The word “economy” comes from the Greek word oikonomos, which means
“one who manages a household”
Economics is defined as the study of
how society manages its scarce resources
Economics deals primarily with the concept of:
scarcity
Scarcity exists when
there is less of a good or resource available than people wish to have
In most societies, resources are allocated by
the combined actions of millions of households and firms
The adage, “There is no such thing as a free lunch,” is used to illustrate the principle that
people face tradeoffs
When the government implements welfare programs, which of the following is likely to occur?
equity is increased and efficiency is decreased
The opportunity cost of an item is
what you give up to get that item
Suppose after graduating from college you get a job working at a bank earning $30,000 per year. After two years of working at the bank earning the same salary, you have an opportunity to enroll in a one-year graduate program that would require you to quit your job at the bank. Which of the following should not be included in a calculation of your graduate program cost?
the $45,000 salary that you will be able to earn after having completed the program
A marginal change is a
small, incremental change
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?
all of the above
According to Adam Smith, the success of decentralized market economies is primarily due to
individuals’ pursuit of self-interest
The term “market failure” refers to
a situation in which the market on its own fails to allocate resources efficiently
Market failure can be cause by
externalities and market power
The fact that different countries experience different standards of living is largely explained by differences in those countries’
productivity levels
To raise productivity, policymakers could
all of the above
Large or persistent inflation is almost always caused by
government printing too much money
The business cycle is the
irregular fluctuations in economic activity
Economists make assumptions
to make the world easier to understand
Just like models constructed in other areas of science, economic models
incorporate assumption that may contradict reality
The circular-flow diagram is a
visual model of how the economy is organized
The two loops in the circular-flow diagram represent the flow of
inputs and outputs and the flow of dollars
The production possibilities frontier is a
graph that shows the various combinations of output the economy can possibly produce given the available resources and technology
If a nation has an absolute advantage in the production of a good,
it can produce that good using fewer resources then its trading partner.
According to the principle of comparative advantage,
countries should specialize in the production of goods for which they have a lower opportunity cost of production than their trading partners
Canada and the U.S. both produce wheat and computer software. Canada is said to have comparative advantage in producing wheat if
the opportunity cost of producing a bushel of wheat is lower for Canada than it is for the U.S.
Which of the statements is true?
Use the data provided to answer this and the following question:
Food Electronics
Australia 20 5
Korea 8 4
Australia has an absolute advantage in the production of both food and electronics
Korea should
specialize in electronics production, export electronics, and import food
A market is a
group of demanders and suppliers of a particular good or service
If John receives an increase in his pay, we would expect
his demand for normal goods to increase
Suppose that scientists find evidence that proves chocolate pudding lowers cholesterol. We would expect to see
an increase in the demand for chocolate pudding
The law of supply clearly states that
an increase in price of the product leads to an increase in quantity supplied, other things equal
The law of demand clearly states that
an increase in price of the product leads to a decrease in quantity demanded, other things equal
Suppose you make gold jewelry. An increase in the price of gold will cause
supply of gold jewelry to decrease
What would happen to the equilibrium price and quantity of coffee if the wages of coffee-bean pickers fell and the price of tea fell?
price will fall and the effect on quantity is ambiguous
Which of the following is the correct definition of GDP?
none of the above are correct
Which of the following is not included in GDP?
vegetables grown in your garden
Which of the following is included in GDP?
medical marijuana purchased from a government-run pharmacy
The value of housing service provided by the economy’s stock of houses is
counted and is based on an estimate of its rental value
Over the last few decades Americans have chosen to cook less at home and eat more at restaurants. This change in behavior, by itself,
increased measured GDP
Which of the following transactions added to U.S. GDP in 2010?
your friend bought a new house which, according to reliable estimates, could be rented for $1,500 a month
An Italian company operates a pasta restaurant in San Francisco. The value of the output produced by this pasta restaurant is included in:
U.S. GDP only
The consumption component of GDP includes spending on:
durables, non-durables and services
Which of the following examples of household spending is categorized as investment rather than consumption?
expenditures on new housing
Real GDP
evaluates current production at the prices that prevailed in some specific year in the past
When economists talk about growth in the economy, they measure that growth with the
percentage change in real GDP
Suppose GDP consists of wheat and rice. In 2002, 20 bushels of wheat are sold at $4 per bushel, and 10 bushels of rice are sold at $2 per bushel. If the price of wheat was $2 per bushel and the price of rice was $1 per bushel in 2001, the base year, nominal 2002 GDP is
$100, real 2002 GDP is $50, and the GDP deflator is 200
If a country reported a nominal GDP of 85 billion in 2002 and 100 billion in 2001 and reported a GDP deflator of 100 in 2002 and of 105 in 2001, then from 2001 to 2002 real output
and prices both fell
The term “inflation” is used to describe a situation in which
the overall level of prices in the economy is increasing
The CPI is a measure of the overall cost of
goods and services bought by a typical consumer
Suppose that the typical consumer basket consists of 10 bushels of peaches and 15 bushels of pecans and that the base year is 2000. What is the consumer price index for 2001?
Refer to the table below to answer this and the following question:
year
|
peaches
|
pecans
| |
2000
|
$11 per bushel
|
$6 per bushel
| |
2001
|
$9 per bushel
|
$10 per bushel
|
120
What was the inflation rate in 2001?
20 percent
According to economic studies CPI
overstates inflation
An important difference between the GDP deflator and the consumer price index is that
the GDP deflator reflects the prices of all final goods and services produced domestically, whereas the consumer price index reflects the prices of goods and services bought by a typical consumer
A nation’s standard of living is best measured by its
real GDP per capita
A nation’s standard of living is determined by
productivity
Productivity
explains all of the differences across countries in the standard of living
Which of the following is a correct way to measure productivity?
divide output by the number of hours worked
Which of the following is the most important determinant of productivity in the US economy?
none of the above
The catch-up effect can help explain
the spectacular economic growth experienced by South Korea over the years 1960 to 1990
A government can encourage growth and, in the long run, raise the economy's standard of living by encouraging
saving and investment
Institutions in the economy that help to match one person's saving with another person's investment are collectively called the
financial system
The economy’s two most important financial markets are
the bond market and the stock market
Long-term bonds are generally
more risky than short-term bonds and so pay higher interest
Which of the following equations will always represent GDP in an open economy?
Y = C + I + G + NX
Supposed that in a closed economy GDP is equal to 11,000, taxes are equal to 1,500, consumption equals 7,500 and government purchases equal 2,000. What is national saving?
1,500
Market for loanable funds
describes the financial system
Which of the following could explain an increase in the equilibrium interest rate and a decrease in the equilibrium quantity of loanable funds?
the supply for loanable funds shifts left
In 1995 Congressperson Bill Archer proposed that the income tax be replaced with a consumption tax. If his program had been passed, then today it is likely that the equilibrium interest rate
would be lower and the equilibrium quantity of loanable funds would be higher
Cyclical unemployment refers to
year-to-year fluctuations of unemployment around its natural rate
The natural unemployment rate includes
both frictional and structural unemployment
Compared to the United States, France has (typically) higher unemployment rates. The cause of much of this difference seems to be attributable to
high France unemployment benefits
Unemployment rate equals:
(number of unemployed/labor force)*100
In the United States in recent years, the unemployment rate among teenagers (16-19 years of age) has been
greater than that of people ages 20 and over
Civilian labor force participation rate equals:
(labor force/adult population)*100
Economists use the word “money” to refer to
those assets regularly used to buy goods and services
The M1 money supply is composed of
currency, demand deposits, traveler’s checks, and other checkable accounts
The Federal Reserve
all of the above
At the Federal Reserve,
the nation’s monetary policy is made by the Federal Open Market Committee
To increase the supply of money the Fed may
lower the discount rate
In the 1970s in response to recessions caused by an increase in the price of oil, the central banks in many countries increased the money supply. The central banks might have done this by
purchasing bonds on the open market, which would have lowered the value of money
A problem that the Fed faces when it attempts to control the money supply is that
the Fed does not control the amount of money that households choose to hold as deposits in banks
If the current money supply is located at MS1,
there is no excess supply or excess demand if the value of money is 2
When the money supply curve shifts from MS1 to MS2,
the equilibrium price level increases
If inflation is higher then what was expected,
creditors receive a lower real interest rate than they had anticipated
Business cycles
are fluctuations in economic activity, such as employment and production
When we say that economic fluctuations are “irregular” we mean that
recessions do not occur at regular intervals
Below are pairs of GDP growth rates and unemployment rates. Economists would be shocked to see most of these pairs in the U.S. with the exception of which?
3%; 5%
In 2001, U.S. was in recession. Which of the following things would you expect not to have happened?
increased investment spending
According to the National Bureau of Economic Research (NBER), the latest recession started in:
December 2007 and ended in June 2009
National Bureau of Economic Research (NBER) defines an economic expansion as:
a period between a trough and a peak
Most economists use the aggregate demand and aggregate supply model primarily to analyze
short-run fluctuations in the economy
Which of the following would cause the aggregate demand curve to shift from AD1 to AD2?
a stock market crash
If the economy is at point b, a policy to restore full employment would be
an increase in the money supply
Stagflation occurs when the economy experiences
rising prices and falling output.
Approximately what percentage of the world's economies experience scarcity?
100%
Guns and butter are used to represent the classic societal tradeoff between spending on
national defense and consumer goods
Which of the following can policy do?
all of the above
The "invisible hand" directs activity through
prices
In a market economy, who makes the decisions that guide most economic activity?
firms and households
One reason we need government, even in a market economy, is that
the invisible hand is not perfect
The historical rise in living standards of American workers is primarily a result of
the rise in American productivity
Economists make assumptions in order to
focus their thinking on the essence of the problem at hand
Which of the following statements about economic models is correct?
models assume away irrelevant details
In economics, capital refers to
buildings and machines used in the production process
The production possibilities frontier shifts outward when
the economy experiences economic growth
Belarus has a comparative advantage in the production of linen, but Russia has an absolute advantage in the production of linen. If these two countries decide to trade
Belarus should export linen to Russia
Pizza is a normal good if
the demand for pizza raises when income raises
Lead is an important input in the production of crystal. If the price of lead decreases, then we would expect the supply of
crystal to increase
A weaker deamand together with a stronger supply would necessarily result in
a lower price
Suppose the number of buyers in a market increases and a technological advancement occurs also. What would we expect to happen in the market?
equilibrium quantity would increase, but the impact on equilibrium price would be ambiguous
When supply and demand both increase, equilibrium
price may increase, decrease, or remain unchanged
Gross Domestic Product includes all
legal goods and services, but it excludes illegal goods and services
Transfer payments are
not included in GDP because they are not payments for currently produced goods or services
GDP is not a perfect measure of well-being; for example
all of the above
Most recently (1Q2016) the United States GDP has grown by about
0.5 percent per year
When the consumer price index rises, the typical family
has to spend more dollars to maintain the same standard of living
In the CPI, goods and services are weighted according to
how much consumers buy of each good or service
According to BLS' April 2016 report, over the last 12 months the United States CPI has increased/decreased by about
1.1 percent per year
The 2015 US GDP per capita was approximately:
$57,000
Which of the following is the most important determinant of productivity in the US economy?
technology
The current (April 2016) unemployment rate stands at:
5.0%
The current (April 2016) civilian labor force participation rate stands at approximately:
62.8%
