Finall Flashcards
In the classical model, an increase in the government deficit that is bond financed (i.e.
borrowed in the loanable funds market) results in:
A) a decrease in the interest rate B) an increase in the quantity of saving
C) an increase in consumption D) all of the above
an increase in the quantity of saving
Figure 2-7 shows the production possibilities frontiers for Pakistan and Indonesia. Each country produces two
goods, cotton and cashews.
2) Refer to Figure 2-7. Assume that in autarky Pakistan consumes 50 cotton and 70
cashews while Indonesia consumes 30 cotton and 80 cashews. What are the potential
gains from trade if each nation specializes in the production of the good in which it has
a comparative advantage?
A) No gains are possible since both countries are producing effieciently.
B) 100 pounds Cashews.
C) 240 Cotton bolts.
D) Both B and C
240 Cotton bolts.
) Refer to Figure 2-7. What is the opportunity cost of producing 1 pound of cashews in
Indonesia?
A) 3/8 of a bolt of cotton B) 5/8 of a bolt of cotton
C) 2 2/3 bolts of cotton D) 120 bolts of cotton
2 2/3 bolts of cotton
Refer to Figure 2-7. Which country has a comparative advantage in the production of cashews? A) They have equal productive abilities. B) Indonesia C) Pakistan D) neither country
Pakistan
Which of the following changes shifts the Classical aggregate supply curve to the right?
A) A decrease in the demand for labor
B) An increase in consumer confidence
C) A demographic change that reduces the labor supply
D) A decrease in taxes
A decrease in taxes
In the classical model, an increase in saving is assumed to increase
A) neither the demand for money nor bonds, leaving interest rates unchanged
B) the supply of loanable funds, which decreases interest rates
C) the demand for loanable funds, which decreases interest rates
D) both the demand for money and loanable funds, which reduces interest rates
the supply of loanable funds, which decreases interest rates
Economic decline (negative growth) is represented on a production possibilities frontier
model by the production possibility frontier
A) shifting inward. B) becoming steeper.
C) becoming flatter. D) shifting outward.
shifting inward.
If there is an increase in government spending that is financed by issuing bonds, then
A) interest rates should rise which decreases private investment
B) interest rates should rise which increases private investment
C) interest rates should fall which increases private investment
D) interest rates will remain the same unless taxes are reduced as well
interest rates should rise which decreases private investment
) What is the relationship between real and nominal GDP? A) real GDP = nominal GDP - Price level B) nominal GDP = Real GDP/Price level C) real GDP = nominal GDP * Price level D) real GDP = nominal GDP/Price level
real GDP = nominal GDP/Price level
According to the classical model, changes in aggregate demand are driven by
A) changes in fiscal policy B) changes in taxes
C) changes in the money supply D) changes in borrowing and lending
changes in the money supply
Assume that the classical labor market can be represented by the following equations:
Aggregate Production Function: Y = 200 + 5N
Labor Demand: Nd = 50 - 4(W/P)
Labor Supply: Ns = 40 + (W/P)
What is equilibrium W/P, N, and Y
A) W/P = 50, N = 300, and Y = 3500
B) W/P = 2, N = 42, and Y = 410
C) W/P = 2, N = 10, and Y = 250
D) Cannot be determined from information given
W/P = 2, N = 42, and Y = 410
According to the Price-Specie-Flow mechanism, if half the gold in England
disappeared over night the effect would be to
A) double the price level.
B) reduce the price level by 50%.
C) make English goods more expensive to French residents.
D) None of the above.
reduce the price level by 50%.
According to the classical model shown in the figure, an exogenous decline in
investment shifts the investment schedule to the left, from i0 to i1, causing the
equilibrium interest rate to decline. Distance B in the figure describes an interest rate
induced
A) decline in saving, which is an equal increase in consumption
B) decrease in investment
C) increase in the quantity of investment
D) decline in saving, which exceeds the increase in consumption
increase in the quantity of investment
What two factors should you equate in deciding how many workers to employ?
A) The marginal product of labor and the marginal product of capital
B) The marginal product of capital and the real wage rate
C) The marginal product of labor and the real wage rate
D) The marginal product of labor and the real interest rate
The marginal product of labor and the real wage rate
The production possibilities frontier shows the ________ combinations of two products
that may be produced in a particular time period with available resources.
A) minimum attainable B) only
C) maximum attainable D) equitable
maximum attainable
Under the assumption of perfect competition, all resources are paid their marginal
oppotunity cost such that firms will earn zero economic profit. Under such conditions
any cost increases faced by firms will result in
A) a decline in the nominal wage.
B) a decline in firms economic profit.
C) a proportional increase in output price.
D) None of the above.
a proportional increase in output price.
Classical economists
A) believed that prices would increase more than proportionate to an increase in the
money supply
B) argued that the money supply determined aggregate demand
C) believed that the quantity of money influences interest rates and real wages
D) regarded monetary policy as unimportant since the quantity of money does not
determine the price level
argued that the money supply determined aggregate demand
An invention that speeds up the Internet is an example of
A) an income effect. B) an increase in labor.
C) a substitution effect. D) a supply shock.
a supply shock.
Fiscal policy encompasses all of the following except A) taxation by the government. B) expenditures by the government. C) monetary injection by the government. D) borrowing by the government.
monetary injection by the government.
The natural resources used in production are made available in the
A) goods and services market. B) government market.
C) factor markets. D) product market.
factor markets.
Real output is determined by \_\_\_\_\_\_\_\_\_ and the price level by \_\_\_\_\_\_\_\_\_ in the Classical model A) aggregate supply; aggregate demand B) aggregate demand; aggregate demand C) aggregate supply; aggregate supply D) none of the above.
aggregate supply; aggregate demand
A production possibilities frontier with a bowed outward shape indicates
A) increasing opportunity costs as more and more of one good is produced.
B) the possibility of inefficient production.
C) constant opportunity costs as more and more of one good is produced.
D) decreasing opportunity costs as more and more of one good is produced.
increasing opportunity costs as more and more of one good is produced.
The principle of opportunity cost is that
A) taking advantage of investment opportunities involves costs.
B) in a market economy, taking advantage of profitable opportunities involves some
money cost.
C) the economic cost of using a factor of production is the alternative use of that
factor that is given up.
D) the cost of production varies depending on the opportunity for technological
application.
the economic cost of using a factor of production is the alternative use of that
factor that is given up.
Suppose the marginal product of labor is
MPN = 200 - 0.5N
where N is aggregate employment. The aggregate quantity of labor supplied is 300 + 8w
where w is the real wage. What is the equilibrium quantity of employment?
A) 760 B) 380 C) 12 D) 190
380
In the Classical model, an increase in tax on firms that hired labor would (i.e. a tax the
firm pays for each worker hired)
A) decrease labor supply, increase the real wage, and decrease output
B) decrease labor demand and the real wage and increase output
C) decrease labor demand, decrease the real wage, and decrease output
D) reduce real wages and increase output
decrease labor demand, decrease the real wage, and decrease output
A vertical aggregate supply schedule implies that
A) real wages cannot impact output
B) the price level does not impact output
C) aggregate demand is horizontal
D) unemployment cannot impact output
the price level does not impact output
The ________ demonstrates the roles played by households and firms in the market
system.
A) business cycle B) theory of comparative advantage
C) production possibilities frontier D) circular flow model
circular flow model
Which of the following statements most accurately describes the Classical view?
A) Fiscal policy is effective at changing nominal aggregate demand but not real
aggregate demand.
B) Changes in the money supply are important determinants of changes in real
output.
C) The economy is a complex dynamic system that is naturally self-correcting and
requires no intervention by fiscal or monetary authorities.
D) All of the above.
The economy is a complex dynamic system that is naturally self-correcting and
requires no intervention by fiscal or monetary authorities.
Adam Smith’s invisible hand refers to
A) the government’s unobtrusive role in ensuring that the economy functions
efficiently.
B) property ownership laws and the rule of the court system.
C) the process by which individuals acting in their own self-interest bring about a
market outcome that benefits society as a whole.
D) the laws of nature that influence economics decisions.
the process by which individuals acting in their own self-interest bring about a
market outcome that benefits society as a whole.
The marginal product of capital is the increase in
A) output from a one-unit increase in capital.
B) labor needed to accompany a one-unit increase in capital.
C) output from a one-dollar increase in capital.
D) capital needed to produce one more unit of output.
output from a one-unit increase in capital.
Assuming that money is neutral, an increase in the nominal money supply would cause A) a rise in nominal wages. B) an excess supply for goods. C) an increase in the real money supply. D) a fall in the price level.
a rise in nominal wages.
A winter ice storm has paralyzed the entire east coast, reducing productivity sharply.
This supply shock shifts the marginal product of labor curve
A) down and to the left, reducing the quantity of labor demanded at any given real
wage.
B) up and to the right, raising the quantity of labor demanded at any given real wage.
C) down and to the left, raising the quantity of labor demanded at any given real
wage.
D) up and to the right, reducing the quantity of labor demanded at any given real
wage.
down and to the left, reducing the quantity of labor demanded at any given real
wage.
In the classical model, if money growth and velocity are constant, then
A) the price level will be constant
B) the price level will rise at the rate of output growth
C) the price level will fall at the rate of output growth
D) none of the above
the price level will fall at the rate of output growth
Which of the following is not a characteristic of the classical system?
A) real values, not nominal values, matter
B) Money wage flexibility
C) Price flexibility
D) temporary excess demand and supply in labor markets
temporary excess demand and supply in labor markets
The marginal product of labor
A) is smaller when the labor supply is relatively smaller.
B) is larger when the labor supply is relatively larger.
C) is measured by the slope of the production function relating capital to
employment.
D) decreases as the number of workers already employed increases.
decreases as the number of workers already employed increases.
According to the quantity theory of money, the quantity of money determines the
A) level of real output B) level of employment
C) price level D) interest rate
price level
If the demand for labor is plotted against the money wage, with the money wage on the
vertical axis, then
A) an increase in the money wage will cause the labor demand schedule to shift to
the right
B) the labor demand schedule will be upward sloping
C) an increase in the money wage will cause the labor demand schedule to shift to
the left
D) an increase in the price level will cause the labor demand schedule to shift to the
right
an increase in the price level will cause the labor demand schedule to shift to the
right
Suppose that there is an increase in technology. The classical model predicts that
A) both output and the price level rises
B) output rises and the price level falls
C) output rises and the price level remains the same
D) none of the above
output rises and the price level falls
) According to the classical model, a 10-percent increase in the money supply, holding
everything else constant, will lead to
A) a 10% increase in prices and no change in the money wage or interest rates
B) a 10% increase in prices, a 10% increase in the money wage, and no change in
nominal interest rates
C) a 10% increase in prices, a 10% increase in the money wage, and a 10% increase
in nominal interest rates
D) a 10% increase in prices, a 10% increase in the real wage, and a 10% increase in
real interest rates
a 10% increase in prices, a 10% increase in the money wage, and a 10% increase
in nominal interest rates
The CPI overestimates inflation because
A) it often ignores the invention of new or higher quality goods
B) it always includes discount stores
C) it allows substitution from more expensive goods to cheaper goods
D) all of the above
it often ignores the invention of new or higher quality goods
Refer to Figure 2-1. Point A is A) unattainable with current resources. B) the equilibrium output combination. C) technically efficient. D) inefficient in that not all resources are being used.
inefficient in that not all resources are being used.
Which of the following is not a factor of production?
A) a drill press in a machine shop B) the manager of the local tire shop
C) $1,000 in cash D) an acre of farmland
$1,000 in cash
Year 2 nominal GDP is
A) $310. B) $390. C) $200. D) $270.
$390.
Suppose that Year 1 is the base year. Year 2 real GDP is
A) $310. B) $270. C) $390. D) $200.
$310
The slope of the aggregate production function with capital stock held fixed measures
A) the marginal propensity to produce B) the marginal product of labor
C) the marginal utility of output D) none of the above.
the marginal product of labor
In the classical model, the only government policy that can affect real output in the
economy is:
A) spending policy B) tax policy
C) monetary policy D) none of the above.
tax policy
In the classical system, the quantity of money
A) determines the price level and, for a given real income, the level of nominal
income
B) does not affect the equilibrium values of output, employment, and the interest rate
C) affects the equilibrium values of output, employment, and the interest rate
D) Both a and b
E) Both a and c
determines the price level and, for a given real income, the level of nominal
income
In the classical model, when AD increases due to an increase in money supply, the
effect on the equilibrium real wage is:
A) The real wage is not affected
B) The same as the effect on real output
C) The same as the effect on total employment
D) All of the above
All of the above
When you purchase a new pair of jeans you do so in the
A) product market. B) resource market.
C) factor market. D) input market.
product market.
If government spending and tax collections both increase by the same amount, then
according to the classical loanable funds market
A) the demand for loanable funds will fall and the interest rate will rise
B) the demand for loanable funds will increase and the interest rate will rise
C) savings will rise and interest rates will fall
D) nothing will shift and the interest rate will remain constant
nothing will shift and the interest rate will remain constant
The “crowding out effect” can be characterized as,
A) increases in spending, usually G, lead to higher interest rates and thus reduced
investment spending.
B) G↑→Y↑→Md↑→r↑→I↓
C) the difference between the simple expenditure multiplier and the equilibrium
expenditure multiplier.
D) All of the above.
All of the above.
On the graph above, a possible cause of the rightward shift of the IS curve is an increase in \_\_\_\_\_\_\_\_. A) taxes B) interest rates C) money supply D) the exchange rate E) none of the abov
none of the abov
The marginal propensity to consume represents
A) the level of consumption that occurs if disposable income is zero.
B) the ratio of total consumption to disposable income.
C) the change in consumption caused by a one-unit change in disposable income.
D) total income minus total taxes.
E) the change in output caused by a one-unit change in autonomous demand.
the change in consumption caused by a one-unit change in disposable income.
In the Keynesian framework, as long as output is ________ the equilibrium level,
unplanned inventory investment will remain ________, firms will continue to lower
production, and output will continue to fall.
A) below; negative B) below; positive
C) above; positive D) above; negative
above; positive
According to liquidity preference theory, as real income increases, so does \_\_\_\_\_\_\_\_. A) the demand for real money balances B) the real interest rate C) the supply of real money balances D) all of the above E) none of the above
the demand for real money balances
If the economy is on the IS curve, but is to the right of the LM curve, aggregate output
will ________ and the interest rate will ________.
A) rise; rise B) fall; rise C) fall; fall D) rise; fall
fall; rise
If the consumption function is C = 20 + 0.5YD, then an increase in disposable income
by $100 will result in an increase in consumer expenditure by
A) $25. B) $70. C) $50. D) $100
$50
The interest rate will increase as a result of which of the following events?
A) an increase in income
B) an open market purchase of bonds by the central bank
C) a reduction in income
D) all of the above
E) none of the above
an increase in income
The IS curve shows the combinations of output and the real interest rate for which
A) the labor market is in equilibrium.
B) the financial asset market is in equilibrium.
C) the goods market is in equilibrium.
D) an increase in output will cause the market-clearing interest rate to be bid up.
the goods market is in equilibrium.
Keynesians believe that the crowding out effect of government spending is
___________ while the classicals believed it to be ___________.
A) small; large B) small; small
C) None of the above. D) large; large
small; large
Suppose there is a simultaneous fiscal expansion and monetary expansion. We know
with certainty that
A) both output and the interest rate will increase.
B) output will increase.
C) output will decrease.
D) the interest rate will increase.
E) the interest rate will decrease.
output will increase.
Suppose a one-year discount bond offers to pay $1000 in one year and currently has a 15% interest rate. Given this information, we know that the bond's price must be A) $869.56. B) $1150. C) $850. D) $950. E) none of the above
$869.56.
If the consumption function is given by C = 100 + .6(Y-T) and planned investment is
150, government spending is 50, and T is 100, then equilibrium income is
A) 300 B) 600 C) 420 D) 750
600
The IS curve shifts to the left when \_\_\_\_\_\_\_\_. A) autonomous consumption increases B) autonomous investment increases C) taxes increase D) all of the above E) none of the above
taxes increase