ECON EXAM WITH 100% CORRECT ANSWERS 2024 GRADED A+

Which of the following is NOT a producer? - answer-An unemployed college student Which of the following is an ethereal added utility to a consumer? - answer-The smell of espresso What is the primary difference between microeconomics and macroeconomics? - answer-Microeconomics looks at scarcity for companies, while macroeconomics looks at it for entire economies. In economics, scarcity means that: - answer-There is a finite amount of resources. Economy A has a comparative advantage over Economy B. What is the reason for this? - answer-Economy A has a lower opportunity cost. The term for being able to make the greatest amount of a good in a given time is: - answer-Absolute advantage All of these are common topics studied in microeconomics, EXCEPT: - answer-Globalization Which of these is the BEST definition of microeconomics? - answer-The study of how individuals and businesses behave and make decisions based on limited resources What is the Fallacy of Composition? - answer-A part of something dictates how the whole will act Which of the following is an example of Post Hoc Ergo Propter Hoc? - answer-A teacher claiming credit for the school's athletic performance since his arrival. Why is it possible for an economic model to fail? - answer-There are various inputs that economist can not control such as the weather or the actions of others. Who could use a production possibilities curve as a model? - answer-A production manager How can a normative statement be turned into a positive statement? - answer-By adding facts and data. Which of the following is a normative statement? - answer-Taxes should be higher. Which functions does the Economic Man fulfill in an economy? - answer-Producer and consumer How does the precision of inputs affect a model? - answer-The model becomes more accurate. You have an economics test tomorrow that you would like to pass. Which of the following activities has the greatest utility? - answer-Studying economics You are overseeing the construction of buildings on an island. Why would you want to build high-rises? - answer-Land is very scarce but air space is not. What is economics? - answer-The study of a society's allocation of resources Which of the following BEST explains sustainable economic growth? - answer-Economic growth that can be sustained with minimally adverse effects on the environment What is the definition of utility? - answer-The real value of something in its usefulness, not anything implicit. Which country did not make use of utility to build its road network in the 1970s? - answer-Nigeria What is the term for determining how resources are used? - answer-Resource allocation Ethan oversees a large company that produces a significant amount of both goods and services as well as economic profit. Which system of allocation is relevant to Ethan's situation? - answer-Contributive standard How do governments plan for greater consumer demand? - answer-New roads How does inflation make an economy inefficient? - answer-High inflation can quickly destroy an economy. When a firm is determining whether or not to relocate a factory, which of the following is of the MOST use? - answer-The cost per unit produced. Mark has $15 that he wants to spend on something that entertains him. He was planning to buy a book with this money, but then he decided to watch a new movie with this money. The fact that Mark cannot read the book because he opted for the film is an example of _____. - answer-opportunity cost The word comfortable meaning different things to different people is an example of _____. - answer-loaded terminology What is the primary purpose of economic models? - answer-To show a direction of movement. Which one of the following is NOT a characteristic of capitalism? - answer-Extensive government planning What determines the price of a good or service in a capitalistic economy? - answer-Supply and demand Why is rewarding risk-taking an advantage to capitalism? - answer-Because it provides an incentive for innovation and economic growth _____ is NOT an example of a natural monopoly. - answer-Cell phone service providers Which of the following describes a natural monopoly? - answer-An electric company that has already laid a lot of underground cables and created a power grid. Why can a natural monopoly be advantageous for consumers? - answer-The efficiency results in lower average costs for the consumer. Which of the following best defines a monopoly? - answer-A market where a single entity is large enough to set prices without impacting demand. What is the biggest risk associated with monopolies? - answer-The entity with complete market share could increase prices as high as they wanted, since consumers would have nowhere else to go. Which is the best example of a regional monopoly? - answer-A power company Ebay's success represents which of the following barriers to entry for another company in the same space? - answer-Product differentiation Which of the following are NOT common types of barrier to entry in economics? - answer-Unskilled jobs and free enterprise In terms of economics, barriers to entry are _____. - answer-obstacles that make it difficult to enter a particular industry or field How do barriers to entry affect the number of producers in an industry? - answer-The lower the barriers to entry, the more producers there will be. Which of the following sets of options available to a consumer seeking to make a purchase does NOT represent a market niche governed by monopolistic competition? - answer-Deciding to purchase an iced coffee, an iced tea, or a smoothie. Which of the following statements describes how prices work under monopolistic competition? - answer-Prices are set by producers. Which of the following is true if competitors in an oligopoly try to beat each other with lower prices? - answer-Price war occurs, and it is not good for consumers because it ultimately limits competition. Identify the agency of the U.S. government that is required to approve all proposed mergers and acquisitions. - answer-Justice Department _____ describes the economic concept of making strategic plans based on anticipations of competitors' actions. - answer-Game theory Which of the following is NOT one of the five requirements for a perfectly competitive market? - answer-Firms sell differentiated products. Which of the following best describes the function of the invisible hand? - answer-The invisible hand sends signals between producers and consumers that result in optimum prices and supply levels. What does the 'perfect' in 'perfect competition' describe? - answer-Prices are perfect, meaning they are in equilibrium at a point that is both the highest consumers are willing to pay and the lowest producers are willing to sell. In a situation with two players, how do we find the optimal solution? - answer-By looking for the option where the two players, combined, have the best outcome The prisoner's dilemma is a common example of what economic theory? - answer-Game theory In a situation with two players, how do we find the Nash equilibrium? - answer-By finding the option where each player has no incentive to change their behavior, because doing so would result in a worse outcome What is one difference between a game theory decision and other strategic business decisions? - answer-The results of a game theory decision are directly influenced by the decisions of another party. What is 'game theory'? - answer-The economic concept that attempts to identify the optimal decision for one decision maker when another player's unknown selection impacts the original decision maker's results. While there are fictitious examples of game theory, which of the following is a good example of game theory in the real-world? - answer-Negotiating a strike or other union action Which of these countries provides a current or historical example of a command system of economics? - answer-China A command economy is: - answer-A system in which resources are allocated by a centralized, top-down authority. In a country with a command economy, people are angry because there are surpluses of snow shovels, overalls, and slow cookers, but shortages of toilet paper, canned food, and televisions. Which of the problems associated with command economic systems are they experiencing? - answer-Coordination problem Which of the following is not considered desirable, according to U.S. economic goals? - answer-Prices that fluctuate quickly or dramatically Which economic goal is being described when talking about the ability to decide what to do with your own money? - answer-Economic freedom Gross domestic product is an important measure of which of the following goals? - answer-Economic growth What does it mean for the United State economy to work efficiently? - answer-All of the answers are correct. Which of the following is considered a broad economic goal of the United States? - answer-Equity Which of the following is considered an example of a government intervention? - answer-A failing industry receives funding from the government that helps them stay in business. Which of the following is the best way to describe what the national debt is? - answer-The amount owed by a government to its lenders Government intervention in the economy is a topic known for: - answer-Fueling political debate In which of the following situations might the government consider intervening in the economy? - answer-All of the answers are correct. Which of the following statements is most accurate? - answer-The costs of government intervention sometimes outweigh the benefits. For the majority of states, where does revenue originate for state level government? - answer-Income and sales taxes Which of the following is paid for using federal tax dollars? - answer-All of the answers are correct. Which level of government relies mainly on property taxes? - answer-Local government Which of the following is a feature of the federal income tax in the United States? - answer-Progressive tax rates Income taxes are paid using what method? - answer-Pay as you go Which of the following is an example of the government protecting property rights? - answer-All of the answers are correct. Which of the following best describes the politics of government intervention in the economy of the United States? - answer-There is a great deal of debate about how much the government should intervene in the economy. Why would the government intervene in the case of a monopoly? - answer-To ensure competition in the economy. Price gouging is a practice that is restricted by the government because of which of the following reasons? - answer-The government aims to protect consumer rights. In which of the following ways does the government become involved in the economy? - answer-All of the answers are correct. Using taxes and spending to influence the economy can best be described as which type of philosophy? - answer-Keynesian economics What is the primary reason why the government would provide you with a tax rebate as part of stimulus fiscal policy? - answer-To put more money back into the economy How does government implement fiscal policy? - answer-Through spending and taxes Which of the following is a sign of a healthy economy? - answer-Low inflation, full employment and steady growth in the the GDP Which of the following is most accurate regarding the relationship between economists and fiscal policy? - answer-Economists use fiscal policies to predict what will happen, predictions that are not always accurate. Why is the following is NOT an accurate representation of a supply curve? - answer-Because the variable price should be on the vertical axis, while the variable quantity should be on the horizontal axis. Identify which of the following is a situation where the government should act with price ceilings: - answer-When a company that has a large control over the market tries to drastically increase prices on products such as food, water or electricity, especially targeting underdeveloped areas. Which of the following is FALSE regarding shortages? - answer-Producers that sell highly elastic goods are likely to impose shortages. How does the treatment of cartels on the domestic scene differ from that of the international scene? - answer-They are generally legal on an international level, but are generally combated on a domestic level. Tina has been working in the banking sector for a long time. She switched jobs and now works for Goldman Sachs and has gotten a very large salary. She used to mostly eat at her local cheap Chinese restaurant and wore normal clothing, but now she eats at expensive restaurants and wears luxurious clothing. What is the changed concept of Tina's habits called? - answer-Income elasticity of demand A movement along the supply curve is caused by: - answer-A price change. If the price of televisions were to fall, then how would the market be affected? - answer-Downward pressure on supply, and increased quantity demanded. Which of the following is an example of a good that may not be fully elastic in the long-term? - answer-Petroleum When demand for a product goes from 100 to 200 and income goes up from $40,000 to $45,000 what is the income elasticity of demand? - answer-8.0 What is market equilibrium? - answer-The point at which supply meets demand. When consumers change their personal income, populations change, or the price of a substitute good changes, what happens to the demand curve? - answer-The demand curve shifts to an entire new demand line. Market equilibrium is the point where which two of the following intersect? - answer-Demand curve; supply curve Elasticity of demand is said to be elastic when elasticity is: - answer-Greater than 1. Price ceilings largely benefit: - answer-Consumers Why is gasoline an inelastic product? - answer-Gasoline is an inelastic product because people are dependent on traveling to their work and moving products all over the country. Why are product shortages normally a bad thing for economic markets? - answer-They mean that the economy is not working at full efficiency. Susie Smith is a celebrity who is famous for her fashion advice. She recently wore a scarf and spoke publicly about how much she liked it. What is likely to happen to the supply of that scarf and why? - answer-It will increase, because as the demand for a product increases, the supply increases. How does price elasticity of demand and cross price elasticity of demand differ? - answer-The price elasticity of demand measures how responsive the quantity demanded for a good is in response to a change in the good's own price, while the cross price elasticity of demand measures how responsive the quantity demanded for a good is in response to a change in the price of another good. Bribery can be _____, but of course is illegal. - answer-innovative _____ refers to the various quantities offered for sale at various prices. - answer-Supply When there is excess demand or a shortage of goods and services, this puts _____ pressure on prices. - answer-upward Why might a company have a perfectly inelastic supply? - answer-Due to a lack of inputs, supply cannot be increased. When quantity demand stays the same while income drops, what kind of product is it? - answer-Necessity How is a supply and demand graph affected by a supply surplus? - answer-The supply curve moves to the right. How is an individual demand curve created? - answer-The quantity of an item a person is willing to buy is plotted along with the price of the item. When demand for a product is greater than supply, a _____ exists and there is _____ pressure on prices. - answer-Shortage; upward Which of the following is NOT an inelastic demand for a product? - answer-An elasticity of 1.5. A binding price ceiling line is _____ the market equilibrium point. - answer-below Which of these probably has inversely proportional derived demand to hamburger patties? - answer-Hot dogs Gross domestic product is the total market value of all final goods and services produced during a given time period: - answer-within a nation's domestic borders. Which of the following IS an injection? - answer-All answers could be considered an injection What type of model is an economics professor MOST likely to present to her students to demonstrate relationships in a market economy? - answer-Circular flow of economic activity What do taxes, savings, and imports share in common in the circular flow of economic activity? - answer-They can be a leakage A circle, with occasional leakages and injections from abroad BEST describes: - answer-monetary movement throughout an entire economy. What item in the circular flow of economic activity flows from households to firms? - answer-Resources Consumption which is part of the _____ formula, accounts for the largest share represented in the formula. - answer-gross domestic product (GDP) Complete the following statement in reference to investments: individuals _____, while firms _____. - answer-save; invest What type of good would the bricks used for a new home construction be considered? - answer-An intermediate good John wants to calculate the Gross Domestic Product (GDP) to show off his knowledge to a business associate. Which item would be relevant to perform this calculation? - answer-Both wages and new purchases How is investment, in economics, related to spending? - answer-It is more concerned with business spending than consumer spending. What are the main categories of investment? - answer-Business expenditures, new residential housing, and changes in business inventories. Which of the following statements is NOT true regarding investment? - answer-Investment refers to purchases of stocks, bonds, or mutual funds. In economics, the term investment refers to what? - answer-Gross private domestic investment. When economists estimate Gross Domestic Product using the income approach, which types of income are included? - answer-Rent, wages, interest, and profit. Which of the following is true when using the income approach to measure GDP? - answer-It measures total income earned by all households in a nation. Which of the following statements is NOT true regarding the expenditure approach? - answer-It measures the total income earned by households. Which of the following is NOT a valid exchange medium for factors of production? - answer-Imports What are the factors of production? - answer-Land, labor, capital, and entrepreneurship. Which of the following statements is true regarding the relationships in a market economy? - answer-Businesses pay wages, interest, and profits to households in exchange for use of their factors of production. Which of the following is an injection into the circular flow model? - answer-Exports What does the circular flow model of the economy illustrate? - answer-Injections and leakages that take place in the economy. Tommy's Tweezers has had a change in inventory, increasing by 100,000. What component of the GDP would this affect? - answer-Investment What does the word domestic in Gross Domestic Product refer to? - answer-All goods and services that are produced within a nation's domestic borders. What is the GDP for the following information: Consumption = 10,000 Investment = 2,000 Government spending = 1,000 Exports = 7,500 Imports = 7,000 - answer-13,500 Which of the following would NOT be included in consumption? - answer-Welfare checks received Why would the revenue of a singer from the United States that held a concert abroad not included in the U.S. GDP? - answer-The service happened outside of the U.S. When calculating GDP, transfer payments are: - answer-Not counted in the GDP. Which of the following scenarios would be included when calculating the GDP? - answer-Margie buys a new set of sunglasses that were made in the US. Which of the following would be included in the GDP? - answer-Goods that are produced by foreigners within the domestic borders of a nation You are discussing economics with a financial professional, and she states, 'I don't recommend using _____ per capita GDP for inflation measurements because it doesn't take into account price differences.' - answer-nominal A potential investor is seeking to analyze the current economy. She is interested in a measure of GDP represented in current dollars. What GDP value will she MOST likely utilize? - answer-Nominal GDP An economist representing the U.S. government wants to prepare a calculation that presents a broad and comprehensive view of total inflation. What value is she MOST likely to use to attain her goal? - answer-GDP deflator Measuring the level of prices in the economy and comparing them to previous years yield an inflation measure known as the: - answer-consumer price index. Economic forecasters are challenged by an economy where rising prices are causing a devaluation in currency. Which item MOST likely is responsible for this condition? - answer-Unanticipated inflation Consumption, government spending, and investment are inputs that can be used to calculate: - answer-gross domestic product. An economics professor starts with a value of one. She states to the class, 'I arrived at this value by adding the marginal propensity to consume (MPC) and the _____.' - answer-marginal propensity to save (MPS) It's payday and you are so excited that your hard work has been rewarded. On your way home from work, you stop at your favorite sandwich shop to get some food. As you pay the vendor in cash, you see him hand your money to an employee asking him to run out to a supplier to replenish inventory. What economic event has just taken place? - answer-The multiplier effect The marginal propensity to save (MPS) would present a figure MOST often calculated when government officials are considering: - answer-a tax cut. What happened if the rate of inflation as reported by the Consumer Price Index is 3%? - answer-The actual rate of inflation may be lower because of the Substitution Effect. Susie lives in Arkansas and she is in the market for a new car just released by XYZ Car Company. Susie is finding out that the car is in very high demand, and she has seen the price on the car rise twice since she started shopping around. Alan lives in California and he is in the market for the new tablet released by ABC Electronics. Alan is finding out the tablet is hard to get a hold of because it is in such high demand, and the price keeps rising on the tablet at all the retailers Alan is visiting. Rachel lives in New York and she is the market for new leather jacket put out by her favorite clothing line. Rachel is realizing that this is the case for many in New York and so the cost keeps increasing for this leather jacket she wants. What is the above scenario an example of? - answer-Demand-Pull Inflation When economists want to measure current production of an economy at current prices, they use which of the following? - answer-Nominal gross domestic product If Mary's nominal income rises by 4%, while her real income fell by 2%, what happens to the level of prices? - answer-Prices increase by 6%. Using the chart below, which statement is true regarding wages over the three year period? - answer-Nominal wages rose, while real wages stayed the same. If the consumer price index is equal to 100 in year 1, and 103 in year 2, what does this mean? - answer-The prices have risen by 3 percent. Which of the following would be negatively affected from unanticipated inflation? - answer-People that own investments that pay a fixed rate of interest, such as bonds What is the major drawback of using nominal GDP to measure the economic output of a nation? - answer-It creates a false impression of the amount of output taking place from one year to the next because of the change in prices. What is the result of cost-push inflation? - answer-A higher equilibrium price and lower economic output. Nominal GDP in year one was $16,000, while nominal GDP in year two was $19,320. Real GDP was $16,000 in year one and $15,500 in year two. What does this indicate about the economy? - answer-It was in recession. Which of the following is the correct formulation of the equation of exchange? - answer-M x V = P x Y Assume that the marginal propensity to save is 0.1. What is the maximum amount that real GDP could change if net exports increase by $15 billion? - answer-$150 billion The Substitution Bias is which of the following? - answer-A weakness in the Consumer Price Index (CPI) When aggregate demand increases faster than aggregate supply, prices go up. What is this an example of? - answer-Demand-pull inflation Real GDP evaluates _____ production at _____ prices. - answer-current; past If the Consumer Price Index rises from 101 to 104, which of the following statements is true? - answer-The average level of prices for a fixed basket of goods and services rises by 3%. Melissa has a choice between two jobs. The first is a job is in New York City with a salary of $90,000. The other job has a salary of $80,000 per year salary in Boise, Idaho. Let's assume that the CPI is 120 in New York, while the CPI is 100 in Boise. If Melissa wants to maximize her 'real wage', which job should she choose? - answer-Boise, because the real wage is $5,000 higher than the real wage in New York. Which if the following is considered the best measure of changes in prices by economists? - answer-GDP deflator A retired woman lives entirely on Social Security income, while a farmer borrows money to buy a new tractor. How would inflation affect them? - answer-Inflation helps the farmer but hurts the retiree How is real GDP calculated? - answer-Multiplying the quantity x the price in a base year. What occurs when the rate of unemployment goes up at the same time as inflation? - answer-Stagflation Mary Beth ran a local newspaper business. She found that fewer people were purchasing the local paper since they were able to conveniently access the news online via their computers and smart phones. Mary Beth's business was no longer making a profit, and she was forced to close its doors. This led to people losing their jobs, such as journalists, printers, and newspaper delivery boys. This is an example of _____. - answer-structural unemployment Derek was working in construction when the housing bubble burst following the 2008 financial crisis. The demand for new construction declined, and Derek lost his job. This scenario is an example of which type of unemployment? - answer-cyclical Which of the following is NOT an example of seasonal unemployment? - answer-An economics professor in August If discouraged workers were actually counted in the unemployment rate: - answer-The unemployment rate would be higher. Which of the following individuals would be counted as unemployed? - answer-Jennifer, who is about to start a new job The Bureau of Labor Statistics categorizes an individual as unemployed if they are: - answer-Without a job but looking for work What prevailing economy theory was the theory of rational expectations developed to counter? - answer-The Keynesian theory that promotes government intervention in the economy. How does the theory of rational expectations relate future economic outcomes to the behavior of those making market decisions? - answer-Because people are forward-looking and incorporate this into their expectations, the future tends to follow their expectations. Jim owns a custom printing business. According to the theory of rational expectations, how would he reach a decision about whether to expand his business in the next year? - answer-Jim will use his past experiences along with all information available to him. Governments often impose minimum wages in order to help unskilled workers. Which of the following statements is true? - answer-Minimum wages increase unemployment. When the labor market is in equilibrium, how does labor affect other economic drivers? - answer-The supply of labor is equal to the demand for labor. Which of the following statements is true regarding a minimum wage? - answer-It is set above the market wage. Which of the following methods best describes how data is gathered for the monthly unemployment rate? - answer-Census workers survey 60,000 households regarding their employment status and then extrapolate that to the rest of the country. Which of the following statements is true regarding changes to the unemployment rate? - answer-Changes to either the numerator (number of unemployed) or the denominator (total workforce) can change the unemployment rate. Select the person who is considered as being unemployed. - answer-Maggie, who is a university graduate looking for a full-time job. The natural rate of unemployment is the rate of unemployment that coincides with which part of a graph of a labor market's supply and demand curves? - answer-At the equilibrium point Which one of the following groups of people are NOT taken into consideration when calculating unemployment rates? - answer-People not working and not looking for work For the last year, the rate of unemployment has been above the natural rate for the labor market. How does this affect labor costs? - answer-They tend to be less expensive than when unemployment is at its natural rate. Which of the following is NOT a likely result of a prolonged rate of unemployment? - answer-Increasing support for free trade Why is unemployment a significant concern for businesses? - answer-We live in a consumption-based economy. Which of the following is NOT an individual cost of unemployment? - answer-Decrease in demand Why do most economists not subscribe to the classical theory of unemployment? - answer-The classical theory of unemployment views employment as theoretically possible, while most economists think that an unemployment rate of zero is unobtainable over the long term. When actual unemployment falls below the natural rate, that LIKELY results in _____. - answer-higher inflation Which of the following individuals is structurally unemployed? - answer-Wanda, who picks berries at a farm over the summers. Jeb is starting up a restaurant, and he's trying to decide how much to pay his servers. He knows that the market-clearing wage for servers is $10 per hour. According to efficiency wage theory, how much should he pay them? Why? - answer-More than $10 per hour, in order to motivate his servers to work harder and stay with the company longer. What do we call the wage that occurs when labor supplied equals labor demanded? - answer-Market-clearing wage How does efficiency wage theory generally affect a company's turnover rate? - answer-It decreases Why does frictional unemployment occur in the workforce? - answer-It is due to normal turnover in the labor market and the time it takes for workers for find new jobs In December 2016, 155,000 of Mainfield's adult residents were employed while 27,000 were unemployed. What was Mainfield's unemployment rate in December? - answer-15% How can the rational expectations theory be applied to the labor market and the government's role in employment levels? - answer-Unemployment levels will find a natural equilibrium, government actions to reduce these levels will lead to higher prices. In regards to economic productivity, micromanagement is likely to: - answer-have a minimal impact on labor productivity. Which item is an example of physical capital used in the production of goods and services? - answer-Factory equipment Which is NOT an example of physical capital? - answer-Seed money used to fund a startup business The assembly line equipment used to produce an automobile would be considered: - answer-the physical capital. A recruit at a new job is asked by an interviewer, 'Tell me about your human capital accomplishments.' Which item would the interviewer want the interviewee to discuss? - answer-All answers are relevant examples of human capital Gross private domestic investment is one of four expenditure values used in: - answer-national income accounting. Your economics professor is covering a unit in class where she's discussing calculating GDP by either using expenditure approach or income approach. What unit is she MOST likely covering? - answer-National income accounting By dividing real GDP by population, one is calculating the: - answer-standard of living. Heightened investments in research and development and natural resources, coupled with a higher savings rate, ALL increase: - answer-the standard of living. An economist is carefully evaluating productivity values; she will most likely uncover that these values have an effect on _____. - answer-standard of living A company executive is advocating for a budget increase in _____. She states that such funding increases will promote greater productivity. - answer-Both answers are plausible Which IS an example of research and development? - answer-A new software application that increases workplace productivity When envisioning economic growth and productivity, population is a driver of: - answer-standard of living. You are presented with a case study where it's stated that standard of living has increased. What value MOST likely increased to cause this change? - answer-Savings rate increased An economist suggests that a nation's GDP has decreased. Which item is MOST likely to be responsible for this outcome? - answer-Rapid population growth One way to create new technologies is by investing into _____. - answer-research & development Why is fiscal policy important for the economy? - answer-It influences aggregate demand. Which of the following is NOT an example of physical capital? - answer-Patents What is the accounting methodology used to calculate the GDP, regardless of the approach used? - answer-National income accounting Which of the following will likely increase productivity in a corporation? - answer-Availability of influenza vaccines Economists call the equipment and structures used to produce goods and services: - answer-Physical capital In the short run, economic growth is measured in terms of which of the following? - answer-The percentage change in real GDP Economists define Real GDP per capita as which of the following? - answer-The value of economic output of a nation divided by the population Which of the following is FALSE regarding the productivity of a nation? - answer-It cannot be increased because of rising prices. Which of the following is MOST likely to produce higher economic growth in the long run? - answer-Investment tax credits Why is physical capital important to an economy? - answer-It increases the productivity of goods and services. If GDP is calculated by both the expenditure approach and the income approach, what will be the difference in the end values? - answer-If calculated correctly, there is no difference between GDP calculated using the expenditure approach or the income approach. What is human capital? - answer-The education and experience of the labor force Human capital refers to which of the following? - answer-The education and experience of the labor force. Why is real GDP a poor indicator of economic growth? - answer-Real GDP is a short run measure, and economic growth is a long run potential. Which of these institutions has the authority to levy taxes in the United States? - answer-State governments What type of income tax system is currently in place at the federal level in the United States? - answer-A progressive tax system If the United States radically overhauled the tax code and established a flat tax, what type of tax structure would it have? - answer-Proportional tax What effect do taxes levied at the federal and state levels have on consumer prices? - answer-Taxes cause prices to increase. Which of the following is an example of a regressive tax? - answer-Lottery tickets How can a government best establish trade barriers? - answer-By using their legal system to limit market access. dentify the scenario where there is NO embargo. - answer-Tariffs on Japanese cars How do trade barriers affect supply and price of a good? - answer-They will cause the price to increase while causing a decrease in supply. Define protectionism. - answer-A protection to businesses at home through trade barriers. _____ is an amount of money paid directly to domestic producers to make them more competitive with foreign imports. - answer-Subsidy How did increased regulation impact the mortgage market after 2008? - answer-It was more difficult for consumers to get mortgages. Economic regulators are responsible for overseeing which of the following industries? - answer-Both the financial sector and the utility sector What economic problem occurred in 2008 that led to the passage of the Dodd-Frank Act? - answer-The Great Recession What theory seeks to explain that individuals who act in their own self-interest might deplete a common resource important to a whole group of people? - answer-Tragedy of the commons Why might a government decide to grant a monopoly in a heavily regulated industry? - answer-It is cheaper to regulate only one company and ensure it acts in a business-friendly fashion. Which of the following was NOT a benefit of destroying 'Ma Bell'? - answer-Increased market share for AT&T What was the largest company to be busted by the Sherman Antitrust Act of 1890? - answer-Standard Oil Which president had a reputation as a trust-buster? - answer-Theodore Roosevelt Which of the following is NOT an effect of a trust? - answer-Increased consumer confidence Why was American Telephone and Telegraph able to remain a trust as late as the 1980's? - answer-They monopolized use of their long-distance phone lines. Why can the currency exchange rate have a large impact on the trade balance? - answer-Because an overvalued currency can make exports less competitive. Which of the following is NOT a component of the current account? - answer-Value of personal savings accounts Latervia is a very small country that has exports of $100,000, imports of $20,000, net income from abroad $250,000, and net current transfers $200,000. What is Latervia's current account? - answer-$530,000 How can a fiscal policy affect exchange rates? - answer-Through interest rate, income, and price level effect What is true about contractionary monetary or fiscal policy? - answer-It decreases our income, decreases our demand for imports, and increases the exchange rate. Predict the effect on the exchange rate when the Federal Reserve uses monetary policy to increase income or available money. - answer-It increases demand for foreign currencies and lowers exchange rate. _____ are payments made by those in the domestic economy to purchase financial and physical assets in other countries. - answer-Domestic investments in the foreign sector. Which two components make up the balance of payments account? - answer-Capital/financial and current account. Which of the following statements about the financial/capital account is NOT true? - answer-Financial account surpluses to offset foreign trade deficits are always a good thing. How is domestic currency related to exports? - answer-A strong domestic currency decreases exports. What is most likely to happen with a strong dollar? - answer-Higher imports. If U.S. exports to Japan increased, what most likely happened? - answer-The U.S. dollar decreased in value compared to the Japanese Yen. If the American dollar rose in value in relation to the Japanese Yen, what would likely be the effect? - answer-Japanese goods and services will be relatively cheaper for Americans If more Americans want to suddenly purchase goods in Mexico, what likely happens? - answer-Demand for pesos increases, dollar falls in value compared to peso What is the rate at which one currency is converted in another called? - answer-Exchange rate Consider a scenario where there has been a decrease in the exchange rate of the American dollar. How will the inflation and import prices vary? - answer-Higher inflation and higher import prices What would you expect if there is an increase in exchange rate? - answer-Imports get cheaper An increase in the value of a domestic currency will mainly affect _____. - answer-trade deficit Which of the following is FALSE concerning trade? - answer-Trade surplus in the U.S. started in 1975 Why does Saudi Arabia have a large trade surplus? - answer-Due to the fact that they have over 20% of the world's petroleum reserves Why did the U.S. trade deficit start to grow in the 1990s? - answer-Because the economy grew much faster than that of their major trading partners Which exchange rate would most likely be used for a good or service that will be delivered at a future date? - answer-Forward Assume the following exchange rates: 1 Dollar = 102 Japanese Yen 1 Dollar = 0.6 British Pound 1 Dollar = 0.91 Swiss Franc 1 Dollar = 13 Pesos Which of the following is the least amount of money? - answer-507 Pesos Which of the following statements regarding an exchange rate is not true? - answer-Fixed exchange rates are determined by supply and demand forces. Which of the following is NOT associated with foreign trade? - answer-Mutual funds Which of the following statements is true? - answer-An increase in the U.S. demand for foreign goods and services will cause an increase in the supply of dollars. Which of the following does NOT impact the trade balance of a country? - answer-GDP If the exchange rate between the U.S. dollar and Mexican Peso is 13 Pesos to 1 U.S. dollar, how many dollars would a gallon of ice cream costing 52 pesos be? - answer-4 Several European countries have just submitted their balance of payments upon request by a U.S. diplomat. What is recorded on this document? - answer-Transactions with the rest of the world Why is the balance of payments useful for understanding the state of the economy? - answer-It shows all the inflows and outflows of the economy. The goods markets are the life force of the economy and encompasses all of the following except - answer-Stocks and bonds Why is it NOT possible to purchase shares of General Motors on the bond market? - answer-Because this needs to be done on the stock market. Jim produces high-end cellphones and tablets. Which of the following best describes his products? - answer-Consumer goods Which of the following is an example of a financial market? - answer-Capital market One of the biggest capital markets is the stock market which is associated with all of the following except - answer-Money markets Why is it likely that you will be able to easily trade financial bonds from the money market for cash? - answer-Because they usually have short maturities and high liquidity. If a high tariff is imposed on a specific brand of handbags coming from France, what is a likely effect of this action? - answer-The market will be flooded with fake, black market handbags bearing the same name at lower prices. A _____ sets a numerical limit on how much of a product can be imported into a country. - answer-quota How do quotas and tariffs impact the supply of goods available to consumers and domestic prices in general? - answer-They decrease the supply of goods and increase prices. A _____ is a tax imposed by the government on imports coming into a country. - answer-tariff When the U.S. places an added tax on a Japanese car, this is an example of a(n) _____. - answer-an import tariff Why can tariffs help decrease the chance of structural unemployment? - answer-Because it protects domestic jobs by decreasing foreign competition. Why do import tariffs help domestic producers? - answer-Because they increase the price of imported goods. Tariffs and quotas can also be referred to as _____. - answer-trade restrictions Why are protectionist strategies used in trade restrictions? - answer-To restrict importations of goods or services from foreign countries. In a theoretic scenario, Japan and South Korea are having problems because of China's very cheap products. They are having more and more people protesting because they lost their jobs and their domestic industries are becoming increasingly noncompetitive. What should they do to combat their problems? - answer-Implement trade restrictions Which of the following best summarizes the infant industry argument? - answer-Small and newer domestic industries may need trade protection Why is outsourcing often used? - answer-To take advantage of lower labor costs in foreign countries. Which of the following are the three most common trade restrictions? - answer-Quotas, tariffs and embargos. A government has deep concerns that several other countries are exporting products to their market and selling them at prices lower than the costs of production. This practice, known as dumping, is prohibited by the World Trade Organization (WTO). While the country makes its case in front of the WTO, which strategy would be most effective in combating their problem? - answer-Protectionist policy Which of the following is an example of positive net exports: - answer-When your country has spent $150 million on imported goods, while the value of the goods that you have sold is $200 million. Which of the following illustrates a trade surplus? - answer-A country exports $300,000 and imports $150,000. Why are capital flows significant for an economy? - answer-They represent money sent from overseas in order to pay for foreign goods and invest in markets. Which of the following does NOT influence the trade deficit or surplus a country experiences? - answer-Individual retirement account balances . If the United States had $5,000,000 in exports, $10,000,000 in GDP, $3,000,000 in imports and $1,000,000 in national savings, what would the net exports be? - answer-$2,000,000 Which of the following is NOT a variable that influences net exports? - answer-Balance of trade The flow of money between businesses and government, that goes in and out of countries, is called _____ flow. - answer-capital How do tariffs and quotas benefit a country? - answer-By protecting domestic industries and jobs. _____ can often disrupt or make it difficult for domestic firms to compete in various industries. - answer-Cheaper foreign labor How do tariffs and quotas affect domestic markets? - answer-All of the answers are correct How does the demand curve for money shift? - answer-It shifts down as the price level decreases. What happens when there is an increase in the demand for money when the supply of money is unchanged? - answer-Lower interest rates How does inflation prevent most of the money in use today from serving as a pure store of value? - answer-Inflation causes the purchasing power of money to decrease over time. What does it mean if everything in an economy can be quoted in terms of money? - answer-It refers to money as the foundation of every transaction. Because the central bank controls the money supply, it also controls what other economic driver? - answer-It also controls market interest rates. What is the economics model that describes the demand and supply of money in a nation called? - answer-The money market Which of the following statements is true regarding the money supply? - answer-M1 is more liquid than M2. Which of the following measures of the money supply is largest? - answer-M2 If a couple saves $5,000 a year for five years at 5% interest, what is the future value of this annuity after those 5 years? - answer-$27,628 How much will Bill and Mary need to put in the bank today at 4% interest to have $20,000 in five years for a down payment on a house? - answer-$16,439 In the formula C = i / p, what does the p represent? - answer-Par value Most bonds have par values of: - answer-$1,000 Which of the following BEST explains the contractual obligation associated with stock? - answer-An ownership interest in a company. George reaches into his wallet and pulls out a $20 US bill to pay for his coffee. By using currency to make a purchase, what is George actually doing? - answer-George is paying with a government guaranteed note. According to the T-account shown, if the required reserve ratio is 10%, what is the maximum amount of additional loans this bank can make? - answer-$4,000 A bank has demand deposits of $50,000 and actual reserves of $5,000. If the reserve requirement is 10%, what is the maximum the bank can loan out at this time? - answer-$45,000 Besides being known as the reserve ratio, what is the fraction of a customer's deposits that a bank is required to hold in reserve also called? - answer-Required reserves If banks have excess reserves of $5,000, and the money supply increased by $20,000, what is the reserve ratio? - answer-25% Lydia deposits $70,000 into the First National Bank of Ceelo. The required reserve ratio is 10%. How much will the money supply increase if the bank loans out excess reserves? - answer-$63,000 How do banks make money? - answer-Loaning out excess reserves Money that has an intrinsic value is called what? - answer-Commodity money Why was money created? - answer-To reduce the costs of making transactions in the economy. When interest rates are 20%, the demand for money is: - answer-Lower than it would be if interest rates are 2%. Money is a medium of exchange because: - answer-It can be used to satisfy any number of needs and desires. When economists illustrate the money market, the demand curve is _____ while the supply curve is _____. - answer-downward sloping; vertical In economics, the word 'liquid' refers to which of the following? - answer-The ability to quickly and easily convert an asset to cash. Which of these is an annuity? - answer-Joan gets $100 every year for the rest of her life There is a company offering $5000 bonds which will earn an annual interest of $200. What is the coupon rate? - answer-4% Which of the following lists is in the correct order, from least to most, of the market value of each type of financial asset discussed in this lesson? - answer-Money, Stock, Bonds Under fractional banking, when a bank lends to a customer, which of the following happens? - answer-The money supply increases. What are some of the objectives of the Fed? - answer-Maximize employment, stabilize prices, and moderate interest rates The Federal Reserve achieves its monetary goals by doing which of the following? - answer-Controlling the money supply and interest rates Which of the following is an inaccurate description of The Federal Reserve? - answer-It is the US mint. Which of the following is FALSE regarding the Federal Reserve? - answer-It issues debit cards. Why does the Federal Reserve require commercial banks to maintain reserves with them? - answer-It gives the Federal Reserve more control over the money supply and interest rates. What is the interest rate that the Federal Reserve charges on loans it makes to member banks called? - answer-The discount rate. What happens if the Federal Reserve sells a large amount of government securities in the open market? - answer-The total amount of loans in the banking system will decrease. How would buying or selling government bonds affect the federal funds rate, if it was the government that initiated the sale? - answer-The government uses the sales of securities to change the money supply, thus changing the federal funds rate. What is the prime rate? - answer-The rate banks charge to their best customers. Which of the following statements is FALSE about the monetary tools of the Federal Reserve? - answer-They include changing tariffs on imported goods. The purchases and sales of government securities in the open market by the Federal Reserve are referred to as which of the following? - answer-Open market operations What will the purchase of government bonds from the public in the open market by the central bank do? - answer-Increase the money supply What will happen if the Federal Reserve sells a significant amount of government securities in the open market? - answer-The total amount of loans made by commercial banks will decrease. When the reserve ratio is 20%, the Fed buys $500,000 worth of government bonds in the open market. What is the maximum amount that the money supply could increase? - answer-$2.5 million Assume that the Federal Reserve increases the monetary base by $1 billion when the reserve requirement is 10 percent. The money supply will increase by: - answer-$10 billion If the Federal Reserve lowers reserve requirements, nominal GDP will most likely do which of the following? - answer-Increase In a fractional reserve banking system, how does a decrease in reserve requirements affect the money supply? - answer-It increases the money multiplier and the money supply. When the central bank raises the reserve ratio from 20% to 25%, how does the multiplier change? - answer-From 5 to 4 What is the reserve requirement? - answer-The proportion of customer deposits a bank is required to hold in reserve. When the reserve requirement is 20% and banks hold no excess reserves, how will an open market sale of $500,000 of government securities by the Fed affect money supply? - answer-It will decrease the money supply by up to $2.5 million. Which of the following statements is FALSE regarding the discount rate? - answer-It is the rate that banks charge to other banks when they need more reserves. When the Fed lowers the discount rate, what will happen? - answer-Banks borrow more from the Fed, so reserves increase. Why do banks choose to borrow directly from the Fed? - answer-They need additional reserves and cannot borrow from other banks. Why is the Fed referred to as 'the lender of last resort'? - answer-Banks can always borrow directly from the Fed when other banks will not lend to them. Which of the following accurately describes the discount rate? - answer-The interest rate member banks pay when they borrow directly from the Fed. How would economists graphically illustrate a decrease in the money supply? - answer-A leftward shift of the vertical money supply curve. The Fed's monetary policy has the greatest effect on real Gross Domestic Product under what set of conditions? - answer-When interest rates are low and the interest rate has a large effect on investment spending. If the Federal Reserve suddenly decreases the growth rate of the money supply from 6% to 4% per year, what is likely to happen to aggregate demand and real Gross Domestic Product in the short-run? - answer-Aggregate demand will decrease and real GDP will decline. If all other factors remain equal, what would happen to interest rates when the amount of money circulating in the economy is increased? - answer-The interest rate would decline. How does an increase in the money supply impact economic output within the US economy? - answer-Lower interest rates encourage additional borrowing and investment, leading to higher aggregate demand. The quantity theory of money describes the relationship between what fiscal components? - answer-Inflation, the money supply, real output, and prices. Monetarism is the economic viewpoint that states which of the following? - answer-Excessive expansion of the money supply leads to inflation. According to the quantity theory of money, an increase in the money supply results in an increase in which of the following? - answer-Real GDP According to the quantity theory of money, increasing the money supply will lead to what? - answer-Higher economic output in the short-run and inflation in the long-run If nominal GDP = $5,000 billion and the money supply is $1,000 billion, assuming a constant price level, what is the velocity of money? - answer-5 All of the following impacts the velocity of money except - answer-how many years ago the currency was printed The velocity of money is a ratio of what quantities? - answer-Nominal GDP to a measure of the money supply Which of the following statements BEST explains the velocity of money? - answer-How many times a single dollar is spent, or turned over within a certain time period Let us assume that the price level remains constant and the nominal gross domestic product is $8 trillion and the money supply is $2 trillion. Use the equation of exchange (MV=PY) to determine what the velocity of money would be. - answer-4 Which of the following statements BEST explains how a high velocity of monetary exchange effects the economy? - answer-The changes in the money supply will have a greater effect on nominal GDP A money market account at the bank offers a 4% nominal interest rate, while inflation is expected to be 3%. What is the real interest rate for this account? - answer-1% In order to adjust a nominal interest rate for inflation, which of the following formula should be used? - answer-r = n - i Which of the following is FALSE regarding real interest rates? - answer-Real interest rates are determined in the money market The real interest rate for a consumer loan is 5%, and the expected inflation rate is 3%. What is the nominal interest rate on this consumer loan? - answer-8% In the country of Athenia, banks charge 10% interest on all loans. If the general price level has been increasing at a rate of 2% per year, what is the real rate of interest in Athenia? - answer-8% What happens when the government provides a tax incentive for businesses to invest? - answer-The increased investment leads higher demand for loanable funds. What is directly connected with borrowing for private investment in the market for loanable funds? - answer-Savings When does investment demand increase? - answer-When investors are more optimistic about the future How will an increase in national saving affect the real interest rate and therefore investment? - answer-Real interest rate will fall and investment will rise. What is the most important determinant of saving? - answer-The real interest rate Hyperinflation is usually associated with: - answer-the growth rate of the money supply If a country has a money supply of 20 billion dollars, a real GDP of 100 billion dollars, and a price level of 1, then what's the velocity of money in this country? - answer-5 Economists use the _____ to explain the link between inflation and the money supply. - answer-the quantity theory of money How can government overspending cause hyperinflation? - answer-To cover the costs of the overspending, the government borrows from a central bank, which causes the money supply to rise, making the money worth less. What's hyperinflation? - answer-A rise in prices exceeding 50% per month. Which economic goal is being described when talking about the ability to decide what to do with your own money? - answer-Economic freedom What does it mean for the United State economy to work efficiently? - answer-All of the answers are correct. Which of the following is not considered desirable, according to U.S. economic goals? - answer-Prices that fluctuate quickly or dramatically Which of the following is considered a broad economic goal of the United States? - answer-Equity Gross domestic product is an important measure of which of the following goals? - answer-Economic growth Why would the government intervene in the case of a monopoly? - answer-To ensure competition in the economy. Price gouging is a practice that is restricted by the government because of which of the following reasons? - answer-The government aims to protect consumer rights. In which of the following ways does the government become involved in the economy? - answer-All of the answers are correct. Which of the following best describes the politics of government intervention in the economy of the United States? - answer-There is a great deal of debate about how much the government should intervene in the economy. Which of the following is an example of the government protecting property rights? - answer-All of the answers are correct. Using taxes and spending to influence the economy can best be described as which type of philosophy? - answer-Keynesian economics Which of the following is a sign of a healthy economy? - answer-Low inflation, full employment and steady growth in the the GDP What is the primary reason why the government would provide you with a tax rebate as part of stimulus fiscal policy? - answer-To put more money back into the economy How does government implement fiscal policy? - answer-Through spending and taxes Which of the following is most accurate regarding the relationship between economists and fiscal policy? - answer-Economists use fiscal policies to predict what will happen, predictions that are not always accurate. Which of the following is the best way to describe what the national debt is? - answer-The amount owed by a government to its lenders Government intervention in the economy is a topic known for: - answer-fueling political debate In which of the following situations might the government consider intervening in the economy? - answer-All of the answers are correct. Which of the following statements is most accurate? - answer-The costs of government intervention sometimes outweigh the benefits. Which of the following is considered an example of a government intervention? - answer-A failing industry receives funding from the government that helps them stay in business. Which of the following is paid for using federal tax dollars? - answer-All of the answers are correct. Income taxes are paid using what method? - answer-Pay as you go Which level of government relies mainly on property taxes? - answer-local government Which of the following is a feature of the federal income tax in the United States? - answer-Progressive tax rates For the majority of states, where does revenue originate for state level government? - answer-Income and sales taxes If the Consumer Price Index rises from 101 to 104, which of the following statements is true? - answer-The average level of prices for a fixed basket of goods and services rises by 3%. Which of the following statements is FALSE regarding inflation? - answer-During the 1970's, it was extremely low. If Mary's nominal income rises by 4%, while her real income fell by 2%, what happens to the level of prices? - answer-Prices increase by 6%. What is the real interest rate when the nominal interest rate on a bank checking account is 1%, and the rate of inflation is 2%? - answer--1% What does the Consumer Price Index measure? - answer-changes in the price level of an economy Which if the following is considered the best measure of changes in prices by economists? - answer-GDP deflator What does the GDP deflator represent? - answer-the ratio of nominal GDP to real GDP If the consumer price index is equal to 100 in year 1, and 103 in year 2, what does this mean? - answer-the prices have risen by 3 percent. If nominal GDP is $5 trillion in year 1, and real GDP is $4.5 trillion, what is the GDP deflator? - answer-$5 trillion / $4.5 trillion = around 1.111 Why is the GDP deflator considered superior to the consumer price index? - answer-It is not based on a fixed basket of goods. The Substitution Bias is which of the following? - answer-A weakness in the Consumer Price Index (CPI) The Consumer Price Index (CPI) is based on a fixed basket of goods that the average citizen buys. The Substitution Bias causes this index to do which of the following? - answer-Overstate the level of inflation Why does the Substitution Bias occur? - answer-Because consumers are willing to substitute a cheaper good for another good that is more expensive Which of the following statements is FALSE regarding the Substitution Bias? - answer-It leads to an understatement in inflation. What happened if the rate of inflation as reported by the Consumer Price Index is 3%? - answer-The actual rate of inflation may be lower because of the Substitution Effect. Using the chart below, which statement is true regarding wages over the three year period? YEAR: CPI: Nominal Wage: 1 100 40,000 2 110 50,000 3 125 50,000 - answer-Nominal wages rose, while real wages stayed the same. Last year, the Consumer Price Inde