Test 2 Economics PDF

**Chapter 14 Firms in Competitive Markets** **MULTIPLE CHOICE** **Figure 14-1** 1\. **Refer to Figure 14-1**. Let *Q* represent the quantity of output and suppose the price of the good is \$125. Then ---- ----------------------------------------- a. marginal revenue is \$125 at *Q* = 270....

**Chapter 14 Firms in Competitive Markets** **MULTIPLE CHOICE** **Figure 14-1** 1\. **Refer to Figure 14-1**. Let *Q* represent the quantity of output and suppose the price of the good is \$125. Then ---- ----------------------------------------- a. marginal revenue is \$125 at *Q* = 270. b. marginal revenue is \$125 at *Q* = 322. c. marginal revenue is \$125 at *Q* = 515. d. All of the above are correct. ---- ----------------------------------------- ANS: D PTS: 1 DIF: 1 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Marginal revenue MSC: Interpretive 2\. **Refer to Figure 14-1**. Let *Q* represent the quantity of output and suppose the price of the good is \$125. Then ---- ----------------------------------------- a. marginal revenue is \$80 at *Q* = 270. b. marginal revenue is \$100 at *Q* = 322. c. marginal revenue is \$175 at *Q* = 515. d. None of the above are correct. ---- ----------------------------------------- ANS: D PTS: 1 DIF: 1 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Marginal revenue MSC: Interpretive 3\. **Refer to Figure 14-1.** Suppose the price of the good is \$175. If the firm produces and sells 515 units of output, its total revenue is ---- ------------ a. \$100,525. b. \$90,125. c. \$84,500. d. \$75,250. ---- ------------ ANS: B PTS: 1 DIF: 1 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Total revenue MSC: Applicative 4\. **Refer to Figure 14-1.** When the price of the good is \$175, the firm's maximum profit is ---- ----------- a. \$16,500. b. \$20,375. c. \$25,750. d. \$90,125. ---- ----------- ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Cost curves \| Profit maximization MSC: Applicative 5\. **Refer to Figure 14-1**. Suppose AVC = \$113 when the firm produces 515 units of output. Then the firm's fixed cost amounts to ---- --------------------------------------------- a. \$5,500 and its profit amounts to \$20,375. b. \$5,750 and its profit amounts to \$20,375 c. \$5,980 and its profit amounts to \$25,750. d. \$6,180 and its profit amounts to \$25,750. ---- --------------------------------------------- ANS: D PTS: 1 DIF: 3 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Cost curves MSC: Applicative 6\. **Refer to Figure 14-1.** Suppose the price of the good is \$175. If the firm produces and sells 514 units of output, its profit is approximately ---- ----------- a. \$24,995. b. \$25,550. c. \$25,750. d. \$26,025. ---- ----------- ANS: C PTS: 1 DIF: 3 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Cost curves \| Profit MSC: Applicative 7\. **Refer to Figure 14-1.** The firm will shut down in the short run if the price of the good is ---- ------------------------------- a. \$75. b. \$85. c. \$95. d. All of the above are correct. ---- ------------------------------- ANS: A PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Cost curves \| Profit maximization MSC: Applicative 8\. **Refer to Figure 14-1.** In the long run, the firm will exit the market if the price of the good is ---- ------------------------------- a. \$75. b. \$85. c. \$95. d. All of the above are correct. ---- ------------------------------- ANS: D PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Long run MSC: Applicative 9\. **Refer to Figure 14-1.** In the short run, the firm's maximum profit (or minimum loss) is the same at which of the following pairs of prices? ---- ----------------- a. \$65 and \$75 b. \$75 and \$85 c. \$80 and \$100 d. \$125 and \$175 ---- ----------------- ANS: A PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Cost curves \| Profit maximization MSC: Applicative 10\. **Refer to Figure 14-1.** At what price is the firm's maximum profit zero? ---- ------- a. \$80 b. \$90 c. \$100 d. \$125 ---- ------- ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Cost curves \| Profit maximization MSC: Applicative 11\. For a firm, marginal revenue minus marginal cost is equal to ---- ---------------------------- a. profit. b. average total cost. c. change in profit. d. change in average revenue. ---- ---------------------------- ANS: C PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Marginal revenue \| Marginal cost MSC: Interpretive 12\. A competitive firm is currently producing a quantity of output at which marginal revenue exceeds marginal cost. In order to increase its profit, the firm should ---- ------------------------------------------------------------ a. increase the price of the good that it produces and sells. b. increase its quantity of output. c. decrease its total cost. d. decrease its average total cost. ---- ------------------------------------------------------------ ANS: B PTS: 1 DIF: 2 REF: 14-2 NAT: Analytic LOC: Perfect competition TOP: Profit maximization MSC: Interpretive 13\. In a market with a fixed number of firms, as long as price is ---- ---------------------------------------------------------------------------------------- a. above average variable cost, each firm's marginal-cost curve is its supply curve. b. above average variable cost, each firm's average-total-cost curve is its supply curve. c. above average total cost, each firm's marginal-cost curve is its supply curve. d. above average total cost, each firm's average-total-cost curve is its supply curve. ---- ---------------------------------------------------------------------------------------- ANS: A PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 14\. Suppose the long-run supply curve for a good is upward-sloping. The upward slope could be explained by ---- --------------------------------------------------------------------------------- a. increases in production costs resulting from more firms coming into the market. b. a breakdown of the "free entry and exit" feature of competition. c. a breakdown of the "price taking" feature of competition. d. a stable demand curve for the good, that is, a demand curve that never shifts. ---- --------------------------------------------------------------------------------- ANS: A PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive 15\. Suppose the long-run supply curve for a good is upward-sloping. The upward slope could be explained by ---- ------------------------------------------------------------------------------------------------------ a. decreases in production costs resulting from more firms coming into the market. b. a breakdown of the "free entry and exit" feature of competition. c. a breakdown of the "price taking" feature of competition. d. the fact that a resource used in the production of the good is available only in limited quantities. ---- ------------------------------------------------------------------------------------------------------ ANS: D PTS: 1 DIF: 2 REF: 14-3 NAT: Analytic LOC: Perfect competition TOP: Long-run supply curve MSC: Interpretive **Chapter 15 Monopoly** **MULTIPLE CHOICE** 1\. Suppose ABC Aluminum Inc. owns 80% of the world's bauxite, a mineral used in the production of aluminum. Which of the following reasons describes the fundamental barrier to entry for the aluminum industry? ---- --------------------------- a. monopoly resources b. government regulation c. the production process d. Both a and b are correct. ---- --------------------------- ANS: A PTS: 1 DIF: 1 REF: 15-1 NAT: Analytic LOC: Monopoly TOP: Barriers to entry MSC: Applicative 2\. Exclusive ownership of a key resource ---- -------------------------------------------------------------- a. is the most common cause of a monopoly. b. is a potential but rare cause of a monopoly. c. explains the monopoly ownership of the US Postal Service. d. explains why a single firm distributes water to a community. ---- -------------------------------------------------------------- ANS: B PTS: 1 DIF: 2 REF: 15-1 NAT: Analytic LOC: Monopoly TOP: Barriers to entry MSC: Applicative 3\. Which of the following is NOT a difference between monopolies and perfectly competitive markets? ---- ------------------------------------------------------------------------------------------------------------------------------------ a. Monopolies can earn profits in the long run while perfectly competitive firms break even. b. Monopolies charge a price higher than marginal cost while perfectly competitive firms charge a price equal to marginal cost. c. Monopolies choose to produce the quantity at which marginal revenue equals marginal cost while perfectly competitive firms do not. d. Monopolies face downward sloping demand curves while perfectly competitive firms face horizontal demand curves. ---- ------------------------------------------------------------------------------------------------------------------------------------ ANS: C PTS: 1 DIF: 2 REF: 15-2 NAT: Analytic LOC: Monopoly TOP: Monopoly \| Perfect competition MSC: Interpretive **Figure 15-1** 4\. **Refer to Figure 15-1**. Which of the following reasons describes the fundamental barrier to entry for the monopoly in the figure? ---- --------------------------- a. monopoly resources b. government regulation c. the production process d. Both a and b are correct. ---- --------------------------- ANS: C PTS: 1 DIF: 3 REF: 15-1 NAT: Analytic LOC: Monopoly TOP: Barriers to entry \| Natural monopoly MSC: Interpretive 5\. When a monopolist reduces the quantity of output it produces and sells, ---- ------------------------------------------- a. the price of its output increases. b. the price of its output remains constant. c. the price of its output decreases. d. the profits for the firm always decrease. ---- ------------------------------------------- ANS: A PTS: 1 DIF: 2 REF: 15-2 NAT: Analytic LOC: Monopoly TOP: Monopoly MSC: Interpretive **Table 15-1** A monopolist faces the following demand curve: -------------- ----------- **Quantity** **Price** 0 20 1 18 2 16 3 14 4 12 5 10 6 8 -------------- ----------- Marginal cost is constant at \$8 per unit. 6\. **Refer to Table 15-1.** The monopolist's total revenue from selling 4 units of output is ---- ------- a. \$4. b. \$16. c. \$32. d. \$48. ---- ------- ANS: D PTS: 1 DIF: 1 REF: 15-2 NAT: Analytic LOC: Monopoly TOP: Total revenue MSC: Applicative 7\. **Refer to Table 15-1.** The monopolist's marginal revenue from selling the second unit of output is ---- ------- a. \$8. b. \$14. c. \$16. d. \$24. ---- ------- ANS: B PTS: 1 DIF: 2 REF: 15-2 NAT: Analytic LOC: Monopoly TOP: Marginal revenue MSC: Applicative 8\. **Refer to Table 15-1.** The monopolist's marginal revenue is ---- --------------------------------------------------------------- a. always more than the price of its good. b. always equal to the price of its good. c. always less than the price of its good. d. sometimes more and sometimes less than the price of its good. ---- --------------------------------------------------------------- ANS: C PTS: 1 DIF: 2 REF: 15-2 NAT: Analytic LOC: Monopoly TOP: Marginal revenue MSC: Interpretive 9\. **Refer to Table 15-1.** When the price effect on revenue is greater than the output effect, marginal revenue is ---- ---------------------------------------------------- a. positive. This occurs with the 3rd unit of output. b. positive. This occurs with the 4th unit of output. c. negative. This occurs with the 5th unit of output. d. negative. This occurs with the 6th unit of output. ---- ---------------------------------------------------- ANS: D PTS: 1 DIF: 2 REF: 15-2 NAT: Analytic LOC: Monopoly TOP: Price effect \| Output effect MSC: Applicative 10\. **Refer to Table 15-1.** The monopolist's profit-maximizing level of output is ---- ---------- a. 3 units. b. 4 units. c. 5 units. d. 6 units. ---- ---------- ANS: A PTS: 1 DIF: 3 REF: 15-2 NAT: Analytic LOC: Monopoly TOP: Profit maximization MSC: Applicative 11\. **Refer to Table 15-1.** Suppose the firm depicted in the table is selling a prescription drug for which it had a patent, but the patent has expired. As new firms enter the market and sell the generic version of this drug competitively, what quantity will be sold? ---- --------- a. 3 units b. 4 units c. 5 units d. 6 units ---- --------- ANS: D PTS: 1 DIF: 3 REF: 15-2 NAT: Analytic LOC: Monopoly TOP: Perfect competition MSC: Applicative **Scenario 15-1** Suppose executives at an art museum know that 100 adults are willing to pay \$12 for admission to the museum on a weekday. Suppose the executives also know that 200 students are willing to pay \$8 for admission on a weekday. The cost of operating the museum on a weekday is \$2,000. 12\. **Refer to Scenario 15-1.** How much profit will the museum earn if it charges all customers \$8 for admission? ---- --------- a. \$200. b. \$400. c. \$800. d. \$2400. ---- --------- ANS: B PTS: 1 DIF: 2 REF: 15-4 NAT: Analytic LOC: Monopoly TOP: Price discrimination MSC: Applicative 13\. **Refer to Scenario 15-1.** How much profit will the museum earn if it charges all customers \$12 for admission? ---- --------- a. \$-800. b. \$100. c. \$800. d. \$1200. ---- --------- ANS: A PTS: 1 DIF: 2 REF: 15-4 NAT: Analytic LOC: Monopoly TOP: Price discrimination MSC: Applicative 14\. **Refer to Scenario 15-1.** How much profit will the museum earn if it engages in price discrimination? ---- --------- a. \$800. b. \$1200. c. \$1600. d. \$2800. ---- --------- ANS: A PTS: 1 DIF: 2 REF: 15-4 NAT: Analytic LOC: Monopoly TOP: Price discrimination MSC: Applicative 15\. **Refer to Scenario 15-1.** How much additional profit will the museum earn if it engages in price discrimination compared to charging each customer \$8 for admission? ---- -------- a. \$0. b. \$200. c. \$400. d. \$800. ---- -------- ANS: C PTS: 1 DIF: 2 REF: 15-4 NAT: Analytic LOC: Monopoly TOP: Price discrimination MSC: Applicative **Chapter 16 Monopolistic Competition** **MULTIPLE CHOICE** 1\. The breakfast cereal industry, with its concentration ratio of 78%, would best be described as a(n) ---- -------------------------------------- a. perfectly competitive market. b. monopolistically competitive market. c. oligopoly. d. monopoly. ---- -------------------------------------- ANS: C PTS: 1 DIF: 2 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Oligopoly MSC: Interpretive 2\. Which of the following is most likely sold in a monopolistically competitive market? ---- ----------------------------- a. sports drinks b. cable tv programming c. a share of McDonald's stock d. sunglasses ---- ----------------------------- ANS: D PTS: 1 DIF: 2 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition MSC: Applicative **Scenario 16-1** Suppose the following are the sales for all of the firms in two different industries. ---------------- ---------------- **Industry A** **Industry B** \$225,000 \$400,000 \$200,000 \$325,000 \$180,000 \$300,000 \$100,000 \$200,000 \$100,000 \$95,000 \$90,000 \$80,000 \$75,000 \$78,000 \$60,000 \$75,000 ---------------- ---------------- 3\. **Refer to Scenario 16-1.** What are the concentration ratios for these industries? ---- ------------------------------------- a. Industry A: 22%, Industry B: 26% b. Industry A: 41%, Industry B: 47%. c. Industry A: 68%, Industry B: 79% d. Industry A: 100%, Industry B: 100%. ---- ------------------------------------- ANS: C PTS: 1 DIF: 2 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Concentration ratios MSC: Applicative 4\. **Refer to Scenario 16-1.** Which of the following statements is correct regarding the competitiveness of these two industries? ---- ---------------------------------------------------------------------------------------------- a. Industry A and Industry B are equally competitive. b. Industry A is more competitive than Industry B. c. Industry A is less competitive than Industry B. d. The competitiveness of these two industries cannot be determined from the information given. ---- ---------------------------------------------------------------------------------------------- ANS: B PTS: 1 DIF: 2 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Concentration ratios MSC: Applicative **Figure 16-1** 5\. **Refer to Figure 16-1.** Which of the graphs illustrates the demand curve most likely faced by a firm in a monopolistically competitive market? ---- --------- a. Panel A b. Panel B c. Panel C d. Panel D ---- --------- ANS: B PTS: 1 DIF: 2 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition MSC: Applicative 6\. **Refer to Figure 16-1.** Which of the graphs illustrates a relatively elastic, though not perfectly elastic, demand curve consistent with a market that has many substitute products? ---- --------- a. Panel A b. Panel B c. Panel C d. Panel D ---- --------- ANS: B PTS: 1 DIF: 2 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition MSC: Applicative 7\. **Refer to Figure 16-1.** Which of the following sets of explanations best describes the differences between the graphs above? +-----------------------------------+-----------------------------------+ | a. | Panel A: monopolistically | | | competitive firm's demand curve | | | | | | Panel B: monopoly firm's demand | | | curve | | | | | | Panel C: oligopoly firm's demand | | | curve | | | | | | Panel D: perfectly competitive | | | firm's demand curve | +-----------------------------------+-----------------------------------+ | b. | Panel A: oligopoly firm's demand | | | curve | | | | | | Panel B: perfectly competitive | | | firm's demand curve | | | | | | Panel C: monopolistically | | | competitive firm's demand curve | | | | | | Panel D: supply curve | +-----------------------------------+-----------------------------------+ | c. | Panel A: perfectly competitive | | | firm's demand curve | | | | | | Panel B: monopolistically | | | competitive firm's demand curve | | | | | | Panel C: monopoly firm's demand | | | curve | | | | | | Panel D: supply curve | +-----------------------------------+-----------------------------------+ | d. | Panel A: monopolistically | | | competitive firm's demand curve | | | | | | Panel B: monopoly firm's demand | | | curve | | | | | | Panel C: perfectly competitive | | | firm's demand curve | | | | | | Panel D: supply curve | +-----------------------------------+-----------------------------------+ ANS: C PTS: 1 DIF: 2 REF: 16-1 NAT: Analytic LOC: Monopolistic competition TOP: Monopolistic competition MSC: Applicative **Figure 16-2** 8\. **Refer to Figure 16-2.** The profit for this firm is ---- --------- a. \$375. b. \$500. c. \$1000. d. \$1250. ---- --------- ANS: B PTS: 1 DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Profit maximization MSC: Applicative 9\. **Refer to Figure 16-2.** How much consumer surplus will be derived from the purchase of this product at the monopolistically competitive price? ---- ----------- a. \$250. b. \$500 c. \$562.50. d. \$1250. ---- ----------- ANS: A PTS: 1 DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Consumer surplus MSC: Applicative 10\. **Refer to Figure 16-2.** The graph depicts a monopolistically competitive firm in the short run. Which of the following explanations best decribes the long run adjustment? ---- ------------------------------------------------------------------------------------------------------------------------------------------------------ a. More firms will enter this market and each firm will have a smaller share of the total market demand, shifting this firm's demand curve to the left. b. More firms will enter this market and each firm will have a larger share of the total market demand, shifting this firm's demand to the right. c. Firms will exit this market and each firm will have a smaller share of the total market demand, shifting this firm's demand to the left. d. Firms will exit this market and each firm will have a larger share of the total market demand, shifting this firm's demand to the right. ---- ------------------------------------------------------------------------------------------------------------------------------------------------------ ANS: A PTS: 1 DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Long run equilibrium MSC: Applicative **Scenario 16-2** Ike's Ice Cream has decided to open a new ice cream parlor in Mayville, MS. The market for ice cream parlors is monopolistically competitive. 11\. **Refer to Scenario 16-2.** As a result of the new Ike's Ice Cream parlor, consumers living in and visiting Mayville are likely to experience a ---- ---------------------------------------------------------- a. business-stealing externality, which harms producers. b. business-stealing externality, which benefits producers. c. product-variety externality, which harms consumers. d. product-variety externality, which benefits consumers. ---- ---------------------------------------------------------- ANS: D PTS: 1 DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Product-variety externality MSC: Applicative 12\. **Refer to Scenario 16-2.** As a result of the new Ike's Ice Cream parlor, existing ice cream shops located in Mayville are likely to experience a ---- ---------------------------------------------------------- a. business-stealing externality, which harms producers. b. business-stealing externality, which benefits producers. c. product-variety externality, which harms consumers. d. product-variety externality, which benefits consumers. ---- ---------------------------------------------------------- ANS: A PTS: 1 DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Business-stealing externality MSC: Applicative **Figure 16-3** 13\. **Refer to Figure 16-3.** What is the efficient scale of production? ---- --------------------------------------- a. This firm cannot produce efficiently. b. 12 units c. 22 units d. 28 units ---- --------------------------------------- ANS: D PTS: 1 DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Excess capacity MSC: Applicative 14\. **Refer to Figure 16-3.** How much cost per unit could this firm save by producing the efficient level of output rather than the profit-maximizing level of output? ---- ----- a. \$0 b. \$1 c. \$2 d. \$3 ---- ----- ANS: C PTS: 1 DIF: 2 REF: 16-2 NAT: Analytic LOC: Monopolistic competition TOP: Efficient scale MSC: Applicative 15\. AllClean knows that it produces and sells very effective laundry detergent. NotQuiteWhite knows that it produces and sells ineffective laundry detergent. According to the signaling theory of advertising, ---- ----------------------------------------------------------------------------------------------------------------------- a. both AllClean and NotQuiteWhite have incentives to spend large amounts of money on advertising their products. b. AllClean has an incentive to spend a large amount of money on advertising its detergent, but NotQuiteWhite does not. c. NotQuiteWhite has an incentive to spend a large amount of money on advertising its detergent, but AllClean does not. d. neither AllClean nor NotQuiteWhite has an incentive to spend a large amount of money on advertising their detergents. ---- ----------------------------------------------------------------------------------------------------------------------- ANS: B PTS: 1 DIF: 2 REF: 16-3 NAT: Analytic LOC: Monopolistic competition TOP: Advertising MSC: Applicative **Chapter 17 Oligopoly** **MULTIPLE CHOICE** 1\. Because oligopoly markets have only a few sellers, the actions of any one seller ---- ------------------------------------------------------------------------ a. do not affect other sellers in the market. b. can have a large impact on the profits of other sellers in the market. c. will affect how other firms behave in the market. d. Both b) and c) are correct. ---- ------------------------------------------------------------------------ ANS: D DIF: 1 REF: 17-0 NAT: Analytic LOC: Oligopoly TOP: Oligopoly \| Markets MSC: Definitional 2\. Game theory is necessary to understand which kinds of markets? ---- ------------------------------- a. monopoly b. competitive c. oligopoly d. All of the above are correct. ---- ------------------------------- ANS: C DIF: 1 REF: 17-0 NAT: Analytic LOC: Oligopoly TOP: Game theory MSC: Definitional 3\. If two firms comprise the entire soft drink market, the market would be a(n) ---- --------------------------------------- a. Nash equilibrium. b. monopolistically competitive market. c. oligopolistically competitive market. d. duopoly. ---- --------------------------------------- ANS: D DIF: 1 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Duopoly MSC: Definitional 4\. Suppose that George and Laura are duopolists. George is producing 300 units of output, and Laura is producing 400 units of output. When Laura produces 400 units, George maximizes profit by producing 300 units. When George produces 300 units of output, Laura maximizes profit by producing 400 units. George and Laura are ---- ----------------------------------------------- a. in a competitive market. b. at a Nash equilibrium. c. pricing at the minimum of average total cost. d. engaging in mark-up pricing. ---- ----------------------------------------------- ANS: B DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Nash equilibrium MSC: Interpretive ***Table 17-1*** Imagine a small town in which only two residents, Abby and Brad, own wells that produce safe drinking water. Each week Abby and Brad work together to decide how many gallons of water to pump. They bring water to town and sell it at whatever price the market will bear. To keep things simple, suppose that Abby and Brad can pump as much water as they want without cost so that the marginal cost is zero. The weekly town demand schedule and total revenue schedule for water is shown in the table below: +-----------------------+-----------------------+-----------------------+ | Quantity | Price | Total Revenue | | | | | | (in gallons) | | (and Total Profit) | +-----------------------+-----------------------+-----------------------+ | 0 | \$12 | \$0 | +-----------------------+-----------------------+-----------------------+ | 1 | \$11 | \$11 | +-----------------------+-----------------------+-----------------------+ | 2 | \$10 | \$20 | +-----------------------+-----------------------+-----------------------+ | 3 | \$9 | \$27 | +-----------------------+-----------------------+-----------------------+ | 4 | \$8 | \$32 | +-----------------------+-----------------------+-----------------------+ | 5 | \$7 | \$35 | +-----------------------+-----------------------+-----------------------+ | 6 | \$6 | \$36 | +-----------------------+-----------------------+-----------------------+ | 7 | \$5 | \$35 | +-----------------------+-----------------------+-----------------------+ | 8 | \$4 | \$32 | +-----------------------+-----------------------+-----------------------+ | 9 | \$3 | \$27 | +-----------------------+-----------------------+-----------------------+ | 10 | \$2 | \$20 | +-----------------------+-----------------------+-----------------------+ | 11 | \$1 | \$11 | +-----------------------+-----------------------+-----------------------+ | 12 | \$0 | \$0 | +-----------------------+-----------------------+-----------------------+ 5\. **Refer to Table 17-1.** Suppose that Abby and Brad work together in order to operate as a profit-maximizing monopolist. What price will they charge for water? ---- ----- a. \$8 b. \$7 c. \$6 d. \$4 ---- ----- ANS: C DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Monopoly MSC: Applicative 6\. **Refer to Table 17-1.** Suppose that Abby and Brad work together in order to operate as a profit-maximizing monopolist. How many gallons of water will be produced and sold? ---- ----------- a. 4 gallons b. 5 gallons c. 6 gallons d. 8 gallons ---- ----------- ANS: C DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Monopoly MSC: Applicative 7\. **Refer to Table 17-1.** If this market for water were perfectly competitive instead of monopolistic, what would be the price for water? ---- ------ a. \$0 b. \$4 c. \$6 d. \$12 ---- ------ ANS: A DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Competitive markets MSC: Applicative 8\. **Refer to Table 17-1.** If this market for water were perfectly competitive instead of monopolistic, how many gallons of water would be produced and sold? ---- ------------ a. 12 gallons b. 8 gallons c. 6 gallons d. 0 gallons ---- ------------ ANS: A DIF: 2 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Competitive markets MSC: Applicative 9\. **Refer to Table 17-1.** Suppose the town enacts new antitrust laws that prohibit Abby and Brad from operating as a monopoly. What will be the price of water once Abby and Brad reach a Nash equilibrium? ---- ------ a. \$12 b. \$8 c. \$6 d. \$4 ---- ------ ANS: D DIF: 3 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Nash equilibrium MSC: Applicative 10\. **Refer to Table 17-1.** Suppose the town enacts new antitrust laws that prohibit Abby and Brad from operating as a monopoly. How much profit will Abby and Brad *each* earn once they reach a Nash equilibrium? ---- ------ a. \$36 b. \$32 c. \$18 d. \$16 ---- ------ ANS: D DIF: 3 REF: 17-1 NAT: Analytic LOC: Oligopoly TOP: Nash equilibrium MSC: Applicative 11\. Which of the following companies may be the federal government's next big antitrust target? ---- ---------- a. Spalding b. Google c. Linux d. Apple ---- ---------- ANS: B DIF: 1 REF: 17-3 NAT: Analytic LOC: Oligopoly TOP: Antitrust MSC: Applicative ***Table 17-2*** Suppose that two firms determine that each could lower its costs and increase its profits if both reduced their advertising budgets. But in order for the plan to work, each firm must agree to refrain from advertising. Each firm believes that advertising works by increasing the demand for the firm's product, but each firm also believes that if neither firm advertises, the cost savings will outweigh the lost sales. The table below lists each firm's individual profits: **Firm A** Breaks agreement Maintains agreement and advertises and does **not** advertise +-----------------+-----------------+-----------------+-----------------+ | **Firm B** | Breaks | Firm A's profit | Firm A's profit | | | agreement | = \$16,000 | = \$14,000 | | | | | | | | and advertises | Firm B's profit | Firm B's profit | | | | = \$6,000 | = \$10,000 | +-----------------+-----------------+-----------------+-----------------+ | | Maintains | Firm A's profit | Firm A's profit | | | agreement | = \$24,000 | = \$22,000 | | | | | | | | and does | Firm B's profit | Firm B's profit | | | **not** | = \$5,000 | = \$9,000 | | | advertise | | | +-----------------+-----------------+-----------------+-----------------+ 12\. **Refer to Table 17-2.** Does either Firm A or Firm B have a dominant strategy? ---- ------------------------------------------------------------ a. Firm A has a dominant strategy, but Firm B does not. b. Firm A does not have a dominant strategy, but Firm B does. c. Neither Firm A nor Firm B has a dominant strategy. d. Both Firm A and Firm B have a dominant strategy. ---- ------------------------------------------------------------ ANS: D DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Prisoners\' dilemma MSC: Applicative 13\. **Refer to Table 17-2.** What is the outcome of this game? ---- -------------------------------------------- a. Firm A will advertise but Firm B will not. b. Firm A will not advertise but Firm B will. c. Neither Firm A nor Firm B will advertise. d. Both Firm A and Firm B will advertise. ---- -------------------------------------------- ANS: D DIF: 2 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Prisoners\' dilemma MSC: Applicative 14\. **Refer to Table 17-2.** Which of the following statement(s) correctly characterizes the outcome of this game? ---- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- a. Both Firm A and Firm B have a dominant strategy to advertise. b. There is a Nash equilibrium when both firms advertise. c. Although both firms collectively would earn higher profits by maintaining the agreement not to advertise, self-interest will cause each firm to break the agreement. d. All of the above are correct. ---- ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- ANS: D DIF: 3 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Prisoners\' dilemma MSC: Applicative 15\. **Refer to Table 17-2.** Which of the following statements does *not* correctly characterize the outcome of this game? ---- ------------------------------------------------------------------------------------------------------------- a. There is a Nash equilibrium. b. Both firms collectively would earn the highest joint profits by maintaining the agreement not to advertise. c. Only one firm has a dominant strategy. d. The game is an example of the Prisoners' Dilemma. ---- ------------------------------------------------------------------------------------------------------------- ANS: C DIF: 3 REF: 17-2 NAT: Analytic LOC: Oligopoly TOP: Prisoners\' dilemma MSC: Applicative **Chapter 23 Measuring a Nation\'s Income** **MULTIPLE CHOICE** 1\. In the GDP accounts production equals ---- ----------------------------------- a. income. b. income + saving. c. income - government expenditures. d. income - imports. ---- ----------------------------------- ANS: A DIF: 1 REF: 23-1 NAT: Analytic LOC: The study of economics and definitions in economics TOP: GDP \| Income MSC: Definitional 2\. According to the circular-flow diagram, GDP ---- ------------------------------------------------------------------------------------------------------------------------------------------------------------ a. can be computed as payments firms make to factors of production plus revenues they receive from the sales of goods and services. b. can be computed as the revenue firms receive from the sales of goods and services minus the payments they make to factors of production. c. can be computed as either the revenue firms receive from the sales of goods and services or as revenues they receive from the sales of goods and services. d. can be computed as the payments firms make to factors of production, but not as revenues they receive from the sales of goods and services. ---- ------------------------------------------------------------------------------------------------------------------------------------------------------------ ANS: C DIF: 2 REF: 23-1 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Circular flow MSC: Definitional 3\. GDP includes the value of all ---- -------------------------------------------------------------------------------------------------------------------------------------- a. final goods and services produced within a country using primarily market prices to measure the value of goods and services. b. final goods and services produced within a country using primarily a survey of consumers to measure the value of goods and services. c. goods and services produced within a country using primarily market prices to measure the value of goods and services. d. goods and services produced within a country using primarily a survey of consumers to measure the value of goods and services. ---- -------------------------------------------------------------------------------------------------------------------------------------- ANS: A DIF: 1 REF: 23-2 NAT: Analytic LOC: The study of economics and definitions in economics TOP: GDP MSC: Definitional 4\. Estimates of the values of which of the following non-market goods or services are included in GDP? ---- ------------------------------------------------------------------------ a. unpaid housework but not the rental value of owner-occupied homes. b. the rental value of owner-occupied homes but not unpaid housework. c. unpaid housework and the rental value of owner-occupied homes. d. Neither unpaid housework nor the rental value of owner-occupied homes. ---- ------------------------------------------------------------------------ ANS: B DIF: 2 REF: 23-2 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Housing services \| Household chores MSC: Definitional 5\. A dairy buys \$50,000 worth of milk and spend \$5,000 on cartons and utilities. It sells the cartons of milk to a grocery store for \$60,000 that then sells all of the cartons to consumers for \$65,000. How much do these actions add to GDP? ---- -------------------------------- a. \$55,000 b. \$65,000 c. \$120,000 d. None of the above are correct. ---- -------------------------------- ANS: B DIF: 2 REF: 23-2 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Intermediate goods MSC: Applicative 6\. A U.S.-owned car factory in Mexico produces \$5 million of cars. \$2.5 million of these cars are sold in Mexico and the other \$2.5 million are sold in the U.S. In both cases \$1 million of the value of the cars was due to U.S-owned equipment located in Mexico and U.S. managers working in Mexico. How much did this production contribute to U.S. GDP? ---- ------------------------------- a. \$0 b. \$1 million c. \$2 million d. None of the above are correct ---- ------------------------------- ANS: A DIF: 2 REF: 23-2 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Domestic Production MSC: Applicative 7\. U.S. GNP ---- ------------------------------------------------------------------------------------------------------------------------------ a. includes production of foreigners working in the U.S. and production of U.S. citizens working in foreign countries. b. includes production of foreigners working in the U.S. but excludes production of U.S. citizens working in foreign countries. c. excludes production of foreigners working in the U.S. but includes production by U.S. citizens working in foreign countries. d. excludes production of foreigners working in the U.S. and production by U.S. citizens working in foreign countries. ---- ------------------------------------------------------------------------------------------------------------------------------ ANS: C DIF: 2 REF: 23-2 NAT: Analytic LOC: The study of economics and definitions in economics TOP: GNP MSC: Definitional 8\. Which of the following correctly lists what is included in the consumption component of GDP? ---- --------------------------------------------------------------------------------------------------------------------------------------- a. household purchases of services and household purchases of nondurable goods but not any household purchases of durable goods b. household purchases of nondurable goods and durable goods other than residential construction but not household purchases of services c. household purchases of services, nondurable goods, and all durable goods d. household purchases of services, nondurable goods, and durable goods other than residential construction ---- --------------------------------------------------------------------------------------------------------------------------------------- ANS: D DIF: 1 REF: 23-2 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Consumption MSC: Definitional 9\. Which of the following is included in the investment component of GDP? ---- ---------------------------------------------------------- a. Elaine pays her college tuition bill. b. John's law firm buys him a new computer. c. Laura buys a bond that McDoanald's sells to raise funds. d. All of the above are correct. ---- ---------------------------------------------------------- ANS: B DIF: 1 REF: 23-2 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Investment MSC: Definitional 10\. Which of the following is included in government purchases? ---- ----------------------------------------------------------------------------- a. unemployment benefits a state pays b. Social Security payments the U.S. government makes c. the services of a U.S. government attorney valued at the cost of her salary d. All of the above are correct. ---- ----------------------------------------------------------------------------- ANS: C DIF: 1 REF: 23-2 NAT: Analytic LOC: The study of economics and definitions in economics TOP: GDP MSC: Definitional 11\. A U.S. grocery chain purchases olive oil from Tunisia and sells it to U.S. consumers. In which of the following is this transaction included? ---- ------------------------------------------- a. U.S. consumption and U.S. imports b. U.S. consumption but not U.S. imports c. U.S. imports but not U.S. consumption d. neither U.S. consumption nor U.S. imports ---- ------------------------------------------- ANS: A DIF: 2 REF: 23-3 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Net exports MSC: Analytical 12\. A U.S.-owned automobile factory uses \$100,000worth of parts purchased from foreign countries along with U.S. inputs to produce 30 cars worth \$20,000 each Twenty of these cars are sold and 10 are left in inventory. How much did these actions add to GDP? ---- ----------- a. \$300,000 b. \$500,000 c. \$600,000 d. \$700,000 ---- ----------- ANS: B DIF: 2 REF: 23-2 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Inventory \| Net exports MSC: Applicative 13\. An economy recently reported nominal GDP of 3 trillion euro and a GDP deflator of 200. What was real GDP? ---- ------------------------------------------------------------------------------------------ a. 1.5 trillion euro, and real GDP is a better gauge of economic activity than nominal GDP. b. 1.5 trillion euro, but nominal GDP is a better gauge of economic activity than real GDP. c. 6 trillion euro, and real GDP is a better gauge of economic activity than nominal GDP. d. 6 trillion euro, but nominal GDP is a better gauge of economic activity than real GDP. ---- ------------------------------------------------------------------------------------------ ANS: A DIF: 2 REF: 23-3 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Real GDP \| Nominal GDP MSC: Applicative ***Table 23-1*** A country produces only ice cream and pie. Quantities and prices of these goods for the last several years are shown below. The base year is 2008. **Prices and Quantities** +-------------+-------------+-------------+-------------+-------------+ | **Year** | **Price of | **Quantity | **Price of | **Quantity | | | Ice Cream** | of Ice | Pie** | of** | | | | Cream** | | | | | | | | **Pie** | +-------------+-------------+-------------+-------------+-------------+ | 2008 | \$2.50 | 40 | \$5.00 | 20 | +-------------+-------------+-------------+-------------+-------------+ | 2009 | \$3.00 | 50 | \$6.00 | 25 | +-------------+-------------+-------------+-------------+-------------+ | 2010 | \$4.00 | 40 | \$6.00 | 30 | +-------------+-------------+-------------+-------------+-------------+ 14\. **Refer to Table 23-1.** In 2009, this country's ---- --------------------------------------------------- a. real GDP was \$250, and the GDP deflator was 125 b. real GDP was \$250, and the GDP deflator was 120. c. real GDP was \$240, and the GDP deflator was 125. d. real GDP was \$240, and the GDP deflator was 120. ---- --------------------------------------------------- ANS: B DIF: 2 REF: 23-4 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Nominal GDP \| Real GDP \| GDP deflator MSC: Applicative 15\. **Refer to Table 23-1.** This country's inflation rate from 2009 to 2010 to the nearest tenth was ---- ------------------------------- a. 2.9% b. 8.8% c. 13.3% d. None of the above is correct. ---- ------------------------------- ANS: C DIF: 3 REF: 23-4 NAT: Analytic LOC: Unemployment and inflation TOP: GDP deflator \| Inflation MSC: Applicative **Chapter 24 Measuring the Cost of Living** **MULTIPLE CHOICE** 1\. Suppose a basket of goods and services has been selected to calculate the CPI and 2009 has been selected as the base year. In 2007, the basket's cost was \$64; in 2009, the basket's cost was \$68; and in 2011, the basket's cost was \$70. The value of the CPI in 2011 was ---- --------- a. 97.14. b. 100.10. c. 102.94. d. 109.38. ---- --------- ANS: C DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions in economics TOP: CPI MSC: Applicative 2\. The price index was 136 in one year and 142 in the next year. What was the inflation rate between the two years? ---- --------------- a. 1.04 percent b. 4.41 percent c. 6.00 percent d. 42.00 percent ---- --------------- ANS: B DIF: 2 REF: 24-1 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate MSC: Applicative 3\. From 2009 to 2010, the CPI for education increased from 279.3 to 281.8. What was the inflation rate for education between 2009 and 2010? ---- ------ a. 0.9% b. 9.0% c. 2.5% d. 90% ---- ------ ANS: A DIF: 2 REF: 24-1 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate MSC: Applicative ***Table 24-1*** The table below shows the prices of baseballs and baseball bats for three years. Assume the typical consumer's basket consists of 6 baseballs and 2 baseball bats. +-----------------------+-----------------------+-----------------------+ | **Year** | **Price of a** | **Price of a** | | | | | | | **Baseball** | **Baseball Bat** | +-----------------------+-----------------------+-----------------------+ | 2008 | \$3.25 | \$75 | +-----------------------+-----------------------+-----------------------+ | 2009 | \$3.75 | \$82 | +-----------------------+-----------------------+-----------------------+ | 2010 | \$4.50 | \$96 | +-----------------------+-----------------------+-----------------------+ 4\. **Refer to Table 24-1.** How much was the cost of the basket in 2008? ---- ---------- a. \$78.25 b. \$84.75 c. \$169.50 d. \$456.50 ---- ---------- ANS: C DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions in economics TOP: CPI MSC: Applicative 5\. **Refer to Table 24-1.** If 2008 is the base year, then the consumer price index was ---- ----------------------------------------------------- a. 100.00 in 2008, 110.03 in 2009, and 117.43 in 2010. b. 100.00 in 2008, 110.03 in 2009, and 129.20 in 2010. c. 100.00 in 2008, 117.00 in 2009, and 132.50 in 2010. d. 169.50 in 2008, 186.50 in 2009, and 219.00 in 2010. ---- ----------------------------------------------------- ANS: B DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions in economics TOP: CPI MSC: Applicative 6\. **Refer to Table 24-1.** If 2009 is the base year, then the consumer price index was ---- ----------------------------------------------------- a. 83.00 in 2008, 100.00 in 2009, and 132.50 in 2010. b. 89.97 in 2008, 100.00 in 2009, and 117.43 in 2010. c. 90.88 in 2008, 100.00 in 2009, and 117.43 in 2010. d. 169.50 in 2008, 186.50 in 2009, and 219.00 in 2010. ---- ----------------------------------------------------- ANS: C DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions in economics TOP: CPI MSC: Applicative 7\. **Refer to Table 24-1.** If 2010 is the base year, then the consumer price index was ---- ----------------------------------------------------- a. 77.40 in 2008, 85.16 in 2009, and 100.00 in 2010. b. 50.50 in 2008, 67.50 in 2009, and 100.00 in 2010. c. 90.88 in 2008, 85.16 in 2009, and 100.00 in 2010. d. 169.50 in 2008, 186.50 in 2009, and 219.00 in 2010. ---- ----------------------------------------------------- ANS: A DIF: 2 REF: 24-1 NAT: Analytic LOC: The study of economics and definitions in economics TOP: CPI MSC: Applicative 8\. **Refer to Table 24-1.** The inflation rate was ---- -------------------------------------------------- a. 10.03 percent in 2009 and 17.43 percent in 2010. b. 17.00 percent in 2009 and 32.50 percent in 2010. c. 10.03 percent in 2009 and 29.20 percent in 2010. d. 17.00 percent in 2009 and 29.20 percent in 2010. ---- -------------------------------------------------- ANS: A DIF: 2 REF: 24-1 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate MSC: Applicative 9\. If the CPI was 68 in 1965 and is 285 today, then \$100 today purchases the same amount of goods and services as ---- ----------------------------- a. \$23.86 purchased in 1965. b. \$32.47 purchased in 1965. c. \$68.00 purchased in 1965. d. \$419.12 purchased in 1965. ---- ----------------------------- ANS: A DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Comparing dollar figures MSC: Applicative 10\. If the CPI was 127 in 1972 and is 324 today, then \$10 in 1972 purchased the same amount of goods and services as ---- --------------------------- a. \$3.92 purchases today. b. \$25.51 purchases today. c. \$207.00 purchases today. d. \$324.00 purchases today. ---- --------------------------- ANS: B DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Comparing dollar figures MSC: Applicative 11\. In 1986, Ken bought a Ford Mustang for \$8,000. If the price index was 122 in 1986 and the price index was 280 in 2011, then what is the price of the Mustang in 2011 dollars? ---- ------------- a. \$3,485.71 b. \$8,100.71 c. \$18,360.66 d. \$22,400.00 ---- ------------- ANS: C DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Comparing dollar figures MSC: Applicative 12\. David earned a salary of \$43,500 in 1994 and \$89,000 in 2010. The consumer price index was 148.2 in 1994 and 215.3 in 2010. David's 1994 salary in 2010 dollars is ---- ------------- a. \$43,849.05 b. \$61,263.43 c. \$63,195.34 d. \$93,655.50 ---- ------------- ANS: C DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Comparing dollar figures MSC: Applicative **Table 24-2.** Olivia's expenditures on clothing for three consecutive years, along with some values for the CPI, are presented in the table below. ------------------------------ ---------- --------- --------- **Year** 2009 2010 2011 **Expenditures on Clothing** \$1,200 \$1,600 \$1,800 **Consumer Price Index** X 180 200 ------------------------------ ---------- --------- --------- 13\. **Refer to Table 24-2.** To the nearest dollar, how much is Olivia's 2010 clothing expenditure in 2011 dollars? ---- --------- a. \$1,683 b. \$1,778 c. \$1,800 d. \$3,600 ---- --------- ANS: B DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Consumer price index \| Inflation MSC: Applicative 14\. **Refer to Table 24-2.** Suppose Olivia's 2009 clothing expenditure in 2010 dollars amounts to \$1,440. Then X, the consumer price index for 2009, has a value of ---- ------ a. 120. b. 130. c. 140. d. 150. ---- ------ ANS: D DIF: 2 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Consumer price index \| Inflation MSC: Applicative 15\. Suppose the consumer price index was 184 in 2009 and 198.17 in 2010. The nominal interest rate during this period was 5.8 percent. What was the real interest rate during this period? ---- --------------- a. 0.4 percent b. 1.2 percent c. --1.9 percent d. --2.6 percent ---- --------------- ANS: C DIF: 3 REF: 24-2 NAT: Analytic LOC: The study of economics and definitions in economics TOP: Real interest rate MSC: Analytical **Chapter 25 Production and Growth** **MULTIPLE CHOICE** 1\. Measured in 2008 dollars, real GDP per person in the United States in 2008 was about ---- ----------- a. \$37,000. b. \$47,000. c. \$57,000. d. \$67,000. ---- ----------- ANS: B PTS: 1 DIF: 1 REF: 25-1 NAT: Analytic LOC: Productivity and growth TOP: Real GDP MSC: Definitional 2\. Measured in 2008 dollars, real GDP per person in the United States in 2008 was about 8 times that of ---- ---------- a. China. b. Canada. c. Japan. d. Germany. ---- ---------- ANS: A PTS: 1 DIF: 1 REF: 25-1 NAT: Analytic LOC: Productivity and growth TOP: Real GDP MSC: Definitional 3\. The United Kingdom is ---- -------------------------------------------------------------------------------------------------------------------------------- a. an advanced economy, and over the past century its rate of economic growth has been higher than that of the United States. b. an advanced economy, and over the past century its rate of economic growth has been lower than that of the United States. c. a middle-income country, and over the past century its rate of economic growth has been higher than that of the United States. d. a middle-income country, and over the past century its rate of economic growth has been lower than that of the United States. ---- -------------------------------------------------------------------------------------------------------------------------------- ANS: B PTS: 1 DIF: 2 REF: 25-1 NAT: Analytic LOC: Productivity and growth TOP: Economic growth MSC: Definitional 4\. Mexico is ---- -------------------------------------------------------------------------------------------------------------------------------- a. a poor country, and over the past century its rate of economic growth has been higher than that of the United States. b. a poor country, and over the past century its rate of economic growth has been lower than that of the United States. c. a middle-income country, and over the past century its rate of economic growth has been higher than that of the United States. d. a middle-income country, and over the past century its rate of economic growth has been lower than that of the United States. ---- -------------------------------------------------------------------------------------------------------------------------------- ANS: C PTS: 1 DIF: 2 REF: 25-1 NAT: Analytic LOC: Productivity and growth TOP: Economic growth MSC: Definitional 5\. Which of these countries' growth rates of real GDP per person have exceeded the United States' growth rate of real GDP per person over the last century? ---- -------------------------- a. Japan and Brazil b. Bangladesh and Indonesia c. India and China d. India and Pakistan ---- -------------------------- ANS: A PTS: 1 DIF: 2 REF: 25-1 NAT: Analytic LOC: Productivity and growth TOP: Economic growth MSC: Definitional 6\. Among the following countries, which one has the highest growth rate of real GDP per person over the last 100 years? ---- ------------ a. India b. Bangladesh c. Argentina d. Brazil ---- ------------ ANS: D PTS: 1 DIF: 2 REF: 25-1 NAT: Analytic LOC: Productivity and growth TOP: Economic growth MSC: Definitional 7\. Among the following countries, which one has the highest level of real GDP per person but the lowest growth rate of real GDP per person over a very long period of time? ---- -------------------- a. the United Kingdom b. Mexico c. Argentina d. China ---- -------------------- ANS: A PTS: 1 DIF: 2 REF: 25-1 NAT: Analytic LOC: Productivity and growth TOP: Real GDP \| Economic growth MSC: Definitional 8\. Which of the following statements is correct? ---- --------------------------------------------------------------- a. Productivity is a determinant of human capital per worker. b. Technological knowledge is a determinant of productivity. c. Human capital and technological knowledge are the same thing. d. All of the above are correct. ---- --------------------------------------------------------------- ANS: B PTS: 1 DIF: 2 REF: 25-2 NAT: Analytic LOC: Productivity and growth TOP: Technology \| Productivity MSC: Interpretive 9\. Which of the following statements is correct? ---- -------------------------------------------------------------------------------------------------------------------- a. Growth of productivity is the main determinant of growth in living standards. b. Common knowledge and proprietary technology are both important for the economy's production of goods and services. c. The terms *capital* and *physical capital* refer to the same thing. d. All of the above are correct. ---- -------------------------------------------------------------------------------------------------------------------- ANS: D PTS: 1 DIF: 2 REF: 25-2 NAT: Analytic LOC: Productivity and growth TOP: Productivity \| Technology \| Capital MSC: Interpretive 10\. Which of the following statements is correct? ---- ------------------------------------------------------------------------------------------------------------------------ a. Human capital per worker is a determinant of productivity. b. A nation cannot be highly productive in producing goods and services without abundant quantities of natural resources. c. Human capital and technological knowledge are the same thing. d. All technological knowledge is proprietary. ---- ------------------------------------------------------------------------------------------------------------------------ ANS: A PTS: 1 DIF: 2 REF: 25-2 NAT: Analytic LOC: Productivity and growth TOP: Human capital MSC: Interpretive 11\. Human capital ---- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- a. can be thought of, metaphorically, as the quality of society's textbooks, whereas technological knowledge can be thought of as the time that the population has devoted to reading textbooks. b. is more tangible than physical capital. c. is an input in the production of goods and services. d. is the same as the quantity of labor. ---- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- ANS: C PTS: 1 DIF: 2 REF: 25-2 NAT: Analytic LOC: Productivity and growth TOP: Human capital MSC: Interpretive 12\. In the production function , which symbol reflects the state of technology? ---- ----- a. *A* b. *K* c. *H* d. *N* ---- ----- ANS: A PTS: 1 DIF: 2 REF: 25-2 NAT: Analytic LOC: Productivity and growth TOP: Production function \| Technology MSC: Interpretive 13\. Japan's status as a rich nation is attributable to ---- ------------------------------------------------------------------------------------------- a. Japan's quantities of natural resources, but not to international trade. b. international trade, but not to Japan's domestic quantities of natural resources. c. the fact that Japanese productivity has remained nearly constant for more than 100 years. d. the fact that the Japanese have downplayed the role of human capital in economic growth. ---- ------------------------------------------------------------------------------------------- ANS: B PTS: 1 DIF: 2 REF: 25-2 NAT: Analytic LOC: Productivity and growth TOP: Productivity \| Natural resources MSC: Interpretive 14\. An increase in a country's population may contribute to the rate of technological progress because a larger population ---- ----------------------------------------------------------------- a. forces the capital stock to be spread more thinly. b. forces natural resources to be spread more thinly. c. brings with it more scientists, inventors, and engineers. d. brings with it more favorable recognition from other countries. ---- ----------------------------------------------------------------- ANS: C PTS: 1 DIF: 1 REF: 25-3 NAT: Analytic LOC: Productivity and growth TOP: Productivity \| Population growth MSC: Interpretive 15\. Which of the following public policies would be *least* likely to result in more rapid economic growth for a poor or developing country? ---- -------------------------------------------------------------------- a. policies designed to promote economic development in coastal areas b. policies designed to foster strict enforcement of property rights c. policies designed to foster free trade d. inward-oriented policies ---- -------------------------------------------------------------------- ANS: D PTS: 1 DIF: 2 REF: 25-3 NAT: Analytic LOC: Productivity and growth TOP: Public policy \| Economic growth MSC: Interpretive MSC: Definitional **Chapter 28 Unemployment** **MULTIPLE CHOICE** 1\. Which of the following raises a country's standard of living? ------- ------------------ (i) savings (ii) investment (iii) low unemployment ------- ------------------ ---- ---------------------- a. \(i) and (ii) only b. \(iii) only c. \(ii) and (iii) only d. (i), (ii), and (iii) ---- ---------------------- ANS: D DIF: 1 REF: 28-0 NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment MSC: Interpretive ***Scenario 28-1*** Suppose the Bureau of Labor Statistics reports that the entire adult population of Mankiwland can be categorized as follows: 25 million people employed, 3 million people unemployed, 1 million discouraged workers, and 1 million people who are either students, homemakers, retirees, or other people not seeking employment. 2\. **Refer to Scenario 28-1.** What is the total labor force? ---- ------------ a. 25 million b. 28 million c. 29 million d. 30 million ---- ------------ ANS: B DIF: 2 REF: 28-1 NAT: Analytic LOC: Unemployment and inflation TOP: Labor force MSC: Analytical 3\. **Refer to Scenario 28-1.** What is the labor-force participation rate? ---- ------- a. 83.3% b. 86.7% c. 93.3% d. 96.7% ---- ------- ANS: C DIF: 2 REF: 28-1 NAT: Analytic LOC: Unemployment and inflation TOP: Labor-force participation rate MSC: Analytical 4\. **Refer to Scenario 28-1.** How many people are unemployed? ---- ----------- a. 1 million b. 3 million c. 4 million d. 5 million ---- ----------- ANS: B DIF: 2 REF: 28-1 NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment MSC: Analytical 5\. **Refer to Scenario 28-1.** What is the unemployment rate? ---- ------- a. 3.3% b. 6.7% c. 10.7% d. 12% ---- ------- ANS: C DIF: 2 REF: 28-1 NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate MSC: Analytical 6\. Suppose that a well-respected study published in *Child Psychology Today* finds that a very high proportion of children raised by stay-at-home fathers are accepted to Harvard University. If a large number of previously working fathers quit their jobs and become stay-at-home dads, which of the following will occur, all else equal? ------- ------------------------------------------------ (i) The unemployment rate will decrease. (ii) The size of the labor force will decrease. (iii) The number of unemployed people will increase. (iv) The unemployment rate will increase. ------- ------------------------------------------------ ---- ---------------------------- a. \(i) and (ii) only b. \(ii) and (iv) only c. (i), (ii), and (iii) only d. (ii), (iii), and (iv) only ---- ---------------------------- ANS: B DIF: 3 REF: 28-1 NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate \| Labor force MSC: Analytical 7\. All else equal, which of the following would increase the unemployment rate? ------- ------------------------------------------------------------------------------------------------------------------- (i) an increase in the number of women who return to work after being stay-at-home mothers (ii) a preference among older men to retire early (iii) an increase in the maximum number of weeks for which someone can receive government unemployment benefits (iv) an increase in the number of previously unemployed women who stop looking for work and become discouraged workers ------- ------------------------------------------------------------------------------------------------------------------- ---- ---------------------------- a. \(i) and (ii) only b. \(iii) only c. \(ii) and (iii) only d. (ii), (iii), and (iv) only ---- ---------------------------- ANS: C DIF: 3 REF: 28-1 NAT: Analytic LOC: Unemployment and inflation TOP: Unemployment rate MSC: Analytical 8\. Which of the following is *not* a commonly-cited explanation for the dramatically increasing labor-force participation rates for women from 1950 to the present? ---- ------------------------------------------------------------------------------------- a. availability of reliable birth control b. invention of household labor-saving devices such as dishwashers and microwave ovens c. an increasing number of women who work to support their parents d. changing social attitudes about working mothers ---- ------------------------------------------------------------------------------------- ANS: C DIF: 2 REF: 28-1 NAT: Analytic LOC: Unemployment and inflation TOP: Labor-force participation rate by gender MSC: Applicative 9\. Which of the following is *not* a commonly-cited explanation for the decreasing labor-force participation rates for men from 1950 to the present? ---- ----------------------------------------------------------------------------- a. availability of reliable birth control b. men acquiring additional years of schooling before entering the labor force c. a preference for men to retire when younger d. changing social attitudes about stay-at-home fathers ---- ----------------------------------------------------------------------------- ANS: A DIF: 2 REF: 28-1 NAT: Analytic LOC: Unemployment and inflation TOP: Labor-force participation rate by gender MSC: Applicative 10\. If changing consumer preferences increase the demand for consumer electronics and decrease the demand for wool clothing, the economy will likely exhibit ---- -------------------------------------------------- a. an increase in the natural rate of unemployment. b. a decrease in the natural rate of unemployment. c. frictional unemployment. d. efficiency wages. ---- -------------------------------------------------- ANS: C DIF: 2 REF: 28-2 NAT: Analytic LOC: Unemployment and inflation TOP: Frictional unemployment MSC: Applicative 11\. Minimum-wage laws ---- --------------------------------------------------------------------- a. create unemployment. b. do not apply in states with right-to-work laws. c. affect highly-educated workers more than high school dropouts. d. cause labor shortages, which further raise wages above equilibrium. ---- --------------------------------------------------------------------- ANS: A DIF: 2 REF: 28-3 NAT: Analytic LOC: Unemployment and inflation TOP: Minimum wage MSC: Applicative 12\. Labor unions ---- ------------------------------------------------------------------------------------------------------ a. raise wages in unionized industries. b. create labor shortages in non-unionized industries. c. play a larger role in the current U.S. economy than in European countries such as Norway and Sweden. d. prefer to operate in states with right-to-work laws. ---- ------------------------------------------------------------------------------------------------------ ANS: A DIF: 2 REF: 28-4 NAT: Analytic LOC: Labor markets TOP: Unions MSC: Applicative 13\. Labor unions ---- ------------------------------------------------------------------------------------------------------ a. prefer to operate in states with right-to-work laws. b. are similar to cartels. c. play a larger role in the current U.S. economy than in European countries such as Norway and Sweden. d. attract a membership of about 25 percent of current U.S. workers. ---- ------------------------------------------------------------------------------------------------------ ANS: B DIF: 2 REF: 28-4 NAT: Analytic LOC: Labor markets TOP: Unions MSC: Applicative 14\. Which of the following is an example of an efficiency wage? ---- ----------------------------------------------------------------------------------------------- a. a high wage paid to compensate for dangerous work such as coal mining b. an above-equilibrium wage offered by a firm to attract a more talented pool of job applicants c. a wage below the minimum wage but supplemented by customer tips d. a high wage paid to a college graduate for a high-skill job such as electrical engineering ---- ----------------------------------------------------------------------------------------------- ANS: B DIF: 2 REF: 28-5 NAT: Analytic LOC: Labor markets TOP: Efficiency wages MSC: Applicative 15\. Which of the following is an example of an efficiency wage? ---- --------------------------------------------------------------------------------- a. a higher wage paid to a more experienced worker b. a below-equilibrium wage paid by a small business exempt from minimum-wage laws c. an above-equilibrium wage paid by a firm to reduce turnover costs d. a wage tied to participation in a government-sponsored job training program ---- --------------------------------------------------------------------------------- ANS: C DIF: 2 REF: 28-5 NAT: Analytic LOC: Labor markets TOP: Efficiency wages MSC: Applicative **Chapter 29 The Monetary System** **MULTIPLE CHOICE** 1\. Which of the following items is *not* included in the most narrow definition of money, M1? ---- ------------------- a. currency b. savings deposits c. traveler's checks d. demand deposits ---- ------------------- ANS: B PTS: 1 DIF: 1 REF: 29-1 NAT: Analytic LOC: The role of money TOP: Money supply MSC: Definitional 2\. All U.S. paper dollars read "This note is legal tender for all debts, public and private." This statement represents which characteristic of US currency? ---- --------------------------------------------------- a. The U.S. operates under the gold standard. b. U.S. paper money is commodity money. c. U.S. paper money is fiat money. d. U.S. paper money is a convenient store of wealth. ---- --------------------------------------------------- ANS: C PTS: 1 DIF: 1 REF: 29-1 NAT: Analytic LOC: The role of money TOP: Fiat money MSC: Interpretive 3\. Credit cards ---- ------------------------------------------------ a. represent the largest component of M1. b. are not included in M1 but are included in M2. c. are a form of money unique to the U.S. d. are not considered money. ---- ------------------------------------------------ ANS: D PTS: 1 DIF: 2 REF: 29-1 NAT: Analytic LOC: The role of money TOP: Credit cards MSC: Definitional 4\. The agency responsible for regulating the U.S. monetary system is the ---- -------------------------- a. U.S. Treasury b. Federal Reserve c. Department of Justice d. Federal Trade Commission ---- -------------------------- ANS: B PTS: 1 DIF: 1 REF: 29-2 NAT: Analytic LOC: Monetary and fiscal policy TOP: Federal Reserve MSC: Definitional 5\. The Federal Reserve was created ---- --------------------------------------------- a. in 1913 by Congress b. as a result of the Great Depression c. according to the standards enforced by NATO d. by President Kennedy ---- --------------------------------------------- ANS: A PTS: 1 DIF: 1 REF: 29-2 NAT: Analytic LOC: Monetary and fiscal policy TOP: Federal Reserve MSC: Definitional 6\. The Federal Reserve Board of Governors ---- ------------------------------------------------------------- a. rotate each four years. b. are appointed by the President and confirmed by the Senate. c. are elected by popular vote. d. hold lifetime appointments. ---- ------------------------------------------------------------- ANS: B PTS: 1 DIF: 1 REF: 29-3 NAT: Analytic LOC: Monetary and fiscal policy TOP: Federal Reserve MSC: Definitional 7\. An important function of the U.S. Federal Reserve is to ---- ------------------------------ a. set the debt ceiling. b. fund Congressional spending. c. control the supply of money. d. mint coins. ---- ------------------------------ ANS: C PTS: 1 DIF: 1 REF: 29-2 NAT: Analytic LOC: Monetary and fiscal policy TOP: Money supply MSC: Definitional 8\. The most common method employed by the Fed to increase the money supply is the ---- --------------------------------------- a. sale of U.S. government bonds. b. purchase of U.S. government bonds. c. sale of gold. d. increase of the federal debt ceiling. ---- --------------------------------------- ANS: B PTS: 1 DIF: 1 REF: 29-4 NAT: Analytic LOC: Monetary and fiscal policy TOP: Open market operation MSC: Definitional 9\. Banks are able to create money only when ---- -------------------------------------------------- a. interest rates are above 2%. b. the Fed sells U.S. government bonds. c. the reserve ratio is 100%. d. only a fraction of deposits are held in reserve. ---- -------------------------------------------------- ANS: D PTS: 1 DIF: 2 REF: 29-3 NAT: Analytic LOC: Monetary and fiscal policy TOP: Fractional banking MSC: Interpretive 10\. The leverage ratio is calculated as ---- -------------------------------------------------------- a. assets minus liabilities. b. assets divided by bank capital c. the reciprocal of the required reserve ratio d. the required reserve ratio multiplied by bank capital. ---- -------------------------------------------------------- ANS: B PTS: 1 DIF: 2 REF: 29-3 NAT: Analytic LOC: Monetary and fiscal policy TOP: Reserve ratio MSC: Definitional 11\. Bank regulators impose capital requirements in order to ---- ------------------------------------------------------ a. increase the amount of leverage in the economy. b. provide an incentive for banks to hold risky assets. c. ensure banks can pay off depositors. d. increase the probability of a credit crunch. ---- ------------------------------------------------------ ANS: C PTS: 1 DIF: 1 REF: 29-3 NAT: Analytic LOC: Monetary and fiscal policy TOP: Capital requirement MSC: Interpretive 12\. The rate at which the Fed lends money to banks is ---- ------------------------- a. the prime rate. b. fixed at 4%. c. the federal funds rate. d. the discount rate. ---- ------------------------- ANS: D PTS: 1 DIF: 1 REF: 29-3 NAT: Analytic LOC: Monetary and fiscal policy TOP: Discount rate MSC: Definitional 13\. The tool most often used by the Fed to control the money supply is ---- --------------------------------- a. changing reserve requirements. b. open market operations. c. buying and selling of equities. d. altering the discount rate. ---- --------------------------------- ANS: B PTS: 1 DIF: 1 REF: 29-4 NAT: Analytic LOC: Monetary and fiscal policy TOP: Open market operation MSC: Interpretive 14\. In measuring the stock of money in the U.S., M1 includes ---- -------------------- a. traveler's checks. b. savings deposits. c. credit cards d. none of the above. ---- -------------------- ANS: A PTS: 1 DIF: 1 REF: 29-1 NAT: Analytic LOC: The role of money TOP: M1 MSC: Definitional 15\. Suppose a bank is operating with a leverage rate of 10. A 6% increase in the value of assets ---- -------------------------------------------------- a. will reduce liabilities by 6%. b. will result in a 60% increase in owner's equity. c. will result in a 60% decrease in owner's equity. d. will reduce liabilities by 10. ---- -------------------------------------------------- ANS: B PTS: 1 DIF: 1 REF: 29-3 NAT: Analytic LOC: Monetary and fiscal policy TOP: Leverage MSC: Applicative **Chapter 30 Money Growth and Inflation** **MULTIPLE CHOICE** 1\. Inflation can be measured by the ---- -------------------------------------------------------------------------------------------------------------------- a. change in the consumer price index. Inflation in the U.S. has averaged about 6% over the last 70 years. b. change in the consumer price index. Inflation in the U.S. has averaged about 4% over the last 70 years. c. percentage change in the consumer price index. Inflation in the U.S. has averaged about 6% over the last 70 years. d. percentage change in the consumer price index. Inflation in the U.S. has averaged about 4% over the last 70 years. ---- -------------------------------------------------------------------------------------------------------------------- ANS: D DIF: 1 REF: 30-0 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate MSC: Definitional 2\. If the price level increased from 200 to 250, then what was the inflation rate? ---- ------------------------------- a. 50 percent b. 25 percent c. 20 percent d. None of the above is correct. ---- ------------------------------- ANS: B DIF: 2 REF: 30-0 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate MSC: Applicative 3\. If the number of dollars needed to buy a representative basket of goods falls, the price level ---- ------------------------------------- a. falls, so the value of money falls. b. falls, so the value of money rises. c. rises, so the value of money falls. d. rises, so the value of money rises. ---- ------------------------------------- ANS: B DIF: 1 REF: 30-1 NAT: Analytic LOC: The role of money TOP: Value of money MSC: Definitional 4\. If the value of a dollar falls, then the quantity of money demanded ---- --------------------------------------------------------------------------- a. rises, meaning people want to hold more of their wealth in a liquid form. b. rises, meaning people desire to work more so their income rises. c. falls, meaning people want to hold less of their wealth in a liquid form. d. falls, meaning people want to work less so their income falls. ---- --------------------------------------------------------------------------- ANS: A DIF: 1 REF: 30-1 NAT: Analytic LOC: The role of money TOP: Money demand MSC: Interpretive 5\. In the long run, money demand and money supply determine ---- -------------------------------------------------------- a. the value of money and the real interest rate. b. the value of money but not the real interest rate. c. the real interest rate but not the value of money. d. neither the value of money nor the real interest rate. ---- -------------------------------------------------------- ANS: B DIF: 1 REF: 30-1 NAT: Analytic LOC: The role of money TOP: Money market MSC: Definitional 6\. When the money market is drawn with the value of money on the vertical axis, a decrease in the money supply leads people to ---- -------------------------------------------- a. spend more so the value of a dollar rises. b. spend more so the value of a dollar falls. c. spend less so the value of a dollar rises. d. spend less so the value of a dollar falls. ---- -------------------------------------------- ANS: C DIF: 2 REF: 30-1 NAT: Analytic LOC: The role of money TOP: Money market MSC: Analytical 7\. When the money market is drawn with the value of money on the vertical axis, if money supply and money demand both shift to the right ---- ------------------------------------------------------------------------- a. the price level must have risen b. the price level must have fallen. c. the price level rises if money supply shifts farther than money demand. d. the price level falls if money supply shifts farther than money demand. ---- ------------------------------------------------------------------------- ANS: C DIF: 3 REF: 30-1 NAT: Analytic LOC: The role of money TOP: Money market MSC: Analytical 8\. In 1975 tuition at Wattsomata University was \$2,500 and the consumer price index was 80. In 2011 tuition was \$12,000 and the price index was 320. Which of the following is correct. ---- ---------------------------------------------------------------------- a. Nominal and real tuition were both higher in 1975. b. Nominal and real tuition were both higher in 2011. c. Nominal tuition was higher in 1975, real tuition was higher in 2011. d. Nominal tuition was higher in 2011, real tuition was higher in 1975. ---- ---------------------------------------------------------------------- ANS: B DIF: 2 REF: 30-1 NAT: Analytic LOC: The role of money TOP: Real versus nominal values MSC: Analytical 9\. Suppose every good costs \$8 per unit and Molly holds \$120. What is the real value of the money she holds? ---- ----------------------------------------------------------------------------------------------------------------------------------- a. \$120. If the price of goods rises, to maintain the real value of her money holdings she needs to hold more dollars. b. \$120. If the price of goods rises, to maintain the real value of her money holdings she needs to hold fewer dollars. c. 15 units of goods. If the price of goods rises, to maintain the real value of her money holdings she needs to hold more dollars. d. 15 units of goods. If the price of goods rises, to maintain the real value of her money holdings she needs to hold fewer dollars. ---- ----------------------------------------------------------------------------------------------------------------------------------- ANS: C DIF: 2 REF: 30-1 NAT: Analytic LOC: The role of money TOP: Real versus nominal values MSC: Analytical 10\. If monetary neutrality holds, then an increase in the money supply ---- ---------------------------------------------------------------------------------------------------------------------------------- a. increases real but not nominal variables. Most economists think that monetary neutrality is a good description of the short run. b. increases real but not nominal variables. Most economists think that monetary neutrality is a good description of the long run. c. increases nominal but not real variables. Most economists think that monetary neutrality is a good description of the short run. d. increases nominal but not real variables. Most economists think that monetary neutrality is a good description of the long run. ---- ---------------------------------------------------------------------------------------------------------------------------------- ANS: D DIF: 2 REF: 30-1 NAT: Analytic LOC: The role of money TOP: Monetary neutrality MSC: Definitional 11\. In which case is velocity the highest? ---- ------------------------------------------------------------------------------------ a. the price level equals 4, the money supply equals 5,000, and output equals 20,000. b. the price level equals 4, the money supply equals 20,000 and output equals 5,000. c. the price level equals 2, the money supply equals 5,000, and output equals 20,000. d. the price level equals 2, the money supply equals 20,000 and output equals 5,000. ---- ------------------------------------------------------------------------------------ ANS: A DIF: 2 REF: 30-1 NAT: Analytic LOC: The role of money TOP: Velocity MSC: Applicative 12\. When inflation rises people will ---- --------------------------------------------- a. demand more money so the price level rises. b. demand more money so the price level falls. c. demand less money so the price level rises. d. demand less money so the price level falls. ---- --------------------------------------------- ANS: C DIF: 3 REF: 30-2 NAT: Analytic LOC: The role of money TOP: Inflation tax \| Money market MSC: Analytical 13\. You observe people going to the bank more frequently. Other things the same this could result from ---- -------------------------------------------------------- a. an increase in inflation which increases money demand. b. an increase in inflation which reduces money demand. c. a decrease in inflation which increases money demand. d. a decrease in inflation which reduces money demand. ---- -------------------------------------------------------- ANS: B DIF: 2 REF: 30-2 NAT: Analytic LOC: The role of money TOP: Shoeleather costs MSC: Applicative 14\. A reduction in the inflation rate would make relative prices ---- ------------------------------------------------------------------------------------------ a. less variable, making it more likely that resources will be allocated to their best use. b. less variable, making it less likely that resources will be allocated to their best use. c. more variable, making it more likely that resources will be allocated to their best use. d. more variable, making it less likely that resources will be allocated to their best use. ---- ------------------------------------------------------------------------------------------ ANS: A DIF: 2 REF: 30-2 NAT: Analytic LOC: Unemployment and inflation TOP: Relative-price variability MSC: Definitional 15\. In which of the following cases is the after-tax real interest rate highest? ---- --------------------------------------------------------------------------------- a. inflation is 6%, the pre-tax real interest rate is 3%, and the tax rate is 20%. b. inflation is 6%, the pre-tax real interest rate is 3%, and the tax rate is 25%. c. inflation is 4%, the pre-tax real interest rate is 2%, and the tax rate is 20%. d. inflation is 4%, the pre-tax real interest rate is 2%, and the tax rate is 25%. ---- --------------------------------------------------------------------------------- ANS: A DIF: 2 REF: 30-2 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation-induced tax distortions MSC: Applicative alytical **Chapter 30 Money Growth and Inflation** **MULTIPLE CHOICE** 1\. Inflation can be measured by the ---- -------------------------------------------------------------------------------------------------------------------- a. change in the consumer price index. Inflation in the U.S. has averaged about 6% over the last 70 years. b. change in the consumer price index. Inflation in the U.S. has averaged about 4% over the last 70 years. c. percentage change in the consumer price index. Inflation in the U.S. has averaged about 6% over the last 70 years. d. percentage change in the consumer price index. Inflation in the U.S. has averaged about 4% over the last 70 years. ---- -------------------------------------------------------------------------------------------------------------------- ANS: D DIF: 1 REF: 30-0 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate MSC: Definitional 2\. If the price level increased from 200 to 250, then what was the inflation rate? ---- ------------------------------- a. 50 percent b. 25 percent c. 20 percent d. None of the above is correct. ---- ------------------------------- ANS: B DIF: 2 REF: 30-0 NAT: Analytic LOC: Unemployment and inflation TOP: Inflation rate MSC: Applicative 3\. If the number of dollars needed to buy a representative basket of goods falls, the price level ---- ------------------------------------- a. falls, so the value of money falls. b. falls, so the value of money rises. c. rises, so the value of money falls. d. rises, so the value of money rises. ---- ------------------------------------- ANS: B DIF: 1 REF: 30-1 NAT: Analytic LOC: The role of money TOP: Value of money MSC: Definitional 4\. If the value of a dollar falls, then the quantity of money demanded ---- --------------------------------------------------------------------------- a. rises, meaning people want to hold more of their wealth in a liquid form. b. rises, meaning people desire to work more so their income rises. c. falls, meaning people want to hold less of their wealth in a liquid form. d. falls, meaning people want to work less so their income falls. ---- --------------------------------------------------------------------------- ANS: A DIF: 1 REF: 30-1 NAT: Analytic LOC: The role of money TOP: Money demand MSC: Interpretive 5\. In the long run, money demand and money supply determine ---- -------------------------------------------------------- a. the value of money and the real interest rate. b. the value of money but not the real interest rate. c. the real interest rate but not the value of money. d. neither the value of money nor the real interest rate. ---- -------------------------------------------------------- ANS: B DIF: 1 REF: 30-1 NAT: Analytic LOC: The role of money TOP: Money market MSC: Definitional 6\. When the money market is drawn with the value of money on the vertical axis, a decrease in the money supply leads people to ---- -------------------------------------------- a. spend more so the value of a dollar rises. b. spend more so the value of a dollar falls. c. spend less so the value of a dollar rises. d. spend less so the value of a dollar falls. ---- -------------------------------------------- ANS: C DIF: 2 REF: 30-1 NAT: Analytic LOC: The role of money TOP: Money market MSC: Analytical 7\. When the money market is drawn with the value of money on the vertical axis, if money supply and money demand both shift to the right ---- ------------------------------------------------------------------------- a. the price level must have risen b. the price level must have fallen. c. the price level rises if money supply shifts farther than money demand. d. the price level falls if money supply shifts farther than money demand. ---- ------------------------------------------------------------------------- ANS: C DIF: 3 REF: 30-1 NAT: Analytic LOC: The role of money TOP: Money market MSC: Analytical 8\. In 1975 tuition at Wattsomata University was \$2,500 and the consumer price index was 80. In 2011 tuition was \$12,000 and the price index was 320. Which of the following is correct. ---- ---------------------------------------------------------------------- a. Nominal and real tuition were both higher in 1975. b. Nominal and real tuition were both higher in 2011. c. Nominal tuition was higher in 1975, real tuition was higher in 2011. d. Nominal tuition was higher in 2011, real tuition was higher in 1975. ---- ---------------------------------------------------------------------- ANS: B DIF: 2 REF: 30-1 NAT: Analytic LOC: The role of money TOP: Real versus nominal values MSC: Analytical 9\. Suppose every good costs \$8 per unit and Molly holds \$120. What is the real value of the money she holds? ---- ----------------------------------------------------------------------------------------------------------------------------------- a. \$120. If the price of goods rises, to maintain the real value of her money holdings she needs to hold more dollars. b. \$120. If the price of goods rises, to maintain the real value of her money holdings she needs to hold fewer dollars. c. 15 units of goods. If the price of goods rises, to maintain the real value of her money holdings she needs to hold more dollars. d. 15 units of goods. If the price of goods rises, to maintain the real value of her money holdings she needs to hold fewer dollars. ---- ----------------------------------------------------------------------------------------------------------------------------------- ANS: C DIF: 2 REF: 30-1 NAT: Analytic LOC: The role of money TOP: Real versus nominal values MSC: Analytical 10\. If monetary neutrality holds, then an increase in the money supply ---- ---------------------------------------------------------------------------------------------------------------------------------- a. increases real but not nominal variables. Most economists think that monetary neutrality is a good description of the short run. b. increases real but not nominal variables. Most economists think that monetary neutrality is a good description of the long run. c. increases nominal but not real variables. Most economists think that monetary neutrality is a good description of the short run. d. increases nominal but not real variables. Most economists think that monetary neutrality is a good description of the long run. ---- ---------------------------------------------------------------------------------------------------------------------------------- ANS: D DIF: 2 REF: 30-1 NAT: Analytic LOC: The role of money TOP: Monetary neutrality MSC: Definitional 11\. In which case is velocity the highest? ---- ------------------------------------------------------------------------------------ a. the price level equals 4, the money supply equals 5,000, and output equals 20,000. b. the price level equals 4, the money supply equals 20,000 and output equals 5,000. c. the price level equals 2, the money supply equals 5,000, and output equals 20,000.