Archimedean Upper Conservatory Economics, October 2016

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1 Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The point on a business cycle when real gross domestic product stops rising and begins falling is a(n): A. peak. B. trough. C. expansion. D. recession. E. recovery. 2. Suppose an economy experiences rising total output accompanied by increasing employment, this is generally known as: A. stagflation. B. recession. C. inflation. D. expansion. E. contraction. 3. The production possibility curve for producing goods X and Y is bowed out from the origin because: A. resources are not equally suited for the production of both goods. B. resources are scarce. C. economic growth leads to inefficiency. D. resources are inefficiently used. E. consumers don t view goods X and Y as equally substitutable. Figure 3-9: Strawberries and Submarines II 4. Use the Strawberries and Submarines II Figure 3-9. Point F: A. it is unattainable, all other things unchanged. B. is attainable if the quantity and/or quality of factors decreases. C. is attainable if the economy is able to reach full employment. D. is feasible, but not efficient. E. it is unattainable until the production possibility curve shifts inward.

2 5. Nate and Dylan are brothers. They have to mow the lawn and clean their rooms before they can go to the high school football game. Nate mows the lawn and Dylan picks up the rooms and they make it to the football game on time. This statement best represents the economic concept of: A. people usually exploit opportunities to make themselves better off. B. there are gains from trade. C. markets usually lead to efficiency. D. one person's spending is another person's income. E. how much is a decision at the margin. 6. In one hour, the United States can produce 25 tons of steel or 250 automobiles. In one hour, Japan can produce 30 tons of steel or 275 automobiles. This information implies that: A. Japan has a comparative advantage in the production of automobiles. B. the United States has an absolute advantage in the production of steel. C. Japan has a comparative advantage in the production of both goods. D. the United States has a comparative advantage in the production of automobiles. E. the United States should export steel to Japan in exchange for automobiles. 7. An economy is said to have a comparative advantage in the production of one good if it: A. can produce more of all goods than another economy. B. can produce less of all goods than another economy. C. has the highest opportunity cost for producing a particular good. D. has the lowest opportunity cost for producing a particular good. E. cannot benefit from trade with other economies. 8. If the opportunity cost of manufacturing machinery is higher in the United States than in Britain and the opportunity cost of manufacturing sweaters is lower in the United States than in Britain, then the United States will: A. export both sweaters and machinery to Britain. B. import both sweaters and machinery from Britain. C. export sweaters to Britain and import machinery from Britain. D. import sweaters from Britain and export machinery to Britain. E. neither import, nor export goods with Britain. Figure 6-2: DVD Market

3 9. Use the DVD Market Figure 6-2. At a rental price of $3, there will be A. equilibrium in the rental market for DVDs. B. an increase in demand. C. an excess supply of 40 DVD rentals. D. an excess demand of 40 DVD rentals. E. an excess demand of 10 DVD rentals. Figure 7-1: Demand and Supply of Gasoline 10. Use the Demand and Supply of Gasoline Figure 7-1. What might cause the supply curve to shift from S 2 back to the initial supply curve S 1? A. The Organization of Petroleum Exporting Countries (OPEC. restricts the production of crude oil. B. The government decreases the per-gallon tax on gasoline production. C. Americans want to buy more gasoline. D. Technology in the refinement of gasoline greatly improves. E. The price of crude oil decreases. 11. Which of the following always results in an increase in price and quantity? A. an increase in supply and a decrease in demand B. an increase in demand and supply C. an increase in supply with no change in demand D. a decrease in demand and supply E. an increase in demand with no change in supply 12. The market price of airline flights increased recently. Some economists suggest that the price increased because there has been an increase in the number of business travelers. If the economists are correct, it must be the case that: A. supply increased. B. supply decreased. C. supply increased while demand also decreased. D. demand decreased. E. demand increased.

4 13. Suppose the local real estate market is in equilibrium. Recently a recession has caused local household incomes to decline. At the same time, construction of a large subdivision of new homes has just been completed. Given these two changes, we can predict the price of real estate will and the quantity of real estate bought and sold will. A. fall; fall if the demand decrease is larger than the supply increase B. fall; rise if the demand decrease is larger than the supply increase C. fall if the demand decrease is larger than the supply increase; rise D. rise if the supply increase is larger than the demand decrease; fall E. rise; rise 14. Given a supply curve that is positively sloped and a demand curve for a normal good that is negatively sloped, an increase in income will most likely result in: A. an increase in equilibrium price and quantity. B. a decrease in equilibrium price and an increase in equilibrium quantity. C. a decrease in both equilibrium price and quantity. D. an increase in equilibrium price and a decrease in equilibrium quantity. E. an increase in equilibrium price and an uncertain change in equilibrium quantity. Figure 8-1: Rent Controls 15. Use the Rent Controls Figure 8-1. If rent controls are set at Rent 3 : A. the shortage of rental units is the distance Q 3 Q 1. B. some renters would be willing to pay a price as high as Rent 4 for Q 3 units. C. no one would have to pay a higher actual price than Rent 0, nor would anyone be willing to do so. D. rent would remain at Rent 2. E. the surplus of rental units is the distance Q 3 Q The market for apples is in equilibrium at a price of $0.50 per pound. If the government imposes a price floor in the market at a price of $0.40 per pound, then: A. quantity demanded will decrease. B. quantity supplied will increase. C. there will be a shortage of the good. D. the price floor will not affect the market price or output. E. there will be a surplus of the good.

5 P Q p Q s $ Table 8-5: Market for Butter Note: P = Price per lb in $; Q p = Quantity demanded in millions of lbs; Q s = Quantity supplied in millions of lbs. 17. Use Table 8-5. If the government imposes a price floor of $0.90 per pound of butter, the quantity of butter actually purchased will be: A million pounds. B. 9.0 million pounds. C. 1.5 million pounds. D. 8.0 million pounds. E million pounds. 18. When the government removes a binding price floor: A. quantity demanded would decrease and quantity supplied would increase. B. quantity demanded would increase and quantity supplied would decrease. C. an excess demand would develop. D. an excess supply would develop. E. market efficiency is lost. Figure 8-10: Market for Hybrid Cars 19. Use Market for Hybrid Cars Figure An effective price floor would be: A. at point P 1 creating a difference in quantity from Q 3 to Q 1. B. at point P 2. C. at point P 3 creating a difference in quantity from Q 3 to Q 1. D. at point P 1 creating no change in quantity. E. at point P 1 creating a difference in quantity from Q 3 to Q 2.

6 Figure 8-13: Market for Tortillas 20. Use Market for Tortillas Figure If there is a nonbinding price floor in the market for tortillas, the price would be equal to, consumers would demand, and producers would supply. A. P 1 ; Q 1 ; Q 3 B. P 1 ; Q 2 ; Q 3 C. P 1 ; Q 3 ; Q 1 D. P 3 ; Q 3 ; Q 1 E. P 2 ; Q 2 ; Q 2 Figure 8-16: Market I 21. Use the Market I Figure A surplus of the good would result if the price was equal to: A. $3. B. $9. C. $6. D. $0. E. $ The labor force is equal to the: A. sum of the employed and the unemployed. B. population minus the number of employed. C. sum of the employed and the underemployed. D. number of people working in the economy. E. number of people in the economy above the age of 16.

7 23. Unemployment that is due to the time workers spend in job search is considered: A. operational unemployment. B. structural unemployment. C. cyclical unemployment. D. natural unemployment. E. frictional unemployment. Figure 13-1: Minimum Wage 24. Use the Minimum Wage Figure When the government introduces the binding minimum wage of P 3, the quantity of labor supplied rises by: A. Q 4 Q 1. B. Q 3 Q 2. C. Q 2 Q 1. D. Q 4 Q 2. E. zero. 25. If actual unemployment is 6.2% and the natural rate of unemployment is 4%, cyclical unemployment is: A. 6.2%. B. 10.2%. C. 4%. D. 2.2%. E. 3.2%

8 Figure 19-1: Shifts of the AD AS Curves 26. Use the Shifts of the AD AS Curves Figure In the short run, a decrease in investment is illustrated by: A. Panel (A). B. Panel (B). C. Panel (C). D. Panel (D). E. Panels (B) and (D). 27. When the economy is producing output below potential, it has a(n): A. full-employment output. B. natural level of employment. C. recessionary gap. D. inflationary gap. E. expanding economy.

9 Figure 19-5: Policy Alternatives 28. Use the Policy Alternatives Figure Assume that the economy depicted in Panel (a) is in short-run equilibrium at a real GDP level of Y 1. Doing nothing and letting the economy correct itself: A. is called fiscal policy. B. occurs in the long run as wages rise. C. occurs in the short run as wages rise. D. occurs as the aggregate demand curve begins to increase. E. occurs in the long run as wages fall. 29. If the short-run macroeconomic equilibrium is _ of the economy's potential output, then there is a(n) and the aggregate price level is expected to. A. to the right; inflationary gap; fall B. to the right; recessionary gap; rise C. to the left; inflationary gap; fall D. to the left; recessionary gap; fall E. to the left; recessionary gap; rise

10 Figure 19-10: An Increase in Aggregate Demand 30. Use the An Increase in Aggregate Demand Figure At the Y 2 level of real GDP: A. an inflationary gap exists equal to the sum of Y 2 and Y P. B. an inflationary gap exists equal to the difference between Y 2 and Y P. C. the output at Y 2 is a long-run equilibrium. D. a recessionary gap exists equal to the difference between Y 2 and Y P. E. the economy will self-correct at output Y p and price level P 1. Figure 19-11: Policy Alternatives 31. Use the Policy Alternatives Figure In Panel (b), the economy is initially in short-run equilibrium at real GDP level Y 1 and price level P 2. If the government decides to intervene, it would most likely: A. increase taxes. B. decrease the quantity of money available. C. increase the level of government purchases of goods and services. D. decrease the level of government purchases of goods and services. E. decrease transfer payments.

11 32. In the short run, when the AD curve increases: A. the aggregate price level will rise and the aggregate output level will fall. B. the aggregate price level will rise and the aggregate output level will increase. C. the aggregate price level will fall and the aggregate output level will increase. D. the aggregate price level will fall and the aggregate output level will decrease. E. the aggregate price level will remain constant and the aggregate output level will increase. 33. The economic policy that uses changes in government spending and taxes to affect the overall spending in the economy, is known as the: A. tax and spend policy. B. monetary policy. C. fiscal policy. D. free trade policy. E. free market policy. Figure 20-5: Fiscal Policy I 34. Use the Fiscal Policy I Figure Suppose that this economy is in equilibrium at E 1. If there is a decrease in taxes, then: A. AD 2 will shift to the left, causing an increase in the price level and a decrease in real B. AD 2 will shift to the left, causing a decrease in the price level and a decrease in the real C. AD 1 will shift to the right, causing an increase in the price level and an increase in real D. AD 1 will shift to the right, causing a decrease in the price level and an increase in real E. AD 1 will shift to the right, causing an increase in the price level and a decrease in real

12 35. Use the Fiscal Policy I Figure Suppose that this economy is in equilibrium at E 2. If there is an increase in government transfers, then: A. AD 2 will shift to the right, causing an increase in the price level and an increase in real B. AD 2 will shift to the left, causing a decrease in the price level and a decrease in the real C. AD 1 will shift to the right, causing an increase in the price level and an increase in real D. AD 1 will shift to the right, causing a decrease in the price level and an increase in real E. AD 2 will shift to the right, causing an increase in the price level and a decrease in real Figure 20-6: Fiscal Policy II 36. Use the Fiscal Policy II Figure Suppose that this economy is in equilibrium at E 2. If there is an increase in government transfers, then: A. AD 2 will shift to the right, causing an increase in the price level and an increase in real B. AD 2 will shift to the left, causing a decrease in the price level and a decrease in the real C. AD 1 will shift to the right, causing an increase in the price level and an increase in real D. AD 1 will shift to the left, causing a decrease in the price level and a decrease in real E. AD 2 will shift to the right, causing an increase in the price level and a decrease in real

13 37. If there is an inflationary gap, discretionary fiscal policy would likely involve action to: A. shift aggregate demand to the right. B. leave aggregate demand alone. C. shift aggregate demand to the left. D. shift both aggregate demand and short-run aggregate supply the left. E. shift aggregate demand to the left and short-run aggregate supply to the right. 38. A contractionary fiscal policy is a policy that: A. reduces aggregate demand by decreasing government purchases. B. reduces aggregate demand by decreasing money supply. C. reduces aggregate demand by decreasing interest rates. D. reduces aggregate demand by decreasing taxes. E. reduces aggregate demand by increasing transfer payments. 39. If the MPC is 0.8 and the government spending decreases by $50 million, then equilibrium GDP will decrease by: A. $40 million. B. $50 million. C. $200 million. D. $250 million. E. $100 million. 40. Suppose the economy is currently operating at an output level of $5,400 billion. Assume furthermore that potential output is $5,000. Which of the following would be necessary to close this inflationary gap if the marginal propensity to consume is 0.75? A. Raise taxes by $400 billion. B. Increase spending by $400 billion. C. Decrease spending by $100 billion. D. Increase spending by $100 billion. E. Decrease transfer payments by $800 billion.