Questions and Answers of Essentials of Economics

How many recessions has the United States experienced since 1950? Which ones were the longest in duration? Which ones were the most severe in terms of declines in real output?
What are the three types of unemployment? Unemployment is seen by some as undesirable. Are all three types of unemployment undesirable? Explain.
How does unanticipated inflation hurt creditors and help borrowers? How can anticipating the inflation make these effects less severe?
How might falling prices that occur during deflation ultimately hurt consumers?
What is the general relationship between a country’s price level and the quantity of its domestic output (real GDP) demanded? Who are the buyers of U.S. real GDP?
Why did the budget surpluses in 2000 and 2001 give way to a series of budget deficits beginning in 2002? Why did those deficits increase substantially beginning in 2008?
How did the Wall Street Reform and Consumer Protection Act of 2010 try to address some of the problems that helped cause the financial crisis of 2007–2008?
What are the two parts of the Fed’s dual mandate? Which of the two targets appears to be more variable? Explain your reasoning.
How did the Fed use the main tools of monetary policy to respond to the financial crisis that began in 2007? What additional programs did the Fed create and implement? When was the Fed able to relax
In 2018, manufacturing workers in the United States earned an average compensation of $21.86 per hour. That same year, manufacturing workers in Mexico earned an average compensation of $3.20 per
Contrast the methods used by inclusive unions and exclusive unions to raise union wage rates.
What factors have contributed to increased income inequality since 1980?
In 2019, Forbes magazine listed Jeff Bezos, the founder of Amazon, as the richest person in the United States. His personal wealth was estimated to be $131 billion. Given that there were about 328
In 2018, many unskilled workers in the United States earned the federal minimum wage of $7.25 per hour. By contrast, average earnings in 2018 were about $27 per hour, and certain highly skilled
Ralph Waldo Emerson once wrote: “Want is a growing giant whom the coat of Have was never large enough to cover.” How does this statement relate to the definition of economics?
“Buy 2, get 1 free.” Explain why the “1 free” is free to the buyer but not to society.
What is “utility” and how does it relate to purposeful behavior?
What is an inverse relationship? How does it graph? What is a direct relationship? How does it graph?
What are the major forms of household income?Contrast the wage and salary share to the profit share in terms of relative size. Distinguish between a durable consumer good and a nondurable consumer
Suppose that the demand and supply schedules for rental apartments in the city of Gotham are as given in the following table.a. What is the market equilibrium rental price per month and the market
What is the formula for measuring price elasticity of demand? What does it mean (in terms of relative price and quantity changes) if the price-elasticity coefficient is less than 1? Equal to 1?
Why have firms such as Google, Facebook, and Amazon gained monopoly power in search, social media, and online retail, respectively, despite potential competitors having virtually unrestricted access
An economy’s gross domestic product isa. the excess of spending over income.b. the excess of income over spending.c. total income and total spending.d. total spending as a percent of total income.
Carla bakes a cake and sells it to Norm for $10.Sam pays Diane $30 to tutor him. In this economy, GDP isa. $10.b. $20.c. $30.d. $40.
If the price of a hot dog is $2 and the price of a hamburger is $4, then 30 hot dogs contribute as much to GDP as _____ hamburgers.a. 5b. 15c. 30d. 60
Angus the sheep farmer sells wool to Barnaby the knitter for $20. Barnaby makes two sweaters, each of which has a market price of $40. Collette buys one of them, while the other remains on the shelf
Desirae, an American college student, moves to Japan for the summer to teach English. Her salary is includeda. only in U.S. GDP.b. only in Japan’s GDP.c. in both U.S. GDP and Japan’s GDP.d. in
Which of the following does NOT add to U.S. GDP?a. Boeing manufactures and sells a plane to Air France.b. General Motors builds a new auto factory in North Carolina.c. The city of New York pays a
An American buys a pair of shoes made in Italy.How do the U.S. national income accounts treat the transaction?a. Net exports and GDP both rise.b. Net exports and GDP both fall.c. Net exports fall,
Which is the largest component of GDP?a. consumptionb. investmentc. government purchasesd. net exports
An economy produces 10 cookies in year 1 at a price of $2 per cookie and 12 cookies in year 2 at a price of $3 per cookie. From year 1 to year 2, real GDP increases bya. 20 percent.b. 50 percent.c.
If all quantities produced rise by 5 percent and all prices fall by 5 percent, which of the following best describes what occurs?a. Real GDP rises by 5 percent, while nominal GDP falls by 5
If Mr. Keating quits his job as a teacher to homeschool his own children, GDPa. stays the same because he is engaged in the same activity.b. rises because he now pays lower income taxes.c. falls
GDP is an imperfect measure of well-being because ita. includes physical goods produced but not intangible services.b. excludes goods and services provided by the government.c. ignores the
Many years ago, Sophie paid $500 to put together a record collection. Today, she sold her albums at a garage sale for $100. How does this sale affect current GDP?
Fill in the blanks: Year 1970 1980 1990 2000 2010 2020 2030 Real GDP (in 2000 dollars) 3,000 5,000 10,000 20,000 Nominal GDP (in current dollars) 1,200 6,000 8,000 15,000 50,000 GDP deflator (base
The CPI measures approximately the same economic phenomenon asa. nominal GDP.b. real GDP.c. the GDP deflator.d. the unemployment rate.
The largest component in the basket of goods and services used to compute the CPI isa. food and beverages.b. housing.c. medical care.d. apparel.
If a Pennsylvania gun manufacturer raises the price of rifles it sells to the U.S. Army, its price hike will increasea. both the CPI and the GDP deflator.b. neither the CPI nor the GDP deflator.c.
Because consumers can sometimes substitute cheaper goods for those that have risen in price,a. the CPI overstates inflation.b. the CPI understates inflation.c. the GDP deflator overstates
If the CPI is 200 for the year 2010 and 300 today, then $600 in 2010 has the same purchasing power as ________ has today.a. $400b. $500c. $700d. $900
The main reason the cost of living varies across regions of the country is differences in the price ofa. food.b. clothing.c. housing.d. medical care.
You deposit $2,000 in a savings account, and a year later, you have $2,100. Meanwhile, the CPI rises from 200 to 204. In this case, the nominal interest rate is _____ percent, and the real interest
Over the past century, real GDP per person in the United States has grown about _____ percent per year, meaning it has roughly doubled every _____ years.a. 2; 14b. 2; 35c. 5; 14d. 5; 35
The world’s rich countries, such as the United States and Germany, have income per person that is about _____ times income per person in the world’s poor countries, such as Pakistan and India.a.
Over the past century, ________ has experienced particularly strong growth, and ________ has experienced particularly weak growth.a. China; the United Kingdomb. China; Canadac. the United Kingdom;
Increases in the amount of human capital in the economy tend to ________ real incomes because they increase the ________ of labor.a. increase; bargaining powerb. increase; productivityc. decrease;
Most economists are ________ that natural resources will eventually limit economic growth. As evidence, they note that the prices of most natural resources, adjusted for overall inflation, have
Because capital is subject to diminishing returns, higher saving and investment do not lead to highera. income in the long run.b. income in the short run.c. growth in the long run.d. growth in the
When the Japanese car maker Toyota expands one of its car factories in the United States, what is the likely impact of this event on the gross domestic product and gross national product of the
Thomas Robert Malthus believed that population growth woulda. put stress on the economy’s ability to produce food, dooming humans to remain in poverty.b. spread the capital stock too thinly across
Lois wants to publish a local newspaper but doesn’t have the financial resources to start the business.She borrows $60,000 from her friend Clark, to whom she promises an interest rate of 7 percent,
A bond tends to pay a high interest rate if it isa. a short-term bond rather than a long-term bond.b. a municipal bond exempt from federal taxation.c. issued by the federal government rather than a
The main advantage of mutual funds is that they providea. a return insured by the government.b. an easy way to hold a diversified portfolio.c. an asset that is widely used as the medium of
If the government collects more in tax revenue than it spends, and households consume more than they get in after-tax income, thena. private saving and public saving are both positive.b. private
A closed economy has income of $1,000, government spending of $200, taxes of $150, and investment of $250. What is private saving?a. $100b. $200c. $300d. $400
If a popular TV show on personal finance convinces Americans to save more for retirement, the ________ curve for loanable funds would shift, driving the equilibrium interest rate ________.a. supply;
If the business community becomes more optimistic about the profitability of capital, the ________ curve for loanable funds would shift, driving the equilibrium interest rate ________.a. supply; upb.
Which of the following policy actions would unambiguously reduce the supply of loanable funds and crowd out investment?a. an increase in taxes and a decrease in government spendingb. a decrease in
From 2019 to 2021, during the Covid-19 crisis, the ratio of government debt to GDP in the United Statesa. increased markedly.b. decreased markedly.c. was stable at a historically high level.d. was
For each of the following pairs, which bond would you expect to pay a higher interest rate? Explain.a. a bond of the U.S. government or a bond of an Eastern European governmentb. a bond that repays
If the interest rate is zero, then $100 to be paid in 10 years has a present value that isa. less than $100.b. exactly $100.c. more than $100.d. indeterminate.
If the interest rate is 10 percent, then the future value in 2 years of $100 today isa. $80.b. $83.c. $120.d. $121.
If the interest rate is 10 percent, then the present value of $100 to be paid in 2 years isa. $80.b. $83.c. $120.d. $121.
The ability of insurance to spread risk is limited bya. risk aversion and moral hazard.b. risk aversion and adverse selection.c. moral hazard and adverse selection.d. risk aversion only.
The benefit of diversification when constructing a portfolio is that it can eliminatea. adverse selection.b. risk aversion.c. firm-specific risk.d. market risk.
The extra return that stocks earn over bonds (on average) compensates stockholders fora. the greater market risk that stockholding entails.b. the greater firm-specific risk that stockholding
The goal of fundamental analysis is toa. determine the true value of a company.b. put together a diversified portfolio.c. predict changes in investor irrationality.d. eliminate investor risk aversion.
According to the efficient markets hypothesis,a. excessive diversification can reduce an investor’s expected portfolio returns.b. changes in stock prices are impossible to predict from public
Historically, index funds have had ________ than most actively managed mutual funds.a. higher feesb. less diversificationc. larger tax burdensd. better returns
The population of Ectenia is 100 people: 40 work full-time, 20 work half-time but would prefer to work full-time, 10 are looking for a job, 10 would like to work but are so discouraged that they have
Using the numbers in the preceding question, what is the size of Ectenia’s labor force?a. 50b. 60c. 70d. 80
The main policy goal of unemployment insurance is to reduce thea. search effort of the unemployed.b. income uncertainty that workers face.c. role of unions in wage setting.d. amount of frictional
One unintended consequence of unemployment insurance is that it reduces thea. search effort of the unemployed.b. income uncertainty that workers face.c. role of unions in wage setting.d. amount of
In a competitive labor market, an increase in the minimum wage results in a(n) __________ in the quantity of labor supplied and a(n) __________ in the quantity of labor demanded.a. increase;
Approximately what percent of U.S. workers are directly affected by the federal minimum wage?a. 1b. 6c. 12d. 25
In the United States, unionized workers are paid about _____ percent more than similar nonunion workers.a. 2b. 5c. 15d. 40
In many European nations, unionsa. are considered cartels in violation of antitrust laws.b. conspire with firms to keep wages below competitive levels.c. are social clubs without any economic
According to the theory of efficiency wages,a. firms may find it profitable to pay aboveequilibrium wages.b. an excess supply of labor puts downward pressure on wages.c. sectoral shifts are the main
When a firm pays an efficiency wage, it maya. have trouble attracting enough workers.b. have to monitor its workers more closely.c. experience declines in worker quality.d. find that its workers quit
Go to the website of the Bureau of Labor Statistics (http://www.bls.gov). What is the national unemployment rate right now? Find the unemployment rate for the demographic group that best fits a
Fiat money isa. a type of money with intrinsic value.b. a type of money set by government decree.c. any asset used as the medium of exchange.d. any asset used as the unit of account.
The money stock includes all of the following EXCEPTa. metal coins.b. paper currency.c. lines of credit accessible with credit cards.d. bank balances accessible with debit cards.
Which of the following is NOT true about the Federal Reserve?a. It was established by the U.S. Constitution.b. It regulates the banking system.c. It lends to banks.d. It can own government bonds.
If the Fed wants to increase the money supply, it cana. raise income tax rates.b. reduce income tax rates.c. buy bonds in open-market operations.d. sell bonds in open-market operations.
Isabella takes $100 of currency from her wallet and deposits it into her checking account. If the bank adds the entire $100 to reserves, the money supply ________, but if the bank lends out some of
If the reserve ratio is ¼ and the central bank increases the quantity of reserves in the banking system by $120, the money supply increases bya. $90.b. $150.c. $160.d. $480.
A bank has capital of $200 and a leverage ratio of 5. If the value of the bank’s assets declines by 10 percent, then its capital will be reduced toa. $100.b. $150.c. $180.d. $185.
The classical principle of monetary neutrality states that changes in the money supply do not influence ________ variables, and it is thought to be most applicable in the ________ run.a. nominal;
If nominal GDP is $400, real GDP is $200, and the money supply is $100, thena. the price level is ½, and velocity is 2.b. the price level is ½, and velocity is 4.c. the price level is 2, and
According to the quantity theory of money, which variable in the quantity equation is most stable over long periods of time?a. moneyb. velocityc. price leveld. output
Hyperinflation occurs when the government runs a large budget ________, which the central bank finances with a substantial monetary ________.a. deficit; contractionb. deficit; expansionc. surplus;
According to the quantity theory of money and the Fisher effect, if the central bank increases the rate of money growth, thena. inflation and the nominal interest rate both increase.b. inflation and
Ongoing inflation does not automatically reduce most people’s incomes becausea. the tax code is fully indexed for inflation.b. people respond to inflation by holding less money.c. wage inflation
If an economy always has inflation of 10 percent per year, which of the following costs of inflation will it NOT suffer?a. shoeleather costs from reduced holdings of moneyb. menu costs from more
Because most loans are written in ________ terms, an unexpected increase in inflation hurts ________.a. real; creditorsb. real; debtorsc. nominal; creditorsd. nominal; debtors
When the economy goes into a recession, real GDP ________ and unemployment ________.a. rises; risesb. rises; fallsc. falls; risesd. falls; falls
Recessions occura. regularly, about every 3 years.b. regularly, about every 7 years.c. regularly, about every 12 years.d. irregularly.
According to classical macroeconomic theory and monetary neutrality, changes in the money supply affecta. the unemployment rate.b. real GDP.c. the GDP deflator.d. none of the above.
Most economists believe that classical macroeconomic theorya. is valid only in the long run.b. is valid only in the short run.c. is always valid.d. is never valid.

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