Macro Exam 2

1. “Classical economist” is often used interchangeably with which term?

A. Laissez-faire economist
B. Keynesian economist
C. Activist economist
D. Marxian economist

A. Laissez-faire economist

2. Keynesian economists focus their analysis on:

A. the long run.
B. the short run.
C. aggregate supply.
D. economic growth.

B. the short run.

3. Between 2007 and 2009, the U.S. unemployment rate rose from under 5 percent to over 8
percent. A Keynesian economist would most likely blame this increase in unemployment
on:

A. an increase in the minimum wage.
B. an increase in the bargaining power of labor unions.
C. a decline in the level of aggregate demand.
D. a decline in aggregate supply.

C. a decline in the level of aggregate demand.

4. Before the Great Depression the popular view of government was:

A. laissez-faire; and after the Great Depression, the popular view of government was activist.

A. laissez-faire; and after the Great Depression, the popular view of government was activist.

5.

Growth in the graph shown is depicted by:

A. A.
B. B.
C. C.
D. D.

C. C.

6. What turns a business cycle into a structural stagnation?

A. A trough that is lower than the peak.
B. Multiple business cycles in a short period of time.
C. A slow expansion that keeps the economy below trend.
D. A downturn that doesn’t end.

D. A downturn that doesn’t end.

7. Policies that affect aggregate expenditures are primarily relevant to the:

A. short-run business cycle framework.
B. long-run growth framework.
C. short-run growth framework.
D. long-run business cycle framework.

A. short-run business cycle framework.

8. Policies that affect work, capital accumulation, and technological change are primarily
relevant to:

A. the short-run business cycle framework.
B. the long-run growth framework.
C. the short-run growth framework.
D. the long-run business cycle framework.

B. the long-run growth framework.

9. Per capita output would be certain to increase if:

A. both output and population increase.
B. both output and population decrease.
C. real output increases and population decreases.
D. real output decreases and population increases.

C. real output increases and population decreases.

10. Suppose a country’s output is $440 billion and its population is 240 million. Now suppose
that both its price level and its population increase by 24 percent. As a result of these
changes, its new level of per capita output will be:

A. $400.
B. $440.
C. $4,000.
D. $4,400.

C. $4,000.

11. Per capita real output is a:

A. better measure of personal material consumption than output.
B. worse measure of personal material consumption than output.
C. better measure of the physical environment than output.
D. worse measure of the physical environment than output.

A. better measure of personal material consumption than output.

12. Which of the following statements best characterizes the Classical view of business
cycles?

A. Fluctuations in business activity occur in regular and predictable patterns.
B. Fluctuations in business activity are to be expected and should be accepted just as
changes in the seasons are accepted.
C. Expansions and recessions are symptoms of underlying problems and should be
addressed by macroeconomic policy.
D. The appropriate macroeconomic policy can eliminate fluctuations in business activity

B. Fluctuations in business activity are to be expected and should be accepted just as
changes in the seasons are accepted.

13. The top of the business cycle is called:

A. an expansion.
B. a recession.
C. an upturn.
D. a peak

D. a peak

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14.

Refer to the graph shown. A complete business cycle is represented by:

A. A to G.
B. O to C.
C. A to F.
D. C to F.

A. A to G.

15. Which of the following institutional changes would tend to reduce the target rate of
unemployment?

A. Greater ease with which families may support unemployed family members
B. An increased number of people reaching the age at which they are more employable
C. The availability of unemployment insurance
D. The increased incidence of two-earner families

B. An increased number of people reaching the age at which they are more employable

16.

Refer to the graph shown. A recession occurs when the economy moves from point:

A. B to point E.
B. C to point F.
C. A to point D.
D. D to point G.

D. D to point G.

17. A recession is often considered to be:

A. an economic downturn that persists for more than two consecutive quarters of the year.
B. an economic downturn that persists for more than four consecutive quarters of the
year.
C. any period of more than six months in which unemployment is rising.
D. any period when the unemployment rate exceeds 6 percent.

A. an economic downturn that persists for more than two consecutive quarters of the year.

18. The business cycle consists of several stages or phases. Which is the accurate
sequence?

A. Recession, peak, expansion, trough
B. Recession, peak, trough, expansion
C. Recession, expansion, peak, trough
D. Recession, trough, expansion, peak

D. Recession, trough, expansion, peak

19. In order of their occurrence, the phases of the business cycle are:

A. peak, downturn, upturn, trough.
B. peak, upturn, downturn, trough.
C. peak, downturn, trough, upturn.
D. peak, upturn, trough, downturn

C. peak, downturn, trough, upturn.

20. During the business cycle, an economic expansion occurs:

A. at the peak of the business cycle.
B. at the trough of a business cycle.
C. in between the peak and trough.
D. in between the trough and peak.

D. in between the trough and peak.

21. Most economists agree that during a depression:

A. economic policy should be used to improve economic conditions.
B. economic policy is ineffective.
C. economic policy is counterproductive.
D. the demand for output is excessive.

A. economic policy should be used to improve economic conditions.

22. The largest expenditure component of GDP is:

A. consumption.
B. investment.
C. net exports.
D. government spending

A. consumption.

23. If you decide not to spend $1,000 you earned at your summer job but instead intend to buy
shares in a mutual fund, in terms of aggregate economic accounting you would be:

A. consuming.
B. saving.
C. investing.
D. transferring

B. saving.

24. A change in business inventories is:

A. not counted in GDP because it does not represent final sales.
B. counted in GDP as investment.
C. counted in GDP as consumption.
D. counted in GDP as net exports

B. counted in GDP as investment.

25. Which of the following is not included in GDP but is included in GNP?

A. A foreign company’s production in the United States
B. Income of a citizen of Germany working in the United States
C. Economic activity of U.S. citizens working abroad
D. Sales of a good by one firm to another firm

A. A foreign company’s production in the United States

26. Aggregate income is a measure of:

A. household and business earnings from the sale of productive resources.
B. the market value of total output.
C. income households have available to spend before paying personal taxes.
D. income households have available to spend after paying personal taxes

D. income households have available to spend after paying personal taxes

27. GDP is $7 trillion. If consumption is $3.5 trillion, investment is $1.4 trillion, and government
purchases are $2.1 trillion, then:

A. exports are equal to imports.
B. exports exceed imports.
C. imports exceed exports.
D. net exports cannot be determined from the available information.

A. exports are equal to imports.

28. If real GDP has increased by 3 percent and nominal GDP has increased by 5 percent,
then:

A. depreciation is 2 percent.
B. net factor income is 2 percent.
C. inflation is 2 percent.
D. net exports are 2 percent.

C. inflation is 2 percent.

29. The relationship between real GDP and nominal GDP can be expressed by:

A. real GDP = nominal GDP + inflation.
B. percent change in real GDP = percent change in nominal GDP – inflation.
C. real GDP = nominal GDP – inflation.
D. Real GDP = nominal GDP + inflation.

B. percent change in real GDP = percent change in nominal GDP – inflation.

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30. Aggregate demand management policies are designed most directly to:

A. minimize unemployment.
B. minimize inflation.
C. control the aggregate level of spending in the economy.
D. prevent budget deficits or surpluses.

C. control the aggregate level of spending in the economy.

31. Equilibrium income is that level of income:

A. the economy always produces.
B. toward which the economy gravitates in the short-run.
C. an economy is capable of producing without generating accelerating inflation.
D. an economy is capable of producing without generating unemployment.

B. toward which the economy gravitates in the short-run.

32. Potential income is that level of income that:

A. the economy always produces.
B. toward which the economy gravitates in the short-run.
C. an economy is capable of producing without generating higher inflation.
D. an economy is capable of producing without generating unemployment.

C. an economy is capable of producing without generating higher inflation.

33. Keynes believed the economy was:

A. not generally at potential income.
B. always at potential income.
C. always moving away from potential income.
D. always moving toward potential income.

D. always moving toward potential income.

34. According to the Keynesian model,

A. wages are flexible because workers wouldn’t otherwise be able to keep their jobs.
B. the price level is fixed due to social forces, which keeps an economy from remaining at
an equilibrium level of unemployment.
C. prices are subject to significant fluctuations as demand and supply change.
D. the government puts price controls on the economy, keeping the price level fixed

B. the price level is fixed due to social forces, which keeps an economy from remaining at an equilibrium level of unemployment.

35. In the short run, deflation in asset prices

A. is the easiest way for expenditures and production to return to their normal levels.
B. is impossible because social forces keep prices from fluctuating in a market economy.
C. can create problems because borrowers would lose collateral and reduce
expenditures.
D. leads to expansions as an economy comes out of a recession by lowering the
unemployment rate.

C. can create problems because borrowers would lose collateral and reduce
expenditures.

36. In 2009, the personal savings rate rose. If the additional savings were not translated into
investment, Keynes would predict that aggregate income would:

A. decline and remain there.
B. rise indefinitely.
C. decline, but rise in the future.
D. would rise and remain there

A. decline and remain there.

37. The paradox of thrift occurs when:

A. an increase in saving raises output.
B. an increase in saving reduces output.
C. saving is unrelated to output.
D. a decrease in saving reduces output.

B. an increase in saving reduces output.

38. Keynes believed that an increase in savings would:

A. raise aggregate demand by reducing investment.
B. raise aggregate demand by increasing consumption
C. reduce aggregate demand by reducing investment.
D. reduce aggregate demand by reducing consumption.

D. reduce aggregate demand by reducing consumption.

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39. The paradox of thrift will not arise if:

A. increases in saving are translated into identical increases in investment.
B. increases in saving are translated into identical decreases in consumption.
C. decreases in saving are translated into identical increases in investment.
D. decreases in saving are translated into identical decreases in consumption.

A. increases in saving are translated into identical increases in investment.

0. The shapes of the curves in the AS/AD model are based:

A. upon the principle of substitution.
B. upon the principle of opportunity cost.
C. upon the relationship between a single good and its price.
D. on the relationship between the price level and total output.

D. on the relationship between the price level and total output.

41. The reason why the AS/AD model does not depend upon the concepts of substitution and
opportunity cost is that:

A. in groups, people do not make the same choices as when they are alone.
B. the AS/AD model considers total output. There are no goods to substitute.
C. the AS/AD model considers the effects of other countries’ decisions.
D. other things remain constant in the AS/AD model.

B. the AS/AD model considers total output. There are no goods to substitute.

42. Refer to the following graphs.

Which of the graphs correctly labels the axes of the AS/AD model?

A. A
B. B
C. C
D. D

D. D

43. As prices fall, people become richer and buy more. This occurs as a result of:

A. the international effect.
B. the multiplier effect.
C. the interest rate effect.
D. the money wealth effect.

D. the money wealth effect.

44. A fall in the price level:

A. reduces the value of money in peoples’ pockets, so people buy less goods.
B. reduces the value of money in peoples’ pockets, so people buy more goods.
C. increases the value of money in peoples’ pockets, so people buy less goods.
D. increases the value of money in peoples’ pockets, so people buy more goods.

D. increases the value of money in peoples’ pockets, so people buy more goods.

45. An increase in the price level:

A. increases the purchasing power of money, leading to lower interest rates and increases
investment.
B. increases the purchasing power of money, leading to higher interest rates and
decreases investment.
C. decreases the purchasing power of money, leading to lower interest rates and
increases investment.
D. decreases the purchasing power of money, leading to higher interest rates and
decreases investment.

B. increases the purchasing power of money, leading to higher interest rates and

46. If the price level falls but people don’t feel richer because of that fall, then the AD curve
would likely:

A. shift in.
B. shift out.
C. be flatter than it otherwise would be.
D. be steeper than it otherwise would be

D. be steeper than it otherwise would be

47. If the price level rises, the interest rate effect will cause investment:

A. and the quantity of aggregate demand to increase.
B. and the quantity of aggregate demand to decrease.
C. to increase and the quantity of aggregate demand to decrease.
D. to decrease and the quantity of aggregate demand to increase.

B. and the quantity of aggregate demand to decrease.

48. The interest rate effect exists because changes in the price level affect:

A. the multiplier.
B. exchange rates.
C. real wealth.
D. real cash balances

D. real cash balances

49. A rise in the U.S. price level will cause:

A. both exports and imports to increase.
B. both exports and imports to decrease.
C. exports to increase and imports to decrease.
D. exports to decrease and imports to increase

D. exports to decrease and imports to increase

50. In the 1990s, the price level in Japan fell relative to the price level in the United States. If
the exchange rate did not change, one would expect that:

A. U.S. exports to Japan would rise and U.S. imports from Japan would decline.
B. U.S. exports to Japan would decline and U.S. imports from Japan would rise.
C. both U.S. exports to Japan and U.S. imports from Japan would rise.
D. both U.S. exports to Japan and U.S. imports from Japan would fall.

B. U.S. exports to Japan would decline and U.S. imports from Japan would rise.

51. In the AS/AD model, the repercussions that a change in quantity demanded has on
production and subsequently on income and expenditures is called the:

A. accelerator effect.
B. expenditure effect.
C. multiplier effect.
D. money wealth effect.

C. multiplier effect.

52. If the multiplier effect did not exist, the aggregate demand curve would:

A. be steeper.
B. be flatter.
C. be horizontal.
D. not exist.

A. be steeper.

53. A fall in the value of the dollar relative to other currencies will:

A. increase demand for U.S. goods, shifting the U.S. aggregate demand curve to the right.
B. increase demand for U.S. goods, shifting the U.S. aggregate demand curve to the left.
C. decrease demand for U.S. goods, shifting the U.S. aggregate demand curve to the
right.
D. decrease demand for U.S. goods, shifting the U.S. aggregate demand curve to the left.

A. increase demand for U.S. goods, shifting the U.S. aggregate demand curve to the right.

54. A change in the distribution of income affects the AD curve because:

A. workers are more likely than stockholders to spend the income they receive.
B. stockholders are more likely than workers to spend the income they receive.
C. workers and stockholders are equally likely to spend the income they receive.
D. the distribution of income is always shifting in favor of stockholders.

A. workers are more likely than stockholders to spend the income they receive.

55. If the dollar appreciates while foreign income rises:

A. the U.S. AD curve would likely shift to the left.
B. the U.S. AD curve would likely shift to the right.
C. the U.S. AD curve would likely remain unchanged.
D. what happens to the U.S. AD curve is unclear.

56. If a fall in foreign income decreases domestic aggregate expenditures by 20, the AD curve
will:

A. shift left by more than 20.
B. shift left by less than 20.
C. shift left by exactly 20.
D. not shift at all.

A. shift left by more than 20.

57. If the multiplier effect is 4, a $15 billion increase in government expenditures will shift the
AD curve:

A. to the right by $15 billion.
B. to the left by $15 billion.
C. to the right by $60 billion.
D. to the left by $60 billion.

C. to the right by $60 billion.

58. The short-run aggregate supply curve specifies how shifts in aggregate demand affect:

A. real output and the price level in the short run.
B. real output and unemployment in the short run.
C. inflation and real output in the short run.
D. unemployment and inflation in the short run

A. real output and the price level in the short run.

59. An increase in production costs is most likely to shift the:

A. short-run aggregate supply curve up (to the left).
B. short-run aggregate supply curve down (to the right).
C. aggregate demand curve to the left.
D. aggregate demand curve to the right.

A. short-run aggregate supply curve up (to the left).

60. If productivity increases by 5 percent but wages increase by 2 percent, then it is most likely
that the price level will:

A. rise by 3 percent.
B. fall by 3 percent.
C. rise by 7 percent.
D. fall by 7 percent

B. fall by 3 percent.

61. If productivity increases by 3 percent but wages increase by 4 percent, then it is most likely
that the price level will:

A. rise by 1 percent.
B. fall by 1 percent.
C. rise by 7 percent.
D. fall by 7 percent.

A. rise by 1 percent.

62. In the early 2000s the European Central Bank warned that higher oil prices were a threat
to economic growth. The Bank President called the higher prices “a sizeable adverse
shock” to the economy. In terms of the AS/AD framework, this shock would be represented
as a shift:

A. up (to the left) of the AS curve.
B. down (to the right) of the AS curve.
C. left of the AD curve
D. right of the AD curve.

A. up (to the left) of the AS curve.

63. The long-run aggregate supply curve shows the output level that an economy can produce
when:

A. firms adjust quantity rather than price.
B. capital is fully employed.
C. labor is fully employed.
D. both capital and labor are fully employed.

D. both capital and labor are fully employed.

64. The long-run aggregate supply curve plays an important role in determining:

A. the price level in the short run.
B. output in the short run.
C. output in the short run and long run.
D. output in the long run.

D. output in the long run.

65. An increase in aggregate demand:

A. raises potential output.
B. reduces potential output.
C. does not change potential output.
D. has an unpredictable effect on potential output.

C. does not change potential output.

66. Which of the following factors will not shift the long-run aggregate supply curve?

A. An increase in capital accumulation
B. An increase in available resources
C. An increase in the price level
D. An improvement in production technology

C. An increase in the price level

67. Which of the following factors will shift the long-run aggregate supply curve?

A. A change in aggregate demand
B. A change in available resources
C. A change in the price level
D. A change in sales or excise taxes

B. A change in available resources

68. At the intersection of the short-run aggregate supply curve, the aggregate demand curve,
and the long-run aggregate supply curve, the economy is in:

A. a short-run equilibrium but not a long-run equilibrium.
B. a long-run equilibrium but not a short-run equilibrium.
C. both a short-run and long-run equilibrium.
D. neither a short-run nor long-run equilibrium

C. both a short-run and long-run equilibrium.

69. If actual output exceeds potential output, the economy:

A. is experiencing an inflationary gap.
B. is experiencing a recessionary gap.
C. may be in a long-run equilibrium but is not in a short-run equilibrium.
D. is in neither a short-run nor long-run equilibrium

A. is experiencing an inflationary gap.

70. If potential output exceeds actual output, eventually:

A. input prices will rise and output will fall.
B. both input prices and output will rise.
C. input prices will fall and output will rise.
D. both input prices and output will fall.

A. input prices will rise and output will fall.

71.

Refer to the graph shown. In the graph, an inflationary gap exists if the price level is:

A. P0 and the aggregate demand curve is AD0.
B. P0 and the aggregate demand curve is AD1.
C. P1 and the aggregate demand curve is AD0.
D. P1 and the aggregate demand curve is AD1.

C. P1 and the aggregate demand curve is AD0.

72.

Refer to the graph shown. In the graph, if the price level is P1 and the aggregate demand
curve is AD0 then the economy is:

A. in a recessionary gap.
B. in an inflationary gap.
C. in a long-run equilibrium.
D. fully employed.

A. in a recessionary gap.

73.

Refer to the graph shown. If the price level is P1, then:

A. input prices will fall and output will rise in the long run.
B. both input prices and output will fall in the long run.
C. input prices will rise and output will fall in the long run.
D. both input prices and output will rise in the long run.

A. input prices will fall and output will rise in the long run.

74. Contractionary fiscal policies are most appropriate when the economy is in:

A. a recessionary gap.
B. an inflationary gap.
C. a short-run equilibrium.
D. a long-run equilibrium.

B. an inflationary gap.

75.

Refer to the graph shown. A policy that cuts government spending would be most
appropriate when the economy is at point:

A. A.
B. B.
C. C.
D. D

B. B.

76.

Refer to the graph shown. No changes in fiscal policy are advisable when the economy is
at point:

A. A.
B. B.
C. C.
D. D.

C. C.

77. Suppose output exceeds potential output and a contractionary fiscal policy is enacted.
According to the AS/AD model, in the long run, this fiscal policy will produce:

A. a lower output level and a lower price level than would otherwise have occurred.
B. a lower price level than would otherwise have occurred.
C. a lower output level than would otherwise have occurred.
D. neither a lower price level nor a lower output level than would otherwise have occurred.

B. a lower price level than would otherwise have occurred.

78. Refer to the following graph.

The massive increase in defense spending that occurred in the United States during WWII
is best represented by the:

A. AD curve shifting from AD0 to AD1.
B. AD curve shifting from AD1 to AD0.
C. SAS curve shifting from SAS0 to SAS1.
D. SAS curve shifting from SAS1 to SAS0

D. SAS curve shifting from SAS1 to SAS0

79. During WWII, the U.S. government increased spending:

A. by more than it raised taxes.
B. by the same amount as it raised taxes.
C. by less than it raised taxes.
D. but did not increase taxes.

A. by more than it raised taxes.

80. An example of countercyclical fiscal policy is:

A. raising government spending when the economy is above potential.
B. raising government spending when the economy is at potential.
C. reducing government spending when the economy is above potential.
D. reducing government spending when the economy is below potential.

D. reducing government spending when the economy is below potential.

81. According to Say’s Law, people:

A. supply goods in order to obtain other goods.
B. supply goods in order to accumulate profits.
C. demand goods in order to maximize their welfare.
D. demand goods so they can supply them to others.

A. supply goods in order to obtain other goods.

82. The idea behind Say’s Law is that people work because:

A. they like to work.
B. they want to buy things.
C. they want to accumulate wealth.
D. work gives them social status.

C. they want to accumulate wealth.

83. Economic growth:

A. does not affect living standards at all.
B. has a relatively small effect on living standards over long periods of time.
C. has a relatively large effect on living standards over long periods of time.
D. is the sole determinant of living standards over any time period.

C. has a relatively large effect on living standards over long periods of time.

84. Per capita growth:

A. occurs only when the population is growing.
B. occurs only when output is growing.
C. occurs when there is an increase in goods and services per person.
D. always improves the distribution of income.

C. occurs when there is an increase in goods and services per person.

85. If a country’s population is 10 million and its GDP is $113 billion, its per capita output is:

A. $113.
B. $1,130
C. $11,300.
D. $113,000.

C. $11,300.

86. If a country’s population is 30 million and its GDP is $8.5 billion, its per capita output is:

A. $283.
B. $850.
C. $2,830.
D. $8,500.

A. $283.

87. If per capita output increases by 5 percent and output grows by 3 percent, the population
must be:

A. falling at a rate of 8 percent.
B. falling at a rate of 2 percent.
C. increasing at a rate of 2 percent.
D. increasing at a rate of 8 percent

B. falling at a rate of 2 percent.

88. If per capita output increases by 2 percent and population grows by 3 percent, output:

A. falls by 5 percent.
B. falls by 1 percent.
C. grows by 1 percent.
D. grows by 5 percent.

C. grows by 1 percent.

89. If median income is unchanged from one year to the next, then per capita income:

A. is also constant.
B. is increasing.
C. is decreasing.
D. could be increasing, decreasing, or constant.

D. could be increasing, decreasing, or constant.

90. What effect would we expect in the market for loanable funds if some people discover a
new business opportunity that requires investment?

A. Supply will shift right and demand will not change.
B. Supply will shift left and demand will not change.
C. Demand will shift right and supply will not change.
D. Demand will shift left and supply will not change.

C. Demand will shift right and supply will not change.

91. What effect would we expect the market for loanable funds if people increase their
saving?

A. Supply will shift right and demand will not change.
B. Supply will shift left and demand will not change.
C. Demand will shift right and supply will not change.
D. Demand will shift left and supply will not change.

A. Supply will shift right and demand will not change.

92. Suppose that consumers decide to save less and spend more. What effect would this have
in the market for loanable funds?

A. It will increase interest rates and the quantity of funds lent will rise.
B. It will decrease interest rates and the quantity of funds lent will rise.
C. It will increase interest rates and the quantity of funds lent will fall.
D. It will decrease interest rates and the quantity of funds lent will fall.

93. In the early 2000s, analysts feared that low academic achievement in math in the United
States may reduce U.S. economic growth by as much as half a percentage point a year. In
terms of factors leading to growth, the low math scores indicate that the U.S. may be at a
disadvantage in terms of:

A. social capital.
B. human capital.
C. growth-compatible institutions.
D. technology

B. human capital.

94. Growth compatible institutions:

A. have incentives built into them that lead people to put forth effort.
B. encourage people to pursue activities that inhibit growth in others.
C. allow people to gain income for themselves by creating impediments for others.
D. encourage people to spend a lot of time in leisure pursuits.

A. have incentives built into them that lead people to put forth effort.

95. Which of the following is an example of human capital?

A. Robots used to manufacture cars
B. Well-developed financial markets
C. On-the-job training
D. Trust among firms that allows short-term credit

C. On-the-job training

96. The most important policy implication of the Classical growth model is that:

A. policies to slow population growth will accelerate economic growth.
B. policies to stimulate technological development will stimulate economic growth.
C. policies to stimulate saving and investment will stimulate economic growth.
D. budget deficits will stimulate economic growth.

C. policies to stimulate saving and investment will stimulate economic growth.

97. According to the Classical growth model, an economy that increases its saving will grow:

A. slowly because consumption and aggregate demand will be reduced.
B. slowly because interest rates will fall, causing investment to decline.
C. quickly since the increase in saving will permit greater investment.
D. quickly since the increase in saving will permit more rapid technological progress.

C. quickly since the increase in saving will permit greater investment.

98. Classical economists predicted that population growth would eventually reduce economic
growth because they believed:

A. in the law of diminishing marginal productivity.
B. in the law of increasing marginal productivity.
C. that production involved decreasing returns to scale.
D. that production involved increasing returns to scale.

A. in the law of diminishing marginal productivity.

99. Classical growth economists who applied the law of diminishing marginal productivity to
capital concluded that:

A. both output and per capita output could grow indefinitely.
B. output could grow indefinitely but per capita output could not.
C. per capita output could grow indefinitely but output could not.
D. neither output nor per capita output could grow indefinitely.

B. output could grow indefinitely but per capita output could not.

The quantity of goods and services available to society:
B. depends on human action. The quantity of goods and services available depends on the incentives to work.

Scarcity exists because:
D. new wants continue to develop and willingness to meet them is limited. Scarcity is perceived because human desires have always exceeded human willingness to
meet those desires

Alexandra has determined that studying an hour for her economics quiz will improve her
grade on the quiz from 75 to 100. She also determines that this improvement is worth $20.
To study for an hour for her economics quiz, however, she will have to work one fewer
hour at her part-time job. Alexandra should:
A. study for the quiz as long as her hourly wage rate is less than $20.
It is efficient for Alexandra to study if the marginal benefit exceeds the marginal cost. The
marginal benefit is $20 and the marginal cost is equal to her hourly wage rate, and so
marginal benefit exceeds marginal cost as long as her hourly wage rate is less than $20.

Deion Sanders is a two-sport athlete who plays both pro football and pro baseball. He
could earn $1,000,000 playing either sport. Troy Aikman is also a two-sport athlete who
plays both football and auto racing. He could earn $1,000,000 playing football or $200,000
racing cars. Garo Yepremian can play both football and soccer. He could earn $1,000,000
playing football or $50,000 playing soccer. Assuming that all three men have only two
options for work and can pursue only one sport full-time, who has the highest opportunity
cost of playing football?
A. Deion Sanders
Opportunity cost is the benefit forgone of the next best alternative. The opportunity cost of
playing football is $1,000,000 for Sanders, $200,000 for Aikman, and $50,000 for
Yepremian. The highest opportunity cost of playing football is for Sanders, who would earn
$1,000,000 playing baseball.

Which of the following cannot be determined by using a production possibility table?
C. What combination of outputs is bestA production possibility table indicates what combinations of goods can be produced, not
what combination is best.

With which curve does the opportunity cost of an additional unit of good Y decrease as
more units of good Y are produced?
D. D
A production possibility curve that exhibits decreasing marginal opportunity cost must be
bowed inward.

The graph indicates that as more eggs are produced, the marginal opportunity cost of:
C. eggs increases while the marginal opportunity cost of rye decreases.
Since the production possibility curve is bowed outward, we know that it demonstrates the
principle of increasing opportunity cost. As more eggs are produced, the marginal
opportunity cost of eggs increases and the marginal opportunity cost of rye decreases.

Refer to the graphs shown. The discovery of a new supply of resources used only in the
production of guns can be shown by which movement?
C. From X to Y to X to Z in diagram b
Since the new resources will not increase the maximum amount of butter that can be
increased but will increase the maximum number of guns, the production possibility curve
will rotate up, staying anchored at X.

Refer to the graph shown. Suppose Country X exports agricultural goods to Country Y in
exchange for industrial goods. This pattern of trade increases consumption in both
countries only if:
B. X’s production possibility curve is B and Y’s is A.
Since the opportunity cost of producing agricultural goods is lower along B than in A (and
vice versa for industrial goods), trade based on comparative advantage will occur only if
X’s production possibility is B and Y’s is A.

Markets coordinate economic activity through:
A. the price mechanism.
Markets are based upon the price mechanism—encouraging the production and
discouraging the consumption of goods which are in shortage by raising their price

The law of demand states that the quantity demanded of a good is inversely related to the
price of that good. Therefore, as the price of a good goes:
B. up, the quantity demanded goes down.

Refer to the graphs shown. The arrow that would best illustrate the impact on consumers
of reducing sales tax on a good paid by suppliers is:
C. C.
Reducing the sales tax on suppliers shifts the supply curve to the right. Equilibrium price
falls and consumers move down along their demand curve.

Which of the following is not held constant as you move along the demand curve?
A. The price of that good
A movement along a demand curve shows the effect of a change in the price of that good.
Anything else will shift the entire demand curve.

Which statement is not consistent with the law of supply?
D. Quantity supplied of a good is inversely related to the good’s price.
The law of supply states that, other things constant as the price of a good goes up, the
quantity supplied goes up and as the price of a good goes down, the quantity supplied
goes down. Price and quantity supplied are directly related.

Suppose farmers can use their land to grow either wheat or corn. The law of supply
predicts that an increase in the market price of wheat will cause:
A. farmers to substitute wheat for the production of corn.
The increase in the price of wheat causes a movement along the supply curve for wheat
(change in quantity supplied), not a shift.

Assume the graphs shown reflect the egg market. The arrow that would best capture the
impact of cheaper, prefabricated henhouses on the egg market is:
C. Y
A cheaper, prefabricated henhouse is a shift factor of supply. Specifically it reduces the
cost of production, which would shift the supply curve to the right.

Which of the following will move the supply curve for housing in Florida, a popular
retirement state, to the left?
D. Higher construction costs

If supply and demand both shift to the right, equilibrium quantity:
A. rises, but the equilibrium price may rise, fall, or stay the same.

Refer to the graphs shown. The consequences of improved technology combined with an
increase in the number of consumers can best be illustrated by:
A. a
Improved technology causes supply to shift to the right. An increase in the number of
consumers causes demand to shift to the right.

The Katrina disaster in New Orleans decreased the ability of oil companies to purify crude
oil into gasoline. This caused:
A. the supply curve for gasoline to shift inward.

Suppose a price floor is imposed on eggs above their equilibrium price. The likely result
will be:
C. a decrease in the quantity of eggs demanded.
A price floor above equilibrium price will result in a higher quantity supplied and a lower
quantity demanded. Price floors will not shift the supply or demand curves for the good in
question. A higher price will result in a decrease in the quantity demanded, according to
the law of demand.

New York City has been experiencing a housing emergency for quite some time.
Apartments are difficult to come by. In fact, the vacancy rate has been below 5 percent
since World War II. The most likely cause of the housing emergency is:
B. a price ceiling on rent lower than equilibrium price.
In New York City, many apartments have government-imposed rents below market price.
As a result, the quantity of apartments demanded exceeds quantity supplied. The price
ceiling (rent control) has perpetuated the housing emergency.

In a third-party payer system:
B. total expenditures generally rise.

Refer to the table shown that depicts a third-party payer market. What is the cost of this
program to the third-party if a $2 co-pay is established?
A. $0
The co-payment equals the equilibrium price, so the cost to the third party is zero.

Refer to the table shown that depicts a third-party payer market. What is the cost of this
program to the third-party if a $1 co-pay is established?
C. $1,800
For $1 co-payment, the consumer demands 600 units. The supplier requires $4 per unit for
that quantity, for a total of $2,400. The third party pays $2,400 minus $600, or $1,800.

A decrease in the equilibrium price for a product will result:
C. when there is an increase in supply and a decrease in demand for the product.

A change in which of the following factors does not bring about a shift in the demand
curve for a particular good?
B. price of the good itself

As a seller raises the price of its product by 10%, the quantity demanded decreases by
20%. What do you think happens to revenue?
B. decreases

In a market economy
D. supply and demand determine prices and, in turn, prices allocate scarce resources

If the market price is above equilibrium, then
A. quantity supplied is greater than quantity demanded.

If the supply curve for houses has the normal positive slope, rent controls will likely
C. aggravate the housing shortage

If the demand curve for houses has the normal negative slope, rent controls will likely
C. increase the quantity of housing demanded.

Because you can get more of one good only by giving up some of another good, the shape
of a production possibility curve is:
D. downward-sloping.
The negative slope of a production possibility curve represents the opportunity cost concept—you
get more of one benefit only if you get less of another benefit

Based on in-class discussions the U-3 official U.S. unemployment rate of 6.6% as of
January 2014 is:
B. one of few labor market indicators available.

An increase in equilibrium price and a decrease in equilibrium quantity is most likely the
result of:
D. a decrease in supply

The standard supply/demand framework:
A. can be modified to explain real-world events

Suppose caviar sales soars at the same time price increases. What would lead to both a
higher quantity sold and higher price of caviar?
C. A shift in demand to the right and a shift in supply to the left

A Wall Street Journal headline reads: “Cigar Shortage Draws New Brands into Market.”
The shortage resulted from a renewed interest in smoking cigars. What best describes the
facts behind the headline?
B. Price is too low, quantity demanded exceeds quantity supplied

Keynesian economists focus their analysis on:
B. the short run

Between 2007 and 2009, the U.S. unemployment rate rose from under 5 percent to over 8
percent. A Keynesian economist would most likely blame this increase in unemployment
on:
C. a decline in the level of aggregate demand.
Keynesian economists view short-run fluctuations in unemployment and output as the
result of fluctuations in the level of household and business spending.

Before the Great Depression the popular view of government was:
A. laissez-faire; and after the Great Depression, the popular view of government was
activist.

Emerging markets:
B. are a group of developing countries that have on average posted stronger growth rates
compared to the rest of the world.

Per capita output would be certain to increase if:
C. real output increases and population decreases.

According to some research discussed in class and NYU Classes forum, efficient
workplace automation:
A. is inevitable and will affect every job including junior research analyst positions.

Per capita real output is a:
A. better measure of personal material consumption than output.

Which of the following statements best characterizes the Classical view of business
cycles?
B. Fluctuations in business activity are to be expected and should be accepted just as
changes in the seasons are accepted.

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1. If the MPS = 0.1, then the value of the multiplier equals: A) 1. B) 5. C) 9. D) 10. D) 10. 2. If the multiplier equals 4, then the marginal propensity to save must be equal to: A) …

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How did Adam Smith’s economic ideas help the United States establish a free enterprise system? Check all that apply. 1.3.4 A government might enact expansionary spending when it is trying to increase aggregate demand for goods. WE WILL WRITE A …

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