.C) developing countries.

D) Russia and China.


49.Refer to the above data. The domestic opportunity cost of producing 1 ton of steel in Omega is:A) ½ ton of wheat. B) 2 tons of wheat. C) 3 tons of wheat. D) 5 tons of wheat.

50.Refer to the above data. If Alpha was producing at alternative B and Omega was at alternative C before trade, the gain from specialization and trade would be:

A) 30 tons of wheat.B) 5 tons of steel.C) 5 tons of steel and 15 tons of wheat.D) 15 tons of steel and 5 tons of wheat.

51.If the Japanese yen appreciates relative to the Swedish krona, then the krona: A) will be more expensive to the Japanese. B) may either appreciate or depreciate relative to the yen. C) will appreciate relative to the yen. D) will depreciate relative to the yen.

52.A trade bloc is: A) a tariff or quota that impedes imports. B) a group of nations that allows free trade among member nations but restrict imports from

nonmember nations via tariffs and quotas. C) an area of a nation where manufacturers can import product components without paying tariffs. D) a group of nations that advertise their common export goods abroad.

53.If the price of tickets for fair rides decreases from $.50 to $.25 and the same number of tickets are required for each ride as before:

A) fair tickets have appreciated relative to the dollar.B) the dollar price of the fair rides has declined.C) the dollar price of fair rides has increased.D) the dollar price of fair rides has not changed.


54.The above diagram shows two product demand curves. On the basis of this diagram we can say that: A) over range P1P2 price elasticity of demand is greater for D1 than for D2. B) over range P1P2 price elasticity of demand is greater for D2 than for D1. C) over range P1P2 price elasticity is the same for the two demand curves. D) not enough information is given to compare price elasticities.


55.Refer to the above diagram. In the P1P2 price range demand is: A) of unit elasticity. B) relatively inelastic. C) relatively elastic. D) perfectly elastic.


56.Over the $4-$2 price range, the elasticity coefficient of supply is:A) 1. B) zero. C) less than 1. D) greater than 1.


57.Refer to the above data. Suppose quantity demanded increased by 12 units at each price, changing the equilibrium price in a direction and an amount for you to determine. Over that price range, supply is:

A) perfectly elastic. B) perfectly inelastic. C) elastic. D) inelastic.

Use the following cost information for the Creamy Crisp Donut Company to answer the next question:

Entrepreneur's potential earnings as a salaried worker = $50,000Annual lease on building = $22,000Annual revenue from operations = $380,000Payments to workers = $120,000Utilities (electricity, water, disposal) costs = $8,000Entrepreneur's potential economic profit from the next best entrepreneurial activity = $80,000Entrepreneur's forgone interest on personal funds used to finance the business = $6,000

58.Refer to the above data. Creamy Crisp's economic profit is:A) $150,000. B) $80,000. C) $230,000. D) $94,000.

59.If you operated a small bakery, which of the following would be a variable cost in the short run?A) baking ovensB) interest on business loansC) annual lease payment for use of the buildingD) baking supplies (flour, salt, etc.)

60.Which of the following curves is not U-shaped? A) MC B) AFC C) AVC D) ATC


The Sunshine Corporation finds that its costs are $40 when it produces no output. Its total variable costs (TVC) change with output as shown in the accompanying table. Use this information to answer the followingquestion.

61.Refer to the above information. The average fixed cost of 3 units of output is: A) $13.33. B) $12.50. C) $40. D) $18.50.

62.If an industry's long-run average total cost curve has an extended range of constant returns to scale, this implies that:

A) technology precludes both economies and diseconomies of scale. B) the industry will be a natural monopoly. C) both relatively small and relatively large firms can be viable in the industry. D) the industry will be comprised of a very large number of small firms.

63.A purely competitive seller is: A) both a "price maker" and a "price taker." B) neither a "price maker" nor a "price taker."C) a "price taker."

D) a "price maker." 64.When a firm is on the inelastic segment of its demand curve, it can:

A) increase total revenue by reducing price. B) decrease total costs by decreasing price. C) increase profits by increasing price. D) increase total revenue by more than the increase in total cost by increasing price.

65.Suppose a pure monopolist is charging a price of $12 and the associated marginal revenue is $9. We thus know that:

A) demand is inelastic at this price. B) the firm is maximizing profits.C) total revenue is increasing.

D) total revenue is at a maximum.


66.Refer to the above diagram for a pure monopolist. Monopoly price will be: A) e. B) c. C) b. D) a.

67.There is some evidence to suggest that X-inefficiency is: A) absent whenever two or more producers are competing with one another. B) not encountered in either competitive or monopolistic firms. C) more likely to occur in monopolistic firms than in competitive firms. D) more likely to occur in competitive firms than in monopolistic firms.

68.Children are charged less than adults for admission to professional baseball games but are charged the same prices as adults at the concession stands. This pricing system occurs because:

A) children have an elastic demand for game ticket but an inelastic demand for concession items.B) children have an inelastic demand for game tickets but an elastic demand for concession items.C) the seller can prevent children from buying game tickets for adults but cannot prevent children from

buying concession items for adults.D) children can personally "consume" only a single game ticket, but can personally consume more than

one concession item. 69.The larger the number of firms and the smaller the degree of product differentiation the:

A) greater the divergence between the demand and the marginal revenue curves of the monopolistically competitive firm.

B) larger will be the monopolistically competitive firm's fixed costs. C) less elastic is the monopolistically competitive firm's demand curve. D) more elastic is the monopolistically competitive firm's demand curve.

Answer the next question on the basis of the following demand and cost data for a specific firm:

D em an d D ata (1 ) (2 ) (3 ) To ta l

P r ice P r ic e Q u a n tity O u tp u t cost $11 $ 1 0 6 6 $ 6 1

9 .9 9 8 .8 5 7 7 62 9 8 8 8 64 8 7 9 9 67

7 .1 0 6 .1 0 10 10 72 6 5 11 11 79

5 .1 5 4 .1 5 12 12 86

C ost D a ta

70.Refer to the above data. Suppose that entry into this industry changes this firm's demand schedule from columns (1) and (3) shown above to columns (2) and (3). We can conclude that this industry is:

A) a pure monopoly. B) purely competitive.C) a constant cost industry.

D) monopolistically competitive. 71.Suppose that total sales in an industry in a particular year are $600 million and sales by the top four sellers are

$200 million, $150 million, $100 million, and $50 million, respectively. We can conclude that: A) price leadership exists in this industry. B) the concentration ratio is more than 80 percent. C) this industry is a differentiated oligopoly. D) the firms in this industry face a kinked demand curve.


72.Refer to the above diagram for a noncollusive oligopolist. We assume that the firm is initially in equilibrium at point E where the equilibrium price and quantity are P and Q. If the firm's rivals will ignore any price increase but match any price reduction, over what range might marginal cost rise without disturbing equilibrium price and output?

A) bE B) ab C) Qa D) Qb

Use the following to answer the following question:

73.Refer to the above figures. Both allocative and productive efficiency are being realized in: A) all four figures. B) Figures B and D. C) Figure D only. D) Figure B only.

74.When economists view technological change as internal to the economy, they mean that it: A) occurs randomly. B) occurs accidentally. C) arises deliberately from the profit motive and competition. D) arises mainly from government subsidies.


Consumer's income = $12

M a rg in a l M a rg in a l M a rgin a l u tility, n ew

U n its o f u tility, X u tility, Y p rod u ct, Z p rod u ct (p r ice = $ 1) (p r ice = $ 1) (p r ice = $ 1) F irs t 1 2 1 6 2 0 S e c on d 1 0 1 4 1 8 T h ird 8 1 2 1 6 F o u rth 6 1 0 1 4 F if th 4 8 1 2 S ix th 2 6 1 0 S e v en th 0 4 8

75.Refer to the above data for a utility-maximizing consumer. Assume that new product Z doesn't exist. How

many units of X and Y will this consumer buy, given his or her $12 budget? A) 5 of X and 7 of Y. B) 7 of X and 5 of Y. C) 6 of X and 6 of Y. D) 5 of X and 6 of Y.

76.Which of the following market structures do economists generally agree is the least conducive to R&D and innovation?

A) monopolistic competition B) pure competition C) pure monopoly D) oligopoly

77.The earnings of highly educated workers: A) rise more slowly than those of less-educated workers. B) rise more rapidly than those of less-educated workers. C) rise at about the same rate as those of less-educated workers. D) stagnate earlier than do those of less-educated workers.

78.One of the potential negative side-effects of pay in the form of sales commissions is:A) a greater incentive for sales people to engage in unethical or fraudulent sales practices that may

eventually cause legal problems for the firm.B) increased volatility of sales revenue for the firm.C) the potential that pay levels may get so high that they will increase a firm's marginal wage cost more

than its marginal revenue product. D) an increased likelihood of shirking by workers.

79.The U.S. Justice Department would most likely block a merger between:A) Walt Disney and Coca Cola.B) Sony and Home Depot.C) Wal-Mart and Subway Sandwiches.D) Boeing and Airbus.

80.Productivity increases in agriculture have: A) increased the demand for foodstuffs. B) been negligible since the Second World War. C) increased the incomes of farm households above the national average. D) lowered farm prices.

81.The persistence of large subsidies to farmers can be explained in terms of: A) public choice theory. B) the inelasticity of demand for farm products.C) the paradox of voting.

D) cost-benefit analysis. 82.People's incomes are relatively low when they are young, reach a peak in middle age, and then decline. This

fact helps explain: A) the wide variations of Gini ratios among nations.B) the equality-efficiency tradeoff. C) why the lifetime distribution of income is more equal than the distribution in any given year. D) why the lifetime distribution of income is less equal than the distribution in any given year.

83.The equality-efficiency tradeoff suggests that: A) welfare programs stimulate incentives to work. B) inefficiencies result when income is transferred from rich to poor. C) noncash transfers are superior to cash transfers. D) economic growth is the best means of reducing poverty.


84.Which of the above plans entails the highest benefit-reduction rate? A) Plan A B) Plan B C) Plan C D) cannot be determined from the data given

85.The demand for health care in industrially advanced economies is: A) highly elastic with respect to both price and income. B) highly inelastic with respect to both price and income. C) highly elastic with respect to income, but highly inelastic with respect to price. D) about unit elasticity with respect to income and relatively inelastic with respect to price.

86.Under a system of national health insurance: A) the Federal government would provide a basic health care package to all citizens at no direct cost. B) health care would be financed out of tax revenues. C) government could negotiate to reduce the fees charged by doctors and hospitals. D) all of the above might be done.

87.Collective bargaining agreements usually cover: A) wages and hours. B) union status. C) seniority and job opportunities. D) all of the above.

88.In 2005, the percentage of African-American men who had completed college was 16.6 percent compared to 30 percent of white men. This primarily suggests the possibility of:

A) wage discrimination.B) human-capital discrimination.C) employment discrimination.D) occupational discrimination.

89.Wage and employment discrimination were expressly outlawed in the:A) Comparable Worth Act of 1975 and the Affirmative Action Act of 1976.B) Labor Market Discrimination Act of 1965 and Civil Rights Act of 1970.C) Equal Pay Act of 1963 and Civil Rights Act of 1964.D) Civil Rights Act of 1984 and Labor Market Discrimination Act of 1985.

90.Gross investment refers to: A) private investment minus public investment. B) net investment plus replacement investment. C) net investment after it has been "inflated" for changes in the price level. D) net investment plus net exports.

Answer the next question on the basis of the following data. All figures are in billions of dollars.

Personal taxes $ 40Social Security contributions 15Taxes on production and imports 20Corporate income taxes 40Transfer payments 22U.S. exports 24Undistributed corporate profits 35Government purchases 90Gross private domestic investment 75U.S. imports 22Personal consumption expenditures 250Consumption of fixed capital 25Net foreign factor income 10Statistical discrepancy 0

91.Refer to the above data. GDP is: A) $390. B) $417. C) $422. D) $492.

92.Which of the following best defines disposable income? A) income received by households less personal taxes B) the before-tax income received by households C) all income earned by resource suppliers for their current contributions to production D) the market value of the annual output net of consumption of fixed capital

Assume an economy that is producing only one product. Output and price data for a three-year period are as follows. Answer the next question(s) on the basis of these data.

93.Refer to the above data. If year 2 is chosen as the base year, the price index for year one is:A) 80. B) 100. C) 120. D) 20.

94.Between 1950 and 2002, U.S. real GDP grew at an average annual rate of about:A) 1.3 percent. B) 3.4 percent. C) 5.1 percent. D) 8.6 percent.

95.Susie has lost her job in a Massachusetts textile plant because of import competition. She intends to take a short course in electronics and move to California where she anticipates that a new job will be available. We can say that Susie is faced with:

A) secular unemployment. B) cyclical unemployment.C) structural unemployment.

D) frictional unemployment.

96.If the Consumer Price Index rises from 300 to 333 in a particular year, the rate of inflation in that year is: A) 11 percent. B) 33 percent. C) 91 percent. D) 10 percent.

97.A burst stock market bubble might adversely affect the economy by:A) causing rapid inflation.B) greatly reducing net exports.C) causing a severe negative wealth effect and engendering pessimism about the economy's future.D) raising interest rates.

98.The size of the MPC is assumed to be: A) less than zero. B) greater than one. C) greater than zero, but less than one. D) two or more.

99.An upward shift of the saving schedule suggests: A) nothing with respect to changes in the APC and APS. B) that the APC and APS have both decreased at each GDP level. C) that the APC and APS have both increased at each GDP level. D) that the APC has decreased and the APS has increased at each GDP level.


100.Refer to the above diagram. The average propensity to consume: A) is greater than 1 at all levels of disposable income above $100. B) is greater than 1 at all levels of disposable income below $100. C) is equal to the average propensity to save. D) cannot be determined from the information given.

Answer the next question on the basis of the following information for a private closed economy.

Assume that for the entire business sector of the economy there is $0 worth of investment projects that will yield an expected rate of return of 25 percent or more. But there are $15 worth of investments that will yield an expected rate of return of 20-25 percent; another $15 with an expected rate of return of 15-20 percent; and similarly an additional $15 of investment projects in each successive rate of return range down to and including the 0-5 percent range.

101.Refer to the above information. If the real interest rate is 5 percent, what amount of investment will be undertaken?

A) $15 B) $30 C) $45 D) $60

102.If a $500 billion increase in investment spending increases income by $500 billion in the first round of the multiplier process and by $450 in the second round, income will eventually increase by:

A) $2500 billion. B) $3000 billion. C) $4000 billion. D) $5000 billion.

103.If investment increases by $10 billion and the economy's MPC is .8, the aggregate demand curve will shift:A) leftward by $50 billion at each price level.B) rightward by $10 billion at each price level.C) rightward by $50 billion at each price level.D) leftward by $40 billion at each price level.

104.Other things equal, an improvement in productivity will: A) increase the equilibrium price level. B) shift the aggregate supply curve to the left.C) shift the aggregate supply curve to the right.

D) shift the aggregate demand curve to the left. 105.In which of the following sets of circumstances can we confidently expect inflation?

A) aggregate supply and aggregate demand both increase B) aggregate supply and aggregate demand both decrease C) aggregate supply decreases and aggregate demand increases D) aggregate supply increases and aggregate demand decreases

106.The ratchet effect is the tendency of:A) the price level to increase but not to decrease.B) nominal GDP to increase more rapidly than real GDP.C) real interest rates to fall more rapidly than nominal interest rates.D) consumption to rise year after year regardless of what happens to disposable income.

107.In a certain year the aggregate amount demanded at the existing price level consists of $100 billion of consumption, $40 billion of investment, $10 billion of net exports, and $20 billion of government purchases. Full-employment GDP is $120 billion. To obtain price level stability under these conditions the government should:

A) increase tax rates and/or reduce government spending. B) discourage personal saving by reducing the interest rate on government bonds. C) increase government expenditures. D) encourage private investment by reducing corporate income taxes.


108.Refer to the above diagram in which T is tax revenues and G is government expenditures. All figures are in billions. The budget will entail a deficit:

A) at all levels of GDP. B) at any level of GDP above $400.C) at any level of GDP below $400.

D) only when GDP is stable. Use the following to answer the next question:

109.With the expenditures programs and the tax system shown in the above diagram: A) the public budget will be expansionary at all GDP levels above K, and contractionary at all GDP levels

below K. B) the public budget will be a destabilizing force at all levels of GDP. C) deficits will occur at income levels below K, and surpluses above K. D) deficits will occur at income levels below H, and surpluses above H.


110.Suppose real GDP is X, as shown in graph (a). If the economy's MPC is .8, X is $200 billion and full-employment real GDP Y is $300 billion, an appropriate fiscal policy would be to reduce taxes by:

A) $100 billion. B) $20 billion. C) $25 billion. D) $164 billion.

111.Other things equal, the stock of capital inherited by future generations is likely to be smaller when government spending:

A) increases during a period of recession, rather than prosperity. B) is primarily for capital-type goods. C) is financed by borrowing. D) is financed by taxation.

Answer the next question on the basis of the following table:

112.Refer to the above table. The value of the dollar in year 2 is: A) $1.25. B) $1.33. C) $.80. D) $1.00.

113.The bank and thrift share of total financial assets has:A) declined significantly since 1980.B) increased significantly since 1980.C) remained quite constant since the Second World War. D) increased in the United States but declined abroad.

114.Other things equal, if the required reserve ratio was lowered: A) banks would have to reduce their lending. B) the size of the monetary multiplier would increase. C) the actual reserves of banks would increase. D) the Federal funds interest rate would rise.

Answer the next two questions on the basis of the following table for a commercial bank or thrift:

115.Refer to the above table. When the legal reserve ratio is 25 percent, the excess reserves of this single bank are:

A) $0. B) $1,000. C) $5,000. D) $30,000.

116.Refer to the above table. When the legal reserve ratio is 30 percent, the monetary multiplier is: A) 5. B) 4. C) 3.33. D) 2.5.

117.The greater the legal reserve ratio, the: A) higher is the spending multiplier. B) lower is the spending multiplier.C) lower is the monetary multiplier.

D) higher is the monetary multiplier. 118.If the quantity of money demanded exceeds the quantity supplied:

A) the supply-of-money curve will shift to the left. B) the demand-for-money curve will shift to the right. C) the interest rate will rise. D) the interest rate will fall.

119.Which of the following will increase commercial bank reserves? A) the purchase of government bonds in the open market by the Federal Reserve Banks B) a decrease in the reserve ratio C) an increase in the discount rate D) the sale of government bonds in the open market by the Federal Reserve Banks

120.When the reserve requirement is increased: A) required reserves are changed into excess reserves. B) the excess reserves of member banks are increased. C) a single commercial bank can no longer lend dollar-for-dollar with its excess reserves. D) the excess reserves of member banks are reduced.


121.Refer to the above diagram for the Federal funds market. An expansionary monetary policy would be shown by:

A) a shift from Sf3 to Sf2. B) a shift from Sf1 to Sf3.C) a rightward shift of Df.

D) a leftward shift of Df. 122.Which of the following best describes the cause-effect chain of a restrictive monetary policy?

A) A decrease in the money supply will lower the interest rate, increase investment spending, and increase aggregate demand and GDP.

B) A decrease in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.

C) An increase in the money supply will raise the interest rate, decrease investment spending, and decrease aggregate demand and GDP.

D) An increase in the money supply will lower the interest rate, decrease investment spending, and increase aggregate demand and GDP.

123.An expansionary monetary policy may be less effective than a restrictive monetary policy because: A) the Federal Reserve Banks are always willing to make loans to commercial banks which are short of

reserves. B) fiscal policy always works at cross purposes with an expansionary monetary policy. C) changes in exchange rates complicate an expansionary monetary policy more than it does a restrictive

monetary policy. D) commercial banks may not be able to find loan customers.

124.The terms of trade reflect the: A) rate at which gold exchanges internationally for any domestic currency. B) ratio at which nations will exchange two goods. C) fact that the gains from trade will be equally divided. D) cost conditions embodied in a single country's production possibilities curve.

125.A nation will neither export nor import a specific product when its: A) domestic price (no-international-trade price) equals the world price. B) export supply curve lies above its import demand curve. C) export supply curve is upsloping. D) import demand curve is downsloping.

Answer the next question on the basis of the following domestic supply and demand schedules for a product. Suppose that the world price of the product is $1.

126.Refer to the above data. With a $1 dollar per unit tariff, price and total quantity sold will be: A) $3 and 7 units. B) $5 and 2 units. C) $3 and 7 units. D) $2 and 11 units.

127.Which of the following combinations is plausible, as it relates to a nation's balance of payments?A) current account = $ + 40 billion; capital account = $ - 10 billion; financial account = $ - 50 billion.B) current account - $ + 50 billion; capital account = $ - 20 billion; financial account = $ + 30 billion.C) current account = $ + 10 billion; capital account = $ + 40 billion; financial account = $ + 50 billion.D) current account = $ + 30 billion; capital account = $ - 20 billion; financial account = $ - 10 billion.

128.With which of the following countries does the United States have its largest goods and services deficit? A) Canada.B) Germany.C) Japan.D) China.

129.Assume that Brazil and Mexico have floating exchange rates. Other things unchanged, if the price level is stable in Mexico but Brazil experiences rapid inflation:

A) gold bullion will flow into Brazil. B) the Brazilian real will depreciate.C) the Mexican peso will depreciate.

D) the Brazilian real will appreciate. 130.Which of the following has contributed to large U.S. trade deficits in recent years?

A) China fixing its exchange rate. B) Rapid increases in the price of oil. C) A declining U.S. saving rate. D) All of the above have contributed.

131.The DVCs are: A) located primarily in Northern Europe. B) located primarily in Western Europe. C) located primarily in Africa, Asia, and Latin America. D) more-or-less evenly distributed over the various continents.

132.It is sometimes difficult to transfer the advanced technologies of the industrialized nations to the DVCs because:

A) the technologies of the IACs are frequently based on relatively expensive labor and relatively cheap capital.

B) the resource endowments of the IACs and the DVCs are highly similar. C) international patent laws prohibit such transfers. D) the technologies of the IACs are frequently based on relatively cheap labor and relatively expensive

capital. 133.Large agricultural subsidies for food and fiber in IACs hurt the economies of the DVCs by:

A) causing higher prices for imported food products.B) lowering saving rates in the DVCs.C) encouraging "brain drains" from the DVCs.D) reducing world agricultural prices and thus export income of the DVCs.

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