PS Ans 2

PROBLEM SET 1
Question 1
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1.Economists use the phrase "There is no such thing as a free

lunch," to illustrate the principle that
Select one:
a.
a.inflation almost always results in higher prices over time.
b.
b.nothing is free in a market economy.
c.
c.making decisions requires trading off one goal against another.
d.
d.if something looks too good to be true, it probably is not worth pursuing.
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The correct answer is: c.making decisions requires trading off one goal against another.
Question 2
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2.A typical society strives to get the most it can from its scarce
resources. At the same time, the society attempts to distribute
the benefits of those resources to the members of the society
in a fair manner. In other words, the society faces a tradeoff
between
Select one:
a.
a.guns and butter.
b.
b.efficiency and equity.
c.
c.inflation and unemployment.
d.
d.work and leisure.
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The correct answer is: b.efficiency and equity.
Question 3
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3.The opportunity cost of going to college is

Select one:
a.
a.the total spent on food, clothing, books, transportation, tuition, lodging, and other expenses.
b.
b.the value of the best opportunity a student gives up to attend college.
c.
c.zero for students who are fortunate enough to have all of their college expenses paid by someone else.
d.
d.zero, since a college education will allow a student to earn a larger income after graduation.
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The correct answer is: b.the value of the best opportunity a student gives up to attend college.
Question 4
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4.Maurice receives $100 as a birthday gift. In deciding how to

spend the money, he narrows his options down to four
choices: Option A, Option B, Option C, and Option D. Each
option costs $100. Finally he decides on Option B. The
opportunity cost of this decision is
Select one:
a.
a.the value to Maurice of the option he would have chosen had Option B not been available.
b.
b.the value to Maurice of Options A, C and D combined.
c.
c.$100.
d.
d.$300
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The correct answer is: a.the value to Maurice of the option he would have chosen had Option B not been
available.
Question 5
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5.Russell spends an hour studying instead of playing tennis.

The opportunity cost to him of studying is
Select one:
a.
a.the improvement in his grades from studying for the hour.
b.
b.the improvement in his grades from studying minus the enjoyment of playing tennis.
c.
c.the enjoyment and exercise he would have received had he played tennis.
d.
d.zero. Since Russell chose to study rather than to play tennis, the value of studying must have been greater than
the value of playing tennis.
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The correct answer is: c.the enjoyment and exercise he would have received had he played tennis.
Question 6
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6.A person's willingness to pay for a good is based on

Select one:
a.
a.the availability of the good.
b.
b.the marginal benefit that an extra unit of the good would provide for that person.
c.
c.the marginal cost of producing an extra unit of the good.
d.
d.esoteric factors, the study of which lies beyond the boundaries of economics.
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The correct answer is: b.the marginal benefit that an extra unit of the good would provide for that person.
Question 7
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7.The average cost per seat on the 50-passenger Floating-On-

Air Bus company's trip from Kansas City to St. Louis, on
which no refreshments are served, is $45. In advance of a
particular trip, three seats remain unsold. The bus company
could increase its profit only if it
Select one:
a.
a.charged any ticket price above $0 for the three remaining seats.
b.
b.charged at least $15 for each of the three remaining seats.
c.
c.charged at least $45 for each of the three remaining seats.
d.
d.paid three people to occupy the three remaining seats.
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The correct answer is: a.charged any ticket price above $0 for the three remaining seats.
Question 8
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8.A construction company has built 50 houses so far this year

at a total cost to the company of $8 million. If the company
builds a 51st house, its total cost will increase to $8.18
million. Which of the following statements is correct?
Select one:
a.
a.For the first 50 houses, the average cost per house was $160,000.
b.
b.The marginal cost of the 51st house, if it is built, will be $180,000.
c.
c.If the company can experience a marginal benefit of $190,000 by building the 51st house, then the company
should build it.
d.
d.All of the above are correct.
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The correct answer is: d.All of the above are correct.
Question 9
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9.Suppose your management professor has been offered a

corporate job with a 30 percent pay increase. He has decided
to take the job. For him, the marginal
Select one:
a.
a.cost of leaving was greater than the marginal benefit.
b.
b.benefit of leaving was greater than the marginal cost.
c.
c.benefit of teaching was greater than the marginal cost.
d.
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The correct answer is: b.benefit of leaving was greater than the marginal cost.
Question 10
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10.In an economy in which decisions are guided by prices and

individual self-interest, there is
Select one:
a.
a.the potential to achieve efficiency in production.
b.
b.a strong need for government intervention in the market.
c.
c.less efficiency than would be observed in a centrally-planned economy.
d.
d.more need for a strong legal system to control individual greed than would be needed in a centrally-planned
economy.
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The correct answer is: a.the potential to achieve efficiency in production.
Question 11
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11. A company that formerly produced software went out of

business because too many potential customers bought
illegally-produced copies of the software instead of buying the
product directly from the company. This instance serves as an
example of
Select one:
a.
a.market power.
b.
b.market failure.
c.
c.inadequate enforcement of property rights.
d.
d.the invisible hand at work.
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The correct answer is: c.inadequate enforcement of property rights.
Question 12
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12. Market failure can be caused by

Select one:
a.
a.low consumer demand.
b.
b.government intervention and price controls.
c.
c.externalities and market power.
d.
d.high prices and foreign competition.
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The correct answer is: c.externalities and market power.
Question 13
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13. Suppose that the average income of a Kenyan is higher

than the average income of a South African. You might
conclude that
Select one:
a.
a.South African firms are faced with stricter government regulations than Kenyan firms.
b.
b.total income is divided among fewer workers in Kenya since it has a smaller labor force than South Africa.
c.
c.Kenya's climate allows for longer growing seasons and therefore Kenya can produce large quantities of grain
and other crops.
d.
d.productivity in Kenya is higher than in South Africa.
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The correct answer is: d.productivity in Kenya is higher than in South Africa.
Question 14
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14.Which of the following is the most correct statement about

the relationship between inflation and unemployment?
Select one:
a.
a.In the short run, falling inflation is associated with falling unemployment.
b.
b.In the short run, falling inflation is associated with rising unemployment.
c.
c.In the long run, falling inflation is associated with falling unemployment.
d.
d.In the long run, falling inflation is associated with rising unemployment.
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The correct answer is: b.In the short run, falling inflation is associated with rising unemployment.
Question 15
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15.A circular-flow diagram is a model that

Select one:
a.
a.helps to explain how participants in the economy interact with one another.
b.
b.helps to explain how the economy is organized.
c.
c.incorporates the markets for the factors of production.
d.
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Question 16
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16.In a circular-flow diagram,

Select one:
a.
a.taxes flow from households to firms, and transfer payments flow from firms to households.
b.
b.income payments flow from firms to households, and sales revenue flows from households to firms.
c.
c.resources flow from firms to households, and goods and services flow from households to firms.
d.
d.inputs and outputs flow in the same direction as the flow of dollars, from firms to households.
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The correct answer is: b.income payments flow from firms to households, and sales revenue flows from
households to firms.
Question 17
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17.Production possibilities frontiers are usually bowed

outward. This is because
Select one:
a.
a.the more resources a society uses to produce one good, the fewer resources it has available to produce another
good.
b.
b.it reflects the fact that the opportunity cost of producing a good decreases as more and more of that good is
produced.
c.
c.of the effects of technological change.
d.
d.resources are specialized, that is, some are better at producing particular goods rather than other goods.
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The correct answer is: d.resources are specialized, that is, some are better at producing particular goods rather
than other goods.
Question 18
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18. Refer to Figure 1. What is the opportunity cost to society
of the movement from point A to point C?
Select one:
a.
a.50 baseballs
b.
b.100 baseballs
c.
c.100 bananas
d.
d.300 bananas
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The correct answer is: b.100 baseballs
Question 19
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19.Refer to Figure 1. A movement from point C to point D

could be caused by
Select one:
a.
a.unemployment.
b.
b.a decrease in society's preference for bananas.
c.
c.fewer resources available for production of bananas.
d.
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The correct answer is: a.unemployment.
Question 20
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20.Refer to Figure 1. If the economy moves from point C to
point B, then which of the following statements is correct?
Select one:
a.
a.The economy benefited from a technological advance in the production of baseballs.
b.
b.The opportunity cost of each additional baseball is 2 bananas.
c.
c.The opportunity cost of each additional banana is 2 baseballs.
d.
d.The move involves no opportunity cost; it simply reflects the desires of the economy's citizens.
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The correct answer is: b.The opportunity cost of each additional baseball is 2 bananas.
Question 21
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21. Refer to Figure 1. If the economy moves from point A to

point B, then which of the following statements is correct?
Select one:
a.
a.The economy has moved from a point of inefficient production to a point of efficient production.
b.
b.The economy has experienced economic growth.
c.
c.The opportunity cost of each additional banana produced is 50 baseballs.
d.
d.None of the above is correct.
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The correct answer is: d.None of the above is correct.
Question 22
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22.A production possibilities frontier can shift outward if

Select one:
a.
a.government increases the amount of money in the economy.
b.
b.there is a technological improvement.
c.
c.resources are shifted from the production of one good to the production of the other good.
d.
d.the economy abandons inefficient production methods in favor of efficient production methods.
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The correct answer is: b.there is a technological improvement.
Question 23
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23. The difference between production possibilities frontiers

that are bowed out and those that are straight lines is that
Select one:
a.
a.bowed-out production possibilities frontiers apply to economies that face tradeoffs, whereas straight-line
production possibilities frontiers apply to economies that do not face tradeoffs.
b.
b.bowed-out production possibilities frontiers apply to economies in which resources are not specialized,
whereas straight-line production possibilities frontiers apply to economies in which resources are specialized.
c.
c.bowed-out production possibilities frontiers illustrate increasing opportunity cost, whereas straight-line
production possibilities frontiers illustrate constant opportunity cost.
d.
d.straight-line production possibilities frontiers illustrate real-world conditions, whereas bowed-out production
possibilities frontiers illustrate more simplistic assumptions.
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The correct answer is: c.bowed-out production possibilities frontiers illustrate increasing opportunity cost,
whereas straight-line production possibilities frontiers illustrate constant opportunity cost.
Question 24
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24. Without trade,

Select one:
a.
a.a country is better off because it will have to learn to be self-sufficient without trade.
b.
b.a country's production possibilities frontier is also its consumption possibilities frontier.
c.
c.a country can still benefit from international specialization.
d.
d.interdependence is more extensive than it would be with trade.
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The correct answer is: b.a country's production possibilities frontier is also its consumption possibilities frontier.
Question 25
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25. Which of the following statements is not correct?

Select one:
a.
a.Trade allows for specialization.
b.
b.Trade has the potential to benefit all nations.
c.
c.Trade allows nations to consume outside of their production possibilities curves.
d.
d.Absolute advantage is the driving force of specialization.
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The correct answer is: d.Absolute advantage is the driving force of specialization.
Question 26
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26. Refer to Table 3-1. The opportunity cost of 1 pound of

meat for the farmer is
Select one:
a.
a.1/4 hour of labor.
b.
b.4 hours of labor.
c.
c.4 pounds of potatoes.
d.
d.1/4 pound of potatoes.
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The correct answer is: c.4 pounds of potatoes.
Question 27
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27.Refer to Table 3-1. The opportunity cost of 1 pound of

meat for the rancher is
Select one:
a.
a.4 hours of labor.
b.
b.5 hours of labor.
c.
c.4/5 pounds of potatoes.
d.
d.5/4 pounds of potatoes.
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The correct answer is: c.4/5 pounds of potatoes.
Question 28
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28.Refer to Table 3-1. The farmer has an absolute advantage

in
Select one:
a.
a.meat, and the rancher has an absolute advantage in potatoes.
b.
b.potatoes, and the rancher has an absolute advantage in meat.
c.
c.meat, and the rancher has an absolute advantage in meat.
d.
d.neither good, and the rancher has an absolute advantage in both goods.
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The correct answer is: b.potatoes, and the rancher has an absolute advantage in meat.
Question 29
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29. Refer to Table 3-1. The rancher has an absolute advantage

in
Select one:
a.
a.both goods, and the farmer has a comparative advantage in meat.
b.
b.both goods, and the farmer has a comparative advantage in potatoes.
c.
c.meat, and the farmer has a comparative advantage in potatoes.
d.
d.meat, and the farmer has a comparative advantage in neither good.
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The correct answer is: c.meat, and the farmer has a comparative advantage in potatoes.
Question 30
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30. Refer to Table 3-1. The rancher has a comparative

advantage in
Select one:
a.
a.neither good, and the farmer has a comparative advantage in both goods.
b.
b.both goods, and the farmer has a comparative advantage in neither good.
c.
c.potatoes, and the farmer has a comparative advantage in meat.
d.
d.meat, and the farmer has a comparative advantage in potatoes.
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The correct answer is: d.meat, and the farmer has a comparative advantage in potatoes.
PROBLEM SET 2
Question 1
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1. The negative relationship between price and quantity

demanded
Select one:
a.
a. applies to most goods in the economy.
b.
b. is represented by a downward-sloping demand curve.
c.
c. is referred to as the law of demand.
d.
d. All of the above are correct.
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The correct answer is: d. All of the above are correct.
Question 2
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2.Quantity demanded falls as the price rises and rises as the

price falls, so we say that
Select one:
a.
a.quantity demanded is determined by quantity supplied.
b.
b.price is determined by quantity demanded.
c.
c.quantity demanded is a function of demand.
d.
d.quantity demanded is negatively related to the price.
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The correct answer is: d.quantity demanded is negatively related to the price.
Question 3
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3. Which of the following changes would not shift the demand

curve for a good or service?
Select one:
a.
a. a change in income
b.
b. a change in the price of the good or service
c.
c. a change in expectations about the future price of the good or service
d.
d. a change in the price of a related good or service
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The correct answer is: b. a change in the price of the good or service
Question 4
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4. Suppose you like to make, from scratch, pies filled with

banana cream and vanilla pudding. You notice that the price of
bananas has increased. How would this price increase affect
your demand for vanilla pudding?
Select one:
a.
a. It would decrease.
b.
b. It would increase.
c.
c. It would be unaffected.
d.
d. There is insufficient information given to answer the question.
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The correct answer is: a. It would decrease.
Question 5
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5. Currently you purchase 6 packages of hot dogs a month.

You will graduate from college in December and you will start
a new job in January. You have no plans to purchase hot dogs
in January. For you, hot dogs are
Select one:
a.
a.a substitute good.
b.
b.a normal good.
c.
c.an inferior good.
d.
d.a law-of-demand good.
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The correct answer is: c.an inferior good.
Question 6
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6. If Francis experiences a decrease in his income, we would

expect that, as a result, Francis's demand for
Select one:
a.
a. each good he purchases will remain unchanged.
b.
b. normal goods will decrease.
c.
c. luxury goods will increase.
d.
d. inferior goods will decrease.
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The correct answer is: b. normal goods will decrease.
Question 7
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7.Ford Motor Company announces that it will offer $3,000

rebates on new Mustangs starting next month. As a result of
this information, today's demand curve for Mustangs
Select one:
a.
a.shifts to the right.
b.
b.shifts to the left.
c.
c.shifts either to the right or to the left, but we cannot determine the direction of the shift from the given
information.
d.
d.will not shift; rather, the demand curve for Mustangs will shift to the right next month.
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The correct answer is: b.shifts to the left.
Question 8
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8. Holding the nonprice determinants of supply constant, a

change in price would
Select one:
a.
a.result in either a decrease in supply or an increase in supply.
b.
b.result in a movement along a stationary supply curve.
c.
c.result in a shift of demand.
d.
d.have no effect on the quantity supplied.
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The correct answer is: b.result in a movement along a stationary supply curve.
Question 9
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9. Workers at a bicycle assembly plant currently earn the

mandatory minimum wage. If the government increases the
minimum wage by $1.00 an hour it is likely that the
Select one:
a.
a. demand for bicycle assembly workers will increase.
b.
b. supply of bicycles will shift to the right.
c.
c. supply of bicycles will shift to the left.
d.
d. firm must increase output to maintain profit levels.
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The correct answer is: c. supply of bicycles will shift to the left.
Question 10
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10. If car manufacturers begin utilizing new labor-saving

technology on their assembly lines, we would not expect
Select one:
a.
a. a smaller quantity of labor to be used.
b.
b. the supply of cars to increase.
c.
c. costs to the firm to fall.
d.
d. individual car manufacturers to move up and to the right along their individual supply curves.
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The correct answer is: d. individual car manufacturers to move up and to the right along their individual supply
curves.
Question 11
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11. Suppose there is an earthquake that destroys several corn

canneries. Which of the following would not be a direct result
of this event?
Select one:
a.
a. Sellers would decrease their ability to produce and sell as much as before at each relevant price.
b.
b. The supply would decrease.
c.
c. Buyers would not be willing to buy as much as before at each relevant price.
d.
d. The equilibrium price would rise.
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The correct answer is: c. Buyers would not be willing to buy as much as before at each relevant price.
Question 12
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12. Refer to Table 1. The equilibrium price and quantity,

respectively, are
Select one:
a.
a.$4 and 40.
b.
b.$6 and 30.
c.
c.$8 and 30.
d.
d.$10 and 35.
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The correct answer is: b.$6 and 30.
Question 13
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13. Refer to Table 1. If the price were $8, a

Select one:
a.
a.surplus of 50 units would exist and price would tend to fall.
b.
b.surplus of 10 units would exist and price would tend to fall.
c.
c.surplus of 25 units would exist and price would tend to fall.
d.
d.shortage of 25 units would exist and price would tend to rise.
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The correct answer is: c.surplus of 25 units would exist and price would tend to fall.
Question 14
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14. Refer to Table 1. If the price were $2, a

Select one:
a.
a.shortage of 25 units would exist and price would tend to fall.
b.
b.surplus of 50 units would exist and price would tend to rise.
c.
c.surplus of 25 units would exist and price would tend to fall.
d.
d.shortage of 50 units would exist and price would tend to rise.
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The correct answer is: d.shortage of 50 units would exist and price would tend to rise.
Question 15
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15. Refer to Figure 4-8. In this market, equilibrium price and

quantity, respectively, are
Select one:
a.
a. $14 and 70.
b.
b. $12 and 40.
c.
c. $10 and 50.
d.
d. $8 and 50.
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The correct answer is: c. $10 and 50.
Question 16
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16. Refer to Figure 4-8. If price in this market is currently $14,

there would be a
Select one:
a.
a. shortage of 20 units and the law of demand predicts that the price will rise from $14 to a higher price.
b.
b. excess supply of 20 units and the law of supply and demand predicts that the price will fall from $14 to a
lower price.
c.
c. shortage of 40 units and the law of supply predicts that the price will fall from $14 to a lower price.
d.
d. surplus of 40 units and the law of supply and demand predicts that the price will fall from $14 to a lower
price.
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The correct answer is: d. surplus of 40 units and the law of supply and demand predicts that the price will fall
from $14 to a lower price.
Question 17
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17. Refer to Figure 4-8. If there is currently a shortage of 30

units of the good, then
Select one:
a.
a. the law of demand predicts that the price will rise by $5 to eliminate the shortage.
b.
b. the law of supply predicts that the price will rise by $5 to eliminate the shortage.
c.
c. the law of supply and demand predicts that the price will rise by $3 to eliminate the shortage.
d.
d. the law of supply and demand predicts that the price will fall from its current level by an indeterminate
amount, exacerbating the shortage.
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The correct answer is: c. the law of supply and demand predicts that the price will rise by $3 to eliminate the
shortage.
Question 18
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18. The demand for Werthers candy is likely

Select one:
a.
a. elastic because candy is expensive relative to other snacks.
b.
b. elastic because there are many close substitutes for Werthers.
c.
c. elastic because Werthers are regarded as a necessity by many people.
d.
d. inelastic because it is usually eaten quickly, making the relevant time horizon short.
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The correct answer is: b. elastic because there are many close substitutes for Werthers.
Question 19
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19. It is likely that

Select one:
a.
a. the demand for flat-screen computer monitors is more elastic than the demand for monitors in general.
b.
b. the demand for grandfather clocks is more elastic than the demand for wristwatches.
c.
c. the demand for cardboard is more elastic over a long period of time than over a short period of time.
d.
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Question 20
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20. A person who takes a prescription drug to control high

cholesterol most likely has a demand for that drug that is
Select one:
a.
a. inelastic.
b.
b. unit elastic.
c.
c. elastic.
d.
d. highly responsive to changes in income.
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The correct answer is: a. inelastic.
Question 21
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21. Holding all other forces constant, when the price of

gasoline rises, the number of gallons of gasoline demanded
would fall substantially over a ten-year period because
Select one:
a.
a. buyers tend to be much less sensitive to a change in price when given more time to react.
b.
b. buyers tend to be much more sensitive to a change in price when given more time to react.
c.
c. buyers will have substantially more income over a ten-year period.
d.
d. the quantity supplied of gasoline increases very little in response to an increase in the price of gasoline.
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The correct answer is: b. buyers tend to be much more sensitive to a change in price when given more time to
react.
Question 22
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22. For a particular good, a 2 percent increase in price causes a

12 percent decrease in quantity demanded. Which of the
following statements is most likely applicable to this good?
Select one:
a.
a. There are no close substitutes for this good.
b.
b. The good is a luxury.
c.
c. The market for the good is broadly defined.
d.
d. The relevant time horizon is short.
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The correct answer is: b. The good is a luxury.
Question 23
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23. The local pizza restaurant makes such great bread sticks
that consumers do not respond much at all to a change in the
price. If the owner is only interested in increasing revenue, he
should
Select one:
a.
a. lower the price of the bread sticks.
b.
b. leave the price of the bread sticks alone.
c.
c. raise the price of the bread sticks.
d.
d. reduce costs.
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The correct answer is: c. raise the price of the bread sticks.
Question 24
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24. Refer to Figure 5-1. Assume the section of the demand

curve labeled A corresponds to prices between $8 and $16.
Then, when the price changes between $9 and $10,
Select one:
a.
a. quantity demanded changes proportionately less than the price.
b.
b. quantity demanded changes proportionately more than the price.
c.
c. quantity demanded changes the same amount proportionately as price.
d.
d. the price elasticity of demand is less than 1.
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The correct answer is: b. quantity demanded changes proportionately more than the price.
Question 25
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25. If the demand for donuts is elastic, then a decrease in the

price of donuts will
Select one:
a.
a. increase total revenue of donut sellers.
b.
b. decrease total revenue of donut sellers.
c.
c. not change total revenue of donut sellers.
d.
d. There is not enough information to answer this question.
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The correct answer is: a. increase total revenue of donut sellers.
Question 26
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26. Harry's Barber Shop increased its total monthly revenue

from $1,500 to $1,800 when it raised the price of a haircut
from $5 to $9. The price elasticity of demand for Harry's
Haircuts is
Select one:
a.
a. 0.567.
b.
b. 0.700.
c.
c. 1.429.
d.
d. 2.200.
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The correct answer is: b. 0.700.
Question 27
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27. Refer to Figure 5-5. An increase in price from $20 to $30
would
Select one:
a.
a. increase total revenue by $2,000.
b.
b. decrease total revenue by $2,000.
c.
c. increase total revenue by $1,000.
d.
d. decrease total revenue by $1,000.
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The correct answer is: c. increase total revenue by $1,000.
Question 28
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28. Refer to Figure 5-5. An increase in price from $30 to $35

would
Select one:
a.
a. increase total revenue by $250
b.
b. decrease total revenue by $250.
c.
c. increase total revenue by $500.
d.
d. decrease total revenue by $500.
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The correct answer is: b. decrease total revenue by $250.
Question 29
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29. For a horizontal demand curve,

Select one:
a.
a. slope is undefined and price elasticity of demand is equal to 0.
b.
b. slope is equal to 0 and price elasticity of demand is undefined.
c.
c. slope and price elasticity of demand both are undefined.
d.
d. slope and price elasticity of demand both are equal to 0.
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The correct answer is: b. slope is equal to 0 and price elasticity of demand is undefined.
Question 30
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30. Last year, Joan bought 50 pounds of hamburger when her

household's income was $40,000. This year, he household
income was only $30,000 and Joan bought 60 pounds of
hamburger. All else constant, Joan's income elasticity of
demand for hamburger is
Select one:
a.
a. positive, so Joan considers hamburger to be an inferior good.
b.
b. positive, so Joan considers hamburger to be a normal good and a necessity.
c.
c. negative, so Joan considers hamburger to be an inferior good.
d.
d. negative, so Joan considers hamburger to be a normal good, but not a necessity.
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The correct answer is: c. negative, so Joan considers hamburger to be an inferior good.
Question 31
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31. Suppose the cross-price elasticity of demand between hot

dogs and mustard is -2.00. This implies that a 20 percent
increase in the price of hot dogs will cause the quantity of
mustard purchased to
Select one:
a.
a. fall by 200 percent.
b.
b. fall by 40 percent.
c.
c. rise by 200 percent.
d.
d. rise by 40 percent.
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The correct answer is: b. fall by 40 percent.
Question 32
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32. Cross-price elasticity of demand measures how

Select one:
a.
a. the price of one good changes in response to a change in the price of another good.
b.
b. the quantity demanded of one good changes in response to a change in the quantity demanded of another
good.
c.
c. the quantity demanded of one good changes in response to a change in the price of another good.
d.
d. strongly normal or inferior a good is.
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The correct answer is: c. the quantity demanded of one good changes in response to a change in the price of
another good.
Question 33
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33. Which of the following expressions represents a cross-

price elasticity of demand?
Select one:
a.
a. percentage change in quantity demanded of apples divided by percentage change in quantity supplied of
apples
b.
b. percentage change in quantity demanded of apples divided by percentage change in price of pears
c.
c. percentage change in price of apples divided by percentage change in quantity demanded of apples
d.
d. percentage change in quantity demanded of apples divided by percentage change in income
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The correct answer is: b. percentage change in quantity demanded of apples divided by percentage change in
price of pears
Question 34
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34. Generally, a firm is more willing and able to increase

quantity supplied in response to a price change when
Select one:
a.
a. the relevant time period is short rather than long.
b.
b. the relevant time period is long rather than short.
c.
c. supply is inelastic.
d.
d. the firm is experiencing capacity problems.
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The correct answer is: b. the relevant time period is long rather than short.
Question 35
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35. The discovery of a new hybrid wheat would increase the

supply of wheat. As a result, wheat farmers would realize an
increase in total revenue if
Select one:
a.
a. the supply of wheat is elastic.
b.
b. the supply of wheat is inelastic.
c.
c. the demand for wheat is inelastic.
d.
d. the demand for wheat is elastic.
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The correct answer is: d. the demand for wheat is elastic.
Question 36
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36. Price controls are usually enacted

Select one:
a.
a. as a means of raising revenue for public purposes.
b.
b. when policymakers believe that the market price of a good or service is unfair to buyers or sellers.
c.
c. when policymakers detect inefficiencies in a market.
d.
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The correct answer is: b. when policymakers believe that the market price of a good or service is unfair to buyers
or sellers.
Question 37
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37. A price ceiling will be binding only if it is set

Select one:
a.
a. equal to equilibrium price.
b.
b. above equilibrium price.
c.
c. below equilibrium price.
d.
d. none of the above; a price ceiling is never binding.
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The correct answer is: c. below equilibrium price.
Question 38
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38. When, in a particular market, the law of demand and the

law of supply both apply, the imposition of a binding price
ceiling in that market causes quantity demanded to be
Select one:
a.
a. greater than quantity supplied.
b.
b. less than quantity supplied.
c.
c. equal to quantity supplied.
d.
d. Any of the above is possible.
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The correct answer is: a. greater than quantity supplied.
Question 39
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39. Suppose the equilibrium price of a physical examination

("physical") by a doctor is $200, and the government imposes
a price ceiling of $150 per physical. As a result of the price
ceiling,
Select one:
a.
a. the demand curve for physicals shifts to the right.
b.
b. the supply curve for physicals shifts to the left.
c.
c. the quantity demanded of physicals increases and the quantity supplied of physicals decreases.
d.
d. the number of physicals performed will increase.
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The correct answer is: c. the quantity demanded of physicals increases and the quantity supplied of physicals
decreases.
Question 40
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40. Refer to Figure 6-4. For a price ceiling to be binding, it
would have to be set at
Select one:
a.
a. any price below $6.00.
b.
b. a price between $4.00 and $6.00.
c.
c. a price between $6.00 and $8.00.
d.
d. any price above $6.00.
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The correct answer is: a. any price below $6.00.
Question 41
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41. Refer to Figure 6-4. Suppose a price floor of $7.00 is

imposed. As a result,
Select one:
a.
a. buyers' total expenditure on the good decreases by $20.00.
b.
b. the supply curve will shift to the left so as to now pass through the point (Q = 40, P = $7.00).
c.
c. the quantity of the good demanded decreases by 20 units.
d.
d. the price of the good continues to serve as the rationing mechanism.
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The correct answer is: a. buyers' total expenditure on the good decreases by $20.00.
Question 42
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42. Refer to Figure 6-6. When the price ceiling applies in this
market and the supply curve for gasoline shifts from S1 to S2,
Select one:
a.
a. the price will increase to P3.
b.
b. a surplus will occur at the new market price of P2.
c.
c. the market price will stay at P1 due to the price ceiling.
d.
d. a shortage will occur at the price ceiling of P2.
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The correct answer is: d. a shortage will occur at the price ceiling of P2.
Question 43
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43. Which of the following statements about the effects of rent

control is correct?
Select one:
a.
a. The short-run effect of rent control is a surplus of apartments, and the long-run effect of rent control is a
shortage of apartments.
b.
b. The short-run effect of rent control is a relatively small shortage of apartments, and the long-run effect of rent
control is a larger shortage of apartments.
c.
c. In the long run, rent control leads to a shortage of apartments, and the quality of available apartments is
improved by rent control.
d.
d. The effects of rent control are very noticeable to the public in the short run, because the primary effects of rent
control occur very quickly.
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The correct answer is: b. The short-run effect of rent control is a relatively small shortage of apartments, and the
long-run effect of rent control is a larger shortage of apartments.
Question 44
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44. Refer to Figure 6-8. The effective price that buyers pay
after the tax is imposed is
Select one:
a.
a. $8.
b.
b. $6.
c.
c. $5.
d.
d. $3.
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The correct answer is: a. $8.
Question 45
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45. Refer to Figure 6-8. The tax size is

Select one:
a.
a. $8.
b.
b. $6.
c.
c. $5.
d.
d. $3.
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The correct answer is: d. $3.
Question 46
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46. Refer to Figure 6-8. The burden of the tax on buyers is

Select one:
a.
a. $1.00 per unit.
b.
b. $1.50 per unit.
c.
c. $2.00 per unit.
d.
d. $3.00 per unit.
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The correct answer is: c. $2.00 per unit.
Question 47
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47. Refer to Figure 6-8. The burden of the tax on sellers is
Select one:
a.
a. $1.00 per unit.
b.
b. $1.50 per unit.
c.
c. $2.00 per unit.
d.
d. $3.00 per unit.
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The correct answer is: a. $1.00 per unit.
Question 48
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48. Refer to Figure 6-12. In which market will the majority of
the tax burden fall on the buyer?
Select one:
a.
a. market (a)
b.
b. market (b)
c.
c. market (c)
d.
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The correct answer is: b. market (b)
Question 49
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49. Refer to Figure 6-12. In which market will the majority of

the tax burden fall on the seller?
Select one:
a.
a. market (a)
b.
b. market (b)
c.
c. market (c)
d.
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The correct answer is: a. market (a)
Question 50
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50. Suppose the demand curve for a good is very flat and the
supply curve for the good is very steep. If the government
taxes this good,
Select one:
a.
a. buyers and sellers will each share 50 percent of the burden, regardless of the slopes of the demand and supply
curves.
b.
b. sellers will bear a larger share of the tax burden and buyers will bear a smaller share of the burden.
c.
c. the distribution of the burden will depend upon whether the buyers or the sellers are required to send the tax to
the government.
d.
d. the amount of tax revenue collected by the government will depend upon whether the buyers or the sellers are
required to send the tax to the government.
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The correct answer is: b. sellers will bear a larger share of the tax burden and buyers will bear a smaller share of
the burden.
PROBLEM SET 3
Question 1
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1. A result of welfare economics is that the equilibrium price

of a product is considered to be the best price because it
Select one:
a.
a. maximizes total revenue for firms and maximizes the quantity supplied of the product.
b.
b. maximizes the combined welfare of buyers and sellers.
c.
c. minimizes costs and maximizes profits of sellers.
d.
d. minimizes the level of welfare payments to those who no longer live below the poverty line.
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The correct answer is: b. maximizes the combined welfare of buyers and sellers.
Question 2
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2. Refer to Figure 7-11. At the equilibrium, total surplus is

measured by the area
Select one:
a.
a. ACG.
b.
b. AFG.
c.
c. DBG.
d.
d. CFG.
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The correct answer is: a. ACG.
Question 3
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3. Refer to Figure 7-11. At the equilibrium, total surplus

amounts to
Select one:
a.
a. $64.
b.
b. $72.
c.
c. $96.
d.
d. $108.
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The correct answer is: d. $108.
Question 4
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4. Refer to Figure 7-11. The equilibrium allocation of

resources is
Select one:
a.
a. efficient because total surplus is maximized at the equilibrium.
b.
b. efficient because consumer surplus is maximized at the equilibrium.
c.
c. inefficient because consumer surplus is larger than producer surplus at the equilibrium.
d.
d. inefficient because total surplus is maximized when 10 units of output are produced and sold.
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The correct answer is: a. efficient because total surplus is maximized at the equilibrium.
Question 5
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5. Suppose a tax of $5 per unit is imposed on a good. The

supply curve and the demand curve are straight lines. The tax
decreases consumer surplus by $10,000 and it decreases
producer surplus by $15,000. The deadweight loss of the tax is
$2,500. From this information it follows that the tax decreased
the equilibrium quantity of the good
Select one:
a.
a. from 6,500 to 5,500.
b.
b. from 5,500 to 4,500.
c.
c. from 5,000 to 3,000.
d.
d. from 6,000 to 4,000.
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The correct answer is: b. from 5,500 to 4,500.
Question 6
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6. When the government places a tax on a product,
Select one:
a.
a. the cost of the tax to buyers and sellers is less than the revenue raised from the tax by the government.
b.
b. the cost of the tax to buyers and sellers is equal to the revenue raised from the tax by the government.
c.
c. the cost of the tax to buyers and sellers exceeds the revenue raised from the tax by the government.
d.
d. Without additional information, such as the elasticity of demand for this product, it is impossible to compare
the cost of a tax to buyers and sellers with tax revenue.
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The correct answer is: c. the cost of the tax to buyers and sellers exceeds the revenue raised from the tax by the
government.
Question 7
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7. Taxes cause deadweight losses because they

Select one:
a.
a. lead to losses in surplus for consumers and for producers that, when taken together, exceed tax revenue
collected by the government.
b.
b. distort incentives to both buyers and sellers.
c.
c. prevent buyers and sellers from realizing some of the gains from trade.
d.
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8.Refer to Figure 8-4. The tax is levied on
Select one:
a.
a.buyers only.
b.
b.sellers only.
c.
c.both buyers and sellers.
d.
d.This is impossible to determine from the figure.
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The correct answer is: d.This is impossible to determine from the figure.
Question 9
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9. Refer to Figure 8-4. Consumer surplus before the tax was
levied is represented by area
Select one:
a.
a.A.
b.
b.A + B + C.
c.
c.D + E + F.
d.
d.F.
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The correct answer is: b.A + B + C.
Question 10
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10. Refer to Figure 8-4. Producer surplus before the tax was
levied is represented by area
Select one:
a.
a.A.
b.
b.A + B + C.
c.
c.D + E + F.
d.
d.F.
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The correct answer is: c.D + E + F.
Question 11
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11. Refer to Figure 8-4. After the tax is levied, consumer
surplus is represented by area
Select one:
a.
a.A.
b.
b.A + B + C.
c.
c.D + E + F.
d.
d.F.
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The correct answer is: a.A.
Question 12
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12.Refer to Figure 8-4. After the tax is levied, producer
surplus is represented by area
Select one:
a.
a.A.
b.
b.A + B + C.
c.
c.D + E + F.
d.
d.F.
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The correct answer is: d.F.
Question 13
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13.Refer to Figure 8-4. The tax causes a reduction in

consumer surplus that is represented by area
Select one:
a.
a.A.
b.
b.B + C.
c.
c.D + E.
d.
d.F.
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The correct answer is: b.B + C.
Question 14
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14.Refer to Figure 8-4. The tax causes a reduction in producer

surplus that is represented by area
Select one:
a.
a.A.
b.
b.B + C.
c.
c.D + E.
d.
d.F.
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The correct answer is: c.D + E.
Question 15
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15.Refer to Figure 8-4. The benefit to the government is

Select one:
a.
a.measured by tax revenue and is represented by area A + B.
b.
b.measured by tax revenue and is represented by area B + D.
c.
c.measured by the net gain in total surplus and is represented by area B + D.
d.
d.measured by the net gain in total surplus and is represented by area D + E.
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The correct answer is: b.measured by tax revenue and is represented by area B + D.
Question 16
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16.Refer to Figure 8-4. The total surplus (consumer, producer,

and government) with the tax is represented by area
Select one:
a.
a.C + E.
b.
b.A + B + C.
c.
c.D + E + F.
d.
d.A + B + D + F.
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The correct answer is: d.A + B + D + F.
Question 17
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17.Refer to Figure 8-4. The loss in total welfare that results

from the tax is represented by area
Select one:
a.
a.A + B + D + F.
b.
b.A + B + C.
c.
c.D + E + F.
d.
d.C + E.
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The correct answer is: d.C + E.
Question 18
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18. Consider a good to which a per-unit tax applies. The size

of the deadweight that results from the tax is smaller, the
Select one:
a.
a. less elastic is the demand for the good.
b.
b. less elastic is the supply of the good.
c.
c. smaller is the amount of the tax.
d.
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Question 19
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1. Suppose Haiti has a comparative advantage over other

countries in producing sugar, but other countries have an
absolute advantage over Haiti in producing sugar. If trade in
sugar is allowed, Haiti
Select one:
a.
will import sugar.
b.
will export sugar.
c.
will either export sugar or export sugar, but it is not clear from the given information.
d.
would have nothing to gain either from exporting or importing sugar.
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The correct answer is: will export sugar.
Question 20
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10. When a country allows trade and becomes an exporter of a

good,
Select one:
a.
consumer surplus and producer surplus both increase.
b.
consumer surplus and producer surplus both decrease.
c.
consumer surplus increases and producer surplus decreases.
d.
consumer surplus decreases and producer surplus increases.
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The correct answer is: consumer surplus decreases and producer surplus increases.
Question 21
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11. When the nation of Econoland allows trade and becomes

an exporter of televisions,
Select one:
a.
residents of Econoland who produce televisions become worse off; residents of Econoland who buy televisions
become better off; and the economic well-being of Econoland rises.
b.
residents of Econoland who produce televisions become worse off; residents of Econoland who buy televisions
become better off; and the economic well-being of Econoland falls.
c.
residents of Econoland who produce televisions become better off; residents of Econoland who buy televisions
become worse off; and the economic well-being of Econoland rises.
d.
residents of Econoland who produce televisions become better off; residents of Econoland who buy televisions
become worse off; and the economic well-being of Econoland falls.
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The correct answer is: residents of Econoland who produce televisions become better off; residents of Econoland
who buy televisions become worse off; and the economic well-being of Econoland rises.
Question 22
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12. Refer to Figure 9-1. Without trade, consumer surplus is
Select one:
a.
$210.
b.
$245.
c.
$455.
d.
$490.
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The correct answer is: $245.
Question 23
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13. Refer to Figure 9-1. Without trade, producer surplus is

Select one:
a.
$210.
b.
$245.
c.
$455.
d.
$490.
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Question 24
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14. Refer to Figure 9-1. With free trade, this country will
Select one:
a.
import 40 baskets.
b.
import 70 baskets.
c.
export 35 baskets.
d.
export 65 baskets.
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The correct answer is: export 65 baskets.
Question 25
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15. Refer to Figure 9-1. If this country chooses to trade, the

price of baskets in this country will be
Select one:
a.
$10 and 40 baskets will be sold domestically.
b.
$10 and 105 baskets will be domestically.
c.
d.
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The correct answer is: $10 and 40 baskets will be sold domestically.
Question 26
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16. Refer to Figure 9-1. With free trade, consumer surplus is

Select one:
a.
$45.
b.
$80.
c.
$210.
d.
$245.
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17. Refer to Figure 9-1. With free trade, producer surplus is

Select one:
a.
$80.00.
b.
$210.00.
c.
$245.50.
d.
$472.50.
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The correct answer is: $472.50.
Question 28
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18. Refer to Figure 9-1. As a result of trade, total surplus
increases by
Select one:
a.
$80.
b.
$97.50.
c.
$162.50.
d.
$495.50.
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The correct answer is: $97.50.
Question 29
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19. Refer to Figure 9-1. This country

Select one:
a.
has a comparative advantage in baskets.
b.
should export baskets.
c.
is a price taker in the world economy.
d.
All of the above are correct.
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The correct answer is: All of the above are correct.
Question 30
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2. Suppose the United States exports cars to France and

imports cheese from Switzerland. This situation suggests that
Select one:
a.
the United States has a comparative advantage relative to Switzerland in producing cheese, and France has a
comparative advantage relative to the United States in producing cars.
b.
the United States has a comparative advantage relative to France in producing cars, and Switzerland has a
comparative advantage relative to the United States in producing cheese.
c.
the United States has an absolute advantage relative to Switzerland in producing cheese, and France has an
absolute advantage relative to the United States in producing cars.
d.
the United States has an absolute advantage relative to France in producing cars, and Switzerland has an absolute
advantage relative to the United States in producing cheese.
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The correct answer is: the United States has a comparative advantage relative to France in producing cars, and
Switzerland has a comparative advantage relative to the United States in producing cheese.
Question 31
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20. Refer to Figure 9-1. The world price for baskets represents
Select one:
a.
the demand for baskets from the rest of the world.
b.
the supply of baskets from the rest of the world.
c.
the level of inefficiency in the domestic market caused by trade.
d.
the gap between domestic quantity demanded and domestic quantity supplied and the resulting shortage.
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The correct answer is: the demand for baskets from the rest of the world.
Question 32
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21. Refer to Figure 9-1. At the world price and with free trade,
Select one:
a.
the domestic quantity of baskets demanded is greater than the domestic quantity of baskets supplied.
b.
the basket market is in equilibrium.
c.
the domestic demand for baskets is perfectly inelastic.
d.
both domestic producers of baskets and domestic consumers of baskets are better off than they were without free
trade.
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The correct answer is: the basket market is in equilibrium.
Question 33
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22. Refer to Figure 9-5. Without trade, the equilibrium price

of carnations is
Select one:
a.
$8 and the equilibrium quantity is 300.
b.
c.
d.
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The correct answer is: $8 and the equilibrium quantity is 300.
Question 34
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23. Refer to Figure 9-5. With trade and without a tariff,

Select one:
a.
the domestic price is equal to the world price.
b.
carnations are sold at $8 in this market.
c.
there is a shortage of 400 carnations in this market.
d.
this country imports 200 carnations.
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The correct answer is: the domestic price is equal to the world price.
Question 35
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24. Refer to Figure 9-5. Before the tariff is imposed, this
country
Select one:
a.
imports 200 carnations.
b.
imports 400 carnations.
c.
exports 200 carnations.
d.
exports 400 carnations.
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The correct answer is: imports 400 carnations.
Question 36
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25. Refer to Figure 9-5. The size of the tariff on carnations is

Select one:
a.
$8 per dozen.
b.
$6 per dozen.
c.
$4 per dozen.
d.
$2 per dozen.
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The correct answer is: $2 per dozen.
Question 37
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26. Refer to Figure 9-5. The imposition of a tariff on

carnations
Select one:
a.
increases the number of carnations imported by 100.
b.
increases the number of carnations imported by 200.
c.
decreases the number of carnations imported by 200.
d.
decreases the number of carnations imported by 400.
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The correct answer is: decreases the number of carnations imported by 200.
Question 38
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27. Refer to Figure 9-5. The amount of revenue collected by

the government from the tariff is
Select one:
a.
$200.
b.
$400.
c.
$500.
d.
$600.
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PROBLEM SET 4
Question 1
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1. Which of the following is an implicit cost? (i) the owner of

a firm forgoing an opportunity to earn a large salary working
for a Wall Street brokerage firm (ii) interest paid on the firm's
debt (iii) rent paid by the firm to lease office space
Select one:
a.
(ii) and (iii)
b.
(i) and (iii)
c.
(i) only
d.
(iii) only
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The correct answer is: (i) only
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2. (Scenario 13-2)
Zach took $400,000 out of the bank and used it to start his
new cookie business. The bank account pays 3 percent interest
per year. During the first year of his business, Zach sold 6,000
boxes of cookies for $2.50 per box. Also, during the first year,
the cookie business incurred costs that required outlays of
money amounting to $9,000.
Zach's accounting profit for the year was

Select one:
a.
$-494,000.
b.
$-6,000.
c.
$6,000.
d.
$12,000.
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The correct answer is: $6,000.
Question 3
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3.
(Scenario 13-2)
Zach took $400,000 out of the bank and used it to start his
new cookie business. The bank account pays 3 percent interest
per year. During the first year of his business, Zach sold 6,000
boxes of cookies for $2.50 per box. Also, during the first year,
the cookie business incurred costs that required outlays of
money amounting to $9,000.
Refer to Scenario 13-2. Zach's economic profit for the year

was
Select one:
a.
$-506,000.
b.
$-6,000.
c.
$3,000.
d.
$6,000.
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The correct answer is: $-6,000.
Question 4
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4. On a 100-acre farm, a farmer is able to produce 3,000

bushels of wheat when he hires 2 workers. He is able to
produce 4,400 bushels of wheat when he hires 3 workers.
Which of the following possibilities is consistent with the
property of diminishing marginal product?
Select one:
a.
The farmer is able to produce 5,600 bushels of wheat when he hires 4 workers.
b.
c.
d.
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The correct answer is: The farmer is able to produce 5,600 bushels of wheat when he hires 4 workers.
Question 5
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5. Refer to Figure 13-6. Which of the curves is most likely to

represent average total cost?
Select one:
a.
A
b.
B
c.
C
d.
D
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represent average variable cost?
Select one:
a.
A
b.
B
c.
C
d.
D
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The correct answer is: C
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represent marginal cost?
Select one:
a.
A
b.
B
c.
C
d.
D
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The correct answer is: A
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8. Refer to Table 13-7. What is the marginal cost of creating

the tenth instructional module in a given month?
Select one:
a.
$900
b.
$1,250
c.
$2,500
d.
$3,060
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The correct answer is: $2,500
Question 9
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9. Refer to Table 13-7. What is the average variable cost for

the month if six instructional modules are produced?
Select one:
a.
$180.00
b.
$533.33
c.
$700.00
d.
$713.33
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The correct answer is: $533.33
Question 10
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10. Refer to Table 13-7. What is the average fixed cost for the
month if nine instructional modules are produced?
Select one:
a.
$108.00
b.
$120.00
c.
$150.00
d.
$811.11
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The correct answer is: $120.00
Question 11
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11. Refer to Table 13-7. How many instructional modules are

produced when marginal cost is $1,300?
Select one:
a.
4
b.
5
c.
7
d.
8
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The correct answer is: 8
Question 12
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12. Refer to Table 13-7. One month, Teacher's Helper

produced 18 instructional modules. What was the average
fixed cost for that month?
Select one:
a.
$60
b.
$108
c.
$811
d.
It can't be determined from the information given.
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The correct answer is: $60
Question 13
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13. Refer to Figure 13-9. The three average total cost curves
on the diagram correspond to three different
Select one:
a.
time horizons.
b.
products.
c.
firms.
d.
factory sizes.
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The correct answer is: factory sizes.
Question 14
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14. Refer to Figure 13-9. The firm experiences economies of

scale if it changes its level of output
Select one:
a.
from Q1 to Q2.
b.
from Q2 to Q3.
c.
from Q3 to Q4.
d.
from Q4 to Q5.
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The correct answer is: from Q1 to Q2.
Question 15
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15. Refer to Figure 13-9. The firm experiences diseconomies

of scale if it changes its level of output
Select one:
a.
from Q1 to Q2.
b.
from Q2 to Q3.
c.
from Q3 to Q4.
d.
from Q4 to Q5.
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The correct answer is: from Q4 to Q5.
Question 16
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16. Some reasons that firms may experience diseconomies of

scale include that
Select one:
a.
the firm is too small to take advantage of specialization.
b.
large management structures may be bureaucratic and inefficient.
c.
if there are too many employees, the work place becomes crowded and people become less productive.
d.
average fixed costs begin to rise again.
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The correct answer is: large management structures may be bureaucratic and inefficient.
Question 17
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17. Refer to Figure 14-1. When price rises from P2 to P3, the
firm finds that
Select one:
a.
marginal cost exceeds marginal revenue at a production level of Q2.
b.
if it produces at output level Q3 it will earn a positive profit.
c.
expanding output to Q4 would leave the firm with losses.
d.
it could increase profits by lowering output from Q3 to Q2.
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The correct answer is: expanding output to Q4 would leave the firm with losses.
Question 18
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18. Refer to Figure 14-1. When price falls from P3 to P1, the
firm finds that
Select one:
a.
fixed cost is higher at a production level of Q1 than it is at Q3.
b.
it should produce Q1 units of output.
c.
it should produce Q3 units of output.
d.
it should shut down immediately.
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The correct answer is: it should shut down immediately.
Question 19
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19. Refer to Figure 14-1. When price rises from P3 to P4, the
firm finds that
Select one:
a.
fixed costs are lower at a production level of Q4.
b.
it can earn a positive profit by increasing production to Q4.
c.
profit is still maximized at a production level of Q3.
d.
average revenue exceeds marginal revenue at a production level of Q4.
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The correct answer is: it can earn a positive profit by increasing production to Q4.
Question 20
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20. A profit-maximizing firm in a competitive market will

always make marginal adjustments to production as long as
Select one:
a.
average revenue is greater than average total cost.
b.
average revenue is equal to marginal cost.
c.
marginal cost is greater than average total cost.
d.
price is above or below marginal cost.
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The correct answer is: price is above or below marginal cost.
Question 21
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21. The short-run supply curve for a firm in a perfectly

competitive market is
Select one:
a.
horizontal.
b.
likely to slope downward.
c.
determined by forces external to the firm.
d.
the portion of its marginal cost curve that lies above its average variable cost.
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The correct answer is: the portion of its marginal cost curve that lies above its average variable cost.
Question 22
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22. When price is below average variable cost, a firm in a

competitive market will
Select one:
a.
shut down and incur fixed costs.
b.
shut down and incur both variable and fixed costs.
c.
continue to operate as long as average revenue exceeds marginal cost.
d.
continue to operate as long as average revenue exceeds average fixed cost.
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The correct answer is: shut down and incur fixed costs.
Question 23
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23. Refer to Figure 14-4. When market price is P5, a profit-
maximizing firm's profits can be represented by the area
Select one:
a.
P5 x Q3.
b.
(P5 - P3) x Q2.
c.
(P5 - P4)x Q3.
d.
When market price is P5 there are no profits.
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The correct answer is: (P5 - P4)x Q3.
Question 24
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24. Refer to Figure 14-4. Firms would be encouraged to enter

this market for all prices that exceed
Select one:
a.
P1.
b.
P2.
c.
P3.
d.
None of the above is correct.
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The correct answer is: P3.
Question 25
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25. Refer to Figure 14-4. When market price is P2, a profit-

maximizing firm's losses can be represented by the area
Select one:
a.
(P3 - P2) x Q2.
b.
(P2 - P1) x Q2.
c.
At a market price of P2, the firm does not have losses.
d.
At a market price of P2 the firm has losses, but the reference points in the figure don't identify the losses.
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The correct answer is: At a market price of P2 the firm has losses, but the reference points in the figure don't
identify the losses.
Question 26
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1. Angelo is a wholesale meatball distributor. He sells his

meatballs to all the finest Italian restaurants in town. Nobody
can make meatballs like Angelo. As a result, his is the only
business in town that sells meatballs to restaurants. Assuming
that Angelo is maximizing his profit, which of the following
statements is true?
Select one:
a.
Meatball prices will be less than marginal cost.
b.
Meatball prices will equal marginal cost.
c.
Meatball prices will exceed marginal cost.
d.
Meatball prices will be a function of supply and demand and will therefore oscillate around marginal costs.
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The correct answer is: Meatball prices will exceed marginal cost.
Question 27
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10. Refer to Figure 15-3. Profit on a typical unit sold for a

profit-maximizing monopoly would equal
Select one:
a.
P2 - P1.
b.
P2 - P0.
c.
P3 - P2.
d.
P3 - P0.
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The correct answer is: P3 - P0.
Question 28
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11. What is the monopolist's profit under the following

conditions? The profit-maximizing price charged for goods
produced is $12. The intersection of the marginal revenue and
marginal cost curves occurs where output is 10 units and
marginal cost is $6. Average total cost for 10 units of output is
$5.
Select one:
a.
$60
b.
$70
c.
$100
d.
$120
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12. Suppose when a monopolist produces 50 units its average
revenue is $8 per unit, its marginal revenue is $4 per unit, its
marginal cost is $4 per unit, and its average total cost is $3 per
unit. What can we conclude about this monopolist?
Select one:
a.
The monopolist is currently maximizing profits and its total profits are $200.
b.
The monopolist is currently maximizing profits and its total profits are $250.
c.
The monopolist is not currently maximizing its profits; it should produce more units and charge a lower price to
maximize profit.
d.
The monopolist is not currently maximizing its profits; it should produce fewer units and charger a higher price
to maximize profit.
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The correct answer is: The monopolist is currently maximizing profits and its total profits are $250.
Question 30
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13. The economic inefficiency of a monopolist can be

measured by the
Select one:
a.
number of consumers who are unable to purchase the product because of its high price.
b.
excess profit generated by monopoly firms.
c.
poor quality of service offered by monopoly firms.
d.
deadweight loss.
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The correct answer is: deadweight loss.
Question 31
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14. Price discrimination requires the firm to

Select one:
a.
separate customers according to their willingness to pay.
b.
differentiate between different units of its product.
c.
engage in arbitrage.
d.
use coupons.
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The correct answer is: separate customers according to their willingness to pay.
Question 32
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15. Price discrimination

Select one:
a.
forces monopolies to charge a lower price as a result of government regulation.
b.
is an attempt by a monopoly to prevent some customers from purchasing its product by charging a high price.
c.
is an attempt by a monopoly to increases its profit by selling the same good to different customers at different
prices.
d.
increases the consumer surplus associated with a monopolistic market.
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The correct answer is: is an attempt by a monopoly to increases its profit by selling the same good to different
customers at different prices.
Question 33
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2. Which of the following statements is (are) true of a

monopoly? (i) A monopoly has the ability to set the price of its
product at whatever level it desires. (ii) A monopoly's total
revenue will always increase when it increases the price of its
product. (iii) A monopoly can earn unlimited profits.
Select one:
a.
(i) only
b.
(ii) only
c.
(i) and (ii)
d.
(ii) and (iii)
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The correct answer is: (i) only
Question 34
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3. Which of the following is an example of a barrier to entry?

(i) A key resource is owned by a single firm.(ii) The costs of
production make a single producer more efficient than a large
number of producers.(iii) The government has given the
existing monopoly the exclusive right to produce the good.
Select one:
a.
(i) and (ii)
b.
(ii) and (iii)
c.
(i) only
d.
All of the above are examples of barriers to entry.
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The correct answer is: All of the above are examples of barriers to entry.
Question 35
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4. Because monopoly firms do not have to compete with other

firms, the outcome in a market with a monopoly is often
Select one:
a.
not in the best interest of society.
b.
one that fails to maximize total economic well-being.
c.
inefficient.
d.
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5. Allowing an inventor to have the exclusive rights to market

her new invention will lead to(i) a product that is priced higher
than it would be without the exclusive rights.(ii) desirable
behavior in the sense that inventors are encouraged to invent.
(iii) higher profits for the inventor.
Select one:
a.
(i) and (ii)
b.
(ii) and (iii)
c.
(i) and (iii)
d.
(i), (ii), and (iii)
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The correct answer is: (i), (ii), and (iii)
Question 37
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6. A natural monopolist's ability to price its product is

Select one:
a.
constrained by the market demand curve.
b.
constrained by market supply.
c.
not affected by market demand.
d.
enhanced by regulatory control of the government.
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The correct answer is: constrained by the market demand curve.
Question 38
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7. Refer to Figure 15-3. A profit-maximizing monopoly's total

revenue is equal to
Select one:
a.
P3 × Q2.
b.
P2 × Q4.
c.
(P3 - P0) × Q2.
d.
(P3 - P0) × Q4.
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The correct answer is: P3 × Q2.
Question 39
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8. Refer to Figure 15-3. A profit-maximizing monopoly's total

cost is equal to
Select one:
a.
(P1 - P0) × Q2.
b.
P0 × Q1.
c.
P0 × Q2.
d.
P0 × Q3.
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The correct answer is: P0 × Q2.
Question 40
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9. Refer to Figure 15-3. A profit-maximizing monopoly's

profit is equal to
Select one:
a.
P3 × Q2.
b.
P2 × Q4.
c.
(P3 - P0) × Q2.
d.
(P3 - P0) × Q4.
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The correct answer is: (P3 - P0) × Q2.
PROBLEM SET 5
Question 1
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16. In a market that is characterized by imperfect competition,

Select one:
a.
firms are price takers.
b.
there are always a large number of firms.
c.
there are at least a few firms that compete with one another.
d.
the actions of one firm in the market never have any impact on the other firms' profits.
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The correct answer is: there are at least a few firms that compete with one another.
Question 2
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17. There are two types of imperfectly competitive markets:

Select one:
a.
monopoly and monopolistic competition.
b.
monopoly and oligopoly.
c.
monopolistic competition and oligopoly.
d.
monopolistic competition and cartels.
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The correct answer is: monopolistic competition and oligopoly.
Question 3
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18. When an industry has many firms, the industry is

Select one:
a.
an oligopoly if the firms sell differentiated products, but it is monopolistically competitive if the firms sell
identical products.
b.
an oligopoly if the firms sell differentiated products, but it is perfectly competitive if the firms sell identical
products.
c.
monopolistically competitive if the firms sell differentiated products, but it is perfectly competitive if the firms
sell identical products.
d.
perfectly competitive if the firms sell differentiated products, but it is monopolistically competitive if the firms
sell identical products.
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The correct answer is: monopolistically competitive if the firms sell differentiated products, but it is perfectly
competitive if the firms sell identical products.
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19. The cigarette industry consists of large firms that compete

vigorously through advertising which is directed at creating
fantasy and image. Economists would characterize this
industry as
Select one:
a.
perfectly competitive.
b.
monopolistically competitive.
c.
an oligopoly.
d.
a monopoly.
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The correct answer is: an oligopoly.
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20. An oligopoly is a market in which

Select one:
a.
there are only a few sellers, each offering a product similar or identical to the products offered by other firms in
the market.
b.
firms are price takers.
c.
the actions of one seller in the market have no impact on the other sellers' profits.
d.
there are many price-taking firms, each offering a product similar or identical to the products offered by other
firms in the market.
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The correct answer is: there are only a few sellers, each offering a product similar or identical to the products
offered by other firms in the market.
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21. One key difference between an oligopoly market and a

competitive market is that oligopolistic firms
Select one:
a.
are price takers while competitive firms are not.
b.
can affect the profit of other firms in the market by the choices they make while firms in competitive markets do
not affect each other by the choices they make.
c.
sell completely unrelated products while competitive firms do not.
d.
sell their product at a price equal to marginal cost while competitive firms do not.
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The correct answer is: can affect the profit of other firms in the market by the choices they make while firms in
competitive markets do not affect each other by the choices they make.
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22. Refer to Table 16-1. What is the concentration ratio in

Industry A?
Select one:
a.
24%
b.
55%
c.
66%
d.
82%
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The correct answer is: 55%
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23. Refer to Table 16-1. What is the concentration ratio in

Industry B?
Select one:
a.
5%
b.
46%
c.
85%
d.
95%
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24. Refer to Table 16-1. Which industry has the highest

concentration ratio?
Select one:
a.
Industry A
b.
Industry B
c.
Industry C
d.
Industry D
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The correct answer is: Industry B
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25. The U.S. market for locomotives is divided between two

producers: General Electric has 70 percent of the market and
General Motors has 30 percent. This market is an example of
Select one:
a.
monopolistic competition.
b.
a collusive monopoly.
c.
a duopoly.
d.
a cartel.
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The correct answer is: a duopoly.
26. As a group, oligopolists would always be better off if they

would act collectively
Select one:
a.
as if they were each seeking to maximize their own individual profits.
b.
in a manner that would prohibit collusive agreements.
c.
as a single monopolist.
d.
as a single perfectly competitive firm.
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The correct answer is: as a single monopolist.
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27. As a group, oligopolists would always earn the highest
profit if they would
Select one:
a.
produce the perfectly competitive quantity of output.
b.
produce more than the perfectly competitive quantity of output.
c.
charge the same price that a monopolist would charge if the market were a monopoly.
d.
operate according to their own individual self-interests.
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The correct answer is: charge the same price that a monopolist would charge if the market were a monopoly.
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28. In order to be successful, a cartel must

Select one:
a.
find a way to encourage members to produce more than they would otherwise produce.
b.
agree on the total level of production for the cartel, but they need not agree on the amount produced by each
member.
c.
agree on the total level of production and on the amount produced by each member.
d.
agree on the prices charged by each member, but they need not agree on amounts produced.
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The correct answer is: agree on the total level of production and on the amount produced by each member.
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29. Which of these situations produces the largest profits for

oligopolists?
Select one:
a.
The firms reach a Nash equilibrium.
b.
The firms reach the monopoly outcome.
c.
The firms reach the competitive outcome.
d.
The firms produce a quantity of output that lies between the competitive outcome and the monopoly outcome.
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The correct answer is: The firms reach the monopoly outcome.
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30. OPEC can be classified as a (i) group whose concern is to

control production levels of oil.(ii) cartel. (iii) resale price
maintenance group.
Select one:
a.
(i) and (ii)
b.
(ii)and (iii)
c.
(i) and (iii)
d.
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The correct answer is: (i) and (ii)
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Scenario 16-2
Imagine that two oil companies, Big Petro Inc. and
Gargantuan Gas, own adjacent oil fields. Under the fields is a
common pool of oil worth $48 million. Drilling a well to
recover oil costs $2 million per well. If each company drills
one well, each will get half of the oil and earn a $22 million
profit ($24 million in revenue - $2 million in costs). Assume
that having X percent of the total wells means that a company
will collect X percent of the total revenue.
31. Refer to Scenario 16-2. If Big Petro Inc. were to drill a

second well, what would its profit be if Gargantuan Gas did
not drill a second well?
Select one:
a.
$22 million
b.
$24 million
c.
$26 million
d.
$28 million
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The correct answer is: $28 million
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33. Scenario 16-2 Imagine that two oil companies, Big Petro
Inc. and Gargantuan Gas, own adjacent oil fields. Under the
fields is a common pool of oil worth $48 million. Drilling a
well to recover oil costs $2 million per well. If each company
drills one well, each will get half of the oil and earn a $22
million profit ($24 million in revenue - $2 million in costs).
Assume that having X percent of the total wells means that a
company will collect X percent of the total revenue. Refer to
Scenario 16-2. Gargantuan Gas's dominant strategy would
lead to what sort of well-drilling behavior?
Select one:
a.
Gargantuan Gas will never drill a second well.
b.
Gargantuan Gas will always drill a second well.
c.
Gargantuan Gas will drill a second well only if Big Petro Inc. drills a well.
d.
Gargantuan Gas will drill a second well only if Big Petro Inc. does not drill a well.
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The correct answer is: Gargantuan Gas will always drill a second well.
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32. Scenario 16-2 Imagine that two oil companies, Big Petro
Inc. and Gargantuan Gas, own adjacent oil fields. Under the
fields is a common pool of oil worth $48 million. Drilling a
well to recover oil costs $2 million per well. If each company
drills one well, each will get half of the oil and earn a $22
million profit ($24 million in revenue - $2 million in costs).
Assume that having X percent of the total wells means that a
company will collect X percent of the total revenue. Refer to
Scenario 16-2. If Big Petro Inc. were to drill a second well and
Gargantuan Gas also drilled a second well, what would Big
Petro Inc's profit be?
Select one:
a.
$16 million
b.
$18 million
c.
$20 million
d.
$22 million
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The correct answer is: $20 million
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34. Antitrust laws in general are used to

Select one:
a.
prevent oligopolists from acting in ways that make markets less competitive.
b.
encourage oligopolists to pursue cooperative-interest at the expense of self-interest.
c.
encourage frivolous lawsuits among competitive firms.
d.
encourage all firms to cut production levels and cut prices.
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The correct answer is: prevent oligopolists from acting in ways that make markets less competitive.
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35. Assume that Peach Computers has entered into a resale

price maintenance agreement with Computer Super Stores Inc.
(CSS Inc.) but not with CompuMart. In this case,
Select one:
a.
the wholesale price of Peach computers will be different for CSS Inc. than it is for CompuMart.
b.
Peach computers will never increase profits by having a resale price maintenance agreement with all retail
outlets that sell its products.
c.
CompuMart will benefit from customers who go to CSS Inc. for information about different computers.
d.
CSS Inc. will sell Peach computers at a lower price than CompuMart.
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The correct answer is: CompuMart will benefit from customers who go to CSS Inc. for information about
different computers.
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36. Refer to Table 16-3. If there is only one digital cable TV

company in this market, what price would it charge for a
premium digital channel subscription to maximize its profit?
Select one:
a.
$40
b.
$60
c.
$80
d.
$100
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37. Refer to Table 16-3. Assume that there are two digital
cable TV companies operating in this market. If they are able
to collude on the price and quantity of subscriptions to sell,
what price (P) will they charge, and how many subscriptions
(Q) will they sell collectively?
Select one:
a.
P = $40, Q = 12,000
b.
P = $60, Q = 9,000
c.
P = $80, Q = 6,000
d.
P = $100, Q = 3,000
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The correct answer is: P = $60, Q = 9,000
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38. Refer to Table 16-3. Assume that there are two profit-
maximizing digital cable TV companies operating in this
market. Further assume that they are able to collude on the
price and quantity of premium digital channel subscriptions to
sell. As part of their collusive agreement they decide to take
an equal share of the market. How much profit will each
company make?
Select one:
a.
$40,000
b.
$170,000
c.
$480,000
d.
$540,000
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market. Further assume that they are not able to collude on the
sell. How many premium digital channel cable TV
subscriptions will be sold altogether when this market reaches
a Nash equilibrium?
Select one:
a.
3,000
b.
6,000
c.
9,000
d.
12,000
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The correct answer is: 12,000
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sell. What price will premium digital channel cable TV
subscriptions be sold at when this market reaches a Nash
equilibrium?
Select one:
a.
$40
b.
$60
c.
$80
d.
$100
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sell. How much profit will each firm earn when this market
reaches a Nash equilibrium?
Select one:
a.
$0
b.
$140,000
c.
$170,000
d.
$220,000
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42. Suppose a market is initially perfectly competitive with

many firms selling an identical product. Over time, however,
suppose the merging of firms results in the market being
served by only three or four firms selling this same product.
As a result, we would expect
Select one:
a.
an increase in market output and an increase in the price of the product.
b.
an increase in market output and an decrease in the price of the product.
c.
a decrease in market output and an increase in the price of the product.
d.
a decrease in market output and a decrease in the price of the product.
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The correct answer is: a decrease in market output and an increase in the price of the product.
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44. Refer to Table 16-8. Pursuing its own best interests, Firm
A will concede that cigarette smoke causes lung cancer
Select one:
a.
only if Firm B concedes that cigarette smoke causes lung cancer.
b.
only if Firm B does not concede that cigarette smoke causes lung cancer.
c.
regardless of whether Firm B concedes that cigarette smoke causes lung cancer.
d.
None of the above. In pursuing its own best interests, Firm A will in no case concede that cigarette smoke causes
lung cancer.
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The correct answer is: None of the above. In pursuing its own best interests, Firm A will in no case concede that
cigarette smoke causes lung cancer.
Question 29
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45. Refer to Table 16-8. When this game reaches a Nash

equilibrium, profits for Firm A and Firm B will be
Select one:
a.
$-5 and $-50, respectively.
b.
c.
d.
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The correct answer is: $-10 and $-10, respectively.
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43. The theory of oligopoly provides another reason that free

trade can benefit all countries because (i) as the number of
firms within a given market increases, the price of the good
falls. (ii) increased competition leads to smaller deadweight
losses. (iii) profit increases with the level of competition for
oligopoly firms.
Select one:
a.
(i) only
b.
(ii) only
c.
(i) and (ii)
d.
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The correct answer is: (i) and (ii)
46. Monopolistic competition differs from perfect competition

because in monopolistically competitive markets
Select one:
a.
a.there are barriers to entry.
b.
b.all firms can eventually earn economic profits.
c.
c.each of the sellers offers a somewhat different product.
d.
d.strategic interactions between firms is vitally important.
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The correct answer is: c.each of the sellers offers a somewhat different product.
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2. A profit-maximizing firm in a monopolistically competitive

market differs from a firm in a perfectly competitive market
because the firm in the monopolistically competitive market
Select one:
a.
a.is characterized by market-share maximization.
b.
b.has no barriers to entry.
c.
c.faces a downward-sloping demand curve for its product.
d.
d.faces a horizontal demand curve at the market clearing price.
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The correct answer is: c.faces a downward-sloping demand curve for its product.
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48. In monopolistically competitive markets, free entry and
exit suggests that
Select one:
a.
a.the market structure will eventually be characterized by perfect competition in the long run.
b.
b.all firms earn zero economic profits in the long run.
c.
c.some firms will be able to earn economic profits in the long run.
d.
d.some firms will be forced to incur economic losses in the long run.
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The correct answer is: b.all firms earn zero economic profits in the long run.
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49. If firms in a monopolistically competitive market are

earning positive profits, then
Select one:
a.
a.firms will likely be subject to regulation.
b.
b.barriers to entry will be strengthened.
c.
c.some firms must exit the market.
d.
d.new firms will enter the market.
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The correct answer is: d.new firms will enter the market.
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50. In the long run, a firm in a perfectly competitive market

operates
Select one:
a.
a.at its efficient scale and a monopolistically competitive firm operates at efficient scale.
b.
b.at its efficient scale and a monopolistically competitive firm operates with excess capacity.
c.
c.with excess capacity and a monopolistically competitive firm operates with excess capacity.
d.
d.with excess capacity and a monopolistically competitive firm operates at its efficient scale.
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The correct answer is: b.at its efficient scale and a monopolistically competitive firm operates with excess
capacity.
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Figure 17-2
51. Refer to Figure 17-2. Which of the graphs shown would be

consistent with a firm in a monopolistically competitive
market that is earning a positive profit?
Select one:
a.
a.Panel a
b.
b.Panel b
c.
c.Panel c
d.
d.Panel d
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The correct answer is: c.Panel c
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52. Refer to Figure 17-2. Which of the graphs shown would be

consistent with a firm in a monopolistically competitive
market that is doing its best but still losing money?
Select one:
a.
a.Panel a
b.
b.Panel b
c.
c.Panel c
d.
d.Panel d
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53. Refer to Figure 17-2. Which of the graphs depicts a

monopolistically competitive firm in long-run equilibrium?
Select one:
a.
a.Panel a
b.
b.Panel b
c.
c.Panel c
d.
d.None of the above is correct.
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The correct answer is: d.None of the above is correct.
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Figure 17-4
54. Refer to Figure 17-4. Panel (a) shows a profit-maximizing

monopolistically competitive firm that is
Select one:
a.
a.earning zero economic profit.
b.
b.likely to exit the market in the long run.
c.
c.producing its efficient scale of output.
d.
d.not maximizing its profit.
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The correct answer is: a.earning zero economic profit.
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55. Refer to Figure 17-4. Which of the panels shown could

illustrate the short-run situation for a monopolistically
competitive firm?
Select one:
a.
a.Panel a
b.
b.Panel b
c.
c.Panel c
d.
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Figure 17-4
56. Refer to Figure 17-4. Panel (b) is consistent with a firm in
a monopolistically competitive market that is
Select one:
a.
a.not in long-run equilibrium.
b.
b.in long-run equilibrium.
c.
c.producing its efficient scale of output.
d.
d.earning a positive economic profit.
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The correct answer is: a.not in long-run equilibrium.
57.When existing firms lose customers and profits due to entry

of a new competitor, a
Select one:
a.
a.predatory-pricing externality occurs.
b.
b.consumption externality occurs.
c.
c.business-stealing externality occurs.
d.
d.product-variety externality occurs.
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The correct answer is: c.business-stealing externality occurs.
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58.When a new firm enters a monopolistically competitive

market, the individual demand curves faced by all existing
firms in that market will
Select one:
a.
a.shift to the left.
b.
b.shift to the right.
c.
c.shift in a direction that is unpredictable without further information.
d.
d.remain unchanged. It is the supply curve that will shift.
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The correct answer is: a.shift to the left.
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Figure 17-5
59. Refer to Figure 17-5. This figure depicts a situation in a
monopolistically competitive market. What price will the
monopolistically competitive firm charge in this market?
Select one:
a.
a.$60
b.
b.$70
c.
c.$75
d.
d.$80
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The correct answer is: d.$80
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monopolistically competitive market. How much consumer
surplus will be derived from the purchase of this product at the
monopolistically competitive price?
Select one:
a.
a.$200.00
b.
b.$312.50
c.
c.$400.00
d.
d.$800.00
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The correct answer is: a.$200.00
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monopolistically competitive market. How much profit will
the monopolistically competitive firm earn in this situation?
Select one:
a.
a.A $10 profit.
b.
b.A $20 profit.
c.
c.A $200 profit.
d.
d.No profit, since monopolistically competitive firms never earn economic profit.
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The correct answer is: c.A $200 profit.
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monopolistically competitive market. How much output will
the monopolistically competitive firm produce in this
situation?
Select one:
a.
a.20 units
b.
b.25 units
c.
c.40 units
d.
d.No output, since producing in this situation will result in a loss for the firm.
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The correct answer is: a.20 units
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63. Your company has recently requested that you travel to

Dhaka, Bangladesh, to work on negotiations for a new factory
to be located in one of the port cities. Your travel agent
provides a list of several hundred local hotels, and a Sheraton.
In this case, the Sheraton brand-name is likely to be used as a
signal of
Select one:
a.
a.perceived differences that are not likely to exist among your various options.
b.
b.quality when quality cannot be easily judged.
c.
c.inefficiency in markets characterized by recognizable brand names.
d.
d.the quality of general lodging accommodations in Dhaka.
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The correct answer is: b.quality when quality cannot be easily judged.
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64. A recent outbreak of hepatitis was linked to a national fast-
food restaurant chain. This is an example of a case in which
Select one:
a.
a.brand name identity increases the effectiveness of markets.
b.
b.brand name identity can be detrimental to the profitability of a firm.
c.
c.advertising is ineffective in salvaging perceptions of product quality.
d.
d.advertising cannot be used to establish brand loyalty.
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The correct answer is: b.brand name identity can be detrimental to the profitability of a firm.
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65. Firm A produces and sells in a market that is characterized

by highly differentiated consumer goods. Firm B produces and
sells industrial products. Firm C produces and sells an
agricultural commodity. Which firm is likely to spend the
greatest portion of its total revenue on advertising?
Select one:
a.
a.Firm A
b.
b.Firm B
c.
c.Firm C
d.
d.There is no reason to believe that any one of the three firms would spend a greater portion of its total revenue
on advertising than the other two firms.
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1. A budget constraint
Select one:
a.
a.shows the prices that a consumer chooses to pay for products he consumes.
b.
b.shows the purchases made by consumers.
c.
c.shows the consumption bundles that a consumer can afford.
d.
d.represents the consumption bundles that give a consumer equal satisfaction.
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The correct answer is: c.shows the consumption bundles that a consumer can afford.
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10. Refer to Figure 21-4. Which of the following statements is

true for a consumer who moves from point A to point D?
Select one:
a.
a.It is difficult to compare the level of consumer satisfaction between points D and A.
b.
b.The consumer is indifferent between point A and point D.
c.
c.The consumer is definitely worse off.
d.
d.The consumer is likely to place a higher relative value on Twinkies at point A than at point D.
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Figure 21-4
11. Refer to Figure 21-4. A person that chooses to consume
bundle C is likely to
Select one:
a.
a.receive higher total satisfaction at point C than at point A.
b.
b.spend more on bundle C than bundle A.
c.
c.receive higher marginal utility from Ho-Ho's than from Twinkies.
d.
d.receive higher marginal utility from Twinkies than from Ho-Ho's.
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The correct answer is: d.receive higher marginal utility from Twinkies than from Ho-Ho's.
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Figure 21-6
12. Refer to Figure 21-6. The consumer is likely to select the
consumption bundle at
Select one:
a.
a.point B
b.
b.point C
c.
c.point D
d.
d.point E
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The correct answer is: b.point C
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13. Refer to Figure 21-6. It would be possible for the

consumer to reach I2 if
Select one:
a.
a.the price of Y decreases.
b.
b.the price of X decreases.
c.
c.income increases.
d.
d.All of the above would be correct.
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Figure 21-8
14. Refer to Figure 21-8. If the consumer is currently at point

A in the figure, a movement to point B as a result of a
decrease in the price of potato chips represents the
Select one:
a.
a.substitution effect.
b.
b.income effect.
c.
c.budget effect.
d.
d.price effect.
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Question 57
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15. Refer to Figure 21-8. If the consumer was initially at point

A in the figure, a movement from point B to point C as a result
of a decrease in the price of potato chips represents the
Select one:
a.
a.substitution effect.
b.
b.income effect.
c.
c.budget effect.
d.
d.price effect.
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Question 58
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Figure 21-9
16. Refer to Figure 21-9. Assume that the consumer depicted
in the figure has an income of $40, the price of a bag of
marshmallows is $2, and the price of a bag of chocolate chips
is $2. The optimizing consumer will choose to purchase which
bundle of marshmallows and chocolate chips?
Select one:
a.
a.bundle A
b.
b.bundle B
c.
c.bundle C
d.
d.bundle D
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Question 59
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in the figure has an income of $100 and currently optimizes at
point A. When the price of marshmallows decreases to $5,
which point will the optimizing consumer choose?
Select one:
a.
a.Point A
b.
b.Point B
c.
c.Point C
d.
d.Point D
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Question 60
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in the figure has an income of $40. If the price of chocolate
chips is $4.00 and the price of marshmallows is $4.00, the
optimizing consumer would choose to purchase
Select one:
a.
a.9 marshmallows and 6 chocolate chips.
b.
b.10 marshmallows and 10 chocolate chips.
c.
c.5 marshmallows and 5 chocolate chips.
d.
d.3 marshmallows and 9 chocolate chips.
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Question 61
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in the figure has an income of $80. If the price of chocolate
chips is $4.00 and the price of marshmallows is $4.00, the
optimizing consumer would choose to purchase
Select one:
a.
a.9 marshmallows and 6 chocolate chips.
b.
b.10 marshmallows and 10 chocolate chips.
c.
c.5 marshmallows and 5 chocolate chips.
d.
d.3 marshmallows and 9 chocolate chips.
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The correct answer is: b.10 marshmallows and 10 chocolate chips.
Question 62
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20.Refer to Figure 21-9. Assume that the consumer depicted

in the figure has an income of $40. Which of the following
price-quantity combinations would be on her demand curve
for marshmallows if the price of chocolate chips is $4?
Select one:
a.
a.$2.00, 3
b.
b.$2.00, 9
c.
c.$4.00, 3
d.
d.$4.00, 9
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Question 63
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22.Assume that a college student spends her income on books

and pizza. The price of a pizza is $8.00, and the price of a
book is $15. If she has $100 of income, she could choose to
consume
Select one:
a.
a.8 pizzas and 4 books.
b.
b.4 pizzas and 5 books.
c.
c.9 pizzas and 3 books.
d.
d.4 pizzas and 3 books.
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The correct answer is: d.4 pizzas and 3 books.
Question 64
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Figure 21-2
3.Refer to Figure 21-2. Which of the graphs in the figure
reflects a decrease in the price of good X only?
Select one:
a.
a.graph (a)
b.
b.graph (b)
c.
c.graph (c)
d.
d.graph (d)
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Question 65
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4. Refer to Figure 21-2. Which of the graphs in the figure

reflects an increase in the price of good Y only?
Select one:
a.
a.graph (a)
b.
b.graph (b)
c.
c.graph (c)
d.
d.graph (d)
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Question 66
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5. Refer to Figure 21-2. Which of the graphs in the figure

could reflect a decrease in the prices of both goods?
Select one:
a.
a.graph (a)
b.
b.graph (b)
c.
c.graph (c)
d.
d.graph (d)
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The correct answer is: d.graph (d)
Question 67
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6. The slope of the budget constraint is determined by the

Select one:
a.
a.relative price of the goods measured on the axes.
b.
b.relative price of the goods measured on the axes and the consumer's income.
c.
c.endowment of productive resources.
d.
d.preferences of the consumer.
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The correct answer is: a.relative price of the goods measured on the axes.
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Figure 21-4

correct?
Select one:
a.
a.Point A is preferred equally to point E.
b.
b.Point A is preferred equally to point C.
c.
c.The bundle associated with point B contains more Ho-Ho's than that associated with point C.
d.
d.The bundles along indifference curve I1 are preferred to those along indifference curve I2
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The correct answer is: b.Point A is preferred equally to point C.
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true?
Select one:
a.
a.If a consumer moves from point C to point A, her loss of Ho-Ho's cannot be compensated for by an increase in
Twinkies.
b.
b.Point E is preferred to all other points identified in the figure.
c.
c.Since more is preferred to less, point C may be preferred to point E in some circumstances for this consumer.
d.
d.Even though point E has more of both goods than point B, we could draw a different set of indifference curves
in which point B is preferred to point E.
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not true for a consumer who moves from point B to point C?
Select one:
a.
a.At point C the consumer would be willing to give up a larger number of Ho-Hos in exchange for a Twinkie
than at point B.
b.
b.The marginal rate of substitution at points C and B are the same since the points lie on the same indifference
curve.
c.
c.The consumer is willing to sacrifice Twinkies to obtain Ho-Ho's.
d.
d.The consumer receives the same level of satisfaction at points B and C.
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The correct answer is: b.The marginal rate of substitution at points C and B are the same since the points lie on
the same indifference curve.
PROBLEM SET 6
Question 1
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1. Which of the following is not included in GDP?

Select one:
a.
a.unpaid cleaning and maintenance of houses
b.
b.services such as those provided by lawyers and hair stylists
c.
c.the estimated rental value of owner-occupied housing
d.
d.production of foreign citizens living in the United States
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The correct answer is: a.unpaid cleaning and maintenance of houses
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2. Which of the following transactions adds to U.S. GDP for

2006?
Select one:
a.
a.In 2006, Ashley sells a car that she bought in 2002 to William for $5,000.
b.
b.An American management consultant works in Mexico during the summer of 2006 and earns the equivalent of
$30,000 during that time.
c.
c.When John and Jennifer were both single, they lived in separate apartments and each paid $750 in rent. John
and Jennifer got married in 2006 and they bought a house that, according to reliable estimates, could be rented
for $1,600 per month.
d.
d.None of the above transactions adds to GDP for 2006.
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The correct answer is: c.When John and Jennifer were both single, they lived in separate apartments and each
paid $750 in rent. John and Jennifer got married in 2006 and they bought a house that, according to reliable
estimates, could be rented for $1,600 per month.
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3. Over time, people have come to rely more on market-

produced goods and less on goods that 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
Select one:
a.
a.caused GDP to fall.
b.
b.not caused any change in GDP.
c.
c.caused GDP to rise.
d.
d.probably changed GDP, but in an uncertain direction; the direction of the change depends on the difference in
the quality of the cleaning that has resulted.
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The correct answer is: c.caused GDP to rise.
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4. A steel company sells some steel to a bicycle company for

$100. The bicycle company uses the steel to produce a
bicycle, which it sells for $200. Taken together, these two
transactions contribute
Select one:
a.
a.$100 to GDP.
b.
b.$200 to GDP.
c.
c.between $200 and $300 to GDP, depending on the profit earned by the bicycle company when it sold the
bicycle.
d.
d.$300 to GDP.
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The correct answer is: b.$200 to GDP.
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5. Grapes are
Select one:
a.
a.always counted as an intermediate good.
b.
b.counted as an intermediate good only if they are used to produce another good such as wine.
c.
c.counted as an intermediate good only if they are consumed.
d.
d.counted as an intermediate good, whether they are used to produce another good or consumed.
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The correct answer is: b.counted as an intermediate good only if they are used to produce another good such as
wine.
Question 6
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6. The local Chevrolet dealership has an increase in inventory

of 25 cars in 2006. In 2007 it sells all 25 cars. Which of the
following statements is correct?
Select one:
a.
a.The full value of the increased inventory will be counted as part of GDP in 2006, and the value of the cars sold
in 2007 will not cause 2007 GDP to increase.
b.
b.The value of the increased inventory will not affect 2006 GDP; instead, the full value of the inventory will be
counted as part of 2007 GDP.
c.
c.The value of the increased inventory will be counted as part of 2006 GDP and the value of the cars sold in
2007 will increase 2007 GDP.
d.
d.One-half of the value of the increased inventory will be counted as part of 2006 GDP and the other one-half of
the value will be counted as part of 2007 GDP.
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The correct answer is: a.The full value of the increased inventory will be counted as part of GDP in 2006, and
the value of the cars sold in 2007 will not cause 2007 GDP to increase.
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7. Until recently, George lived in a home that was newly

constructed in 2005. In 2005, he paid $200,000 for the brand
new house. He sold the house in 2006 for $225,0000. Which
of the following statements is correct regarding the sale of the
house?
Select one:
a.
a.The 2006 sale increased 2006 GDP by $225,000 and had no effect on 2005 GDP.
b.
b.The 2006 sale increased 2006 GDP by $25,000 and had no effect on 2005 GDP.
c.
c.The 2006 sale increased 2006 GDP by $225,000; furthermore, the 2006 sale caused 2005 GDP to be revised
upward by $25,000.
d.
d.The 2006 sale affected neither 2005 GDP nor 2006 GDP.
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The correct answer is: d.The 2006 sale affected neither 2005 GDP nor 2006 GDP.
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8. An American company operates a fast food restaurant in

Romania. Which of the following statements is accurate?
Select one:
a.
a.The value of the goods and services produced by the restaurant is included in both Romanian GDP and U.S.
GDP.
b.
b.One-half of the value of the goods and services produced by the restaurant is included in Romanian GDP, and
the other one-half of the value is included in U.S. GDP.
c.
c.The value of the goods and services produced by the restaurant is included in Romanian GDP, but not in U.S.
GDP.
d.
d.The value of the goods and services produced by the restaurant is included in U.S. GDP, but not in Romanian
GDP.
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The correct answer is: c.The value of the goods and services produced by the restaurant is included in Romanian
GDP, but not in U.S. GDP.
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9.U.S. GDP and U.S. GNP are related as follows:

Select one:
a.
a.GNP = GDP - Income earned by foreigners in the U.S. + Income earned by U.S. citizens abroad.
b.
b.GNP = GDP + Income earned by foreigners in the U.S. - Income earned by U.S. citizens abroad.
c.
c.GNP = GDP + Value of exported goods - Value of imported goods.
d.
d.GNP = GDP - Value of exported goods + Value of imported goods.
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The correct answer is: a.GNP = GDP - Income earned by foreigners in the U.S. + Income earned by U.S. citizens
abroad.
Question 10
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10. In a certain small country, the unit of currency is the huck.

That country's government recently announced that "GDP
amounted to 400 million hucks in the quarter that just ended."
Assuming this country has adopted American GDP accounting
conventions, this statement means that GDP,
Select one:
a.
a.without seasonal adjustment, amounted to 100 million hucks in the quarter that just ended.
b.
b.with seasonal adjustment, amounted to 100 million hucks in the quarter that just ended.
c.
c.without seasonal adjustment, amounted to 400 million hucks in the quarter that just ended.
d.
d.with seasonal adjustment, amounted to 400 million hucks in the quarter that just ended.
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The correct answer is: b.with seasonal adjustment, amounted to 100 million hucks in the quarter that just ended.
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11. If you buy a burger and fries at your favorite fast food
restaurant,
Select one:
a.
a.neither GDP nor consumption will be affected because you would have eaten at home had you not bought the
meal at the restaurant.
b.
b.GDP will be higher, but consumption spending will be unchanged.
c.
c.GDP will be unchanged, but consumption spending will be higher.
d.
d.both GDP and consumption spending will be higher.
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The correct answer is: d.both GDP and consumption spending will be higher.
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12. For the purpose of calculating GDP, investment is

spending on
Select one:
a.
a.stocks, bonds, and other financial assets.
b.
b.real estate and financial assets.
c.
c.new capital equipment, inventories, and structures, including new housing.
d.
d.capital equipment, inventories, and structures, excluding household purchases of new housing.
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The correct answer is: c.new capital equipment, inventories, and structures, including new housing.
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13. The U.S. Air Force pays a Turkish citizen $30,000 to work
on a U.S. base in Turkey. As a result,
Select one:
a.
a.U.S. government purchases increase by $30,000; U.S. net exports decrease by $30,000; and U.S. GDP and
GNP are unaffected.
b.
b.U.S. government purchases increase by $30,000; U.S. GNP increases by $30,000; and U.S. GDP and U.S. net
exports are unaffected.
c.
c.U.S. government purchases; and U.S. net exports, GDP, and GNP are unaffected.
d.
d.U.S. government purchases increase by $30,000; U.S. net exports decrease by $30,000; U.S. GNP increases by
$30,000; and U.S. GDP is unaffected.
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The correct answer is: a.U.S. government purchases increase by $30,000; U.S. net exports decrease by $30,000;
and U.S. GDP and GNP are unaffected.
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14. If a U.S. citizen buys a television made in Korea by a

Korean firm,
Select one:
a.
a.U.S. net exports decrease and U.S. GDP decreases.
b.
b.U.S. net exports are unaffected and U.S. GDP decreases.
c.
c.U.S. net exports are unaffected and U.S. GDP is unaffected.
d.
d.U.S. net exports decrease and U.S. GDP is unaffected.
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The correct answer is: d.U.S. net exports decrease and U.S. GDP is unaffected.
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Table 23-3.
15. Refer to Table 23-3. Nominal GDP for 2007 is

Select one:
a.
a.$900.
b.
b.$1,100.
c.
c.$1,250.
d.
d.$1,350.
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The correct answer is: b.$1,100.
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16. Refer to Table 23-3. Nominal GDP is

Select one:
a.
a.$680 for 2006, $880 for 2007, and $1,200 for 2008.
b.
b.$760 for 2006, $880 for 2007, and $1,000 for 2008.
c.
c.$760 for 2006, $1,100 for 2007, and $1,600 for 2008.
d.
d.$960 for 2006, $1,280 for 2007, and $1,300 for 2008.
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The correct answer is: c.$760 for 2006, $1,100 for 2007, and $1,600 for 2008.
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17. Refer to Table 23-3. Using 2006 as the base year, for 2007,
Select one:
a.
a.real GDP is $880 and the GDP deflator is 80.
b.
b.real GDP is $880 and the GDP deflator is 125.
c.
c.real GDP is $950 and the GDP deflator is 95.
d.
d.real GDP is $950 and the GDP deflator is 116.
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The correct answer is: b.real GDP is $880 and the GDP deflator is 125.
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18. Refer to Table 23-3. Using 2007 as the base year, for 2006,
Select one:
a.
a.real GDP is $760 and the GDP deflator is 100.
b.
b.real GDP is $760 and the GDP deflator is 125.
c.
c.real GDP is $880 and the GDP deflator is 80.
d.
d.real GDP is $950 and the GDP deflator is 80.
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The correct answer is: d.real GDP is $950 and the GDP deflator is 80.
Question 19
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19. Refer to Table 23-3. Using the GDP deflator to measure

the average level of prices and using 2006 as the base year, the
economy's inflation rate is
Select one:
a.
a.20 percent for 2007 and 12.5 percent for 2008.
b.
b.20 percent for 2007 and 30 percent for 2008.
c.
c.25 percent for 2007 and 28 percent for 2008.
d.
d.44.7 percent for 2007 and 45.5 percent for 2008.
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The correct answer is: c.25 percent for 2007 and 28 percent for 2008.
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20. The consumer price index is used to

Select one:
a.
a.track changes in the level of wholesale prices in the economy.
b.
b.monitor changes in the cost of living.
c.
c.monitor changes in the level of real GDP.
d.
d.track changes in the stock market.
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The correct answer is: b.monitor changes in the cost of living.
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21. The term inflation is used to describe a situation in which

Select one:
a.
a.the overall level of prices in the economy is increasing.
b.
b.incomes in the economy are increasing.
c.
c.stock-market prices are rising.
d.
d.the economy is growing rapidly.
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The correct answer is: a.the overall level of prices in the economy is increasing.
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Table 24-4
The table below pertains to an economy with only two goods -
- books and calculators. The fixed basket consists of 5 books
and 10 calculators.
22. Refer to Table 24-4. Using 2006 as the base year, the
consumer price index is
Select one:
a.
a.100 in 2006, 135 in 2007, and 155 in 2008.
b.
b.100 in 2006, 270 in 2007, and 310 in 2008.
c.
c.200 in 2006, 270 in 2007, and 310 in 2008.
d.
d.200 in 2006, 540 in 2007, and 620 in 2008.
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The correct answer is: a.100 in 2006, 135 in 2007, and 155 in 2008.
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Select one:
a.
a.78.22 in 2006, 100 in 2007, and 121.10 in 2008.
b.
b.74.07 in 2006, 100 in 2007, and 114.81 in 2008.
c.
c.100 in 2006, 135 in 2007, and 155 in 2008.
d.
d.200 in 2006, 270 in 2007, and 310 in 2008.
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The correct answer is: b.74.07 in 2006, 100 in 2007, and 114.81 in 2008.
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Select one:
a.
a.52.66 in 2006, 84.25 in 2007, and 106.5 in 2008.
b.
b.64.52 in 2006, 87.10 in 2007, and 100 in 2008.
c.
c.52.66 in 2006, 90.89 in 2007, and 100 in 2008.
d.
d.100 in 2006, 135 in 2007, and 155 in 2008.
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The correct answer is: b.64.52 in 2006, 87.10 in 2007, and 100 in 2008.
Question 25
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inflation rate is
Select one:
a.
a.13.3 percent for 2007 and 14.8 percent for 2008.
b.
b.35 percent for 2007 and 14.8 percent for 2008.
c.
c.35 percent for 2007 and 55 percent for 2008.
d.
d.135 percent for 2007 and 155 percent for 2008.
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The correct answer is: b.35 percent for 2007 and 14.8 percent for 2008.
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26. In an imaginary economy, consumers buy only shirts and

pants. The fixed basket consists of 6 shirts and 4 pairs of
pants. A shirt cost $20 in 2006 and $25 in 2007. A pair of
pants cost $30 in 2006 and $40 in 2007. Using 2006 as the
base year, which of the following statements is correct?
Select one:
a.
a.For the typical consumer, the number of dollars spent on shirts is equal to the number of dollars spent on pants
in each of the two years.
b.
b.The consumer price index is 134 in 2007.
c.
c.The rate of inflation is 29.17% in 2007.
d.
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The correct answer is: c.The rate of inflation is 29.17% in 2007.
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27. In an imaginary economy, consumers buy only sandwiches

and magazines. The fixed basket consists of 20 sandwiches
and 30 magazines. In 2006, a sandwich cost $4 and a
magazine cost $2. In 2007, a sandwich cost $5. The base year
is 2006. If the consumer price index in 2007 was 125, then
how much did a magazine cost in 2007?
Select one:
a.
a.$2.50
b.
b.$2.80
c.
c.$3.20
d.
d.$3.45
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The correct answer is: a.$2.50
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28. Suppose the price index in 2004 was 100; the price index
in 2005 was 118; and the inflation rate between 2005 and 2006
was lower than it was between 2004 and 2005. This means
that
Select one:
a.
a.the price index in 2006 was lower than 118.00.
b.
b.the price index in 2006 was lower than 136.00.
c.
c.the price index in 2006 was lower than 139.24.
d.
d.the inflation rate between 2005 and 2006 was lower than 1.18 percent.
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The correct answer is: c.the price index in 2006 was lower than 139.24.
Question 29
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29. In the basket of goods that is used to compute the

consumer price index, the three most important categories of
consumer spending are
Select one:
a.
a.housing, transportation, and entertainment.
b.
b.housing, transportation, and food & beverages.
c.
c.housing, medical care, and food & beverages.
d.
d.education, medical care, and food & beverages.
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The correct answer is: b.housing, transportation, and food & beverages.
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30. Suppose the price of gasoline increases rapidly, and that

consumers respond by buying a smaller quantity of gasoline.
The consumer price index
Select one:
a.
a.reflects this price increase accurately.
b.
b.understates the price increase due to the so-called income bias.
c.
c.overstates the price increase due to the so-called income bias.
d.
d.overstates the price increase due to the so-called substitution bias.
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The correct answer is: d.overstates the price increase due to the so-called substitution bias.
Question 31
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31. Which of these events would cause the consumer price

index to overstate the increase in the cost of living?
Select one:
a.
a.Carmakers benefit from a new technology that allows them to sell higher-quality cars to consumers with no
increase in price.
b.
b.Energy prices decrease, and consumers respond by buying more gas and electricity.
c.
c.A new good is introduced that renders cellular telephones inferior and obsolete.
d.
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32. When the quality of a good improves, the purchasing

power of the dollar
Select one:
a.
a.increases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.
b.
b.increases, so the CPI understates the change in the cost of living if the quality change is not accounted for.
c.
c.decreases, so the CPI overstates the change in the cost of living if the quality change is not accounted for.
d.
d.decreases, so the CPI understates the change in the cost of living if the quality change is not accounted for.
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The correct answer is: a.increases, so the CPI overstates the change in the cost of living if the quality change is
not accounted for.
Question 33
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33. An important difference between the GDP deflator and the

consumer price index is that
Select one:
a.
a.the GDP deflator reflects the prices of goods and services bought by producers, whereas the consumer price
index reflects the prices of goods and services bought by consumers.
b.
b.the GDP deflator reflects the prices of all final goods and services produced domestically, whereas the
consumer price index reflects the prices of some goods and services bought by consumers.
c.
c.the GDP deflator reflects the prices of all final goods and services produced by a nation's citizens, whereas the
consumer price index reflects the prices of final goods and services bought by consumers.
d.
d.the GDP deflator reflects the prices of all goods and services bought by producers and consumers, whereas the
consumer price index reflects the prices of final goods and services bought by consumers.
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The correct answer is: b.the GDP deflator reflects the prices of all final goods and services produced
domestically, whereas the consumer price index reflects the prices of some goods and services bought by
consumers.
Question 34
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34. An increase in the price of dairy products produced

domestically will be reflected in
Select one:
a.
a.both the GDP deflator and the consumer price index.
b.
b.neither the GDP deflator nor the consumer price index.
c.
c.the GDP deflator but not in the consumer price index.
d.
d.the consumer price index but not in the GDP deflator.
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The correct answer is: a.both the GDP deflator and the consumer price index.
Question 35
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35. The price of imported olives produced by a U.S. company

operating in Spain increases. By itself, what effect will this
price increase have on the GDP deflator and on the CPI?
Select one:
a.
a.The GDP deflator and the CPI will both increase.
b.
b.The GDP deflator will increase and the CPI will be unaffected.
c.
c.The GDP deflator and the CPI will both be unaffected.
d.
d.The GDP deflator will be unaffected and the CPI will increase.
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The correct answer is: d.The GDP deflator will be unaffected and the CPI will increase.
Question 36
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36. Babe Ruth's 1931 salary was $80,000. Government

statistics show a consumer price index of 15.2 for 1931 and
195 for 2005. Ruth's 1931 salary was equivalent to a 2005
salary of about
Select one:
a.
a.$536,000.
b.
b.$828,000.
c.
c.$1,026,000.
d.
d.$1,216,000.
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The correct answer is: c.$1,026,000.
Question 37
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37. If the nominal interest rate is 6 percent and the rate of

inflation is 9 percent, then the real interest rate is
Select one:
a.
a.15 percent.
b.
b.3 percent.
c.
c.-3 percent.
d.
d.-15 percent.
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The correct answer is: c.-3 percent.
Question 38
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38. The real interest rate tells you

Select one:
a.
a.how fast the number of dollars in your bank account rises over time.
b.
b.how fast the purchasing power of your bank account rises over time.
c.
c.the number of dollars in your bank account today.
d.
d.the purchasing power of your bank account today.
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The correct answer is: b.how fast the purchasing power of your bank account rises over time.
Question 39
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39. If the real interest rate relevant to a bank account is 5

percent and the expected inflation rate is 4 percent, then after a
year a person expects to have, relative to today,
Select one:
a.
a.9 percent more dollars in the bank account, which will purchase 5 percent more goods.
b.
b.5 percent more dollars in the bank account, which will purchase 4 percent more goods.
c.
c.5 percent more dollars in the bank account, which will purchase 4 percent more goods.
d.
d.4 percent more dollars in the bank account, which will purchase 1 percent more goods.
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The correct answer is: a.9 percent more dollars in the bank account, which will purchase 5 percent more goods.
Question 40
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40. Ralph puts money in the bank and earns a 5 percent

nominal interest rate. Then, if the inflation rate is 3 percent,
Select one:
a.
a.Ralph will have 3 percent more money, which will purchase 2 percent more goods.
b.
b.Ralph will have 3 percent more money, which will purchase 8 percent more goods.
c.
c.Ralph will have 5 percent more money, which will purchase 2 percent more goods.
d.
d.Ralph will have 5 percent more money, which will purchase 8 percent more goods.
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The correct answer is: c.Ralph will have 5 percent more money, which will purchase 2 percent more goods.
PROBLEM SET 7
Question 1
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1. Megasoft wants to finance the purchase of new equipment

for developing security software called Doors, but they have
limited internal funds. Megasoft will likely
Select one:
a.
demand loanable funds by buying bonds.
b.
demand loanable funds by selling bonds.
c.
supply loanable funds by buying bonds.
d.
supply loanable funds by selling bonds.
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The correct answer is: demand loanable funds by selling bonds.
Question 2
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2. The length of time until a bond matures is called the

Select one:
a.
perpetuity.
b.
term.
c.
maturity.
d.
intermediation.
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The correct answer is: term.
Question 3
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3. Alonzo pays $10,000 to buy a bond from IBM that

promises repayment ten years from today. Which of the
following is correct?
Select one:
a.
Alonzo is the principal of this bond.
b.
The bond matures in 10 years.
c.
The term of the bond is $10,000.
d.
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The correct answer is: The bond matures in 10 years.
Question 4
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4. You are thinking of buying a bond from Knight

Corporation. You know that this bond is long term and you
know that Knight's business ventures are risky and uncertain.
You then consider another bond with a shorter term to
maturity issued by a company with good prospects and an
established reputation. Which of the following is correct?
Select one:
a.
The longer term would tend to make the interest rate on the bond issued by Knight higher, while the higher risk
would tend to make the interest rate lower.
b.
The longer term would tend to make the interest rate on the bond issued by Knight lower, while the higher risk
would tend to make the interest rate higher.
c.
Both the longer term and the higher risk would tend to make the interest rate lower on the bond issued by
Knight.
d.
Both the longer term and the higher risk would tend to make the interest rate higher on the bond issued by
Knight.
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The correct answer is: Both the longer term and the higher risk would tend to make the interest rate higher on the
bond issued by Knight.
Question 5
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5. Compared to bonds, stocks offer the holder

Select one:
a.
higher risk.
b.
potentially higher return.
c.
ownership in a firm.
d.
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6. People who buy stock in a corporation such as General

Electric become
Select one:
a.
creditors of General Electric, so the benefits of holding the stock depend on General Electric's profits.
b.
creditors of General Electric, but the benefits of holding the stock do not depend on General Electric's profits.
c.
part owners of General Electric, so the benefits of holding the stock depend on General Electric's profits.
d.
part owners of General Electric, but the benefits of holding the stock do not depend on General Electric's profits.
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The correct answer is: part owners of General Electric, so the benefits of holding the stock depend on General
Electric's profits.
Question 7
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7. Suppose that the government finds a major defect in one of

a company's product and demands them to take it off the
market. We would expect that
Select one:
a.
the supply of the stock (and thus the price) rises.
b.
the supply of the stock (and thus the price) falls.
c.
the demand for the stock (and thus the price) rises.
d.
the demand for the stock (and thus the price) falls.
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The correct answer is: the demand for the stock (and thus the price) falls.
Question 8
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8. In the Coen Brothers' movie The Hudsucker Proxy the

board of directors picks someone to run the company that they
believe will make poor decisions. If things turn out as they
plan
Select one:
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.
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The correct answer is: The price of a share of stock in the Hudsucker corporation should decline as the demand
for shares falls.
Question 9
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9. Queen City Sausage stock is selling at $40 per share, it has

retained earnings of $2.00 per share and dividends of $.50 per
share. What is the price-earnings ratio and what is the
dividend yield?
Select one:
a.
20, 1.25 percent
b.
20, 6.25 percent
c.
16, 1.25 percent
d.
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The correct answer is: 16, 1.25 percent
Question 10
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10. Buskin's Corporation has issued 2 million shares of stocks.

Its earnings were $10 million dollars of which it retained $6
million. What was the dividend per share?
Select one:
a.
$2.
b.
$3.
c.
$5
d.
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11. Dependable Appliances had a PE ratio of 25, earnings per

share of $4, and retained earnings per share of $3. What was
its dividend yield?
Select one:
a.
4%
b.
3%
c.
1%
d.
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12. Which of the following is both a store of value and a

common medium of exchange?
Select one:
a.
corporate bonds
b.
mutual funds
c.
checking account balances
d.
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The correct answer is: checking account balances
Question 13
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13 . It is claimed that mutual funds have two advantages. The

first is that mutual funds allow people with small amounts of
money to diversify. The second is that mutual funds provide
the skills of professional money managers who buy stocks
they believe will be the most profitable and thereby increase
the return that mutual fund depositors earn on their savings.
Select one:
a.
Economists strongly agree with both claims.
b.
Economists are skeptical of both claims.
c.
Economists are skeptical of the first claim, but strongly agree with the second.
d.
Economists strongly agree with the first claim, but are skeptical of the second.
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The correct answer is: Economists strongly agree with the first claim, but are skeptical of the second.
Question 14
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14. Which of the following equations represents national

saving in a closed economy?
Select one:
a.
Y - I - G - NX
b.
Y-C-G
c.
Y-I-C
d.
G+C-Y
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The correct answer is: Y - C - G
Question 15
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15. Suppose that in a closed economy GDP is equal to 8,000,

Taxes are equal to 2,000, Consumption equals 5,000, and
Government expenditures equal 1,000. What are private
saving and public saving?
Select one:
a.
2000 and -2000
b.
2000 and 1000
c.
1000 and 1000
d.
1000 and 2000
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The correct answer is: 1000 and 1000
Question 16
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16. If the tax revenue of the federal government exceeds

spending, then the government
Select one:
a.
runs a national debt.
b.
will increase taxes.
c.
runs a budget deficit.
d.
runs a budget surplus.
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The correct answer is: runs a budget surplus.
Question 17
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17. According to the definitions of national saving and private

saving, if Y, C, and G remained the same, an increase in taxes
would
Select one:
a.
raise national saving and private saving.
b.
raise national saving and reduce private saving.
c.
leave national saving and private saving unchanged.
d.
leave national saving unchanged and reduce private saving.
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The correct answer is: leave national saving unchanged and reduce private saving.
Question 18
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18. What would happen in the market for loanable funds if the
government were to increase the tax on interest income?
Select one:
a.
interest rates would rise
b.
interest rates would be unaffected
c.
interest rates would fall
d.
the change in the interest rate would be ambiguous
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The correct answer is: interest rates would rise
Question 19
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19. Suppose Congress institutes an investment tax credit.

What would happen in the market for loanable funds?
Select one:
a.
The interest rate and investment would rise.
b.
The interest rate and investment would fall.
c.
The interest rate would rise and investment would fall.
d.
None of the above is necessarily correct.
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The correct answer is: The interest rate and investment would rise.
Question 20
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20. An increase in the budget deficit

Select one:
a.
reduces public saving and so shifts the supply of loanable funds left.
b.
reduces private saving and so shifts the supply of loanable funds left.
c.
reduces investment and so shifts the demand for loanable funds left.
d.
None of the above are correct.
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The correct answer is: reduces public saving and so shifts the supply of loanable funds left.
Question 21
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21. Raphael is not working and is currently not looking for

work. The BLS would count Raphael
Select one:
a.
as unemployed and in the labor force.
b.
as unemployed, but not in the labor force.
c.
in the labor force, but not as unemployed.
d.
neither as unemployed nor in the labor force.
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The correct answer is: neither as unemployed nor in the labor force.
Question 22
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22. Sally is on a temporary layoff from her factory job. If

Sally participates in the BLS survey, she will be classified as
Select one:
a.
unemployed and in the labor force.
b.
unemployed and out of the labor force.
c.
employed and in the labor force.
d.
employed and out of the labor force.
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The correct answer is: unemployed and in the labor force.
Question 23
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23. In 2004, based on concepts similar to those used to

estimate U.S. employment figures, the Swedish adult non-
institutionalized population was 6.712 million, the labor force
was 4.576 million, and the number of people employed was
4.276 million. According to these numbers, the Swedish labor-
force participation rate and unemployment rate were about
Select one:
a.
59.5%, 4.5%
b.
59.5%, 6.6%
c.
68.2%, 4.5%
d.
68.2%, 6.6%
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The correct answer is: 68.2%, 6.6%
Question 24
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24. The BLS reported in 2005 that there were 53.23 million
people over age 25 who had at least a bachelor's degree 40.59
million of them were employed and .98 million of them were
unemployed. What were the labor-force participation rate and
the unemployment rate for this group?
Select one:
a.
76.3% and 1.8%
b.
76.3% and 2.4%
c.
78.1% and 1.8%
d.
78.1% and 2.4%
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The correct answer is: 78.1% and 2.4%
Question 25
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25. Suppose some country had an adult population of about

46.5 million, the labor-force participation rate was 63.5
percent, and the unemployment rate was 5.8 percent. What
were the number of people employed and the number of
people unemployed?
Select one:
a.
about 29.5 million and 2.7 million.
b.
c.
d.
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The correct answer is: about 27.8 million and 1.7 million.
Question 26
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26. Tara just graduated from college. In order to devote all her
efforts to college, she didn't hold a job. She is going to cruise
around the country on her motorcycle for awhile before she
starts looking for work. As a result, the unemployment rate
Select one:
a.
increases, and the labor-force participation rate increases.
b.
is unaffected, and the labor-force participation rate is unaffected.
c.
increases, and the labor-force participation rate decreases.
d.
increases, and the labor-force participation rate is unaffected.
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The correct answer is: is unaffected, and the labor-force participation rate is unaffected.
Question 27
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27. We would predict that the more generous unemployment

compensation a country has,
Select one:
a.
the longer the duration of each spell of unemployment, and the higher the unemployment rate.
b.
the shorter the duration of each spell of unemployment, and the higher the unemployment rate.
c.
the longer the duration of each spell of unemployment, and the lower the unemployment rate.
d.
the shorter the duration of each spell of unemployment, and the lower the unemployment rate.
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The correct answer is: the longer the duration of each spell of unemployment, and the higher the unemployment
rate.
Question 28
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28. Bob is looking for work after school, but everywhere he

fills out an application the managers say they always have a
lot more applications than open positions. Tom has a law
degree. Several firms have made him offers, but he thinks he
might be able to find a firm where his talents could be put to
better use.
Select one:
a.
Bob and Tom are both frictionally unemployed.
b.
Bob and Tom are both structurally unemployed.
c.
Bob is frictionally unemployed, and Tom is structurally unemployed.
d.
Bob is structurally unemployed, and Tom is frictionally unemployed.
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The correct answer is: Bob is structurally unemployed, and Tom is frictionally unemployed.
Question 29
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29. Providing training for unemployed individuals is primarily

intended to reduce
Select one:
a.
frictional unemployment.
b.
seasonal unemployment.
c.
structural unemployment.
d.
cyclical unemployment.
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The correct answer is: frictional unemployment.
Question 30
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30. When unions raise wages in one sector of the economy,

the supply of labor in other sectors of the economy
Select one:
a.
increases, raising wages in industries that are not unionized.
b.
increases, reducing wages in industries that are not unionized.
c.
decreases, raising wages in industries that are not unionized.
d.
decreases, reducing wages in industries that are not unionized.
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The correct answer is: increases, reducing wages in industries that are not unionized.
Question 31
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31. Consumers decide to buy more computers and fewer

typewriters. As a result, computer companies expand
production while typewriter companies lay-off workers. This
is an example of
Select one:
a.
structural unemployment created by efficiency wages.
b.
cyclical unemployment created by a recession.
c.
frictional unemployment created by a sectoral shift in demand.
d.
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The correct answer is: frictional unemployment created by a sectoral shift in demand.
Question 32
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32. If the market for day care workers is in equilibrium at

$5.00 per hour as shown in this diagram, a minimum wage of
$8.00 per hour will
Select one:
a.
increase unemployment by 300 workers.
b.
c.
d.
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The correct answer is: increase unemployment by 600 workers.
Question 33
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33. When a union bargains successfully with employers, in

that industry
Select one:
a.
both the quantity of labor supplied and the quantity of labor demanded increase.
b.
both the quantity of labor supplied and the quantity of labor demanded decrease.
c.
the quantity of labor supplied increases and the quantity of labor demanded decreases.
d.
the quantity of labor demanded increases and the quantity of labor supplied decreases.
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The correct answer is: the quantity of labor supplied increases and the quantity of labor demanded decreases.
Question 34
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34. Suppose that neither textile workers nor shoemakers are

unionized. If textile workers unionize and so are able to raise
their wages, then the supply of shoemakers
Select one:
a.
rises and their wages rise.
b.
rises and their wages fall.
c.
falls and their wages fall.
d.
falls and their wages rise.
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The correct answer is: rises and their wages fall.
Question 35
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35. Samantha, the CEO of a corporation operating in a

comparatively poor country where wages are low, decides to
raise the wages of her workers even though she faces an
excess supply of labor. Her decision
Select one:
a.
might increase profits if it means that the wage is high enough for her workers to eat a nutritious diet that makes
them more productive.
b.
will help eliminate the excess supply of labor if she raises it sufficiently.
c.
may cause her workers to increase shirking.
d.
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The correct answer is: might increase profits if it means that the wage is high enough for her workers to eat a
nutritious diet that makes them more productive.
Question 36
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36. Sectoral changes

Select one:
a.
create frictional unemployment. Firms paying wages above equilibrium to attract a better pool of candidates
create structural unemployment.
b.
create structural unemployment. Firms paying wages above equilibrium to attract a better pool of candidates
create frictional unemployment.
c.
and firms paying wages above equilibrium to attract a better pool of candidates both create structural
unemployment.
d.
and firms paying wages above equilibrium to attract a better pool of candidates both create frictional
unemployment.
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The correct answer is: create frictional unemployment. Firms paying wages above equilibrium to attract a better
pool of candidates create structural unemployment.
PROBLEM SET 8
Question 1
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1. Current U.S. currency is

Select one:
a.
fiat money with intrinsic value.
b.
fiat money with no intrinsic value.
c.
commodity money with intrinsic value.
d.
commodity money with no intrinsic value.
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The correct answer is: fiat money with no intrinsic value.
Question 2
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2. Given the following information, what would be the values
of M1 and M2?
Small time deposits $650 billion
Demand Deposits and other Checkable $300 billion
Deposits
Savings-type deposits $750 billion
Money market mutual funds $600 billion
Travelers' checks $25 billion
Large time deposits $600 billion
Currency $100 billion
Miscellaneous Categories in M2 $25 billion
Select one:
a.
M1 = $400 billion, M2 = $2,475 billion.
b.
c.
M1 = $425 billion, M2 = $2, 450 billion.
d.
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The correct answer is: M1 = $425 billion, M2 = $2, 450 billion.
Question 3
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Tazian Banking Statistics: The Monetary Policy of Tazi is

controlled by the country's central bank known as the Bank of
Tazi. The local unit of currency is the Taz. Aggregate banking
statistics show that collectively the banks of Tazi hold 300
million Tazes of required reserves, 75 million Tazes of excess
reserves, have issued 7,500 million Tazes of deposits, and hold
225 million Tazes of Tazian Treasury bonds. Tazians prefer to
use only demand deposits and so all currency is on deposit at
the bank.
3. Refer to Tazian Banking Statistics. Assume that banks

desire to continue holding the same ratio of excess reserves to
deposits. What is the required reserve ratio and the reserve
ratio for Tazian Banks?
Select one:
a.
5%, 8%
b.
4%, 8%
c.
4%, 5%
d.
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The correct answer is: 4%, 5%
Question 4
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4. Refer to Tazian Banking Statistics. Assuming the only other

thing Tazian banks have on their balance sheets is loans, what
is the value of existing loans made by Tazian banks?
Select one:
a.
6,900 million Tazes
b.
7,125 million Tazes
c.
7,350 million Tazes
d.
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The correct answer is: 6,900 million Tazes
Question 5
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5. Refer to Tazian Banking Statistics. Suppose that the Bank

of Tazi loaned the banks of Tazi 10 million Tazes. Suppose
also that both the required reserve ratio and the percentage of
deposits held as excess reserves stay the same. By how much
would the money supply change?
Select one:
a.
250 million Tazes
b.
200 million Tazes
c.
125 million Tazes
d.
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The correct answer is: 200 million Tazes
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of Tazi purchased 50 million Tazes of Tazian Treasury Bonds
from the banks. Suppose also that both the required reserve
ratio and the percentage of deposits held as excess reserves
stay the same. By how much does the money supply change?
Select one:
a.
625 million Tazes
b.
1,000 million Tazes
c.
1,250 million Tazes
d.
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of Tazi changes the reserve requirement ratio to 3%.
Assuming that the banks still want to hold the same
percentage of excess reserves what is the value of the money
supply after the change in the reserve requirement ratio?
Select one:
a.
9,375 million Tazes
b.
10,000 million Tazes
c.
12,500 million Tazes
d.
None of the above is correct to the nearest million medits.
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8. When the Central Bank (the Fed in the U.S.) wants to

change the money supply, it most frequently
Select one:
a.
conducts open market operations.
b.
changes the discount rate.
c.
changes the reserve requirement.
d.
issues Federal Reserve notes.
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The correct answer is: conducts open market operations.
Question 9
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9. The Fed can increase the money supply by conducting open

market
Select one:
a.
sales and raising the discount rate.
b.
sales and lowering the discount rate.
c.
purchases and raising the discount rate.
d.
purchases and lowering the discount rate.
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The correct answer is: purchases and lowering the discount rate.
Question 10
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10. Which list contains only actions that increase the money
supply?
Select one:
a.
raise the discount rate, make open market purchases
b.
raise the discount rate, make open market sales
c.
lower the discount rate, make open market purchases
d.
lower the discount rate, make open market sales
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The correct answer is: lower the discount rate, make open market purchases
Question 11
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11. Which list contains only actions that decrease the money
supply?
Select one:
a.
make open market purchases, raise the reserve requirement ratio
b.
make open market purchases, lower the reserve requirement ratio
c.
make open market sales, raise the reserve requirement ratio
d.
make open market sales, lower the reserve requirement ratio
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The correct answer is: make open market sales, raise the reserve requirement ratio
Question 12
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12. In a fractional reserve banking system, a decrease in

reserve requirements
Select one:
a.
increases both the money multiplier and the money supply.
b.
decreases both the money multiplier and the money supply.
c.
increases the money multiplier, but decreases the money supply.
d.
decreases the money multiplier, but increases the money supply.
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The correct answer is: increases both the money multiplier and the money supply.
Question 13
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13. The price level (P)

Select one:
a.
refers to the price of individual goods.
b.
is the number of dollars needed to buy a basket of goods and services.
c.
is measured by a price index like the CPI or GDP deflator.
d.
Both b and c are correct.
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The correct answer is: Both b and c are correct.
Question 14
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14. When the price level (P) rises, the number of dollars
needed to buy a representative basket of goods
Select one:
a.
increases, so the value of money (1/P) rises.
b.
increases, so the value of money (1/P) falls.
c.
decreases, so the value of money (1/P) rises.
d.
decreases, so the value of money (1/P) falls.
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The correct answer is: increases, so the value of money (1/P) falls.
Question 15
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15. The supply of money increases when

Select one:
a.
the value of money increases.
b.
the interest rate increases.
c.
the Central Bank makes open-market purchases.
d.
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The correct answer is: the Central Bank makes open-market purchases.
Question 16
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16. When the money market is drawn with the value of money
on the vertical axis, an increase in the money supply causes
the equilibrium value of money
Select one:
a.
and equilibrium quantity of money to increase.
b.
and equilibrium quantity of money to decrease.
c.
to increase, while the equilibrium quantity of money decreases.
d.
to decrease, while the equilibrium quantity of money increases.
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The correct answer is: to decrease, while the equilibrium quantity of money increases.
Question 17
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on the vertical axis, an increase in the price level causes
Select one:
a.
a movement to the left along the money demand curve, so the quantity of money demanded decreases.
b.
a movement to the right along the money demand curve, so the quantity of money demanded increases.
c.
a shift to the right of the money demand curve, so the quantity of money demanded increases.
d.
a shift to the left of the money demand curve, so the quantity of money demanded decreases.
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The correct answer is: a movement to the right along the money demand curve, so the quantity of money
demanded increases.
Question 18
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on the vertical axis, the value of money increases if
Select one:
a.
either money demand or money supply shifts right.
b.
either money demand or money supply shifts left.
c.
money demand shifts right or money supply shifts left.
d.
money demand shifts left or money supply shifts right.
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The correct answer is: money demand shifts right or money supply shifts left.
Question 19
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19. A decrease in the money supply creates

Select one:
a.
an excess supply of money that is eliminated by rising prices.
b.
an excess supply of money that is eliminated by falling prices.
c.
an excess demand for money that is eliminated by rising prices.
d.
an excess demand for money that is eliminated by falling prices.
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The correct answer is: an excess demand for money that is eliminated by falling prices.
Question 20
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Figure 21
20. Refer to Figure 21. If the money supply is MS2 and the
value of money is 2, there is excess
Select one:
a.
demand equal to the distance between A and C.
b.
demand equal to the distance between A and B.
c.
supply equal to the distance between A and C.
d.
supply equal to the distance between A and B.
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The correct answer is: supply equal to the distance between A and B.
Question 21
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21. Eve gives her employees a $1 increase in their hourly

wage. However, the employees figure that, even with the
increase, their wage buys fewer goods than a year ago. It
follows that
Select one:
a.
the workers' real and nominal wages have risen.
b.
the workers' real wage rose and their nominal wage fell.
c.
the workers' real wage fell and their nominal wage rose.
d.
Both the real and nominal wages fell.
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The correct answer is: the workers' real wage fell and their nominal wage rose.
Question 22
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22. According to the classical dichotomy, which of the

following is not influenced by monetary factors?
Select one:
a.
nominal GDP
b.
price level
c.
real wage
d.
nominal wage
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The correct answer is: real wage
Question 23
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23. Monetary neutrality implies that an increase in the quantity

of money will
Select one:
a.
increase employment.
b.
increase the price level.
c.
increase the incentive to save.
d.
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The correct answer is: increase the price level.
Question 24
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24. Based on the quantity equation, if P = 20, Y = 40, and M =

400, then V =
Select one:
a.
80.
b.
20.
c.
2.
d.
1/2.
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The correct answer is: 2.
Question 25
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25. If velocity and output were nearly constant,

Select one:
a.
the inflation rate would be much higher than the money supply growth rate.
b.
the inflation rate would be about the same as the money supply growth rate.
c.
the inflation rate would be much lower than the money supply growth rate.
d.
any of the above would be possible.
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The correct answer is: the inflation rate would be about the same as the money supply growth rate.
Question 26
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26. The inflation tax

Select one:
a.
is an alternative to income taxes and borrowing.
b.
taxes most those who hold the most money.
c.
is the revenue created when the government prints money.
d.
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27. Greta puts money in a savings account at her bank earning

6.5 percent (the inflation rate is zero now). One year later she
takes her money out and notes that while her money was
earning interest, prices rose 3.5 percent. Greta now has
Select one:
a.
10 percent more money with which she can purchase 6.5 percent more goods.
b.
10 percent more money with which she can purchase 3.5 percent more goods.
c.
6.5 percent more money with which she can purchase 3 percent more goods.
d.
6.5 percent more money with which she can purchase 3.5 percent fewer goods.
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The correct answer is: 6.5 percent more money with which she can purchase 3 percent more goods.
Question 28
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28. When deciding how much to save, people care most about
Select one:
a.
before-tax nominal interest rates.
b.
after-tax nominal interest rates.
c.
before-tax real interest rates.
d.
after-tax real interest rates.
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The correct answer is: after-tax real interest rates.
Question 29
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29. Kelly purchased ten shares of Gentech stock for $200 in

year 1 and sold all the shares in year 2 for $220 a share.
Between year 1 and year 2, the price level increased by 5%.
The tax on capital gains is 50%. If the capital gains tax is on
nominal gains, how much tax does Sally pay on her gain?
Select one:
a.
$90
b.
$95
c.
$100
d.
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30. If inflation is less than expected,

Select one:
a.
debtors receive a higher real interest rate than they had anticipated.
b.
debtors pay a higher real interest rate than they had anticipated.
c.
creditors pay a higher real interest rate than they had anticipated.
d.
both a and c are correct.
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The correct answer is: debtors pay a higher real interest rate than they had anticipated.
PROBLEM SET 9
Question 1
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1. If U.S. imports total $100 billion and U.S. exports total

$150 billion, which of the following is correct?
Select one:
a.
The U.S. has a trade surplus of $100 billion.
b.
The U.S. has a trade surplus of $50 billion.
c.
The U.S. has a trade deficit of $100 billion.
d.
The U.S. has a trade deficit of $50 billion.
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The correct answer is: The U.S. has a trade surplus of $50 billion.
Question 2
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2. Sonya, a citizen of Denmark, produces boots and shoes that

she sells to department stores in the United States. Other
things the same, these sales
Select one:
a.
increase U.S. net exports and have no effect on Danish net exports.
b.
decrease U.S. net exports and have no effect on Danish net exports.
c.
increase U.S. net exports and decrease Danish net exports.
d.
decrease U.S. net exports and increase Danish net exports.
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The correct answer is: decrease U.S. net exports and increase Danish net exports.
Question 3
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3. Suppose a country had $2.4 billion of net exports and

bought $4.8 billion of goods and services from foreign
countries. This country would have
Select one:
a.
$7.2 billion of exports and $4.8 billion of imports.
b.
$7.2 billion of imports and $4.8 billion of exports.
c.
$4.8 billion of exports and $2.4 billion of imports.
d.
$4.8 billion of imports and $2.4 billion of exports.
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The correct answer is: $7.2 billion of exports and $4.8 billion of imports.
Question 4
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4. Net capital outflow refers to the purchase of

Select one:
a.
foreign assets by domestic residents minus the purchase of domestic assets by foreign residents.
b.
foreign assets by domestic residents minus the purchase of foreign goods and services by domestic residents.
c.
domestic assets by foreign residents minus the purchase of domestic goods and services by foreign residents.
d.
domestic assets by foreign residents minus the purchase of foreign assets by domestic residents.
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The correct answer is: foreign assets by domestic residents minus the purchase of domestic assets by foreign
residents.
Question 5
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5. Suppose that more Chinese decide to vacation in the U.S.

and that the Chinese purchase more U.S. Treasury bonds.
Ignoring how payments are made for these purchases,
Select one:
a.
the first action by itself raises U.S. net exports, the second action by itself raises U.S. net capital outflow.
b.
the first action by itself raises U.S. net exports, the second action by itself lowers U.S. net capital outflow.
c.
the first action by itself lowers U.S. net exports, the second action by itself raises U.S. net capital outflow.
d.
the first action by itself lowers U.S. net exports, the second action by itself lowers U.S. net capital outflow.
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The correct answer is: the first action by itself raises U.S. net exports, the second action by itself lowers U.S. net
capital outflow.
Question 6
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6. Which of the following would be U.S. foreign portfolio

investment?
Select one:
a.
Disney builds a new amusement park near Barcelona, Spain.
b.
A U.S. citizen buys stock in companies located in Asia.
c.
A Dutch hotel chain opens a new hotel in the United States.
d.
A citizen of Singapore buys a bond issued by a U.S. corporation.
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The correct answer is: A U.S. citizen buys stock in companies located in Asia.
Question 7
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7. Sue, a U.S. citizen, buys stock in an Italian automobile

corporation. Her purchase counts as
Select one:
a.
investment for Sue and U.S. foreign direct investment.
b.
investment for Sue and U.S. foreign portfolio investment.
c.
saving for Sue and U.S. foreign direct investment.
d.
saving for Sue and U.S. foreign portfolio investment.
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The correct answer is: saving for Sue and U.S. foreign portfolio investment.
Question 8
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8. When a French vineyard establishes a distribution center in

the U.S., U.S. net capital outflow
Select one:
a.
increases because the foreign company makes a portfolio investment in the U.S.
b.
declines because the foreign company makes a portfolio investment in the U.S.
c.
increases because the foreign company makes a direct investment in capital in the U.S.
d.
declines because the foreign company makes a direct investment in capital in the U.S.
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The correct answer is: declines because the foreign company makes a direct investment in capital in the U.S.
Question 9
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9. A Venezuelan firm purchases earth-moving equipment from
a U.S. company and pays for it with Venezuelan currency.
This transaction
Select one:
a.
increases U.S. net exports, and increases Venezuelan net capital outflow.
b.
increases U.S. net exports, and decreases Venezuelan net capital outflow.
c.
decreases U.S. net exports, and increases Venezuelan net capital outflow.
d.
decreases U.S. net exports, and decreases Venezuelan net capital outflow.
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The correct answer is: increases U.S. net exports, and decreases Venezuelan net capital outflow.
Question 10
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10. If a country has a trade surplus

Select one:
a.
it has positive net exports and positive net capital outflow.
b.
it has positive net exports and negative net capital outflow.
c.
it has negative net exports and positive net capital outflow.
d.
it has negative net exports and negative net capital outflow.
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The correct answer is: it has positive net exports and positive net capital outflow.
Question 11
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11. If there is a trade deficit, then

Select one:
a.
saving is greater than domestic investment and Y > C + I + G.
b.
saving is greater than domestic investment and Y < C + I + G.
c.
saving is less than domestic investment and Y > C +I + G.
d.
saving is less than domestic investment and Y < C + I + G.
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The correct answer is: saving is less than domestic investment and Y < C + I + G.
Question 12
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12. A country has $100 million of net exports and $170

million of saving. Net capital outflow is
Select one:
a.
$70 million and domestic investment is $170 million.
b.
c.
d.
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The correct answer is: $100 million and domestic investment is $70 million.
Question 13
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13. In an open economy, gross domestic product equals $1,950

billion, government expenditure equals $280 billion,
investment equals $500, and net capital outflow equals $280
billion. What is consumption expenditure?
Select one:
a.
$280 billion
b.
$780 billion
c.
$890 billion
d.
$1,170 billion
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The correct answer is: $890 billion
Question 14
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14. You are the CEO of a firm considering opening a factory

in Peru. If the dollar appreciated relative to the Peruvian peso,
then other things the same
Select one:
a.
you'd find it took fewer dollars to build the factory. The building of the factory increases U.S. net capital
outflow.
b.
you'd find it took fewer dollars to build the factory. The building of the factory decreases U.S. net capital
outflow.
c.
you'd find it took more dollars to build the factory. If you still build the factory anyway, it will increase U.S. net
capital outflow.
d.
you'd find it took more dollars to build the factory. If you still build the factory anyway, it will decrease U.S. net
capital outflow.
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The correct answer is: you'd find it took fewer dollars to build the factory. The building of the factory increases
U.S. net capital outflow.
Question 15
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15. You are staying in London over the summer and you have
a number of dollars with you. If the dollar appreciated relative
to the British pound then, other things the same,
Select one:
a.
the dollar would buy more pounds. The appreciation would discourage you from buying as many British goods
and services.
b.
the dollar would buy more pounds. The appreciation would encourage you to buy more British goods and
services.
c.
the dollar would buy fewer pounds. The appreciation would discourage you from buying as many British goods
and services.
d.
the dollar would buy fewer pounds. The appreciation would encourage you to buy more British goods and
services.
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The correct answer is: the dollar would buy more pounds. The appreciation would encourage you to buy more
British goods and services.
Question 16
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16. Other things the same, the real exchange rate between U.S.
and South African goods would be higher if
Select one:
a.
prices in the U.S. were higher, or the number of South African rand the dollar purchased were higher.
b.
prices in the U.S. were higher, or the number of South African rand the dollar purchased were lower.
c.
prices in the U.S. were lower, or the number of South African rand the dollar purchased were higher.
d.
prices in the U.S. were lower, or the number of South African rand the dollar purchased were lower.
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The correct answer is: prices in the U.S. were higher, or the number of South African rand the dollar purchased
were higher.
Question 17
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17. Exchange rates are 120 yen per dollar, 0.8 euro per dollar,
and 10 pesos per dollar. A bottle of beer in New York costs 6
dollars, 1,200 yen in Tokyo, 7.2 euro in Munich, and 50 pesos
in Cancun. Where is the most expensive and the cheapest beer
in that order?
Select one:
a.
Cancun, New York
b.
New York, Tokyo
c.
Tokyo, Cancun
d.
Munich, New York
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The correct answer is: Tokyo, Cancun
Question 18
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18. In the United States, a three-pound can of coffee costs

about $5. Suppose the exchange rate is about 0.8 euros per
dollar and that a three-pound can of coffee in Belgium costs
about 3 euros. What is the real exchange rate?
Select one:
a.
5/3 cans of Belgian coffee per can of U.S. coffee
b.
c.
d.
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The correct answer is: 4/3 cans of Belgian coffee per can of U.S. coffee
Question 19
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19. In Ireland, a pint of beer costs 2.2 Irish pounds. In

Australia, a pint of beer costs 4 Australian dollars. If the
exchange rate is .5 pounds per Australian dollar, what is the
real exchange rate?
Select one:
a.
.91 pints of Irish beer per pint of Australian beer
b.
1.1 pint of Irish beer per pint of Australian beer
c.
3.64 pints of Irish beer per pint of Australian beer
d.
4.4 pints of Irish beer per pint of Australian beer
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The correct answer is: .91 pints of Irish beer per pint of Australian beer
Question 20
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20. U.S. corporation Well's Petroleum borrows money to build

an oil well in Texas and to build another in Venezuela.
Select one:
a.
The borrowing for the well in the U.S. and the well in Venezuela both count as part of the demand for loanable
funds in the U.S. market.
b.
Neither the borrowing for the well in the U.S. nor the well in Venezuela count as part of the demand for loanable
funds in the U.S. market.
c.
The borrowing for the well in the U.S. counts as part of the demand for loanable funds in the U.S. The
borrowing for the well in Venezuela does not count as part of the demand for loanable funds in the U.S. market.
d.
The borrowing for the well in Venezuela counts as part of the demand for loanable funds in the U.S. The
borrowing for the well in the US. does not counts as part of the demand for loanable funds in the U.S. market.
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The correct answer is: The borrowing for the well in the U.S. and the well in Venezuela both count as part of the
demand for loanable funds in the U.S. market.
Question 21
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21. An increase in the real interest rate

Select one:
a.
discourages people from saving and so increases the quantity of loanable funds demanded.
b.
discourages people from saving and so decreases the quantity of loanable funds demanded.
c.
encourages people to save and so increases the quantity of loanable funds supplied.
d.
encourages people to save and so decreases the quantity of loanable funds supplied.
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The correct answer is: encourages people to save and so increases the quantity of loanable funds supplied.
Question 22
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22. If interest rates rose more in France than in the U.S., then
other things the same
Select one:
a.
U.S. citizens would buy more French bonds and French citizens would buy more U.S. bonds.
b.
U.S. citizens would buy more French bonds and French citizens would buy fewer U.S. bonds.
c.
U.S. citizens would buy fewer French bonds and French citizens would buy more U.S. bonds.
d.
U.S. citizens would buy fewer French bonds and French citizens would buy fewer U.S. bonds.
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The correct answer is: U.S. citizens would buy more French bonds and French citizens would buy fewer U.S.
bonds.
Question 23
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23. In an open economy the supply of loanable funds comes

from
Select one:
a.
national saving. Demand comes from only domestic investment.
b.
national saving. Demand comes from domestic investment and net capital outflow.
c.
Only net capital outflow. Demand for loanable funds comes from national saving.
d.
domestic investment and net capital outflow. Demand for loanable funds comes from national saving.
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The correct answer is: national saving. Demand comes from domestic investment and net capital outflow.
Question 24
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24. If there is a surplus of loanable funds, the quantity

demanded is
Select one:
a.
greater than the quantity supplied and the interest rate will rise.
b.
greater than the quantity supplied and the interest rate will fall.
c.
less than the quantity supplied and the interest rate will rise.
d.
less than the quantity supplied and the interest rate will fall.
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The correct answer is: less than the quantity supplied and the interest rate will fall.
Question 25
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25. If net exports are negative, then

Select one:
a.
net capital outflow is positive, so foreign assets bought by Americans are greater than American assets bought
by foreigners.
b.
net capital outflow is positive, so American assets bought by foreigners are greater than foreign assets bought by
Americans.
c.
net capital outflow is negative, so foreign assets bought by Americans are greater than American assets bought
by foreigners.
d.
net capital outflow is negative, so American assets bought by foreigners are greater than foreign assets bought by
Americans.
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The correct answer is: net capital outflow is negative, so American assets bought by foreigners are greater than
foreign assets bought by Americans.
Question 26
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26. In the market for foreign-currency exchange in the open

economy macroeconomic model, the amount of net capital
outflow represents the quantity of dollars
Select one:
a.
supplied for the purpose of selling assets domestically.
b.
supplied for the purpose of buying assets abroad.
c.
demanded for the purpose of buying U.S. net exports of goods and services.
d.
demanded for the purpose of importing foreign goods and services.
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The correct answer is: supplied for the purpose of buying assets abroad.
Question 27
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27. Suppose that the real exchange rate is such that the market
for foreign-currency exchange has a surplus
Select one:
a.
this will lead to an appreciation of the dollar, an increase in U.S. net exports, and so an increase in the quantity of
dollars demanded in the foreign exchange market.
b.
this will lead to an appreciation of the dollar, a decrease in U.S. net exports, and so a decrease in the quantity of
c.
this will lead to a depreciation of the dollar, an increase in U.S. net exports, and so an increase in the quantity of
d.
this will lead to a depreciation of the dollar, a decrease in U.S. net exports, and so a decrease in the quantity of
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The correct answer is: this will lead to a depreciation of the dollar, an increase in U.S. net exports, and so an
increase in the quantity of dollars demanded in the foreign exchange market.
Question 28
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28. Which of the following would tend to shift the supply of

dollars in the market for foreign-currency exchange of the
open-economy macroeconomic model to the left?
Select one:
a.
The exchange rate rises.
b.
The exchange rate falls.
c.
The expected rate of return on U.S. assets rises.
d.
The expected rate of return on U.S. assets falls.
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The correct answer is: The expected rate of return on U.S. assets rises.
Question 29
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29. At a given real exchange rate, which of the following, by

itself, would increase the supply of dollars in the market for
foreign-currency exchange?
Select one:
a.
foreign citizens buy more U.S. bonds
b.
U.S. citizens buy more foreign bonds
c.
foreign citizens buy more U.S. goods
d.
U.S. citizens buy more foreign goods
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The correct answer is: U.S. citizens buy more foreign bonds
Question 30
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30. In the open-economy macroeconomic model, the key

determinant of net capital outflow is the
Select one:
a.
nominal exchange rate.
b.
nominal interest rate.
c.
real exchange rate.
d.
real interest rate.
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The correct answer is: real interest rate.
Question 31
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31. If a U.S. resident wants to buy a foreign bond, his actions

are included
Select one:
a.
in the U.S. supply of loanable funds and the supply of dollars in the market for foreign-currency exchange.
b.
in the U.S. supply of loanable funds and the demand for dollars in the market for foreign-currency exchange.
c.
in the U.S. demand for loanable funds and the supply of dollars in the market for foreign-currency exchange.
d.
in the U.S. demand for loanable funds only
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The correct answer is: in the U.S. demand for loanable funds and the supply of dollars in the market for foreign-
currency exchange.
Question 32
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32. Suppose that Egypt has a government budget surplus, and

then goes into deficit. This action would
Select one:
a.
increase national saving and shift Egypt's supply of loanable funds left.
b.
increase national saving and shift Egypt's demand for loanable funds right.
c.
decrease national saving and shift Egypt's supply of loanable funds left.
d.
decrease national saving and shift Egypt's demand for loanable funds right.
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The correct answer is: decrease national saving and shift Egypt's supply of loanable funds left.
Question 33
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33. If the government of Colombia made policy changes that

increased national saving, the real exchange rate of the peso
would
Select one:
a.
depreciate and Colombian net exports would rise.
b.
depreciate and Colombian net exports would fall.
c.
appreciate and Colombian net exports would rise.
d.
appreciate and Colombian net exports would fall.
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The correct answer is: depreciate and Colombian net exports would rise.
Question 34
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34. If a government increases its budget deficit, then interest

rates
Select one:
a.
and domestic investment rise.
b.
and domestic investment falls.
c.
rise and domestic investment falls.
d.
fall and domestic investment rises.
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The correct answer is: rise and domestic investment falls.
Question 35
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35. If the U.S. were to impose restrictions on imports
Select one:
a.
the demand for loanable funds and the demand for dollars in the market for foreign-currency exchange would
both increase.
b.
nether the demand for loanable funds nor the demand for dollars in the market for foreign-currency exchange
would increase.
c.
the demand for loanable funds would increase, but the demand for dollars in the market for foreign-currency
exchange would not.
d.
the demand for dollars in the market for foreign-currency exchange would increase, but the demand for loanable
funds would not.
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The correct answer is: the demand for dollars in the market for foreign-currency exchange would increase, but
the demand for loanable funds would not.
Question 36
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36. If the United States imposes an import quota on clothing,

U.S. exports
Select one:
a.
increase, U.S. imports increase, and U.S. net exports are unchanged.
b.
increase, U.S. imports decrease, and U.S. net exports increase.
c.
decrease, U.S. imports increase, and U.S. net exports decrease.
d.
decrease, U.S. imports decrease, and U.S. net exports are unchanged.
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The correct answer is: decrease, U.S. imports decrease, and U.S. net exports are unchanged.
Question 37
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37. Capital flight refers to
Select one:
a.
the movement of workers across international borders in response to exchange rate changes.
b.
the movement of funds between financial intermediaries when interest rates change.
c.
the ability of foreign direct investment to lift a country out of poverty.
d.
a large and sudden movement of funds out of a country.
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The correct answer is: a large and sudden movement of funds out of a country.
Question 38
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38. If there is capital flight from the United States, then the
demand for loanable funds
Select one:
a.
and the supply of dollars in the foreign-exchange market shift right.
b.
and the supply of dollars in the foreign-exchange market shift left.
c.
shifts left while the supply of dollars in the foreign-exchange market shifts right.
d.
shifts right while the supply of dollars in the foreign-exchange market shifts left.
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The correct answer is: and the supply of dollars in the foreign-exchange market shift right.
Question 39
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39. The country of Meditor is politically very stable and has a

long tradition of respecting property rights. If several other
countries suddenly became politically unstable, we would
expect Meditor's
Select one:
a.
real interest rate to rise.
b.
real exchange rate to fall.
c.
net exports to fall.
d.
None of the above is likely.
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The correct answer is: net exports to fall.
Question 40
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40. If government policy encouraged households to save more

at each interest rate, then
Select one:
a.
the real exchange rate and net exports would rise.
b.
the real exchange rate and net exports would fall.
c.
the real exchange rate would rise and net exports would fall.
d.
the real exchange rate would fall and net exports would rise.
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The correct answer is: the real exchange rate would fall and net exports would rise.
PROBLEM SET 10
Question 1
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1.The aggregate quantity of goods demanded decreases if

Select one:
a.
real wealth falls.
b.
the interest rate rises.
c.
the dollar appreciates.
d.
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2.A decrease in the price level

Select one:
a.
causes real wealth to rise, people to lend more, interest rates to rise, and the dollar to appreciate.
b.
causes real wealth to rise, people to lend more, interest rates to fall, and the dollar to depreciate.
c.
causes real wealth to fall, people to lend less, interest rates to fall, and the dollar to depreciate.
d.
causes real wealth to fall, people to lend less, interest rates to rise, and the dollar to depreciate.
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The correct answer is: causes real wealth to rise, people to lend more, interest rates to fall, and the dollar to
depreciate.
Question 3
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3.When the dollar depreciates, each dollar

Select one:
a.
buys more foreign currency, and so buys more foreign goods.
b.
buys more foreign currency, and so buys fewer foreign goods.
c.
buys less foreign currency, and so buys more foreign goods.
d.
buys less foreign currency, and so buys fewer foreign goods.
Feedback
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The correct answer is: buys less foreign currency, and so buys fewer foreign goods.
Question 4
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4.Suppose a stock market boom makes people feel wealthier.

The increase in wealth would cause people to
Select one:
a.
increase consumption, which shifts the aggregate demand curve right.
b.
increase consumption, which shifts the aggregate demand curve left.
c.
decrease consumption, which shifts the aggregate demand curve right.
d.
decrease consumption, which shifts the aggregate demand curve left.
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The correct answer is: increase consumption, which shifts the aggregate demand curve right.
Question 5
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5.When taxes increase, consumption decreases

Select one:
a.
as shown by a movement to the left along the aggregate demand curve.
b.
shifting aggregate demand to the left.
c.
shifting aggregate supply the left.
d.
which does none of the above.
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The correct answer is: shifting aggregate demand to the left.
Question 6
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6.Aggregate demand shifts right when the government

Select one:
a.
increases taxes.
b.
increases military expenditures.
c.
increases the money supply.
d.
Both b and c are correct.
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The correct answer is: Both b and c are correct.
Question 7
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7.If the dollar appreciates perhaps because of speculation or

government policy then U.S.
Select one:
a.
net exports increase and aggregate demand shifts right.
b.
net exports increase and aggregate demand shifts left.
c.
net exports decrease and aggregate demand shifts right.
d.
net exports decrease and aggregate demand shifts left.
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The correct answer is: net exports decrease and aggregate demand shifts left.
Question 8
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8.Which of the following does not determine the long-run

level of real GDP?
Select one:
a.
the price level
b.
supplies of labor
c.
available natural resources
d.
available technology
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The correct answer is: the price level
Question 9
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9.The misperceptions theory of the short-run aggregate supply

curve says that if the price level increases more than people
expect, firms believe that the relative price of what they
produce has
Select one:
a.
increased, so they increase production.
b.
increased, so they decrease production.
c.
decreased, so they increase production.
d.
decreased, so they decrease production.
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The correct answer is: increased, so they increase production.
Question 10
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10.The sticky wage theory of the short-run aggregate supply

curve says that when prices fall unexpectedly, the real wage
Select one:
a.
rises, so employment rises.
b.
rises, so employment falls.
c.
falls, so employment rises.
d.
falls, so employment falls.
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The correct answer is: rises, so employment falls.
Question 11
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11.The sticky price theory of the short-run aggregate supply

curve says that when prices fall unexpectedly, some firms will
have
Select one:
a.
higher than desired prices which increases their sales.
b.
higher than desired prices which depresses their sales.
c.
lower than desired prices which increases their sales.
d.
lower than desired prices which depresses their sales.
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The correct answer is: higher than desired prices which depresses their sales.
Question 12
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12.Which of the following shifts short-run aggregate supply

left?
Select one:
a.
an increase in the price level
b.
an increase in the expected price level
c.
an increase in the capital stock
d.
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The correct answer is: an increase in the expected price level
Question 13
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13.If the economy starts at A and there is a fall in aggregate

demand, the economy moves
Select one:
a.
back to A in the long run.
b.
to B in the long run.
c.
to C in the long run.
d.
to D in the long run.
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The correct answer is: to C in the long run.
Question 14
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14.If a change in aggregate demand shifts the economy from

A to D, the government might use fiscal policy to move the
economy
Select one:
a.
back to A.
b.
to B.
c.
to C.
d.
to D.
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The correct answer is: back to A.
Question 15
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15.Suppose a shift in aggregate demand creates an economic

contraction. If policymakers can respond with sufficient speed
and precision, they can offset the initial shift by
Select one:
a.
shifting aggregate demand right.
b.
shifting aggregate demand left.
c.
shifting aggregate supply right.
d.
shifting aggregate supply left.
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The correct answer is: shifting aggregate demand right.
Question 16
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16.Which of the following are goals of monetary policy?

Select one:
a.
maximizing the value of the dollar relative to other currencies, economic growth, and high employment
b.
price stability, maximizing the value of the dollar relative to other currencies, and high employment
c.
price stability, economic growth, and high employment.
d.
price stability, economic growth, and maximizing the value of the dollar relative to other currencies.
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The correct answer is: price stability, economic growth, and high employment.
Question 17
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17.Monetary policy refers to the actions the Central Bank

takes to manage
Select one:
a.
the money supply and income tax rates to pursue its economic objectives.
b.
the money supply and interest rates to pursue its economic objectives.
c.
income tax rates and interest rates to pursue its economic objectives.
d.
government spending and income tax rates to pursue its economic objectives.
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The correct answer is: the money supply and interest rates to pursue its economic objectives.
Question 18
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18. Liquidity preference theory is most relevant to the

Select one:
a.
short run and supposes that the price level adjusts to bring money supply and money demand into balance.
b.
short run and supposes that the interest rate adjusts to bring money supply and money demand into balance.
c.
long run and supposes that the price level adjusts to bring money supply and money demand into balance.
d.
long run and supposes that the interest rate adjusts to bring money supply and money demand into balance.
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The correct answer is: short run and supposes that the interest rate adjusts to bring money supply and money
demand into balance.
Question 19
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19. The supply of money is determined by

Select one:
a.
the price level.
b.
the Central Bank.
c.
the value of money.
d.
the demand for money.
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The correct answer is: the Central Bank.
Question 20
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20. The supply of money increases when

Select one:
a.
the value of money increases.
b.
the interest rate increases.
c.
the Central Bank makes open-market purchases.
d.
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The correct answer is: the Central Bank makes open-market purchases.
Question 21
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Figure 1
21. Refer to Figure 1. In the figure above, the movement from

point A to point B in the money market would be caused by
Select one:
a.
an increase in the price level.
b.
a decrease in real GDP.
c.
an open market sale of Treasury securities by the Central Bank.
d.
an increase in the required reserve ratio by the Central Bank.
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The correct answer is: an open market sale of Treasury securities by the Central Bank.
Question 22
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22. The Central Bank can increase the federal funds rate by
Select one:
a.
selling Treasury bills, which increases bank reserves.
b.
buying Treasury bills, which increases bank reserves.
c.
selling Treasury bills, which decreases bank reserves.
d.
buying Treasury bills, which decreases bank reserves.
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The correct answer is: selling Treasury bills, which decreases bank reserves.
Question 23
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23.The money demand curve has a negative slope because

Select one:
a.
lower interest rates cause households and firms to switch from money to financial assets.
b.
lower interest rates cause households and firms to switch from financial assets to money.
c.
lower interest rates cause households and firms to switch from money to stocks.
d.
lower interest rates cause households and firms to switch from money to bonds.
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The correct answer is: lower interest rates cause households and firms to switch from financial assets to money.
Question 24
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24. An increase in real GDP

Select one:
a.
increases the buying and selling of goods and increases the demand for money as a medium of exchange.
b.
increases the buying and selling of goods and decreases the demand for money as a medium of exchange.
c.
decreases the buying and selling of goods and increases the demand for money as a medium of exchange.
d.
decreases the buying and selling of goods and decreases the demand for money as a medium of exchange.
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The correct answer is: increases the buying and selling of goods and increases the demand for money as a
medium of exchange.
Question 25
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25. The money demand curve would shift right if

Select one:
a.
real GDP decreased.
b.
the price level increased.
c.
the interest rate increased.
d.
the Central Bank sold Treasury securities.
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The correct answer is: the price level increased.
Question 26
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26. According to liquidity preference theory, if the quantity of

money supplied is greater than the quantity demanded the
interest rate will
Select one:
a.
increase and the quantity of money demanded will decrease.
b.
increase and the quantity of money demanded will increase.
c.
decrease and the quantity of money demanded will decrease.
d.
decrease and the quantity of money demanded will increase.
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The correct answer is: decrease and the quantity of money demanded will increase.
Question 27
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27.According to liquidity preference theory, an increase in the

price level shifts the
Select one:
a.
money demand curve right so the interest rate increases.
b.
money demand curve right so the interest rate decreases.
c.
money demand curve left so the interest rate decreases.
d.
money demand curve left so the interest rate increases.
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The correct answer is: money demand curve right so the interest rate increases.
Question 28
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28. Which of the following properly describes the interest rate

effect?
Select one:
a.
A higher price level leads to higher money demand, higher money demand leads to higher interest rates, a higher
interest rate increases the quantity of goods and services demanded.
b.
A higher price level leads to higher money demand, higher money demand leads to lower interest rates, a higher
interest rate reduces the quantity of goods and services demanded.
c.
A lower price level leads to lower money demand, lower money demand leads to lower interest rates, a lower
interest rate reduces the quantity of goods and services demanded.
d.
A lower price level leads to lower money demand, lower money demand leads to lower interest rates, a lower
interest rate increases the quantity of goods and services demanded.
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The correct answer is: A lower price level leads to lower money demand, lower money demand leads to lower
interest rates, a lower interest rate increases the quantity of goods and services demanded.
Question 29
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29. If the stock market booms

Select one:
a.
household spending increases. To offset the effects of this on the price level and real GDP, the Fed would
increase the money supply.
b.
household spending increases. To offset the effects of this on the price level and real GDP, the Fed would
decrease the money supply.
c.
household spending decreases. To offset the effects of this on the price level and real GDP, the Fed would
increase the money supply.
d.
household spending decreases. To offset the effects of this on the price level and real GDP, the Fed would
decrease the money supply.
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The correct answer is: household spending increases. To offset the effects of this on the price level and real GDP,
the Fed would decrease the money supply.
Question 30
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30. Fiscal policy refers to the idea that aggregate demand is

changed by changes in
Select one:
a.
the money supply.
b.
government spending and taxes.
c.
trade policy.
d.
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The correct answer is: government spending and taxes.
Question 31
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31. If the MPC = .85, then the government purchases

multiplier is about
Select one:
a.
1.18.
b.
3.33.
c.
6.67.
d.
8.5.
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The correct answer is: 6.67.
Question 32
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32. Which of the following correctly explains the crowding-

out effect?
Select one:
a.
An increase in government expenditures decreases the interest rate and so increases investment spending.
b.
An increase in government expenditures increases the interest rate and so reduces investment spending.
c.
A decrease in government expenditures increases the interest rate and so increases investment spending.
d.
A decrease in government expenditures decreases the interest rate and so reduces investment spending.
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The correct answer is: An increase in government expenditures increases the interest rate and so reduces
investment spending.
Question 33
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33. Assume the multiplier is 5 and that the total crowding-out

effect is $20 billion. An increase in government purchases of
$10 billion when the multiplier is 5 will shift the aggregate
demand curve
Select one:
a.
right $150 billion.
b.
right $70 billion.
c.
right $30 billion.
d.
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The correct answer is: right $30 billion.
Question 34
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Figure 2
34. Refer to Figure 2. In the figure above suppose the
economy is initially at point A. The movement of the
economy to point B as shown in the graph illustrates the effect
of which of the following policy actions by the Central Bank?
Select one:
a.
A decrease in income taxes
b.
An increase in the required reserve ratio
c.
An open market purchase of Treasury bills
d.
An open market sale of Treasury bills.
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The correct answer is: An open market purchase of Treasury bills
Question 35
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35. Aggregate demand shifts to the left and policymakers want

to stabilize output. What can they do?
Select one:
a.
repeal an investment tax credit or increase the money supply
b.
repeal an investment tax credit or decrease the money supply
c.
institute an investment tax credit or increase the money supply
d.
institute an investment tax credit or decrease the money supply
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The correct answer is: institute an investment tax credit or increase the money supply
Question 36
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36.Critics of stabilization policy argue that

Select one:
a.
there is a lag between the time policy is passed and the time policy has an impact on the economy.
b.
the impact of policy may last longer than the problem it was designed to offset.
c.
policy can be a source of, instead of a cure for, economic fluctuations.
d.
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37. According to the short-run Phillips curve, the

unemployment rate and the inflation rate are
Select one:
a.
unrelated.
b.
positively related.
c.
negatively related.
d.
unaffected by monetary policy.
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The correct answer is: negatively related.
Question 38
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38. If policymakers expand aggregate demand, inflation

Select one:
a.
falls, but unemployment rises.
b.
and unemployment fall.
c.
and unemployment rise.
d.
rises, but unemployment falls.
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The correct answer is: rises, but unemployment falls.
Question 39
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Figure 3
39. Refer to Figure-3. What should the Federal Reserve do if

it wants to move from point A to point B in the short-run
Phillips curve depicted in the figure above?
Select one:
a.
buy treasury bills
b.
sell treasury bills
c.
lower the discount rate
d.
increase the money supply
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The correct answer is: sell treasury bills
Question 40
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40.In the long run, the Phillips curve is a ________ at

________.
Select one:
a.
horizontal line; 0% inflation
b.
negatively sloped line; the intersection of aggregate demand and short-run aggregate supply
c.
vertical line; the natural rate of unemployment
d.
vertical line; the expected rate of inflation
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The correct answer is: vertical line; the natural rate of unemployment
Question 41
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41. If actual inflation is less than expected inflation, actual real

wages will be _________ expected real wages and
unemployment will _______.
Select one:
a.
greater than; rise
b.
greater than; fall
c.
less than; rise
d.
less than; fall
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The correct answer is: greater than; rise
Question 42
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42.Suppose that the money supply increases. In the short run,

this increases prices according to
Select one:
a.
both the short-run Phillips curve and the aggregate demand and aggregate supply model.
b.
neither the short-run Phillips curve nor the aggregate demand and aggregate supply model.
c.
the short-run Phillips curve, but not the aggregate demand and aggregate supply model.
d.
the aggregate demand and aggregate supply model but not the short-run Phillips curve.
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The correct answer is: both the short-run Phillips curve and the aggregate demand and aggregate supply model.
Question 43
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43. The government of Libertina considers two policies.

Policy A would shift AD right by 200 units while policy B
would shift AD right by 100 units. According to the short-run
Phillips curve policy A will lead
Select one:
a.
to a lower unemployment rate and a lower inflation rate than policy B.
b.
to a lower unemployment rate and a higher inflation rate than policy B.
c.
to a higher unemployment rate and lower inflation rate than policy B.
d.
to a higher unemployment rate and higher inflation rate than policy B.
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The correct answer is: to a lower unemployment rate and a higher inflation rate than policy B.
Question 44
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Figure 4
44. Refer to Figure 4. Suppose the economy is at point C in

the figure above. Which of the following is true?
Select one:
a.
The short-run Phillips curve will shift to the right.
b.
The short-run Phillips curve will shift to the left.
c.
The economy will move from C to A.
d.
Workers and firms expect inflation to be 1%.
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The correct answer is: The short-run Phillips curve will shift to the left.
Question 45
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45. An increase in expected inflation shifts the

Select one:
a.
short-run Phillips curve right.
b.
short-run Phillips curve left.
c.
long-run Phillips curve right.
d.
long-run Phillips curve left.
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The correct answer is: short-run Phillips curve right.
Question 46
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46. Where does the short-run Phillips curve intersect the long-
run Phillips curve?
Select one:
a.
at the point where the rate of inflation and the unemployment rate are equal
b.
at the natural rate of inflation
c.
at the point where actual inflation is equal to expected inflation
d.
There is no intersection between the short- and long-run Phillips curves.
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The correct answer is: at the point where actual inflation is equal to expected inflation
Question 47
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47. What impact does monetary policy have on the long-run

Phillips curve?
Select one:
a.
Monetary policy can only shift the long-run Phillips curve to the left.
b.
Monetary policy shifts the long-run Phillips curve to the right or left, depending on whether monetary policy is
expansionary or contractionary.
c.
Monetary policy can only shift the long-run Phillips curve to the right.
d.
Monetary policy has no impact on the long-run Phillips curve.
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The correct answer is: Monetary policy has no impact on the long-run Phillips curve.
Question 48
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48. Which of the following is correct if there is an adverse

supply shock?
Select one:
a.
The short-run aggregate supply curve and the short-run Phillips curve both shift right.
b.
The short-run aggregate supply curve and the short-run Phillips curve both shift left.
c.
The short-run aggregate supply curve shifts right and the short-run Phillips curve shifts left.
d.
The short-run aggregate supply curve shifts left and the short-run Phillips curve shifts right.
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The correct answer is: The short-run aggregate supply curve shifts left and the short-run Phillips curve shifts
right.
Question 49
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49. Contractionary monetary policy would

Select one:
a.
cause disinflation and make the short-run Phillips curve shift right.
b.
cause disinflation and make the short-run Phillips curve shift left.
c.
not cause disinflation, but make the short-run Phillips curve shift right.
d.
not cause disinflation, but make the short-run Phillips curve shift left.
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The correct answer is: cause disinflation and make the short-run Phillips curve shift left.
Question 50
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50.If a central bank reduced inflation by 2 percentage points

and that made output fall by 6 percentage points for 2 years
and the unemployment rate rises from 3 percent to 5 percent
for 2 years, the sacrifice ratio is
Select one:
a.
1.
b.
2.
c.
3.
d.
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The correct answer is: 3.
Question 51
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51. If the sacrifice ratio is 2, reducing the inflation rate from
10 percent to 6 percent would require sacrificing
Select one:
a.
2 percent of annual output.
b.
c.
d.
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The correct answer is: 8 percent of annual output.
Question 52
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52. A country is likely to have a lower sacrifice ratio if

Select one:
a.
contracts are shorter, and the Central Bank is credible.
b.
contracts are shorter, and the Central Bank has a poor reputation.
c.
contracts are longer, and the Central Bank is credible.
d.
contracts are longer, and the Central Bank has a poor reputation.
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The correct answer is: contracts are shorter, and the Central Bank is credible.
Question 53
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53. If the Fed announced a policy to reduce inflation and

people found it credible, the short-run Phillips curve would
shift
Select one:
a.
right and the sacrifice ratio would fall.
b.
right and the sacrifice ratio would rise.
c.
left and the sacrifice ratio would fall.
d.
left and the sacrifice ratio would rise.
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The correct answer is: left and the sacrifice ratio would fall.
Question 54
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54. Proponents of rational expectations argued that the

sacrifice ratio
Select one:
a.
could be high because it was rational for people not to immediately change their expectations.
b.
could be high because people might adjust their expectations quickly if they found anti-inflation policy credible.
c.
could be low because it was rational for people not to immediately change their expectations.
d.
could be low because people might adjust their expectations quickly if they found anti-inflation policy credible.
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The correct answer is: could be low because people might adjust their expectations quickly if they found anti-
inflation policy credible.
Question 55
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55. Over the long run the Volcker disinflation

Select one:
a.
shifted the short-run and long-run Phillips curves left.
b.
shifted the short-run, but not the long-run Phillips curve left.
c.
shifted the long-run, but not the short-run Phillips curve left.
d.
Feedback
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The correct answer is: shifted the short-run, but not the long-run Phillips curve left.

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PROBLEM SET 1

1.Economists use the phrase "There is no such thing as a free

3.The opportunity cost of going to college is

4.Maurice receives $100 as a birthday gift. In deciding how to

5.Russell spends an hour studying instead of playing tennis.

6.A person's willingness to pay for a good is based on

7.The average cost per seat on the 50-passenger Floating-On-

8.A construction company has built 50 houses so far this year

9.Suppose your management professor has been offered a

10.In an economy in which decisions are guided by prices and

11. A company that formerly produced software went out of

12. Market failure can be caused by

13. Suppose that the average income of a Kenyan is higher

14.Which of the following is the most correct statement about

15.A circular-flow diagram is a model that

16.In a circular-flow diagram,

17.Production possibilities frontiers are usually bowed

19.Refer to Figure 1. A movement from point C to point D

21. Refer to Figure 1. If the economy moves from point A to

22.A production possibilities frontier can shift outward if

23. The difference between production possibilities frontiers

24. Without trade,

25. Which of the following statements is not correct?

26. Refer to Table 3-1. The opportunity cost of 1 pound of

27.Refer to Table 3-1. The opportunity cost of 1 pound of

28.Refer to Table 3-1. The farmer has an absolute advantage

29. Refer to Table 3-1. The rancher has an absolute advantage

30. Refer to Table 3-1. The rancher has a comparative

1. The negative relationship between price and quantity

2.Quantity demanded falls as the price rises and rises as the

3. Which of the following changes would not shift the demand

4. Suppose you like to make, from scratch, pies filled with

5. Currently you purchase 6 packages of hot dogs a month.

6. If Francis experiences a decrease in his income, we would

7.Ford Motor Company announces that it will offer $3,000

8. Holding the nonprice determinants of supply constant, a

9. Workers at a bicycle assembly plant currently earn the

10. If car manufacturers begin utilizing new labor-saving

11. Suppose there is an earthquake that destroys several corn

12. Refer to Table 1. The equilibrium price and quantity,

13. Refer to Table 1. If the price were $8, a

14. Refer to Table 1. If the price were $2, a

15. Refer to Figure 4-8. In this market, equilibrium price and

16. Refer to Figure 4-8. If price in this market is currently $14,

17. Refer to Figure 4-8. If there is currently a shortage of 30

18. The demand for Werthers candy is likely

19. It is likely that

20. A person who takes a prescription drug to control high

21. Holding all other forces constant, when the price of

22. For a particular good, a 2 percent increase in price causes a

24. Refer to Figure 5-1. Assume the section of the demand

25. If the demand for donuts is elastic, then a decrease in the

26. Harry's Barber Shop increased its total monthly revenue

28. Refer to Figure 5-5. An increase in price from $30 to $35

29. For a horizontal demand curve,

30. Last year, Joan bought 50 pounds of hamburger when her

31. Suppose the cross-price elasticity of demand between hot

32. Cross-price elasticity of demand measures how

33. Which of the following expressions represents a cross-

34. Generally, a firm is more willing and able to increase

35. The discovery of a new hybrid wheat would increase the

36. Price controls are usually enacted