Module 4 - Macroeconomics

Question 1

Economics deals primarily with the concept of

Answer 1

Scarcity

Question 2

The opportunity cost of an item is

Answer 2

what you give up to get that item

Question 3

A tax on gasoline encourages people to drive smaller, more fuel-efficient cars. Which
principle of economics does this illustrate?

Answer 3

People respond to incentives.

Question 4

Kari downloads 7 songs per month when the price is $1.29 per song and 10 songs per month
when the price is $0.99 per song. Kari’s behavior demonstrates the law of

Answer 4

demand

Question 5

Economists compute the price elasticity of demand as the

Answer 5

percentage change in quantity demanded divided by the percentage change in price.

Question 6

When the price of candy bars is $1.00, the quantity demanded is 500 per day. When the price
falls to $0.80, the quantity demanded increases to 600. Given this information and using the midpoint method, we
know that the demand for candy bars is

Answer 6

inelastic

Question 7

Gross Domestic Product is best described as the

Answer 7

sum of money values of all final output produced in the domestic economy within
the year.

Question 8

A recession is a period during which

Answer 8

aggregate demand and production falls while unemployment rises.

Question 9

Because business firms often finance new investments with borrowed money, a key
determinant of investment spending is

Answer 9

the real interest rate

Question 10

Governments can affect the level of aggregate demand in a direct way by changing

Answer 10

government spending

Question 11

The CPI is a measure of the overall cost of

Answer 11

goods and services bought by a typical consumer

Question 12

Samantha deposits $2,000 in a saving account that pays an annual interest rate of 4%. Over
the course of a year the inflation rate is 1%. At the end of the year Samantha has

Answer 12

$80 more in her account, and her purchasing power has increased $60.

Question 13

Suppose Congress increases income taxes. This is an example of

Answer 13

contractionary fiscal policy

Question 14

Expansionary fiscal policy actions include __________ government spending and/or
__________ taxes, while contractionary fiscal policy actions include __________ government spending and/or
__________ taxes.

Answer 14

increasing; decreasing; decreasing; increasing

Question 15

General Motors Corporation (a U.S.-based firm) produces a Saab vehicle in Sweden, and
sells it in the United States. In which country’s GDP is it included?

Answer 15

Sweden because it was produced there

Question 16

Which of the following people is counted as unemployed according to official statistics?

Answer 16

Nancy, who is on temporary layoff

Question 17

The official definition of the money supply that includes coins, paper money, travelers’
checks, conventional checking accounts, and other checkable deposits at banks and savings institutions is called
____.

Answer 17

M1

Question 18

If the Fed sells a T-bill to an individual rather than to a commercial bank, how will this affect
the money supply

Answer 18

It will have no effect on the money supply (recheck)

Question 19

If the Fed wants to reduce banks’ reserves, it can

Answer 19

lower the reserve ratio or raise the discount rate

Question 20

If the Fed raises the reserve requirement on deposits from 15 percent to 20 percent, what
would happen to the money supply?

Answer 20

It would decrease.

Question 21

When a banker accepts a deposit of $1,000 in cash and puts $200 aside as required
reserves and then makes a loan of $800 to a new borrower, this set of transactions

Answer 21

increases the money supply by $800

Question 22

If Ms. Anniston transfers $1,000 from her checking account to her money market account,
then

Answer 22

M1 falls and M2 remains the same.

Question 23

A tariff is

Answer 23

a tax on imports

Question 24

The effect of a tariff or a quota is to

Answer 24

raise the price of a commodity in an importing country above the price
in the exporting country

Question 25

A country has a comparative advantage over another in the production of gadgets if it can
produce

Answer 25

gadgets at lower opportunity cost than can the other country.

Question 26

On May 12, 2011, the U.S. dollar was worth 0.61 British pounds. How many dollars did it
take to buy one British pound?

Answer 26

1.64

Question 27

If a currency decreases in value as a result of government decree rather than market
forces, the process is known as

Answer 27

devaluation

Question 28

If the quantity supplied of euro were greater than the quantity demanded, then the price of
the

Answer 28

euro would fall

Question 29

The purchasing power parity theory of exchange rate determination maintains that

Answer 29

the exchange rate between two nations’ currencies adjusts to reflect differences
in the price levels in the two nations.

Question 30

Appreciation is the term used to describe

Answer 30

the upward movement of currencies in a free market