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WorksheetsEconomic Concepts and Principles
Total questions: 84
Worksheet time: 42mins
Macroeconomists study
the decisions of individual households and firms.
the interaction between households and firms.
regulations imposed on firms and unions.
economy-wide phenomena.
The phenomenon of scarcity stems from the fact that
most economies' production methods are not very good.
in most economies, wealthy people consume disproportionate quantities of goods and services.
governments restrict production of too many goods and services.
resources are limited.
Economists make assumptions to
minimize the likelihood that some aspect of the problem at hand is being overlooked.
teach economics to people who have never before studied economics.
provide issues for political discussion
focus their thinking on the essence of the problem at hand.
Which of the following is an example of a positive, as opposed to a normative, statement?
When public policies are evaluated, the benefits to the economy of improved equality should be considered more important than the costs of reduced efficiency.
The income tax rate should be increased to offset the budget deficit.
The United States Department of Justice sued AT&T to block its merger with T-Mobile.
Antitrust laws should be used to prevent further concentration in the wireless telephone service market.
For an economy as a whole,
wages must equal profit.
consumption must equal income.
income must equal expenditure.
consumption must equal saving.
In order to include many different goods and services in an aggregate measure, GDP is computed using, primarily,
values of goods and services based on surveys of consumers.
market prices.
quantities purchased by a typical urban household.
profits from producing goods and services.
Because every transaction has a buyer and a seller,
GDP is more closely associated with an economy's income than it is with an economy's expenditure.
every transaction contributes equally to an economy's income and to its expenditure.
the number of firms must be equal to the number of households in a simple circular-flow diagram.
firms' profits are necessarily zero in a simple circular-flow diagram.
A company sells titanium to a bicycle company for $100. The bicycle company uses the titanium to produce a bicycle, which it sells for $230. Taken together, these two transactions contribute
$100 to GDP.
$230 to GDP.
between $230 and $330 to GDP, depending on the profit earned by the bicycle company when it sold the bicycle.
$130 to GDP.
Which of the following is included in GDP?
The market value of rental housing services, but not the market value of owner-occupied housing services
The market value of owner-occupied housing services, but not the market value of rental housing services
Both the market value of rental housing services and the market value of owner-occupied housing services
Neither the market value of owner-occupied housing services nor the market value of rental housing services
Changes in real GDP reflect
only changes in prices
only changes in the amounts being produced.
both changes in prices and changes in the amounts being produced
. neither changes in prices nor changes in the amounts being produced
A country reported nominal GDP of $75 billion in 2016 and $85 billion in 2015. It also reported a GDP deflator of 105 in 2016 and 115 in 2015. Between 2015 and 2016,
real output and the price level both fell.
real output fell and the price level rose.
real output rose and the price level fell.
real output and the price level both rose.
The CPI is a measure of the overall cost of the goods and services bought by
a typical consumer, and the CPI is computed and reported by the Department of the Treasury
typical consumers and typical business firms, and the CPI is computed and reported by the Department of the Treasury.
. a typical consumer, and the CPI is computed and reported by the Bureau of Labor Statistics
typical consumers and typical business firms, and the CPI is computed and reported by the Bureau of Labor Statistics.
The inflation rate is defined as the
price level in an economy.
change in the price level from one period to the next.
percentage change in the price level from the previous period.
. price level minus the price level from the previous period.
What basket of goods and services is used to construct the CPI?
A random sample of all goods and services produced in the economy
The goods and services that are typically bought by consumers as determined by government surveys
Only food, clothing, transportation, entertainment, and education
The least expensive and the most expensive goods and services in each major category of consumer expenditures
Suppose the price of a quart of milk rises from $1.00 to $1.20 and the price of a T-shirt rises from $8.00 to $9.60. If the CPI rises from 150 to 195, then people likely will buy
more milk and more T-shirts.
more milk and fewer T-shirts.
less milk and more T-shirts.
less milk and fewer T-shirts.
. One of the widely acknowledged problems with using the consumer price index as a measure of the cost of living is that the CPI
fails to account for consumer spending on housing
accounts only for consumer spending on food, clothing, and energy.
fails to account for the fact that consumers spend larger percentages of their incomes on some goods and smaller percentages of their incomes on other goods.
fails to account for the introduction of new goods.
The CPI differs from the GDP deflator in that
the CPI is a price index, while the GDP deflator is an inflation index.
substitution bias is not a problem with the CPI, but it is a problem with the GDP deflator.
. increases in the prices of foreign produced goods that are sold to U.S. consumers show up in the CPI but not in the GDP deflator.
increases in the prices of domestically produced goods that are sold to the U.S. government show up in the CPI but not in the GDP deflator.
Changes in the quality of a good
do not present a problem in the construction of the consumer price index.
present a problem in the construction of the consumer price index, and that problem is sometimes referred to as substitution bias.
are not accounted for, as a matter of policy, by the Bureau of Labor Statistics
can lead to either an increase or a decrease in the value of a dollar.
Indexation refers to
a process of adjusting the nominal interest rate so that it is equal to the real interest rate
using a law or contract to automatically correct a dollar amount for the effects of inflation.
using a price index to deflate dollar values.
. an adjustment made by the Bureau of Labor Statistics to the CPI so that the index is in line with the GDP deflator.
Which of the following statements is correct about the relationship between inflation and interest rates?
There is no relationship between inflation and interest rates.
The interest rate is determined by the rate of inflation.
In order to fully understand inflation, we need to know how to correct for the effects of interest rates.
In order to fully understand interest rates, we need to know how to correct for the effects of inflation.
Suppose the consumer price index was 184 in Year 1 and 198.17 in Year 1. The nominal interest rate during this period was steady at 5.8 percent. What was the real interest rate during this period?
0.4 percent
1.2 percent
–1.9 percent
–2.6 percent
Who of the following is not included in the Bureau of Labor Statistics' "employed" category?
Those who worked in their own business
Those who worked as unpaid workers in a family member's business
Those waiting to be recalled to a job from which they had been laid off
Those who were temporarily absent from work because of vacation
The labor force equals the
. number of people employed
. number of people employed plus the number of people unemployed.
number of people employed plus the number of people unemployed plus teenagers between ages 14 and 16 who work at least 10 hours a week.
adult population.
Suppose that the Bureau of Labor Statistics reported that there were 59 million people over age 25 whose highest level of education was some college or an associate degree. Of these, 42.6 million were employed and 10.2 million were unemployed. What were the labor-force participation rate and the unemployment rate for this group?
19.3% and 89.5%
89.5% and 19.3%
111.7% and 19.3%
89.5% and 111.7%
. If the natural rate of unemployment is 5.7 percent and the actual rate of unemployment is 6.1 percent, then by definition there is
. cyclical unemployment amounting to 0.4 percent of the labor force
frictional unemployment amounting to 0.4 percent of the labor force.
structural unemployment amounting to 0.4 percent of the labor force
search unemployment amounting to 0.4 percent of the labor force.
Which of the following is not correct?
Most people who become unemployed will soon find jobs.
In an ideal labor market, wages would adjust to ensure that all workers are always fully employed.
The unemployment rate occasionally falls to zero.
There are always some workers without jobs, even when the overall economy is doing well.
The natural rate of unemployment includes
both frictional and structural unemployment
neither frictional nor structural unemployment
structural but not frictional unemployment.
frictional but not structural unemployment.
Sandy has graduated from college and is devoting her time to searching for a job. She has seen plenty of openings but has not yet been offered one that best suits her tastes and skills. Sandy is
structurally unemployed. Structural unemployment exists even in the long run.
structurally unemployed. There is no structural unemployment in the long run
. frictionally unemployed. Frictional unemployment can exist even in the long run.
. frictionally unemployed. There is no frictional unemployment in the long run.
Minimum wages create unemployment in markets where they create a
shortage of labor. Unemployment of this type is called frictional.
shortage of labor. Unemployment of this type is called structural
surplus of labor. Unemployment of this type is called frictional.
surplus of labor. Unemployment of this type is called structural.
Over the past century in the United States, real GDP per person has grown, on average, by about
1 percent per year.
2 percent per year.
3 percent per year
4 percent per year.
The key measurement of the standard of living in a country is
the real GDP per person.
the real GDP.
the nominal GDP per person.
its growth rate of real GDP.
. Industrial machinery is an example of
a factor of production that in the past was an output from the production process.
technological knowledge.
a production function.
an item which always has the property called constant returns to scale.
Brian learns how to cook from his grandmother. This is an example of
human capital, but not technological knowledge.
technological knowledge, but not human capital.
both human capital and technological knowledge.
neither human capital nor technological knowledge.
Other things the same, which of the following would increase the output per worker?
An increase in either human or physical capital
An increase in human capital but not an increase in physical capital
An increase in physical capital but not an increase in human capital
Neither an increase in human capital nor an increase in physical capital
All else equal, if there are diminishing returns, then which of the following is true if a country increases its capital by one unit?
Output will rise by more than it did when the previous unit was added.
Output will fall by more than it did when the previous unit was added.
Output will rise but by less than it did when the previous unit was added.
Output will fall but by less then it did when the previous unit was added.
The catch-up effect refers to the idea that
saving will always catch-up with investment spending.
it is easier for a country to grow fast and so catch-up if it starts out relatively poor.
population eventually catches-up with increased output.
if investment spending is low, increased saving will help investment to "catch-up."
An understanding of the best ways to produce goods and services is called
human capital.
physical capital.
. technology.
productivity.
In order to promote growth in living standards, policymakers must
protect property rights and maintain political stability.
minimize accumulation of factors of production.
rise taxes to increase government revenue.
promote bureaucracy.
A policy that increases saving will
worsen economic growth, but improve health outcomes.
worsen economic growth and health outcomes.
improve economic growth but worsen health outcomes.
improve economic growth and health outcomes.
The economy's two most important financial markets are
the investment market and the saving market
the bond market and the stock market.
banks and the stock market.
financial markets and financial institutions
At the broadest level, the financial system moves the economy's scarce resources from
the rich to the poor.
financial institutions to business firms and government
households to financial institutions.
savers to borrowers.
Consider the expressions T − G and Y − T − C. Which of the following statements is correct?
Each one of these is equal to national saving.
Each one of these is equal to public saving.
The first of these is private saving; the second one is public saving.
The first of these is public saving; the second one is private saving.
In a closed economy, if Y, C, and T remained the same, a decrease in G would
reduce private saving and public saving.
increase private saving but not public saving.
increase public saving but not private saving.
increase neither private nor public saving.
The slope of the demand for loanable funds curve represents the
. positive relation between the real interest rate and investment.
negative relation between the real interest rate and investment.
positive relation between the real interest rate and saving.
negative relation between the real interest rate and saving.
The source of the supply of loanable funds
. is saving and the source of demand for loanable funds is investment.
is investment and the source of demand for loanable funds is saving
. and the demand for loanable funds is saving.
and the demand for loanable funds is investment.
The slope of the supply of loanable funds curve represents the
positive relation between the interest rate and investment.
positive relation between the interest rate and saving
negative relation between the interest rate and investment.
negative relation between the interest rate and saving.
Crowding out occurs when investment declines because a budget
deficit makes interest rates rise.
deficit makes interest rates fall.
surplus makes interest rates rise.
surplus makes interest rates fall.
You pay for your pizza using currency. Which function of money does this best illustrate?
Medium of exchange
Unit of account
stores of value.
extremely liquid assets.
Which of the following is included in M2?
Credit cards
Stock market mutual funds
Corporate bonds
Savings account deposits
A bank has an 8 percent reserve requirement, $10,000 in deposits, and has loaned out all it can, given the reserve
requirement.
It has $80 in reserves and $9,920 in loans.
. It has $800 in reserves and $9,200 in loans.
It has $1,250 in reserves and $8,750 in loans.
It has $8,000 in reserves and $2,000 in loans.
If the reserve requirement is 9 percent, a bank desires to hold no excess reserves, and it receives a new deposit of $100, it
must increase required reserves by $18.
will initially see reserves decrease by $100.
will be able to use this deposit to make new loans amounting to $100.
must increase required reserves by $9.
In the special case of 100-percent-reserve banking, the money multiplier is
1 and banks create money.
1 and banks do not create money.
2 and banks create money.
2 and banks do not create money.
The Federal Reserve
was created in 1896.
is part of the executive branch of government.
is only responsible for controlling the money supply.
is the central bank of the United States.
Which of the following groups meets to discuss changes in the economy and determine monetary policy?
Congress
The Federal Open Market Committee
The President of the United States
The Board of Directors from each of the 12 regional Federal Reserve Banks
If the Federal Open Market Committee decides to decrease the money supply, it will
purchase corporate bonds.
purchase government bonds.
reduce interest rates.
. sell government bonds.
If the money multiplier is 3 and the Fed buys $50,000 worth of bonds, what happens to the money supply?
. It increases by $100,000.
It increases by $150,000.
It decreases by $100,000.
It decreases by $200,000.
. To explain the long-run determinants of the price level and the inflation rate, most economists today rely on the
quantity theory of money.
price-index theory of money.
theory of hyperinflation
disequilibrium theory of money and inflation.
The price level is a
relative variable.
dichotomous variable
real variable.
nominal variable.
The principle of monetary neutrality implies that an increase in the money supply will increase
real GDP and the price level.
real GDP, but not the price level.
the price level, but not real GDP.
neither the price level nor real GDP
The velocity of money is
the rate at which the Fed puts money into the economy.
the same thing as the long-term growth rate of the money supply.
the money supply divided by nominal GDP.
. the average number of times per year a dollar is spent
If M = 5,000, P = 3.75, and Y = 7,000, what is velocity?
5
. 1
1.88
0.71
According to the assumptions of the quantity theory of money, if the money supply increases by 2 percent,
nominal and real GDP would rise by 0.20 percent.
nominal GDP would rise by 2 percent; real GDP would be unchanged.
nominal GDP would be unchanged; real GDP would rise by 2 percent.
neither nominal GDP nor real GDP would change.
The inflation tax refers to
. the revenue a government creates by printing money.
higher inflation which requires more frequent price changes.
the idea that, other things the same, an increase in the tax rate raises the inflation rate.
taxes being indexed for inflation.
Wealth is redistributed from creditors to debtors when inflation is
high, whether it is expected or not.
low, whether it is expected or not
. unexpectedly high.
unexpectedly low
Recessions come at
regular intervals. During recessions consumption spending falls relatively more than investment spending.
regular intervals. During recessions investment spending falls relatively more than consumption spending.
irregular intervals. During recessions consumption spending falls relatively more than investment spending.
. irregular intervals. During recessions investment spending falls relatively more than consumption spending
When looking at a graph of aggregate demand, which of the following is correct?
There are nominal variables on both the vertical and the horizontal axes.
There are real variables on both the vertical and horizontal axes
The variable on the vertical axis is nominal; the variable on the horizontal axis is real.
The variable on the vertical axis is real; the variable on the horizontal axis is nominal.
The wealth effect, interest-rate effect, and exchange-rate effect are all explanations for
the slope of short-run aggregate supply.
the slope of long-run aggregate supply
the slope of the aggregate-demand curve.
shifts in the aggregate-demand curve.
Which of the following would shift the long-run aggregate supply curve right
Both an increase in the capital stock and an increase in the price level
An increase in the capital stock, but not an increase in the price level
An increase in the money supply, but not an increase in the capital stock
Neither an increase in the money supply nor an increase in the capital stock
The sticky-wage theory of the short-run aggregate supply curve says that when the price level rises more than expected, production is
more profitable and employment and output rises.
more profitable and employment and output falls.
less profitable and employment and output rises.
less profitable and employment and output falls.
An increase in the expected price level shifts
both the short-run and long-run aggregate supply curves to the left.
the short-run aggregate supply curve to the left but does not affect the long-run aggregate supply curve.
the long-run aggregate supply curve to the left but does not affect the short-run aggregate supply curve.
neither the long-run aggregate supply curve nor the short-run aggregate supply curve to the left.
Policymakers who control monetary and fiscal policy and want to offset the effects on output of an economic contraction caused by a shift in aggregate supply, could use policy to shift
aggregate supply to the right
aggregate supply to the left.
aggregate demand to the right.
aggregate demand to the left.
The price level rises in the short run if
aggregate demand or aggregate supply shifts left.
aggregate demand shifts right or aggregate supply shifts left.
aggregate demand shifts left or aggregate supply shifts right.
aggregate demand or aggregate supply shifts right.
Which of the following would cause stagflation?
Aggregate demand shifts right.
Aggregate demand shifts left.
Aggregate supply shifts right.
Aggregate supply shifts left.
The Federal Open Market Committee is
the group at the Federal Reserve that sets monetary policy.
in charge of tax collection.
. the group that sets the amount of government spending.
the group that reviews income assistance programs.
According to liquidity preference theory, if the price level decreases, then
the interest rate falls because money demand shifts right.
the interest rate falls because money demand shifts left.
the interest rate rises because money supply shifts right.
the interest rate rises because money supply shifts left.
According to liquidity preference theory, the money-supply curve is
upward sloping
downward sloping.
vertical.
horizontal.
. In recent years, the Federal Reserve has conducted policy by setting a target for the
size of the money supply.
growth rate of the money supply
federal funds rate.
discount rate.
If the Federal Reserve decided to raise interest rates, it could
buy bonds to lower the money supply.
buy bonds to raise the money supply
sell bonds to lower the money supply.
sell bonds to raise the money supply.
The short-run relationship between inflation and unemployment is often called
the Classical Dichotomy.
Money Neutrality
the Phillips curve.
the Aggregate Supply and Demand model.
If policymakers increase aggregate demand, then in the short run the price level
rises and unemployment falls.
and unemployment rise.
and unemployment fall.
falls and unemployment rises.
When monetary and fiscal policymakers expand aggregate demand, which of the following costs to the economy is incurred in the short run?
Short-run aggregate supply decreases.
The natural rate of unemployment increases.
The price level increases.
The money supply decreases.
If inflation expectations rise, the short-run Phillips curve shifts
right, so that at any inflation rate output is higher in the short run than before.
left, so that at any inflation rate output is higher in the short run than before.
right, so that at any inflation rate output is lower in the short run than before.
left, so that at any inflation rate output is lower in the short run than before.
Disinflation is defined as a
zero rate of inflation.
constant rate of inflation.
reduction in the rate of inflation.
. negative rate of inflation.
. If people correctly anticipate that inflation will fall by 1%, then
the short-run Phillips curve shifts right and unemployment is unchanged.
the short-run Phillips curve shifts right and unemployment rises.
the short-run Phillips curve shifts left and unemployment is unchanged.
the short-run Phillips curve would shift left and unemployment falls.
