Multiple Choice Answers

1. (TCO 1) When a state government chooses to build more roads, the required resources are no longer available for spending on public education.  This dilemma illustrates the concept of
production expenses.
unemployment issues.
unintended consequences.
opportunity cost.

2. (TCO1) Which of the following is considered to be an entrepreneur?
Self-employed person
MBA graduate hired by a firm to be its CEO
Production-line worker
Customer of a firm

3. (TCO1) A point on the production possibilities curve is
attainable and resources are fully employed.
attainable, but resources are unemployed.
unattainable, but resources are unemployed.
unattainable and resources are fully employed.

4. (TCO1) A basic characteristic of a command system is that
wages paid to labor are higher.
government owns most economic resources.
free markets are never permitted in a command economy.
government planners play a limited role in deciding what goods will be produced.

5. (TCO 2) Which is consistent with the law of demand?
A decrease in the price of tacos causes no change in the quantity of tacos demanded.
An increase in the price of pizza causes an increase in the quantity of pizza demanded.
An increase in the price of hamburgers causes a decrease in the quantity of hamburgers demanded.
A decrease in the price of turkey sandwiches causes a decrease in the quantity of turkey sandwiches demanded.

6. (TCO 2) A decrease in supply and a decrease in demand will
increase price and affect the equilibrium quantity in an indeterminate way.
decrease the equilibrium quantity and decrease price.
increase the equilibrium quantity and affect price in an indeterminate way.
decrease the equilibrium quantity and affect price in an indeterminate way.

7. (TCO 2) You are the sales manager for a software company and have been informed that the price elasticity of demand for your most popular software is less than one.  To increase total revenues, you should
increase the price of the software.
decrease the price of the software.
hold the price of the software constant.
increase the supply of the software.

8. (TCO 2) The elasticity of supply for a product will be 2 if:
A 1 percent decrease in the price causes a 0.2 percent decrease in quantity supplied
A 2 percent decrease in price causes a 1 percent decrease in quantity supplied
A 1 percent decrease in price causes a 2 percent decrease in quantity supplied
A 2 percent decrease in price causes a 2 percent decrease in quantity supplied

9. (TCO 2) A purely competitive firm’s output is such that its marginal cost is $4 and marginal revenue is $5. Hint: remember that MR = P for Pure Competition and the Profit Maximizing rule. Assuming profit maximization, the firm should
cut its price and raise its output.
raise its price and cut output.
leave price unchanged and raise output.
leave price unchanged and cut output.

10. (TCO 2) Consumers who clip and redeem discount coupons
exhibit the same price elasticity of demand for a given product than consumers who do not clip and redeem coupons.
exhibit more price elasticity of demand for a given product than consumers who do not clip and redeem coupons.
exhibit less price elasticity of demand for a given product than consumers who do not clip and redeem coupons.
cause total revenue to decrease for firms that issue coupons for their products.

11. (TCO 3) In the kinked demand model of oligopoly, if one firm increases its price, the most likely reaction of the other firms will be to
decrease their prices.
increase their prices.
not change their prices.
reduce their quantity.

12. (TCO 3) The main difference between the short run and the long run is that
firms earn zero profits in the long run.
the long run always refers to a time period of one year or longer.
in the short run, some inputs are fixed.
in the long run, all inputs are fixed.

13. (TCO 4) Refer to the diagram.  The phases of the business cycle from points A to D are, respectively:
Peak, recession, expansion, trough
Trough, recovery, expansion, peak
Expansion, recession, trough, peak
Peak, recession, trough, expansion

14. (TCO 4) Official unemployment rate statistics may
overstate the amount of unemployment by including part-time workers in the calculations.
understate the amount of unemployment by excluding part-time workers in the calculations.
overstate the amount of unemployment because of the presence of “discouraged” workers who are not actively seeking employment.
understate the amount of unemployment because of the presence of “discouraged” workers who are not actively seeking employment.

15. (TCO 4) GDP is the market value of
resources (land, labor, capita, and entrepreneurship) in an economy in a given year.
all final goods and services produced in an economy in a given year.
consumption and investment spending in an economy in a given year.
all output produced and accumulated over the years.

16. (TCO 4 G) Nominal GDP differs from real DP because
nominal GDP is based on constant prices.
real GDP is based on current prices.
real GDP is adjusted for changes in the price level.
nominal GDP is adjusted for changes in the price level.

17. (TCO 6) When the federal government uses taxation and spending actions to stimulate the economy it is conducting
fiscal policy.
incomes policy.
monetary policy.
employment policy.

18. (TCO 6) Refer to the graph.  What combination would most likely cause a shift from AD1 to AD2?
Increases in taxes and government spending
Decrease in taxes and increase in government spending
Increase in taxes and no change in government spending – not 100% on this one as cannot see graph
Decreases in taxes and government spending

19. (TCO 6) Which of the following serves as an automatic stabilizer in the economy?
Interest rates
Exchange rates
Inflation rate
Progressive income tax

20. (TCO 6) The time which elapses between the beginning of a recession or an inflationary episode and the identification of the macroeconomic problem is referred to as a(n)
budget lag.
recognition lag.
operational lag.
administrative lag.

21. (TCO 5) An increase in expected future income will
increase aggregate demand and aggregate supply.
decrease aggregate demand and aggregate supply.
increase aggregate supply.
increase aggregate demand.

22. (TCO 5) The long-run aggregate supply curve is
upward-sloping and becomes steeper at output levels above the full-employment output.
upward-sloping and becomes flatter at output levels above the full-employment output.
horizontal.
vertical.

23. (TCO 5) Which would most likely increase aggregate supply?
An increase in the prices of imported products
An increase in productivity
A decrease in business subsidies
A decrease in personal taxes

24. (TCO 5) Disinflation refers to a situation where
price level falls, but the rate of inflation does not.
Price level rises, but the rate of inflation does not.
the rate of inflation falls, but the price level does not.
the rate of inflation rises, but the price level does not.

25. (TCO 6) With an MPS of .3, the MPC will be
1 – .3.
.3 – 1.
1/.3.
.3.

26. (TCO 7) The M1 money supply is composed of
all coins and paper money held by the general public and the banks.
bank deposits of households and business firms.
bank deposits and mutual funds.
checkable deposits and currency in circulation.

27. (TCO 7) The basic requirement of money is that it be
backed by precious metals–gold or silver.
authorized as legal tender by the central government.
generally accepted as a medium of exchange.
some form of debt or credit.

28. (TCO 7) How many members can serve on the Board of Governors of the Federal Reserve System?
Seven
Nine
12
14

29. (TCO 7) Which of the following is the most important function of the Federal Reserve System?
Setting reserve requirements
Controlling the money supply
Lending money to banks and thrifts
Acting as fiscal agent for the U.S. government

30. (TCO 7) The Federal funds rate is the rate that banks pay for loans from
the Fed.
the U.S. Treasury.
other banks.
large corporations.

31. (TCO 7) During the financial crisis of 2007-2008, the FDIC increased deposit insurance coverage from
$50,000 to $100,000 per account.
$100,000 to $250,000 per account.
$200,000 to $500,000 per account.
$500,000 to $1,000,000 per account.

32. (TCO 7) Which one of the following is a tool of monetary policy for altering the reserves of commercial banks?
Issuing currency
Check collection
Open-market operations
Acting as the fiscal agent for the federal government

33. (TCO 7) The most frequently used monetary device for achieving price stability is:
open market operations.
the discount rate.
the reserve ratio.
the prime interest rate.

34. (TCO 8) Which of the following products is a leading import of the United States?
Grains
Aircraft
Petroleum
Generating equipment

35. (TCO 8) In a two-nation world, comparative advantage means that one nation can produce
a product with fewer inputs than the other nation.
a product at lower average cost than the other nation.
a product at a lower domestic opportunity cost than the other nation.
more of a product than the other nation.

36. (TCO 8) If a nation imposes a tariff on an imported product, then the nation will experience a(n)
decrease in total supply and an increase in the price of the product.
decrease in demand and a decrease in the price of the product.
decrease in supply of, and an increase in demand for, the product.
increase in supply of, and a decrease in demand for, the product.

37. (TCO 8) Tariffs and quotas are costly to consumers because
the price of the imported good falls.
the supply of the imported good increases.
import competition increases for domestic goods.
consumers shift purchases to higher-priced domestic goods.

38. (TCO 8) When tariffs on imported products are removed by a nation, it will result in
higher prices and lower quantities consumed.
higher prices and quantities consumed.
lower prices and quantities consumed.
lower prices and higher quantities consumed.

39. (TCO 8) A major goal of the World Trade Organization is to
increase the protection of producers against foreign trade competition.
encourage bilateral trade agreements between nations.
liberalize international trade among nations.
maximize tariff revenue for governments.

40. (TCO 9) French and German farmers wanting to buy equipment from an American manufacturer based in the U.S. will be
supplying dollars and also supplying euros in the foreign exchange market.
demanding dollars and also demanding euros in the foreign exchange market.
supplying dollars and demanding euros in the foreign exchange market.
supplying euros and demanding dollars in the foreign exchange market.

41. (TCO 9) Remittances of Mexican workers in the U.S. to their families in Mexico are included in the U.S. balance of payments as a debit in the section on
trade in services.
net international transfers.
financial accounts.
capital accounts.

42. (TCO 9) Comparing everything that the United States owes to other nations, and what they owe to the United States, the United States is currently a(n)
net creditor.
net debtor.
international banking asset.
international banking liability.

43. (TCO 9) Foreign exchange rates refer to the
price at which purchases and sales of foreign goods take place.
movement of goods and services from one nation to another.
price of one nation’s currency in terms of another nation’s currency.
difference between exports and imports in a particular nation.

44. (TCO 9) When the exchange rate between pounds and dollars moves from $2 = 1 pound to $1 = 1 pound, we say that the dollar has
depreciated.
appreciated.
inflated.
deflated.

45. (TCO 9) The monetary system for conducting international trade is usually described as a system of
fixed exchange rates.
freely floating exchange rates.
a managed gold standard.
managed floating exchange rates.

46. (TCO 8) a) Define the four basic types of trade barriers.  b) Who gains and who loses from a protective tariff?  Explain.

47. (TCO 6) a) Identify the four major tools of monetary policy.  b) Describe how changes in the Fed’s major policy tools leads to [1] expansionary and [2] restrictive or contractionay monetary policies.