Principles I Take Home Quiz

Student:
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1. When economists say that people act rationally in their self interest, they mean that
individuals:
A. are mainly creatures of habit.
B. generally disregard the interests of others.
C. are unpredictable.
D. look for and pursue opportunities to increase their utility.

2. The study of economics is primarily concerned with:

A. choices that are made in seeking the best use of resources.
B. demonstrating that capitalistic economies are superior to socialistic economies.
C. determining the most equitable distribution of society's output.
D. keeping private businesses from losing money.

3. Marginal costs exist because:

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

4. Which of the following most closely relates to the idea of opportunity costs?
A. technological change.
B. tradeoffs.
C. capitalism.
D. economic growth.

5. If the production possibilities curve is a straight line:

A. equal quantities of the two products will be produced at each possible point on the curve.
B. the two products are equally important to consumers.
C. economic resources are perfectly substitutable between the production of the two products.
D. the two products will sell at the same market prices.

6. Economic scarcity:
A. applies to all economies.
B. is peculiar to market systems.
C. is peculiar to the United States economy.
D. is peculiar to command systems.

7. Broadly defined, competition involves:

A. private property and freedom of expression.
B. independently acting buyers and sellers and freedom to enter or leave markets.
C. capital goods and division of labor.
D. increasing opportunity costs and diminishing marginal utility.

8. When the price of a product falls, the purchasing power of our money income rises and thus
permits consumers to purchase more of the product. This statement describes:
A. the substitution effect.
B. the income effect.
C. an inferior good.
D. the rationing function of prices.

9. An economist for a bicycle company predicts that, other things equal, a rise in consumer
incomes will increase the demand for bicycles. This prediction is based on the assumption that:
A. there are many goods that are substitutes for bicycles.
B. there are many goods that are complementary to bicycles.
C. there are few goods that are substitutes for bicycles.
D. bicycles are normal goods.

10. Market failure occurs when:

A. government interferes with competitive market forces.
B. competitive market forces produce incomes that are unequal.
C. not every consumer can buy as much of a good as they want at the price they want it.
D. the competitive market system produces too much or too little of a good.

11. As it relates to a public good, nonrivalry means that:

A. either the public sector or the public sector can produce the good, but not both.
B. one person's benefit from the good does not reduce the benefit available to others.
C. the public sector is able to provide the good profitably.
D. there is no need or demand for the good.

12. Refer to the above data. Alpha has a comparative advantage in producing:
A. both steel and wheat.
B. neither steel nor wheat.
C. wheat.
D. steel.

13. Real GDP measures the:

A. value of all goods and services produced in the world, using current prices.
B. total dollar value of all goods and services produced within the borders of a country using
current prices.
C. total dollar value of all goods and services consumed within the borders of a country, adjusted
for price changes.
D. value of final goods and services produced within the borders of a country, corrected for price
changes.

14. Unemployment describes the condition where:

A. any resource sits idle.
B. a person cannot get a job, but is willing to work and is actively seeking work.
C. a person does not have a job, regardless of whether or not they want one.
D. equipment and machinery are going unused.

15. Why are economists concerned about inflation?

A. Real GDP is necessarily falling when there is inflation.
B. Inflation generally causes unemployment rates to rise.
C. Inflation increases the value of peoples' saving and encourages overspending on goods and
services.
D. Inflation lowers the standard of living for people whose income does not increase as fast as
the price level.

16. Refer to the above data. On the basis of the above information:
A. Omega should export steel to Alpha and Alpha should export wheat to Omega.
B. Omega should export both steel and wheat to Alpha.
C. Alpha should export both steel and wheat to Omega.
D. Alpha should export steel to Omega and Omega should export wheat to Alpha.

17. When economists refer to "investment," they are describing a situation where:
A. people are buying shares of corporate stock.
B. money is saved in a bank account.
C. resources are devoted to increasing future output.
D. financial assets are purchased in the hope of a monetary gain.

18. Supply shocks:

A. occur when sellers face unexpected changes in the availability and/or prices of key inputs.
B. have been responsible for most of the recessions in the United States since World War II.
C. occur more frequently than demand shocks.
D. usually result from fiscal and monetary policy changes.

19. In 1933 net private domestic investment was a minus $6.0 billion. This means that:
A. the economy was expanding in that year.
B. the economy produced no capital goods at all in 1933.
C. gross private domestic investment exceeded depreciation by $6.0 billion.
D. the production of 1933's GDP used up more capital goods than were produced in that year.

20. Transfer payments are:

A. excluded when calculating GDP because they only reflect inflation.
B. excluded when calculating GDP because they do not reflect current production.
C. included when calculating GDP because they are a category of investment spending.
D. included when calculating GDP because they increase the spending of recipients.

21. The value of U.S. imports is:

A. subtracted from exports when calculating GDP because imports do not constitute production
in the United States.
B. subtracted from exports when calculating GDP because imports do not constitute spending by
Americans.
C. added to exports when calculating GDP because imports reflect spending by Americans.
D. added when calculating GDP because imports do not constitute production in the United
States.

22. Assume that a manufacturer of stereo speakers purchases $40 worth of components for each
speaker. The completed speaker sells for $70. The value added by the manufacturer for each
speaker is:
A. $110.
B. $70.
C. $40.
D. $30.

23. The consumption schedule shows:

A. the amounts households intend to consume at various possible levels of aggregate income.
B. that consumption depends primarily on the level of business investment.
C. that the MPC increases in proportion to GDP.
D. that households consume more when interest rates are low.

24. The consumption and saving schedules reveal that the:

A. MPC is equal to or greater than one at all income levels.
B. MPC is greater than zero, but less than one.
C. MPC and APC are equal at the point where the consumption schedule intersects the 45-degree
line.
D. APS is positive at all income levels.

(Advanced analysis) Answer the next question(s) on the basis of the following consumption
schedule: C = 20 + .9Y, where C is consumption and Y is disposable income.

25. Refer to the above data. The MPC is:

A. .50.
B. .20.
C. .45.
D. .90.

26. In the aggregate expenditures model, it is assumed that investment:

A. changes by less in percentage terms than changes in real GDP.
B. does not respond to changes in interest rates.
C. does not change when real GDP changes.
D. automatically changes in response to changes in real GDP.

27. Refer to the above data for a private closed economy. If gross investment is $12 billion, the
equilibrium level of GDP will be:
A. $350.
B. $370.
C. $380.
D. $360.

28. The aggregate demand curve:

A. shows the amount of expenditures required to induce the production of each possible level of
real output.
B. is upsloping because a higher price level is necessary to make production profitable as
production costs rise.
C. shows the amount of real output that will be purchased at each possible price level.
D. is downsloping because production costs decline as real output increases.

29. The aggregate demand curve is:

A. downsloping because of the interest-rate, real-balances, and foreign purchases effects.
B. horizontal when there is considerable unemployment in the economy.
C. vertical if full employment exists.
D. downsloping because production costs decrease as real output rises.

30. The interest-rate effect suggests that:

A. an increase in the price level will increase the demand for money, increase interest rates, and
decrease consumption and investment spending.
B. an increase in the price level will increase the demand for money, reduce interest rates, and
decrease consumption and investment spending.
C. a decrease in the supply of money will increase interest rates and reduce interest-sensitive
consumption and investment spending.
D. an increase in the price level will decrease the demand for money, reduce interest rates, and
increase consumption and investment spending.

31. Other things equal, a decrease in the real interest rate will:
A. reduce investment and shift the AD curve to the right.
B. expand investment and shift the AD curve to the left.
C. expand investment and shift the AD curve to the right.
D. reduce investment and shift the AD curve to the left.

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

33. The immediate-short-run aggregate supply curve is:

A. horizontal.
B. vertical.
C. upward sloping.
D. downward sloping.

34. The aggregate supply curve:

A. gets steeper as the economy moves from the top of the curve to the bottom of the curve.
B. shows the various amounts of real output that businesses will produce at each price level.
C. is downsloping because real purchasing power increases as the price level falls.
D. is explained by the interest rate, real-balances, and foreign purchases effects.

35. The aggregate supply curve (short-run) is upsloping because:

A. per-unit production costs rise as the economy moves toward and beyond its full-employment
real output.
B. wages and other resource prices match changes in the price level.
C. the price level is flexible upward but inflexible downward.
D. wages and other resource prices are flexible upward but inflexible downward.

36. In the above diagram, a shift from AS3 to AS2might be caused by an increase in:
A. business taxes and government regulation.
B. the prices of domestic resources.
C. productivity.
D. the prices of imported resources.

37. Countercyclical discretionary fiscal policy calls for:

A. surpluses during recessions and deficits during periods of demand-pull inflation.
B. deficits during both recessions and periods of demand-pull inflation.
C. deficits during recessions and surpluses during periods of demand-pull inflation.
D. surpluses during both recessions and periods of demand-pull inflation.

38. Discretionary fiscal policy is so named because it:

A. involves specific changes in T and G undertaken expressly for stabilization at the option of
Congress.
B. occurs automatically as the nation's level of GDP changes.
C. is invoked secretly by the Council of Economic Advisers.
D. is undertaken at the option of the nation's central bank.

39. An economist who favors smaller government would recommend:

A. increases in government spending during recession and tax increases during inflation.
B. tax increases during recession and tax cuts during inflation.
C. tax cuts during recession and tax increases during inflation.
D. tax cuts during recession and reductions in government spending during inflation.

40. If the MPS in an economy is .1, government could shift the aggregate demand curve
rightward by $40 billion by:
A. increasing government spending by $40 billion.
B. increasing government spending by $4 billion.
C. increasing taxes by $4 billion.
D. decreasing taxes by $4 billion.

41. Which of the following represents the most expansionary fiscal policy?
A. a $10 billion increase in government spending
B. a $10 billion tax cut
C. a $10 billion tax increase
D. a $10 billion decrease in government spending

42. Money functions as:

A. a store of value.
B. a unit of account.
C. a medium of exchange.
D. all of these.

43. The primary purpose of the legal reserve requirement is to:

A. prevent banks from hoarding too much vault cash.
B. provide a means by which the monetary authorities can influence the lending ability of
commercial banks.
C. prevent commercial banks from earning excess profits.
D. provide a dependable source of interest income for commercial banks.

44. Suppose a commercial bank has checkable deposits of $100,000 and the legal reserve ratio is
10 percent. If the bank's required and excess reserves are equal, then its actual reserves:
A. cannot be determined from the given information.
B. are $10,000.
C. are $20,000.
D. are $30,000.

45. Suppose the reserve requirement is 20 percent. If a bank has checkable deposits of $4 million
and actual reserves of $1 million, it can safely lend out:
A. $1.2 million.
B. $800,000.
C. $1 million.
D. $200,000.

46. The multiple by which the commercial banking system can expand the supply of money is
equal to the reciprocal of:
A. its actual reserves.
B. the reserve ratio.
C. its excess reserves.
D. the MPS.

47. Suppose a commercial banking system has $100,000 of outstanding checkable deposits and
actual reserves of $35,000. If the reserve ratio is 20 percent, the banking system can expand the
supply of money by the maximum amount of:
A. $175,000.
B. $122,000.
C. $75,000.
D. $300,000.

48. Money is destroyed when:

A. loans are repaid.
B. checks written on one bank are deposited in another bank.
C. the net worth of the banking system declines.
D. loans are made.

49. The transactions demand for money is most closely related to money functioning as a:
A. measure of value.
B. unit of account.
C. store of value.
D. medium of exchange.

50. The asset demand for money:

A. varies directly with the level of nominal GDP.
B. varies inversely with the level of real GDP.
C. varies inversely with the rate of interest.
D. is unrelated to both the interest rate and the level of GDP.

51. In which of the following situations is it certain that the quantity of money demanded by the
public will decrease?
A. nominal GDP decreases and the interest rate decreases
B. nominal GDP increases and the interest rate increases
C. nominal GDP decreases and the interest rate increases
D. nominal GDP increases and the interest rate decreases

52. 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 fall.
D. the interest rate will rise.

53. The equilibrium rate of interest in the market for money is determined by the intersection of
the:
A. supply of money curve and the total demand for money curve.
B. investment demand curve and total demand for money curve.
C. supply of money curve and the transactions demand for money curve.
D. supply of money curve and the asset demand for money curve.

54. Which of the following statements is correct?

A. Interest rates and bond prices vary directly during inflations and inversely during recessions.
B. Interest rates and bond prices vary directly.
C. Interest rates and bond prices vary inversely.
D. Interest rates and bond prices are unrelated.

55. Which of the following will increase commercial bank reserves?

A. a decrease in the reserve ratio
B. an increase in the discount rate
C. the sale of government bonds in the open market by the Federal Reserve Banks
D. the purchase of government bonds in the open market by the Federal Reserve Banks

56. Which of the following is a tool of monetary policy?

A. changes in banking laws
B. changes in tax rates
C. open market operations
D. changes in government spending

57. The four main tools of monetary policy are:

A. the discount rate, the reserve ratio, the term auction facility, and open-market operations.
B. tax rate changes, changes in government expenditures, open-market operations, and the term
auction facility.
C. tax rate changes, the discount rate, open-market operations, and the Federal funds rate.
D. changes in government expenditures, the reserve ratio, the Federal funds rate, and the
discount rate.

58. The Fed can change the money supply by:

A. changing bank reserves through the sale or purchase of government securities.
B. changing the quantities of required and excess reserves by altering the legal reserve ratio.
C. doing all of these.
D. changing the discount rate so as to encourage or discourage commercial banks in borrowing
from the central banks.

59. Open-market operations refer to:

A. central bank lending to commercial banks.
B. the purchase or sale of government securities by the Fed.
C. the specifying of loan maximums on stock purchases.
D. purchases of stocks in the New York Stock Exchange.

60. The purchase of government securities from the public by the Fed will cause:
A. the money supply to increase.
B. the interest rate to increase.
C. commercial bank reserves to decrease.
D. demand deposits to decrease.