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Questions and Answers of Economics

1. Consider the example of Xena€™s copy shop. Adding a second worker increased output by 300 pages. If she added a third worker, her output would increase by fewer than ________ pages.2. If
1. Your savings account pays 4 percent per year: Each $100 in the bank grows to $104 over a one-year period. If prices increase by 3 percent per year, by keeping $100 in the bank for a year you
About 90 percent of the world s candy canes are consumed in the United States, and until recently most were produced domestically. Domestic producers were closer to consumers, so they had lower
As an example of a market that results from comparative advantage, consider the market for virtual currency. Firms in China pay workers (called gold farmers) to play the online game World of War
In 1802, a new market developed in the United States garden seeds sold in small packets. The new market was developed by the Shakers, a religious group whose members took a vow of celibacy and lived
1. Consider an accounting firm with two accountants.a. Fill in the blanks in the following table.b. Quigley has a comparative advantage in_____________, while Slokum has a comparative advantage
1. Arrows up or down: Outsourcing _____ production costs and _____ consumer prices.2. In the first three months of 2004, the number of jobs moving to another state was _____ (larger/smaller) than the
1. Four social inventions that support markets are (1) ______, which specify the terms of exchange; (2) ______, which reduce the risk of entrepreneurs; (3) ______, which increases the profitability
1. For markets to operate efficiently, the people making consumption and production decisions must bear the full _____and reap the full _____from their decisions.2. Pollution from a paper mill is an
In the late summer of 2005, Hurricane Katrina caused a storm surge and levee breaks that flooded much of New Orleans and destroyed a large fraction of the city s housing. Hundreds of thousands of
In the last few years thousands of honeybee colonies have vanished, a result of bee colony collapse disorder (CCD). Roughly one-third of the U.S. food supply including a wide variety of fruits,
What happens when an increase in supply is combined with a decrease in demand? In 2009 the cruise industry invested $4.7 billion on 14 new ships, and in 2010 the industry launched 12 additional new
The price of vanilla beans has been bouncing around a lot. The price was $50 per kilogram (2.2 pounds) in 2000, then rose to $500 in 2003, then dropped to $25 in 2006. We can use the model of demand
1. Arrow up or down: According to the law of demand, an increase in price ____ the quantity demanded.2. From the following list, choose the variables that are held fixed in drawing a market demand
1. Arrow up or down: According to the law of supply, an increase in price ___ the quantity supplied. 2. From the following list, choose the variables that are held fixed when drawing a market supply
1. The market equilibrium is shown by the intersection of the ____ curve and the ____ curve.2. Excess demand occurs when the price is (less/greater) than the equilibrium price; excess supply occurs
1. A change in demand causes a ____ (movement along/shift of) the demand curve. A change in quantity demanded causes a ______ (movement along/ shift of ) the demand curve.2. Circle the variables that
1. A change in supply causes a ______ (movement along/shift of) the supply curve. A change in quantity supplied causes a ____ (movement along/shift of) the supply curve.2. Circle the variables that
1. Fill in the blanks in the following table. Note that the ordering of the first column has been scrambled.2. When _____ (supply/demand) changes, the equilibrium price and the equilibrium quantity
1. Arrow up or down: Hurricane Katrina ____ the demand for housing in Baton Rouge, so the price of housing and the quantity of housing ____.2. Arrows up or down: The decrease in the number of bee
Was the most recent recession the most severe economic downturn since the Great Depression? With the data now in, it appears that the recession starting in December 2007 will rival the recession
Two economists, David Blanch flower of Dartmouth College and Andrew Oswald of Warwick University in the United Kingdom, have systematically analyzed surveys over a nearly 30-year period that ask
1. The circular flow describes the process by which GDP generates____, which is spent on goods and services.2. Labor and capital are exchanged in _________markets.3. Which government department
1. Which of the following is not a component of GDP?a. Consumptionb. Investmentc. Producer Price Indexd. Government purchasese. Net exports2. What part of government spending is excluded from GDP
1. What do we add to GDP to reach GNP?a. Net income earned abroad by U.S. householdsb. Personal incomec. Depreciationd. Net exports2. What is the largest component of national income?a. Compensation
1. The GDP deflator is calculated for any given year by dividing nominal GDP by ______GDP and multiplying by 100.2. If the base year is 2010, then real and nominal GDP in 2010 will be equal. ____
1. The date that a recession begins is called the__________.2. Since World War II, the United States has experienced seven recessions. ______ (True/False)3. The ______ marks the date that ends a
1. Which of the following are not included in GDP?a. Leisure timeb. Sales of new carsc. Strawberries sold in a grocery stored. Economics textbooks sold in the bookstore2. Men s reported happiness has
Dumping is selling a product in a foreign market at a lower price than a firms own domestic market. You might think that this would require a comparison of actual prices charged in home markets
1. A country has a comparative advantage if it has a lower ________ cost of producing a good 2. The terms of trade is the rate at which two goods can be ________ for one another.3. Suppose a country
1. If a country bans the importation of a particular good, the market equilibrium is shown by the intersection of the _____curve and the_____ curve.2. The equilibrium price under an import quota is
1. The -industry argument is often given to provide a rationale for tariffs for new firms.2. Knowledge gained during production is known as by doing. 3. If only one firm can exist in a market, a
1. The latest trade round is called the_________ round.2. The _________ was formed in 1995 to oversee GATT.3. NAFTA is a free-trade agreement between the United States, Mexico, and _____________.4.
1. Pricing below production cost or selling at prices in foreign markets less than those in domestic markets is known as __________.2. Under global trade rules, the United States was allowed to ban
In recent years, the U.S. and Chinese governments have been at odds about the appropriate value of the exchange rate between the Chinese yuan and the U.S. dollar. The United States believes that the
The 2006 Economic Report of the President directly addressed whether the United States can continue to run large current account deficits and, of course, financial account surpluses. In the report,
When the euro was launched, countries with typically weaker currencies or fiscal discipline benefited from the discipline of one currency and a strong, single central bank. No longer would investors
During the late 1980s, Argentina suffered from hyperinflation. As part of its financial reforms, it pegged its currency to the U.S. dollar, making pesos convertible into dollars. To issue pesos, the
1. The dollar _______ against the euro when the European central bank lowers interest rates.2. If the dollar appreciates against the euro, then the euro also _______ against the dollar.3. The dollar
1. When the U.S. price level increases but the nominal exchange rate remains the same, the real exchange rate will ________.2. When the U.S. and foreign price levels remain the same but the dollar
1. Net transfers from abroad are a(n) _______ entry on the current account.2. The current, financial, and capital accounts must sum to_______.3. According to latest data on the U.S. international
1. The government _______ foreign currency for dollars if it wants to peg the exchange rate at a higher rate than would normally prevail in the market.2. If there is an excess supply of a country s
1. When prices rose in Mexico faster than in the United States and the nominal exchange rate remained constant, the real exchange rate _________.2. If a country borrows in dollars, a depreciation
Economists have taken a number of different approaches to analyze the behavior of retail prices. Anil Kashyap of the University of Chicago examined prices in consumer catalogs. In particular, he
Economists have used the basic framework of aggregate demand and supply analysis to explain recessions. Recessions can occur either when there is sharp decreases in aggregate demand a leftward shift
During the 1970s, the world economy was hit with a series of unfavorable supply shocks that raised prices and lowered output, including spikes in oil prices and the prices of many agricultural
1. Arthur Okun distinguished between _____prices, which changed rapidly, and custom prices, which are slow to change.2. For most firms, the biggest cost of doing business is _____.3. The price system
1. Which of the following is not a component of aggregate demand?a. Consumptionb. Investmentc. Government expendituresd. The supply of moneye. Net exports2. In the Great Depression, prices in the
1. The long-run aggregate supply curve is _____ (vertical/horizontal).2. A decrease in material costs will shift the short-run aggregate supply _____.3. Using the long-run aggregate supply curve, a
1. Suppose the supply of money increases, causing output to exceed full employment. Prices will ______ and real GDP will ______ in the short run, and prices will ______ and real GDP will in the long
As life expectancies increase, the population ages, and new medical technologies become available to help people live longer, economists and budget analysts predict that spending on federal
As part of President Obama s fiscal stimulus package, the Council of Economic Advisers was required to make quarterly reports to the Congress on the role that the stimulus package played in economic
1. To decrease aggregate demand, a government can either decrease spending or ____ taxes.2. Contractionary fiscal policy shifts the aggregate demand curve to the ____, ____ prices, and ____ real
1. Fiscal year 2009 began on October 1________.2. Discretionary spending is the largest component of federal spending. ________ (True/False)3. Two examples of entitlement spending are ________and
1. ________ was the first president to consciously use fiscal policy to stabilize the economy.2. Walter Heller was President Lyndon Johnson s chief economic adviser. ________ (True/False)3. The U.S.
1. Find the Multiplier. An economy has a marginal propensity to consume (b) of 0.6 and a marginal propensity to import (m) of 0.2. What is the multiplier for government spending for this economy?2.
The value of homes in excess of what people borrow with a mortgage is known as their home equity. Home equity is the single largest component of net wealth for most families in the United States.
One of the difficulties in estimating multipliers is that during normal times, government spending and taxes do not change too much so it is difficult to isolate their effects on the economy.
1. The income-expenditure model is most appropriate for long-run analysis. ____ (True/False)2. Equilibrium output occurs when real output equals planned expenditures. ____ (True/False)3. If output is
1. The slope of the consumption function is called.2. A decrease in consumer confidence will shift the consumption function (upward/downward).3. If housing prices fall, you would expect the
1. In our simple model, if C = 100 + 0.8y, and I = 50, equilibrium output will be ______.2. If in Exercise 3.1 I increase to 100,a. The equilibrium income will be ______.b. The multiplier is
1. The multiplier for taxes is greater than the multiplier for government spending. _______ (True/False)2. A decrease in the tax rate will_______ the government spending multiplier.3. Economic
1. An increase in the marginal propensity to import will _____ the multiplier for investment spending.2. An increase in exports will lead to a(n) _____ in GDP.3. Use the income-expenditure graph to
1. An increase in the price level will GDP and thereby move the economy the aggregate demand curve.2. At any price level, the income-expenditure model determines the level of equilibrium output and
The lucky winner of a lottery was given an option. She could either receive $1 million a year for 20 years, for a total of $20 million, or simply receive $10 million today. Why would anyone take the
In early 2010, one quarter of all U.S. homes were underwater. No, there was not massive flooding across the entire country. The term underwater means that homeowners owed more on their mortgages than
As securitization developed, it allowed financial intermediaries to provide new funds for borrowers to enter the housing market. This led to a rise in the rate of homeownership and was hailed as a
1. Investment is a larger component of GDP than consumption, but it is much more volatile. _____ (True/False)2. Investment spending is very_______, since it moves in conjunction with GDP.3. The
1. If the interest rate is 10 percent, the present value of $200 paid one year from now equal’s ______.2. If the interest rate is 5 percent, the present value of $200 paid one year from now
1. If a project costs $100 and pays $107 next year, the maximum interest rate at which the present value of the investment exceeds its cost is _________________.2. As real interest rates rise,
1. An illiquid financial asset is one that can easily be used to buy goods and services. _____ (True/False)2. Creation of _____ following the Great Depression has greatly reduced the likelihood of
As banks failed during the Great Depression, residents in many cities and towns faced a shortage of money to make transactions. Both individuals and businesses lost funds in failed banks or had their
During the height of the financial crisis in September 2008, the Fed injected large amounts of reserves into banks, and in the next month, it started paying interest to banks on these reserves. Prior
The Fed was tested on September 11, 2001, following the terrorist attacks against the United States. Many financial firms keep little cash on hand and expect to borrow on a daily basis to pay their
Sunday, March 16, 2008, was not a peaceful day for the Board of Governors. Over the prior week, one of Wall Street s most famous investment houses, Bear Stearns, had gone into full collapse. Although
1. Money solves the problem of double coincidence of wants that would regularly occur under a system of _______.2. Gold is a good example of fiat money. _______ (True/False)3. Deposits in checking
1. Banks are required by law to keep a fraction of their deposits as ______.2. When reserves do not pay interest, banks prefer to keep reserves rather than make loans. ______ (True/False) 3. If the
1. The Federal Reserve is the ________of last resort.2. The San Francisco Federal Reserve Bank is the only one in the West because San Francisco outbid Los Angeles to be its host. ________
1. The Federal Reserve arranged for JPMorgan Chase & Co._________ to Bears Stearns during the financial crisis in 2008. 2. The float in the banking system is the difference between the Federal
Economists have often noticed that as an economy recovers from a recession, interest rates start to rise. And, in general, interest rates tend to rise as the economy grows quickly. An example
When Professor Alan Blinder returned to teaching after serving as vice-chairman of the Federal Reserve from 1994 to 1996, he was convinced that committees were not effective for making decisions
Traditionally, to conduct monetary policy and to expand the money supply, the Fed purchased either outright or on temporary basis Treasury securities. When it purchased these securities for the
1. We measure the opportunity cost of holding money with ________.2. Money demand will________ (increase/decrease) as prices fall.3. The principle of ________suggests that the demand for money
1. To increase the supply of money, the Fed should_______ bonds.2. Increasing reserve requirements _______ the supply of money.3. Banks trade reserves with one another in the _______ market.4. Banks
1. Interest rates typically fall in a recession because the demand for money depends______ on changes in real income.2. If interest rates are 9 percent per year, the price of a bond that promises to
1. When the Federal Reserve sells bonds on the open market, it leads to ______ (higher/lower) levels of investment and output in the economy.2. To decrease the level of output, the Fed should conduct
1. ___________ (Inside/Outside) lags are longer for the Fed.2. Experimental evidence shows us that individuals perform ________ than committees in making monetary policy decisions.3. Long-term
As a keen student of the Great Depression, Federal Reserve Chairman Ben Bernanke became concerned when short term interest rates such as the federal funds rate fell below 0.5 percent in late 2008 as
The original political business cycle theories focused on incumbent presidents trying to manipulate the economy in their favor to gain reelection. Subsequent research began to incorporate other, more
In 1950 health-care expenditures in the United States were 5.2 percent of GDP; by 2000 this share had risen to 15.4 percent. Driving these increases were several factors: increasing relative prices
1. Wages and prices will increase when actual output exceeds potential. __________(True/False)2. The short run in macroeconomics is the time period over which __________do not adjust to economic
1. The short-run aggregate supply curve will move_________ if the economy s actual output is below full-employment output.2. If the adjustment process works slowly, then economic policy is less
1. As the price level increases, the demand for money ________and interest rates __________.2. If output is above full employment, we expect wages and prices to rise, money demand to increase, and
1. Professors Don _________ and Franco _________developed the adjustment-process model used in this chapter.2. Keynes s objection to Say s law was that it is possible for demand to create its own
Economists believe that the natural rate of unemployment changes over time, although they often have difficulty pinning down an exact estimate. Policymakers need to have an accurate assessment of the
On May 6, 1997, the then-chancellor of the exchequer in Great Britain, Gordon Brown, announced a major change in monetary policy. From that time forward, the Bank of England would be more independent
In June 2008 the consumer price index in Zimbabwe was 8 million percent higher than it was a year before. A $12 lunch in local currency cost 1.1 trillion Zimbabwe dollars. What caused Zimbabwe to
1. The expected real rate of interest is the nominal interest rate minus the expected inflation rate. ____________(True/False)2. Countries with higher rates of money growth have____________ interest
1. If inflation increases less than expected, the actual unemployment rate will be ________ (above/below) the natural rate.2. Robert E, Lucas, Jr., explained business cycles by rules of thumb._____
1. An aggressive union will shift the aggregate supply curve_________, causing prices to and real GDP to ________.2. In the face of an upward shift in the aggregate supply curve, the Fed can increase

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