1. (TCO 1) Individuals are forced to make choices because: (Points: 4)
Wants are satiable.
The supply of resources is infinite.
Wants are insatiable and resources are scarce.
Resources are satiable.
2. (TCO 1) The economic problem is essentially one of deciding how to make the best use of
(Points: 4)
Limited resources to satisfy limited wants.
Unlimited resources to satisfy limited wants.
Limited resources to satisfy unlimited wants.
Unlimited resources to satisfy unlimited wants.
3. (TCO 1) The 'opportunity cost' for a student of attending college for a year is measured by
(Points: 4)
The benefit received by the student.
The tuition paid for the year.
The value of the most valued opportunity foregone by attending college.
The total money outlays associated with attending college.
4. (TCO 1) Each of the following is an example of an economic resource "except" (Points: 4)
Land
Money
Capital
Labor
5. (TCO 1) In order to raise our rate of economic growth we would need to (Points: 4)
Increase the level of capital.
Reduce the level of labor.
Spend more on environmental campaigns.
Spend more on public shelters.
6. (TCO 1) A mixed economy is a mixture of: (Points: 4)
Foreign and domestic
Private and public
Command and control
None of the above
7. (TCO 1) Adam Smith's "Invisible Hand" is NOT: (Points: 4)
About the profit motive
About looking after your self interest
About promoting the social interest
About market prices
8. (TCO 2) If the tea harvest is bad in a particular year, what will happen in the market for
coffee (Substitute for tea)? (Points: 4)
increased price and decreased quantity.
increased price and increased quantity.
decreased price and increased quantity.
decreased price and decreased quantity.
no change in equilibrium price and quantity.
9. (TCO 2) An increase in the 'number of producers' of a good will (Points: 4)
increase the market supply because the price will rise.
increase the market demand simultaneously.
increase the market supply because market supply is the sum of all individual supply
curves.
does not change the market supply.
None of the above.
10. (TCO 2) When a market is in equilibrium, (Points: 4)
producers earn profits.
the minimum possible price is achieved.
there is no incentive for consumers or producers to change their current behavior.
excess demand is less than excess supply.
the maximum possible price is achieved.
11. (TCO 2) Suppose a market is in equilibrium and then a 'price ceiling' is established below
the equilibrium price. Which of the following will happen? (Points: 4)
quantity demanded will decrease.
a surplus will develop.
a shortage will develop.
the quantity sold will rise.
the market will remain in equilibrium.
12. (TCO 2) If a luxury product has an 'elastic demand,' the firm would _______ to increase
total revenue. (Points: 4)
decrease price
increase price
hold price steady
stop selling
13. (TCO 2) Mr. Smith has recently received a promotion with a significant increase in
'salary.' Since receiving his pay raise, Mr. Smith has eaten less canned foods. We would
conclude that canned foods are (Points: 4)
inferior goods
substitute goods
normal goods
complementary goods
14. (TCO 3) If you compare the demand curve of a monopolist to the demand curve for a
perfectly competitive firm, the demand curve for a monopolist will be: (Points: 4)
more elastic
less elastic
perfectly elastic
perfectly inelastic
15. (TCO 3) Why do firms Not want to produce to at an output level that is to the left of the
profit maximizing output point? (Points: 4)
They want to make sure they always produce where the marginal cost is greater
than the marginal revenue
They will make more on a per unit basis and sell more units.
They will make more on a per unit basis but sell fewer units.
They typically have no idea where the profit maximizing output point is.
16. (TCO 3) Why does the average variable cost curve initially slope downward? (Points: 4)
diseconomies of scale
law of diminishing returns
decreasing returns to scale
increasing marginal output
17. (TCO 3) Which of the following statements correctly describes Total Fixed Costs (TFC)?
When the TFC is graphed, the curve is: (Points: 4)
upward sloping from left to right
a vertical line
a horizontal line
a downward sloping line from left to right.
18. (TCO 3) In the 'short run,' (Points: 4)
all costs are fixed costs
all costs are variable costs
some costs are fixed costs
all costs are marginal costs
19. (TCO 3) How long is the short-run? (Points: 4)
24 hours
the current year
until the mortgage is paid off
as long as there are any fixed costs in an operation
20. (TCO 3) Pat opened his restaurant 10 years ago. He has a 15 year mortgage on his
$200,000 building. He just paid off all of his equipment last year. He has a payroll of
$400,000 a year, and his cost for product was $600,000 last year. A new freeway section
just opened which bypasses his market area. Traffic has dropped by 60%. He realizes that
he can no longer stay in business so he chooses to 'shut his operation down.' Which of the
following is not true? (Points: 4)
Fixed cost will be zero
Variable cost will be zero
Total revenue will be zero
Fixed cost still remains.
21. (TCO 4) Which of the following statements about GDP is most accurate? (Points: 4)
The dollar value of goods and services in a nation.
The dollar value of all intermediate goods and services in a nation.
The dollar value of all the final goods and services produced in a nation during the
year.
The dollar value of all intermediate goods and services produced in a nation in one
year regardless of who owns the resources.
22. (TCO 4) GDP may be found by: (Points: 4)
adding together money spent on goods and services and incomes received by the
factors of production
subtracting incomes received by the factors of production from the money spent on
goods and services
subtracting the money spent on goods and services from the incomes received by
the factors of production
adding the money spent on final goods and services
23. (TCO 4) The 'expenditure approach' to GDP uses: (Points: 4)
Only earned income by investors.
C+I+G
C + I + G + Xn
Uses all income from ownership of the factors of production including government
spending on goods and services.
24. (TCO 4) To include the value of the parts used in producing the automobiles turned out
during a year in GDP for that year would be an example of (Points: 4)
including a non-market transaction
Including a non-production transaction
Including a non-investment transaction
Multiple counting
25. (TCO 5) Demand-pull inflation is often summed up as (Points: 4)
too many dollars chasing too few goods.
the wage-price spiral.
profit-push inflation.
supply-side cost shock inflation.
1. (TCO 5) Rising business investment and consumption will (Points: 5)
increase aggregate demand
increase aggregate supply
not change aggregate demand
None of the above
2. (TCO 6, 10) A major advantage of 'automatic stabilizers' is that (Points: 5)
they automatically produce surpluses during recessions and deficits during inflation.
they help stabilize the economy without having any effect on the personal income.
they simultaneously stabilize the inflation and reduce the absolute size of the public
debt.
they require no legislative action by Congress to be made effective.
3. (TCO 6, 10) The effectiveness of discretionary fiscal policy will be reduced if: (Points: 5)
borrowing increases interest rates and crowds out private investment
the dollar depreciates because of an increased outflow of currency
the price level falls
stock prices rise
4. (TCO 6, 10) Which of the following is an example of 'crowding-out effect'? (Points: 5)
Federal government spending causes changes in state and local government
spending.
Government spending reduces private spending.
Tax changes perceived as temporary are largely ignored.
Government spending causes the price level to rise.
5. (TCO 6, 10) An increase in taxes and cut in government spending would be appropriate to
curb (Points: 5)
demand-pull inflation
recession
rising interest rates
fiscal deficits
6. (TCO 6, 10) Each of the following is an example of discretionary fiscal policy except
(Points: 5)
public works spending
making the automatic stabilizers more effective
changes in tax rates
changes in interest rates
7. (TCO 5, 6) Most economists would agree that public debt should be reduced (Points: 5)
during both periods of recession and prosperity
just during periods of recession
just during periods of prosperity
never
8. (TCO 6, 10) Which of the following exemplifies the crowding-out effect? An increase in
government spending: (Points: 5)
is financed by increasing the money supply, reducing interest rates and causing exports to
fall
is financed by borrowing, raising interest rates and causing investment to fall
causes taxes to rise automatically, reducing consumption spending
causes the price level to rise, reducing net exports
9. (TCO 7, 10) Which is most likely to be affected by changes in the rate of interest? (Points:
5)
tax multiplier
investment spending
government spending
the imports of the economy
10. (TCO 7, 10) The Federal Reserve decides to pursue an 'expansionary monetary policy.'
Which set of actions by the Fed would be most consistent with this policy? (Points: 5)
buying government securities and raising the reserve ratio
selling government securities and raising the reserve ratio
buying government securities and lowering the reserve ratio
a decrease in commercial bank loans
selling government securities and lowering the reserve ratio
11. (TCO 5, 6, 10) If automatic stabilizers kick in automatically, when real GDP falls, (Points:
5)
tax revenues and transfer payments both should fall
tax revenues and transfer payments both should rise
tax revenues should fall and transfer payments should rise
tax revenues should rise and transfer payments should fall
12. (TCO 5, 6, 10) During time of a big booming economy, we want to (Points: 5)
lower taxes and run budget deficits
reduce social expenditures
raise taxes and reduce government spending
lower taxes and raise government spending
13. (TCO 5, 6, 10) Budget surpluses are most appropriate during (Points: 5)
depressions
recessions
inflations
none of the above
14. (TCO 5, 6, 10) The 'Crowding-Out Effect' of government spending as a fiscal policy tool
is shown by (Points: 5)
People expecting the government to "take care" of them and not saving for
themselves
Increasing interest rates that reduce businesses borrowing for investment
Government buying pre-school shots for children instead of the children's parents
buying them
Foreign investors buying U.S. currency to buy U.S. securities which drives the
exchange rate of U.S. currency up
15. (TCO 8) 'Comparative advantage' is based on (Points: 5)
"gains from free trade"
idea of economic superiority.
absolute costs of producing goods in different countries.
relative opportunity costs of producing goods in different countries.
16. (TCO 8) 'Absolute advantage' is found by (Points: 5)
comparing opportunity costs.
calculating the dollar cost of production.
comparing the productivity of one nation to that of another.
first determining which country has a comparative advantage.
17. (TCO 9) Today international finance is based on (Points: 5)
the gold standard
mainly a relatively free-floating exchange rate system
fixed rates of exchange
none of the above
18. (TCO 9) If the worldwide demand for dollars relative to all other currencies increases,
then the value of the dollar in terms of any other currency: (Points: 5)
Increase and the dollar will appreciate
Increase and the dollar will depreciate
Decrease and the dollar will appreciate
Decrease and the dollar will depreciate
19. (TCO 8, 9) Frank gets a job because the foreign demand for the product his firm
produces rose. This is a result of the U.S. dollar: (Points: 5)
Being weak relative to other nation's currencies.
Appreciating relative to other currencies.
Being targeted by the IMF for inflation.
none of the above
20. (TCO 8, 9) The U.S. Current Account Balance most often shows (Points: 5)
A surplus
A deficit
Zero balance, equal number of debits and credits
The smallest current account deficits relative to its GDP compared to other countries
1. (TCO 7, 10) 1(a) Is the Federal Reserve more effective at fighting a recession than an
inflation? Yes/ No? Explain your answer thoroughly. (20 points)
1(b) What Monetary Policy Tools should the Federal Reserve use to fight a recession?
Describe them thoroughly. (25 points)
(Points: 45)
2. (TCO 9, 10) 2(a) How is the exchange rate determined in a freely floating rate system?
(15 points)
2(b) For few months, prior to your vacation trip to France, you find that the exchange rate
for your U.S. dollar has increased relative to the Euro. If you were a U.S. citizen or resident,
are you pleased? Explain. (15 points)
2(c) Explain why a currency depreciation leads to an improvement in a nation's balance of
trade. (15 points)
(Points: 45)