CHAPTER 1

1. GDP
a. is used to monitor the performance of the overall economy but is not the single best measure of a
society’s
economic well-being.
b. is used to monitor the performance of the overall economy and is the single best measure of a
society’s
economic well-being.
c. is not used to monitor the performance of the overall economy but is the single best measure of a
society’s
economic well-being.
d. is not used to monitor the performance of the overall economy and is not the single best measure
of a
society’s economic wellbeing.
2. Gross domestic product measures
a. income and expenditures.
b. income but not expenditures.
c. expenditures but not income.
d. neither income nor expenditures.
3. For an economy as a whole,
a. wages must equal profit.
b. consumption must equal income.
c. income must equal expenditure.
d. consumption must equal saving.
4. Which of the following statements about GDP is correct?
a. GDP measures two things at once: the total income of everyone in the economy and the total
expenditure on the economy’s output of goods and services.
b. Money continuously flows from households to firms and then back to households, and GDP
measures this flow of money.
c. GDP is generally regarded as the best single measure of a society’s economic wellbeing.
d. All of the above are correct.
5. Because every transaction has a buyer and a seller,
a. GDP is more closely associated with an economy’s income than it is with an economy’s
expenditure.
b. every transaction contributes equally to an economy’s income and to its expenditure.
c. the number of firms must be equal to the number of households in a simple circular-flow diagram.
d. firms’ profits are necessarily zero in a simple circularflow diagram.
6. If an economy’s GDP falls, then it must be the case that the economy’s
a. income falls and saving rises.
b. income and saving both fall.
c. income falls and expenditure rises.
d. income and expenditure both fall.
 7. Which of the following statements about GDP is correct?
a. GDP measures two things at once: the total income of everyone in the economy and the
unemployment rate of the economy’s labor force.
b. Money continuously flows from households to government and then back to households, and GDP
measures this flow of money.
c. GDP is to a nation’s economy as household income is to a household.
d. All of the above are correct.
8. According to the circular-flow diagram GDP
a. can be computed as the total income paid by firms or as expenditures on final goods and services.
b. can be computed as the total income paid by firms, but not as expenditures on final goods and
services.
c. can be computed as expenditures on final goods and services, but not as the total income paid by
firms.
d. cannot be computed as either total income paid by firms or expenditures on final goods and
services.
9. Which of the following is a way to compute GDP?
a. add up the wages paid to all workers
b. add up the quantities of all final goods and services
c. add up the market values of all final goods and services
d. add up the difference between the market values of all final goods and services and then subtract
the costs of producing those goods and services
10. In order to include many different goods and services in an aggregate measure, GDP is computed
using, primarily,
a. values of goods and services based on surveys of consumers.
b. market prices.
c. quantities purchased by a typical urban household.
d. profits from producing goods and services.
11. Suppose that an economy produces 20,000 units of good A which sells at $3 a unit and 40,000
units of good B which sells at $1 per unit. Production of good A contributes
a. 1/3 times as much to GDP as the production of good B.
b. 3/2 times as much to GDP as the production of good B.
c. 3 times as much to GDP as the production of good B.
d. 2/3 times as much to GDP as production of good B.
12. Which of the following is included in GDP?
a. the market value of rental housing services, but not the market value of owner-occupied housing services.
b. the market value of owner-occupied housing services, but not the market value of rental housing services
c. both the market value of rental housing services and the market value of owner-occupied housing services
d. neither the market value of owner-occupied housing services nor the market value of rental housing
services.
13. James owns two houses. He rents one house to the Johnson family for $10,000 per year. He lives
in the other house. If he were to rent the house in which he lives, he could earn $12,000 per year in
rent. How much do the housing services provided by the two houses contribute to GDP?
a. $0
b. $10,000
c. $12,000
d. $22,000
14. GDP excludes most items that are produced and sold illegally and most items that are produced
and consumed at home because
a. the quality of these items is not high enough to contribute value to GDP.
b. measuring them is so difficult.
c. the government wants to discourage the production and consumption of these items.
these items are not reported on income tax forms
15. Over time, people have come to rely more on market-produced goods and services and less on
goods and services they produce for themselves. For example, busy people with high incomes, rather
than cleaning their own houses, hire people to clean their houses. By itself, this change has
a. caused measured GDP to fall.
b. not caused any change in measured GDP.
c. caused measured GDP to rise.
probably changed measured GDP, but in an uncertain direction; the direction of the change depends
on the difference in the quality of the cleaning that has resulted
16. Joe and Jim purchase vegetables at a grocery store, but Jim also grows vegetables in his back
yard. Regarding these two practices, which of the following statements is correct?
a. Only Joe’s grocery store purchases are included in GDP.
b. Only Joe’s and Jim’s grocery store purchases are included in GDP.
c. Joe’s and Jim’s grocery store purchases are included in GDP. The vegetables from Jim’s backyard garden
are included at their market value.
d. Joe’s and Jim’s grocery store purchases are included in GDP. The vegetables from Jim’s backyard garden
are included at their market value, if Jim provides this information.
17. Rachel babysits for her sister for no pay. When she babysits for someone else she charges $8 an
hour. When is Rachel’s babysitting included in GDP?
a. When she babysits for her sister and when she babysits for someone else.
b. When she babysits for her sister, but not when she babysits for someone else.
c. When she babysits for someone else, but not when she babysits for her sister.
d. Neither when she babysits for her sister nor for someone else.
18. A professional gambler moves from a state where gambling is illegal to a state where gambling is
legal. Most of his income was, and continues to be, from gambling. His move
a. raises GDP.
b. decreases GDP.
c. doesn't change GDP because gambling is never included in GDP.
doesn't change GDP because in either case his income is included
19. The purchase of rice produced this period is included in GDP if the rice is
a. used in a meal a restaurant sells during the same period they buy the rice.
b. purchased by a family who uses it to make tuna casserole for its supper.
c. purchased by a frozen food company to increase its inventory.
d. B and C are correct.
20. A farmer sells $25,000 worth of apples to individuals who take them home to eat, $50,000 worth
of apples to a company that uses them all to produce cider, and $75,000 worth of apples to a grocery
store that will sell them to households. How much of the farmer’s sales will be included as apples in
GDP?
a. $25,000
b. $150,000
c. $100,000
d. $125,000
21. Sam, an American citizen, prepares meals for his family at home. Ellen, a Canadian citizen,
commutes to the U.S. to help prepare meals at a restaurant in Idaho. Whose value of services
preparing meals is included in U.S. GDP?
a. Sam’s and Ellen’s.
b. Sam’s but not Ellen’s.
c. Ellen’s but not Sam’s.
d. Neither Sam’s nor Ellen’s.
22. Gasoline is considered a final good if it is sold by a
a. gasoline station to a bus company that operates a bus route between San Francisco and Los Angeles.
b. pipeline operator to a gasoline station in San Francisco.
c. gasoline station to a motorist in Los Angeles.
d. All of the above are correct.
23. One bag of flour is sold for $1.00 to a bakery, which uses the flour to bake bread that is sold for
$3.00 to consumers. A second bag of flour is sold for $1 to a grocery store who sells it to a consumer
for $2.00. Taking these four transactions into account, what is the effect on GDP?
a. GDP increases by $3.00.
b. GDP increases by $5.00.
c. GDP increases by $6.00.
d. GDP increases by $7.00.
24. A farmer sells five pounds of pecans to a Smith’s Fresh Pecans for $10. Smith’s Fresh Pecans
resells three pounds for $4.50 per pound. The remaining pecans are shelled and canned and sold for a
total of $8.00 Taking these transactions into account, how much is added to GDP?
a. $22.50 b. $29.50 c. $21.50 d. $31.50
25. Suppose there are only two firms in an economy: Cowhide, Inc. produces leather and sells it to
Couches, Inc., which produces and sells leather furniture. With each $1,000 worth of leather that it
buys from Cowhide, Inc., Couches, Inc. produces a couch and sells it for $2,600. Neither firm had
any inventory at the beginning of 2015. During that year, Cowhide produced enough leather for 25
couches. Couches, Inc. bought 80% of that leather for $20,000 and promised to buy the remaining
20% for $5,000 in 2016. Couches, Inc. produced 20 couches during 2015 and sold each one during
that year for $2,600. What was the economy's GDP for 2015?
a. $25,000
b. $52,000
c. $57,000
d. $65,000
26. A newspaper article informs you that most businesses reduced production in the last quarter but
 also sold from their inventories during the last quarter. Based on this information GDP likely
a. increased.
b. decreased.
c. stayed the same.
d. may have increased, decreased, or stayed the same.
27. U.S. GDP and U.S. GNP are related as follows:
a. GNP = GDP + Value of exported goods - Value of imported goods.
b. GNP = GDP - Value of exported goods + Value of imported goods.
c. GNP = GDP + Income earned by foreigners in the U.S. - Income earned by U.S. citizens abroad.
d. GNP = GDP - Income earned by foreigners in the U.S. + Income earned by U.S. citizens abroad.
28. Which of the following examples of household spending is categorized as investment rather than
consumption?
a. expenditures on durable goods such as automobiles and refrigerators
b. expenditures on intangibles items such as medical care
c. expenditures on new housing
d. All of the above are correct.
29. GA wind farm in Iowa buys a large turbine generator from a Swedish-owned factory located in
Connecticut that uses workers who live in Connecticut. As a result,
a. U.S. investment, GDP, and GNP all increase by the same amount.
b. U.S. investment increases, but GDP and GNP are unaffected by the purchase.
c. U.S. investment and GDP increase by the same amount, but U.S. GNP increases by a smaller amount.
d. U.S. investment and GNP increase by the same amount, but U.S. GDP increases by a smaller amount.
30. A stove is produced by a firm in 2014, added to the firm’s inventory in 2014, and sold to a
household in 2015. It follows that
a. the value of the good is added to the investment category of 2014 GDP, added to the consumption
category of 2015 GDP, and subtracted from the investment category of 2015 GDP.
b. the value of the good is added to the investment category of 2014 GDP, added to the consumption
category of 2015 GDP, and not included in the investment category of 2015 GDP.
c. the value of the good is added to the investment category of 2014 GDP, subtracted from the consumption
category of 2015 GDP, and not included in the investment category of 2015 GDP.
d. the value of the good is added to the investment category of 2014 GDP, subtracted from the consumption
category of 2015 GDP, and added to the investment category of 2015 GDP.

Table 23-1

The table below contains data for Chereaux for the year 2015.

GDP $200
Income earned by citizens abroad $9
Income foreigners earn here $5
Losses from depreciation $6
 Indirect business taxes $10
Statistical discrepancy $0
Retained earnings $8
Corporate income taxes $12
Social insurance contributions $30
Interest paid to households by government $8
Transfer payments to households from government $55
Personal taxes $60
Nontax payments to government $11

31. Refer to Table 23-1. The market value of all final goods and services produced within Chereaux
in 2015 is
a. $214.
b. $200.
c. $204.
d. $230.

32. Refer to Table 23-1. Gross national product for Chereaux in 2015 is
a. $186.
b. $214.
c. $200.
d. $204.

33. Refer to Table 23-1. Net national product for Chereaux in 2015 is
a. $194.
b. $196.
c. $198.
d. $204.

34. Refer to Table 23-1. Personal income for Chereaux in 2015 is

a. $178.
b. $201.
c. $259.
d. $196.

35. Refer to Table 23-1. Disposable personal income for Chereaux in 2015 is
a. $190.
b. $211.
c. $130.
 d. $141.
36. If you buy a burger and fries at your favorite fast food restaurant,
a. then neither GDP nor consumption will be affected because you would have eaten at home had you not
bought the meal at the restaurant.
b. then GDP will be higher, but consumption spending will be unchanged.
c. then GDP will be unchanged, but consumption spending will be higher.
d. then both GDP and consumption spending will be higher.
37. In the economy of Talikastan in 2015, consumption was $600, exports were $300, GDP was
$1300, government purchases were $250, and investment was $300. What were Talikastan’s imports
in 2015?
a. -$150
b. -$200
c. $200
d. $150
38. In the economy of Talikastan in 2015, consumption was two-thirds of GDP, government
purchases were $1000 more than investment, investment was one-ninth of GDP, and the value of
exports exceeded the value of imports by $500. What was Talikastan’s GDP in 2015?
a. $1688
b. $9000
c. $13,500
d. $15,000
Table 23-2

The table below contains data for country A for the year 2010.

Household purchases of durable goods $1293

Household purchases of nondurable goods $1717
Household purchases of services $301
Household purchases of new housing $704
Purchases of capital equipment $310
Inventory changes $374
Purchases of new structures $611
Depreciation $117
Salaries of government workers $1422
Government expenditures on public works $553
Transfer payments $777
Foreign purchases of domestically produced goods $88
Domestic purchases of foreign goods $120

39. Refer to Table 23-2. What was country A’s GDP in 2010?
a. $6359
b. $7136
 c. $7253
d. $8147
40. Refer to Table 23-2. What was country A’s consumption in 2010?
a. $2018
b. $3010
c. $3311
d. $4015
41. Refer to Table 23-2. What was country A’s investment in 2010?
a. $1178
b. $1295
c. $1882
d. $1999
42. Refer to Table 23-2. What were country A’s government purchases in 2010?
a. $553
b. $1198
c. $1975
d. $2752
43. Refer to Table 23-2. What were country A’s exports in 2010?
a. -$32
b. $32
c. $88
d. $120
44. Refer to Table 23-2. What were country A’s imports in 2010?
a. -$32
b. $32
c. $88
d. $120
45. Refer to Table 23-2. What were country A’s net exports in 2010?
a. -$32
b. $32
c. $88
d. $120
46. If the prices of all goods and services produced in the economy rose while the quantity of
all goods and services stayed the same, which would rise?
a. both real GDP and nominal GDP.
b. real GDP but not nominal GDP.
c. nominal GDP but not real GDP.
d. neither nominal GDP nor real GDP.
47. Changes in real GDP reflect
a. only changes in prices.
b. only changes in the amounts being produced.
c. both changes in prices and changes in the amounts being produced.
d. neither changes in prices nor changes in the amounts being produced.
 48. Which of the following is always measured in prices from a base-year?
a. both nominal and real GDP.
b. nominal but not real GDP.
c. real but not nominal GDP.
d. neither nominal nor real GDP.
49. Changes in the GDP deflator reflect
a. only changes in prices.
b. only changes in the amounts being produced.
c. both changes in prices and changes in the amounts being produced.
d. neither changes in prices nor changes in the amounts being produced.
50. If real GDP doubles and the GDP deflator doubles, then nominal GDP
a. remains constant.
b. doubles.
c. triples.
d. quadruples.
CHAPTER 2

1. When the consumer price index falls, the typical family

a. has to spend more dollars to maintain the same standard of living.
b. can spend fewer dollars to maintain the same standard of living.
c. finds that its standard of living is not affected.
d. can save less because they do not need to offset the effects of rising prices.
2. Which of the following is correct?
a. The GDP deflator is better than the CPI at reflecting the goods and services bought
by consumers.
b. The CPI is better than the GDP deflator at reflecting the goods and services bought
by consumers.
c. The GDP deflator and the CPI are equally good at reflecting the goods and services
bought by consumers.
d. The GDP deflator is more commonly used as a gauge of inflation than the CPI is.
3. In the calculation of the CPI, tea is given greater weight than beer if
a. the price of tea is higher than the price of beer.
b. it costs more to produce tea than it costs to produce beer.
c. tea is more readily available than beer to the typical consumer.
d. consumers buy more tea than beer.
4. Consider a small economy in which consumers buy only two goods: apples and pears. In order to
compute the consumer price index for this economy for two or more consecutive years, we assume
that
a. the number of apples bought by the typical consumer is equal to the number of pears bought by the typical
consumer in each year.
b. neither the number of apples nor the number of pears bought by the typical consumer changes from year
 to year.
c. the percentage change in the price of apples is equal to the percentage change in the price of pears from
year to year.
d. neither the price of apples nor the price of pears changes from year to year.
5. When computing the cost of the basket of goods and services purchased by a typical consumer,
which of the following changes from year to year?
a. the quantities of the goods and services purchased
b. the prices of the goods and services
c. the goods and services making up the basket
d. All of the above are correct.
6. In computing the consumer price index, a base year is chosen. Which of the following statements
about the base year is correct?
a. The base year is always the first year among the years for which computations are being made.
b. It is necessary to designate a base year only in the simplest case of two goods; in more realistic cases, it is
not necessary to designate a base year.
c. The value of the consumer price index is always 100 in the base year.
d. The base year is always the year in which the cost of the basket was highest among the years for which
computations are being made.
7. If the consumer price index was 96 in 2012, 100 in 2013, and 102 in 2014, then the base year must be
a. 2012.
b. 2013.
c. 2014.
d. The base year cannot be determined from the given information.
8. In an imaginary economy, consumers buy only hot dogs and hamburgers. The fixed basket consists of
10 hot dogs and 6 hamburgers. A hot dog cost $3 in 2006 and $5.40 in 2007. A hamburger cost $5 in
2006 and $6 in 2007. Which of the following statements is correct?
a. When 2006 is chosen as the base year, the consumer price index is 90 in 2007.
b. When 2006 is chosen as the base year, the inflation rate is 150 percent in 2007.
c. When 2007 is chosen as the base year, the consumer price index is 100 in 2006.
d. When 2007 is chosen as the base year, the inflation rate is 50 percent in 2007.
9. Which of the following is not a widely acknowledged problem with using the CPI as a measure of
the cost of living?
a. substitution bias
b. introduction of new goods
c. unmeasured quality change
d. unmeasured price change
10. Suppose the price of a quart of milk rises from $1.00 to $1.20 and the price of a T-shirt rises from
$8.00 to $9.60. If the CPI rises from 150 to 195, then people likely will buy
a. more milk and more T-shirts.
b. more milk and fewer T-shirts.
c. less milk and more T-shirts.
d. less milk and fewer T-shirts.
 11. The substitution bias in the consumer price index refers to the
a. substitution by consumers toward new goods and away from old goods.
b. substitution by consumers toward a smaller number of high-quality goods and away from a larger number
of low-quality goods.
c. substitution by consumers toward goods that have become relatively less expensive and away from goods
that have become relatively more expensive.
d. substitution of new prices for old prices in the CPI basket of goods and services from one year to the next.
12. By not taking into account the possibility of consumer substitution, the CPI
a. understates the cost of living.
b. overstates the cost of living.
c. may overstate or understate the cost of living, depending on how quickly prices rise.
d. may overstate or understate the cost of living, regardless of how quickly prices rise.
13. One of the widely acknowledged problems with using the consumer price index as a measure of
the cost of living is that the CPI
a. fails to account for consumer spending on housing.
b. accounts only for consumer spending on food, clothing, and energy.
c. fails to account for the fact that consumers spend larger percentages of their incomes on some goods and
smaller percentages of their incomes on other goods.
d. fails to account for the introduction of new goods

14. If the quality of a good deteriorates while its price remains the same, then the value of a dollar
a. rises and the cost of living increases.
b. rises and the cost of living decreases.
c. falls and the cost of living increases.
d. falls and the cost of living decreases.
15. One of the widely acknowledged problems with using the consumer price index as a measure of
the cost of living is that the CPI
a. fails to measure all changes in the quality of goods.
b. displays a housing bias.
c. accounts for changes in prices of some goods, but prices of certain goods are assumed to remain constant.
d. All of the above are correct.
16. Michelle bought word-processing software in 2009 for $75. Michelle’s cousin, Barry, bought an
upgrade of the same software in 2010 for $75. To which problem in the construction of the CPI is
this situation most relevant?
a. substitution bias
b. unmeasured quality change
c. introduction of new goods
d. income bias
17. Which of these events would cause the consumer price index to overstate the increase in the cost
of living?
a. Car makers benefit from a new technology that allows them to sell higher-quality cars to consumers with
no increase in price.
b. Energy prices decrease, and consumers respond by buying more gas and electricity.
c. A new good is introduced that renders cellular telephones inferior and obsolete.
d. All of the above are correct.
18. The problems with using the consumer price index as a measure of the cost of living are important
because
a. even the appearance of high rates of inflation cause voters to become disenchanted.
b. politicians have manipulated the measurement problems to their advantage.
c. many government programs use the CPI to adjust for changes in the overall level of prices.
d. if the price level is overstated, consumers will be taken advantage of by sellers of consumer goods.
19. The CPI differs from the GDP deflator in that
a. the CPI is a price index, while the GDP deflator is an inflation index.
b. substitution bias is not a problem with the CPI, but it is a problem with the GDP deflator.
c. increases in the prices of foreign produced goods that are sold to U.S. consumers show up in the CPI but
not in the GDP deflator.
d. increases in the prices of domestically produced goods that are sold to the U.S. government show up in the
CPI but not in the GDP deflator.
20. An increase in the price of dairy products produced domestically will be reflected in
a. both the GDP deflator and the consumer price index.
b. neither the GDP deflator nor the consumer price index.
c. the GDP deflator but not in the consumer price index.
d. the consumer price index but not in the GDP deflator.
21. If the price of domestically produced power tools increases, then
a. the consumer price index and the GDP deflator will both increase.
b. the consumer price index will increase, and the GDP deflator will be unaffected.
c. the consumer price index will be unaffected, and the GDP deflator will increase.
d. the consumer price index and the GDP deflator will both be unaffected

22. A Korean steel company produces steel in the United States, with some of its steel being exported
to other nations and some of it being sold within the United States. If the prices of this steel
increase, then
a. the GDP deflator and the CPI will both increase.
b. the GDP deflator will increase and the CPI will be unchanged.
c. the GDP deflator will be unchanged and the CPI will increase.
d. the GDP deflator and the CPI will both be unchanged.

23. A decrease in the price of domestically produced nuclear reactors will be reflected in
a. both the GDP deflator and the consumer price index.
b. neither the GDP deflator nor the consumer price index.
c. the GDP deflator but not in the consumer price index.
d. the consumer price index but not in the GDP deflator.
24. Assume most athletic apparel bought by U.S. consumers is imported from other nations. If all else
is constant, an increase in the price of foreign-made athletic apparel will cause the U.S.
a. consumer price index and GDP deflator to increase by exactly the same amount.
b. GDP deflator to increase more than the consumer price index.
c. consumer price index to increase more than the GDP deflator.
d. GDP deflator to decrease less than the consumer price index.
25. The price of milk increases dramatically, causing a 0.5 percent increase in the CPI. The price
increase will most likely cause the GDP deflator to increase by
a. more than 0.5 percent.
b. less than 0.5 percent.
c. 0.5 percent.
d. None of the above is correct; this particular price increase will not affect the GDP deflator.
26. If the price of Italian shoes imported into the United States increases, then
a. both the GDP deflator and the consumer price index will increase.
b. neither the GDP deflator nor the consumer price index will increase.
c. the GDP deflator will increase, but the consumer price index will not increase.
d. the consumer price index will increase, but the GDP deflator will not increase.
27. An increase in the price of Irish whiskey imported into the United States will be reflected in
a. both the U.S. GDP deflator and the U.S. CPI.
b. neither the U.S. GDP deflator nor the U.S. CPI.
c. the U.S. GDP deflator, but not the U.S. CPI.
d. the U.S. CPI, but not the U.S. GDP deflator.

Table 24 -10
The table below shows the prices of baseballs and baseball bats for three years. Assume the typical
consumer’s basket consists of 6 baseballs and 2 baseball bats.

Price of a Price of a
Year Baseball Baseball Bat
2008 $3.25 $75
2009 $3.75 $82
2010 $4.50 $96

28. Refer to Table 24-10. How much was the cost of the basket in 2008?
a. $78.25
b. $84.75
c. $169.50
d. $456.50
29. Refer to Table 24-10. If 2008 is the base year, then the consumer price index was
a. 100.00 in 2008, 110.03 in 2009, and 117.43 in 2010.
b. 100.00 in 2008, 110.03 in 2009, and 129.20 in 2010.
c. 100.00 in 2008, 117.00 in 2009, and 132.50 in 2010.
 d. 169.50 in 2008, 186.50 in 2009, and 219.00 in 2010.
30. Refer to Table 24-10. If 2009 is the base year, then the consumer price index was
a. 83.00 in 2008, 100.00 in 2009, and 132.50 in 2010.
b. 89.97 in 2008, 100.00 in 2009, and 117.43 in 2010.
c. 90.88 in 2008, 100.00 in 2009, and 117.43 in 2010.
d. 169.50 in 2008, 186.50 in 2009, and 219.00 in 2010.
31. Refer to Table 24-10. If 2010 is the base year, then the consumer price index was
a. 77.40 in 2008, 85.16 in 2009, and 100.00 in 2010.
b. 50.50 in 2008, 67.50 in 2009, and 100.00 in 2010.
c. 90.88 in 2008, 85.16 in 2009, and 100.00 in 2010.
d. 169.50 in 2008, 186.50 in 2009, and 219.00 in 2010.
32. Refer to Table 24-10. The inflation rate was
a. 10.03 percent in 2009 and 17.43 percent in 2010.
b. 17.00 percent in 2009 and 32.50 percent in 2010.
c. 10.03 percent in 2009 and 29.20 percent in 2010.
d. 17.00 percent in 2009 and 29.20 percent in 2010.
33. When we are calculating the consumer price index and the inflation rate for a certain year,
a. the value of the consumer price index may depend on the choice of a base year, but the inflation
rate does not depend on the choice of a base year.
b. the inflation rate may depend on the choice of a base year, but the value of the consumer price
index does not depend on the choice of a base year.
c. both the value of the consumer price index and the inflation rate may depend on the choice of a
base year.
d. neither the value of the consumer price index nor the inflation rate depends on the choice of a base
year.
34. In which of the following cases would there be an effect on the value of the U.S. consumer price
index, but not on the value of the U.S. GDP deflator?
a. All of the truck tires that are produced by a certain company in South Korea are sold to the U.S.
military, and the price of these tires decreases.
b. All of the truck tires that are produced by a certain company in California are sold to the U.S.
military, and the price of these tires decreases.
c. Most of the bananas that are produced by a certain company in Honduras end up in U.S. grocery
stores, and the price of these bananas increases.
d. Most of the earth-moving machines that are produced by a certain company in Illinois are exported
to other countries, and the price of these machines increases.
35. With respect to the consumer price index, which of the following serves as an example of how the
substitution bias arises? Between 2010 and 2011, the price of a pound of peanuts
a. rises from $0.80 to $1.00 while the price of a loaf of bread rises from $2.00 to $2.50.
b. falls from $0.90 to $0.72 while the price of a loaf of bread falls from $2.00 to $1.60.
c. remains constant, as does the price of a loaf of bread.
d. None of the above serves as an example of how the substitution bias arises.
36. Which of the following pairs of values of the consumer price index (CPI) is consistent with an
inflation rate of 10 percent for 2014?
 a. CPI in 2014 = 90; CPI in 2015 = 100
b. CPI in 2014 = 102; CPI in 2015 = 112
c. CPI in 2013 = 210; CPI in 2014 = 220
d. CPI in 2013 = 210; CPI in 2014 = 231
37. Babe Ruth's 1931 salary was $80,000. Government statistics show a consumer price index of 15.2
for 1931 and 229.6 for 2012. Ruth's 1931 salary was equivalent to a 2012 salary of about
a. $5,296.
b. $1,128,421
c. $1,208,421
d. $17,152,000
38. You know that a candy bar cost five cents in 1962. You also know the CPI for 1962 and the CPI
for today. Which of the following would you use to compute the price of the candy bar in today's
prices?
a. five cents × (1962 CPI / today's CPI)
b. five cents × ((today's CPI - 1962 CPI)/1962 CPI)
c. five cents × (today's CPI / 1962 CPI)
d. five cents × today's CPI - five cents 1962 CPI.
39. Ethel purchased a bag of groceries in 1970 for $8. She purchased the same bag of groceries in
2006 for $25. If the price index was 38.8 in 1970 and the price index was 180 in 2006, then what is
the price of the 1970 bag of groceries in 2006 dollars?
a. $5.39
b. $25.00
c. $29.11
d. $37.11
40. Ruben earned a salary of $60,000 in 2001 and $80,000 in 2006. The consumer price index was 177
in 2001 and 221.25 in 2006. Ruben's 2001 salary in 2006 dollars is
a. $75,000; thus, Ruben's purchasing power increased between 2001 and 2006.
b. $75,000; thus, Ruben's purchasing power decreased between 2001 and 2006.
c. $85,000; thus, Ruben's purchasing power increased between 2001 and 2006.
d. $85,000; thus, Ruben's purchasing power decreased between 2001 and 2006.

Scenario 24-3

Sue Holloway was an accountant in 1944 and earned $12,000 that year. Her son, Josh Holloway, is
an accountant today and he earned $210,000 in 2013. The price index was 17.6 in 1944 and 218.4 in
2013.

41. Refer to Scenario 24-3. Sue Holloway’s 1944 income in 2013 dollars is
a. $23,033.
b. $136,909.
c. $148,909.
d. $240,960.
42. Refer to Scenario 24-3. Josh Holloway’s 2013 income in 1944 dollars is
 a. $11,528.
b. $16,923.
c. $149,009.
d. $26,059.
43. Refer to Scenario 24-3. In real terms, Josh Holloway’s income amounts to about what percentage
of Sue Holloway’s income?
a. 71 percent
b. 141 percent
c. 165 percent
d. 198 percent
44. Refer to Scenario 24-3. In real terms, Sue Holloway’s income amounts to about what percentage
of Josh Holloway’s income?
a. 11.0 percent
b. 65.2 percent
c. 70.9 percent
d. 114.7 percent
CHAPTER 3
1. Which of the following is correct?
a. The amount of unemployment that a country typically experiences is a determinant of that country's
standard of living, and some degree of unemployment is inevitable in a complex economy.
b. The amount of unemployment that a country typically experiences is a determinant of that country's
standard of living, and a complex economy can achieve zero unemployment.
c. The amount of unemployment that a country typically experiences is not a determinant of that
country's standard of living, and a complex economy can achieve zero unemployment.
d. The amount of unemployment that a country typically experiences is not a determinant of that
country's standard of living, and some degree of unemployment is inevitable in a complex economy.
2. In the long run the unemployment rate equals
a. zero.
b. the cyclical rate of unemployment.
c. the natural rate of unemployment.
d. the sum of the cyclical and natural rate of unemployment

3. Cyclical unemployment is closely associated with

a. long-term economic growth.
b. short-run ups and downs of the economy.
c. fluctuations in the natural rate of unemployment.
d. changes in the minimum wage.
4. The designation "natural" implies that the natural rate of unemployment
a. is desirable.
b. is constant over time.
c. is impervious to economic policy.
d. does not go away on its own even in the long run.
 5. Amy is working part-time. Tavaris is on temporary layoff. Who is included in the Bureau of Labor
Statistics’ “employed” category?
a. only Amy
b. only Tavaris
c. both Amy and Tavaris
d. neither Amy nor Tavaris
6. Olga owns her own business. Sven is an unpaid worker in his family’s business. Who is included in
the Bureau of Labor Statistics’ “employed” category?
a. only Olga
b. only Sven
c. both Olga and Sven
d. neither Olga nor Sven
7. Who of the following would necessarily be included in the Bureau of Labor Statistics’ “unemployed”
category?
a. Huey, who did not work during the previous four weeks
b. Dewey, who tried to find new employment during the previous four weeks
c. Louie, who was an unpaid worker during the previous four weeks
d. None of the above is correct.
8. Anna recently graduated from college with a degree in electrical engineering, but she has not yet
started working. To be counted as “unemployed” she
a. does not have to have looked for work.
b. must have looked for work no more than a week ago.
c. must have looked for work no more than four weeks ago.
d. must have looked for work no more than twelve weeks ago.
9. Sheila is on a temporary layoff from her automobile factory job but has not looked for work in the
last four weeks. The Bureau of Labor Statistics counts Sheila as
a. unemployed and in the labor force.
b. unemployed and not in the labor force.
c. employed and in the labor force.
d. employed and not in the labor force

10. Josh is a full-time college student who is not working or looking for a job. The Bureau of Labor
Statistics counts Josh as
a. unemployed and in the labor force.
b. unemployed but not in the labor force.
c. in the labor force but not unemployed.
d. neither in the labor force nor unemployed.
11. Octavia does not currently have a job, but she has applied for several jobs in the previous week.
Eve is an unpaid stay-at-home mom who has not searched for work in recent years. Who does the
Bureau of Labor Statistics count as “out of the labor force”?
a. Octavia but not Eve
b. Eve but not Octavia
c. both Octavia and Eve
d. neither Octavia nor Eve
12. Suppose there are a large number of men who used to work or seek work who now no longer do
either. Other things the same, this makes
a. the number of people unemployed rise but does not change the labor force.
b. the number of people unemployed rise but makes the labor force fall.
c. both the number of people unemployed and the labor force fall.
d. the number of people unemployed fall but does not change the labor force.

Table 28-1
Sample Population

Person Status
Allen Unpaid stay at home dad. Has not looked for a job in several years.
Ben College president.
Allison Part-time welder. Actively looking for full time work.
Brittany Self-employed full-time wedding singer.
Cathy Fulltime physician’s assistant.
Calvin Retired finance professor. Last applied for work 10 weeks ago.
Diane Laid-off fork-lift operator expecting to be recalled.
David Works for a bicycle store. Age 70.
Evelyn Manager of health food store.
Eli Museum guard. Was not at work last week due to illness.
Flora Has never been employed. Looked for a job last week.
Frank Fired from job as an investment banker. Last looked for work three weeks ago.

13. Refer to Table 28-1. How many in the sample are unemployed?
a. 5
b. 4
c. 3
d. 2
14. Refer to Table 28-1. How many in the sample are in the labor force?
a. 11
b. 10
c. 9
d. 8
15. Which of the following is correct?
a. Labor force = number of employed.
b. Labor force = population - number of unemployed.
c. Unemployment Rate = number of unemployed ÷ (number of employed + number of unemployed) × 100.
d. Unemployment Rate = number of unemployed ÷ adult population × 100.
16. Matilda just graduated from college. In order to devote all her efforts to college, she didn’t hold a
job. She is going to tour around the country on her motorcycle for a month before she starts looking
for work. Other things the same, the unemployment rate
a. increases, and the labor-force participation rate decreases.
b. and the labor-force participation rate both increase.
c. increases, and the labor-force participation rate is unaffected.
d. and the labor-force participation rate are both unaffected.
17. President Bigego is running for re-election against Senator Pander. Bigego proclaims that more
people are working now than when he took office. Pander says that the unemployment rate is higher
now than when Bigego took office. You conclude that
a. one of them must be lying.
b. both of them could be telling the truth if the labor force, and employment grew at the exact same rate.
c. both of them could be telling the truth if the labor force grew slower than employment.
d. both of them could be telling the truth if the labor force grew faster than employment.
18. In June 2009 the Bureau of Labor Statistics reported an adult population of 234.9 million, a labor
force of 154 million and employment of 141.6 million. Based on these numbers the unemployment
rate was
a. 93.3/234.9.
b. 12.4/234.9.
c. 93.3/154.
d. 12.4/154.
19. In 2009, based on concepts similar to those used to estimate U.S. employment figures, the
Japanese adult non- institutionalized population was 110.272 million, the labor force was 65.362
million, and the number of people employed was 62.242 million. According to these numbers, the
Japanese labor-force participation rate and unemployment rate were about
a. 56.4% and 2.8%.
b. 56.4% and 4.8%.
c. 59.3% and 2.8%.
d. 59.3% and 4.8%.
20. Suppose that the adult population is 4 million, the number of unemployed is 0.25 million, and the
labor-force participation rate is 75%. What is the unemployment rate?
a. 6.25%
b. 8.3%
c. 9.1%
d. 18.75%

21. Suppose that some country had an adult population of about 46 million, a labor-force participation
rate of 75 percent, and an unemployment rate of 8 percent. How many people were unemployed?
a. 2.54 million
b. 2.76 million
c. 3.68 million
d. 8 million

Scenario 28-1
Suppose that the Bureau of Labor Statistics reports that the entire adult population of Mankiwland
can be categorized as follows: 25 million people employed, 3 million people unemployed, 1 million
discouraged workers, and 1 million people who are either students, homemakers, retirees, or other
people not seeking employment.

22. Refer to Scenario 28-1. What is the total labor force?

a. 25 million
b. 28 million
c. 29 million
d. 30 million
23. Refer to Scenario 28-1. What is the labor-force participation rate?
a. 83.3%
b. 86.7%
c. 93.3%
d. 96.7%
24. Refer to Scenario 28-1. How many people are unemployed?
a. 1 million
b. 3 million
c. 4 million
d. 5 million
25. Refer to Scenario 28-1. What is the unemployment rate?
a. 3.3%
b. 6.7%
c. 10.7%
d. 12%

Table 28-2

Labor Data for Aridia

Year 2010 2011 2012

Adult population 2,000 3,000 3,200
Number of employed 1,400 1,300 1,600
Number of unemployed 200 600 200

26. Refer to Table 28-2. The labor force of Aridia in 2010 was
a. 1,400.
b. 1,600.
c. 1,800.
 d. 2,000.
27. Refer to Table 28-2. The labor force of Aridia in 2011 was
a. 1,300.
b. 1,900.
c. 2,400.
d. 3,000.

28. Refer to Table 28-2. The labor force of Aridia in 2012 was
a. 1,600.
b. 1,800.
c. 3,000.
d. 3,200.

29. Refer to Table 28-2. The labor force of Aridia

a. increased both from 2010 to 2011 and from 2011 to 2012.
b. increased from 2010 to 2011 but decreased from 2011 to 2012.
c. decreased from 2010 to 2011 but increased from 2011 to 2012.
d. decreased both from 2010 to 2011 and from 2011 to 2012.

30. Refer to Table 28-2. The number of adults not in the labor force of Aridia in 2010 was
a. 200.
b. 400.
c. 600.
d. 1,800.

31. Refer to Table 28-2. The number of adults not in the labor force of Aridia in 2011 was
a. 600.
b. 1,100.
c. 1,700.
d. 2,400.

32. Refer to Table 28-2. The number of adults not in the labor force of Aridia in 2012 was
a. 200.
b. 1,400.
c. 1,600.
d. 3,000.

33. Refer to Table 28-2. The number of adults not in the labor force of Aridia
a. increased both from 2010 to 2011 and from 2011 to 2012.
b. increased from 2010 to 2011 but decreased from 2011 to 2012.
c. decreased from 2010 to 2011 but increased from 2011 to 2012.
d. decreased both from 2010 to 2011 and from 2011 to 2012.
34. Refer to Table 28-2. The unemployment rate of Aridia in 2010 was
a. 10%.
b. 12.5%.
c. 14.3%.
d. 80%.
35. Refer to Table 28-2. The unemployment rate of Aridia in 2011 was
a. 20%.
b. 31.6%.
c. 46.2%.
d. 63.3%.
36. Refer to Table 28-2. The unemployment rate of Aridia in 2012 was
a. 6.25%.
b. 11.1%.
c. 12.5%.
d. 56.25%.
37. Refer to Table 28-2. The unemployment rate of Aridia
a. increased both from 2010 to 2011 and from 2011 to 2012.
b. increased from 2010 to 2011 but decreased from 2011 to 2012.
c. decreased from 2010 to 2011 but increased from 2011 to 2012.
d. decreased both from 2010 to 2011 and from 2011 to 2012.

38. Refer to Table 28-2. The labor-force participation rate of Aridia in 2010 was
a. 70%.
b. 77.8%.
c. 80%.
d. 87.5%.
39. Refer to Table 28-2. The labor-force participation rate of Aridia in 2011 was
a. 43.3%.
b. 54.2%.
c. 63.3%.
d. 68.4%.
40. Refer to Table 28-2. The labor-force participation rate of Aridia in 2012 was
a. 50%.
b. 53.3%.
c. 56.25%.
d. 88.9%.

41. Refer to Table 28-2. The labor-force participation rate of Aridia

a. increased both from 2010 to 2011 and from 2011 to 2012.
b. increased from 2010 to 2011 but decreased from 2011 to 2012.
c. decreased from 2010 to 2011 but increased from 2011 to 2012.
d. decreased both from 2010 to 2011 and from 2011 to 2012.
42. Suppose that some people report themselves as unemployed when, in fact, they are working in the
 underground economy. If these persons were counted as employed, then
a. both the unemployment rate and labor-force participation rate would be higher.
b. both the unemployment rate and labor-force participation rate would be lower.
c. the unemployment rate would be higher, and the labor-force participation rate would be higher.
d. the unemployment rate would be lower, and the labor-force participation rate would be
unaffected.
43. Some persons are counted as out of the labor force because they have made no serious or recent
effort to look for work. However, some of these individuals may want to work even though they are
too discouraged to make a serious effort to look for work. If these individuals were counted as
unemployed instead of out of the labor force, then
a. both the unemployment rate and labor-force participation rate would be higher.
b. the unemployment rate would be higher ,and the labor-force participation rate would be lower.
c. the unemployment rate would be lower, and the labor-force participation rate would be higher.
d. both the unemployment rate and labor-force participation rate would be lower

44. A survey showed that in each of the past 12 months there was one person who was unemployed
who worked in all other months. There were also two people who were unemployed for all 12
months. What percentage of the unemployment spells during the year was short term, and what
percentage of the unemployment in a given month was long term?
a. 75% was short term; 33.3% was long term
b. 75% was short term; 66.7% was long term
c. 85.7% was short term; 33.3% was long term
d. 85.7% was short term; 66.7% was long term
45. Which of the following is not correct?
a. Most people who become unemployed will soon find jobs.
b. In an ideal labor market, wages would adjust to ensure that all workers are always fully
employed.
c. The unemployment rate occasionally falls to zero.
d. There are always some workers without jobs, even when the overall economy is doing well.
46. Meredith is looking for work as a computer programmer. Although her prospects are good, she
has not yet taken a job. Julie is looking for work in a steel mill. Every time she shows up for an
interview, there are more people looking for work than there are openings. Someone waiting in line
with her tells her it has been that way for a long time.
a. Meredith and Julie are both frictionally unemployed.
b. Meredith and Julie are both structurally unemployed.
c. Meredith is frictionally unemployed, and Julie is structurally unemployed.
d. Meredith is structurally unemployed, and Julie is frictionally unemployed.
47. Frictional unemployment is inevitable because
a. sectoral shifts are always happening.
b.there is a federal minimum-wage law in the U.S.
c. some people do not want to be employed.
d.unions are very popular in the U.S.
48. Which of the following is not a cause of frictional unemployment?
 a. the destruction of manufacturing jobs
b.a worker leaving a job to find one with better benefits
c. minimum-wage laws
d. unemployment insurance
49. If the minimum wage is currently above the equilibrium wage, then a decrease in the minimum
wage
a. increases both the quantity demanded and the quantity supplied of labor.
b. decreases both the quantity demanded and the quantity supplied of labor.
c. increases the quantity of labor demanded but decreases the quantity of labor supplied.
d. decreases the quantity of labor demanded but increases the quantity of labor supplied.
50. The theory of efficiency wages provides a possible explanation as to why
a. workers form unions.
b. firms should try to reduce surpluses of labor.
c. firms may be inclined to keep their workers’ wages above the equilibrium level.
d. firms may be inclined to keep their workers’ wages below the equilibrium level.

CHAPTER 4
1. We would expect the interest rate on Bond A to be higher than the interest rate on Bond B if the two
bonds have identical characteristics except that
a. the credit risk associated with Bond A is lower than the credit risk associated with Bond B.
b. Bond A was issued by the city of Philadelphia and Bond B was issued by Red Hat Corporation.
c. Bond A has a term of 20 years and Bond B has a term of 2 years.
d. All of the above are correct.
2. We would expect the interest rate on Bond A to be lower than the interest rate on Bond B if the two
bonds have identical characteristics except that
a. the credit risk associated with Bond A is lower than the credit risk associated with Bond B.
b. Bond A was issued by the Apple corporation and Bond B was issued by the city of Houston.
c. Bond A has a term of 20 years and Bond B has a term of 2 years.
d. All of the above are correct.
3. Which of the following statements is correct?
a. The expected future profitability of a corporation influences the demand for that corporation’s stock.
b. When a corporation sells stock as a means of raising funds it is engaging in debt finance.
c. The owners of bonds sold by the Microsoft Corporation are part owners of that corporation.
d. All bonds are, by definition, perpetuities.
4. All else equal, when people become more optimistic about a company's future, the
a. supply of the stock and the price will both rise.
b. supply of the stock and the price will both fall.
c. demand for the stock and the price will both rise.
d. demand for the stock and the price will both fall.
5. World Wide Delivery Service Corporation develops a way to speed up its deliveries and reduce its
 costs. We would expect that this would
a. raise the demand for existing shares of the stock, causing the price to rise.
b. decrease the demand for existing shares of the stock, causing the price to fall.
c. raise the supply of the existing shares of stock, causing the price to rise.
d. raise the supply of the existing shares of stock, causing the price to fall.
6. In the Coen Brothers’ movie The Hudsucker Proxy the board of directors picks someone to run the
company who they believe will make poor decisions. If things turn out as they plan,
a. the price of a share of stock in the Hudsucker corporation should decline as the demand for shares falls.
b. the price of a share of stock in the Hudsucker corporation should rise as the demand for shares rises.
c. the price of a share of stock in the Hudsucker corporation should decline as the supply of existing shares
falls.
d. the price of a share of stock in the Hudsucker corporation should rise as the supply of existing shares
rises.
7. Other things being constant, when a firm sells new shares of stock, the
a. supply of the stock increases and the price decreases.
b. supply of the stock decreases and the price increases.
c. demand for the stock increases and the price increases.
d. demand for the stock decreases and the price decreases.
8. A high demand for a company’s stock is an indication that
a. the company is in need of funds.
b. the company has recently sold a large quantity of bonds.
c. people are optimistic about the company’s future.
d. people are pessimistic about the company’s future.
9. Which of the following statements is correct?
a. A large, well-known corporation such as Proctor and Gamble would generally use financial
intermediation to finance expansion of its factories.
b. On average, indexed funds outperform managed funds.
c. Unlike corporate bonds and stocks, checking accounts are a store of value.
d. Financial intermediaries are institutions through which savers can directly provide funds to
borrowers.
10. Borrowers can (and sometimes do) default on their loans when
a. the dividend yield on their shares of stock reaches zero.
b. they convert their bonds into perpetuities.
c. they declare bankruptcy.
d. they cannot find enough buyers of their bonds to sell all the bonds they wish to sell.
11. Who accepts all of the risk associated with a mutual fund’s portfolio of stocks and/or bonds?
a. the fund’s managers
b. the fund’s shareholders
c. the federal government
d. the corporations that originally issued the stocks and/or bonds held by the fund
12. A bond buyer is a
 a. saver. Long term bonds have less risk than short term bonds.
b. saver. Long term bonds have more risk than short term bonds.
c. borrower. Long term bonds have less risk than short term bonds.
d. borrower. Long term bonds have more risk than short term bonds.
13. Suppose private saving in a closed economy is $12b and investment is $10b.
a. National saving must equal $12b.
b.Public saving must equal $2b.
c. The government budget surplus must equal $2b.
d.The government budget deficit must equal $2b.
14. For a closed economy, GDP is $12 trillion, consumption is $7 trillion, taxes net of transfers are $3
trillion and the government runs a deficit of $1 trillion. What are private saving and national saving?
a. $5 trillion and $3 trillion, respectively
b. $5 trillion and $1 trillion, respectively
c. $2 trillion and $3 trillion, respectively
d. $2 trillion and $1 trillion, respectively
15. For an imaginary closed economy, T = $5,000; S = $11,000; C = $48,000; and the government is
running a budget surplus of $1,000. Then
a. private saving = $10,000 and GDP = $55,000.
b.private saving = $10,000 and GDP = $63,000.
c. private saving = $12,000 and GDP = $67,000.
d.private saving = $12,000 and GDP = $69,000.

Scenario 26-1. Assume the following information for an imaginary, closed

economy.

GDP = $100,000; taxes = $22,000; government purchases = $25,000; national saving = $15,000.

16. Refer to Scenario 26-1. For this economy, investment amounts to

a. $38,000.
b. $18,000.
c. $12,000.
d. $15,000.
17. Refer to Scenario 26-1. This economy’s government is running a
a. budget surplus of $3,000.
b. budget surplus of $12,000.
c. budget deficit of $3,000.
d. budget deficit of $12,000.
18. Refer to Scenario 26-1. For this economy, private saving amounts to
a. $22,000.
b. $18,000.
c. $15,000.
d. $37,000.
 19. Refer to Scenario 26-1. For this economy, consumption amounts to
a. $68,000.
b. $38,000.
c. $53,000.
d. $60,000.
20. The country of Meditor, a small country with a closed economy, uses the merit as its currency.
Recent national income statistics showed that it had GDP of $600 million merits, no government
transfer payments, taxes of $150 million merits, a budget surplus of $40 billion merits, and
investment of $100 billion merits. What were its consumption and government expenditures on
goods and services?
a. $460 million merits and $150 million merits
b. $310 million merits and $190 million merits
c. $350 million merits and $190 million merits
d.$390 million merits and $110 million merits
21. The country of Cedarland does not trade with any other country. Its GDP is $17 billion.
Its government purchases $5 billion worth of goods and services each year and collects $6 billion in
taxes. Private saving in Cedarland is $5 billion. For Cedarland,
a. investment is $6 billion and consumption is $7 billion.
b. investment is $6 billion and consumption is $6 billion.
c. investment is $7 billion and consumption is $7 billion.
d. investment is $7 billion and consumption is $6 billion.
22. A budget surplus
a. occurs when the government has debt equal to zero.
b. causes government debt to increase.
c. exists when government spending is greater than tax revenues.
d. reduces the government’s debt.
23. An increase in the government’s budget deficit means
a. public saving is greater than $0 and increasing.
b.public saving is greater than $0 and decreasing.
c. public saving is less than $0 and increasing.
d. public saving is less than $0 and decreasing.
24. The slope of the demand for loanable funds curve represents the
a. positive relation between the real interest rate and investment.
b. negative relation between the real interest rate and investment.
c. positive relation between the real interest rate and saving.
d. negative relation between the real interest rate and saving.
25. Other things the same, when the interest rate rises,
a. people would want to lend more, making the supply of loanable funds increase.
b. people would want to lend less, making the supply of loanable funds decrease.
c. people would want to lend more, making the quantity of loanable funds supplied increase.
d. people would want to lend less, making the quantity of loanable funds supplied decrease.
26. Kathleen is considering expanding her dress shop. If interest rates rise she is
 a. less likely to expand. This illustrates why the supply of loanable funds slopes downward.
b. more likely to expand. This illustrates why the supply of loanable funds slopes upward.
c. less likely to expand. This illustrates why the demand for loanable funds slopes downward.
d. more likely to expand. This illustrates why the demand for loanable funds slopes upward.
27. Other things the same, an increase in the interest rate
a. would shift the demand for loanable funds to the right.
b. would shift the demand for loanable funds to the left.
c. would increase the quantity of loanable funds demanded.
d. would decrease the quantity of loanable funds demanded
28. If there is a surplus of loanable funds, then
a. the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and
the interest rate is above equilibrium.
b. the quantity of loanable funds demanded is greater than the quantity of loanable funds supplied and
the interest rate is below equilibrium.
c. the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and
the interest rate is above equilibrium.
d. the quantity of loanable funds supplied is greater than the quantity of loanable funds demanded and
the interest rate is below equilibrium.
29. If there is a shortage of loanable funds, then
a. the quantity demanded is greater than the quantity supplied and the interest rate will rise.
b. the quantity demanded is greater than the quantity supplied and the interest rate will fall.
c. the quantity supplied is greater than the quantity demanded and the interest rate will rise.
d. the quantity supplied is greater than the quantity demanded and the interest rate will fall
30. Which of the following would necessarily increase the equilibrium interest rate?
a. The demand for and the supply of loanable funds shift right.
b. The demand for and the supply of loanable funds shift left.
c. The demand for loanable funds shifts right and the supply of loanable funds shifts left.
d. The demand for loanable funds shifts left and the supply of loanable funds shifts right.
31. In 2002 mortgage rates fell and mortgage lending increased. Which of the following could explain
both of these changes?
a. The demand for loanable funds shifted rightward.
b. The demand for loanable funds shifted leftward.
c. The supply of loanable funds shifted rightward.
d. The supply of loanable funds shifted leftward.
32. Which of the following statements is correct?
a. As a group, economists see no purpose in distinguishing between the nominal interest rate and the
real interest rate.
b. The interest rate that is usually reported is the nominal interest rate.
c. If the nominal interest rate increases and the inflation rate remains unchanged, then the real
interest rate decreases.
d. All of the above are correct.
33. What would happen in the market for loanable funds if the government were to increase the tax
on interest income?
a. Interest rates would rise.
b. Interest rates would be unaffected.
c. Interest rates would fall.
d. The effect on the interest rate is uncertain.
34. If Congress increased the tax rate on interest income, investment
a. would increase and saving would decrease.
b. would decrease and saving would increase.
c. and saving would increase.
d.and saving would decrease.
35. If the government institutes policies that diminish incentives to save, then in the loanable funds
market
a. the demand for loanable funds shifts rightward.
b. the demand for loanable funds shifts leftward.
c. the supply of loanable funds shifts rightward.
d. the supply of loanable funds shifts leftward.
36. Suppose the government were to replace the income tax with a consumption tax so that interest
on savings was not taxed. The result would be that the interest rate
a. and investment both would increase.
b. and investment both would decrease.
c. would increase and investment would decrease.
d. would decrease and investment would increase.
37. Which of the following would not be a result of replacing the income tax with a
consumption tax so that interest income was no longer taxed?
a. The interest rate would decrease.
b. Investment would decrease.
c. The standard of living would eventually rise.
d. The supply of loanable funds would shift right.
38. If the government currently has a budget deficit, then
a. it does not necessarily have a debt.
b. its debt is increasing.
c. government expenditures are greater than taxes.
d. All of the above are correct.
39. If Canada goes from a large budget deficit to a small budget deficit, it will
a. increase private saving and so shift the supply of loanable funds right.
b. increase investment and so shift the demand for loanable funds right.
c. increase public saving and so shift the supply of loanable funds right.
d. reduce national saving and shift the supply left.
40. Which of the following events could explain a decrease in interest rates together with an increase
in investment?
 a. The government went from surplus to deficit.
b. The government instituted an investment tax credit.
c. The government reduced the tax rate on savings.
d. None of the above is correct.
41. For an imaginary economy, when the real interest rate is 7 percent, the quantity of loanable funds
demanded is $500 and the quantity of loanable funds supplied is $500. Currently, the nominal interest
rate is 9 percent and the inflation rate is 4 percent. Currently,
a. the market for loanable funds is in equilibrium.
b. the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, and as a
result the real interest rate will rise.
c. the quantity of loanable funds supplied exceeds the quantity of loanable funds demanded, and as a
result the real interest rate will fall.
d. the quantity of loanable funds demanded exceeds the quantity of loanable funds supplied, and as a
result the real interest rate will rise.
42. When the government goes from running a balanced budget to running a budget surplus,
a. national saving decreases, the interest rate rises, and the economy’s longrun growth rate is likely
to decrease.
b. national saving increases, the interest rate falls, and the economy’s longrun growth rate is likely to
decrease.
c. national saving decreases, the interest rate rises, and the economy’s longrun growth rate is likely
to increase.
d. national saving increases, the interest rate falls, and the economy’s longrun growth rate is likely to
increase.
CHAPTER 5

e.